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PERSPECTIVEInsuring Californians: A Proposal That Matters
The basic provisions of the proposal by George Halvorson and colleagues provide a realistic way for many states to afford coverage for their uninsured residents. In this commentary we suggest some modifications to achieve a more viable plan.
THE PROPOSAL BY George Halvorson and colleagues presents ideas that should help California, and other states with sizable uninsured populations, bring these residents into coverage.1 One important contribution is the clear presentation of alternatives and difficult trade-offs regarding scope of benefits, provider reimbursement rates, and levels of revenue needed. Another is the identification of specific dedicated revenue sources structured to reduce the counterproductive incentives of our current system. It is noteworthy that Kaiser Permanente itself (with which Halvorson and colleagues are affiliated) would be directly affected by the provider services fee, which is strikingly refreshing to these long-in-the-tooth health policy analysts. Cost of uncompensated care. The proposed provider services fee is a reasonable, sustainable revenue source for needed subsidies. The fee could capture the reduction in uncompensated care costs for the uninsured population brought into coverage. Available data indicate that provider cost shifts for uncompensated care provided to uninsured people increase private health coverage costs in California by about 5–6 percent.2 With an individual mandate that brings the vast majority of the uninsured into coverage, these uncompensated care costs would be greatly reduced. Thus, an uncompensated-cost-recovery fee of, say, 4–5 percent, should not, on average, increase net private coverage costs. Many who oppose increased spending to cover the uninsured argue that policymakers should instead find ways to harness already high health care spending. The provider services fee would do exactly that by capturing the reduction in uncompensated care costs. Of course, some providers provide little or no care to the uninsured and therefore would not have associated cost reductions. Other providers serve large uninsured populations and would realize sizable reductions in the costs they now shift to private plans. A flat cost-recovery fee across all providers could essentially level the playing field among providers with respect to heretofore uncompensated costs for the uninsured. Under the current system, such a provider surcharge would be an unfair tax on the sick and on those employers that do provide coverage to their workers and families. But this would not be the case where virtually all state residents are brought into coverage, where the cost of the surcharge is therefore offset by the average savings in uncompensated care costs, and where premium rates are not allowed to be higher for those who are sick (as we suggest later). We note that a conceptually similar hospital and surgical center surcharge helps finance Massachusetts’ existing charity care pool, transfers from which support premium subsidies under the commonwealth’s individual mandate plan. No individual market reform? Curiously, the proposal by Halvorson and colleagues would not reform the individual health insurance market. In our view, where a state requires individuals to have coverage, the state also needs to assure easy, convenient access to health insurance that does not cost more for people with health conditions, just as employers cannot charge their workers more for employment-based health coverage based on the individual’s health status. Under the proposal, nonsubsidized people with health problems and without employer coverage would generally have to pay more than standard-risk people. While many would want better coverage, they would presumably need to settle for the $10,000 deductible "CalCAT" (catastrophic) coverage at a standard rate. But private insurers would design underwritten products that—for healthy people only—provide better benefits at an equal or lower cost than CalCAT can provide. Thus, the CalCAT high-deductible plan would likely enroll mostly higher-risk people and would therefore cost more than the authors predict. The median subscriber premium for the capped-benefit plans offered by California’s Major Risk Medical Insurance Program (MRMIP) in July 2005 was about $400 per month, an amount that represented 16.7 percent of income for a single person with an income of 300 percent of the federal poverty level.3 Requiring those at high risk to pay this much seems particularly unfair where people are required to obtain coverage, and we doubt that the electorate would find it acceptable. A survey recently reported in Health Affairs found that 87 percent of respondents said that having "everyone pay the same, regardless of health status or age," would be "the fairest way to pay for health insurance."4 In a voluntary environment, the individual market is subject to marketwide adverse selection. But with an individual mandate, the overall risk profile of the population using the individual market would be very similar to that of the population in the employer group market. Although the marketwide risk profile would not be a problem, a reinsurance or risk-adjustment mechanism would be desirable to protect individual carriers from adverse-selection costs. Minimal disruption. Elsewhere, we have outlined similar coverage reforms for California that replace the individual market with a health insurance "exchange."5 But we agree with Halvorson and colleagues’ goal of minimizing negative disruption for people who now have individual coverage. As a transition, people already covered in the individual market could be allowed to keep their