Thursday, August 24, 2017

Building Bipartisan Healthcare Reform with Conservative Bricks

Republicans now control both chambers of Congress and the White House, yet they have been unable, on their own, to fulfill their pledge to repeal and replace the Affordable Care Act (ACA or “Obamacare.”) The Democratic leadership, for the time being, seems content to watch Republican failures from the sidelines. Meanwhile, however, rank and file voters from both parties are becoming impatient. A Morning Consult/Politico poll taken in March found that 72 percent of Democratic voters, 71 percent of Independents, and 75 percent of Republicans thought the parties should work together more on healthcare reform. 

Just what kind of healthcare program might draw enough bipartisan support to pass both houses of Congress? No ACA replacement could draw significant Democratic support unless it clearly moved closer to the goal of universal, affordable health care, not away from it. At the same time, since Republicans control the committees and leadership in the House and Senate, any reform would have to start with ideas that have an acceptable conservative pedigree. 

The practical question, then, is whether it is possible to build bipartisan healthcare reform from conservative bricks. Here are three conservative ideas that might do the job.

Universal catastrophic coverage

The first building block is universal catastrophic healthcare coverage (UCC), an idea that has had conservative backing for years. Martin Feldstein, who served as Chairman of President Reagan’s Council of Economic Advisers, proposed the idea as early as 1971. Milton Friedman endorsed the idea in an article he wrote for the Hoover Institute in 2001. An up-to-date version of UCC is described by Kip Hagopian and Dana Goldman in National Affairs.

UCC would provide everyone with an insurance policy that has a high-deductible but no annual or lifetime caps. Ideas vary on just how to set the cap. Feldstein’s original proposal suggested a cap equal to 10 percent of family income. Hagopian and Goldman suggest a deductible equal to 10 percent of the income a family earns in excess of the amount that would qualify them for Medicaid. For example, a family of four in a state with Medicaid expansion under the ACA  might qualify for Medicaid with any income under $40,000, approximately 133 percent of the official poverty line. If the family’s earned income was $75,000, their “surplus” income would be $35,000, so their deductible would be $3,500. For a family with a million dollar annual income, the “surplus” would be $960,000, so the deductible would be $96,000. The catastrophic coverage itself could be provided directly by the government, at either at the federal or state level, or purchased from a private insurer using a voucher or tax credit sufficient to cover the premium.

Many plans pair UCC with health savings accounts (HSAs) for financing routine healthcare needs and minor emergencies. HSA’s allow people to spend pre-tax dollars for out-of-pocket healthcare costs. They have existed since 2003, so they would need only minor tweaks to make them consistent with universal catastrophic coverage.

Introducing UCC would protect families from the threat of medical bankruptcy and from the risk of losing access to medical care altogether, if they could not find affordable private insurance. At the same time, UCC would have important indirect effects on the individual insurance market.

With UCC in force, the individual insurance market would deal only in supplemental coverage. The limit beyond which catastrophic coverage came into force would cap the maximum exposure of companies offering supplemental policies. If those policies themselves had deductibles or co-pays, the maximum exposure would be smaller still. As a result, premiums for supplemental policies would be far lower than for policies now sold on the ACA exchanges, which must cover both routine and catastrophic needs with no caps.

Many healthy people with steady incomes would probably choose not to buy supplemental insurance. With UCC in force, the decision not to purchase supplemental insurance would no longer carry a social stigma. Under the ACA, healthy people who go without coverage are seen as engaging in antisocial behavior. By staying out of the insurance pool, they push premiums up for the less healthy who are more in need of coverage. In doing so, the uninsured act as free riders on the ACA’s pre-existing condition guarantee, which they know will let them buy coverage later at the same cost as everyone else if they develop a costly chronic health problem. 

Decoupling healthcare from employment

A second conservative reform capable of drawing bipartisan support would be to end the tax-free status of employer-sponsored health insurance (ESI). As of 2015, 49 percent of Americans received health coverage through their employer—more than Medicare and Medicaid combined. ESI has serious drawbacks, however. If it were more widely understood, it would be far less popular.

The special tax treatment of ESI dates from World War II. Employers, frustrated by wartime wage controls, competed with one another to attract scarce workers by offering fringe benefits such as healthcare coverage. After the war, laws were passed to confirm that employees would not have to declare the value of fringe benefits as income when paying income taxes. Since then, the exclusion of employer-sponsored health benefits has grown into the largest tax expenditure in the federal budget, an estimated $235 billion in 2017.

