New plan for health insurance for all could mean savings for states

A proposal by health policy experts Karen Davis, president, and Cathy Schoen, vice president, for health policy, research, and evaluation for the Commonwealth Fund in New York City, suggests a framework through which automatic, affordable health insurance could be provided to nearly all Americans.

With this plan, state and local governments would save money, the authors say, as costs would be reduced in charity care in public hospitals and also for public employee health benefits.

Ms. Davis and Ms. Schoen say that major disagreements standing in the way of expanded coverage include the role of private insurance in covering the uninsured, whether public programs should be expanded to additional groups, and the commitment of adequate budgetary resources required to assist those who are unable to afford the full cost of health coverage. There also are the questions, they say, of whether to focus simply on expanding coverage or to reform the delivery of health care services at the same time, and whether to focus expansion efforts on the uninsured or to replace existing coverage with a new system of insurance for all.

The proposal would expand the State Children’s Health Insurance Program (SCHIP) to include all families and single people with incomes below 150% of poverty. The program would be renamed FHIP, the Family Health Insurance Plan. It would have the same benefits as SCHIP has, and states would administer it as they now administer SCHIP. States would have the option of buying eligible families into employer coverage or potentially into the Congressional Health Plan (CHP). States also would have the option of extending coverage above 150% of poverty through use of federal matching funds and premiums charged on a sliding scale. FHIP would be the default coverage for all uninsured people filing tax returns with incomes below 150% of poverty.

Ms. Davis and Ms. Schoen put together their consensus framework based on general principles, including retention of current coverage choices, affordability, automatic coverage, and protection from adverse risk selection.

At the heart of their proposal is creation of what they call the CHP, which would make available a choice of any insurance plan participating in the Federal Employees Health Benefits Program (FEHBP). Although plans in FEHBP would be required to also participate in CHP, they would remain distinct and separate entities. The proposal assumes that members of Congress would switch their own coverage to the CHP to symbolize their commitment to ensuring high-quality coverage and choices. Benefit packages would be the same in the CHP and FEHBP market and subject to FEHBP approval.

Enrollment in CHP would be open to all self-employed individuals and small businesses with fewer than 50 employees, without regard for the individual’s or group’s health risks.

"Expecting that initially this community rate would attract those with higher than average health risks," the proposal says, "federal funds would finance these risks through reinsurance or other risk-pooling arrangements. The resulting average’ premium rates would likely be particularly attractive to those now insured in the individual or small group market that have higher than average health risks. Furthermore, because the federal government would compensate participating plans for adverse risk selection, the community-rated premiums would be less than that now available to many small businesses and individuals purchasing coverage in the individual market."

Ms. Davis and Ms. Schoen project that based on the FEHBP Blue Cross Blue Shield Standard Plan, the 2002 CHP premium would have been $2,880 for an individual, $5,772 for a couple, $8,328 for a two-parent family, and $4,716 for a single-parent family.

Another of the framework’s important new approaches is a mechanism to assess health insurance coverage annually, automatically enroll uninsured people in coverage, and provide tax credits for premiums in excess of a certain percentage of income. All individual tax filers would have to show evidence of health insurance when they file their personal income taxes.

Individuals or families without coverage would receive tax credits for premiums in excess of 5% of adjusted gross income for those with lower incomes and in the lower tax brackets and 10% of adjusted gross income for those with higher incomes.

To further reduce adverse risk selection in the CHP and promote insurance continuity and integrity within families, a new Part E would be added to Medicare to offer coverage to three groups: dependents of current Medicare beneficiaries, adults age 60 and older who don’t have access to group coverage, and the disabled in the two-year waiting period for Medicare coverage.

The article states that the CHP options are unlikely to work well for families and adults with very low incomes who cannot afford out-of-pocket costs for excluded benefits, cost sharing, or premiums. To help these people, Ms. Davis and Ms. Schoen propose to expand eligibility under public programs to include Americans living below 150% of poverty. Any low-income person or family preferring to obtain coverage through the CHP and meeting its eligibility requirements still could do so, and there is an assumption that some would prefer the CHP’s greater choice of private plans and providers.

The authors say they recognize that keeping employer coverage as a mainstay of the current health insurance system in a transition to more universal coverage is essential to minimize disruptions in coverage and the incremental budgetary cost of covering the uninsured. They suggest a number of reforms to strengthen the stability of employer benefits for working families by modestly expanding employer health coverage and helping workers and their families retain insurance.

