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Newhouse Web Exclusive
C O M M E N T A R Y
U N I V E R S A L C O V E R A G E
W E B E X C L U S I V E
31 March 2004
The Institute Of Medicine Committee’s Clarion Call
For Universal Coverage
The recommendation for universal
coverage faces an uphill struggle,
because of difficulties defining benefits and variations in health care costs.
By Joseph P. Newhouse and
Robert D. Reischauer
ABSTRACT:
The Institute of Medicine (IOM) Committee on the Consequences of Being Uninsured
is to be commended for its work, which recently culminated in the release of
six volumes on the subject. The concluding volume presents a vision for universal
coverage and describes four options for achieving it. The options include an
incremental approach, employer and individual mandates, and a single-payer plan.
We identify complications involving benefits and geographic variation in costs
surrounding attempts to achieve universal coverage. The complications suggest
that the committee’s cost estimates may be too low and that there may be
sizable political barriers to the proposals.
The institute of medicine (IOM) Committee on the Consequences of Being Uninsured
is to be commended for its series on the uninsured in America.1
The six volumes examine who lacks insurance coverage; detail the consequences
of uninsurance for individuals, families, and communities; measure the economic
costs of being uninsured; and make recommendations for the future. Not surprisingly,
the information on the nature and adverse consequences of uninsurance becomes
sketchier as one moves from the individual to the family, the community, and
the nation. Nevertheless, the reviews of the literature contained in these volumes,
by themselves, are worth the price of admission.
The IOM committee, of course, hopes that its labors do more than simply assist
future students of the uninsured with a first-class literature review. Indeed,
it would be happiest if there were no further need to study this subject. To
that end, the concluding report offers a “vision statement” and a
set of principles, the first and “most important” of which is that
“health care coverage should be universal.” However, when it comes
to drawing a roadmap of how to proceed, the subject of the final volume, the
committee loses some steam.
The committee puts forward four options or prototypes. The first, an incremental
approach, would expand Medicaid and State Children’s Health Insurance Program
(SCHIP) eligibility, lower the age of Medicare eligibility to age fifty-five,
and provide refundable tax credits for health insurance. Unless the eligibility
extensions and tax credits are much more generous than anyone is now proposing,
this option is unlikely to come close to achieving universal coverage, a fact
that the committee readily concedes. By contrast, the committee’s remaining
three options could, in theory, achieve universal coverage. The second option
follows the general contours of the Clinton plan, an employer mandate coupled
with a public program for those not covered through work. The third option involves
individual mandates with tax subsidies, and the fourth, a single-payer, public
plan.
The first (incremental) approach has the virtue of being politically and institutionally
more acceptable than the other three. Furthermore, in today’s constrained
fiscal climate, some sort of incremental approach is by far the most likely
course and the one we prefer to no action at all.2
Nevertheless, incrementalism is unlikely to get close to what most would consider
universal coverage. Because of this and because the committee believes that
there should be universal coverage, we focus our comments on two complications
that arise when pursuing any of the other three approaches, although the same
complications also arise if tax subsidies are used as part of an incremental
approach. Specifically, we examine (1) the nature of the benefit package and
(2) geographic variation in health care spending. These two issues, which the
committee did not address, involve sizable redistribution, which could raise
barriers to seeking universal coverage.
The Benefit Package
The IOM committee tried to make the case that universal insurance is not costly
relative to what the United States already spends on health care services. It
estimated that universal coverage would boost spending, in 2001 dollars, by
$34– $69 billion—about 3–6 percent of total spending on personal
health care services. These estimates, of course, depend critically on the nature
of the benefit package—what services are covered, the cost sharing for
covered services, and required premiums—which affect not only the overall
costliness of the program but also the distribution of cost among individuals
and the amount of services used.3
But even cutting the committee some slack, its estimate is likely to be unrealistically
low. The rub comes in the need to work through how, in the real world, the guaranteed
and specified benefit package might affect people who are now insured.
