OP-ED

A Healthcare Contract With America

Critics of the Affordable Care Act (Obamacare) need an alternative vision. What follows is a short explanation of the core ideas posted at the Congressional Health Care Caucus and developed in greater detail in the book Priceless: Curing the Healthcare Crisis.

Tax FairnessFamilies at the same income level should get the same help from government when they obtain private health insurance, regardless of where they obtain it. The federal government encourages the purchase of private health insurance through the tax system. Yet the current approach is arbitrary, regressive and unfair. Instead of paying taxable wages, employers are able to purchase health insurance for their employees with untaxed dollars. These employer-paid premiums avoid federal income taxes, federal payroll taxes (FICA), and state and local income taxes as well. This “subsidy” is worth almost half the cost of the insurance for a middle income family. Yet the same family receives virtually no tax relief if it purchases the insurance on its own.

Because of the way we subsidize private health insurance, the higher the family’s tax bracket, the greater the subsidy. A family earning $100,000 gets six times as much tax relief as a family earning $25,000. We are giving the most encouragement to those who need it least.

As an alternative, we should replace the current system of tax and spending subsidies with a system that offers everyone a uniform, fixed-dollar tax credit for the purchase of health insurance. The credit would be refundable, so that it would be available even to those with no tax liability. A reasonable goal, for example, would be a credit of $2,500 per adult and $8,000 for a family of four.

Universality: Unclaimed tax relief should be made available to local safety net institutions to be used in case the uninsured cannot pay their own medical bills. If an individual chooses to be uninsured, the unclaimed tax credit should be sent to a safety net agency in the community where the person lives. These funds would provide a source of finance in case the uninsured are unable to pay their medical bills.

Under this approach, the government pledges a fixed sum of money for every individual and money follows people. If everyone in Dallas County opts to obtain private insurance, there would be no need to fund a safety net and all the government’s support would be in the form of tax credits for health insurance premiums. On the other hand, if everyone in Dallas County opts to be uninsured, all the unclaimed tax credits would go to safety net institutions in Dallas.

This is an easy reform to implement, even if peoples’ insurance status changes often over the course of a year. All the federal government needs to know is how many people live in each community. If the tax credits claimed on income tax returns fall short of their potential for the community as a whole, the balance would be provided in the form of a block grant to be spent at the local level.

Portability: Employers should be able to purchase personal and portable insurance for their employees. One of the biggest problems in the U.S. health care system for the working age population is that health insurance is not portable. In general, when people leave their employers, they must eventually leave their employer’s health plan. Almost all the problems people have with pre-existing conditions arise because of a transition from the employer provided insurance to individually purchased insurance. And those problems arise because the employee doesn’t own the insurance.

There are four advantages to individually owned insurance that travels with the individual from job to job and in and out of the labor market. First, portability allows a long-lasting relationship with a health plan, which in turn allows a long lasting relationship with providers of care. This means that people who switch jobs frequently can still have continuity of care — which is usually a prerequisite for high quality care. Second, people who have portable insurance will not be locked into jobs solely because their benefits aren’t portable. Third, portable benefits are consistent with a mobile labor market, which is a necessary component of a dynamic, competitive economy. Finally, a system of portable benefits is one in which the employer’s role can be purely financial rather than administrative – much like the 401(k) system. Employers could specialize in what they do best, leaving health insurance to insurance firms.

One reason we don’t have portable insurance today is because of the federal tax law. As noted, we generously subsidize employer-provided insurance, but offer very little tax relief to those who must purchase insurance on their own. Even with these discriminatory tax subsidies, insurance could still be portable if employers bought individually owned insurance rather than group insurance. But most states make it illegalfor employers to use pretax dollars to purchase individually owned insurance and most states believe they are required to outlaw the practice under federal law.

The first problem could be solved by providing everyone with a uniform, fixed-dollar subsidy as discussed above. The second problem could be solved by a change in federal policy, freeing employers to provide employees with individually owned insurance on the same terms as all other employer-provided insurance.

Patient ControlPatients should be able to manage more of their own health care dollars. Individuals are able to save for medical expenses in a number of tax-favored accounts. Yet the rules governing these accounts are arbitrary, unfair and void of any clear public policy purpose. To have a Health Savings Account (HSA), for example, people must have health insurance with a rigid, across-the-board deductible. By contrast, people with Health Reimbursement Arrangements (HRAs) can have flexible deductibles, but they can never withdraw unspent money for nonhealth purposes. Flexible Spending Accounts (FSAs) are also completely flexible, but they are use-it-or-lose-it accounts. Any funds remaining at year end must be forfeited.

What is needed is a single, flexible account that can wrap around any health insurance plan. In this way, people could combine self-insurance with third-party insurance in creative and economically efficient ways. Ideally, unspent funds could be withdrawn for other purposes without taxes or penalties.