Ms. Davis and Ms. Schoen acknowledge the "fundamental inequity between employers that help finance coverage for their workers and those that do not." They say that a contribution from all firms would be needed to help generate the revenue to finance coverage, to create a disincentive for firms to drop coverage, and to reduce inequities across firms and in labor markets. They suggest that companies not offering coverage to employees contribute 5% of payroll, up to $1 per hour worked, through the payroll tax option. These funds would be pooled to provide coverage in the CHP. Those offering coverage would be exempt from this "play or pay" provision, so long as they meet general prevailing minimum standards on coverage and achieve 80% participation.

According to Ms. David and Ms. Schoen, their plan’s elements could be combined and linked through the tax system to identify and enroll the uninsured automatically. The expansion could either require everyone to participate (individual mandate) or allow opting out.

The numbers of uninsured people would drop under either alternative, the authors say. Among the 41 million people who are now uninsured, an estimated 33 million would be insured under the opt-out version and 39 million under the individual mandate. The authors say the individual mandate would be particularly effective in lowering uninsurance rates among those at higher income levels who might not participate under a purely voluntary scheme.

The uninsured would be covered by a balance of private and public coverage; about 59% of the population would be covered in private plans in the individual mandate version. Public programs would enroll slightly less than a third of the population under either version. The mix of private and public coverage for people who are now uninsured would vary by income.

Ms. Davis and Ms. Schoen project that expansion in coverage would increase use of health care services by an estimated $50 billion, a 3% increase in the $1.5 trillion national health spending expected in the absence of change. Improved coverage would help correct the underuse of preventive and chronic disease services by the under- and uninsured. Out-of-pocket costs for the under- and uninsured would fall by $20 billion, reducing the financial burdens and risk of medical bankruptcy that we have today.

They also project a number of efficiency gains from their proposal, the most important of which is substitution of the economies of group coverage for those of individual coverage.

The authors say their consensus framework lends itself to being phased in over time and to having elements modified based on experience. Ideally, they say, the CHP program would be established first, perhaps opening coverage to small businesses and uninsured people voluntarily. Insurance verification through the income tax system would require time to be put in place and should be implemented early in any transition. They suggest the program could start with automatic enrollment with opt-out, perhaps followed by the individual mandate in later phases. Medicaid/ FHIP expansion could occur in steps, as could be Medicare coverage expansion for the disabled and older adults.

The plan was designed on balance to impose no net additional cost on employers or state and local governments. Employers that now offer health coverage would save an estimated $22 billion, while employers that do not would incur additional costs of $20 billion. This amount would be split about equally between firms purchasing coverage through CHP and those contributing to a pool to fund coverage for uninsured workers. According to the authors, the enhanced match for current Medicaid nonlong-term-care services plus the expansion groups would offset new costs for public programs. State and local governments would see modest net savings as a result of reduced costs of charity care in public hospitals and reduced costs of charity care in public hospitals and reduced cost of public employee health benefits.

There are five major sources of federal budget costs, according to Ms. Davis and Ms. Schoen: CHP reinsurance costs, tax credits for CHP premium assistance, tax credits for Medicare buy-in premiums and COBRA (the Consolidated Omnibus Budget Reconciliation Act) coverage, coverage of disabled and older adults under Medicare Part E, and expansion of Medicaid/ SCHIP/FHIP. Offsets to these costs could include contributions from employers not offering coverage and from reduction of $30 billion in current federal subsidies for uncompensated care.

The two say that concerns that would need to be addressed in implementing their framework include that fact that maintaining the current system of health insurance coverage while adding features to provide affordable choices to the under- and uninsured is more complex than eliminating the current system and replacing it with something new that applies to everyone. One of the greatest potential weaknesses, they say, is that healthier and sicker people will choose different forms of coverage and this risk selection could prove destabilizing.

Financing is the most controversial issue. Employers are likely to resist taking on additional costs, whether covering workers who are now uninsured or paying the additional cost of COBRA coverage. Diverting funds that now go for uncompensated care of the uninsured will also meet with resistance from safety-net providers.

Substantial new federal revenues would be required, forcing societal trade-offs of tax relief vs. improved insurance coverage. But, Ms. Davis and Ms. Schoen say, "universal coverage is unlikely to be feasible unless all parties — the uninsured, the insured, employers, and government — are willing to share in the cost."

The framework was published in an on-line Health Affairs article and presented it at a joint Alliance for Health Reform/Commonwealth Fund presentation that included reaction from congressional staff members.

[Contact Ms. Davis and Ms. Schoen at (212) 606-3800. For the consensus framework article, go to: www.healthaffairs.org/1130_abstract_c.php?ID=http://www.healthaffairs.org/Library/v22n3/s6.pdf.]