While the committee’s estimate assumes that the uninsured would be provided
with an average insurance policy, roughly half of those who are already insured
have below-average insurance policies. It seems unlikely that policymakers would
mandate or provide those who are now uninsured with a more generous policy than
the policies covering many of the currently insured. If the subpar policies
of the insured were beefed up, the cost of universal coverage would have to
include both the increased use of services by the uninsured and the additional
service use by the currently (perhaps under-) insured.4
Alternatively, the committee’s cost estimate could be achieved by providing
the uninsured with a below-average policy and raising those who are currently
insured with policies less adequate than this to the new minimum, although that
would dilute the gains the committee estimated, since many of the studies the
committee used implicitly compared the uninsured with a group of people having
an average policy.5 In either case, there would
be opposition from those—workers, employers, or taxpayers—who were
asked to pick up the tab for augmenting substandard policies.
The point here is that the cost of providing the uninsured with an average insurance
policy will be greater than simply the cost of the additional services that
the uninsured would use if they had such coverage. Moreover, any proposal to
provide coverage to the uninsured would meet strong opposition from those who
were asked to foot the bill for the unavoidable requirement to bring subpar
existing coverage up to the level of that provided to the uninsured.
The issue becomes even more complex in the case of a single payer with a single
plan; for example, some advocates have suggested covering everyone through an
improved version of Medicare. Not only does the generosity of the single benefit
package become an issue at both ends of the distribution, but provider payment
policy becomes a battleground. If the single-payer plan has benefits that are
around the current average, roughly half of people with above-average coverage
now will have less coverage under reform, something they are unlikely to take
kindly, especially if their current benefits had been decided through collective
bargaining. And if the single plan is much better than the current average,
costs explode.
If the single-payer plan were modeled after Medicaid, beneficiaries might be
pleased because the plan would cover a wider range of services than most plans
now include and would require negligible cost sharing. But providers would be
furious because the rates at which Medicaid pays providers are notoriously low.
If Medicaid were the single payer, would its rates rise? If so, that would add
to government and probably social cost, beyond simply the cost of covering the
uninsured. If, however, the plan paid for all services at something approximating
Medicaid rates, there would be a sharp reduction in resources flowing to health
care providers, something that is not likely to happen.
A single-payer approach, of course, need not imply a single plan. Medicare is
a single payer for people age sixty-five and older, but most Medicare beneficiaries
have a choice of receiving coverage through the traditional fee-for-service
delivery system or through a Medicare managed care plan. But if multiple plans
are permitted, decisions must be made about the minimum and maximum benefits
that health plans have to provide to qualify for participation.6
In fact, the issue of what benefits are to be provided must be addressed under
all four of the committee’s options. An employer or individual mandate
must define the dimensions of the mandated policy, and a tax subsidy must specify
the elements of the policy that qualify for the subsidy. Benefits and cost sharing
can be specified, or a minimum actuarial value can be set. Either way, additional
costs from improved benefits among the currently insured population are likely.7
Geographic Variation
A second issue that must be confronted is the large geographic variation in
health spending. For example, health care spending per capita in Massachusetts
is almost double that in Wyoming.8 Should this variation
be reflected in the approach? If so, to what extent? For example, if tax subsidies
are part of the plan, will they be larger in Massachusetts than in Wyoming?
Will they be open-ended? Will they be capped, as in President Bush’s proposal?9
Historically, the individual income tax code has not explicitly reflected geographic
differences in spending levels, costs, or cost of living. However, some deductions
and credits are open-ended, allowing those living in high-cost or high- spending
areas to reap larger tax benefits. The deduction for medical spending above
7.5 percent of adjusted gross income is an example of an open-ended deduction.
The home mortgage interest deduction is the most widespread example of a capped
deduction.10 Most other income tax parameters,
such as the personal and standard deductions and child credits, are uniform
across the United States.
If the subsidy for health insurance were uniform or capped, the increment in
insurance coverage that the subsidy would buy would surely be less in Massachusetts
than in Wyoming. If, on the other hand, the tax subsidy were to vary geographically,
difficult and politically divisive decisions would have to be made to define
the areas over which the subsidy would vary and to determine how much variation
to allow. States, clearly, are not useful geographic units for the first purpose.
Health spending is greater in New York City than it is upstate. Even within
metropolitan areas, health spending varies considerably. To determine the appropriate
amount of variation to provide in the subsidy, policymakers would have to know
the variation across areas in the cost of providing the mandated minimal benefit
package, information that is not now available. The committee’s second
and third options, which impose mandates on individuals or employers, raise
these issues because they call for subsidies for those with lower incomes.
