Universal Coverage without Mandates

When Barack Obama was a candidate for president, he endorsed universal health insurance, but opposed forcing individuals to buy their own insurance.

As President, he signed into law a bill that violates both of these promises. The Affordable Care Act (ObamaCare) gives the federal government the authority to tell every American what insurance they must have, where they will get it and what they will pay for it. Moreover, even as it violates another campaign promise (“if you’re in a plan you like, you can keep it”), the most optimistic estimate expects 23 million people will remain uninsured once the new health reform law is fully implemented.

Now that the Supreme Court has declared the mandate constitutional, what’s next? Mitt Romney says “repeal and replace.” But what should we replace ObamaCare with? Republicans on Capitol Hill are being way to timid. They are endorsing only modest reforms that will not solve the more fundamental problems of cost, quality and access to care.

Here is my suggestion; Return to the two original ideas Obama said he was for: universal coverage and no mandate. How can that be done?  Ironically, the first step is to consider a health policy idea proposed by Obama’s presidential opponent, John McCain.

There’s got to be a morning after,
If we can hold on through the night.
We have a chance to find the sunshine,
Let’s keep on looking for the light.

The Current System. Most people who purchase private insurance today benefit from federal tax subsidies that total about $300 billion a year. Yet the system is completely arbitrary and unfair. The amount of tax subsidy any particular individual receives depends upon whether the insurance is obtained through an employer, what options the employer offers, the family’s tax bracket, and other factors. For a middle-income family facing a 25 percent federal income tax rate, a 15.3 percent Federal Insurance Contributions Act (FICA) tax and a 5 percent state income tax rate, the ability of an employer to pay premiums with pre-tax dollars is a subsidy worth 45.3 percent. Government is efficiently paying almost half the cost of the insurance.

Because the amount of subsidy depends on the employee’s tax bracket, the largest subsidies are given to people who need them least. In addition, the system encourages waste. The more expensive the insurance, the larger the subsidy. Also, since most of the uninsured do not have access to employer provided coverage, they get little or no tax rebate when they purchase insurance on their own.

Our system for taking care of the uninsured is also arbitrary and unfair. Although no one knows the exact number, it appears the uninsured pay about half the cost of the health care they receive from their own resources, leaving the other half as unpaid bills. Yet how much help people get depends on where they live, how many other uninsured patients are also seeking care and how much hospitals get from federal, state and local governments.

Under ObamaCare, tax and spending subsidies for private health insurance will become even more arbitrary and unfair. For example, a family earning just over $30,000 a year will get no additional tax relief for employer provided insurance. Yet the government will pay as much as 95% of the premium if the family gets insurance through a health insurance exchange. In the latter case, the family can get $20,000 more help from the government in some cases.

A Better Way. Suppose the government offered every individual a uniform, fixed-dollar subsidy for the purchase of health insurance, say $2,500 for every adult and $1,500 for every child. A two-adult, two-child family, then, would get $8,000. The credit would be refundable, so that it would be available even to those with no tax liability. This was essentially John McCain’s proposal in 2008. The idea was also included in legislation proposed by Sen. Tom Coburn (R-OK), Rep. Paul Ryan (R-WIS) and others.

To make the arrangement universal, however, one more step is needed.

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 — in case he generates medical bills he cannot pay from his own resources.

To implement the program, all the federal government needs to know is how many adults and how many children live in each community. In principle, it will be offering every adult an annual $2,500 tax credit. Some will claim the full credit. Some will claim a partial credit (because they will only be insured for part of a year). Others will claim no credit. What the government pledges to each community will be $2,500 times the number of adults and $1,500 times the number of children. The portion of this sum that is not claimed on tax returns should be available as block grants to be spent on indigent health care at the local level.

Suppose that every adult in Dallas County chose to obtain private insurance, relying on a refundable $2,500 federal income tax credit to pay the premiums. As a result, Dallas County no longer would need the money that previously funded safety net medical care. These funds could be used to fund the private insurance premiums, instead.

On the other hand, if all the adults in Dallas County changed their minds and opted to be uninsured, the $2,500 unclaimed credits would be available for safety net institutions.

Where would the federal government get the money to fund this proposal?

We could begin with the $300 billion in tax subsidies the government already “spends” to subsidize private insurance. Add to that the money the federal, state and local governments already spend on indigent care. For the remainder, the federal government could make certain tax benefits conditional on proof of insurance. For example, the $1,000 child tax credit could be made conditional on proof of insurance for a child. For middle-income families, a portion of the standard deduction could be made conditional on proof of insurance for adults. For lower-income families, part of the Earned Income Tax Credit (EITC) refunds could be conditional.

