A new book calls for universal health insurance coverage, but with no increase in government spending. It’s getting a lot of attention in progressive circles. Yet MIT economist Amy Finkelstein, one of the authors, says she doesn’t regard the proposal as a leftwing idea.
In a recent podcast, Finkelstein said the health care systems that work best in the world are in Singapore, Australia, Israel and Switzerland. These are all market-based systems.
Even more surprising, a bill that would go a long way toward implementing Finkelstein’s proposal has been introduced in Congress by a conservative Republican.
The Problem
Finkelstein and her coauthor, Stanford University economist Liran Einav, say that health insurance in the US has three flaws:
- It’s hard to access. Six in ten people who are uninsured are eligible for free or highly subsidized insurance but can’t manage to enroll.
- It’s not lasting. One in every five people under 65 will become uninsured over a two-year period.
- It’s inadequate. The amount of unpaid medical debt held by collection agencies is more than the debt for all other consumer expenditures combined, and three-fifths of that debt is incurred by households with health insurance.
So, what can be done? Finkelstein and Einav note that half the spending in our health care is already done by government. That’s enough, they say, to provide every American with “universal coverage that is automatic, free and basic.”
- “Automatic” means that if people do not choose a health plan on their own, they are auto-enrolled in one.
- “Free” means the premium for basic coverage is completely paid by government
- “Basic” means the care most of us would regard as medically necessary. People would be free to use their own money to upgrade and purchase additional benefits – such as less waiting, a private hospital room, and other amenities.
A bill that embodies much of this idea is the Health Care Fairness for All Act, introduced by Pete Sessions (R-TX). The bill would replace all federal tax and spending subsidies for private insurance with a tax credit – giving every American an equal amount. Because it would be refundable, even those who pay no tax would receive it. Health plans would compete to provide “basic” coverage at a price equal to the amount of the credit. People could add their own money for “non basic” coverage.
For anyone who turns down the credit and elects to be uninsured, the subsidy would fund coverage through a safety net.
The Sessions approach is not a new idea. It was first proposed by John McCain in his 2008 presidential campaign and in legislation sponsored by Paul Ryan and other Republicans in Congress. The current system of excluding employer-paid health insurance from the employee’s taxable income is very regressive. It confers the largest tax benefits on those in the highest income tax brackets. By contrast, the tax credit approach would treat everyone the same.
An important argument made by Finkelstein and Einav is that Americans are paying about twice as much as we really need to pay for medically necessary health care. So, if we gave the government’s share to people directly, they would be able to buy essential coverage with that money alone.
Could the Sessions bill meet that same aspiration?
When Congressman Sessions and Sen. Bill Cassidy introduced an earlier version of the tax credit approach, I made a back-of-the-envelope calculation to see what kind of health insurance could be purchased if all private health insurance subsidies were converted into lump-sum transfers to households.
I concluded that the amount of the credit would cover the costs of a well-managed, private Medicaid plan. Right now, about two thirds of Medicaid enrollees are in such plans. As is well known, many doctors and even some high-end hospitals won’t take Medicaid patients. Even so, society has decided that this is the minimum amount of coverage we insist that even the poorest citizens should have access to.
So, imagine that the most efficient Medicaid contractors were free to offer their plans in a competitive market to everyone – not just poor people. Then, everyone would have the opportunity to have access to a health insurance “floor” with no additional government spending. More generous coverage would be available, but would require additional out-of-pocket spending.
Making health care “free” does not mean there would be no role for price-conscious consumers. Under Medicaid’s Cash and Counseling program, for example, homebound disabled patients manage their own budgets and can hire and fire the attendants who provide them with services.
In a similar way, health insurers under the Sessions bill could make deposits to health savings accounts to allow patients to manage their own budgets for diabetes and other chronic conditions.
How to Make the Transition
A problem with the Finkelstein/Einav approach is the lack of a practical transition. After all, most people like their health insurance. Why would they want to switch to a new system?
