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5 Prototypes to Extend Coverage: Descriptions and Assessments The problem of uninsurance has many potential solutions. Over the past decade, researchers, policy makers, advocacy organizations, special interest groups, and elected officials have all devoted considerable effort to developing proposals to ameliorate the situation. Proposals to extend coverage come from many different points along the political spectrum. Although few people openly oppose letting individuals have access to health care, opinions differ on how federal and state law, regulations, and public funds should be used and whether the goal of universal coverage justifies their use. Therefore, it is important to consider how successfully alternative solutions might fulfill the Committee’s principles. This chapter describes and examines four basic strategies to eliminate uninsurance. The purpose of this chapter is twofold: • to highlight the range of options that have been proposed by focusing on four prototypical models that illustrate approaches under public discussion, and • to demonstrate how the Committee’s principles can be used to assess various options and thus promote a more informed public debate about solutions to the problem of uninsurance. Each of the four prototypes satisfies the principles better than does the status quo. Each model does so through different mechanisms and realizes each principle to a different degree. The Committee does not recommend one approach over another. Rather, the analysis highlights aspects of each strategy that need further attention to correct a potential problem. Indeed, because the Com- mittee chose to analyze very basic, simplified models in order to illustrate more clearly their inherent incentives, the prototypes lack some of the detailed refine- 118

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119 PROTOTYPES TO EXTEND COVERAGE ments that have been proposed in the literature (Meyer and Wicks, 2001; Meyer and Wicks, 2002). If any particular approach is pursued, one will find many adjustments and corrective mechanisms available for developing a realistic and worthwhile strategy. The Committee cautions, however, that the pursuit of a “perfect strategy” could be an endless process and delay action unnecessarily. The Committee also notes that the four prototypes selected here do not include all possible approaches to achieving universal coverage and are meant to be illustra- tive of the variety of available mechanisms. First, this chapter briefly examines selected design issues that must be ad- dressed in the development of most proposals. The next section explains the Committee’s rationale for the selection and development of these specific proto- types. The third section includes a brief description of each prototype. The fourth section assesses each prototype against the Committee’s principles. The chapter concludes with a brief summary. DESIGN ISSUES Before addressing the specific models, this chapter identifies five issues or design choices to be made that affect many, if not all, of the prototypes. Aspects of the five issues are interrelated, but the issues will be discussed individually: • voluntarism versus mandates and taxes, • phasing in of target populations, • substitution of new programs for current coverage and maintenance of effort, • public and private responsibilities and functions for different levels of government, and • risk selection and insurance pools. This list is not exhaustive; the chapter does not attempt to cover all design issues that policy makers will encounter in crafting a reform proposal. These issues are raised explicitly now to acknowledge them and to identify implications of a particular design, not to recommend which choice should be made. Voluntarism Versus Mandates and Taxes The choice between policies that rely on voluntary action versus those that mandate a specific course of action is key. Most coverage extension proposals incorporate both voluntary and mandatory elements, but the balance or general level of compulsion varies significantly among strategies. Should certain players, such as employers, be required to provide insurance? Should anyone be forced to accept insurance? Can financial incentives alone induce voluntary universal take- up of an insurance option? If incentives can induce voluntary take-up, how much of an incentive would be necessary?

