Update: Note I missed the cost-sharing subsidies in the Senate bill, which significantly improves affordability, though it doesn't get it down to the level where I would like.
Note: This diary has been reposted at the request of fellow Kossacks.
And so the U.S. health care revolution began just a few months ago. With the new law, millions of Americans who just a year ago had nothing now will have at least some financial protection from medical bankruptcy. Millions more Americans will now have at least some health insurance stabilty when they change jobs. Health insurers will be limited in their ability to compete on the applicants they select, and will instead have to compete on the quality of the services they provide at the price they offer. Millions fewer Americans will be punished because of their circumstances. In other words, the new health reform law bends the arc of the moral universe a little bit more towards justice.
But it's important to remember that we are just at the beginning -- not nearing the end -- of the health reform revolution. This diary examines the weaknesses of current health care reform law, and then proposes a solution to deal with these weaknesses.
Weaknesses of Current Law
Obviously, the strengths and weaknesses of any health reform proposal depend upon its goals, so we must first define the goals of health reform. The goal of health reform is to protect every American from having large medical expenses, and shield them from its consequences (i.e., bankruptcy, death). Based on this goal, below are the core weaknesses of current law:
- By making employer participation in the Exchange voluntary, it is likely that employers who have healthier workforces will continue to provide health insurance to their employees while those who have more trouble getting health insurance are more likely to dump their employees onto the Exchange. This will turn the Exchange into a dumping ground for older, sicker people, and the marketplace will become unpopular.
- The subsidies simply don’t make insurance nearly affordable enough for people who purchase health insurance on the Exchange.
- The 3:1 age rating, 1.5:1 smoker rating will still price out millions of adults ages 50-64.
- How will smoking status be measured? Will every American who gets their health insurance on the Exchange be required to take a blood test?
- By allowing insurers to sell rather limited benefit policies and have much flexibility in designing benefit packages, it is likely that the healthiest people will choose these limited benefit policies with benefits more tailored towards the non-users of health insurance while those with major chronic conditions will choose the more generous policies. As a result, the more generous plans will become extremely pricey and unpopular.
- The nationwide plans, which are not subject to state mandated benefits, will cause insurers to cherry-pick healthier customers based upon their benefit packages.
- State regulation of the self-insured is, well, substandard.
- The individual mandate is insufficient to deter young, healthy, non-procreating bachelors from paying the penalty and forgoing coverage and thus making the risk pool older and sicker.
- Prevention and wellness programs will unfairly punish people because of their circumstances: i.e., those who were born with pre-existing conditions as they are less likely to participate than those who are healthy.
- The Cadillac tax will unfairly punish those with older workforces, those with greater percentages of women, those with sicker workforces, etc.
The next section contains a proposal to deal with these weaknesses.
Changes to HC Reform
This section has two parts: First, there is a table breaking down the proposal provision by provision. Next, each provision is explained as to why it is necessary and the holistic effects of the provisions.
The table below breaks the proposal down provision by provision. The most important provisions in this proposal are the tax treatment of health insurance, the community rating, the individual mandate, the subsidies, the Exchange tiers (or non-tiers), and the nationwide plans. It is important to read everything, and look at the proposal holistically before commenting on anything. In insurance, each provision interacts with other provisions.
|Provision||Current law||jim bow proposal|
|Tax Treatment of Health Insurance||40 percent excise tax on insurers and businesses that self-insure on the marginal end of employer-provided plans costing more than $8,500/individual and $27,000/family indexed to CPI-U (general inflation)||
|Individual Mandate||Exemption from the individual mandate if cost of cheapest policy (after subsidies) exceeds 8% of AGI
Monthly penalty equals greater of the following two items for each month uninsured:
Penalty equals 115% of the average monthly premium (for taxpayer’s family structure and region) for each month uninsured
|Minimum Services to be covered||
HHS specifies what each category means (i.e., whether rehabilitative and habilitative services includes crutches, a walker, an insulin pump, etc.), and benefits are placed in a standardized form
Congress specifies what each category means (as has been done to a limited extent here), and benefits are placed in a standardized form. [This is how the 1993-1994 Clinton plan was done. See H.R. 3600 and S.1757 of the 103rd Congress]
No other items besides the required services may be sold inside the Exchange, and none of the required services may be sold outside the Exchange.
