Health Care: Plan B

“Our goal is to give every American access to quality, affordable health care,” Paul Ryan “Health care Obamacare replacement-Paul Ryan”

The above statement by Paul Ryan is the goal of both Republicans and Democrats, so surely there is enough common ground that with a few compromises on each side congress can adopt reforms with broad support. Such fundamental, broad based legislation should always have broad bipartisan support. Failure to fulfill that requirement was one of Obamacare’s flaws.

America’s universal health care costs twice as much as does health care in Europe. Healthcare costs per capital in the United State in 2014 where $9,024, while in Canada they were $4,506 and in Italy $3,207. Our system provides universal care through company group insurance plans, individual insurance plans, government plans (Veterans Administration, Medicaid or Medicare), out of pocket payments for the uninsured who can afford it or charitable clinics and services, or free emergency room medical treatment for those who can’t afford it. “Health-care expenditures rose as a percentage of GDP from 5 percent in 1960 to 17.8 percent in 2015.” “A radical idea for health care reform-listen to the doctors.” While Canadians, Italians and others from around the world who can afford it come to the U.S. for top of the line care, the average result in terms of general health under America’s system is worse than in Europe. Clearly the American system is seriously flawed.

President Trump has promised that everyone would have health insurance and pay less for it. On January 15 he said: ““We’re going to have insurance for everybody. There was a philosophy in some circles that if you can’t pay for it, you don’t get it. That’s not going to happen with us.” “Trump-vows-insurance-for-everybody-in-obamacare-replacement-plan”. It is possible to achieve this ambitious promise.

This note reviews the options for reducing the cost of health care and insuring that everyone gets the care they need whether they can afford it or not.

Costs can be reduced by better aligning incentives of providers and patients for choosing the most cost effective care, by removing government and professional (i.e. union) restrictions on how care is delivered, by increasing competition to reduce the huge price range for the same service in the same market (e.g., stronger incentives for customers to seek out the best deal and the price/quality information needed for them to do so), and by Tort reform that reduces doctor’s risks of being sued that has resulted in wasteful, defensive prescriptions of unnecessary lab tests, etc.

Two broad measures supported by Republicans to reduce the cost of medical services are to free up the regulatory restrictions on how medical service are delivered (computerized diagnoses, telephone consultations, greater use of nurse practitioners, etc.) and stronger incentives for patients to shop for lower prices for the same service. Modern technology is on the threshold of dramatically improving the quality of health services while lowering its cost, if given the chance. Many Democrats would accept these reforms as well in exchange for better protection of the poor.

Health care services are paid for by various mixes of out of pocket payments, insurance, and government assistance. The design of this mix influences the incentives of service providers and patients to make better choices, and the fairness and efficiency of service financing.

Insurance by its nature is a plan for sharing health care costs so that those who are unlucky and have large health costs are helped by those who are lucky and don’t. The cost of insurance is lowest when the insurance pool is largest, mixing the healthy with the sick. Prior to the Affordable Care Act of 2010 (Obamacare), the private medical insurance market suffered from two serious problems. Most people acquire health insurance through their employer. Employers, especially companies with many employees, can negotiate better terms with insurance companies because insurers can be confident that the insured pool of workers has a normal mix of healthy and sick people over which to average the cost of insurance claims. However, they have another, unfair advantage over individually purchased insurance because that part of insurance premiums paid by employers (usually half) are not taxed as they would have been if paid out directly as wages then spent by the employee on health insurance. Furthermore, when an employee leaves the company for whatever reason, she losses the company provided policy and must pay the higher unsubsidized cost of insurance in the private market, plus a still higher premium if she has an existing medical condition and risks being uninsurable all together.

Republicans and Democrats both agree that people should be able to keep their insurance policy if they change employers, retire, or become unemployed and that the private and the company markets should enjoy the same tax treatment (both should have the same tax exemption or both should have no tax exemption for insurance premiums). Both also endorse some form or other of supporting the cost to insurance companies of patients with chronic or catastrophic medical costs. Different states have adopted and are experimenting with different approaches to financing such costs and should be encouraged to continue doing so by converting Federal financial assistance into block grants to the states. Agreement in both parties on the approach to these situations should not be that difficult to reach if the effort is made.

