We Must Subsidize Insurance Before We Can Mandate
If not the Wyden-Bennett bill as suggested in my first posting, my second preference is for the shared responsibility ideas put forth this past winter in a White Paper by Senator Max Baucus, the Chair of the Senate Finance Committee. They may be more politically doable than Wyden-Bennett and are quite similar to what Assembly Speaker Nunez and Governor Schwarzenegger tried in California through AB X1 1 in 2006-08.
This approach is built around an individual mandate to enroll — with shared financing from employers, individuals and government to assure affordability. This approach leaves the insured with the coverage and doctors they already have and assures them they will never lose coverage. It covers the low income uninsured through existing public programs that have low co-pays, low subscriber shares of premiums and familiar delivery networks; this would cover 65%-75% of California’s uninsured, depending on the income threshold where public programs end. The California proposal would have ended eligibility for public programs at 250% of the federal poverty level – roughly $25,000 for an individual. Between 250% and 400% (more than $80,000 a year for a family of four) of the federal poverty level, it could use refundable tax credits to assure affordability. To put these figures in context, roughly half of all Californians have incomes below and about half have incomes in excess of 300% of poverty.
Higher income uninsured would have a choice of enrolling in either a private or public plan and paying the appropriate premium but without public subsidies. Insurance companies would not be allowed turn anyone down; this would be accompanied by an individual mandate, both in order to cover everyone and to avoid adverse selection of the sickest individuals to plans and providers.
There is an affordability problem if individuals are mandated to purchase. Most will get coverage through their jobs or through public programs, where affordability is subsidized by the employer or the public program. Let’s be clear that the affordability challenge for others can be fixed; it is limited to those uninsured individuals who must buy coverage in the individual market because they are not eligible for coverage through the workplace or through public programs. Half of California’s newly unemployed will fall into this group of uninsured. The affordability problem is concentrated among individuals with no access to employer coverage who have to pay three times as much for coverage as do others of comparable income.
Who are they? First, a relatively small percentage of the uninsured are older uninsured individuals – about 9% in California. Their affordability problems in the individual market are caused by age rating; individuals use more health care as they get older, and age rating charges premiums based on the average use of those in the same age group. Due to age rating, those uninsured over 55 pay three times as much for coverage as do twenty-somethings (a far larger share of the uninsured). This aspect of affordability can be solved with refundable tax credits or premium subsidies through an insurance exchange. California proposed to help uninsured individuals with incomes up to 400% of FPL — $40,000 for an individual, maybe it should be higher.
Second, families pay three times as much in the individual market as does a single individual of the same age and income strata. This is due to family rating, which charges individuals based on the size of their family, the number of family members being insured. This is a very real problem for the self-employed who have no employer to contribute towards the costs of their coverage. This group accounts for a very small percentage of the uninsured; three fourths of California’s uninsured families have incomes of less than 200% of the federal poverty level and only 15% (260,000 persons) have incomes in excess of 300% of FPL. California proposed to help uninsured families with this affordability problem up to 400% of FPL or $80,000 for a family of four through a combination of refundable tax credits and public program expansions. Let’s be clear there is an affordability problem under a mandate for a small share of the overall uninsured, but also let’s be clear that this is a manageable problem that can be fixed.
The bigger challenge for federal reform efforts is designing a new structure for coverage of the flex workforce — the temps, provisionals, part timers and contract workers as well as the lower income, self-employed and micro-businesses. They have limited access to group coverage through employers; some have incomes too high to qualify for public coverage and too low to afford individual coverage. They need a new structure that is efficient, has bargaining power and is not a bad risk pool. The individual market as currently configured is not right for them; it is too expensive and of limited value, as medical loss ratios are quite poor. This market has insufficient consumer protections and weak buying power for individuals, on top of little or no tax advantages.
Health Insurance Exchanges (HIEs) could be the answer, but only if they have real bargaining power and can cut down the administrative costs. Reinsurance and risk adjustments among health plans for high cost individuals can be part of the answer, as this will curb “cherry-picking” the healthiest enrollees. There may well need to be a pro rata contribution from employers that would reduce employees’ costs and limit the natural incentives for some employers to create new classes of non-benefitted workers. Several Fortune 500 companies have recognized the problem and created a pool for their flex workforces, but do not offer the subsidies needed to assure affordability.
The right way to partially finance coverage for the uninsured is by redirecting existing spending on the uninsured, savings from cost containment reforms and re-orienting the public tax subsidies to those who need them most. If needed, this can be supplemented with a small consumption tax like a sales tax on certain services or a VAT (Value Added Tax) commonly used in other developed countries, or a small payroll tax for those employers who do not offer and/or a small income tax surcharge for individuals who do not enroll in coverage; this could round out the financing package. The financing reforms will need to be designed to enhance our global competitiveness and recovery from recession.
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