Saturday, October 6, 2018

Universal Catastrophic Coverage FAQs

What is Universal Catastrophic Coverage and Why Do We Need It? 

Across America, health care is a top priority for the reform of social policy. The United States spends more per capita on health care than any other country, but by many measures, its performance is disappointing. Yet, wide differences remain over how to characterize the failures of the current system and what kind of reforms are needed. Universal catastrophic coverage (UCC) offers a way to bridge these differences.

On the one hand, many would-be reformers see the problem primarily as one of a broken health care payment system. Too many Americans do not have have affordable access to quality care. Too many remain one serious illness away from medical bankruptcy. Viewed in this way, the obvious solution would seem to be a guarantee that no one has to pay more than they can afford for the care they need. Proponents of such a policy often say they want “single-payer” health care like other high-income countries have.

Meanwhile, other reformers see the problem more as the lack of a working market for health care services. On the demand side, they say, the prevalence of third-party payments erodes incentives for health care consumers to shop for effective and reasonably priced services. On the supply side, regulations stifle competition, block entry by would-be innovators, and protect the interests of providers at the expense of consumers and taxpayers. Viewed in this way, the solution would seem to be to get the government out of the way let the market do its job.

Although single-payer advocates and market reformers often seem to talk past one another, they have more in common than it might at first appear. By and large, they agree that even under the most market-oriented reforms, there would still be a need for some kind of social insurance to assure that even the very poor and very sick have access to appropriate care. At the same time, everyone agrees that whatever is done about the payment system, there is a need for more transparency, more choice, and more innovation than the current system seems able to deliver. 

Universal catastrophic coverage combines both approaches. Under UCC, everyone would be protected against financially ruinous medical expenses though insurance that would be issued free to the poorest beneficiaries while requiring income-based cost-sharing from those who can afford it. UCC posits a robust role for the government as a provider of social insurance where needed while creating room for market mechanisms where they have the best chance of working.

The essential features of UCC include:

  • Automatic enrollment in a UCC policy issued by the federal government.
  • A low-income threshold below which individuals and families would have their health care expenses covered in full.
  • Deductibles and coinsurance set as a percentage of eligible income, that is, the amount by which household income exceeds the low-income threshold.

Optional features include:
  • A package of preventive services provided free of cost regardless of income.
  • A modest income-based premium for households above the low-income cutoff.
  • A private insurance option either as a substitute for the government-issued UCC policy (similar to Medicare Advantage) or as supplementary insurance to cover expenses not included in UCC.
After an appropriate transition process, UCC would replace most existing forms of health insurance, including Medicaid, Medicare, employer-sponsored plans, and plans offered on ACA exchanges.

Is UCC a new idea? Universal catastrophic coverage is far from a new idea. The concept can be traced back at least as far as a proposal made by Martin Feldstein in 1971 for something he called “Major Risk Insurance.”

Feldstein’s concept, renamed “Maximum Liability Health Insurance,” soon became part of a comprehensive reform of social insurance dubbed the “Mega Proposal.” That proposal was advanced by Elliot Richardson during his tenure as Secretary of Health, Education and Welfare under President Richard Nixon. With Feldstein serving as a consultant, Richardson and his team added much practical detail to the orginal concept. In the end, however, their proposal became a casualty of the chaotic demise of the Nixon administration.

The idea of universal catastrophic coverage did not die with the Mega Proposal. Milton Friedman was among those who later revived the concept. Although his version of UCC did not get as much attention as his proposals for a negative income tax or school vouchers, it fit naturally with his support of other forms of market-friendly social insurance. More recently, Kip Hagopianand Dana Goldman have developed a more detailed version of UCC, including specific recommendations for its main parameters. Jodi Liu, writing for the RAND Corporation, has provided detailed cost estimates for variations of the Hagopian-Goldman version of UCC.

In 2018, Representative Rosa DeLauro and Jan Schakowsky introduced a health care bill they called Medicare for America that has many structural similarities to UCC. Their plan would offer full coverage to low-income families and individuals, while requiring income-based premiums, deductibles, and coinsurance for those who can afford pay them.

Looking abroad, the health care system of Singapore appears most closely to resemble UCC. One element of the three-part Singaporean system, Medishield, provides universal coverage for catastrophic expenses. A second part, Medisave, mandates compulsory, income-based contributions to health savings accounts, which can be used to pay out-of-pocket costs not covered by Medishield. A third part, Medifund, pays for services to people whose incomes are too low to generate significant balances in their Medisave accounts.

How would deductibles be determined under UCC? The exact formula for setting UCC deductibles would be determined when legislation was drafted. The formula would begin with a low income threshold below which the deductible is zero. For for the sake of discussion, we can use official federal poverty guidelines, which specify a threshold of about $25,000 for a family of four, as of 2018. For families below the threshold, the deductible is zero, so that all health care costs are covered in full.

For other families, the deductible is set as a percentage of eligible income, that is, total income minus the low-income threshold. For example, if the deductible rate is 10 percent of eligible income, a family of four with $75,000 annual income would face a deductible of $5,000; a family with $125,000 income would have a deductible of $10,000, and a family with $1 million of annual income would have a deductible of $97,500. The exact formula would be set by Congress and could differ from these values.

