Tuesday, August 1, 2017

Universal Catastrophic Coverage Would Make an Excellent Centerpiece for the Next Round of Healthcare Reform

Republican attempts to reform the U.S. healthcare system have fallen short, yet again. Sen. John McCain, who cast the deciding vote against the last-ditch version of repeal-and-replace put forward by the Senate leadership, told his colleagues,
We must now return to the correct way of legislating and send the bill back to committee, hold hearings, receive input from both sides of the aisle, heed the recommendations of nation’s governors, and produce a bill that finally delivers affordable health care for the American people. We must do the hard work our citizens expect of us and deserve.”
More tinkering won’t do it. It is time to get serious about keeping the promises GOP leaders made at the very outset of the debate over healthcare reform—not just to repeal Obamacare, but to replace it with something that provides “coverage protections and peace of mind for all Americans—regardless of age, income, medical conditions, or circumstances,” while ensuring “more choices, lower costs, and greater control over your health care.” There is no point in making a new push for healthcare reform without putting some bold new ideas on the table. 

Universal catastrophic coverage (UCC) would make an excellent centerpiece for the next round of healthcare reform. In fact, UCC is not even particularly new to the conservative playbook. Respected thinkers like Martin Feldstein, who would go on to serve as Ronald Reagan’s chief economic adviser, promoted the idea already in the 1970s. In 2004, Milton Friedman, then a fellow at the Hoover Institution, also endorsed the concept. UCC would make healthcare affordable, both for the federal budget and for American families. And because it would throw no one off the healthcare roles—not 22 million people, not 2 million, not anyone—it offers a realistic chance of the bipartisanship that polls show both the Republican and Democratic rank and file want.

How UCC would work

Universal catastrophic coverage is not meant to cover every healthcare need of every citizen. Instead, UCC would offer protection from those relatively rare but ruinous healthcare expenses that are truly unaffordable. (Note: As we use the term UCC here, it is not to be confused with the more narrowly defined catastrophic insurance that is available, in limited circumstances, under the ACA.)

Here is how UCC might work, as outlined in National Affairs by Kip Hagopian and Dana Goldman. Their version of the policy would scale each family’s deductible according to household income. The exact parameters would be subject to negotiation, but to use some simplified numbers, the deductible might be set equal to 10 percent of the amount by which a household’s income exceeds the Medicaid eligibility level, now about $40,000 for a family of four. Under that formula, a middle-class family earning $85,000 a year would face a deductible of $4,500 per family member, perhaps capped at twice that amount for households of more than two people. Following the same formula, the deductible for a household with $1 million of income would be $96,000.

The cost of the catastrophic policy would be covered by the government, either directly or through a refundable tax credit. The policies themselves could, as in the Swiss model, be offered by private insurers, subject to clear standards for pricing and coverage. Alternatively, they could take the form of a public option, for example, the right to buy into a high-deductible version of Medicare.
With UCC in place, people could choose among several ways to meet their out-of-pocket costs, which, for middle-class families, would be comparable to those of policies now offered on the ACA exchanges.

One alternative would be to buy supplemental insurance to cover all or part of expenses up to the UCC deductible. The premiums for such supplemental coverage would be far lower than policies now sold on the ACA exchanges, since the UCC policy would set a ceiling on claims for which the insurer would be responsible. If the supplemental policies included modest deductibles or co-pays of their own, they would be more affordable still. Although UCC itself would be a federal program, the supplemental insurance market would continue to be regulated by the states to meet their particular needs.

Very likely, many middle-class families would forego supplemental insurance and cover all of their routine health care costs from their regular household budgets, the way they now pay for repairs to their homes or cars. Doing so would be easier still if they took advantage of tax-deductible health savings accounts—a mechanism that is already on the books, and could be expanded as part of reform legislation.

Impact on the federal budget

Fiscal conservatives would, quite properly, want to know whether UCC would be affordable not only to families, but to the federal budget. As it turns out, the numbers don’t look all that bad. Because UCC leaves responsibility for routine care with individual families, in line with their ability to pay, it would be far less expensive than a system that offered first-dollar coverage to everyone. Hagopian and Goldman estimate that their version of UCC would cost less than half as much as the projected costs of the ACA.

The impact on the federal budget would be further moderated if the tax deduction for employer-sponsored insurance (ESI) were phased out as UCC came online. Tax expenditures for ESI currently cost the budget an estimated $235 billion per year, an amount that rises to some $250 billion if related deductions for the self-employed are included.