For given health service costs, the lowest possible insurance premiums for insurance policies that cover them would be achieved when everyone is required to pay them. Thus everyone should be required to have health insurance. Many issues arise about the coverage of such insurance (any uncovered health care services would have to be paid for out of the patient’s pocket, by charities, or by tax payers). One issue is whether there should be one insurance pool sharing the costs (healthier young paying for the sicker elderly, men paying for women’s child birth and women paying for uniquely male afflictions, etc.) or several. For example, should premiums reflect age differences as they do now (the more costly elderly pay higher premiums than the less costly young but not enough higher to cover their higher costs)? If insurance pools should be segregated by age, should the segregation be total (no health care financing transferred on average from young to old) or should the higher health costs of the elderly be financed to some extent by the young, and if so to what extent? Keep in mind that the very purpose of insurance is to share costs. As anyone could opt out of the insurance mandate under Obamacare with only a modest penalty, fewer younger people acquired insurance than was expected, leaving an older, sicker, and thus more costly pool to share the costs. This has been one of the factors increasing insurance premiums under Obamacare.

If the government makes purchasing health insurance mandatory, as it should, it will have to set the minimum standards of coverage required to satisfy that mandate. It is really contrary to the whole purpose and philosophy of insurance that each person would choose to insure only those health needs they think they might need (car accident, heart attack, diabetes, broken arm, etc). However, the coverage of all such possibilities can come with a higher or lower deductible and copay or a wider or narrower network of participating medical practitioners etc. Republicans and Democrats can surely come to an agreement over these minimum features. The required features should be carefully designed to maximize the incentives for providers and recipients to make efficient choices. Anyone wishing to and willing to pay for broader services (a doctor outside the network, recovery in the Swiss Alps, etc.) would be, as always, free to do so. The United States already has a government run insurance policy for the elderly called Medicare. Medicare can be purchased in addition to other health insurance policies or in place of them and thus is not a so-called “single payer” system.

With such a minimum coverage policy established by the government, each of us would be free to sign up for an employer offered policy of our choice or buy one from the private market with no difference in price with the policy offered by the employer (incorporating the above recommended elimination of tax discrimination between company and private market policies and allowing policy portability). The bigger challenge is how to cover the cost of insurance for those who cannot afford it. Democrats generally prefer to achieve universal insurance coverage via the government as the single payer and health service provider (our VA system or the British public health service) leaving the better off free to pay more for services outside that system if they wish to. Republicans generally prefer to maximize the choices of the public and to encourage competition among insurance providers.

Health insurance for the poor must be paid for by the government one way or another. Our existing system—Medicaid—is administered by states, which determine eligibility, but is financially supported by the Federal Government if its considerable regulations are adopted by the state. Only American citizens and legal permanent residents are eligible for Medicaid. Obamacare subsidizes up to 90% of state costs for Medicaid. One criticism of Medicaid financing is that when its recipients start working they can loose coverage. This is the so-called financial cliff and can be a deterrent to accepting a job or increasing the number of hours worked. Obamacare has addressed this problem by phasing out the withdrawal of Medicaid financing, ending it at incomes well above the poverty line

Republicans have proposed a refundable tax credit, in effect a guaranteed minimum income, for the poor that must be applied to the purchase of health insurance. This opens the door to competition among multiple insurance providers and would make it easier for low-income families to purchase more expensive policies, if they wanted to, by adding a small amount of their own money to the government’s tax credit. This is close to the minimum guaranteed income proposals I support. “US federal tax policy”. A gradual phasing out of the tax credit as one’s income increased above the poverty level would also reduce the work disincentive of the financial cliff.

The state run insurance exchanges are a useful aid to those looking for an insurance policy and should be retained. Either the Republican tax credit or the Democrat direct subsidy would be applied via the exchanges.

There are many important details to sort out that I have only hinted at. But as Republicans and Democrats both want the more efficient delivery of health care, which would reduce its costs, and humane and effective provision of the financing of such services to everyone, including the poor, it should be possible with only modest give and take to agree on a package that would enjoy broad bipartisan support.

About wcoats

Dr. Warren L. Coats specializes in advising central banks on monetary policy, and in the development of their capacity to formulate and implement monetary policy. He is retired from the International Monetary Fund, where, as Assistant Director of the Monetary and Financial Systems Department, he led missions to over twenty countries. Before then, he served as Visiting Economist to the Board of Governors of the Federal Reserve System, and to the World Bank, and was Assistant Prof of Economics at the Univ. of Virginia from 1970-75. Most recently he was Senior Monetary Policy Advisor to the Central Bank of Iraq; an IMF consultant to the central banks of Afghanistan, Kenya and Zimbabwe; and a Deloitte/USAID advisor to the Government of South Sudan. He is currently a member of the Editorial Board of the Cayman Financial Review and until the end of 2013 was a member of the IMF program team for Afghanistan. His most recent book is entitled "One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina."
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