“Sticks” or Mandates to Buy Health Insurance: Is Health Reform Possible Without Them?
Posted: July 1, 2009 Filed under: Columns, Health and Health Policy Leave a comment »In a letter to top Senate Democrats, President Obama recently stated that he was open to the “principle of shared responsibility—making every American responsible for having health insurance coverage, and asking that employers share in the costs.” This sounds very much like support for what are sometimes labeled individual and employer “mandates,” though in the Presidential campaign he opposed requiring adults to buy insurance, except for their children. Done the right way, “mandates” could increase dramatically the numbers of those insured, while helping drive down the rate of increase in health care costs. Done the wrong way, they can be unenforceable or drive up the number of unemployed. The Senate Finance Committee increasingly has been turning to mandates as part of a package of health reform.
Although there are strong theoretical arguments for a mandate, the arithmetic on the cost of subsidies, not theories, drive policy makers toward it. Health care has gotten so expensive that there is almost no way that the government can achieve fairly universal health care through open-ended subsidies. A recent Congressional Budget Office score on the cost and effect on insurance coverage of new subsidies under Senate Finance Committee consideration supposedly shocked some Senators, according to press reports. But it was no surprise to those who knew the arithmetic.
“Mandate” really isn’t a good term for what’s being considered. The President may have been motivated by previous campaign rhetoric to avoid that word. Still, once practical matters of enforcement, fairness, and efficiency are considered, what can be administered will not really be a mandate. More accurately, the underlying issue is whether government now applies “sticks” for those not buying or offering insurance, not just “carrots” for those who do. Just crossing that bridge would represent huge step for federal government involvement in health care.
The next question, then, is “What types of sticks?” In my view, the sticks cannot be bludgeons. Think about it. Many family health insurance policies now cost well in excess of $10,000. The IRS has trouble even collecting a few hundred dollars from many individuals at the end of the year. Does anyone really think it or some other enforcement agency can run around and collect huge sums of money from those who don’t buy insurance?
Or consider the employer. A requirement that an employer spend $10,000 on a health insurance policy is equivalent roughly to an increase of $5 or more in a minimum wage now set at $7.25. Such an increase in costs would surely threaten job losses for lower-earning employees, and for others it would require that up to 40 percent of their compensation be paid in the form of health insurance. In other words, they would have to forego food or tutors for their kids at $20 an hour to support surgeons who charge $500 an hour—if they’re lucky.
These latter considerations always lead legislators to exempt small employers from any employer mandate and impose it only on larger employers who are likely to offer health insurance anyway. But that gets dicey as well, since many individuals don’t have the connection to employment, or they are part of complicated family structures with multiple employment and unemployment situations. Also, larger firms respond to incentives—already substantial in current law—to contract out work to smaller firms or independent contractors. Our two-tiered job market of haves and have-nots would expand substantially.
And that’s not all. Economists believe that the cost of employer mandates is ultimately borne by employees. When modest-income households already have access to some free care, either through Medicaid or simply free care in an emergency room, they might be thought of as having, say, the equivalent of $4,000 of insurance. Not good insurance, but insurance nonetheless. The requirement to receive a substantial share of compensation in the form of a $10,000 health policy brings a net increase in insurance of $6,000 at a cost of $10,000. Net result: an extra “tax” of $4,000 for this moderate-earning household, but no extra tax on the higher-income household already buying insurance.
Urban Institute analysts concluded that heavy dependence upon employer mandates in some of the Clinton health plan options in 1993 would have imposed large net costs on low-income households. If they are not careful, the Congress and Administration could run into the same problem today.
The state of Massachusetts, when designing its recent program of more universal health insurance, decided to avoid some problems by imposing only modest sticks or penalties on employers who did not provide health insurance. Think of this requirement as less a mandate than a fee for at least some of the expected cost of its employees falling back on state help, as in Medicaid.
Massachusetts has more serious trouble trying to apply a mandate to individuals than does the federal government. In an article I wrote with Paul Van de Water, then at the National Academy of Social Insurance and now at the Center on Budget and Policy Priorities, we examined just what types of mandates—er, I mean, sticks—were most likely to be enforceable. We concluded that the federal government had much bigger sticks to wield-mainly the denial of other tax and expenditure benefits it might provide. Particularly with respect to workers, many of these sticks—such as denial of tax credits and deductions to those who did not certify that they carried insurance for their family—could be reflected in withholding, thus reducing dramatically the enforcement problems previously noted. Employers would be stuck with helping adjust withholding, but that’s a far cry from demanding a huge increase in what they have to pay as a minimum wage.
