EVENTS

Date:	Wednesday, May 4, 2005
Time:	3:30 PM -- 5:30 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

May 2005

How Not to Cover the Uninsured

During the third annual “Cover the Uninsured Week” (May 1-8), the Robert Wood Johnson Foundation and other organizations focused public attention on the problems facing those without health insurance. While health experts and policymakers identify covering the uninsured as a priority, there is sharp disagreement about how best to do so. Should we expand government insurance programs such as Medicaid, mandate that everyone be covered, or use tax policy to induce more coverage in the private insurance market? To help inform this debate, a May 4 AEI event brought together four analysts with extensive research and practical experience to share their views on how best to cover the uninsured, and how not to create programs that leave the uninsured, the currently insured, or taxpayers worse off.

Eugene Steuerle
Urban Institute

A major pressure on health care costs is rooted in the design of modern health insurance. Patients and providers bargain at zero price, a situation that spawns virtually unlimited demand. Intermediaries who might be relied on to bargain for services, like employers who provide insurance, are also insulated from the true cost of health care by large tax subsidies. As costs soar, fewer people are able to afford private insurance, and the government is induced to cover more people’s care. More government involvement further discourages private insurance.

Reform can rely on individuals, intermediaries, or the government to rein in costs. A strategy led by individuals would breed too much inequity, and one directed by intermediaries could not be trusted. The fundamental problem with government-controlled costs is the unpredictability of future systems--only a market can keep pace with a dynamic health care system. Skeptical of these three modes of cost control, policymakers have instead spent more on health care, which has only increased demand and costs further.

True reform cannot be deferred much longer. Following its current cost growth trajectory, health care will overwhelm all other sectors and displace other priorities in the federal budget. In his first term, President George W. Bush increased spending in virtually all areas, but in his second term, he proposes cuts everywhere but in health and retirement.

Efforts to make insurance more affordable could have the unwanted effect of widening inequality in health care. Higher taxes could achieve better income distribution, but they would also create incentives for more comprehensive health insurance at the high-income end, while low-income people, even with subsidies, would buy more basic coverage.

Tax subsidies for health are largest for the wealthiest people and the highest cost plans. By automatic policy, those subsidies are slated to increase by $100 billion each year for the next five years. Most strikingly, the extra budgetary commitment is likely to increase the number of uninsured. At the margin, tax breaks encourage the purchase of higher cost, more comprehensive plans, which increase utilization and ultimately raise the cost of health care, leaving more people unable to afford private insurance.

Including health care tax expenditure, roughly 55 percent of health care in the United States is financed by the government. Public budgets pay more than $7,000 (47 percent of the total) each year toward the health care costs of an average household.

A partial health care reform agenda involves a cap on the tax exclusion for health care, tax credits for all purchasers of health insurance, an “indirect” mandate in which people who do not buy insurance forfeit some tax benefits, and automatic enrollment of workers by their employers into their insurance plan. These strategies would make far better use of government resources than the additional $100 billion in tax subsidies that are scheduled. Without any change in cost to the government, they would promote greater equity, more efficiency, reduced cost growth, and more insured Americans.

Mark Pauly
University of Pennsylvania

Despite the momentum building around “Cover the Uninsured Week,” political will for genuine reform is low. Cutting through other common rhetoric, however, may be more encouraging. The portrait of the uninsured as poor, sick, and miserable is inaccurate, and the notion that only comprehensive and complete insurance is valuable, needs to be dispelled.

A major reduction in the number of uninsured through subsidies for voluntary coverage would cost about $100 billion each year. An employer-enforced individual mandate would be useful but is not politically viable. Fundamental to the serious problems of our health care system, including rising uninsurance and spiraling health care costs, are the skewed incentives created by our tax system. If the tax breaks given to excess health insurance at the margin were instead directed to the uninsured, more Americans overall would be covered.

There is no typical uninsured person. They vary by age, health status, income, and most other characteristics. Most are young to middle-aged, reasonably healthy, and not poor. In fact, most people with similar incomes do purchase health insurance. The uninsured are also not miserable. While they might be happier with free insurance, most would be worse off if they paid for comprehensive coverage.

Until expensive policy solutions are within grasp, low-coverage, high-value insurance could benefit the uninsured if it were made available. And for the uninsured who can afford private insurance, a marketing blitz that aggressively communicates the value of insurance might achieve greater takeup. Lastly, coverage should be the default option at every opportunity, so that new employees, students, or club members need to take action to reject that coverage.

Policymakers should stay focused on these interim strategies and avoid distractions that may offer illusory appeal. Risk segmentation in private insurance does not require their attention, and reducing it may even increase the number of uninsured. Beyond certain measures, preventive medicine is not a panacea that should absorb their focus. Rescuing employment-based insurance for small firms is also not worthwhile.