Is an $8,000 refundable tax credit for families adequate? The typical employer plan these days costs twice that amount. But in almost everyone’s estimation the typical employer plan is buying a lot of wasteful and unnecessary care. The $8,000 would pay for core, catastrophic insurance that we want everyone to have. Any additional coverage purchased by employees and their employers would have to be made with after tax dollars.

Every dollar spent on additional insurance would be an unsubsidized dollar. It would be a dollar that would otherwise be take-home pay. Given this new subsidy structure, it is highly likely that insurers would begin offering plans that cost $8,000 or close to it. Of course, these plans would have fewer options than the typical employer plan today.

To complete the idea of “uninsured coverage,” I would offer one other suggestion. Let Medicaid be open to everyone. That is, let families use their $8,000 tax credit (plus some additional amount contingent on family income) to buy into Medicaid. At the same time, let everyone currently on Medicaid have the opportunity to leave the program and apply their Medicaid dollars to private insurance.

Bottom line: we can have a reasonable system that provides basic coverage to everyone without dictating what insurance people have to have, where they must get it and what they have to pay for it.

 

Comments (33)

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  1. Alex says:

    I like this plan. Thanks for the info Dr. Goodman.

  2. Larry says:

    I reject your first premise. That the government is ‘paying’almost half the cost of insurance. They are ‘paying’ it with my own dollars. Dollars that I earned, not them!

    You’re sounding like one of those politicians that gives us our money back (with a discount) and tells us what a great job they did geting us funding for this project or that in our town.

    So I earned more and got to keep more of it to pay for my health care. Is there something wrong with my spending the money I earned?

  3. Devon Herrick says:

    I like the idea of a tax credit far better than a sliding scale subsidy or an tax exclusion. People will always use more of something if it is subsidized at the margin.

  4. Studebaker says:

    Doesn’t the health care law add new taxes on insurance companies? Maybe a better way would be to tax insurance products at the time of sale. A 100% tax levied on the value of health insurance with the tax revenue going to an HSA would be a better idea. That would discourage costly insurance while providing the funds consumers need to pay their deductible.

  5. Mick says:

    It is unclear to me where pre-existing conditions are in your proposal. I don’t see anything but the current “tough luck” for folks with those circumstances. I’m in favor of a deliberate, national discussion/debate on the topic.

    I know that many such conditions are preventable, but some are not. As a matter of social policy, I’m willing to pay for those pre-existing condition that are not “life-style” related, whatever those are.

    Having stated all of the foregoing, I like you plan. Thanx for thinking and sharing. I have shared your comments with others.

  6. Don McCanne says:

    Cutting what insurers pay for health care in half by eliminating “wasteful and unnecessary care” has been a policy goal for several decades, yet spending continues to escalate. There is no insurance product design that is effective in separating truly beneficial care from wasteful and unnecessary care.

    Accountable care organizations are the latest iteration of such efforts, but it is already clear that they will have difficulties merely tweaking spending, much less cutting it in half.

    A tax credit of $8,000 per family would result in shifting even more costs to families with health care needs, or prevent them from receiving truly beneficial health care services, or a combination of the two.

    A single payer system wouldn’t cut spending in half, but it would slow the rate of cost escalation without the need to cut beneficial services or create financial hardships for patients.

  7. Harold says:

    Larry, that’s a clown comment bro.

  8. David says:

    Would it not be true that once this plan is in place, after dealing with a transition from the current state, there would be little need for concern for “pre-existing conditions” as everyone have coverage or have opted to “self insure.” Stringent waiting periods (say, one year’s wait for every year uninsured)could be applied to the later group to avoid antiselection.

  9. Greg Scandlen says:

    John,
    As I have said for years, this is the cleanest, most elegant plan out there.

    Plus it deals directly with one of my biggest concerns — that there is a large number of people who simply cannot cope with insurance of any kind. They need the direct delivery of services.

    Let’s keep banging this drum and eventually even Republicans will wake up.

  10. Rick Jackson says:

    Brilliant idea John!!

  11. Mike Korbey says:

    Hi John,

    Universal Coverage without a Mandate. Why are the R’s so afraid of the “u” word?
    I have never understood this. I know what you said before — they’re lost. Agree.

    As for your proposal, which I mention every chance I get, for those that do not use the credit, could you not also set up a system where insurance companies bid for their business?

    Take care.

    PS. Bought your book Priceless. Am reading now.