Policy makers can usually achieve progressive goals more easily with individual sticks or mandates than with employer mandates. For instance, they can deny tax benefits to middle- and higher-income taxpayers and exempt those who don’t pay tax. They would have more difficulty protecting the low-income employee from the downward pressure of an employer mandate on cash wages and employment.
By the way, a real slam dunk is available with respect to insuring children—a simple-to-enforce stick that can be made progressive while still appealing to conservatives, such as John Goodman at the National Center for Policy Analysis, who want to maintain markets. I have suggested for years that the federal government could deny child credits to households who do not carry health insurance (for the kids, or, if you want, for the family). The child credit is easy to reflect in withholding, and it applies throughout most of the income distribution, excluding the poor and some higher income households. Medicaid or other subsidies would and could be made available in any case at modest income levels.
For those who want to add more progressivity, the child credit could be made available to many individuals whose incomes are too low to be eligible after 2010 (as part of the stimulus bill, the credit is extended only for 2009 and 2010 to families with earnings as low as $3,000). Extending the credit down the income distribution has been promoted (separately from the health debate) by a number of child advocacy groups, so a nice compromise would be to extend the credit beyond 2010 and to even poorer households in exchange for requiring these households to sign up for their Medicaid or otherwise make sure they carry health insurance. In a more permanent form, different states could integrate the credit with Medicaid in ways they saw fit.
Sticks or mandates also come with a bonus in the form of cost saving. Federal and state governments accrue some saving simply because more people (particularly, uninsured middle class households) will be buying insurance as opposed to falling back on the government when their uninsured health costs become unaffordable.
In sum, mandates or “sticks” can provide an important addition to a system of more universal health insurance. Since some of the sticks being proposed are not easily enforced, the next step is to ensure that considerations of administration, feasibility, and equity—not political sound bites—drive the policies chosen.
Why CBO Won’t Credit Congress For Reducing Health Costs
Posted: June 3, 2009 Filed under: Columns, Health and Health Policy, Taxes and Budget Leave a comment »Again and again, health reformers believe they have identified ways to save money through more efficient delivery of care. So why can’t we count on those savings to budget the coming expansion of health care for Americans or lower cost growth?
It is not as if various steps to contain health care costs won’t yield positive results. Electronic health records and promoting comparative cost effectiveness are only two examples that could yield benefits. Providing rapid access to patient centered care, greater use of primary prevention, efforts to reduce re-admissions to hospitals soon after discharge, and better identification of low-quality and high-quality hospitals—all these are sensible steps.
But much to the chagrin of the members of Congress looking for ways to reduce costs, the Congressional Budget Office often “scores” these potential improvements in health care as generating moderate or no saving. That makes it harder for the President and the Congress to finance larger health subsidies or tackle our long-term deficit.
Having had charge over an office of government estimators at one time, I’d like to explain the dilemma of both the health and budget reformers.
Like any industry, the health care industry should, can, and does proceed on a path of improvement. New possibilities and ideas appear all the time. But when there are few cost constraints faced either by consumers or providers, there are reduced incentives to adopt those improvements. Even when adopted, they can easily be offset by higher demand or higher prices.
Consider three metaphors:
- You propose to offer free gym memberships as a way to tackle the problem of obesity. Now getting more people to the gym may be a good idea. But if not backed up by a nutrition/exercise routine that reduces caloric intake relative to the rate of fat and glucose burn, the change in behavior is unlikely to have much effect.
- You push on air in a balloon. Yes, you had an impact: a dent is made where you push. If the nozzle remains tied, the air simply gets shifted somewhere else.
- You give your kid a credit card that he can use without limit. You then replace it with one that gives a discount on everything that he purchases. Yet your bill at the end of the month is just as high as ever.
Real World Examples
Now consider a few real world examples from the world of health care.
Increased use of generic drugs. Efforts to improve the efficiency of the health care marketplace are hardly new. One flavor du jour has been the speedier development of generic drug alternatives. Clearly, such efforts do reduce costs.