current policies under the current rate structure until they voluntarily left the individual market or chose to purchase an individual policy in the reformed market. Such transition policies seem to us more realistic and fair than making people purchase insurance subject to the foibles of the existing individual market. Subsidizing coverage of the low income. We agree that substantial subsidies for low-income people are an essential adjunct to mandating that uninsured people obtain coverage. The proposed "in-lieu" employer fee would help dissuade employers from dropping coverage altogether. But we are concerned that the specified subsidy policies would lead to substantial shifts from employer coverage to state-subsidized coverage, causing substantial state cost overruns. In addition to monitoring for such "crowding out" (as the authors suggest), we believe that refinements are needed in the subsidy policies proposed. Only for people not covered by an employer plan, the proposal would provide free coverage up to 200 percent of poverty and provide subsidies (that slide down to half of premium) up to 300 percent of poverty—essentially the median income for nonelderly Californians.6 To achieve coverage goals, the availability of this subsidized coverage would need to be widely known. Depending on the benefit plan offered, this could create a powerful incentive for modest-income workers to seek, and employers to offer, jobs that offer higher pay and no health benefits. In the income range of 150–300 percent of poverty, many more California residents have employer coverage than are uninsured.7 The statewide average worker contribution for employment-based family coverage represented about 9 percent of income for a three-person family at 200 of poverty in 2005.8 A modification should be considered to reduce inequities among those with comparable incomes and to reduce incentives for crowd-out. A related strategy to reduce the risk of crowding out would be to provide subsidies to low-income people who enroll in employer coverage in such a way that their employer’s contribution reduces their costs. This would also be fairer to low-income families who heretofore have sacrificed to maintain their employer coverage. We incorporated such a design in our own analysis of mandatory-coverage proposals for California.9 Such premium assistance can be difficult to administer, but it could be streamlined in the context of systemwide reform. And substantial state savings would accrue for the population now eligible for Medicaid. A broader concern is the incentive to shift full-time permanent jobs to part-time, temporary, or contract positions not eligible for employer coverage, as has occurred in Hawaii. The proposed employer "in-lieu" payroll fee would do little to deter this incentive for the majority of offering employers that already contribute substantially more than, for example, 4 percent or 5 percent of their payrolls.10 To address this, one model we analyzed includes an employer payroll fee for all part-time and short-term workers in addition to an employer "in-lieu" fee for full-time workers.11 This could mitigate perverse incentives to convert full-time permanent positions to part-time, temporary, or contract worker arrangements. Further, it would generate premium revenues by accumulating proportionate contributions from a given worker’s multiple or sequential employers. It could also provide continuity of coverage, plan enrollment, and associated provider care for a population otherwise denied such access and stability. Potential tax savings. We also note that as it stands, the proposal omits an important potential means of reducing costs to individual Californians and to the state. As realized in the Massachusetts plan, substantial tax advantages are available to people who pay for health insurance via payroll deduction through "Section 125 plans" under the tax code. We estimate that under similar individual and employer requirements, Californians could realize $3.0–$3.9 billion in additional tax savings beyond the current level of $4.4 billion; more than 80 percent of these savings are in federal taxes.12 Using this method, federal and state tax savings on a $400 monthly premium for a single worker earning $50,000 would be $173—a 43 percent savings. Such savings would go a long way toward making mandatory insurance more palatable for many purchasers. The state could also save money on subsidies for those low-income workers whose net costs would also be reduced.13 Using a health insurance exchange as the single premium-collection entity for payroll deductions would allow individual choice of health plans while making it much simpler for employers than dealing with multiple individual carriers. Closing thoughts. In closing, we emphasize that the concepts and options put forward by Halvorson and colleagues constitute an important and constructive step toward coverage of the uninsured in states like California, where costs for covering the uninsured population outstrip current state resources. Although some states are simply so poor that only a federal solution is possible, a number could bring their uninsured residents into coverage through initiatives that incorporate elements such as those suggested by Halvorson and colleagues as well as measures adopted by Massachusetts. We hope that our observations have also contributed to that possibility.
Rick Curtis is president of the Institute for Health Policy Solutions in Washington, D.C. Ed Neuschler (eneuschler{at}ihps.org) is a senior program officer there. The authors’ work on health coverage alternatives for California is funded by a grant from the California HealthCare Foundation.
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