Universal Coverage: Cheaper Than You Think
Last week I laid out the broad outlines of a model to reform healthcare . In it, I laid out a proposal that I’ve called Universal Medicare Choice (UMC). Universal Medicare Choice is patterned after the existing Medicare Advantage program.
In this week’s article, I hope to lay out why I believe that such a plan is affordable.
In next week’s article, I will try to document the other structural and regulatory changes that need to be in place in order for this plan to work.
In the last article, I will focus on who wins and who loses.
Primer on UMC
The rough outlines of UMC are as follows:
1. Everyone, regardless of age, becomes eligible for UMC, they are “UMC Beneficiaries.”
2. UMC is a voucher-based health care plan.
3. A Beneficiary uses the voucher to purchase insurance in a “marketplace.” This marketplace would resemble the Obamacare marketplaces (but — one hopes — run a lot more smoothly transparently).
4. The insurance products on the marketplace would be created and marketed by private insurance carriers as well as through a public option put together by the federal government. States could also offer their own option.
5. The “cash value” of the voucher is not apparent to the beneficiary; it is based on a number of risk factors including age, gender, and health status.
6. The reason that the “cash value” of each voucher differs is that some people cost more to take care of than others and the goal is to try and prevent insurers from just trying to cherry pick the yoga instructors and vegetarians in the population.
7. Every plan must cover an agreed upon suite of services but can go beyond those services.
8. Insurers can offer more services and also offer plans that require the Beneficiary to pay more (i.e., a Beneficiary can “buy up” from a basic to deluxe plan).
9. The overall cost of this insurance would be paid for by a mix of corporate and individual taxes and in some cases individual contributions.
10. Because some employers, may prefer to continue to offer coverage to their employees directly, they are free to do so. My initial thought was that self-insured employers who have more than 500 FTEs would be eligible to continue to stay in the insurance market and provide their employees with coverage directly. After some discussion with colleagues I have been convinced that there is no real harm of offering the option to any employer that wants to continue to offer coverage to its employees.
They must offer the a minimum basic package of services. They are free to offer more deluxe packages as well. Employers who do offer coverage get a tax credit equal to the cash value of the vouchers those employees (and their families if also covered) would have received. One variation on this would allow individuals and families to opt in or out of the employer plan, and if opting out using their voucher on the marketplace.
11. Risk mitigation programs (Re-Insurance and Risk Corridors) will be in place to try to even out the effect of random chance on insurance performance (much as was done in the Affordable Care Act).
The basic goal of UMC is to cover everyone, keep costs down, preserve private enterprise, encourage competition and innovation, and give people choices.
The Pricey Elephant in the Room
The obvious comment most people make when looking at the proposal is to say that it will cost too much. My guess is that yes, it will cost too much. But, health care already costs too much. It should not cost much more than what healthcare currently costs the nation in the aggregate. In the long run it could be less expensive.
I know most policy proposals are floated in terms of 10-year time horizons, but my sense is that this just makes them confusing. For one thing, the numbers get really big really fast. For another, looking out ten years usually just means that the writer is making a bunch of favorable assumptions about the out-years that will never pan out as a way of making the math work. Rather than look at the 10-year costs, let’s just look at a sample year and think about what the costs structure would look like under UMC vs the status quo.
This pie chart provides data from CMS on where the $3.5T in overall health care spending comes from.
Rather than get into the weeds and the details, there are basically two main points to make.
- We already spend a ton of cash of health care.
What the proposal would require is that a portion of the private sources of revenue funding the system (~48% or 1.7T) be converted into a tax to help fund the entire system. Yes, a “portion.” Why? Because:
a. There will always be an expectation that people pay something out of pocket when they receive services
b. There will be employers who choose to continue to offer coverage directly. Employers who pay directly will still pay tax into the system, but they will also get refundable tax credits. It is important to note that the amount of tax that they pay is not linked to the amount of the tax credit (these are separate concepts).
2. The system will have to pay for an additional 27 million people who currently don’t get health insurance (this doesn’t mean that they don’t get health care).
If one does just straight math taking 92% of $3.5T that goes to cover 290 million people with some kind of insurance — 92% because investment and public health expenditures are not direct patient care. Then the per capita spend is a little of $11K per person.
The demographics of the uninsured are a little different than the demographics of the currently insured. They skew younger (mostly under 45) and mostly male. Younger is relevant because as a whole, younger is less costly. Gender is relevant because as a whole, men don’t bear children. The cost of childbirth (in particular complicated child births) is very high.
The cost per capita for this group should be low (actually lower than the $7,700 per person in traditional private insurance). Assuming a $7K per person cost (which would probably be high) this cohort would cost approximately $190B per year to cover).
It should be noted that we are already paying for much of this. Medicare pays hospitals more to account for the uncompensated care they provide, private insurers do too. Estimates of uncompensated care per year are around $100B.
When more people have coverage and can pay directly, the indirect payments will taper off and offset some of the cost. Will it offset all of the cost? Maybe, but let’s assume that it won’t offset all of the cost and we will still have about $100B extra to pay for.
That’s less than 3% of the total health care tab (and costs go up more than 3% every year — often 5%-8%). We would get a lot for paying that 3% more societally. We pay for this group in many ways. We pay financially, morally and socially. When a person shows up at an ER due to uncontrolled blood sugar, we pay for it. When a person OD’s because of a lack of preventive care or counseling, we pay for it. When a person has a bankruptcy due to medical costs, we pay for it. When a person can’t work because they can’t control their diabetes for lack of preventive care, we pay for it.
This is just half the story
Thus far we have dealt with a few topics. First there was the proposal for a simplified system of healthcare which gets everyone covered and levels the playing field while still preserving choice and a private market. In this article we have talked about cost; but we have dealt with cost without using any real imagination. We have basically said, keeping all things but the mechanism of financing the same, what would it cost to have Universal Medicare Choice? The simple answer in this most unimaginative of scenarios is about an extra 3%.
In the next article we will break out of the box and start asking bigger and more disruptive questions. Does UMC do anything more than just consolidate funds into a big purse and make sure everyone has access to care in a fair manner (not that this is a small thing)?
The answer *** spoiler alert *** is “yes” but the devil is in the details. There are broad reasons to believe that some changes could be beneficial. More **** spoilers **** I won’t count on accountable care organizations and magic transformations in care delivery to drastically reduce cost. Cost reductions may be possible; but so far, the savings have been elusive or modest at best.
In the next article we will start looking at how some of the old ways of doing business no longer make a lot of sense and how a few changes can open up competition, drive down cost, and improve quality.
