In the Nation's Interest

An Alternative Health-Insurance Proposal

By Joseph Minarik

Senators Richard Burr (R-NC), Tom Coburn (R-OK), and Orrin G. Hatch (R-UT) have put forward an approach to health-insurance reform that they describe as an alternative to the current law – that is, the Affordable Care Act (ACA, or “Obamacare”).  It is not yet clear whether this proposal (I’ll call it “BCH” for short) will become a magnet for opposition to the ACA, but it has gotten a fair amount of attention from the press that is opposed to the President’s law.

The objective, according to the co-sponsors and the press commentators, is to eliminate the ACA’s expansion of the federal role in health care, and to unleash competition and innovation in the private healthcare sector.  The proposal clearly would do the former.  Whether it would accomplish the latter depends on developments outside of the range of experience.

In the very broadest terms, BCH would fundamentally alter the most basic part of the structure of the ACA.  The ACA provides coverage to persons without employer plans through income-conditioned federal subsidies to be used in state-level exchanges, with plan terms generally subject to federal standards and regulations.  BCH offers such individuals the opportunity to buy coverage in the existing individual markets, using income-conditioned federal tax credits, with the plan terms left up to the states and their regulatory mechanisms.

Would BCH achieve its objectives?  First, a big caveat.  The devil is in the details – perhaps more in healthcare proposals than almost any other legislation.  One source of delay and resulting frustration on Capitol Hill during the debate over the Affordable Care Act was that the Congressional Budget Office (CBO) refused to “score” any proposal that was not fully drafted in legislative language – precisely because of the importance of detail.

BCH is not drafted in legislative language.  You can find a “detailed summary” on the sponsors’ websites, but the “detailed summary” is the proposal – now and apparently for the indefinite future.  Thus, no one really knows what the proposal actually is, and claims that it is fully paid for cannot be verified.

This is important in that the amounts of the federal tax credits that would allow the recipients of the ACA’s subsidies to pay their new premiums under BCH would be critical.  If the subsidies are too low relative to the cost of insurance, the recipients will not be able to afford coverage.  The proposal summary includes part, but not all, of a schedule of tax credits, and at the current level of plan detail CBO could not say what those tax credits would cost, and whether they are fully paid for in the bill.

(Incidentally, BCH starts by repealing all of the ACA except for its Medicare spending cuts.  The sponsors’ “Frequently Asked Questions” on the proposal state in this context that “Obamacare treated Medicare as a piggybank to pay for new programs. We don’t.”  This could be interpreted to say that the savings from the ACA Medicare cuts will be segregated and used solely to reduce the deficit and to bolster Medicare’s finances.  If so, then the rest of the bill would have to pay for itself, which would be a tall order.  If not, and if the Medicare savings are used to offset the costs in the rest of the bill, then the “piggybank” comment would be difficult to interpret.

And in that context, the main source of finance for the bill is to cap the current-law federal income tax exclusion for employer-paid employee health insurance premiums at 65 percent of the average plan’s cost.  Such a restriction would have almost universal support among economists.  There are practical issues – like determining a particular employee’s premium under a self-insured plan.  However, the Congress already dipped its toe into that pool with the “Cadillac Tax” on high-cost plans under the ACA.  Still, it is a bit difficult to imagine that Members of Congress who railed against the Cadillac Tax will sign on to this provision, which also covers all Buicks and even most mid-sized Chevrolets.)

Nor could anyone say what insurance would cost under BCH.  It would change the insurance market beyond experience – not necessarily a bad thing, but definitely an element of uncertainty as to whether the proposal as currently configured is fully paid for.  By design, BCH would make very little change in the employer-sponsored insurance that most people have.  Thus, if you are looking for dramatic improvement in the healthcare system, you will not find it – at least not soon, or directly – in the employer system.  Where you will see substantial change is in the individual market.

BCH repeals the ACA’s assumption of responsibility by the federal government, and instead delegates both monetary and regulatory responsibility to the insurance companies, and to the states.  So, for example, BCH outlaws lifetime limits (just as the ACA does), and it mandates that family policies cover dependent children to age 26 (but it allows the states to opt out).  Insurers are required to provide guaranteed renewability (except in instances of fraud).  All of these requirements will make insurance more expensive than it otherwise would be.  Relief comes in part from state high-risk pools, supported by some federal funding, and from the income-conditioned, advanceable, and refundable tax credits with which low-income people can buy insurance.

But the key provision of BCH related to access and affordability in the individual market is that, after an initial open enrollment period, any individual who maintains continuous coverage has guaranteed issue without underwriting for health conditions.  This, like the ACA’s prohibition of consideration of pre-existing conditions (and of rescissions), is a major change.  It is touted by the co-sponsors as a strong incentive for people to get and then continue insurance, and they argue that the individual market will in the long run provide competition for the employer system and thereby drive innovation.  But without the ACA’s near-term “risk corridors” and the permanent reinsurance provisions, it could yield higher costs to insurers in the individual market.

Beyond the cost issue, there is at least one more question of detail in how BCH would work.  The proposal specified a one-time open-enrollment period with a prohibition of consideration of pre-existing conditions.  That one-time window would allow anyone with a medical condition to obtain coverage thereafter, and thus to obtain eternal peace from the insurance-coverage worry associated with his or her condition.  That seems logically airtight, but it does not speak to what would be required of succeeding generations of individuals with medical conditions so that they could attain “continuous coverage.”  There may be a simple answer – perhaps everyone ever after gets one free open-enrollment season – but it does illustrate how devilish the details can be, and how important it is for such a proposal to be spelled out in full legislative language.  And it leaves open the question of how the additional cost of covering individuals with expensive conditions will be borne by insurers, and how much this cost will add to premiums (and to state and federal costs under the high-risk pools – and how effectively those separately managed state pools will operate).

Although a BCH – ACA debate would raise many issues, perhaps a good part of that debate would boil down to one basic question:  To what degree is health care properly a national issue, and to what degree should it rest at the state level?  From the extremes, people could give the two rote answers:  “Heart disease in Minnesota is no different from heart disease in Florida,” versus “We in our state know better what our needs are than does someone in Washington [D.C., that is].”  Of course, both statements are true, but neither really answers how we should make healthcare policy.  Yes, you know better your state’s starting point in terms of healthcare infrastructure and its distribution across and through your population centers.  And we all want the freedom for innovative thinking to sprout new ideas.  But we might expect that once those new ideas prove themselves, they would be accepted throughout the country.  Has that happened?  The Dartmouth surveys of medical practice would seem to say no.  And are the proper units for innovation and experimentation necessarily defined by state borders?  It is striking that opponents of the ACA, after they excoriate that law’s national definition of a “basic benefits package” that specifies what each insurance plan at a minimum must cover, then immediately excoriate each of the pre-existing state laws that fulfilled the same function, citing rampant political influence and favoritism.

Another question might be whether BCH’s attempt to revitalize the individual market could debilitate some employer coverage.  What if insurers in the individual market use personal data tools to court young and healthy persons who have employer coverage?  Could the cream of employer risk pools be skimmed successfully, leaving less viable employer pools?

In sum, BCH invests a great deal of trust in state regulation and the individual insurance market, which have not to date seemed to be the paragons of performance (though arguably subject to substantial improvement), despite their theoretical strengths.  It is not clear how long the ACA’s right to exist will remain arguable, as more and more contracts are written according to its terms.  But the arguments likely will rage on.  And yes, innovation is a good thing, and is essential to the control of healthcare costs.

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