Friday, September 25, 2009

A Health-Insurance Difference Without a Distinction

health insurance

My hat is off to Max Baucus. He's produced a credible plan to make health care both a right and a responsibility of all Americans while beginning to rein in health spending in a way that is politically acceptable to a majority of Americans. In many ways it is the most robust proposal so far because of its emphasis on changing the way health care is organized, delivered and paid for. The chairman of the Senate Finance Committee has put the reform back in health reform.

During the first two days of committee action on his bill, Baucus, a Democrat from Montana, beat back repeated attempts by most of the committee's Republicans to gut provisions that would slow runaway growth in Medicare spending. Republicans want us to believe that they care deeply about the federal deficit and about keeping Medicare from going broke, while at the same time demanding that there should be no cuts in benefits, no cuts in payments to insurers or providers, and no reduction in the utilization of medical services. It was the most craven, cynical, hypocritical performance by a group of elected officials that I can remember, and a good measure of the political, intellectual and moral bankruptcy of the Republican leadership in Congress.

There is, however, one feature of all the Democratic health proposals -- including Baucus's -- that's been bothering me for a while, and it has drawn little attention. That's the two-tiered structure of the health-insurance market that the proposals envision.

One part of the market -- the one that has received all the attention -- would be organized around the new government-sponsored health-insurance exchanges, in which insurance companies would offer standardized policies to small businesses, self-employed individuals and employees of any firm that does not offer insurance.

By going through an exchange, these firms and individuals would get the purchasing power and risk-spreading that comes with being a part of a large, heterogeneous group. Insurers would be required to offer the policies to anyone, regardless of health condition, at a price that varies only by age. Plans would have to offer preventive care with no deductibles or co-pays, and annual out-of-pocket costs would be capped.

People who purchase insurance through an exchange would have, as one option, the choice of an insurance plan run by the government -- or, in the case of the Baucus proposal, a nonprofit insurance cooperative. Most significantly, lower-income workers who purchase insurance through the exchange would be eligible for federal subsidies to help them pay for their insurance premiums, as would small businesses that offer health-insurance benefits.

If they work as envisioned, these exchanges would be a huge step toward extending coverage and lowering the cost of health insurance for about 25 to 30 million Americans, according to congressional estimates. But that still leaves roughly 125 million workers and family members who would continue to get their health insurance from medium and large employers under the existing system, where the insurance reforms would not apply and where there would be few -- if any -- subsidies.

In the Baucus plan, for example, workers with the lowest wages in the current system could opt out of their employers' plans and buy coverage through an exchange instead, triggering a "free-rider" tax on their employers. In several proposals, the new rules on benefits, pricing and guaranteed coverage would not extend to insurance plans offered outside the exchange. The size thresholds that would determine which businesses qualify for the exchanges or the subsidies or an exemption from providing health benefits are all over the map. Nobody outside the exchange could opt for the government-run public plan.

The reasons given for maintaining separate markets are mostly political. It allows politicians to assure Americans who already have and like their health insurance that they can keep things as they are. It saves money by limiting the worker subsidies to employees of small firms or companies that don't offer insurance. And it allows Congress to continue kowtowing to small-business owners who throw a political hissy fit any time anyone proposes that they live by the same rules as everyone else.

Unfortunately, what this means is that the system not only winds up unnecessarily complicated and susceptible to all manner of games-playing by companies, workers and even insurance companies angling to qualify for subsides and exemptions. It means that the government will be in the awkward position of subsidizing some low-wage workers but not others, simply because one works for a small firm and the other does not. And it means that both labor and product markets will be distorted by variations in health-care costs.

As a practical matter, it's probably a good idea to get the exchanges up and running by limiting them initially to individuals and small businesses that now have the hardest time finding affordable insurance. But if they prove to be efficient and effective at spreading risk and offering a wide choice of plans at competitive prices, there's no reason why they shouldn't be quickly opened to all workers and all companies, as Sens. Ron Wyden (D-Ore.) and Olympia J. Snowe (R-Maine) have proposed. Under the pressure of competition -- and with some tweaks in the regulations and the structure of the subsidies -- the distinctions between the two markets could fade away.

It's all a bit wonky, I realize, but it sure beats the shouting matches over death panels and government takeovers.