Hennessey's health care reform plan, v2

President Obama has sent a letter to his White House mailing list that warns against “an avalanche of misinformation and scare tactics from those seeking to perpetuate the status quo.”

I am not one of those people. I can’t stand the health policy status quo, and I think there is a better way to reform our health care system than the plans now moving through Congress.

I have written extensively about both what is wrong with the status quo, and with my concerns about the legislation supported by our President. I will continue to try to contribute verifiable information and analysis to raise the level of policy debate.

To demonstrate that I do not favor the status quo, here is version 2 of my desired health care reform. I’m adding a little more detail from v1, but want to keep this description high-level so we don’t get bogged down in second-order details. Without further ado, here is

Keith Hennessey’s health care reform plan (v2)

Do:

  1. Repeal the current law tax exclusion for employer provided health insurance, and replace it with a $7,500 (single) / $15K (family) flat deduction for buying health insurance.
    • The deduction is independent of the premium cost. If you buy a $5,000 individual policy, you get a $7,500 deduction. If you buy a $10,000 individual policy, you get the same $7,500 deduction.
    • The overwhelming majority of premiums fall under these threshholds, so 100m+ people would pay lower taxes.
    • The minority with premiums above these thresholds would pay higher taxes.
    • In total the government does not collect more revenue, although the tax burden shifts to those with high-cost policies.
    • Index the thresholds to inflation (CPI). This bites more tightly over time. I’d funnel the long-term increased revenues into some broad-based tax relief to stay revenue-neutral over time.
  2. Allow the purchase of health insurance sold anywhere in the U.S.
    • This would force States to compete for the right regulatory balance of consumer protection and premium cost.
    • Rep. John Shadegg has a bill that does this.
  3. Make health insurance portable
    • This requires relatively small tweaks to law, but insurers would need to develop new portable insurance plans that you could take with you from one job to the next. The policy change is easy. Getting employers and insurers to change their long-standing business models is hard.
  4. Expand Health Savings Accounts
    • Allow higher contribution limits, and allow financially equivalent coinsurance structures driven by market demand. Continue to mandate an initial deductible and catastrophic protection. No benefit-specific exemptions as advocated by some.
  5. Aggressively reform medical liability
    • aka “medical tort reform.” Details TBD.
  6. Aggressively slow Medicare and Medicaid spending growth, and use the savings for long-term deficit reduction
    • Details TBD.
    • Assume that my package would be significantly more aggressive (“deeper cuts,” in the language of opponents) than anything being discussed in Congress today.

Don’t:

  1. Raise taxes
  2. Create a new government health entitlement
  3. Mandate the purchase of health insurance
  4. Mandate that employers provide health insurance to their employees
  5. Have government set private premiums
  6. Create a government-run health plan option
  7. Have the government mandate benefits
  8. Expand Medicaid

Results:

  • Lower premiums, higher wages
  • Portable health insurance reduces “job lock”
  • +5 million insured (net)
  • 100 million people will pay lower taxes
  • 30m with expensive health plans pay higher taxes
  • No net tax increase overall
  • Reduces short-term and long-term deficit
  • Fair to small business employees & self-employed
  • Incentives and individual decisions “bend the cost curve down”
  • More individual control & responsibility for medical decisions

18 responses

  1. Pingback: A counterpoint to the President’s health care reform email | KeithHennessey.com

  2. For the tort reform I believe that one way to do it is to make malpractice like the workers compensation I deal with. The system in NC is a rating system that depends on the injury and the limitations that injury puts on you. An MMI rating is done and an amount is associated with that rating and the part of the body injured. That is it. Not much wiggle room for extra dollars from other damages. If malpractice were done this way, you would ranges of dollars associated with the type and severity of injury from malpractice. No more frivolous lawsuits and it help allow doctors to stop ordering tests not needed today. One reason some order the tests is to avoid malpractice.

  3. Keith,

    I hope the Medicare and Medicaid “TBD” includes:

    – Means testing and increases in retirement (eligibility) age.

    – Changes in provider incentives, particularly at least some substantial movement from the current fee-for-service system to more fixed fee elements, such as via a capitation-based compensation for primary physician gatekeepers (with withhold or other incentive regarding referrals to specialists), perhaps fixed fee per diagnosis for specialists, perhaps fixed components and incentives for group/staff models including a range of healthcare providers responsible for each patient, etc. I’m very far from an expert on such models and dynamics, but it seems that getting away from pure fee-for-service is key, the alternative being much more rationing in the form of narrower coverage of plans and more denials of authorizations of tests and treatments in particular cases.