Here are some of the most common arguments that critics from across the political spectrum make against ESI:

  • ESI is inequitable. Suppose the cost of health insurance to your employer is $10,000 per employee. If that were taxed as ordinary income, you would pay more tax, but just how much more depends on your tax bracket. If your taxable income is $200,000 a year, putting you in the 33 percent bracket, the exclusion saves you $3,300. If you earn $35,000 a year, in the 15 percent bracket, the exclusion saves you just $1,500 per year. The inequity would be even greater if your employer offers more generous health plan to higher-paid employees.
  • ESI is unfair to minimum-wage workers. In most cases, both employers and workers can gain by adding health benefits and then reducing money wages by an amount that splits the tax benefit. In practice, it is not necessary actually to reduce wages. Instead, workers or their unions negotiate compensation packages that slow the growth of cash wages while increasing the share of health benefits. However, for workers who are already at the minimum wage there is no room for negotiation. Wages for such workers cannot be cut and must rise when the legal minimum increases. As a result, the entire cost of ESI falls on employers. That is one reason why minimum wage jobs are less likely to include health benefits.
  • ESI is a special burden on small businesses. Providing healthcare can be a large problem for small employers. Many large corporations self-insure, but small businesses must buy a group policy from an insurance company. A few employees with chronic conditions can drive up costs. To control costs, small business often ask employees to pay a higher share even when they do offer health benefits.
  • ESI leads to job lock. Job lock is said to occur when fear of losing ESI benefits makes a worker reluctant to change jobs, to retire, or to leave employment for work as an entrepreneur or independent contractor. The Affordable Care Act somewhat mitigates the problem of job lock by ensuring that people who leave or lose a job can buy individual coverage on an exchange, but that coverage may be expensive. By and large, research shows that job-lock remains a problem.
  • Employers have a poor record as ESI administrators. One might hope that as administrators of their employees’ ESI coverage, corporate managers would work hard to minimize costs and maximize the quality of what they pay for. Unfortunately, as healthcare economist Uwe Reinhardt has argued, they have failed dismally in their duty, adding to rather than moderating the rise of healthcare costs.
To overcome these problems, many reformers propose replacing the exclusion of ESI benefits from taxable income with individual tax credits. Roughly speaking, the current cost of the ESI exclusion would be enough to give every adult of working age a tax credit of about $1,200. Because it would be a credit, not a deduction or an exclusion, everyone would get the full benefit regardless of their income tax bracket.

Many versions make the credit advanceable, so that it could be used to meet monthly premium payments. credit of $1,200 a year is less than a third of the cost of an average bronze plan on the ACA exchanges today, but the picture would change dramatically if universal catastrophic insurance and individual tax credits were introduced together. Once UCC were in place, supplemental individual policies would have lower premiums than even the least costly plans now sold on the ACA exchanges. It would be realistic to expect that a $1,200 credit would cover at least half the cost of an individual supplemental plan. Some advocates of this approach think that insurers would offer supplemental plans with premiums that exactly matched the tax credit.

Many supporters of tax credits would allow them to be deposited directly into a health savings account (HSA) instead of being used to buy supplemental insurance. HSAs, which have existed since 2003, allow people with high-deductible health insurance to pay out-of-pocket costs from pre-tax income. The combination of HSAs and UCC together would make the option of going without supplemental insurance more attractive for people with steady incomes. 

Controlling costs through transparency and competition

Instituting universal catastrophic coverage and eliminating employer-sponsored insurance would both be easier if the underlying costs healthcare were lower. It is no secret that healthcare costs are higher in the United States than in other high-income countries, despite the fact that the U.S. system, by many measures, produces inferior outcomes. A study from the Commonwealth Fund found that the United States ranked fifth out of eleven high-income countries in quality of health care but only eleventh in terms of the efficiency. As a result, the United States had more cost-related problems of access to healthcare than any of the other countries surveyed.

In some cases, high U.S. costs may come from a tendency to perform greater numbers of costly tests and procedures. Births by C-section are often cited as an example. However, high prices appear to be a bigger problem. Procedures and drugs cost more—often several times more—in the United States than in other countries where incomes and costs of living are comparable in other respects.
Several approaches to controlling healthcare costs have drawn bipartisan support. One of the most would be to encourage greater price transparency. As another report from the Commonwealth Fund notes,

It's no secret that the U.S. health care market is unlike any other market: patients rarely know what they'll pay for services until they've received them; health care providers bill different payers different prices for the same services; and privately insured patients pay more to subsidize the shortfalls left by uninsured patients.  What's more, prices for health services vary significantly among providers, even for common procedures such as laboratory tests or mammograms, although there's no consistent evidence showing that higher prices are linked to higher quality.

The report goes on to note that many employers and insurers are taking action to encourage providers to be more transparent in their pricing, and lists 30 states that have policies to encourage more transparent pricing, although those policies are not uniformly effective. Recently, Representatives Michael Burgess (R-TX), MD, and Gene Green (D-TX)  introduced legislation at the federal level to promote greater price transparency.