Healthcare policy aside, many conservatives object to employer-sponsored insurance in part because of the disproportionately large administrative burdens it imposes on small businesses, which, unlike large corporations, cannot afford to self-insure. Furthermore, ESI undermines the flexibility of the labor market through the phenomenon of job lock. Workers who have jobs with good insurance fear to leave them for jobs elsewhere that would make better use of their skills but might not have the same health benefits. Quitting a job with ESI to work as an independent contractor or start a small business of one’s own is even riskier. Both the House and Senate healthcare bills proposed this year took timid steps toward elimination of tax-deductible ESI by lifting the much-maligned employer mandate of the ACA. It is time to go all the way.

In addition, a reform that combined UCC with elimination of ESI would have increased bipartisan appeal. Liberals have long criticized ESI as inherently inequitable, since it disproportionately benefits high-income workers. Suppose the cost of ESI is $10,000 per employee. If that amount is deductible instead of being taxed as ordinary income, it would save $3,300 for a worker earning $200,000 a year, in a 33 percent bracket, but only $1,500 a year for a worker earning $35,000 a year, in a 15 percent bracket.

Finally, phasing out the tax deductibility of ESI when UCC is introduced would not prevent employers from continuing to offer supplemental insurance as a benefit to their workers. If workers preferred a package that included supplemental health insurance to one that included an equivalent increase in wages, then it might remain a popular way for employers to attract good workers while controlling total compensation costs. It is difficult to predict in advance whether that would happen or not.

Healthcare for the poor

The version of universal catastrophic coverage described by Hagopian and Goldman would not extend to people now covered by Medicaid. However, healthcare for the poor would be affected indirectly.

In particular UCC would mesh seamlessly with Medicaid, since anyone not on Medicaid or Medicare would automatically be covered. There would no longer be a coverage gap, as there is in many states under the ACA. If workers on Medicaid got new jobs or promotions that raised their income above the Medicaid limit, the transition would be painless, since the UCC deductible for households just above the Medicaid cutoff would be low. The tremendous work disincentive that now exists for workers approaching the Medicaid “cliff” would disappear. As explained here, low-wage workers in non-expansion states now face a situation where earning even one dollar more can cost them thousands of dollars in Medicaid benefits, but still leave them below the income threshold for ACA subsidies.

There is also another way that Medicaid could be integrated with UCC. Under the Hagopian-Goldman version of UCC, the deductible for families with income below the poverty level would be zero. That raises the possibility that individual states could be permitted to use their share of Medicaid dollars to buy UCC policies for low-income or disabled individuals in place of traditional Medicaid. Adoption of such a policy by many or all states would eliminate the barriers that Medicaid now poses to interstate labor mobility for low-income workers. By making it easier for individuals with modest skills to move to a new state to work their way out of poverty, such a policy would ultimately reduce the total Medicaid case load. (See here for further discussion of Medicaid and interstate labor mobility.)

Keeping promises

To date, Republicans have been unable to keep their promise to replace the ACA with a new system that provides affordable healthcare security to all families, with maximum individual control over personal medical choices. Any hope of doing depends on their openness to new thinking. It is time for universal catastrophic coverage to make the transition from its status as a promising idea of conservative intellectuals to a mainstream policy option that could attract real bipartisan support.

Reposted from The American Conservative


  1. Divide healthcare into two, each of which cost less than currently? Not likely. With 70% of costs above average cost and the ACA covering on average, not first dollar, but 70% of costs, costs should actually be similar unless that includes removing administrative and profit from UCC. It would amount to de facto nationalization of hospitals and care facilities, but that is where most of the costs are, and would allow focus on direct costs rather than trying to insure those not needing it. This is a reasonable approach, but politics isn't known for its reason.

  2. Would it be OK if I cross-posted this article to WriterBeat.com? There is no fee; I’m simply trying to add more content diversity for our community and I enjoyed reading your work. I’ll be sure to give you complete credit as the author. If “OK” please let me know via emai.l.


  3. An acquaintance recently sent me an article about UCC, and I dug around a bit more to see what I could find and learn about it. So, here's my question, and I hope I can get Ed to respond: What makes this plan "conservative"? I saw the article on Vox where it was pitched as conservative, but what about it is actually conservative? In the Vox article, Ed states that it could be structured in two ways--either having the government offer the catastrophic coverage policies or creating a regulated market that set minimum standards for private insurers. Of course, the public option was taken out of Obamacare, and the ACA sets a lot of minimum standards for insurance policies. Let's do a thought experiment: If this plan were proposed by Obama and the Democrat congress in 2009, would you support it?