But now consider how drug companies react. Some merely reweight their research efforts toward specialty drugs less likely to receive competition down the road from generic alternatives. Others set higher initial prices for newly patented offerings. For instance, a company simply offers the new drug cocktail for the cancer patient at a cost of $120,000 a year instead of $100,000, offsetting lower profits from drugs going off patent. Would Medicare or insurance companies prevent this price adjustment? Probably not.
Better health and longer lives. Suppose that a proposal advances medical science in a way that extends life and improves its quality, especially at later ages. Surely the estimators would grant substantial cost saving to the lower prevalence of health problems at various ages?
Well, yes, but then they are likely to consider all the offsets. If longer lives merely delay the onset of the same conditions—e.g., we now live five years longer and get cancer at age 85 instead of 80—then some costs have only been deferred, not eliminated. The later cancer care is also likely to be a lot more expensive than if received a few years before. In addition, we now get Medicare (and Social Security) for several additional years, draining the federal budget further. Finally, if we don’t work longer when we live longer, then there may be little or no increase in GDP, and costs relative to GDP rise even more.
Electronic health records. I served for several years on a government committee largely dealing with smoothing the path toward adoption of electronic health records (EHRs). Among other potential gains, EHRs offer great hope for preventing duplicative health care and unneeded prescriptions, improving a doctor’s ability to diagnose, and, perhaps most importantly, providing data that can be used by researchers and the Centers for Disease Control to discover causes of disease and run early warning and monitoring systems. But EHRs may also lead to increased demand for health care, in the same way that information from Consumer Reports may lead us to purchase more or better cars but not spend less on them.
Comparative Effectiveness. Studies that compare effectiveness across regions and among providers may give us valuable information on the relationship between quality and price. An open issue is whether insurance companies and government would use the results to redirect spending, something not easy to estimate. But even if they did, one cannot assume that half of all hospitals or doctors will still not remain below median, or that, without other constraints, the half “found” to be above median won’t begin to charge even more once labeled superior. We’ve known for a long time that Florida charges much more than Minnesota for health care with no measurable quality improvement. So far, that knowledge hasn’t led to much, if anything, in the way of cost saving.
Conclusion
If you’re interpreting these examples to mean that efficiency improvements shouldn’t be sought, you’ve got it backwards: we need to reinforce them. But return to our metaphor of free gym memberships. Lowering the cost of exercise might be a good way to tackle obesity, but in isolation it’s not likely to be very effective. Open-ended budgets—which is largely how government spending and tax subsidies are designed in the health arena-are like an unrestricted diet of limitless calories. Budget constraints and innovative practices work to improve any industry, including health care, just like good nutrition and exercise work together to improve the quality of life. A virtuous cycle of true health reform requires both.
The Psychology of Health Reform
Posted: May 26, 2009 Filed under: Columns, Health and Health Policy, Income and Wealth Leave a comment »If we are to achieve health reform—that is, affordable, sustainable, and constantly improving health care available to all—we need to start looking as much to the psychology of the issue as to the economics and politics.
Psychology tells us that we almost always want to take actions that, at least for the moment, make us feel good. Yet, cost-conscious health reform must curb unsustainable growth in costs and is therefore guaranteed to take something from someone. If we slow the rate of growth of health costs, arithmetic demands that we either deny individuals some services or, more likely, pay providers and intermediaries less money. In the latter case, talent might move to other industries, so we still get less care. Very few doctors, hospitals, politicians, voters, patients, insurers or even health policy reformers want to play that game.
Why not? We all want to make the world a better place, and it’s a lot easier to feel good about increasing benefits than reducing them, almost regardless of costs. You’re a doctor. Do you want to go home to your spouse and brag, “Honey, let me tell you about the care I denied today”? You’re the head of Health and Human Services. Do you want to be known for denying people access to some new expensive drug that they believe will make them better? You’re a politician. How long will you last in politics if you vote to pay providers less or deny benefits to individuals?
None of this should surprise us. We don’t need formal training in psychology to know that positive trumps negative. We find it more fun to give our kids gifts than to deny them something they want. We’re more tempted to indulge ourselves than abstain. And we’re tempted to let health costs rise automatically under existing programs and policies rise rather than rein them in and spend the saving on other needs, whether investment in our children or paying down our national debt.