There is some evidence that consumers have not always made use of healthcare price information even when it has been available. That is understandable at a time when most people received coverage through their employers that had only modest deductible and co-pays. However, that seems already to be changing as employers are imposing greater out-of-pocket costs on ESI beneficiaries. A system that introduced universal catastrophic coverage and replaced ESI with individual tax credits and health savings accounts would encourage greater use of comparative price information if it were available.

Another approach that has drawn broad support is Increased competition. Policies that make it easier for drug companies to raise U.S. prices above those charged in other countries are one prominent target of reformers. Currently, drug companies have little fear that consumers in the U.S. will turn to cheaper sources of the same products in Canada, Mexico, or Europe. Recently, Senators Bernie Sanders and Ted Cruz debated healthcare issues on CNN. A proposal to allow free re-importation of drugs was one of a few points on which they managed to agree.

Pharmaceuticals are not the only area of concern when it comes to competition in healthcare. Mergers among hospitals and between hospitals and physician groups both have the potential to reduce competition and raise prices. At the same time, as detailed in a study from the Mercatus Center, thirty-six states have certificate of need laws that give regulators the power to limit the entry of new hospitals and the expansion of old ones. Even when consumers have a choice of two or more hospitals, barriers to competition, in quality as well as price, can persist, as summarized in this slideshow from the Agency for Healthcare Research and Quality.

Greater transparency and competition would be especially valuable for people who chose to pay out-of-pocket costs from current income or from a health savings account, rather than buying supplemental insurance. As things stand, people without insurance are often charged higher rates than those insurance companies negotiate with providers. However, individuals may not even be able to find out what those lower rates are, let alone have enough bargaining leverage to qualify for them.

Good, but is It Good Enough?

Fully implemented and fully funded, the three-part reform described here would improve on the ACA both in terms of coverage (a key consideration for Democrats) and choice (a key consideration for Republicans). It is a good plan—but is it good enough?

It would not be good enough for all conservatives. Some of them would reject it as too broad and too costly. Others oppose the whole idea that government should treat health care as an entitlement. Still others might endorse each of the parts of the proposal in principle, but fund them so inadequately that they would not work as intended. 

Nor would it be good enough for all liberals. Many would prefer a simpler single-payer, perhaps something like the Medicare for All plan proposed by Sen. Sanders during the presidential primary campaign. In earlier posts, I have made the case that universal healthcare access is coming, so it is time to stop fighting it and start trying to make it work. Understandably, then, some Democrats would prefer to hold out for a reform that makes fewer concessions to conservative proposals, even if nothing of the sort could be enacted in today’s political environment.

Still, there could well be enough Congressional support to constitute a majority for a plan that is better than both the ACA and the AHCA, even if it is no one’s idea of perfect. Universal catastrophic coverage, replacing employer-sponsored insurance with individual tax credits, and measures to improve transparency and competition could very well be the bricks from which a successful bipartisan reform could be built.

A version of this post previously appeared in Milken Institute Review.


  1. That seems really doubtful given the plans attempted and rejected. I don't think there are enough moderates to pass anything, certainly not under majority of majority rule.

    1. Well, politics aside (you may have a point), do any of these ideas make policy sense to you?

  2. Ed, I'm the anonymous commenter who was challenging you on UCC. Here's an interesting story today from The NY Times about reinsurance in Minnesota.

    It doesn't do a good job of describing the actual program, but this appears to effectively create a UCC system. It seems like the state government is providing insurance to the insurers for excessive claims. I mean, that's what reinsurance is in general. But what it means in healthcare is that consumers buy normal plans, but the state ends up handling catastrophic costs rather than the insurance companies. The article indicates that it passed the Minnesota legislature with large numbers of Republican votes. I like this solution, because it still provides preventative care for people with chronic diseases rather than simply throwing them to the wolves. In any case, the article also states that it is helping to hold down rate increases.

    Of course, there was a reinsurance program in the ACA that was weakened. Google Marco Rubio and risk corridors. The risk corridor provision of the ACA maybe wasn't strong enough, but removing it also really weakened the ACA. Rubio's argument on risk corridors was that it was a "bailout" for insurance companies. If people want this sort of thing, we have to give up that sort of language.

    In any case, what do you think of adding reinsurance back into the system in order to take catastrophic claims out of the hands of insurance companies?

    1. Yes, reinsurance is definitely one option. Thanks for the link--I had not seen the details of that one. In theory, a reinsurance scheme could be designed to closely resemble UCC plus private supplementary policies.

      BTW, watch the NYT for an Op-Ed on UCC by yours truly, schedule for publication this next week (if something more urgent doesn't bump it).