    Looking forward to your response.

  4. Hi, thanks for question (or questions).

    What makes this plan conservative--Well, it has conservative roots, in that people like Feldstein and Friedman, considered conservatives at the time, were among the first to propose it. By today's standards, I suppose those two would be on the extreme moderate wing of conservatives. Really, how conservative it is depends on the details. For example, you could tailor it as variant of Medicare for All just by saying you would extend Medicare to everyone, regardless of age, but with a higher deductible if you are under 65. That version would be very similar to the UCC described in the post, but it would sound pretty progressive. Without the public option, it would look a lot like a high-deductible version of the Swiss system. That is somewhat conservative by European standards, but it would be considered liberal in the US>.

    If you are asking me personally, yes, I certainly would have supported it if Obama and the Democrats had put it up in 2009. It would be way better than the ACA. I would support it now regardless of who put it up, although I would really think the best would be bipartisan co-sponsorship.

    1. Thanks for the response, but it was what I suspected based on the Vox article. Essentially, you're saying it is conservative because people who called themselves conservatives previously proposed it. That's the essence of the thought experiment. Go back to 2009, and let's say that no one has proposed this before--it has no roots among persons who identify themselves as conservatives. Now, Obama proposes it, and in order to make it work, he says the government is going to start selling insurance and establish standards for other people who sell insurance. We know what happened with the ACA. The argument went that the government was about to take over one sixth of the American economy, healthcare would be rationed, and it would explode the deficit, the government was raising taxes, on and on and on deriding the ACA as not conservative. It seems to me that each of those arguments against the ACA could be leveled against your UCC proposal. So, if it didn't have conservative roots, and someone made the same arguments against it that were made against the ACA, what would you say? It is in fact conservative because ______.

      In some ways, I am concerned that "conservatism" is nothing more than an identity marker, and your answer that this proposal is conservative because it was supported by self-identified conservatives underlines that concern. Conservatism could be scoped in other ways, for example, a preference for small, incremental changes rather than large, sweeping changes, but the UCC proposal is rather sweeping, isn't it? One could say that conservativism is a preference for giving individuals choices and trusting those choices, but your proposal is silent on the issue of a mandate like that in the ACA. Would the market for catastrophic coverage function if only unhealthy people participated in it?

      Anyway, not to belabor the point. It just seems to me that if one starts thinking about what conservatism is, this proposal really only fits the definition that says conservatism is anything liberals didn't come up with. Why am I wrong about that?

    2. I see your point, of course. I do not think that UCC will ever appeal to the types of conservatives who think the government should have no role in healthcare at all. However, there are relatively few of those. Even Ted Cruz, in proposing his amendment to BCRA, conceded that government support is need for the hardest cases (e.g. most catastrophically expensive relative to income). Cruz added that it is more honest for the government to pay directly, rather than to use gimmicks like individual or employer mandates.

      Once you get there, UCC has the advantage, as you say, that it can be introduced incrementally--just set the parameters "conservatively," that is, a high deductible.

      Also, under UCC as much of the healthcare system as you want can remain privatized, including farming out the insurance functions to private companies, as the Swiss do (and also Singapore). Furthermore, supplemental coverage under UCC meshes well with the concept of health savings accounts, another conservative idea that is supposed to work by giving consumers "skin in the game."

      In short, it can be as conservative as you want it to be. I think it could be pitched to Ted Cruz, as I outlined in this earlier post: https://niskanencenter.org/blog/cruz-amendment-bcra/. That is conservative enough for most people.

  5. Thanks again for your response. An interesting discussion. If you don't mind, let me tell you why I don't think this will get anywhere. I have a great income, about $190,000 a year, but most of that goes to rent, because I live in a high cost area. I also get excellent health insurance from my employer. My wife and I chose the best possible insurance my employer offered, because I have a chronic condition and my out of pocket costs, if I didn't have insurance, would run about $650 per month. Additionally, last year, we decided to have our first kid. That, of course, involved a lot of doctor's visits, and she ending up having a c-section because the baby never turned and she began developing pre-eclampsia. I looked at the bill from the hospital afterwards, and, without insurance, it would have cost us $42,000. Surgery ain't cheap. I think we paid $2,500.

    So, let's run some numbers. For a family of 2, the Medicaid eligibility level is $22,000. At its most generous, a UCC program would cap out costs at 10% of our income above that amount per person. So, that's a deductible of $16,800 x 2 = $33,600 per year. And, on top of that, we would have to pay a premium of some sort. Even if the premium is amazingly cheap, it costs something. Let's be charitable and say it's $100 per month. So, our out of pocket costs for the year are around $35,000. Even at $190,000, I just don't have that sort of cash, brother.