Would UCC require co-pays or coinsurance?  In order to keep deductibles at a moderate level, UCC could also include copays or coinsurance. Including those features would make it possible to raise the low-income threshold or to lower deductibles without increasing the overall cost of the program. Coinsurance would also increase the range of medical spending over which consumers faced a direct economic incentive to shop wisely for care. The range of spending over which copays or coinsurance would apply would vary according to household income.

Would UCC require payment of a premium? In its simplest form, UCC would not require a premium. In principle, however, it would be possible to add an income-dependent premium for middle- and upper-income beneficiaries. Adding premiums would make it possible to raise the low-income threshold or to lower deductibles without increasing the overall cost of the program. 

How would household income be calculated? The short answer is that deductibles, coinsurance, and premiums (if any) would be based on income as reported to the IRS on an individual’s or household's income tax return. Legislation would have to balance ease of reporting against fairness. The following are examples some of the technicalities that would need to be addressed by legislation.

Looking backward. The simplest method, which could be the default method for people with stable or gradually increasing incomes, would be to base this year’s deductible on last year’s income as reported to the IRS. This would require a minimum of paperwork and would mean that people would know their deductible with certainty for the coming year.

Annual or monthly? Since deductibles would be set on an annual basis, annual income would be used, rather than monthly income.

Variable income. Some people’s incomes vary greatly from year to year. It would make sense to allow those people to use income averaging over a period of several years, as, for example the IRS currently permits for farmers and fishers. Income averaging would not be compulsory. People would have to file additional paperwork to qualify.

Sudden decreases in income. A sudden decrease in income, such as loss of a job, inability to work due to poor health, death of a spouse, or divorce, could leave a person facing a high deductible in the first year of low income. Legislation could include a provision for forward-looking income estimates in cases of hardship. Applying for such a provision would require additional paperwork and might be subject to repayment if higher income resumed, somewhat like the system of advance income estimation now used in calculating premium subsidies for policies purchased on ACA exchanges.

Churning. The current system of Medicaid, ACA exchanges, employer-sponsored insurance, and other types of insurance creates a lot of “churning,” as changes in income, employment status, or family status force people to lose coverage or move from one source of coverage to another. There would be no churning under UCC, since everyone would be covered by the same program all the time regardless of income, even though deductibles could vary from year to year. There would be no “cliffs” where coverage was lost. For example, people moving from below poverty level (zero deductibles) to slightly above poverty level would retain continuous coverage, subject to very small deductibles.

What types of income? Legislation would have to specify the exact income definition. Adjusted gross income as reported to the IRS would be an obvious possibility, but some form of modified adjusted gross income could be used instead, something like the definition now used for Medicaid.

Savings. Most people with middle and higher incomes could be expected to deal with variations in annual income through savings, in the form of either ordinary savings or tax-advantaged health savings accounts. 
Would UCC cover preventive care? A comprehensive UCC plan would include a standardized package of cost-effective preventive care would be exempt from deductibles for everyone, regardless of income. (For more on preventive care under UCC, see The Role of Prevention in Health Care Reform.)
Who would issue UCC policies? Congress would have to decide who would issue UCC policies. The Centers for Medicare and Medicaid Services would be one possibility. Private companies operating under rules similar to those for Medicare Advantage would be another possibility.
How does UCC differ from Bernie Sanders Medicare for All plan? Both Medicare for All and UCC would cover everyone, and both plans would guarantee basic health services at no cost to people with low incomes. The principal difference between the two approaches is the way they would ensure that everyone pays their fair share of health care costs. Sanders’ plan would raise taxes on middle- and upper income taxpayers and use the revenue to provide health care without cost at the point of service to everyone. UCC would use income-based deductibles and coinsurance to ensure that middle- and upper-income households paid an affordable share of their own care. The two approaches would have similar impacts on the overall distribution of income when both taxes and services provided are taken into account. (See this post for further comparison of UCC with Sanders' plan.)
Would UCC require new taxes? Because middle- and upper-income consumers would pay for most of their own routine health care services, up to the limit of their deductibles, it would be possible to implement UCC without new taxes. If the low-income threshold and deductibles of a UCC plan were set properly and appropriate cost-saving measures were implemented, the funds that the government currently spends of health care, including the cost of tax subsidies for employer-provided health insurance, would be sufficient to cover costs of the program. . (For more on taxes and financing, see Could We Afford Catastrophic Health Coverage?)
Is UCC the same as "single payer"? No.  The term "single payer" is not easy to define, but literally, it would mean that one entity (such as a government health fund) paid all medical costs. No country has "single payer." All have some forms of care (e.g. cosmetic surgery, cosmetic dentistry, fashion eye wear) that people pay themselves. Almost all have some form of copays for some services. Most are to some degree decentralized. UCC by its nature includes some out-of-pocket costs for people with higher income and routine medical needs. The catastrophic part could be implemented through a single government entity, like traditional Medicare, or through multiple private insurers, like Medicare Advantage.

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