Reforming Health Reform

It may say something about expectations for the Affordable Care Act that the simplistic “just repeal Obamacare” cries of Congressional Republicans are starting to be supplemented by proposals for its replacement.

The most detailed so far is from the conservative American Enterprise Institute, which has published an unexpectedly non-doctrinaire study authored by Harvard professor Michael Chernew and seven other respected academics.

It’s far from perfect, but it’s worth reading.

Structural details of the AEI proposal, modestly titled “Best of Both Worlds,” aren’t always clear (page 1 lists four “principles,” page 5 lists five “priorities”, and page 16 lists three “major planks”), but it does attempt a bipartisan approach, combining ideas from left and right.

Some of these ideas have been contained in other proposals, such as those of Wyden and Bennett and Fuchs and Emanuel (which may damn the AEI proposal in right-wing eyes), and most recently in a THCB piece by Martin Gaynor. They include the elimination of the employer coverage tax preference, the provision of “premium support” subsidies for most individuals, and the establishment of a national insurance exchange. Together, they are designed to encourage individual choice and responsibility and to maximize competition between insurers, while removing some of the inequities of the present system (and of the ACA).

The AEI proposal assumes that eliminating the employer coverage tax preference will result in most individuals obtaining coverage through a national exchange, with national regulation of insurance plans. Current Medicaid eligibles will be included, with the replacement of acute care Medicaid funding by subsidies for conventional coverage. All individuals will be able to choose between fully-subsidized “basic plans” and more generous partially-subsidized options, typically with substantial deductibles tied to income and health status. Insurers will be encouraged to offer multi-year coverage and, unlike in the ACA, medical underwriting will be allowed. The only government financing will be for premium subsidies, to be funded by the additional income and payroll tax revenues resulting from elimination of the employer tax preference and by redirecting federal and state Medicaid payments.

It’s a coherent and somewhat persuasive proposal (at least, on a first reading), and one which goes to some lengths to level the health insurance playing field. It removes the tax advantage that high-paid covered employees currently enjoy, and potentially eliminates “job lock” and the inequity between those with and without employer coverage. It gives individuals the opportunity (and responsibility) to choose the coverage that best meets their needs from the largest possible menu of plans, while eliminating the present “second class” Medicaid system. It allows medical and demographic underwriting in order to lower premiums for the young and healthy, but offsets this with lower deductibles and copays for the less well.

Compared with the ACA, it avoids the publicly unpopular and politically poisonous individual mandate, while offering a much less complicated structure, free of the ACA’s maze of penalties, incentives, and exceptions. According to the AEI, It would also require less government funding, by some $6 billion a year.

It’s too bad that so many of the AEI’s assumptions are overly optimistic.

Eliminating the tax preference doesn’t guarantee that the inequities of employer coverage will go away. Given the proposed high deductibles, especially for higher-paid workers, many employers will almost certainly be forced to offer supplemental coverage. A national exchange with national regulation has the potential of replacing state control by a huge federal bureaucracy. Replacing acute care Medicaid by subsidized conventional insurance would, even according to the AEI’s estimates, increase costs by one-third. Allowing almost unlimited risk underwriting has the potential of creating an actuarial nightmare while allowing insurers to structure rates so as to cream the market. Multi-year contracts are a nice idea for encouraging preventive care, but even the AEI proposal questions their feasibility.

Worse still, the proposed funding would result in “basic plan” coverage—which the AEI proposal fails to define—being extraordinarily limited. The only sources of financing for the basic plan subsidies are the additional taxes from elimination of the employer tax preference (estimated by the AEI authors as some $313 billion), and elimination of all but long term care services from Medicaid (estimated to save $332 billion). Unless the new conventional coverage for current Medicaid eligibles is to be substantially reduced from today’s levels, costs will increase by more than $100 billion a year, leaving barely $200 billion for basic plan subsidies for the rest of the non-Medicare population. Given that today’s non-government health insurance expenditures are some $900 billion, the implication is that for most of the population the basic plan coverage will be less than than a quarter of current levels, forcing individuals or their employers to purchase substantial supplemental coverage or accept such high deductibles that needed care becomes unaffordable.

So why is the AEI proposal worth looking at?

For all its considerable faults, it avoids the fundamental weakness of the ACA: perpetuating every complication of the existing system (and adding some more). Now, if the AEI could figure out a way of funding their proposal to provide an acceptable level of coverage, they might have something that could be taken seriously.

Roger Collier was formerly CEO of a national health care consulting firm. His experience includes the design and implementation of innovative health care programs for HMOs, health insurers, and state and federal agencies.  He is editor of Health Care REFORM UPDATE.

