The Cruz Amendment is a (Small) Step Toward Universal Catastrophic Coverage
Universal health care access is coming to America. As I wrote a few weeks ago, it is time to stop fighting it and make it work. In principle, Republicans agree. After all, from the very start of the repeal-and-replace debate, they have explicitly promised “coverage protections and peace of mind for all Americans.”
The latest version of the Better Care Reconciliation Act (BCRA) takes new steps toward universal access, but it is not yet bold enough. If our Senators only had the courage, they could build on these ideas to craft a plan that would satisfy both conservatives and moderates in their own ranks, and draw support from the Democratic side of the aisle as well. Here is how it could be done.
The Cruz amendment
One of the features added to the BCRA in this latest round is an amendment proposed by Sen. Ted Cruz. Cruz correctly recognizes that the biggest stumbling block in crafting health care policy is determining what to do with the sickest 5 percent of the population, who account for half of all personal health care spending. As Cruz told Vox, his goal is to find a way to subsidize the needs of high-risk consumers directly, rather than having the healthy subsidize the sick by putting everyone into a single risk pool, as the Affordable Care Act (ACA) does. In his words,
If those with serious illnesses are going to be subsidized, and there is widespread agreement in Congress that they are going to be subsidized, I think it far better for that to happen from direct tax revenue rather than forcing a bunch of other people to pay much higher premiums.
The Cruz amendment does this by allowing insurers to offer stripped-down insurance plans to consumers as long as they also offer at least one plan in the same market that complies fully with ACA mandates. The ACA-compliant plans would retain the requirement of guaranteed issue, even to people with pre-existing conditions. As a number of observers have noted, the ACA-compliant plans would, under the Cruz amendment, become a de facto high risk pool.
In principle, as I explained in an earlier post, high-risk pools do offer a way to provide health care coverage to the most difficult sector of the population: those with expensive chronic health conditions. The trouble is, they require heavy subsidies. In a study for the Commonwealth Foundation, Jean P. Hall of the University of Kansas calculated that a national high-risk pool needs to cover 13.7 million people who have average medical costs of $20,000 per year. Even if those beneficiaries paid a hefty annual premium of $7,000, the net cost to the federal government would be $178 billion per year.
Although the new version of the BCRA does retain some ACA-related taxes on wealthy households that were slated for repeal in earlier versions, it still does not appear to offer the financing needed to make ACA-compliant plans affordable to all who need them. The bill allocates only about $40 billion a year for tax credits of all kinds, according to early reports. Without proper funding, ACA-compliant high-risk plans would offer universal access in name only. Subsequently, applicants would encounter waiting periods, high premiums, and other drawbacks that troubled the high-risk pools that existed in many states before the ACA.
Where could Senators find the additional money they need? The most obvious way is to phase out the tax deductibility of employer-sponsored health insurance (ESI), which, together with related programs for the self-employed, now costs the budget nearly $250 billion per year.
Phasing out employer-sponsored insurance fits perfectly with Cruz’s philosophy. As ESI now works, it suffers from exactly the same problem of cross-subsidy that plagues individual coverage on the ACA exchanges. Rather than directly subsidizing the sickest workers, it puts the burden onto their healthy co-workers. As health care economist Uwe Reinhardt explains,
Standard economic theory and empirical research have convinced economists that the premiums paid by employers on behalf of employees are merely part of the total price of labor and, over the longer run, are shifted back to employees collectively through commensurate reductions in take-home pay.
Individual catastrophic insurance
The second promising feature of the new Senate bill is a more permissive stance toward individual catastrophic insurance. Catastrophic plans, which carry low premiums but have high deductibles, were discouraged by the ACA. Under the new bill, they are not only permitted, but are also eligible for tax credits, unlike other forms of noncompliant plans.
Individual catastrophic plans fit the needs of many healthy, middle-class consumers. Before the ACA, many entrepreneurs and self-employed professionals used them to meet family health needs. To make them attractive, a household would have to have sufficient financial resources to cover expenses out of pocket up to the policy’s deductible. Provisions of the new bill allow both premiums and out-of-pocket costs to be paid with pretax dollars from an expanded health savings account.
Consumers who opted for inexpensive catastrophic coverage would need another option if they developed a chronic condition that made it likely that they would have costs in excess of their deductible every year. Under the latest BCRA, they could do so by migrating to the ACA-compliant plans that are preserved under the Cruz amendment. However, if they did so in large numbers, the burden on the ACA-compliant pool would increase, requiring either higher premiums or higher subsidies, or both.
Fortunately, there is a way around that problem. The cost of maintaining ACA-compliant plans as a high-risk safe haven could be substantially reduced if deductibles are set on a sliding scale according to income. For example, a family with expensive chronic health needs and an income of $80,000 might face a deductible of $5,000, while one with a million-dollar income could be expected to meet a deductible of several tens of thousands of dollars. After all, if it is inequitable to ask the healthy to subsidize the health needs of the sick, why is it not also inequitable to ask the poor to subsidize the wealthy within the high-risk pools themselves?
What to do about the poor?
Unfortunately, although the new BCRA offers some constructive new ideas, it retains the biggest shortcoming of earlier versions and of the House reform bill, both of which offered very little to low-income health care consumers. The new bill includes essentially the same cuts to projected Medicaid spending, which would result in lost eligibility for millions of Medicaid recipients unless states stepped in to make up fully for lost federal cost-sharing. As explained in another earlier post, such a shift of Medicaid toward the states is fiscally unrealistic, and would have a number of adverse unintended consequences if it did take place.
However, adequate healthcare coverage for the poor and near-poor could be achieved through appropriate fine-tuning on the catastrophic option. As noted, the new Senate bill allows tax credits for the purchase of catastrophic plans. In their present form, those plans would be attractive mainly to middle-class consumers, but the parameters of the policies and credits could be modified so that deductibles decreased and tax credits increased as household income fell toward the Medicaid cutoff. The poorest consumers would face only token deductibles while receiving sufficient tax credits to cover the entire cost of their premiums.
In fact, if the option of subsidized catastrophic coverage for the poor were pursued to its logical conclusion, it would make Medicaid itself unnecessary. Everyone now covered by Medicaid, including low-income households, special-needs children, the disabled, and residents of long-term care facilities, would then be covered by policies with deductibles scaled to their income and tax credits sufficient to pay the premiums. Would such an extension of catastrophic coverage be expensive? Of course, but the BCRA already allocates more than $700 billion to the Medicaid program, not counting the money it expects states to contribute. The funds could be found.
The bottom line
So, yes, the latest version of the Senate’s BCRA contains some constructive ideas. Yes, Sen. Cruz is right to criticize the ACA for the way it forces the healthy to subsidize the sick. He is right that it would be more equitable and more efficient to pay the needed subsidies directly from general tax revenues. The new Senate bill is also on the right track to open the door to a larger role for catastrophic health care plans. But the bill is not there yet. Passing the BCRA in its present state would be worse than leaving the ACA in place, with all its flaws.
What the Senate needs now is the courage of its convictions. It needs to take its existing ideas to their logical conclusions, to fill in the gaps, and massage the parameters in a way that transforms the BCRA into a system of universal catastrophic coverage. Doing so could meet the twin Republican goals of consumer choice and of “coverage protections and peace of mind for all Americans” in full.