Analysts and would-be reformers often blame the politicians for their failure to act, but we are just as trapped by this psychological barrier. We want more health care for children and better quality. We want nurses to be treated better and for doctors to have more time to treat us like humans. We want everyone to have the best health care possible.
Look at most health studies sponsored by funders like foundations. Those studies seldom address cost head-on, and when the cost factor is considered, it is typically as a footnote to a discussion about how to improve access or care or insurance coverage. At least until recently, a typical funder wanted to hear about how its grants directly helped individuals or persuaded government to spend more on families, not how it helped lower the rate of cost growth (even though lower costs make insurance more affordable).
The complication is not that we can’t provide people more and better health care over time. It’s that the psychological wish to do more than we are doing runs headlong into an existing promise that we will do more than we can do. Relative to infinite care a zero cost, good care at reasonable cost doesn’t always look so good.
A first line of defense against psychological angst is to dodge it by pretending that we can have it both ways. We look for changes that reduce costs while increasing quality and access. We want costs to go down with no loss of benefits or benefits increase at no additional cost.
If you work in government, your member of Congress or cabinet secretary especially wants you to provide information on changes so efficient that everyone wins, such as spotting and eliminating needless health care.
That’s part of the appeal of the Obama administration’s current proposal to invest in comparative cost effectiveness and electronic health records. Initially we spend more, with the actual denial of payments held in abeyance for further reformers. Don’t misunderstand me: considered appropriately, such investments likely will improve the efficiency of the health care sector. In their hyped-up versions, however, these steps are oversold, the political equivalent of the perennial chimera of balancing the budget through future unspecified attacks on waste, fraud, and abuse.
There is a long-range way to adapt health policy-making to our psychological needs, but it still entails a short-run psychological cost. It requires a one-time cutting of the Gordian knot, not simply trying to convert it from a double to a single knot. Tough steps to curb automatic growth in health care spending entail such elements as converting to vouchers, strong regulation, caps on payments, caps on subsidies, single payments to integrated groups for all of an individual’s coverage and higher individual payments out of pocket. I’m not advocating all of these here, some have serious drawbacks. But each does attempt to redefine the base from which we measure progress.
A good health policy process must fulfill our psychological need to build more than tear down. As long as new legislation works off a base of unsustainable growth, we will continually be disappointed in the outcome.
Dealing with the Original Sin Driving Health Costs
Posted: July 7, 2008 Filed under: Columns, Health and Health Policy, Taxes and Budget Leave a comment »In budget policy, myths are progress’s number one enemy. One silly fiction now making the rounds is that we don’t know how to judge the relative value of different types of health care, so we can’t control health care costs—at least not for now. Like many myths, this one contains an element of truth—there is a lot we don’t know. So what? It’s still a myth that we know too little to act.
Suppose you are married and you and your spouse are debating how your daughter Daisy should spend her time. You believe that she should be studying, practicing piano, and avoiding TV. Your spouse believes that educational TV and organized play groups are the way to go. Meanwhile, the kid plays in traffic every day. Every day, new opportunities arise for the child, you learn more, and she reveals new capabilities and limitations. A headlined study indicates that kids are getting fat in idle gear, another that watching Cookie Monster addicts them to sugar. This new knowledge clarifies your choices, but it doesn’t improve your ability to make decisions. You disagree as much as ever, and there Daisy is—still playing in the street.
What’s wrong with this picture, anyway?
Why can’t these parents realize that making decisions requires neither perfect agreement nor perfect information? And what makes them think that they aren’t “deciding”—albeit by default—to let Daisy play in traffic? Clearly, rectifying their original sin by getting the kid out of the street should be the parents’ first move. U.S.-style health care has its own original sin. Insurance, whether public and private, fixes it so my doctor and I bargain over what you will pay for each health benefit I receive. Maybe you pay because we’re in the same health plan or maybe because you’re a taxpayer. Either way, you’ll pay if I demand more, if my doctor decides I need more tests, if she refers me to other providers, or if I need specialists’ help.
If something valuable costs little or nothing, demand is potentially unlimited. Close to unlimited demand for health care means it absorbs ever-rising shares of national income. And that means that health reform will ultimately fail unless I can no longer freely shift costs to you and the income of providers, insurers, and intermediaries no longer are determined largely by how many things they do, not their value.
