The Perils of Play or Not Pay

Remember those heady days with a newly-elected Democratic President and solid Democratic majorities in both houses of Congress, when it seemed that national health care reform was just around the corner? Remember how, after the face-off between the liberals who wanted a single-payer system and the conservatives who wanted as little change as possible, the centrists took command? Remember the early 1990s, and play-or-pay as the magical way to universal coverage?

So you do remember play-or-pay? Be careful about admitting it. After the failure of the Clinton plan and the collapse of similar state reforms in Washington and Massachusetts, a mere mention of the term would cause political eyes to roll, while its inclusion in any reform plan was enough to kill the proposal dead, dead, dead.

Reformers have learned their lesson. There was no talk of play-or-pay in the debate leading up to Massachusetts’ reform legislation, even though employers of more than ten workers are required to make a “fair and reasonable” contribution to their employees’ coverage, or pay a “fair share” contribution into an insurance pool. (More on Massachusetts later.)

Current plans for national reform have gone one better, skipping almost entirely over the issue of employer contributions. Take a look at what might be called the BOD plan: Senator Baucus’ recent Finance Committee paper, President Obama’s campaign proposal, and Secretary -designate Daschle’s book “Critical.”

BOD proposes both carrots and sticks to achieve something close to universal coverage. Employers are offered the ability to enroll employees via an “insurance exchange,” possibly based on FEHBP, while both employees and employers are offered tax credits to partially offset their premium payments. At the same time, some form of individual mandate is imposed (except in the Obama version), most likely via an income tax penalty imposed on those without insurance.

The casual reader of “Critical” or Senator Baucus’ paper or President Obama’s campaign promises may be forgiven for thinking BOD would allow employers to enroll workers in a tax-subsidized “exchange” with no employer contribution, the equivalent in health care financing of virgin birth.  It’s necessary to search long and hard to find clues that employers would actually have to make some payments. 

In the 220 pages of “Critical,” there’s just half a sentence on page 166 that suggests that employers might be required to provide some funding. Senator Baucus’ paper takes a more subtle tack, proposing tax credits for employers paying for coverage through the “exchange,” in effect a tax on those who don’t, while President Obama’s campaign proposal offers an odd mix of mandated payments for large employers and tax credits for small ones. Like it or not, BOD is a play-or-pay plan.

This isn’t necessarily bad in itself. BOD’s emphasis on retaining an employer-based system, combined with its individual mandate and open entry to an “exchange,” means that essentially all employers must contribute somehow to coverage. (A proposal to give some employers a free ride at the expense of others would create instant opposition.) Unfortunately, there are two big and interrelated problems with the BOD approach; one is “crowd-out,” the other is financing.

“Crowd -out” is the inevitable result when it is less expensive for employers not to offer coverage than to do so.  If it costs less to pay a nominal amount into an insurance pool or a penalty for non-coverage, all but the most philanthropic or union-shackled employers will eventually do so.  Massachusetts, where employers have only to make a $295 “fair share” contribution, demonstrates this; small group enrollment is decreasing in spite of the individual and employer mandates. This isn’t too surprising; Massachusetts employers offering coverage now face the double whammy of increased employee take-up, a result of the individual mandate, and the recession. Hawaii, with an ERISA-exempted employer mandate, provides another example. Despite the mandate, fewer than seventy percent of the state’s under-65 population have employer insurance.  In a classic business reaction to government regulation of year one compliance, year two avoidance, year three contempt, many Hawaii employers have sidestepped the mandate by using “contract workers” or part-timers.

Financing is a BOD problem in itself, and even more so because of the potential crowd-out effect. With only minimal payment requirements imposed on employers, it’s going to be hugely expensive to provide premium subsidies to lower-income individuals. Eighty percent of the nation’s reported 47 million uninsured are in families with income below 300 percent of FPL, and presumably would be eligible either for Medicaid/SCHIP or for a premium subsidy. “Critical” co-author Jeanne Lambrew has proposed that no-one should pay more than five to seven percent of income on insurance, suggesting that the total subsidy costs (including Medicaid/SCHIP) would be more than $100 billion. However, this figure does not include subsidies for lower-income individuals who currently have some coverage; these additional subsidy costs, especially if there is significant crowd-out, could easily double or triple the $100 billion estimate.

Worse still, Massachusetts’ experience indicates that the CPS uninsured estimates may be low. Recent data show that the total of those who gained coverage as a result of reform plus those still uninsured is forty percent above the CPS figure (which helps to explain why Massachusetts’ reform costs are so much higher than projected).  If this is typical of most states, there are some very unpleasant funding surprises in store.