    Under the current system our out of pocket costs were about $15,000-that is our monthly premium on my employer sponsored insurance, plus a small deductible for the hospital visit, and my prescription drug costs.

    And then, on top of the fact that my costs would just be higher, you are also targeting tax deductions for my ESI. I have no expectation that my employer would actually increase my income if they could stop paying for my insurance. But even if they did, I don't think the pay differential would be sufficient to make up for the increase in out of pocket costs.

    It may be that incentives are misasligned in some way, but they are what they are, and your plan would actually hurt me and my family. So, I don't see it happening. Just to part it as clearly as possible: Although my wife's pregnancy was slightly unusual, it wasn't wildly out of the ordinary. But we're talking about a world where every pregnancy would be considered "catastrophic." Once we are at that point--where routine medical expenses are catastrophic--we might as well just have a single payer system.

  6. Sorry to be slow responding. You raise some interesting points, some of which I agree with and others not.

    (1) A minor point first: The Hagopian/Goldman version of UCC does not envision any premium, although I admit that might be changed as part of Congressional negotiations.

    (2) More importantly, you are implicitly assuming that you don't "pay" anything for your ESI other than the monthly premium. Economists almost universally disagree with that. They say that employers make decisions on hiring, salaries, product pricing, automation, and so on based on total compensation costs per employee, that is, salary plus benefits per employee. One of the reasons cash wages haven't gone up much is because employers are paying ever more for benefits, especially ESI benefits. If UCC lifted that burden, the mix of total compensation packages would shift away from benefits. Cash wages and salaries would rise.

    (3) You say you live in a "high cost area." Yes, that makes a difference. There are always policy discussions on whether people living in HCAs should get correspondingly higher benefits from government programs. For example, under UCC, deductibles for people in HCAs might be based on a higher base number. People who live in HCAs say that would be fair. People who do not live in HCAs say you don't have to live there, you just moved there because salaries were high. Personally, I am sort of neutral on this issue.

    (4)Having said all this, yes, it is true that my version of UCC, based on H/G, is not especially generous to people in your income bracket. I agree that the political power of people who earn $190k and up is proportionately greater than the political power of those who earn $189k and down. If so, then your point is valid, the tilt toward middle-middle class and working class households inherent in the H/K version of UBI may be a sigificant political barrier to its adoption.

  7. Yes, I could move to the suburbs and lower my housing expenses, but as with wages and health care, that choice entails other costs, including actual costs like commuting expenses and opportunity costs of a long commute. I would miss is seeing my daughter every day, and that’s not really quantifiable. The cost isn’t determinate. One of the problems I have with getting rid of the ESI deduction is that there is no guarantee that my income would increase. I have yet to see a study that says if you remove the business expense deduction for health care premiums my income would increase by X amount. You are proposing creating a near infinite number of separate negotiation problems. The costs of that change are indeterminate and not likely to benefit lower income persons who have low bargaining power with their employers. Yes, the incentives associated with ESI are probably screwy, but that's the system we have, and we should probably focus on improving that rather than radically overhauling it.

    I read the Feldstein and Friedman pieces. Friedman’s arguments were weak, but the Feldstein piece was interesting. He was really addressing a different problem, namely that people weren’t getting value for their insurance. He specifically states that even people with insurance were paying being 50% and 80% of their health care costs on a yearly basis. Your complaint, instead,, is that people don’t pay enough of their health care costs.

    Feldstein’s problem has largely been solved, because most health insurance sold in the US is actually a catastrophic coverage policy. My insurance from my employer just is a catastrophic policy. So are the policies sold through the exchanges since the ACA mandated essential health benefits and banned lifetime and yearly caps. Yes, these policies do other things too, but changing to UCC wouldn't be an improvement for most people, since they would get less out of their insurance. UCC would cut out the other things insurance covers, leaving only the catastrophic coverage. That is a negative for most people, not just the upper classes. UCC would be admirable to the extent it is actually universal, but this is a big problem.

    Another problem is medical costs. I understand the hope that individual decisions can control costs, but it’s limited because most people don't have effective choices with health care. Yes, it’s not a transparent market, but also people often don't have real choices. There are are no generic drugs for my condition. I can take my pricey drugs and have a nice life, or I can not and develop complications. That's my choice. I think it also gets very murky when you have highly educated elites making recommendations to average people. Aren't they almost always going to select the treatment proposed by their doctor? There are real challenges to the idea that price comparisons can effectively control medical costs. I would love to see someone actually think about those problems rather than just waving their hands and muttering magic words about markets.