Medicaid and SCHIP resolve the issue of differential subsidies by varying the
federal matching rate inversely with the per capita income of the state. But
this is a notoriously contentious issue, and there would be more dollars at
stake in subsidies to move toward universal coverage. Even in Medicare, geographic
variation is a contentious issue, as the recent Medicare legislation showed,
with provisions such as lowering the labor share for hospitals (to benefit rural
areas) and updating health plan rates at 100 percent of fee-for-service in high-spending
areas that might previously have been bound by a 2 percent rate of increase
or by a blended national-local rate. How geographic variation in spending is
addressed in a universal program is a political issue of the first order.
How Much Redistribution Will The Political System Allow?
Specifying the mandated benefit package and dealing with geographic variations
are but two of the many dimensions through which universal coverage involves
redistribution. Any universal insurance plan will increase the amount of redistribution
from the healthy to the sick, from higher-income to lower-income households,
across workers at different firms and possibly within a firm according to their
current health benefits, and between owners of different businesses. Ultimately,
of course, it is all redistribution across households.
With personal health care services constituting more than one-eighth of the
economy, the scope of potential redistribution is large—larger than any
non-wartime policy change we can think of, save Social Security. The U.S. political
system tends to resist increased redistribution, particularly when it creates
identifiable losers, precisely the reason an incremental approach is attractive.11
None of this is to disparage the IOM committee’s call for universal health
insurance. We hope that it happens, but we are not holding our breath.
NOTES
1. Institute of Medicine, Coverage Matters: Insurance and
Health Care (Washington: National Academies Press, 2001); Health Insurance
Is a Family Matter (2002); Care without Coverage: Too Little, Too Late
(2003); Hidden Costs, Value Lost: Uninsurance in America (2003); A
Shared Destiny: Community Effects of Uninsurance (2004); and Insuring
America’s Health: Principles and Recommendations (2004). Joe Newhouse
was the National Research Council monitor for most of the volumes in this series.
2. We would impose additional taxes to finance the cost.
3. Given that roughly 15 percent of the population is uninsured
at a point in time, the committee’s 3–6 percent value for the increase
in total use implies an increase in use among the uninsured of 20–40 percent,
a number with which we do not quarrel. Even a larger increase among the uninsured
would not change the conclusion that the increase attributable to the uninsured
will not be large relative to total spending.
4. The addition of a prescription drug benefit to Medicare can
be viewed as beefing up a below-average benefit package.
5. The committee and the literature it surveys make numerous
comparisons between averages for the insured and uninsured, which implies a
comparison to the average insurance policy.
6. Risk adjustment and potential variation in subsidy rates
also arise. See J.P. Newhouse, “Patients at Risk: Health Reform and Risk
Adjustment,” Health Affairs 13, no. 1 (1994): 132–146; and
J.P. Newhouse et al., “Risk Adjustment and Medicare: Taking a Closer Look,”
Health Affairs 16, no. 5 (1997): 26–43.
7. Indeed, the cost-effectiveness calculations in Hidden
Costs, Value Lost are suspect because they do not consider either costs
or benefits among the insured, including Medicare beneficiaries.
8. A.B. Martin et al., “Trends in State Health Care Expenditures
and Funding: 1980–1998,” Health Care Financing Review 22, no.
4 (2001): 111–140.
9. The president’s fiscal year 2005 budget proposal includes
a tax credit for the low-income uninsured of 90 percent of premium costs up
to $1,000 per adult and $500 per child for up to two children. The credit percentage
would phase down for people with adjusted gross incomes between $15,000 and
$30,000 and other filing units with incomes between $25,000 and $60,000.
10. This deduction is capped to limit the deduction to interest
on mortgages of no more than $1 million.
11. C.L. Schultze, The Public Use of Private Interest
(Washington: Brookings Institution, 1977).
Read related papers by Wilhelmine
Miller et al., and Henry
J. Aaron and Stuart M. Butler.
Click here
to view a Webcast of a Kaisernetwork interview with Joe Newhouse.
DOI: 10.1377/hlthaff.W4.179
©2004 Project HOPE–The People-to-People Health Foundation, Inc.
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