March 29, 2019

Reforming Health Care Reform: How to Get There from Here



In a recent column for the New York Times, David Brooks writes that the vision of single-payer health care, as represented by Medicare for All, is worth taking seriously. The problem is less the vision than the transition. Brooks sees no way of getting there from here.

Fortunately, Medicare for All is not the only path to affordable access to health care for all Americans. Our team at the Niskanen Center has been working on an alternative known as universal catastrophic coverage (UCC). UCC would cover the needs of the very poor and the very sick in full, but it differs from Medicare for All by requiring those who can afford to do so to pay a fair share of their routine medical expenses through income-based deductibles, coinsurance, and copays. That gives UCC a greater flexibility that would ease many of the transition problems that Brooks lists.

Sticker Shock

The sheer cost of Medicare for All is one of the biggest obstacles to its adoption. As Brooks notes, public support for comprehensive national health care, as measured by the Kaiser Family Foundation, drops from 56 percent to 37 percent when people are told that it would require higher taxes.

Backers of Medicare for All point out, correctly, that most people would get those taxes back through lower premiums and out-of-pocket costs. But taxation is a leaky bucket. Because taxes distort financial decisions made by families and businesses, and because of the administrative costs of collecting taxes and disbursing benefits, more than one dollar in tax burden is needed to support each dollar of benefits.

As a result, it makes little sense to impose heavy new taxes on middle- and upper-income households and then give that money right back as benefits that are more generous than they are in any other developed country. Highly regarded health care systems, such as those in Australia, Singapore, and France, require at least modest deductibles or copayments and do not cover as wide a range of services as the current Senate or House versions of Medicare for All would do.

By comparison, universal catastrophic coverage would cost at least 30 percent less than Medicare for All. Based on reasonable assumptions, it could be financed entirely from funds government now spends on health care directly, plus what is now spent on mandated and tax-advantaged employer plans. The lower cost of UCC would greatly reduce the problem of sticker shock.

The role of the insurance industry

Brooks worries about the impact of Medicare for All on the half-million-odd people who work in the health insurance industry. Analysts agree that the fragmented and adversarial nature of our health care payment system is a big part of the reason for its high administrative costs compared to the payment systems of our high-income peers. It is inevitable that any serious reform will, and should, have a big impact on the insurance industry.

Still, it would be possible to implement UCC in a way that would be less disruptive to the insurance sector and its employees than Medicare for All, under which the entire industry would effectively disappear.

For example, many upper-middle-income and high-income households would have UCC deductibles and coinsurance of thousands or even tens of thousands of dollars. Many of them would probably choose to buy some form of supplemental insurance. That market would be privately served, much like today’s market for Medigap coverage.

Also, UCC could be implemented in a way that used private insurers as payment agents for the federal catastrophic program. Even if the Centers for Medicare and Medicaid Services administered the basic UCC program, it would be possible to offer a private option, similar to Medicare Advantage.

Alternatively, UCC coverage as a whole could be contracted out to competing private insurers, as is done in the highly-rated Dutch and Swiss systems. Insurance companies in those countries are much more tightly regulated than U.S. insurers are presently. The regulations ensure that companies compete by offering lower costs and better customer service, rather than boosting profits by denying as many claims as possible. But even with its much tighter regulation, the transition to a Dutch or Swiss model would be far less disruptive for insurance companies and their employees than Medicare for All.

If you like your plan …

The failure of the Affordable Care Act to deliver on President Obama’s incautious promise, “If you like your health care plan, you can keep it,” helped spark a widespread backlash against that program. No such promise should ever have been made. There are too many health care plans in today’s system that make no sense even to try to keep.

Employer-sponsored health insurance (ESHI) is Exhibit A. ESHI, which covers about half of all households, came into being in the 1940s as a wartime accident and has been nothing but trouble ever since. It is a source of job lock that ties millions of Americans, terrified of losing coverage, to unsuitable careers. It contributes to fragmentation and raises administrative costs.

Above all, ESHI is appallingly inequitable. Economists Robert Kaestner and Darren Lubotsky  estimate that workers in the bottom fifth of the family income distribution get annual tax benefits of less than $500 from ESHI, while those in the top fifth get benefits averaging $4,500. What is more, their data show that inequity to have become worse over time — to say nothing about the wide variation in the underlying quality of the plans offered through ESHI.

Still, surveys have repeatedly shown that more than two-thirds of people on ESHI like their plans. Presumably, those are people who have little chance of getting other coverage, who have no interest in changing jobs, or who are on the favored end of the unequal distribution of tax benefits. Whatever the reason, Brooks is right to say that Medicare for All’s determination to throw millions who like what they have into an unfamiliar new system is a major barrier to its adoption.

UCC, in contrast, could be phased in more gradually than Medicare for All proposals, especially for employer-provided plans. One possibility would be to lift the employer mandate, phase out the tax deductibility of ESHI, and allow employees to opt into UCC if they chose. Most lower-paid workers would probably take that option. Employers who wanted to use health care benefits to retain higher-paid employees could offer them supplemental policies to cover out-of-pocket costs. That way many fewer people would be forced to make a change of plans against their will.

Cost controls

Any successful health care reform will have to deal with the high prices charged by American doctors, hospitals, and pharmaceutical companies.  Brooks worries that Medicare for All approaches the problem of cost control in a risky and simplistic way. He cites estimates that Medicare for All could lower reimbursement rates for doctors and hospitals by as much as 40 percent. That could be very disruptive to the many communities where hospitals are among the biggest employers.

UCC, too, would need to put downward pressure on excessive prices, but it could do so in a more nuanced way. Like Medicare for All, UCC should empower government administrators to bargain for favorable prices with hospitals, doctors, and drug companies. However, direct bargaining would be only one of several cost-control mechanisms. Administrative actions would be backed up by market-based approaches for consumers who have not reached the limits of their deductibles and coinsurance. Measures to promote competition and transparency, and to reward those providers who offer the best value for money, would make it easier than it is today for such consumers to shop wisely for health care services.

Transition will never be easy

No matter what the final design, comprehensive health care reform will encounter problems of transition. Our existing system is not a product of rational design. It performs so far from optimally that big changes, necessarily disruptive, will be needed to fix it. Too many people, both providers and consumers, exploit imperfections in the system to their own advantage. They will resist change, yet it hardly seems reasonable to defuse that resistance with a blanket promise to make even those who unduly profit from today’s system better off.

Yet, even though transition will not be easy, some paths to reform would be less difficult than others. David Brooks is right to think that the House and Senate Medicare for All bills that are currently on the table face obstacles that are likely to prove insurmountable. The greater pragmatism and flexibility of universal catastrophic coverage offers a less hazardous path forward.