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120 INSURING AMERICA’S HEALTH To cover the uninsured population, additional resources inevitably will be needed, almost certainly raised by taxes. The amount of money to be raised, saved through greater efficiencies or shifted from other uses, will affect the level, type, and sources of financing. These would likely vary among the models and would affect the political acceptability of any approach as well as its equity. New revenues are a necessary aspect of any universal coverage strategy. Based on estimates reviewed in Hidden Costs, Value Lost, we know that services that uninsured indi- viduals use in a year cost approximately $99 billion (2001) and that additional health services for uninsured people would cost between $34 billion and $69 billion (in 2001 dollars) if they use the same amount and type of services as those who have coverage under the current system (IOM, 2003b). The program or budgetary cost of any fully implemented strategy would likely be somewhat more than the marginal economic cost of additional services, primarily due to shifts in the distribution of health care payments on behalf of both currently uninsured and currently insured people. These program costs would vary depending on the model and the richness of the benefit package implemented. Also, there would be costs related to additional utilization by some currently insured people if the defined benefit package for the uninsured were more generous than what they had and their benefits were raised to that level as a result. Even if a successful extension of coverage were implemented, including effective utilization and cost controls, it is unlikely that a sufficient amount of the savings could be shifted to cover all the additional people because of likely resis- tance of existing stakeholders, discussed in Chapter 3. Also, the increased use of services by the previously uninsured would require some additional funds. Financ- ing mechanisms, however, were not within the Committee’s scope of research and will not be examined in detail in the discussion of these prototypes. Equally important to the amount of new revenue is the issue of who bears the burden of providing this revenue—the broad social and economic impact as well as effects on individuals, families, and businesses. Significant redistribution of the benefits and burdens of coverage is virtually certain, and the distributional impacts will vary depending on the strategy implemented. In part these redistributive effects depend on whether revenue streams that currently support health services for the uninsured and insurance for the covered population are maintained or not. Such policy choices will be critical in the political debate. The degree of compulsion (in addition to the newly required contributions) inherent in a proposal to extend coverage would affect both its political accept- ability and its subsequent implementation and outcome, including how closely the model approaches universal coverage. Some mandates or constraints are unavoid- able if universal coverage is to be achieved. A completely voluntary system is unlikely to achieve universal coverage, but the Committee acknowledges that trade-offs among the principles during the design of a coverage strategy could result in a reform that would not maximize the goal of universality. To assess the achievement of particular objectives, the Committee considers the balance of voluntary and mandatory action and its impact on various actors in the process.

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121 PROTOTYPES TO EXTEND COVERAGE Phasing In of Target Populations Many of the recent extensions of coverage and current proposals target a specific population, such as workers losing their jobs as a result of international trade and retirees of certain firms that have failed to provide promised benefits (Trade Act of 2002, signed into law as P.L. 107–210), those leaving a job that offers benefits (Consolidated Omnibus Budget Reconcilation Act of 1985 [COBRA]), or children in families with low income (Medicaid and the State Children’s Health Insurance Program [SCHIP]). The Committee defines its tar- get population as all residents in the United States. Some proposals aspire to universal coverage but plan a phase-in over time, guided by priority populations to be covered. Defining the target population for an extension or a phasing-in strategy requires an early decision because it affects many other choices about mechanisms for extension. For example, if the first priority is to be the lower income, near-elderly population without coverage, lowering the age of eligibility for Medicare is an obvious mechanism. The definition of a target population can require trade-offs between equity and program costs. For example, targeting the whole population within a specific low-income range for a new, publicly subsidized program or, alternatively, de- signing the program to attract only those who are currently uninsured within that income level would require different funding levels. If the former approach is taken, some people will undoubtedly drop their current private coverage. Every- one at a given income level will be treated equitably, but the cost of covering a given number of previously uninsured individuals will be greater than under the latter approach. This issue is also discussed in the next section. Substitution of New Programs for Current Coverage and Maintenance of Effort The issues of substituting subsidized or public coverage for existing, private insurance (crowd-out) and requiring employers or governments to maintain their current investments in health insurance (maintenance of effort) both relate to the preservation of funding streams that are currently being used for health coverage. Any new coverage program will alter, to some extent, current incentives for and behaviors of employers, employees, and various levels of government. The con- sideration of changed costs to various stakeholders is important in designing a new program because it is difficult both to change the flow of funds and to capture existing revenue flows through maintenance of effort provisions. The redistribu- tive effects of any health insurance reform proposal will be greater if existing health care revenue is not captured or maintenance of effort not required. The extent to which current financing streams are preserved or there are shifts in the sources of funding are key factors for evaluating reform proposals. To minimize the amount of new public funds that would be needed to cover the uninsured, some proposals for extension explicitly include mechanisms to discour-