    The big lesson with Obamacare isn't that the insurance isn't covering their catastrophic costs. The complaint for a lot of people is that they aren't getting as much help as poorer people. They hate the ACA, because Medicaid enrollees pay nothing while they still have to pay premiums and deductibles. UCC doesn’t solve the problem since poorer people will get the same coverage for less. Medicaid eligible households would still pay nothing.

    So, the big problems are universality, disparate costs to consumers, and medical cost controls. Is UCC the best way to solve those problems, and can we expect it to be the most fiscally responsible way to create better health outcomes?

    I honestly don't have an answer. I hope I haven’t offended you. I am somewhat sympathetic to UCC, but it needs work. I will leave you alone. If you want to respond again, I will read it, but I don't want to derail you any further than I already have.

    Best regards.

  8. Thanks for participating in the discussion. You have raised some good points. Yes, everyone who has something now they are happy with--more than half the population--is desperate to hang on to in no matter how dysfunctional the system is as a whole. For some of the reasons that you mention, it may really be true that it is too late to rescue the US from the world's most expensive healthcare systems that is at the same time way down the list among developed countries in terms of cost, coverage, and outcomes. If so, sad, as some people might say.

  9. If you read the H/G article they mention that those who have high deductibles under UCC, could purchase a supplemental policy to cover the shortfall. Kind of like a medigap policy. I'm the kind of conservative that wishes government out of healthcare, but the reality is they are involved. I could support this if the UCC and supplemental policies are left to the market place, and there is still a place for (expanded) HSAs as well. Also, prices need to be transparent and posted. If the doctors billed the patients and the patients received compensation from the UCC/Supplemental based on the policy, we would NOT end up with these insanely overpriced medical bills...

  10. Thanks for your work on this, Ed. The Goldman proposal makes a lot of sense in its general design. I also follow David Goldhill, who has proposed a similar design albeit with much higher deductibles.

    You mention correctly that the original Goldman plan did not envision that anyone would pay premiums for the core coverage.
    Man, is that going to be difficult.

    The Goldman plan would offer zero-deductible coverage to poorer folks, moderate deductible coverage to middle income folks, and high deductible coverage to the rich.

    Let's assume that the zero-deductible coverage costs $6000 per person, the medium deductible coverage costs $4000 per person, and the high deductible coverage costs $2000 per person.

    Assume that the low deductible coverage is offered to 50 million persons, the medium deductible is offered to 75 million, and the high deductible coverage to 20 million.

    We have an insurance bill of about $650 billion a year.

    I doubt whether the taxing of employer paid premiums will happen, but even if it did that would not pay all the cost of the Goldman plan.

    Now, $650 billion is much cheaper than the Bernie Sanders plan, and that is worth something.

    But it is still a very big stretch, for a country that is resisting an ACA plan that costs at most about $200 billion a year.

    Comments are welcome!

    1. Many variants are possible. In a more recent version of their proposal, in Forbes, H&G have suggested a premium of $3200 for a high-deductible policy, waived for the lowest income groups. There is also a possibility of adding a tier with a co-pay after the deductible. To me, the real question is not "How much will it cost?" as it is, "How much do you want to spend?"

      I would say, first figure out how much money you can raise by replacing existing programs, such as Obamacare subsidies, Medicaid, employer tax deductions and so on. That gives you $x billion. Then devise a schedule of deductibles, co-pays, and premiums that uses up that money, keeping the proviso that total family out of pocket is scaled to income and the lowest-income groups have zero (or near-zero) premiums or out of pocket. At that point you have a budget neutral plan. If that is not generous enough for you, you will have to raise more taxes. If you don't want to raise taxes, then accept what you can pay for.

  11. There are two aspects to the taxation of employer premiums.

    One aspect is that employers can deduct the premiums as a business expense. If you take that away, some employers will pay higher taxes, but quite a few employers will not. (i.e. all the nonprofits)

    The other aspect is that employees do not recognize any income on what their employers pay in premiums.

    Taking this away will be wildly opposed. A worker whose employer pays $15,000 for family health insurance would have to recognize $15,000 in income, which depending on their marginal tax bracket will mean new tax cost of up to $5000 a year, or $400 a month.

    I do not see how such a plan would get any votes in Congress.