These cost estimates highlight another problem of what looks increasingly like “play-or-not-pay.”  The hundreds of billions of dollars in premium subsidies must be funded somehow. If funding is not to come from the subsidized workers’ employers, it is going to have to be raised through other taxes, meaning that those workers who do have employer coverage will be paying twice over; first in the form of premium-substituted wages, and second in the form of taxes, a scenario that will accelerate crowd-out even faster.It doesn’t take an economist to see that “play-or-not-pay” results in an inherently unstable system that will crumble as soon as it’s built. Unfortunately, the alternative of real play-or-pay, in which the non-players are assessed the costs of their employee coverage, is equally infeasible. The only uncertainty is whether NFIB members will riot in the streets or merely lynch the nearest health care reformer. And, for once, they would have some justification: increasing small businesses’ payroll-related expenses by a quarter or more in the middle of a recession would be an economic disaster. The fact is, play-or-pay, no matter what level of “pay,” doesn’t work.

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12 replies »

  1. What about Zeke Emanuel’s plan? In his plan there are no employer payments, every citizen is enrolled, and a 10% VAT does the financing. I don’t hear much discussion about that option.
    You’re dreaming if you think a 10% VAT is going to generate enough revenues to finance the largest industry in the country/world. More like a 50% VAT at minimum.
    FIX THE PROBLEM PEOPLE. The problem is cost. Until you lower costs, you are running in circles.

  2. Above first sentence should read;
    don’t you think that dollars going into healthcare by any means reduces peoples ability to spend on retail?

  3. “That VAT-funded plan makes a lot of sense–if you want to put every retailer in America out of business.”
    Gary, don’t you think that dollars going into healthcare by any means does not reduce peoples ability to spend on retail? Putting 16%+ approaching 20%+ GDP of our dollars into healthcare is what will put many sectors of the economy in peril. Taking the dollars now spent directly on premiums and care and transferring them to the tax system (VAT or other) only makes sense if we can reduce the cost of healthcare. I would hope that the 10% VAT figure does not represent just paying into the present cost structure. But at least it would be visable with people being able to judge what kind of system they are getting for the taxes paid.

  4. Nate,
    Who is one to believe? My source is a book entitled Making a Killing with forward by Ralph Nadar. Chapter six, entitled The Battle to Make Health Care Work, states:
    NCQA was formed in 1979 by the trade associations for the managed care industry — the American Managed Care and Review Association and the Group Health Association of America. The group was founded, in fact, to counter the federal government’s attempts to monitor HMOs.19 The main funding source for NCQA continues to be HMOs, although the group is seeking to diversify its funding to appear more independent. In 1997, NCQA’s board of directors was a “Who’s Who” of HMO executives and corporate chieftains, including representatives from Aetna, Blue Cross, Henry Ford Health System, PacifiCare, Harvard Pilgrim Health Care. NCQA has created its own performance measurements, the Health Plan Employer Data & Information Set (HEDIS). “The critical point here is that ‘value’ as used by NCQA is to be measured strictly in terms of cost of health care delivery, as distinguished from the clinical needs of a patient as defined by the trained professional,” said former U.S. Justice Department attorney Kenneth Anderson, an expert in anti-trust law who contends NCQA is a part of collusive behavior among the managed care industry. “Thus, the NCQA criteria by which performance is measured are initially framed by those entities — HMOs, managed care companies and employer payers — who have a strong incentive to define ‘appropriate’ levels of care in narrow economic (e.g. cost) terms.”20
    Personal experience with the pubic and very private images of Coventry, points me to Making a Killing. I welcome any additional insight. I do appreciate your interest. I have had very few people on my side for over three years; feel kinda like the Madoff whistleblower…people do not want the truth.