    Mike Korbey
    Director of Legislative Affairs
    The Conservative Caucus
    Vienna, VA

  12. Rick Lane says:

    Dear John,

    I completely agree with you. The Republicans aren’t giving Americans a choice of plans! They are poking at ObamaCare with nothing to suggest themselves except an inference of keeping things the same. This is wrong for our country and bad politics. Please use your influence to speak with Republican leaders and get them on a positive solution of their own. Please.

    Rick Lane

  13. Art Jetter says:

    Brilliant

  14. Bob Lucisano says:

    No one is adressing the main problem, health care services cost too much money because the cost are not transparent. Other countries have used government controls on the cost of care, ie universal halth care and you get rationing of care. Let the carriers give the money to the patient for services needed and let the patient shop for a good deal and the price will come down. Other than emergency care people can get a better deal. Doing away with automatic assignment of benefits and the big pile of crap word the carriers use to raise rates called “trend” would help.

  15. Bruce says:

    A thoughtful piece. Thanks. We need change – we cannot just repeal.

    I also agree that we need to address the cost side. An MRI should cost the same regardless of who is paying. Doctors should understand what they are making on a procedure. Somehow, I think the hospitals know (but I’m just guessing).

  16. Doug Andrews says:

    John, Great start but needs more on the pre-existing condition issue. Either in acceptance of risk (can’t turn down) or in rating of risk (reasonable limites of stratifying rates). This needs to be part of the discussion and cat plans are in a better position to ameliorate this issue.

  17. Jan Peter Ozga says:

    Without a sensible alternative, Obamacare will remain the law of the land and the health care system’s inequities and inefficiencies will continue. This is not reform. Neither is the the Republicans’ implied mantra of “progress through status quo.” It just doesn’t cut it.

    The health care system as is remains unfair and unresponsive to many, including those who are paying for other people’s health care, those who are not provided the same tax break for health costs, and those who are lost in the labyrinth of the health care system. Making it available to more people doesn’t improve it.

    The USA, the richest country in the world, is spending $2.5 trillion dollars on health care but with results that are embarassingly poor compared to countries who spend considerably less. Are Europeans that much smarter than us? Are their citizens that much different from us? Do they have lower standards of care? I think not. We just have too many special interest groups sustaining — then feeding off — a bloated organism.

    Mr. Goodman’s plan may not be perfect but it offers immediate help to those who need it as well as incentives to stakeholders to function more wisely within the system.Moreover, it provides a foundation for reform based on fairness and practicality — without creating still another level of bureacracy. Plus, if needed, it can be modified with limited disruption.

    To paraphrase John Lennon, “give reason a chance.”

  18. Karl Stecher says:

    To Rick Lane: Your criticism of Republicans is incorrect. Republicans had a full plan at the time Obamacare/Abysmalcare was being discussed and voted on. Democrats just kept the plan stuffed in committee.

    Re. Medicare or Medicaid for everyone: Medicare requires an individual to contribute for many years, then to be eligible at 65 for the plan, for which the mandated enrollee pays a monthly premium. But it is lousy insurance: Doesn’t cover hearing, dental, or eye (except cataracts and macular degeneration), requires some secondary insurance policy (Why should this be, if Medicare is so great?), only covers one individual (not a family plan, for those who compare costs), and only pays doctors 26 cents on the dollar…as if paying a gas station owner 85 cents a gallon if in a “Gasicare” program.
    Medicaid is a charity plan for low income people…not really insurance, and pays about 22 cents on the dollar. Since most doctors’ offices have a 40-45 cents on the dollar overhead, they can’t afford NOW to take Medicare or Medicaid patients. And it will be worse with a larger percentage of such patients.
    And, also for Mike: The problem with a “u” run by the govt is that they fail to pay any reasonable reimbursement rate, and tell patients and doctors that what they pay is “usual and customary.” It is not. What say you of the recent “Obamacare” bill, which cut $575 BILLION from Medicare? Won’t that lead to rationing? Of course it will.
    Insurance companies and, worse still, the Govt, have stuck it to doctors for so many years, resulting in fewer of the best and brightest going into Medicine, that we are close to the tipping point. To give you a concrete example: Neurosurgeon, trained 18 years after high school before starting, examines patient with brain tumor, operates 4-7 hours, cares for pt 5 days/nights in ICU, 9 more days in hospital, gives all care for 90 days after surgery. Medicare allows: $1,760.00. Office overhead is $130-175 per hour.

  19. Jon Kessler says:

    John and friends, I offer this as serious feedback to improve an already good idea.