Sessions has an answer: grandfathering. Employers would have the choice to keep all their employees in the current system, or switch to the tax credit system. He believes it wouldn’t take long for both employers and employees to decide that tax credits are better.
Take someone facing a 50 percent marginal tax rate, a likely condition for an executive choosing a health plan for employees. If family coverage costs $24,000 a year, the current ability to substitute tax free health insurance for taxable wages is worth $12,000 to her in reduced taxes.
If the executive chooses a more economical plan (resulting in less insurance and more wages), 50 cents of every dollar saved will go to Uncle Sam. By contrast, with a tax credit approach, the first $12,000 of spending is subsidized dollar-for-dollar by the government. Beyond that, every additional dollar reduces take-home pay by a dollar.
Potentially, the employee now has an opportunity to convert $12,000 of health care spending into take-home pay by being a more economical buyer of health insurance and receiving higher wages instead.
The same principle applies to all employees, regardless of their tax bracket. Tax credits push the government subsidy up front and allow people to convert wasteful health care spending dollar-for-dollar into take home pay.
Sensible ways to reform health care have now been around for almost two decades. It’s time for politicians to pay attention.
Without underwriting, what incentives to insurers face under this system? Will they be able to cherry pick their insureds?
Will you be able to buy it just when you need it?
Etc. Etc.
I assume that Larry is referring to the supplemental insurance that many individuals will want to buy, if their employer decides to drop conventional coverage and go with the tax credit alternative.
He is right to be concerned. Without further regulation and subsidies, this market just screams “adverse selection.” The workers who will most want to buy it will be the workers who need it for chronic illnesses.
This is solved in Medicare by an elaborate and very expensive set of subsidies and regulations. The government literally gives each Medicare Advantage carrier at least $13,000 a year per enrollee to make the program work.
In 2009, when Obamacare was proposed, I put a lot of effort into understanding the muddle of our health care policy. I learned a lot from John C. Goodman. His book, “Priceless,” is not easy to read, but it is a must to know the basics. His lecture, which I attended, was eye-opening. I subscribe to his newsletter.
Today, I received an email with his article about a new book about universal health care. I reviewed that book earlier. The title of Dr. Goodman’s op-ed is scary: “Can the Left and Right Agree on Health Reform?” The arguments are confusing.
Trying to combine the ideas of Amy Finkelstein with the concepts of John C. Goodman is like finding a way that certain cars follow the right-hand traffic rule while others follow the left-hand traffic rule on the same streets. We have it now in health care, which is precisely why it does not work. The left is not right about health care. The right is wrong in seeking compromises instead of promoting a full-blown free market solution.
Dr. Goodman’s fine article assumes that the current “tax subsidies” for employer coverage can seamlessly be transferred into
tax credits and government payments for a Medicaid-like base insurance product.
I am cautious about this. There is a tendency toward assuming that ‘tax subsidies’ and ‘tax expenditures’ are real money. They aren’t. They are assumptions about how much money the government could collect if employer premiums were taxed.
The proposed Medicaid-like program only pays for itself if all taxpayers are in a 50% marginal tax bracket, and if states also contribute to the new product as well (which they won’t). I can share my projections if anyone is interested.
The proposed financing also assumes that employers will transfer all former insurance premiums into taxable salary increases for workers. This is not a sure thing. Some employers will want to keep all or part of the money — without strong unions, who would stop them? There is also a challenge of how to allocate any salary increases…..if one worker is single and a similar worker is married, do you give the single worker a $7000 increase and the married worker a $30,000 increase?
My final comment for today:
It is not accurate to describe Singapore, Israel, Australia and Switzerland as “market-based systems.”
The last three countries noted have strict laws that everyone must sign up with a health insurance entity. Australia has a large publicly funded hospital system.
Singapore has public hospitals, public catastrophic insurance, and the medical savings accounts are mandatory.
Yes, these nations do have market elements, and that is a good thing. But they all have coercion that Americans generally reject.