    – Possible changes in patient incentives (I don’t know if current beneficiaries have co-pays/coinsurance/deductibles or if so, how high they are, but there should be sufficient variable cost to patients to serve as incentives to consume wisely, seeking cost-effective tests and treatments).

  4. I applaud your effort “to contribute verifiable information and analysis to raise the level of policy debate.”

    I am curious as to your explanation of some basic observations:

    The US spends more than twice the OECD average on healthcare, but does not enjoy any material advantage in health care outcomes.

    As noted in this Congressional Research Service report

    http://assets.opencrs.com/rpts/RL34175_20070917.pdf

    In 2004, the United States spent more than twice as much on health care as the average OECD country, at $6,102 per person (compared with the OECD average of $2,560). Health care spending comprised 15.3% of the U.S. GDP in 2004, compared with an average of 8.9% for the average OECD country (Figure 1). Although a country’s health expenditures are highly correlated with GDP (Figure 2), U.S. health spending is nevertheless 60% greater than its GDP alone would predict.

    The United States has the third-highest percentage of the population that reports their health status as being “good,” “very good,” or
    “excellent” (Figure 23). However, the United States has below-average life expectancy (Figure 24) and mortality rates (Table 5). The United States has the third-highest rate of deaths from medical errors (Figure 25) and the highest infant mortality rate among the eight countries that report this metric similarly (Figure 26). However, such measures are often subjective or limited by differing measurement
    methodologies. They may also reflect fundamental population differences (in underlying health, for example) rather than differences in countries’ health care systems. These are just some of the difficult research issues facing international comparisons like those used in this report.

  5. I like this but it leaves all the poor folks where they are today — going to emergency rooms. Is there
    anything in your thinking to cover people that don’t have enough money to buy insurance?

    Expanding free clinics was my suggestion, but haven’t see it mentioned in a lot of places.
    Using the engine of a free market to lower costs is another.

    To get another view of costs read this excellent article:

    The Cost Conundrum

    http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande?currentPage=all

  6. Hi Keith,
    Thanks for all the great educational posts. I’m learning a lot from this blog!

    I think in this post I’d like to see a little bit more about the distribution of the fiscal impact. It seems like #1 (and probably #4 too, though I know less about that) of your plan subsidizes health care more if you earn a lot of money, which seems a bit backwards to me. In the top bracket, a $15,000 tax deduction reduces their tax payment by $5250 I think at current rates, versus what I might consider middle class in the 25% bracket, saving $3750, and lower-income folks would not see any reduction in their taxes (though they might benefit in your plan in other ways, the cost of health insurance for them has just gone up). Also of course a lot of middle-class folks, after other deductions already in place, end up paying at a 15% marginal rate and then would have an even smaller subsidy.

    Would you consider replacing this part of your plan with a tax credit rather than a deduction? Is there something I’m missing that makes the deduction a more beneficial way to do this? (I understand it might be better from a political selling point of view to say “a tax deduction of $15000″ instead of “a tax credit of $3750″, but there are plenty of other ways to sell the number that have often been used in the past, such as giving a tax deduction that partially phases out as your income increases so as to have the same net effect as a tax credit.) No need to get into details like whether the credit should be refundable or not.

    In a mostly unrelated question, I’m also curious about whether you believe your plan or something reasonably close to it has any chance of making it through Congress, and why or why not. But I figure that unlike my question above, this is more of a topic you might consider for a future blog post rather than something you might answer here in the comments.

    Thanks!

    • I believe that there are substantial advantages to a schedule of tax credits rather than deductions. The value of the tax subsidy for health insurance or health expenses should not vary regressively according to one's tax bracket, which would be the case with a deduction as it now is with the employment-based exclusion. Individual and family credits capped at something like the regional cost of a basic policy would do the trick and create equity of treatment. I do also think it necessary to make provision for refundable credits for those with little or no income tax liability.

  7. I would add elimination of all mandates. Allow the insurance market to sell a la carte or in bundles (yes, like car options). And no mandates either for how pricing is done (community, individual, etc). But the key is to break the third party payment effects – this drives much of the expense bcs no one watches over expenses if they are not paying DIRECTLY. How do you accomplish this?