16 replies »

  1. 彼は碁を打ちたいのに、碁を見せられるという感じがした。そうして同じ見せられるなら、もう少し面白い波瀾曲折のある碁が見たいと思った。すると直須永と後姿の女との関係が想像された。もともと頭の中でむやみに色沢を着けて奥行のある

  2. alan, whose jobs did you want them to take to perform those duties?

    Many of the people on Medicaid are children, disabled, elderly, as well as working poor. How would your “solution” help?

    You might be interested that many eligible 65+ Medicare recipients quickly run through all their contributions in health care use. Do you want them to clean streets as well? How about the tax breaks that workers get for company provided health care, should they also step up?

    There are a lot of “free loaders” on the system.

  3. How about requiring all those receiving state and federal aid through Medicaid and less than Medicare age, to volunteer in state and federal programs that supply work back to society in exchange for their health care and food stamps?
    That will help reduce government expenditures on services, restore some sense of responsibility to those on state and federally funded programs.

  4. This may not be wholly fair, but in my experience most of those persons who advocate for individual insurance are themselves covered by secure group plans at their university or think tank.

    You might call them limousine darwinists.

  5. The AEI “plan” does not address how to lower health costs, only insurance costs.

    It assumes insurance companies are acting in premium payers best interest in the rate system they use. It assumes that sick people should pay more for insurance just because of life circumstances. It assumes that reducing coverage to save costs is a laudable achievement. It assumes that healthcare delivery for profit is good.

    All that would be wrong.

  6. Here are twot hurdles in moving from group insurance to individual coverage:

    in group insurance, about 15 per cent of employees receive complete coverage, i.e. no cost sharing with the employer. You find in this in some union plans and wealthier school districts and very prosperous small firms.

    I cannot imagine any method by which they will not come out worse in a shift to individual coverage. I do not stay up nights worrying about them, but this is a political fact.

    A much larger group pays something toward employer coverage. Here I think the big challenge is age rating in the individual market.

    Say that as an employer I have two auto mechanics, each making $40,000.
    One is 25 years old and one is 55 years old.

    Under group insurance i expect each of them to pay 20% of the company group premium.

    If I want to move to individual coverage, what do i give each of them as a subsidy? Suddenly the hidden costs become visible. If I give them the same dollar amount, the 55 year old might become uninsured. If I give them unequal amounts, this may be disruptive.

    If we were back in the 1950’s or in New York State, where there is no age rating, this would not be a problem. But it is a problem now!

    the general pattern is for each employee to pay a flat amount like $250 a month, or 20% of the premium, for their share of coverage
    costs. The employer pays the rest.

  7. You are right Legacy Flyer. But without the protections of the ACA, morphing into an individual market system from our primarily employer-based, guaranteed issue system with its tax advantages, would never be accepted by the public.

    Mitt Romney pitched this very idea while on the 2012 campaign trail. No one asked him what this would mean for others who share the health challenges of his lovely wife Ann. What if he had been far less connected and wealthy and could not afford the premium costs of insuring someone he obviously loved very much through a high-risk, government insurance pool but made too much to qualify for Medicaid? Would he expect her to go find a job with benefits while she tries to take care of her health? What company would take on a new employee with a chronic disease to increase the cost of insurance to the company and other employees?

    We may well be on our way to an Individual Market system as the technology makes this much more feasible, i.e. health insurance exchanges. The corporate world no longer needs the golden handcuffs to find and keep employees as in decades past. Employees are becoming less impressed with “benefits” as they see their pay increases immediately absorbed by the increases in deductibles and their portion of insurance premiums which just transfers the raise they thought they had earned to the insurance and health care industry. If corporations can determine that dumping health insurance costs after factoring in the ability to cut HR staff and that morale can be enhanced more with actual pay raises, their efforts to influence a shift will pick up steam. The employee, however, can expect to see less than an equal trade. That raise will be dinged thrice: the increase in the employer’s portion of payroll taxes will lessen the raise, their own withholding taxes, and in the end an increase in income taxes due on a chunk of what they used to earn tax free.

    The portability of the individual market is a good thing. There’s just a lot to overcome. The ACA with its protections to cap costs to the insured while guaranteeing access to insurance and making premiums more affordable may help pave the way. The upsides of moving to an Individual Market will have to catch up to all of the downsides left by our old, awkward, dysfunctional system. And employees used to employer-provided benefits will have to see a net gain at year-end.

  8. It seems to me that, the tax deduction for health care should be given to the individual, not the employer.

    The employer would then (hopefully) pay what they had been paying for health insurance directly to the employee who could then make their own choice on what insurance they want.