|Minimum Creditable Coverage for a Policy to be Sold||60% minimum actuarial value (AV)||Done by cost-sharing arrangements rather than AV (but minimum coverage is around 90% AV)|
|Maximum Deductible (individual/family)||$2,000/$4,000||No deductible|
|Out-of-pocket Maximum||$5,950/$11,900, however office visits and prescription drugs don’t have to count towards out-of-pocket cap||$3,500/$7,000, where everything but infertility coverage must count towards the out-of-pocket cap|
||At least one plan in the Exchange must be a staff-model HMO (i.e., Kaiser, HealthPartners, Group Health Cooperative)
Exchange tiers eliminated to just one benefit packge (having around 0.90 AV):
|Subsidies on the Exchange (in the form of premium caps)||Premium cap based on second cheapest plan at given actuarial value (AV) for federally mandated benefits
||Premium cap based on cheapest plan (read: approximately 0.90 AV staff model HMO – i.e., Kaiser, Group Health Cooperative, HealthPartners, Fallon, etc.) for federally mandated benefits
|Prudent Purchaser Language||Exchanges can take an insurers’ premium history into account. Some discretion for the exchanges to negotiate with plans around premiums.||Exchange can negotiate premiums, administrative costs with insurers, selecting only the most prudent of policies.|
|Plans sold outside the Exchanges||Allowed||Prohibited
As stated in the minimum benefits package section, only the required services are allowed to be sold inside the Exchange, and only the non-required services (i.e., dental and vision care) can be sold outside the Exchange
|Federal Health Board||IMAB||7 member board appointed by the President and confirmed by the Senate comprising of at least one health care provider, one disabilities advocate, one actuary, and one health economist. Board helps set federal standards for the following items:
|Waiver for State Innovation||Waiver from individual mandate, etc. if states can come up with more efficient system||No waiver from individual mandate, etc.; states, however, should be allowed to set up single-payer systems at comparable costs to the federal government|
|Medicaid||Up to 133% FPL||Up to 150% FPL|
|Employer Mandate/Payroll Tax on Employers||Large employers (50+ workers) have to pay a fee if employees receive subsidies. Improves transition to free-rider policy by subtracting first 30 workers. (A firm with 51 workers that does not offer coverage will pay an amount equal to 51 minus 30, or 21 times the applicable per employee payment amount.)||Payroll tax equal to 7% of payroll, and payroll tax rate is indexed to the ratio of (1 + growth rate of health care premiums) to (1 + growth rate of average wages).|
|Prevention and Wellness||
Now we explain the rationale for each provision, the interactive and holistic effects of the provisions, etc.
For all the pain of those in employer-based coverage losing their current coverage, replacing the employer tax exclusion with a tax subsidy to purchase health insurance on the Exchange has several very significant benefits:
- By having everyone purchase health insurance on the Exchange, the federal government has better control over ensuring the risk pools don’t get out of whack (i.e., small employers with younger, healthier workforces retaining employer-provided coverage while small employers with older, sicker workforces being dumped onto the Exchange).
- Employees can have their health insurance independent of their job, and not have their health care plan coverage changed when they change jobs (so long as they don’t move to another state).
- The tax treatment of health insurance can be made far more progressive, as it is in this proposal.
- Worries about regulation of self-insured plans are minimal, if at all.
The elimination of the age and smoker ratings as well as the prohibition on charging large families more has two main benefits: First, this regulation will further limit an insurer’s ability to price out some of its least profitable customers, and instead compete on the quality of its services. Second, by only allowing insurers to inquire the applicant’s name, address, date of birth (used only to verify applicant’s name and address) and names of others who are on the applicant’s policy, it will be incredibly difficult. Now obviously the downside of eliminating the age and smoker ratings is that premiums will rise for younger people who generally don’t have as high of incomes as older adults, which is why the subsidies are very substantial at the low income levels (below 350% FPL) and reasonably generous at the middle income levels (350-700% FPL).
