Making the Purple Health Plan More Purple

Larry Kotlikoff has proposed a Purple Health Plan (part red, part blue) that has been endorsed already by several hundred economists. Since Larry has attributed to me the idea of a government-subsidized health care voucher, I should have commented on this way before now. Here is the proposal, as summarized by Jason Shafrin of Healthcare Economist:

Larry Kotlikoff has proposed a Purple Health Plan (part red, part blue) that has been endorsed already by several hundred economists. Since Larry has attributed to me the idea of a government-subsidized health care voucher, I should have commented on this way before now. Here is the proposal, as summarized by Jason Shafrin of Healthcare Economist:

• All Americans receive a voucher each year to purchase a standard plan from the private-plan provider of their choice.
• Vouchers are individually risk-adjusted; those with higher expected health care costs, based on documented medical conditions, receive larger vouchers.
• Participating insurance companies providing standard plans cannot deny coverage. Americans choose doctors and hospitals included in the standard plan they choose.
• Plan providers offer supplemental plans to their participants and cannot deny supplemental insurance coverage to their participants.
• The government (federal and state) ends the tax exclusion of employer-provided health insurance premiums.
• Like all other Americans, Medicare, Medicaid and health exchange participants are covered by the Purple Health Plan, subject to appropriate transition provisions.
• Each year a panel of doctors sets the coverage of the standard plan subject to a strict budget, namely that the total cost to the government of the vouchers cannot exceed 10 percent of GDP.

There are two things I would definitely change: The content of health plans and the risk adjustment amounts should be determined by the market, not by government. In addition, there are a few more features I would add, or least make more explicit. Details are below the fold.

Purple Rain

The following comments draw heavily from what I wrote in Ten Characteristics of an Ideal Health Care System and Applying the “Do No Harm” Principle to Health Policy.

1. The market, not the government, should determine the content of people’s health benefits package.

Under the current system, the federal government gives us financial incentives to insure (lower taxes) and imposes financial penalties (higher taxes) if we don’t. With a few exceptions, it does not tell us what insurance we have to buy, however. I think this is the correct relationship between citizens and their government. The problem with the current system is that the subsidies and the penalties are arbitrary, unfair and regressive. Under ObamaCare they will become even more arbitrary and unfair.

How could things be different? My back-of-the-envelope calculations suggest that by combining the money we now spend on tax subsidies plus the disproportionate share of money (for uncompensated care) and maybe the new taxes created under ObamaCare, we could afford to give every adult American a $3,000 refundable tax credit to apply to the purchase of health insurance (ignoring the Medicare and Medicaid populations). I would additionally make the $1,000 child tax credit and/or $1,000 of the Earned Income Tax Credit (EITC) conditional on proof of insurance for each child.

This means that a family of four would have $8,000 for health insurance (and pay $8,000 more in taxes if they don’t insure) — without a need for any new tax revenues. Since the typical employer plan costs $12,000, the refundable tax credit would pay for core insurance that we want everyone to have and they (and their employers) would pay for additional insurance with after-tax dollars. In such a world, insurers would have powerful incentives to provide insurance packages that do not cost more than $8,000.

Moreover, there are good reasons to keep the relationship between government and the taxpayer purely financial. In every state in the Union, regulation of health insurance benefits reflects the power of health insurance lobbies rather than considered expert opinion. Insurance, for example, is required to cover alternative therapies (acupuncture, naturopathy, spiritual counseling), lifestyle choices that are unrelated to any health risk (in vitro fertilization, ED drugs, maternity care) and therapies that are far more expensive than equally-good alternatives (substance abuse providers).

Moreover, even in the absence of special interest activities there is relentless pressure on politicians to create benefits for the vast majority (who are healthy) at the expense of the few (who are really sick). That’s why ObamaCare has a long list of preventive services that insurers must cover with no deductible or copayment but does not extend such “consumer protection” to a ruptured appendix.

2. The market, not government, should determine the size of risk-adjusted premiums.

In the Purple Health Plan, the government subsidy would be adjusted for each person’s health status and would be larger for people who are sick and smaller for the healthy. Yet this is neither necessary nor desirable — and it’s completely impractical for the government to do this anyway. I have previously described John Cochrane’s proposal to combine change-of-health-status insurance with conventional insurance. Say you develop a serious health condition (e.g., cancer, heart disease, etc.) and want to switch to another insurer. Your current insurer would pay the extra premium the new insurer needs to enroll you. (If the two insurers can’t agree on the premium, the matter can go to arbitration.)

3. There needs to be a safety net fall back plan.

No matter how steep the penalties or generous the rewards there will always be people who forgo insurance. In this case, a family of four will forgo $8,000 that it could have used to buy health insurance. This money needs to be allocated to a safety net institution in the community where the family lives as a contingency fund — to pay for the care the family gets if they cannot pay their own medical bills. If everyone in Dallas decides to be uninsured, all the unclaimed tax credit money would go to Dallas safety net institutions. If everyone in Dallas decides to insure, the safety net money is withdrawn and used to subsidize private insurance instead. As I have described previously, under this system money follows people and safety net institutions are guaranteed they have the resources to do what we ask them to do.

4. The opportunity to make deposits to Roth Health Savings Accounts needs to be explicit.

As Mark Pauly and I explained in an article we wrote about 15 years ago, people should be able to choose between third-party insurance and self-insurance (a savings account) on a level playing field under the tax law. The tax credit money not used to pay premiums should be available for deposit to a Roth HSA. People should be able to make additional deposits as well. This means that health savings deposits and premium payments are both made with after-tax dollars. Withdrawals from the savings account for any reason are tax free.

5. The transition to portable insurance should be encouraged, but voluntary.

Currently, it is illegal in almost every state for employers to purchase individually-owned insurance for their employees with pre-tax dollars. They can buy group insurance, but not individual insurance. Although there are transition problems that need to be addressed, this prohibition needs to end. For the near future, employer-provided insurance and individually-purchased insurance should compete on a level playing field under the tax law.

6. The opportunity/obligation to save for postretirement care should be explicit.

Health care is a superior good. As income rises, people spend a larger percent of it on health care. Yet the Purple Health Plan would have the government’s spending on care grow no faster than income. This may be okay for the working-age population. If they want to spend more of their income on health care, they can do so. If Medicare growth is held to GDP growth, however, and if seniors are to have access to the same care the rest of the population expects, people will have to put aside savings during their working years to supplant reduced spending by the government during their retirement years.

I have previously explained the problem and proposed a practical solution.