  8. Pingback: A counterpoint to the President’s health care reform email #tcot #fb « Kelly R. Conaty MD, MBA

  9. Ed, I think if you change the deduction to a refundable credit, that solves the problem of it leaving out the poor. Doing so will effectively subsidize health insurance for anyone whose income tax burden is less than the cost of health insurance.

    You could make this even easier by allowing the insurance companies to collect premiums directly from the government, so that there are no out-of-pocket expenses (up to the limit of the tax credit, of course).

  10. @mcg: you make a good point for refundable credit rather than tax deduction. Approximately half the population does not pay federal income tax so a tax deduction for them is worthless.

    @Keith: it won’t be 100m+ who pay less taxes (nearly half pay zeo now) more like 50m+ and the amount saved will vary by income. A refundable tax credit is the better option.

    I would encourage the refundable tax credit to be at the same levels – $7500/$15000. That will easily cover the health insurance costs for everyone and probably some of the copays as well. Since people can keep what’s left there is incentive to keep costs low(er). Better the people than the banks.

    @curious: I’ve seen this comment many times before. I would be curious about other similar statistics. For example, what is the per capita expenditure on food in the US versus other nations. Housing? Transportation? Picking just the health expenditures is suggestive of selective statistics. I am sceptical of many US statistics, foreign stats even less so. Last, if the per capita health expenditures of so many foreign nations are so drastically lower than in the US why are ALL the nations that have national health care having so much trouble with their budgets as a result of health care expenditures?

  11. Another way to “bend the cost curve down” is for the government to assist the insurance companies in getting together and reducing the paperwork/submission workflow issues. Currently (as I understand it) each insurance company has their own processes, their own forms and their own procedures for claim submission and other procedures. Revamping this, and cleaning up/organizing other compliance issues (HIPPA/SOX compliance is f’ng nasty) would provide a great deal of efficiency.

  12. @curious, note that “below-average OECD life-expectancy” is pretty close to the top and the bottom. Life expectancies are pretty similar throughout the developed world. Our life expectancies are due more to a higher homicide rate and higher obesity rates than our health-care system.

    If life expectancy were the only outcome we cared about, this would be an argument in favor of other countries’ systems against our own — we pay more for pretty similar results. But consider a waiting list for a hip transplant. A hip transplant has no effect on life expectancy, unless it brings it down slightly due to the risk that someone put under general anesthesia won’t wake up.

    It seems possible to me that we have more deaths from medical errors simply because we have more of those elective sorts of surgery, but I’d be interested in other causes. If there are cheap (not just in the sense of money, but of trade-offs in general) ways of bringing that number down, they would obviously worth doing. If having a single centralized system holding patient records leads to fewer bad drug interactions, though, EMRs can get us those benefits without having to put our trust in a single provider.

    @keith, I like what I see so far, but I’ll be a lot more interested in signing on to your plan when you spell out some detail on 5 and especially 6. Just saying you’re going to save money without a serious plan for doing so sounds a bit too much like the current administration (which isn’t to say they invented the tactic).

  13. @mcg – Thanks for the comment.

    However, after searching around for some prices and being thoroughly surprised, I’m more inclined to find a way to avoid all kinds of insurance, private and public. Insurance in and of itself seems very expensive.

    Despite what this excellent article suggests

    The Cost Conundrum

    http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande?currentPage=all

    having individuals acitively participate in paying doctors seems very important to me. Hostpitals and doctors offices charge what they can get. They look on it as “value of service”. The more you can pay, the more they charge. If the individual has no skin in the game because of excellent insurance coverage the costs go up. For example, in Chicago, Rush University Med Ctr reduces prices 50% if bills are repaid. That is a stark reminder of how much insurance and paper work costs. Right there in Chicago is the 2x factor that makes our medical care twice as expensive as Canada and Europe. [Have you ever paid $40 for a box of kleenex in a hostpital?]

    Health Savings accounts should be for all planned medical expenses including physical exams, dental cleanings, child birth, vaccinations and anything else that would be considered maintenance and expected. All contributions to them should be deductable. All companies relieved of health care benefit responsibilities ought (!) to increase the salaries of their employees by the amount of savings achieved by no longer having a company paid health plan. HSA’s would cover planned health care and as you suggest, by suitable arrangements, the government could cover the HSA withdrawals for the poor. An additional benefit is that since the government offers such a safety net, when someone becomes unemployed, the HSA money can be used to pay an HCI premium during unemployment.