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122 INSURING AMERICA’S HEALTH age people from dropping private coverage they currently have in favor of enroll- ing in a new public program that presumably would be of lower cost to the individual. Other reform proposals explicitly intend to substitute the new program for existing ones. Although substitution of the new program may be desirable on its own merits, capturing the current funding streams reduces the need for new revenues. Public and Private Responsibilities and Functions for Different Levels of Government There are three basic questions concerning government responsibilities for major health insurance reform: • How much responsibility should rest in the private sector and how much with government? • Which levels of government (federal, state, or local) should be responsible for which specific operational functions? • Which level(s) of government should take responsibility for financing, and who pays? Answers to these questions would likely reflect a person’s political assumptions and convictions, affecting both the scale of the whole proposal and whether it relies mainly on voluntary, private-sector efforts or public programs and policies. Currently all three levels of government have responsibilities for providing coverage or care to the uninsured. The federal government acts as financier, providing a foundation of tax-based resources and setting minimum standards for eligibility and benefits for public coverage; the states share fiscal responsibility with the federal government, administering coverage programs (including making deci- sions about eligibility and benefit packages) and leading in innovative reforms; and localities directly support the delivery of health services (Holahan et al., 2003c; IOM, 2003a). Drawbacks of the present distribution of duties include inequitable variation in coverage from state to state, the relatively large fiscal burdens on the states for public coverage programs, and the fact that nearly one-sixth of the population is uninsured, with many of those persons eligible but not enrolled in public insurance (Weil and Hill, 2003). The configuration of roles and responsibilities for health under the country’s federal structure would likely change under any major reform proposal. One level of government or another might be more suited to specific functions, such as enrollment and its enforcement, regulation of insurance options, or selection of participating plans or providers. Responsibility for financing a reform proposal should relate to the fiscal capacity of each level of government. Areas of great need (with a high uninsured rate or large numbers of uninsured people) tend to have less ability to raise resources (Marquis and Long, 1997; IOM, 2003a). There could also be a mismatch of resources and need during weak economic periods, depend-

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123 PROTOTYPES TO EXTEND COVERAGE ing on what taxes are used. Financing considerations include decisions about the particular tax and source of revenue for the reform and which level(s) of govern- ment should collect the tax. How to collect the needed revenues, who should ultimately bear the burden, and how subsidies should be provided to those eligible for assistance are all design questions to be resolved politically (Wicks, 2003a). How a reform strategy responds to the three questions posed at the beginning of this section will influence, to some extent, any redistribution of costs and payments. Some governments might benefit and others would not, likewise for tax payers. Also, to the extent the reform creates cost savings or at least reductions in the rate of growth of current health spending in order to fund the new coverage extension, there could be a significant redistribution of dollars. Given the natural inclination of all stakeholders to oppose reductions in their revenues and increases in their taxes, it is not realistic to expect that all current spending on uninsured people could be shifted into a new system. Nor is it likely that sufficiently strong mechanisms to control costs could be designed and imposed that would fully fund an extension to universal coverage. How much new revenue would be required for that extension of coverage would depend on the nature of the new strategy as well as on its ability to redistribute existing resources and contain utilization and costs. Risk Selection and Insurance Pools Insurance is based on risk sharing. A fundamental reality of health insurance is that the premiums of enrollees who turn out to be healthier than average subsidize the costs of care of those who turn out to be less healthy in any given year. Although a small percentage of the population (10 percent) generates a high percentage of total health costs (70 percent), just who will fall within that high-risk group cannot be predicted with any precision, and they are not necessarily the same people from year to year (Berk and Monheit, 2001). Private insurance plans, with premiums based on the shared experience of a particular group of insured individuals, have a strong incentive to select the healthiest people they can attract so they can keep their costs (and premiums) low enough to attract more (low-cost) enrollees. Likewise, employers and individual policy holders have a similar incentive to participate in the healthiest and lowest cost risk pools.1 These incentives are especially pronounced in the current small- group and individual insurance markets. As a result of these incentives, older people, those in worse health, or those expected to have high health costs must often pay significantly higher premiums 1These insurance risk pools are distinct from purchasing pools, which permit small firms, associa- tions, and individuals to join together to increase their purchasing power and potentially benefit from economies of scale.