Even if this original sin in health care didn’t relentlessly drive health costs up, it still distorts health care spending itself. Research on chronic care trumps research on cures because cures are often less profitable to drug companies. Expensive end-of-life care, no matter that it is often of limited value and sometimes involves needless pain, prevails over preventive health care, some forms of which don’t even qualify for health care subsidies.
Reform doesn’t end debate. If health insurance costs aren’t allowed to spiral out of control, then someone must decide that some prices are too high, that some services are too costly, and that one provider is too expensive relative to another.
But who? Here we act like the parents of the child playing in the street. Some of us don’t want government to decide. After all, how can it know which new technology to bet on or what is best for each person? Some of us don’t think that individuals should or could decide either. How can we non-experts pick the right medical care—especially while under the scalpel?
Some of us don’t trust intermediaries and providers to live with a fixed pot of money. Hollywood tells us that health maintenance organizations create greedy physicians, while insurers in that world deny us treatment just to make a buck.
But these issues aren’t insurmountable. Government, providers, intermediaries, and individuals, at least at time of insurance purchase, can all be made to face up more to the cost side of the health care equation. Every day we wait to act, perverse incentives undermine health care by driving employers and individuals out of the market for insurance and chew up dollars that could be spent on other societal necessities.
Before darling Daisy gets maimed or killed, we need to return decisionmaking to every part of the health care system, from government to individual to providers to intermediaries. Just because hot debates will ensue doesn’t mean that we don’t know what to do.
Clinton Versus Obama on Health Mandates
Posted: February 28, 2008 Filed under: Columns, Health and Health Policy Leave a comment »When Senators Hillary Clinton and Barack Obama spar over health mandates, they’re dealing with only one piece of an intriguing policy dilemma: how to achieve meaningful health reform. Unfortunately, presidential debates invite mainly sound bites on this broad, complex issue. For instance, it’s unclear which types of “mandates” are really being opposed or supported.
Mandates figure into many government policies. In Medicaid for the poor, the program benefit must be spent on public health insurance. Some poor people might prefer to spend the money on other goods, but that’s not an option. That’s one type of mandate.
How about Medicare? You and I must pay a Medicare tax on our earnings. We really can’t opt out of the program. The tax mandates our participation.
The logic behind a mandate centers on equal justice for those equally situated. Suppose you and I each have the same income, but you purchase health insurance and I don’t. Then, when I get sick and can’t afford to pay for my health care, I go to the hospital and rely on some free or uncompensated care. It might be inferior care, but, nonetheless, you still end up paying for me through higher taxes or insurance premiums. With a mandate, I no longer can so easily opt out.
Here’s the rub: mandates don’t work without penalties for noncompliance. Whoever doesn’t buy health insurance has to pay some price or bear some consequence.
A small price might be easier to enforce. But then it is less likely to induce a person to buy insurance. A larger price or penalty creates more of an incentive to buy insurance, but then it becomes harder to enforce and might be considered unfair if the cost of insurance and the penalty are set too high. Either way, it is very hard to collect penalties at the end of the year. The IRS has a horrible time collecting from taxpayers who don’t pay up.
My sense is that when candidates for office discuss a “mandate,” they speak of it as an unavoidable commandment. Therefore, by assumption, health insurance would be universal for those subject to the mandate. But unless penalties cost more than the insurance itself and they can be enforced on everyone, then the mandate is partially avoidable. When health experts refer to a mandate, on the other hand, they speak more broadly of anything that induces further participation through a penalty, tax, or fee—a stick rather than a carrot.
Given the ins and outs of mandates, then, the practical differences between what Clinton and Obama would implement may be more apparent than real.
Clinton says she is going to mandate insurance purchase by all, but she doesn’t fully address the enforceability issue. For instance, the Massachusetts health plan—which resembles what Clinton is proposing—is learning what it can implement as it tries to ratchet up penalties beyond simply denying a personal tax exemption to people who don’t buy insurance.
Obama says he doesn’t favor mandates, except for children. Why? Medicaid and perhaps new subsidies he would offer would make insurance fully affordable for the poor. In effect, no penalty would need to be assessed on them. But what about families with children who aren’t fully subsidized? What consequence or penalty would they face if they didn’t insure their children? Suppose Obama would deny them some tax or welfare benefits—a limited but enforceable proposition. Then, why wouldn’t he also be willing to extend at least some affordable penalty to middle and upper income adults who do not buy insurance for themselves?