An important first step is to discourage people from buying excessive coverage simply because of the big tax breaks given to employer-sponsored insurance, a phenomenon that contributes significantly to the soaring cost of insurance. Better empirical evidence is necessary to convince the uninsured who can afford coverage of its value.

Jon R. Gabel
Health Research and Educational Trust

Our health care system is not sensibly or uniformly designed, so no one piece of legislation can undo it or fix its shortcomings. Nevertheless, the problem of the uninsured deserves our serious attention. Eighteen thousand people die each year from lack of access to care, a statistic that sharply undermines the American virtue of equity. At the same time, Americans are interdependent, and areas with disproportionate numbers of uninsured report worse quality of care for the insured.

Two-thirds of the uninsured are poor or near-poor (greater than 200 percent of poverty), though most are in working families. The average family policy cost $9,950 in 2004. At its current pace of growth, health insurance will overtake the salary of a minimum wage worker this year. Between 2001 and 2005, 5 million fewer active workers were covered by their employers, and that decline is even more dramatic among smaller firms.

Rates of health insurance takeup are sensitive to the cost of coverage borne by employees. Between 2000 and 2004, the average single-worker, monthly contribution climbed from $28 to $47. The overall costs paid by insurance are driven by a narrow minority. The sickest 5 percent of employees incur more than 50 percent of claims--on average, $20,000 per employee.

The uninsured are four times more likely to delay care and use 40 percent fewer services than their insured counterparts in similar health. They have more avoidable hospitalizations and tend to enter the hospital sicker. They are discharged sooner and receive fewer high-cost discretionary services. For instance, the uninsured are 75 percent less likely to have total knee replacement surgery than the privately insured. At the same time, they are more likely to die in the hospital and have a 25 percent higher mortality rate than insured individuals.

Early experience with the Health Coverage Tax Credit to workers displaced by trade suggests that low tax credits are insufficient to induce greater private insurance. Despite major state efforts, only 6 percent of eligible persons have signed up. Most are deterred by the cost to the individual--35 percent of the total premium. Of those who have signed up, most have opted for higher-cost, high-benefit plans. Medical underwriting and risk selection are valid concerns.

An effective tax credit could be set around the twenty-fifth percentile of plan cost distribution, so that low-cost plans can be purchased solely with the credit. The subsidy would be roughly $3,000 for an individual and $7,000 for a family. Capping the tax exclusion of employer-sponsored health insurance would introduce greater equity and efficiency into health care. Additional revenue could also come from the hire of more Internal Revenue Service agents. Since many workable health care proposals are funneled through our tax system, a commission should be convened to evaluate the current tax code.

Universal coverage could be achieved through an individual mandate, where insurance status is verified in income tax filings. To increase options for coverage, the Federal Employees Health Benefits Program and state government plans should be open to individuals and small groups seeking insurance. Finally, the rules of competition should be designed so that plans compete on the basis of price and quality, not favorable selection.

In order to improve the efficiency of our health care system, high-cost cases need to be better managed. Tax credits could also be provided as incentives for implementing electronic medical records or paying for performance. More research needs to focus on evaluating medical technologies, and administrative procedures need to be standardized.

Len Nichols
New America Foundation

The United States gets low value for its health care dollar. While most developed countries devote an average of 9 percent of their GDP to health care, the U.S. spends 15 percent. Moreover, quality of care and access to it are sharply uneven.

Incremental approaches to health care reform have failed, as progressively fewer Americans are able to afford coverage. The people most affected by the broken state of our health care system are low-income, so they are largely off our national radar. The growing ranks of uninsured have not provoked the sense of urgency they deserve. Only recently have individuals begun to acknowledge their interdependence and to focus attention on the problem. At the same time, the incentives built into our health care system, such as tax breaks for more health insurance and provider payment detached from outcomes, remain unchanged and perverse.

Necessary reform will require an improved information infrastructure to link performance to payment, and greater value-enhancing incentives for all providers, patients, and payers. At the same time, providers and patients alike need a better understanding of where medicines and technologies are appropriate. Determinations of efficacy across relevant classes of patients should be stamped directly on the product label. And lastly, reducing the number of uninsured will require subsidies for low-income individuals to buy insurance.

Universal coverage could be accomplished through an individual mandate but hinges also on employer and social responsibility. Decisions on which benefits should be collectively financed should be based on evidence. Any workable changes to our health care system must preserve patient choice.

To mobilize support, serious strategies to cover the uninsured should be rooted in a moral imperative to extend health care to all. This campaign should also have a dimension that explains the economic necessity of health insurance and present a fiscally credible solution. Support for meaningful reform will come from compassionate citizens, worried employers, concerned governors and state legislators, pioneering providers, smart workers, and the few politicians willing to lead.

AEI research assistant Ximena Pinell prepared this summary.