Like the tighter rating rules, replacing the Exchange Tiers and "young invincible" policies with one high-quality benefit package (as generous as a typical large employer HMO plan) serves to minimize adverse selection. The benefit package covers a very comprehensive set of services, has no deductible, very small co-payments, and a low out-of-pocket cap. While limited benefit policies might serve well the 27-year-old bachelor who drives a motorcycle without a helmet on the Golden Gate Bridge, the 37-year-old divorced bachelor with HIV needs generous coverage and subsidies from the 27-year-old motorcyclist and other young, healthy people in order for health insurance to be affordable to him. By requiring the motorcyclist and the HIV patient to buy the same level of coverage (in terms of services covered at respective cost-sharing arrangements) at the same price, health insurance is more affordable to the HIV patient.
Also in order to prevent adverse selection, the required services in the minimum benefits package are prohibited from being sold individually and/or outside the Exchange, and the non-required services (i.e., dental care) are prohibited from being sold inside the Exchange. In other words, you will not, for example, be allowed to buy prescription drug coverage, mental health coverage, durable medical equipment, etc. as a separate item and/or outside the Exchange since every insurance policy sold on the Exchange will be required to cover these services. Similarly, if you want to purchase dental insurance or vision care – two services not covered in the minimum benefits package in order to keep the bill affordable (dental coverage – biannual checkups, cavity filling discounts, etc. – alone would increase premiums by 5 percent) – you will be required to purchase it outside the Exchange.
States, in addition, may choose to increase their minimum insurance standard, but must continue to have only one benefit package. If Massachusetts, for example, wants to continue requiring an insurance policy to cover unlimited attempts of in-vitro fertilization (which clearly is not covered under the minimum benefits package), the Bay State and can choose to do so. If New York wants to continue to require $10 co-pays for certain services, the Empire State can choose to do so. In both of these cases, however, federal subsidies will continue to be based on the cost of the federal minimum benefits package in the given region for the given family structure.
With younger, healthier people paying even more for health insurance than under current law, the individual mandate penalty, which in is already inadequate, has to be even stronger in order to prevent an insurance death spiral. That is why the 8% income exemption is changed to a hardship exemption, and the penalty level is increased to the average premium for the offender’s rating class plus 15 percent.
The subsidies, pegged to the cheapest plan’s cost, are by far the biggest highlight of the proposal. By treating all employer-provided health benefits as taxable income, pegging subsidies to the cost of the cheapest plan, standardizing the benefits package to one single benefit package, requiring every region to have at least one staff-model HMO (i.e., Kaiser, HealthPartners, Group Health Cooperative), and having a risk-adjustment program, Americans will be greatly encouraged to choose plans with tighter networks (as they will be the cheapest plans since insurers will have greater bargaining power to negotiate lower payments to providers). If, for example, a family sees that a plan with a far wider provider network than a staff-model HMO costs $3,000-$7,000 more than the staff-model HMO, and the family must pay this difference in cost, many families will think twice about wanting a wider provider network. And by paying providers less, as staff-model HMOs do, this will control health care costs in the most humane way possible.
The subsidies – particularly at the low and middle-income levels – are extremely generous. Individuals earning up to $27,075/yr. and a family of four earning up to $55,125/yr., for example, will only have to pay the cost-sharing arrangements of the cheapest plan, which is most likely to be a staff-model HMO with no deductible, $25 office visits, $30 specialist visits, $10 generic drugs, $250 for inpatient hospitalization, and a $3,500/$7,000 out-of-pocket cap. The table below compares the maximum health care expenditure (premiums and cost-sharing) an individual/family with a major pre-existing condition under current law with that of the proposal.
