May 10, 2017

Universal Catastrophic Coverage — Or How the Senate Can Fix the AHCA

On May 4, the House of Representatives narrowly passed a bill, the American Health Care Act (AHCA), that would repeal and replace key provisions of the Affordable Care Act (ACA or “Obamacare”). The AHCA was immediately greeted by a storm of protest, much of it centered on the fear that the bill would undermine coverage for people with pre-existing conditions.

Pre-existing Conditions Under the AHCA

A dramatic personal story by TV host Jimmy Kimmel served as a focal point for AHCA critics. Just two weeks earlier, Kimmel’s son had been born with a heart defect that would have proved fatal without immediate surgery. The Kimmels could afford it—but what would have happened if the parents’ insurance did not cover the newborn’s care, as was often the case before the ACA? The idea that a child could be born with a curable pre-existing condition, but be locked out of the healthcare system by insurance rules, seems especially cruel.

An amendment by Rep. Tom MacArthur (R-NJ) that made passage of the AHCA possible has language promising that “Nothing in this Act shall be construed as permitting health insurance issuers to limit access to health coverage for individuals with pre-existing conditions,” but it does not prohibit charging them more for coverage. People who found private coverage unaffordable could apply for coverage from state-run high-risk pools, but observers are skeptical about that option. The pools that many states operated before the ACA had serious limitations, including underfunding, waiting periods, enrollment caps, and high premiums.

Furthermore, as Matthew Fielder points out in a study for the Brooking Institution, the AHCA also threatens to erode protections against catastrophic healthcare expenses for people with employer-sponsored insurance. Under the bill, individual states would be able to seek waivers that modified the ACA’s lists of essential health benefits, meaning that basics like maternity care and prescription drugs might no longer be covered in some states. It would also potentially allow employers to remove caps on out-of-pocket costs and impose lifetime caps on benefits. Even if only a few states sought such waivers, argues Fielder, large employers would be able to select the rules of the most restrictive state and apply them to all their employees nationwide.

The AHCA’s treatment of people with pre-existing conditions should be a special concern for conservatives in the Senate. As Kevin King points out in a post on the Quorum Blog, the states with the highest uninsured rates are represented by Republican senators. Republicans in the Senate have promised major revisions to the House version of the AHCA. But what could they agree on that would meet the Jimmy Kimmel test and still attract whatever Democratic support may be needed to get a well-written bill that will stand the test of time?

The Potential Conservative Fix: Universal Catastrophic Coverage

Fortunately, there is solution at hand, one with an impeccable conservative pedigree. That solution is universal catastrophic coverage (UCC), which would protect newborns with heart defects, adults with cancer, and everyone else with catastrophic medical bills, while preserving the advantages of market-based solutions for routine health care expenses.

Universal catastrophic coverage was proposed as long ago as 1971 by Martin Feldstein, the Harvard economist who would go on to serve as Ronald Reagan’s chief economic adviser. In 2004, Milton Friedman endorsed UCC in a piece that he wrote as a Fellow at the Hoover Institution. An up-to-date version, specifically designed to address the problems of the ACA, is outlined by Kip Hagopian and Dana Goldman in National Affairs.

Under the Hagopian-Goldman version of UCC, all people not eligible for Medicaid or Medicare would receive a uniform high-deductible health insurance policy from a private company, subject to federal guidelines. The level of the deductible would vary according to the “surplus income” of each household, defined as the difference between actual income in the preceding year (or averaged over a few years) and the threshold income for Medicaid in the state of residence. The deductible would be set at 10 percent of surplus income for each individual, with a maximum of 20 percent for the combined costs of all members of the household.

Suppose, for example, that the Medicaid threshold for a family of three in a certain state is $30,000. If their household income is $35,000, they would be responsible for the first $500 of each family member’s health care costs, or $1,000, at most, for the family. If household income was $85,000, the deductible would be $5,000 per individual. If Household income were $1 million, the deductible would be $96,500.

Nothing would prevent families from purchasing supplemental insurance for expenses not covered by their UCC policies, just as many people on Medicare now buy supplemental insurance. The premiums, however, would be radically lower than those for policies now sold on ACA exchanges, because UCC would cap maximum claims. Supplemental policies that themselves had small deductibles or co-pays would be even more affordable. Supplemental premiums would, of course, vary with the level of a family’s UCC deductible, so they would be higher for higher-income families.

Presumably, many middle-class families with moderate UCC deductibles would choose not to buy supplemental insurance. After all, as Hagopian and Goldman point out, people do not buy insurance to cover oil changes or the cost of painting their houses. Health savings accounts would make it easier for families without supplemental insurance to manage routine medical expenses.

Together, income-related UCC deductibles, supplemental insurance (if purchased), and health savings accounts would ensure that people had enough “skin in the game” to make them wise shoppers for healthcare services, while protecting them against financial ruin in the event of serious illness.

Would Universal Catastrophic Coverage be Affordable?

One of the first questions conservatives will ask about universal catastrophic health insurance is whether it would mean catastrophic taxes or catastrophic deficits. According to Hagopian and Goldman, it would not. They calculate that their version of UCC would cost about half as much as the ACA is expected to cost over the next ten years, while providing truly universal coverage—something the ACA originally promised, but has not been able to deliver.

A big part of the cost of UCC would be defrayed by eliminating the tax exclusion for employer-sponsored insurance—now the single largest tax expenditure in the federal budget, at nearly $250 billion per year. For low-paid workers, the UCC deductible would be no higher than the out-of-pocket costs workers now bear under many employer-sponsored plans. Farther up the pay scale, employers would need to maintain current levels of total compensation in order to retain skilled workers and executives, but if UCC replaced employer-sponsored health insurance, more would be paid out as wages and salaries, and less in the form of benefits. Taxes on the added cash wages would flow back into federal and state budgets.

Replacing employer-sponsored insurance with UCC would have collateral benefits, as well. Employers would be freed from the burden of administering employee health care. Employees would be liberated from the “job lock” that keeps them pinned to a less-than-optimal employment situation for fear that trying something new would mean losing access to health care altogether. People could move to a new city where the labor market is stronger; go back to school to learn new skills; or strike out on their own as entrepreneurs or independent contractors.

Another collateral benefit of UCC would be the elimination of the coverage gap that affects low-income adults in states that did not expand Medicaid under the ACA. Now, people with part-time jobs or full-time jobs at low wages can find themselves in a situation where a few more hours of work a week or a few dollars of more pay will cost them their Medicaid eligibility without earning enough to qualify for subsidies on the ACA exchanges. The coverage gap becomes a poverty trap that takes away any incentive to seek more or better work.

Tear up the AHCA and Start Over with UCC

Conservatives like Sen. Bill Cassidy (R-LA), himself a physician, sincerely want to fulfill President Trump’s pledge to cut premiums, cover everyone, and protect those with pre-existing conditions. Cassidy and many of his colleagues say they are willing to tear up the AHCA and start over. Why not start over with UCC?

And why make this a Republican-only effort? Universal catastrophic coverage ought to attract at least some Democrats if it is offered in a form that truly fills the gaps in coverage left by the ACA while lowering premiums for the middle class. With even a handful of Democrats on board, the Senate could escape the straitjacket of reconciliation procedures that would limit what could be in a new healthcare bill and what must be left out.

In short, UCC is an idea whose time just may have come.