In effect, Clinton may be suggesting more of a commandment than she can enforce, Obama less of an inducement than he can provide.
Let me offer my solution (again!) for one enforceable way to extend “mandates.” Deny various tax and welfare benefits to those who do not buy insurance. Massachusetts adopted my early 1980s suggestion at least to deny the personal exemption to individuals not buying insurance. But more can be done.
For instance, at least for the middle- and upper-income classes, the federal government could make the $1,000 per child credit, which most taxpayers receive, available only for those who buy insurance for their children. To extend the mandate further down the income scale, I would beef up and extend the credit to those not eligible. This method of denying public benefits is more easily enforced than trying to run around and knock on doors to collect sizable sums of money.
Mandates have to be integrated with subsidies—the sticks with the carrots. But with health care costs now approaching $22,000 per household (more than 20 percent of monetary household income), government contributing more than half (if you count tax subsidies), and looming future commitments for health and retirement that already can’t be met, neither Clinton nor Obama really has much leeway to increase government health spending. Even another $100 billion annually in this $2.5 trillion marketplace covers only 4 percent of costs—never mind the opportunity costs of skimping on education, work subsidies, infrastructure, and other public goods to pay for ever-rising health care costs.
So, both sticks and carrots are probably necessary, neither alone being sufficient. A mandate can nudge many Americans to buy a modest insurance package, if we make it as simple, enforceable, and effective as possible. Practical ways of making the mandate work, as well as constraining costs, will be the real challenge confronting the next president.
Do I Really Deserve Even More Of Your Money?
Posted: June 18, 2007 Filed under: Aging, Columns, Health and Health Policy, Income and Wealth, Taxes and Budget Leave a comment »The Centers for Medicare & Medicaid Services (CMS) have once again expanded the services provided under Medicare. New coverage of ultrasound monitoring of cardiac output today, new treatments for congestive heart failure yesterday, and, undoubtedly, some new cancer treatment tomorrow.
As a baby boomer nearing Medicare eligibility, I’m hoping to benefit from some of these many new treatments promising a longer life and a healthier old age. New technology might even help reduce Medicare costs, though past history argues against that rosy result for most improvements. Getting more usually means paying more.
Who will pay for my additional benefits? Current law suggests you—at least, if you are in your prime working years. I’ll pay a premium in retirement that covers perhaps one-eighth of the insurance value of my Medicare and potential Medicaid long-term care benefits. Benefits now are so extensive, especially relative to past Medicare taxes, that most of us baby boomers are already scheduled to reap huge transfers from you who are younger. A typical couple retiring in 2020, for instance, will have paid about $100,000 in lifetime Medicare taxes (much less if we don’t credit them with interest on their past contributions). For that price, this couple is scheduled to receive about $500,000 in lifetime Medicare benefits over and above the premiums it additionally pays in retirement.
Is there a better business plan? You bet. A basic principle of governing is that we should pay for what we get, unless a case can be made for government to interfere and require others to pay. But by what rationale should you be paying ever more for me? If it’s some notion of transferring from the haves to the have-nots, including the poor or those who can’t work, you should know that, like most of my generation, I’m not poor and am quite capable of work. True, many capable and relatively young retirees look poorer because they stop working—as you would if you stopped working—but, even then, the poverty rate of retirees today is well below that of children.
The lure of new benefits as an incentive to stop working aside, the case for you providing my generation increasingly more benefits over time certainly isn’t progressive government—that is, unless “progressive” just means bigger. Indeed, promising to pay me so many additional benefits every year now pushes government to scrimp on education, after-school activities, and a whole host of other needs for groups of people, including children who truly are needy.
The driving force here is not some rational democratic budget procedure for determining which of society’s needs are most pressing and whether government remedies are appropriate. Instead, medical benefits now compound automatically and so quickly that they force other programs to compete for leftovers that shrink as those benefits grow.
It’s not that government-run health insurance should avoid financing health care improvements. But why should you keep footing the bill by default when I’m the one who’s enjoying the longer and better life? And why should my needs for an ever larger share of your money trump society’s many other needs?