|Example||Total Maximum Health Care Expenses Under Current Law||Total Maximum Health Care Expenses Under jim bow Proposal||Total Maximum Health Care Expenses As a Percentage of AGI Under Current Law||Total Maximum Health Care Expenses As a Percentage of AGI Under jim bow Proposal|
|Individual earning $25,000/yr.||$7,794.85 (0.0738 * $25,000 + $5,950)||$3,500||31.18% ($7,794.85/$25,000)||14% ($3,500/$25,000)|
|Family of 4 earning $65,000/yr.||$17,976.69 (0.0935 * $65,000 + $11,900)||$8,746.60 (0.0269 * $65,000 + $7,000)||27.66%||13.46%|
|Individual earning $60,000/yr.||Yikes! (no subsidy, so depends upon age and smoking status)||$8,948.20||Depends upon age||14.91%|
|Family of 4 earning $130,000/yr.||Yikes! (no subsidy, so depends upon age and smoking status)||$19,728.80||Depends upon age||15.18%|
Again, it’s important to keep in mind that these are maximum figures. This is what someone with a major chronic medical condition that causes he/she/them to hit the out-of-pocket cap every single year (i.e., HIV) would pay. Most individuals and families would spend far, far less than this – except in a really, really bad year – as the benefit packages are similar in richness to most large employer plans (staff-model HMO with no deductible, $25 office visits, $10 generic prescription drugs, $250 inpatient hospitalization, etc.).
Insurers will continue to be required to cover preventative services that U.S. Preventative Services Task Force (USPSTF) grades an "A" or "B"; however, preventative care will only be free if it pays for itself (i.e., colonoscopies for adults 60-65) rather than if it USPSTF grades it as an "A" or "B." In other words, Americans will pay $25 for an annual checkup, $125 for a colonoscopy if they are between ages 50-59, etc. Still, when you grab out your calculator, you will see that these amounts are peanuts – even for those with low incomes. As a numerical example, take a family of four earning $40,000/yr. (181% FPL). Under current law, this family pays $2,177.87 in premiums, but would pay nothing under this proposal. In other words, the subsidies, community rating, and minimum benefits package more than offset the financial costs of paying for preventative care.
Also there present to prevent the risk pools from getting out of whack is a prohibition on insurance being sold outside the Exchange; a prohibition on overlapping Exchanges; a requirement that all regulations from nationwide plans – including mandated benefits – apply to the state of residence of the purchaser, and not the insurer; and a Federal Health Board to determine risk-adjustment formulas.
Finally, in order to keep revenues in line with outlays, all tax rates – the employer mandate payroll tax rate, the millionaire surtax rate, and the sin taxes – increase as health care premiums increase.
As Ezra Klein has said before, it’s not what you destroy that counts – it’s what you build that counts. Does what you build outweigh what you destroy? Does having health insurance independent of employment, a healthier risk pool on the Exchange, a far more progressive tax treatment of health insurance, and a much, much more regulated insurance Exchange outweigh the benefits of allowing people to keep their employer-based health insurance?
All coherent health care reform proposals have their popular parts and their unpopular parts, and this proposal certainly is no exception. You can’t, for example, ensure that the Exchange doesn’t become a dumping ground for older, sicker workforces while allowing every American in employer-based health insurance to keep their current coverage. You can't ensure that everyone is protected from medical financial ruin without asking the bourgeoisie to contribute. In any health care reform proposal, substantial sums of money are taken out of some people’s pockets and put into other people’s pockets. That’s just the way all major health care reforms work. In this proposal, a 28-year-old bachelor living in Manhattan and earning $70,000/yr., for example, will lose his current coverage, receive a small salary increase, and pay the full costs of his $7,500 staff-model HMO policy. The family of four earning $50,000/yr. and with a diabetic child, meanwhile, won’t pay a dime in premiums for their staff-model HMO, and will spend at most $7,000/yr. on health care. At the end of the day, you have to make a value judgement: if you believe no American should have to go broke – let alone die – because of medical expenses, then you simply find a way to pay for it.
No doubt this proposal doesn’t go as far as many would like (including this plan’s author, who would like to do more on comparative effectiveness research and evidence-based medicine), but it certainly addresses the core weaknesses of current health law – that insurance isn’t made affordable enough, that not enough is being done to ensure that the risk pools (i.e., the Exchange vs. employer-based health insurance, tiers on the Exchange, etc.) don’t get out of whack, and that the self-insured are sufficiently regulated. Millions of Americans who will remain uninsured under current law will gain quality health insurance coverage because of this proposal. Millions more will go from being underinsured to having far more financial protection against large medical expenses. The arc of history, I’ve written time and again, is long. All we can do every year is bend that arc a little bit more towards justice.