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The Rubik’s Cube of Health Care Finance

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Girard Miller
October 7, 2019

As the late Walter Cronkite once said, the United States health care system is, “Neither healthy, caring nor a system.” Best described as a multi-payer system, the billings for medical providers can be (1) employer-subsidized, (2) personally insured, (3) government-subsidized through Medicare or Medicaid, or (4) direct-pay for those without insurance. In most cases, an insured patient also bears financial responsibility for deductibles and co-payments. With Medicare providing medical and prescription coverage to elderly citizens, and public subsidies provided to lower-income families through Medicaid, the federal government’s role in health care finance has expanded significantly over the years. Nonetheless, a substantial segment of the United States population remains uninsured or, “Under-insured.” Finding a way to expand coverage and affordable access for these segments of the population remains the Rubik’s Cube of health care finance.

A key obstacle to broadening access and coverage is that employer-paid insurance constitutes a major component of today’s multi-payer landscape. Approximately 180 million Americans are now covered in one form or another by private health insurance. Employers collectively pay premiums of around $880 billion annually for almost 150 million enrollees. Employers that do provide insurance pay an average of 80 percent of the total premiums, but this is not a uniform ratio. Benefits from workplace insurance range from minimum coverage as may be required by law, to union-negotiated benefit levels, to the most generous, “Cadillac,” plans that have highest costs and the most covered expenses. For the self-employed, health insurance is a personal expense that is largely deductible on the income tax. States pay 38% of Medicaid costs, which consume about 26% of their budgets on average. Employees and individuals pay hundreds of billions more than just premiums, including deductibles and out-of-pockets, plus prescriptions. Replacing all those funding sources with new federal taxes is a dubious and divisive concept.

Some have proposed a single-payer system like those in other countries. The fiscal wall facing this, “Solution,” is that the private sector and employers are now paying well over one-half of the $4+ trillion annual  total costs of health care. Regardless of one’s political persuasions, there is not a simple mathematical way to institute a universal federal tax structure to equitably replace the non-governmental payments now made in the current multi-payer system. There will be winners and losers, not savings for all. The requisite taxes will result in higher net costs to a significant segment of the population including many in the middle class who enjoy employer-paid insurance. At minimum, the incremental public-sector cost to provide universal coverage would probably require additional federal taxes of $1.5 trillion annually, and there is no combination of, “One Percenter,” tax reforms that can come close to numbers that large.

Here are some policy alternatives, their financial metrics and the issues they raise:

 “Medicare at Cost,” could be implemented by allowing all citizens to purchase Medicare-level coverage on a non-profit basis with income-based premiums determined actuarially. Starting first with citizens aged 50 to 65, and then working down the age spectrum each year so that the system is not overwhelmed initially by a flood of new participants, premiums can be set for each demographic (which could include both age and geographical location). The Centers for Medicare and Medicaid Services (CMS) could process the paperwork without a profit margin nor the overhead and marketing costs of private insurance carriers, which could result in cost savings of $400 to $500 per participant. But it must be emphasized that eliminating such private insurance costs will never underwrite free health care because they represent only about two percent of the nation’s total health care expenditures.

“Major medical for all,” would be an achievable policy option. An income-based premium structure could fund much of the costs of a nonprofit national catastrophic medical insurance plan, which would reduce costs for employers that opt out, and leave an affordable subsidized tier of lower-income beneficiaries who are not already covered by Medicaid. The federal revenue requirements for this safety net would be attainable under various tax reforms.

“Half-step,” Medicaid expansion could provide a limited government subsidy for those now uninsured or underinsured, with premiums based on income. However, this brings into play the, “Crossover problem,” and it is unlikely to achieve affordable universal coverage. For every new subsidy dollar extended to lower-income participants though Medicaid expansion, even if they pay a premium based on income, there will be crossover demand from presently insured citizens who demand or expect similar subsidies. The costs of crossover are difficult to project without specific plan details and actual experience, but they will not be trivial. As a result, the costs of expanding coverage and access to these target populations is more than just the costs of subsidizing those 70 million citizens. The annual costs of half-step Medicaid expansion could range from $90 billion to over $500 billion annually.

Basic Health Care for All. In between the status quo, the lower-budget public options, half-step Medicaid expansion, and universal single-payer legislative models, there is a fiscally achievable, alternative hybrid model that provides for basic health care for all Americans with, “Progressive,” income-based premiums. To address a widespread concern, the basic benefits would also include a major medical insurance component to reduce the number of medical bankruptcies that are catastrophic to the uninsured and under-insured. This basic-care coverage facility would relieve employers of a significant portion of their benefits costs, and both employers and employees would be free to supplement the basic care policies with supplemental policies (like Medicare Advantage today) or workplace stipends. Those benefits supplements would be determined at the workplace, either by employer policy or through collective bargaining as the case may be. Private insurance companies would continue to exist and actively compete in the workplace and supplemental-benefits market. Employers could still elect to provide equivalent or superior benefits privately so that companies and workers are not required to join the federal system: a, “Voucher,” or tax credit could be given to employers for their per capita cost of providing private insurance at least equal to the basic-care program. Additional tax revenues of $500 to $700 billion annually would likely be necessary.

But first, fix Medicare! What has remained remarkably unspoken in the ongoing public discourse over health care finance is that the existing Medicare program is underfunded, and actuaries project that the Medicare trust fund will be depleted around 2026. “Medicare for All,” would be a cruel hoax if the current system for elderly Americans is not first put onto a sound financial footing.

Note: Cost and revenue estimates are the author’s and documented in Enlightened Public Finance (referenced below)

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This article was adapted from “Part III: Health Care Finance” in the author’s new book Enlightened Public Finance, which addresses fiscal literacy for the 2020 elections. Other chapters address the perils of deficit accumulations, various tax reform options, and infrastructure financing options. The author’s net proceeds will be donated to the Government Finance Officers Association’s public finance scholarship program. Paperback copies are now available through online retailers and directly from the publisher without retail commissions: https://store.bookbaby.com/book/Enlightened-Public-Finance , whereby one-half of the purchase price will be donated


Author: Girard Miller received an MPA degree in 1973 from the Maxwell School at Syracuse University, and an MA in Economics from Wayne State University in 1978. Now retired, his 30-year career spanned the governmental, nonprofit and investment communities. Twice the president of national mutual funds, he served on the Governmental Accounting Standards Board, and has authored several publications for the Government Finance Officers Association, where he is an honorary life member.

 

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One Response to The Rubik’s Cube of Health Care Finance

  1. Burden S Lundgren Reply

    October 13, 2019 at 8:32 pm

    An interesting examination of the technical complexities of health care financing. At a generic level, may I point out that there are winners and losers for almost any policy in any subject area – so not, I think, a good reason for failing to support a particular proposal. But on a broader level, we would do better by spending more on the social programs (e.g., nutritional support, better housing, education) that create health rather than spending more on health care to do the mop up.

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