I can help pay for what I reap by giving up some early retirement and health benefits to pay for added benefits later, perhaps by working longer and, thereby, paying more taxes. Look at the private model. If I want my 401(k) account to pay out an annual benefit that grows by 6 percent a year until I die, as opposed to a level benefit, my mutual fund or bank or insurance company simply reduces my up-front benefits to pay for that annual boost.
Medicare is more complicated, but the analogy is still apt. If I have to pay for some of the built-in growth but think that the cost is too high, I’ll have more reason to demand that government better control costs. But as long as I can simply shove the costs to you, the incentive is to take all I can get—that is, if I don’t care how little government provides for the needs of my children, my grandchildren, and their world.
A Perfect Opportunity for Health Reform
Posted: May 24, 2007 Filed under: Columns, Health and Health Policy Leave a comment »A confluence of forces provides an almost perfect opportunity for health reform this year. Not the perfect reform, perhaps, but one that would significantly improve a sadly flagging system. The only obstacle—a big one—is politics.
Right now, congressional Democrats are pressing to reauthorize and expand children’s health insurance as a way to jump-start a better system. This expansion has already incurred a veto threat, partly because of costs. Separately, some congressional Republicans have indicated serious interest in reforming the way the tax system subsidizes health insurance. The Democrats, in their turn, have reacted with a yawn.
So far both attempts are flawed, but only partially. Put them together, remove some warts, and a combination package could boost the number of insured children and adults well beyond what either proposal in its current form could do. The whole would be much more efficient and fair than the two parts. In addition, the combo could easily avoid any negative impact on the budget, especially in the long term. It’s as close to a perfect win-win situation as Washington permits.
Here are the ground rules. Congress must make some important health care decisions over the next two years. They include reauthorizing and expanding SCHIP (the State Children’s Health Insurance Program) but without reducing the demand for private health insurance, resetting the physicians’ payment structure within Medicare, and reforming Medicare in other ways to keep its costs and the overall budget within some reasonable bounds.
The president’s FY 2008 budget provided a good opening gambit for a separate health policy reform: tackling the tax break for buying health insurance that only applies to policies purchased through an employer. This tax advantage is broadly recognized as inefficient and inequitable. Among other problems, it most favors those with the highest incomes and those who buy the most expensive health insurance policies with excessive use of health procedures and drugs.
The president’s proposed replacement tax subsidy tackles some of these problems, but it still favors those with the highest incomes (although less so than under current law) and deals inadequately with protecting people with high health risks.
Alas, any health push must deal with the reality of the budget. Admittedly, the rhetoric surpasses the substance, but both sides seem to be pushing harder today than in the past few years to deal with the budget. There’s a nearly universal pledge from Democratic and Republican officials to move toward budget balance within a few years. Meanwhile, the president has at least put on the table an option for slowing the swift Medicare growth rate—the budget’s biggest long-term headache. Plus, Democrats in Congress have pledged, at least for now, to stay with “pay as you go” rules that require changes in taxes and entitlements to be balanced by not increasing the deficit. Political translation: real reforms must also identify budget losers.
Mixing and matching health initiatives within a limited budget might be politically difficult, but economically it can operate to enhance the effectiveness of reform—producing more daring health initiatives that almost assuredly advance the cause of greater health insurance for all.
Here are the two sides of a win-win health reform compromise:
To expand health insurance coverage,
- provide a more universal credit to assist with the purchase of health insurance;
- tilt the credit significantly toward children;
- offer states money either to integrate a credit with reform of SCHIP and Medicaid or to otherwise expand SCHIP; and
- provide subsidies for high-risk people through health insurance pools.
To pay for these health insurance expansions,
- cap or otherwise limit existing tax breaks for health insurance purchase;
- place at least some minimal mandates on individuals that they must buy health insurance or else lose other tax breaks, such as personal and dependent deductions and child credits (following the lead of Massachusetts and California);
- if the mandate is extended to child credits, increase the size of those credits; and
- place stricter limits on the exorbitant and unsustainable growth in Medicare costs, perhaps through more effective triggers.
Each of these options has merit, adding to the probability that a compromise package would significantly improve the fairness and efficiency of government-subsidized health insurance.
The obstacles are many. Proposals that change the status quo inevitably create controversy. Many congressional leaders seem to be biding their time, waiting for the next presidential election to sort things out. I suggest, however, that the forces for good health reform will seldom be as aligned as they are right now.