    In this way, health insurance would be made more portable.

    I understand that this would throw a whole lot of people who are in group insurance into the individual market – which could have various associated problems. Nevertheless it seems to me to have at least two advantages; greater individual choice, greater portability of health insurance.

  9. Politically this is ridiculous. Every wonk told the Dems to deal with the tax deductibilty but as soon as McCain mentioned it Obama was against it–and worse the Unions wouldn’t be moved. They even want subsidies for their members in employer paid union plans now (no other employee gets an ACA subsidy unless their employer cuts them adrift and puts them into the Exchange, in which case they’re paying with POST tax $$.)

    So the Cernew/AEI report tries to thread the needle and would never see the light of day for reasons Deborah articulates.

    Suck it up America–we’ve got what we got in the ACA and we have to deal with it for a bunch of years to come.

  10. Reading from the other side of the world (Sydney), very interesting indeed and a great response Deborah.

  11. Great post,Deborah.

    You are correct that ‘phantom taxes’ will drive people crazy.

    Also of interest is your suggestion that Medicare costs are highest among those who are uninsured ages 55-65.

    The recent high risk pool was swamped by the cost of persons who had deferred treatment, so you are probably right.

  12. Obviously, the AEI is failing to recognize the unmovable boulder that has already blocked this “conservative” plan from ever seeing the light of day: Grover Norquist and his minions who have taken “the oath” to never raise taxes. This is DOA because the AEI is proposing two tax increases. One is clearly defined; the other is coming.

    Thank goodness for the Grover Boulder. Because the last thing anyone who has lost employer-based insurance coverage — and everyone else who wonders if their job is really secure — needs to hear right now is that the insurance industry would be able to return to their practices of cherry-picking beneficiaries by pricing bad apples out of coverage and attaching permanent exclusion riders to everyone else’s individual policies for everything from an old injury from a car wreck to runner’s knee to the future potential of arthritis that may or may not emerge and that excludes even a new head injury from a fall on the icy sidewalk that was surely caused not by the ice but by that bum knee in that exclusion rider.

    Even Grover would probably admit that past inflation rates for health care costs (pre ACA) were unsustainable. The resulting premium increases to both employers and employees as well as those unlucky enough to be in the individual insurance market and the increasingly burdensome out-of-pocket costs for all of the above logically leads to worsening health outcomes and sicker and costlier Medicare patients who for years leading up to age 65 wait until they can afford to go to the doctor which for many is the first day they qualify to become a Medicare beneficiary. This — Grover, are you listening? — out of necessity, must lead to higher taxes to pay the healthcare costs for the glut of baby boomers who put off procedures, screenings, and maintenance of chronic conditions which the ACA is already encouraging and mandating and making affordable. Medicare taxes, under the AEI plan, would either have to increase or beneficiaries would have to pony up and pay higher out-of-pocket costs. My bet is with the baby boomers. After all, what politician is going to vote to take away benefits to these millions of voters? Or show up to town halls to face angry mobs holding pitchforks and placards that scream “Hands Off My Medicare!” and “Paid for Medicare. NOT Vouchers!”?

    So employees, under the AEI plan, would now pay taxes on a new chunk of income that they never see; And these same employees can look forward to higher taxes withheld for Medicare. Two new tax increases. AEI has just secured Grover’s relevance. He must be thrilled.

  13. I will study this in more detail, but let me voice one caution right away.

    Making employer health insurance payments into taxable income may not be such a panacea, for several reasons:

    a. Say that I as an employee now receive $12,000 a year in tax-free employer contributions toward my family health insurance.

    Suddenly the $12,000 is taxable to me.

    Say that I am 55 years old and smoke and make $70,000 a year with no kid at home.

    Employer group coverage is still a better deal for me even if it is taxable. My premium on the exchanges would be a lot higher than the taxes on $12,000. Why should I want to change?

    2. So I stay with the employer plan and pay my taxes. In a 25% marginal bracket this will cost me $3000.

    Leave aside the wild political resentment this would cause, whether from
    Republican real estate salesmen or well paid Democrat Federal employees.

    Say that somehow this passes.

    My monthly income is down by $250. That means a lot of restaurants not gone to, cable TV cancelled, health club memberships cancelled.

    The resulting unemployment must be balanced against these wonderful extra taxes that will presumably be collected from resentful insured employees.

    Ideology aside, I am not sure the AEI plan works fiscally as I initially understand it.

  14. The proposal certainly needs more work, but it seems to be grounded more in reality than ACA. Unfortunately, it is still health care financing reform when we need health care system reform.