In addition, employers and insurers should be able to make special deposits to the accounts of the chronically ill. Studies show that chronic patients can often manage their own care with results as good as or better than traditional care. If patients are going to manage their own care, it makes sense to allow them to manage the money that pays for that care. That’s because these programs provide the same incentives and power for patients to manage and control costs as HSAs, since they are effectively spending their own money.

The Commonwealth Fund notes an international trend toward self-directed care (SDC), and it is focused on a most unlikely group of patients: the frail, the old, the disabled, and even the mentally ill.

In the United States, Medicaid Cash and Counseling Programs, under way for over a decade, allow homebound, disabled patients to manage their own budgets and choose services that meet their needs.

  • In Germany and Austria, a cash payment is made to people eligible for long term care—with few strings attached and little oversight on how the money is used.
  • In England and the Netherlands, the disabled and the elderly manage budgets in a manner similar to Cash and Counseling programs in the United States. But the fastest growing use of personal budgets in the Netherlands is for families with children who have attention-deficit hyperactivity disorder, autism, and other types of serious emotional disturbances.
  • Also in the United States, Florida and Texas have SDC programs for patients with serious mental illness, and the Veterans Administration has an SDC program operating in 20 states for long-term care and mental illness.

The British National Health Service (NHS) is contributing to SDC budgets for muscular dystrophy, severe epilepsy and chronic obstructive pulmonary disease. The NHS believes it is saving money in reduced hospital and nursing home costs. The NHS is also about to launch pilot programs that will include mental health, long-term chronic conditions, maternity care, substance abuse, children with complex health conditions and end-of-life care.

In Germany long-term care patients who agree to manage their own budgets spend 50 percent less than what would have been spent in a normal plan. In the Netherlands, spending is 30 percent less. In England, long term care services purchased by individuals cost from 20 percent to 40 percent less than equivalent services purchased by local governments.

Real InsuranceInsurance should not just pay for the cost of becoming ill, it should also pay the higher premium required if patients switch health plans. Insurance markets work best when each enrollee pays a premium that reflects the costs he or she is likely to incur. When this principle is violated (as it is under same-premium-for-all rules), people face perverse incentives. Those who are over-charged will tend to under-insure; while those who are under-charged will tend to over-insure. Even worse, insurers will have an incentive to over-provide to the healthy (to keep the ones they have and attract more of them) and under-provide to the sick (to encourage their departure and discourage enrollment of any more of them).

But what happens if someone gets sick and develops a “pre-existing condition”? Most chronic problems (diabetes, asthma, cancer, heart disease and so forth) do not arise while people are uninsured. They arise when people and their employers are paying premiums. But in a mobile labor market, people leave their jobs. When they seek new insurance, they discover that the new insurer either won’t insure them or insists on excluding coverage for the pre-existing condition.

In popular discussions of this problem, the tendency is to blame the new insurer, but this condemnation is surely misplaced. Remember, the person with the pre-existing condition has been paying premiums perhaps for many years to the original insurer. Does it make sense to allow the original insurer to collect all the premiums but force the new insurer to pay all the bills?

Part of the solution is one already addressed: we should encourage individually owned, personal and portable insurance, so that the problem does not arise in the first place. The rest of the solution is a better insurance product. If people could buy “change of health status” insurance or even better — if that were part of the normal health insurance contract — their original health plan would pay the extra premium being charged by the new plan, reflecting the deterioration in health condition. In this way, people would be insured against the economic consequences of developing a pre-existing condition.

If insurance premiums for people with health problems are artificially low, insurers will run from people such people at the time of enrollment and have no incentive to treat them well after enrollment. Under the proposal made here, the insurer would be fully compensated for the above-average expected costs. As a result, insurers would complete to attract the sick as well as the healthy and would search for ways to better meet their needs.

John Goodman is president and CEO and Kellye Wright Fellow and Peter Ferrara is a senior fellow at the National Center for Policy Analysis.

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ski equipmentZacmovers company South FloridaGuiness Securities Ltd is one of India's leading financial services company.We offer a well diversified range of financial services such as Equities, Derivatives, Commodities, IPO, Mutual Funds, Depository, Portfolio Management Services and Insurance. We Bob Hertz Recent comment authors
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Guiness Securities Ltd is one of India's leading financial services company.We offer a well diversified range of financial services such as Equities, Derivatives, Commodities, IPO, Mutual Funds, Depository, Portfolio Management Services and Insurance. We
Guest

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Bob Hertz
Guest

Let me say it again — the numbers do not add up in the Goodman-Ferrara health plan at first reading.

And it isn’t just me. A reader of the Goodman blog post on “Republican Alternative to ObamaCare” in April stated the following:

– there are 54.1 million family households and 28 million single households under age 65 and not on Medicaid.

At this rate, the tax credits would cost $660 billion.

That is a MAJOR increase in the federal deficit.