    1. Larry’s initial comment is important. The absence of a tax is not a subsidy. This language clouds your presentation.

    2. You imply that if employer-sponsored health insurance were taxed like wages, the approx. $900 billion employers spend on this (net of employee contributions to premiums) would fall, and wages would rise. That is true, but not dollar for dollar or even close, since the demand for labor is price elastic (and supply less so). What could be done transitionally to push those dollars in the direction you intend? Here is a suggestion. Permit employer contributions (not payroll but real employer money) to HSAs over and above the annual contribution limit and irrespective of whether the HSA holder has qualified coverage, and permit distributions to pay for health insurance premiums (as is already allowed post-65). The contributions would be non-taxable. Employers who offer group coverage for reasons other than taxes would keep offering group coverage. Those (I presume most) who would prefer to let individuals decide absent the tax issues would shift dollars from premiums to account contributions.

    3. Echoing other commenters, I would retain a strict prohibition on pre-ex and medical underwriting, not as a right, but as a reward for individual responsibility. If you can show proof uninterrupted of coverage from 18 or for the past 10 years, you get it. If not, you don’t. If some people want to go bare, fine. It has risks as well as benefits.

    4. How to pay for it. Let’s say your tax credit costs approx. $400 billion. Taxing employer-sponsored health insurance like wages, as you propose, would raise perhaps $250 billion. Reduce that to $150 billion by my #2 above. I believe you could fill the gap by means testing the credit, eliminating FSAs and HRAs (which would now be unnecessary), and a few other odds and ends. I’d be happy to explore this in greater depth. If the tax credit is indexed to regular (CPI) inflation, savings would be larger in the out years (because the current tax exclusion costs more each year based on medical cost inflation which is much larger).

    5. Competition and transparency are good things. I would look at ways to increase competition both in health insurance and health services. And I would create consumer protections against the kinds of price discrimination that go on today between insurers and their largest providers versus the smaller carriers.

    6. How do you propose to deal realistically with mandated benefits, which raise ross but are very popular.

    Jon

  20. Raymond Wooldridge says:

    John, very well said, but I am not certain that the government belongs even this far in our lives.

  21. Dean Clancy says:

    “Universal coverage” should not be our goal.

    The goal should be lower costs and more individual freedom.

    Coverage gains will occur as a natural and welcome by-product.

  22. Frank Timmins says:

    This is thinking along the right lines for sure. Personally I think we need to go further with the idea. While I agree that it would be a good idea to remove health “insurance” from the deduction line, it would seem counter productive to also remove HSAs from tax protection (especially given that purpose of the idea is to encourage people to buy less expensive “catastrophic” insurance.

    Given the actuarial implications of the credit/voucher on participation (high enrollment percentage), and the adjusted risk nature of a true catastrophic insurance product, we do not need to reserve a right for carriers choosing to offer this product to medically underwrite applications. If this is included we have a winner for replacement of the Obamacare mess.

  23. Brian says:

    Romney is going to have to elaborate a lot more on the “replace” part pretty soon.

  24. John,
    I take it you would leave Medicare as is? Do costs there. not need to be reduced? Do you see a role for guaranteed renewable and transferable policies as proposed by U. Chicago profs?
    Bob B.

  25. John R. Graham says:

    This blog has had more than one article praising Prof. John Cochrane’s proposal. This entry didn’t mention it, so it looks like Dr. Goodman is proposing a system in which the beneficiary and insurer re-contract every year, leaving the beneficiary at risk for re-underwriting with pre-existing conditions.

    Those familiar with Dr. Goodman’s proposal know that this is not the case: It embraces not only guaranteed renewability for those who pay premiums without interruption, but also health-status insurance like that proposed by Prof. Cochrane. So, if I am insured by ABC Blue Cross and get sick, and then want to switch my coverage to XYZ Blue Shield, a large amount of money (the Net Present Value of my expected health costs over my remaining life) comes with me. So, the sick patient is an asset, not a liability to a new insurer.

    However, you don’t need a big government intervention to ensure this result. The tax reform proposed by Dr. Goodman would give rise to such insurance policies, because nobody, if free to spend his own money on health insurance, would buy health insurance that re-undewrote him when he got sick.

    I bought twenty-year term life insurance when I got married. The premiums are fixed for the entire term. Fortunately, I have remained healthy. However, if I had had cancer or any other illness, it would have had no effect on premiums. I would not have bought the policy otherwise.

  26. John Goodman says:

    @ Alex, Rick, Mike, Art, Jan and Ray:

    Thanks.

