Republican attempts to reform the U.S. healthcare system have fallen short, yet again. Sen. John McCain, who cast the deciding vote against the last-ditch version of repeal-and-replace put forward by the Senate leadership, told his colleagues,
We must now return to the correct way of legislating and send the bill back to committee, hold hearings, receive input from both sides of the aisle, heed the recommendations of nation’s governors, and produce a bill that finally delivers affordable health care for the American people. We must do the hard work our citizens expect of us and deserve.”
More tinkering won’t do it. It is time to get serious about keeping the promises GOP leaders made at the very outset of the debate over healthcare reform—not just to repeal Obamacare, but to replace it with something that provides “coverage protections and peace of mind for all Americans—regardless of age, income, medical conditions, or circumstances,” while ensuring “more choices, lower costs, and greater control over your health care.” There is no point in making a new push for healthcare reform without putting some bold new ideas on the table.
Universal catastrophic coverage (UCC) would make an excellent centerpiece for the next round of healthcare reform. In fact, UCC is not even particularly new to the conservative playbook. Respected thinkers like Martin Feldstein, who would go on to serve as Ronald Reagan’s chief economic adviser, promoted the idea already in the 1970s. In 2004, Milton Friedman, then a fellow at the Hoover Institution, also endorsed the concept. UCC would make healthcare affordable, both for the federal budget and for American families. And because it would throw no one off the healthcare roles—not 22 million people, not 2 million, not anyone—it offers a realistic chance of the bipartisanship that polls show both the Republican and Democratic rank and file want.
How UCC would work
Universal catastrophic coverage is not meant to cover every healthcare need of every citizen. Instead, UCC would offer protection from those relatively rare but ruinous healthcare expenses that are truly unaffordable. (Note: As we use the term UCC here, it is not to be confused with the more narrowly defined catastrophic insurance that is available, in limited circumstances, under the ACA.)
Here is how UCC might work, as outlined in National Affairs by Kip Hagopian and Dana Goldman. Their version of the policy would scale each family’s deductible according to household income. The exact parameters would be subject to negotiation, but to use some simplified numbers, the deductible might be set equal to 10 percent of the amount by which a household’s income exceeds the Medicaid eligibility level, now about $40,000 for a family of four. Under that formula, a middle-class family earning $85,000 a year would face a deductible of $4,500 per family member, perhaps capped at twice that amount for households of more than two people. Following the same formula, the deductible for a household with $1 million of income would be $96,000.
The cost of the catastrophic policy would be covered by the government, either directly or through a refundable tax credit. The policies themselves could, as in the Swiss model, be offered by private insurers, subject to clear standards for pricing and coverage. Alternatively, they could take the form of a public option, for example, the right to buy into a high-deductible version of Medicare.
With UCC in place, people could choose among several ways to meet their out-of-pocket costs, which, for middle-class families, would be comparable to those of policies now offered on the ACA exchanges.
One alternative would be to buy supplemental insurance to cover all or part of expenses up to the UCC deductible. The premiums for such supplemental coverage would be far lower than policies now sold on the ACA exchanges, since the UCC policy would set a ceiling on claims for which the insurer would be responsible. If the supplemental policies included modest deductibles or co-pays of their own, they would be more affordable still. Although UCC itself would be a federal program, the supplemental insurance market would continue to be regulated by the states to meet their particular needs.
Very likely, many middle-class families would forego supplemental insurance and cover all of their routine health care costs from their regular household budgets, the way they now pay for repairs to their homes or cars. Doing so would be easier still if they took advantage of tax-deductible health savings accounts—a mechanism that is already on the books, and could be expanded as part of reform legislation.
Impact on the federal budget
Fiscal conservatives would, quite properly, want to know whether UCC would be affordable not only to families, but to the federal budget. As it turns out, the numbers don’t look all that bad. Because UCC leaves responsibility for routine care with individual families, in line with their ability to pay, it would be far less expensive than a system that offered first-dollar coverage to everyone. Hagopian and Goldman estimate that their version of UCC would cost less than half as much as the projected costs of the ACA.
The impact on the federal budget would be further moderated if the tax deduction for employer-sponsored insurance (ESI) were phased out as UCC came online. Tax expenditures for ESI currently cost the budget an estimated $235 billion per year, an amount that rises to some $250 billion if related deductions for the self-employed are included.
Healthcare policy aside, many conservatives object to employer-sponsored insurance in part because of the disproportionately large administrative burdens it imposes on small businesses, which, unlike large corporations, cannot afford to self-insure. Furthermore, ESI undermines the flexibility of the labor market through the phenomenon of job lock. Workers who have jobs with good insurance fear to leave them for jobs elsewhere that would make better use of their skills but might not have the same health benefits. Quitting a job with ESI to work as an independent contractor or start a small business of one’s own is even riskier. Both the House and Senate healthcare bills proposed this year took timid steps toward elimination of tax-deductible ESI by lifting the much-maligned employer mandate of the ACA. It is time to go all the way.
In addition, a reform that combined UCC with elimination of ESI would have increased bipartisan appeal. Liberals have long criticized ESI as inherently inequitable, since it disproportionately benefits high-income workers. Suppose the cost of ESI is $10,000 per employee. If that amount is deductible instead of being taxed as ordinary income, it would save $3,300 for a worker earning $200,000 a year, in a 33 percent bracket, but only $1,500 a year for a worker earning $35,000 a year, in a 15 percent bracket.
Finally, phasing out the tax deductibility of ESI when UCC is introduced would not prevent employers from continuing to offer supplemental insurance as a benefit to their workers. If workers preferred a package that included supplemental health insurance to one that included an equivalent increase in wages, then it might remain a popular way for employers to attract good workers while controlling total compensation costs. It is difficult to predict in advance whether that would happen or not.
Healthcare for the poor
The version of universal catastrophic coverage described by Hagopian and Goldman would not extend to people now covered by Medicaid. However, healthcare for the poor would be affected indirectly.
In particular UCC would mesh seamlessly with Medicaid, since anyone not on Medicaid or Medicare would automatically be covered. There would no longer be a coverage gap, as there is in many states under the ACA. If workers on Medicaid got new jobs or promotions that raised their income above the Medicaid limit, the transition would be painless, since the UCC deductible for households just above the Medicaid cutoff would be low. The tremendous work disincentive that now exists for workers approaching the Medicaid “cliff” would disappear. As explained here, low-wage workers in non-expansion states now face a situation where earning even one dollar more can cost them thousands of dollars in Medicaid benefits, but still leave them below the income threshold for ACA subsidies.
There is also another way that Medicaid could be integrated with UCC. Under the Hagopian-Goldman version of UCC, the deductible for families with income below the poverty level would be zero. That raises the possibility that individual states could be permitted to use their share of Medicaid dollars to buy UCC policies for low-income or disabled individuals in place of traditional Medicaid. Adoption of such a policy by many or all states would eliminate the barriers that Medicaid now poses to interstate labor mobility for low-income workers. By making it easier for individuals with modest skills to move to a new state to work their way out of poverty, such a policy would ultimately reduce the total Medicaid case load. (See here for further discussion of Medicaid and interstate labor mobility.)
To date, Republicans have been unable to keep their promise to replace the ACA with a new system that provides affordable healthcare security to all families, with maximum individual control over personal medical choices. Any hope of doing depends on their openness to new thinking. It is time for universal catastrophic coverage to make the transition from its status as a promising idea of conservative intellectuals to a mainstream policy option that could attract real bipartisan support.
Ed Dolan is a Senior Fellow at the Niskanen Center.