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124 INSURING AMERICA’S HEALTH for coverage. Some high-risk people are denied coverage and many cannot afford plans that are available. This is to be expected in a competitive insurance market and is necessary for insurance companies to be able to reimburse the higher level of bills generated by heavy users of services. Various regulatory and insurance mechanisms, such as community rating, high-risk pools, and guaranteed issue, have been used to help protect high-risk individuals from exceedingly high premiums. These approaches to spreading risk inevitably raise the premium for others in the pool, such as young, healthy men, or require implicit or explicit subsidies to maintain benefits. The size and heterogeneity of the risk pools, and whether the individual has the option to select a risk pool in any proposed reform, affects the long-term viability of the plan and the affordability of coverage for individuals and their families. This discussion of design issues is far from exhaustive, but it indicates some of the choices to be considered in the preparation of a workable solution for extend- ing coverage. Devising a strategy for increasing insurance coverage is technically complex. Technical issues often have political implications. Recognizing these preliminary and fundamental choices among reform options and engaging them early on should foster a more open political debate and ideally speed a political consensus on a particular strategy. SELECTION OF PROTOTYPES The Committee focuses primarily on proposals and strategies that eliminate uninsurance through major, comprehensive health insurance reform, rather than more limited proposals based on a discrete change to an existing program or a policy targeting a subset of the population. We recognize that the first prototype, which resembles many of the proposals currently under public discussion, is closer to an incremental approach than to comprehensive reform and would not achieve uni- versal coverage, but it is included for the sake of completeness. Although reform around the margins may be helpful to specific subpopulations, it has proven inadequate in achieving the broader goal of universal coverage. Despite all the implemented extensions discussed in Chapter 3, the uninsured rate has remained high and is increasing. We believe health insurance coverage for the entire population is of funda- mental importance and value. Achieving it requires systemic reform. Even if small, piecemeal changes in insurance continue, they will not produce universal cover- age in the foreseeable future. Universal coverage will require mandates, a signifi- cant change from current, voluntary arrangements. Major reform will take time to achieve, even recognizing that it is not necessary to design every fine detail prior to beginning. Modifications and refinements can be introduced during implemen- tation. Garnering support for a comprehensive strategy and its implementation will also take time. Therefore, members of the public and policy makers should begin now to plan for major reform to achieve universal coverage.

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125 PROTOTYPES TO EXTEND COVERAGE Only a goal as important as achieving universal coverage that is equitable and efficient is sufficient to motivate and justify major systemic reforms. Even small changes can be costly, disruptive, and take time to implement (Marmor and Barer, 1997). The Committee did not presume to judge the political feasibility of various approaches. The historical record reviewed in Chapter 3, however, has convinced us that limited approaches, while perhaps more feasible to enact in the short term than major changes, are not necessarily better if they do not lead in the desired direction for future changes (Weil, 2001a). If the small changes do not lead to a more equitable and efficient insurance system in the long run, time and resources could be lost. In the next section, the Committee examines four major insurance reform strategies and measures them against the recommended principles. Because these prototypes have not been implemented, there are no evaluations or hard data with which to assess the impact they might have. The Committee recognizes that federal policy makers and politicians face similar information gaps and uncertain- ties as they weigh alternative approaches. The range of models draws on the breadth and variety of political viewpoints to create clear, coherent prototypes. They are arranged in order from the least disruptive strategy with the least change from the status quo to the prototype requiring the most change. Brief descriptions of the essential structure of each model are included. Some embellishing elements are included in the prototypes to describe a potentially workable model but are not necessarily inherent to a specific prototype. The four models were selected based on the following criteria: • Aspects of the prototype are described in some detail in currently acces- sible literature. • The prototypes represent general categories of approaches and techniques for extending coverage. • They promise substantial increases in coverage, approaching universal. The elements of each prototype were selected from commonly described strategies and seem inherent to the basic model. For example, although a single- payer model could have a more or less comprehensive benefit package or could have multiple benefit packages, we selected a single, comprehensive package for discussion purposes, because that is how the model is most often characterized. At a minimum, a benefit package in any of the models would include hospitalization and outpatient medical services. Specifying a minimum benefit package for coverage of the uninsured would likely mean that people currently underinsured (with less than the specified mini- mum benefits) would need to be brought up to the defined benefit level to avoid inequities. Raising some currently insured people to the minimum benefit level would create additional costs. Improved health access and outcomes for the underinsured would also be anticipated. In the assessment section that follows these descriptions, each of the