Dr Goodman and Mr Ferrara, please answer here when you have a minute.
Something seems fishy/

Bob Hertz
Guest

Sorry for the late post, I was on vacation when this first appeared. I really like the theme and concept, but I am having a real problem with the federal budget numbers in this proposal. Let me explain. If you take 300 million Americans and then subtract those on Medicare, those on Medicaid, prisoners, American Indians, soldiers and their families, and illegal aliens, you are down to roughly 180 million. Assume that 120 million are adults over age 21, and 60 million are children. The proposed credits as i understand them go against taxes paid, not income, and the unused… Read more »

SALVI
Guest

You’ve got great insights about health care, point taken!

Barry Carol
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Barry Carol

John Ballard – I like the exchanges idea conceptually because it will improve transparency and make it easier for consumer to compare insurance offerings both within and across companies. It is also important to note that if you qualify for a subsidy, you MUST use the exchange to make your selection. There is also the issue of how much it will cost to administer the exchanges and who will pay for that. I also think employers, especially larger employers, will continue to play an important role in providing health insurance for their employees and their families. To my knowledge, though,… Read more »

Barry Carol
Guest
Barry Carol

John Ballard — The majority of people who get their health insurance through an employer are in self-funded plans. This means that the employer is responsible for paying all valid claims above a set deductible and after co-pays unless it has purchased stop loss insurance. The insurer processes claims and provides a network of doctors, hospitals, imaging centers, labs, etc. for a set fee per member per month (PMPM) or per employee per month (PEPM). In your area, the insurance card may say Blue Cross and Blue Shield of GA but claims are actually being paid from a checking account… Read more »

John Ballard
Guest

These last two comments have been tremendously helpful and informative. I’m sure it’s old stuff for insurance professionals but for a layman the big picture better explains the smaller parts of a very big puzzle. Many thanks. I already knew about TPAs and large employers being self-funded. That means that a collection of small companies will never be comparable to the same number of covered employees in a group plan. Do you have any opinion about the exchange concept? They seem to be amphibians in the insurance pond, neither small businesses or large groups. And would there be a special… Read more »

Barry Carol
Guest
Barry Carol

John Ballard – Everything in life, it seems, involves tradeoff. Anyone who signs up for a Medicare Advantage plan cannot return to standard Medicare later without passing medical underwriting unless the insurer no longer offers MA plans in that area. Most insurers that offer Medicare Advantage plans do so in counties where they think they can make money and don’t offer them where they can’t. They submit bids each year to CMS against a benchmark which relates to the average cost of standard Medicare in that county. In places like Miami-Dade County in FL, the average cost of standard Medicare… Read more »

steve
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steve

Need to make this into a plan and get CBO to score it. My initial thought is that it still leaves those in the 100% of FPL to 300% of FPL vulnerable. Also, what stops an insurer from increasing premiums to the point of being unaffordable if one develops a chronic disease?

Steve

John Ballard
Guest

Thanks. That clarifies what happened. It’s mystifying for someone just coming into the system. Your mention of “medical underwriting” rings a bell. I think the agent said we would be subject to medical underwriting had the MA provider not left the area and we decided to return to Medicare. One mystery that remains unsolved for me is why MA had a “premium” of ZERO??? And why even a few miles to the South the premium was a mere $40 (instead of larger amounts for supplements). Clearly the industry was sweetening the bait to capture as many Medicare beneficiaries as they… Read more »

Barry Carol
Guest
Barry Carol

John Ballard – Community rating means that everyone within a given age tier pays the same for health insurance regardless of health status. It’s under medical underwriting where sicker people would be charged more or, in some cases, would be considered uninsurable and not offered insurance at all unless they were accepted into a high risk pool if one exists and is not already closed to new enrollees due to cost constraints imposed by the state operating it. You were able to switch back to standard Medicare plus a supplemental policy because you were considered continuously insured, which you were.… Read more »

Barry Carol
Guest
Barry Carol

I think it would be better to get rid of the tax preference for employer provided health insurance altogether in favor of lower marginal income tax rates and a higher standard deduction. I don’t get a tax preference or deduction for buying homeowner, auto, life, long term care or any other form of insurance. Why should health insurance be different? Subsidies are OK to help lower and middle income people buy health insurance, but the percentage of income that they should be expected to contribute toward their premium should be higher than it is under the PPACA, income should be… Read more »

John Ballard
Guest

I like the idea of getting rid of tax preferences for insurance, for both individuals and companies. With the new rules now governing health insurance, especially medical loss ratio, guaranteed issue and removal of lifetime caps, there is no longer any reason to “encourage” anyone to buy health insurance. The problem of what experts all adverse selection or moral hazard and politicians call “free riders” not becomes the fly in the ointment. In order for the system to work now somebody will have to put a thumb on the scale from time to time to keep it working. I had… Read more »