Ten Steps to Insuring the Uninsured

Published November 1, 2008

Excerpt from The Handbook on State Health Care Reform, coauthored by John C. Goodman, Michael Bond, Devon M. Herrick, Gerald L. Musgrave, Pamela Villarreal, and Joe Barnett.

How can health care be reformed at the state level? We propose the 10 steps outlined below.

Step 1
Subsidize Private Insurance

The current system encourages people to be uninsured because it offers highly subsidized or free care to the uninsured and very little subsidy for the purchase of private insurance. As outlined in previous installments of this series, states should correct this perverse incentive by offering the uninsured the same subsidy for private insurance as people can expect in free care.

Step 2
Fund a Social Safety Net

All but a handful of states have income taxes, and most of these piggyback on the federal system, right down to inclusions and exclusions. As a consequence, people who choose jobs paying higher wages rather than jobs with health coverage will pay higher taxes to the state and federal governments.

Currently, these higher taxes become part of the state’s general revenues. Instead, they should be dedicated to providing safety net care for uninsured patients who cannot pay their medical bills.

In this way, the uninsured will pay a financial penalty for being uninsured, and that financial penalty will help offset the costs of any charity care they may require.

Step 3
Enforce Maintenance of Effort Rules

Reforms intended to insure the uninsured will not achieve their purpose if they encourage individuals to drop their coverage in order to get a subsidy, or if they encourage employers to lower their compensation costs by dropping group health insurance in order to dump their employees on the state subsidy system.

Accordingly, the subsidies must be accompanied by maintenance of effort regulations. Individuals who willingly drop their insurance coverage must face a required waiting period before becoming eligible for a subsidy from the state.

A similar principle would apply to employees of employers who discontinue their group health insurance. It is important to recognize that maintenance of effort rules are a stopgap measure and not a permanent solution.

Step 4
Make the Subsidy a Premium Support

The subsidy from the state should be in the form of a fixed-dollar commitment. This implies two features.

First, the form of the subsidy is defined-contribution, not defined-benefit. In other words, the insurance purchased must fit the subsidy (by reducing benefits and coverage limits if needed), not the other way around.

Second, any additional premium (if needed) is paid by the beneficiary. This means the cost of any additional insurance is fully borne by the person who expects to benefit from the added coverage.

The subsidy should also be based on health status. A healthy uninsured person is not expected to use very many health resources. A person with chronic, recurring health problems, by contrast, is expected to cost much more. Ideally, each person should receive a risk-rated subsidy, dependent on health condition.

Step 5
Vary Eligibility by Family Income

The higher an individual’s income, the less help he or she should receive from the state, other things being equal. This means wealthier uninsured patients should pay more of their medical bills than lower-income patients.

The same principle applies to the purchase of health insurance. Neutrality requires the private insurance subsidy and the free care subsidy to be the same. Equity requires the size of the subsidy to be reduced as income rises.

Step 6
Subsidize Any Available Plan

The subsidy should not be restricted to a particular kind of insurance; it should apply to any currently available plan. This includes any plan that has been approved for the individual market, any approved group plan, and any self-insured employer plan operating within the state. Individuals would enter group plans, of course, through their employers.

Step 7
Create New Insurance Opportunities

Although the uninsured should be able to apply their subsidy to any plan approved for sale by the state, they should not be restricted to the currently available options.

For example, insurers should be able to offer the uninsured any plan currently available to state employees as individual insurance. These plans typically are exempt from mandated benefits that legislatures impose on the private sector, and thus should be less costly. The state should also consider limited benefit plans, such as the plan available for Utah Medicaid enrollees.

Special-needs delivery systems should also qualify as recipients of subsidy dollars. For example, a “center of excellence” for diabetes care should be able to offer subsidized care for diabetics as long as it covers entire episodes of diabetes-related care. Care for at-risk pregnant mothers is another example.

Step 8
Create New Entry Points

There are many ways state governments could make it easier for the uninsured to enroll in private insurance plans.

For example, the vast majority of H&R Block’s clientele consists of people who are filing for earned income tax credit (EITC) refunds prior to April 15. Since the EITC “refund” is a grant of cash to people who might otherwise live from paycheck to paycheck, this is an ideal time to combine personal funds with a state subsidy and buy private insurance.

Also, EITC families almost always have children, and children in general are inexpensive to insure. So allowing H&R Block and similar agencies to receive a commission for enrolling people in health plans would be a good idea.

Hospitals and clinics could serve as entry points (as they do today for Medicaid); but unlike Medicaid, the insurance would not be retroactive. That is, newly acquired insurance would pay for future health costs, but not costs that have already been incurred.

Step 9
Follow Current State Rules

No special rules (such as guaranteed issue or community-rated pricing) are needed or desirable. If the uninsured are to be integrated into the same system as the privately insured, the same rules should apply.

In most states, insurance in the individual market is medically underwritten. For those unable to obtain insurance at a reasonable price, most states now have subsidized risk pool insurance—which could also be a recipient of state subsidies for the uninsured. In all states, group insurance is guaranteed issue.

Step 10
Encourage a Market for Sick People

A number of state reforms currently underway—Massachusetts being the most notable example—envision creating a system in which people can switch health plans every 12 months at community-rated premiums. The model for these systems is the Federal Employee Health Benefits Plan. The problem with these systems is that they create perverse incentives.

By design, the premium any single individual pays has no relationship to his or her own expected health costs. Instead, the premium is an average of the expected costs for the group as a whole. As a result, health plans gain (make a profit) when healthy people enroll and lose (incur a loss) when high-cost people enroll. This gives plans a perverse incentive to seek the healthy and avoid the sick, and even worse, to over-provide to the healthy and under-provide to the sick.

Clearly, these perverse incentives are not consistent with the desire to promote high-quality health care. The alternative to a system in which health plans have incentives to avoid the sick is a system where the plans have incentives to compete for them the way producers and sellers compete for customers in other markets. In other words, what really is needed is a market for sick people.

Not every health plan is equally efficient at providing all types of care. Specialization is a normal feature of other markets, so why should health care be any different? A desirable system will allow people with a serious health problem to switch to the health plan that is most proficient at solving it.

A switch of health plans cannot be at community-rated prices, though. If it were, the plans would have no incentive to specialize, become efficient, and attract sick people. So there must be a payment of money from the plan the patient leaves to his or her new plan, and the payment should be one that leaves all parties better off, including the patient. Such a system would encourage health plans to specialize and produce efficient, high-quality care.

John C. Goodman ([email protected]) is president of the National Center for Policy Analysis. His health care blog is at http://www.john-goodman-blog.com/.

For more information …

More information about the State Health Care Handbook: http://www.ncpa.org/pub/special/20071112-sp.html

The State Health Care Handbook: http://www.ncpa.org/email/State_HC_Reform_6-8-07.pdf