Tuesday, January 26, 2010

My Modest, Scaled Down Bipartisan Healthcare Plan

Step 1- Revenues and moving away from the employer-based system-
I propose a full phase out of the employer exclusion for those with incomes above $125 k for an individual/ $250 k for a household. This would only yield a modest amount of revenue assuming a static model. There aren't all that many households that would fall into bracket, however, those that do tend to be upper middle management. I think once hr directors across the country see their tax liability go up anywhere from $2-5k that they may rethink the virtues of having their company "provide" their healthcare. This would not cause every company to cash out their fringe benefits and only pay cash wages but it would significantly shift things in this direction.

Now, obviously, getting rid of the employer exclusion would transform compensation norms away from non-taxable benefits to taxable wages much more quickly, but this is probably not politically possible. One could argue that touching the employer exclusion is basically impossible as evidenced by the fact that an incredibly weak excise tax (this was basically a roundabout way of gradually eroding the employer exclusion-really gradually, like decades) sent labor into a tizzy and is arguably the proximate cause for the failure of current health reform bill (that and the fact that house democrats are apparently stupid and timid). I think what distinguishes this proposal is that labor's ox is not getting gored by and large. Most union members do make good salaries but not on this order. Rather, it is a soak the rich proposal which usually is politically palatable. The strength of the proposal is not that the rich will be successfully soaked but in attempting to avoid being soaked explicitly will drastically change the way companies pay their employees. Far fetched, I don't think so.

Step 2- Dump people into the individual market and let them buy insurance across state lines

I know, the individual insurance market is horrible, yadda yadda yadda. One of the basic problems with the individual market is that many states suffer from minimum benefit creep. If you live in New York or some other states where there are very generous mandated benefits chances are your choice is between buying a policy that is exorbitantly expensive and going uninsured. Given that you need food and shelter, the choice most people make is to go uninsured. In choosing between protecting folks from catastrophe on one side and providing insurance that has a no-copay for acupuncture treatments on the other side, I think the providing protection against catastrophic bit is more important.

Why propose buying across state lines as opposed to a national exchange? National exchanges, while a great idea in theory, are likely to be a cess pool for rent seeking. The notion of a basic catastrophic plan being offered unmolested by gentle nudges from the hill (in response to contributions from the AMA) is simply inconceivable. One could counter that without national exchanges, buying across state lines will promulgate a regulatory race to the bottom. Yes, this is a feature of my plan, not a bug (within reason, addressed later in the blog). In the end, my underlying assumption is that we insure ourselves in a perverse manner, and are incentivized to do so by tax incentives. I don't think it is necessary to add third and fourth parties to a simple transaction covering a predictable expense. Thus, my optimal insurance plan would be a pure high deductible plan where you pay cash directly to the provider until you hit the deductible where the insurer would take over (as the deductible would be around $2,500 for an individual the likelihood that you would hit it in a given year is very low). By going the federalism route such a insurance product is more likely to survive.

Step 3. Mandate a couple of insurance reforms- no rescission, guaranteed issue

The danger of buying across state lines and the attendant race to the bottom is the prospect of incentivizing rescission. Ban it, problem solved. This would make premiums more expensive, however...

Step 4. A Federal Catastrophic Reinsurance Plan

People with pre-existing conditions are basically uninsurable. I liked John Kerry's proposal during the 2004 campaign for catastrophic reinsurance. The basic contours of his plan was that after a certain threshold (I think it was $75k) the government would pay half the cost. I wouldn't touch community rating however as it does away with the one thing insurers do well, price risk(never mind that whole AIG thing, nothing to see here). If there was a federal catastrophic reinsurance plan insurers wouldn't have the incentive, or nearly as much of one to screen for pre-existing conditions, but they would have an incentive to price according to certain unhealthy behaviors- like smoking.

Step 5. Use revenues from step 1 to provide a refundable tax credit to those under 200% of the poverty line in amount sufficient to cover the premium and 75% of the deductible. Phase out the deductible contribution and premium coverage by 350% above the poverty level.

Step 6. An individual mandate. Again, if people want to blow their nonrefundable tax credit on crack that is fine with me, but they should have to pay a penalty. A HDHP by itself in VA (my lovely home state) is about $1500 per annum. A penalty of $500 would probably incent most to go ahead an buy the insurance.

Sidebar- Federalize medicaid and get rid of the State and Local tax deduction.

This plan would be considerably less expensive than the currently proposed one, would do more to reform the system, and in the long run would have greater likelihood of containing costs. It would probably be disruptive though.

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