  5. I want to correct a number of statements in the main post describing the Massachusetts health reform plan.
    First, the post says “There was no talk of play-or-pay in the debate leading up to Massachusetts’ reform legislation.” Actually, the House Speaker’s bill, which passed the House with only a handful of dissenting votes, included a very strong requirement on employers. The bill included a 5% or 7% of payroll health spending requirement. A similar requirement was included in the bill proposed by the wide coalition supporting reform, which included consumer groups, the hospital association, medical society, community health centers, a broad religious coalition and many others. Pay-or-play was very much in the mix leading up to the reform law.
    Second, Mr. Collier writes that “small group enrollment is decreasing in spite of the individual and employer mandates.” I have not seen reported figures breaking out small vs large group enrollment, and would be curious to know the data source. We do know that group enrollment as a whole is increasing dramatically. The latest “key Indicators” report shows private group coverage increasing by 147,000 since reform started.
    Finally, the blog post claims that “Recent data show that the total of those who gained coverage as a result of reform plus those still uninsured is forty percent above the CPS figure.” No so. The initial undercount of the uninsured was due to a faulty state survey, which has since been corrected. The CPS always projected the highest number of uninsured of all the the various surveys. This is all explained in detail, in a state paper, “Estimates of the Uninsurance Rate
    in Massachusetts from Survey Data:
    Why Are They So Different?,” here: http://www.mass.gov/Eeohhs2/docs/dhcfp/r/pubs/08/est_of_uninsur_rate.pdf .

  6. Penny,
    The NCQA claims they where founded in 1990.
    Being that the HMO ACT of 1973 sorta kicked off the growth of HMOs and their where hardly any at the time your claim;
    “Are you aware that the regulatory agency NCQA, that accredits health plans, was formed in 1976 by HMOs?”
    seems a little suspect.
    Dr. Pandey,
    “I mean after all 30% of your insurance dollar goes to administrative cost conservatively speaking.”
    Do you have anything to support this? I have never seen a study that showed over 20%.

  7. While I understand the pilitics, I am not sure why we are talking so lawyerly…with so many nuances. The reform in principles are very simple. I proposed a 3 tier plan at http://blogs.biproinc.com/healthcare/?p=485
    The plan suggests also a three tiered structure. The amount of money that can be saved by nationalization of tier 1 would be phenomenal. I mean after all 30% of your insurance dollar goes to administrative cost conservatively speaking. The details are there.
    Bottom line is that either people realize now or learn trhough the difficult times that healthcare should in part be nationalized. Now only it saves money, smart thing to do, but also it increases national security and drives innovation further.
    the healthcare consultant

  8. Have you read the news today? Mr. Harry Markopolos attempted to report on the illegal activities of Bernie Madoff to the SEC for ten years. While all of your comments provide interesting reading (really!), real people are suffering as no one wants to investigate the truth about some health plans. And its challenging to break through the barriers in the way of the truth.
    As a country we will never get health reform right until people are bold enough to tell the truth. My story about the deceit and dirty tricks of former “darling of Wall Street” Coventry Health Care Inc of Bethesda MD is documented on my blog http://www.tuesdaytiradesandtales.blogspot.com. It is a story of corruption, greed and cronyism in the state of West Virginal in the health care arena. I have tried to tell my story for four years. A little frustrating, but there are many who have not made the progress I am making: I speak for them.
    Are you aware that the regulatory agency NCQA, that accredits health plans, was formed in 1976 by HMOs? That the accreditation is based solely on information provided by the health plan? That US News and World Report uses this biased data to annually rate the top health plans for its readers?
    You can understand my bewilderment when Carelink Health Plans of West Virginia, a Coventry subsidiary, received an excellent accreditation in 2008 from NCQA. Oh, the press that came out of Coventry while the innocent public remains unaware of the WV Insurance Commission’s Final Order 06-AP-024 on December 14, 2006, that mandated radical change in service because of “egregious” deeds. Nor are they aware of the civil lawsuit that will be prosecuted in 2009 in the Ohio County District Court. ERISA preemption was thrown out in the WV Federal Court. A recent motion to silence my blog was also denied.
    It’s not a pretty story, but one that repeats itself too often when the rightful benefits are denied the consumer, especially the most vulnerable – the elderly and mentally ill. The culture may not be different inside the walls of Coventry as many employees describe online the shocking conditions of working conditions throughout the country.
    Sorry to interrupt your discussion. I just keep looking for someone to care about this issue.

  9. I would eventually be in favor of a play-or-pay non-employer system, (even a 10% VAT or dedicated income tax) if the mandatory insurance did not simply feed the present money driven, lobbyist controlled, provider friendly system we have now.

  10. What about Zeke Emanuel’s plan? In his plan there are no employer payments, every citizen is enrolled, and a 10% VAT does the financing. I don’t hear much discussion about that option.

  11. Don’t forget to include CalChoice and it’s complete failure to control cost. An “exchange” designed by politicians is a terrible idea sure to destroy the market. All an exchange does is consolidate business in the hands of a few large carriers and stiffel competition, see CA for proof.
    Why are we always looking to the states with the highest cost of healthcare/insurance as models? Shouldn’t we be looking at NY, MA, and CA and doing the exact opposit?

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