    Health Catastrophic Insurance (HCI), (insurance for unexpected health issues) is the only form of insurance that should be relevant. Exactly how to make sure everyone is covered is a difficult problem because therein lies the rationing issue. However, it wouldn’t be so bad with HSA’s because many healthy people would have substantial amounts of money in their accounts and the accounts would grow faster than Social Security (which has for many a 1% rate of return). HSA would be required to put money in accounts that could only be used for direct pay to medical expenses [devil might be in these details, though]. HSA would be invested in Treasury notes and triple A rated bonds.

    I’m guessing, but 15% of gross salary deposited in an HSA and paying for HCI could keep the next generation from contributing anything at all to the enormous entitlement dept. I also believe that the transition to such a plan is expensive but after fully deployed, the 15% number would go down because “value of service” would transform to “cost of service” which is an entirely different business model for medical corporations.

    There’s more to this, but the basic scheme is that an individual is responsible for his own health care and the government is involved not at all or as little as possible. Government provides the safety net, but that’s all. The safety net is money not control.

  14. Keith,

    I commented on each of your 6 principles. I like them all and
    despite the wording of my comments, think all of your points are
    excellent and relevant.

    1. Repeal the current law tax exclusion for employer provided health
    insurance, and replace it with a $7,500 (single) / $15K (family) flat
    deduction for buying health insurance.

    What would be just as good would be to require 15% of the salary
    to be deposited in an HSA and have companies completely exit the
    picture. This is one area where government coercion to save would
    be better than government simply taking my money like
    the do with Social Security. I would reluctantly support a “You must
    put 15% of your salary in an HSA.” That would be 15% of all salaries
    of any income level. Government would supply the safety net for
    the poor in the form of negative HSA accounts and HCI premium payments.

    2. Allow the purchase of health insurance sold anywhere in the U.S.

    I state elsewhere, that insurance for anything but the unexpected
    is really health redistribution. I would prefer to say that Health
    Catastrophic Insurance could be sold anywhere in the US. This
    requires overriding state laws which may or may not be
    constitutional.

    3. Make health insurance portable
    Once we have an HSA and HCI and national coverage, it is owned by an individual,
    it becomes portable. Also, with an HSA, HCI premiums can be
    paid out of HSA while unemployed. [The government safety net
    that allows an HSA to have a negative balance.]

    4. Expand Health Savings Accounts
    This is it. HSA’s are sustainable. Current insurance schemes
    whether private or public are not. Higher contribution limits for
    HSA might not be needed. Higher voluntary limits for HCI would be a good
    thing.

    5. Aggressively reform medical liability
    AMEN

    6. Aggressively slow Medicare and Medicaid spending growth, and use the
    savings for long-term deficit reduction

    Cost should be the focus of any plan. Insurance is a middleman
    and takes the bill payer out of the picture. Combine that with the
    “value of service” business model of Medical corporations and we get
    very expensive and uneven medical billing.

    To accomplish #6, change “value of service” business model to
    “cost of service” somehow. [Have to think about that. It is like
    changing "income tax" to a "flat tax". You go from the very complex
    to the very simple. Laffer in "End of Prosperity" describes how a
    flat tax could work. We might be able to achieve the same results,
    but lots of careful thought needs to be invested
    before a coherent defensible plan can emerge.]

    SUMMARY:
    Agressive Medical Tort Reform.
    HSA’s for planned medical care.
    HCI for unexpected medical expenses sold anywhere in US.
    Contributions to both are not taxed.
    Government cannot get hands on HSA funds.
    Insurance is a cause of high cost, not a cure.
    Convert medical business model from “value of service” to “cost of service”.

  15. Pingback: Debating the President’s Portsmouth pitch (part 1)  |  KeithHennessey.com

  16. I think the key is HSA’s and maybe HCI. I have some thoughts developing and will post as soon as I think it through.

    @Billy Oblivion – Actually HIPAA does specify standards in electronic forms, i.e. 270/271. The funny thing is that the government, i.e. Centers for Medicare and Medicaid (CMS), doesn’t follow these rules 100%. Private insurers are more standardized. (at least the ones I’ve seen).

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