    @ Larry:

    Good point. But the practical effect of taxing you unless you do X is to subsidize X and penalize non-X.

    @ Mick, Doug, Jan, and Frank:

    Bob Blanford and John Graham got this right. You should be able to insure against pre-existing conditions ala John Cochrane’s idea of health status insurance: http://healthblog.ncpa.org/rational-health-insurance/

    @ Don:

    I have dealt with the idea of single-payer health insurance extensively in Lives at Risk: http://www.ncpa.org/pub/lives-at-risk

    But then, I think you already know that.

    @ Bob and Bruce:

    I don’t disagree.

    @ Karl:

    The GOP never had a “full plan,” unless by that you mean the Coburn/Ryan/McCain plan — but most Republicans in Congress never endorsed it.

    @ Dean:

    Why not have our cake and eat it too?

  27. Don McCanne says:

    John,

    Thanks so much for reminding us about “Lives at Risk: Single-Payer National Health Insurance around the World,” a treatise in which you were so kind as to reference me in your first footnote.

    Your readers may be interested in the rebuttal by our friend and colleague, John Geyman, “Myths and Memes about Single-Payer Health Insurance in the United States: A Rebuttal to Conservative Claims.”

    Although we hold very different views, it does help to understand the position of the opposition. Even if reading alternative views doesn’t change our respective positions, it does make us more secure in our advocacy. Your articles have certainly made me more comfortable with the single payer model.

  28. Michael says:

    The single payer model means one payer & one decision maker, for all patients. It is statism through and through. If you want to be comfortable in a system that doesn’t solve access to and quality of healthcare but does more damage, that is fine by me, just don’t pretend that it is the solution to our current problems in healthcare

  29. Harry Cain says:

    John, if your ideas get enough play within the Repubs, and somehow become the core of how to “replace” ACA, we may have a problem similar to 2008. McCain had, in my view, the core of a much superior reform proposal, but it really wasn’t his subject. He was never comfortable with it, could not articulate it in the debates, lost the ground to Obama. The 2012 challenge is how to get Romney thinking in this direction and able to hold his own against Obama on this subject. Also we would need at least one SuperPac spending lots of marketing money on the “replace” part of the equation. Here’s hoping you have some ideas on how to do that!!

  30. Greg Brown says:

    Subsidizing insurance is a great way to promote market based allocation of resources. This, and every plan ultimately will become unpopular when headlines announce that “Joe Blow Died Because His Greedy Insurance Co. Wouldn’t Cover the Serum Porcelain Test That Would Have Saved His Life”, followed by all insurance plans covering porcelain tests. Over time they’ll all cover everything, the subsidy will have to increase and utilization will be back out of control

  31. Philip Thwing, MD says:

    Bob Lucisano is exactly correct: The primary drivers of the accelerating cost of medical care here are 1) Third-party payment and 2) Lack of transparency of charges & payments.

    If someone else is paying for a pill, why not charge $20 for each one (e.g. Provigil or Avelox)? Neither the patient nor the prescriber nor the pharmacist has any motivation to demand something cheaper. When the insurance company balks at the price, the patient and doctor rise up with pitchforks and usually get the expensive pill covered. This process is the same in spades for labs, XRays, procedures, etc.

    As a doctor, I have no idea what I am going to be paid for anything I do for any given patient. And since the employer is paying most of the insurance premium, the patient has no idea what his insurance actually costs. All he sees is his part of the premium & the co-pay.

    Many facets of our current system get away with murder under cover of darkness.

  32. Ron Bachman says:

    John, what are your thoughts on:

    1. have a national high risk pool (for those with pre-existing conditions) subsidized with the loss of personal tax deductions from those choosing to be uninsured?

    2. lower premium costs nationally with expanded use of HSAs with all health plans (including Medicare)

    3. Allow individual plans to be purchased with pre-tax dollars

    4. Allow cross state selling, but also allow each state to veto sales from other states that don’t meet the standards of the receiving state. For the “secret bonus” of this idea, see:
    http://www.theihcc.com/en/communities/policy_legislation/the-%E2%80%98super-bonus%E2%80%99-of-competitive-cross-state-selli_h33apvo2.html?&highlight=1&keys=cross+state&lang=0

    5. block grant Medicaid to states (expand use Mediciad Health Opportunity Accounts)

    PS I still object to the use of the concept that allowing me to keep my own earnings to buy insurance before you tax me is a subsidy. If I am getting a subsidy, who is providing it? Me?

    Republicans are no more informed to set a fixed limit on a tax credit than democrats are for setting tax rates.

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