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126 INSURING AMERICA’S HEALTH Committee’s guiding principles will be discussed separately in relation to the basic incentives and effects of the models. The Committee does not attempt to estimate specific budgetary and private costs of the prototypes; much more detailed as- sumptions would be necessary to model the costs of each approach. The incre- mental economic costs of providing the uninsured with the kind and amount of health services used by similar people with either public or private coverage amount to between $34 and $69 billion a year in 2001 dollars. As previously mentioned, this estimate of incremental service expenditures does not assume any structural changes in the health system or reflect any particular model for extend- ing coverage. Depending on the prototype and the scope and structure of the benefit package, the incidence and distribution of program costs would vary. Likewise, the health benefits of a particular prototype would vary depending on how fully covered the population would be and how comprehensive its benefit package. In both the descriptions and assessments, the prototypes will be compared to the status quo. A summary table, describing the models, is included at the end of the descriptions (see Table 5.1) and a summary table of the Committee’s assess- ment follows that discussion (Table 5.2). Each table includes a column for the status quo for ease of comparisons. The status quo is not presented separately in the discussions or intended as a prototype, merely as a point of reference. The current situation regarding health insurance coverage and finances is amply assessed in the Committee’s previous five books and summarized in Chapter 2 of this report. DESCRIPTION OF PROTOTYPES FOR EXTENDING COVERAGE Prototype 1: Major Public Program Extension and New Tax Credit This approach would make no fundamental changes in the current structure of private insurance. Some public programs would be merged and all expanded dramatically. A new federal tax credit (usable only for health insurance) would be provided to moderate-income individuals to enable them to purchase private coverage. The intent, ultimately, would be to make coverage available to every- one.2 Employers’ Role: There would be no mandate on the employer. Firms would be free to offer or continue to provide coverage (or not) to employees and their families. Current federal tax incentives for employers and their workers would remain. 2Aspects of this prototype have been discussed in the following articles: Loprest and Uccello (1997); Davis et al. (2000); Hacker (2001); Short et al. (2001); Johnson et al. (2002); Morone (2002); and Davis and Schoen (2003). References for tax credits are mentioned under Prototype 3.

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127 PROTOTYPES TO EXTEND COVERAGE Individuals’ Role: Workers and their dependents would be free to acquire insurance from their employer, if offered, or from the individual market (without the tax incentive), but they would not be required to obtain coverage. Individuals with family income above the eligibility limit of the public program, but below the level at which private insurance becomes affordable, would receive a subsidy in the form of a federal tax credit, if they chose to purchase insurance. The tax credit would be both refundable, meaning those with income sufficiently low that they would owe no tax would receive the credit as a refund, and advanceable, so that people would receive the credit upon purchase of a policy rather than after the end of the tax year. The tax credit would be used to purchase acceptable employment-based or other group coverage or a policy from the individual (nongroup) market. The tax credit would be sufficiently large for those with incomes just above the eligibility limit for public coverage and would phase out to zero at the point where family income would make coverage affordable without assistance. Public Programs: Medicaid (except for the long-term care benefit) and SCHIP would be merged into a new single program run and funded jointly by the federal government and the states. It would offer comprehensive benefits, similar to those currently offered, with minimal cost sharing. Individuals up to a certain income level for a given family size would be eligible without regard to family structure or employment status. The eligibility age for Medicare would be extended down- ward so that individuals could enroll at age 55 with the payment of a special premium. Federal and State Insurance Regulation: The federal government would establish an actuarial value or a package of services commensurate with the amount of the tax credit. It would be the insurers’ responsibility to sell actuarial equivalents or plans superior to the federally defined package. The state would certify whether specific policies met the federal standards. The benefits would likely be less than comprehensive, limited by the size of the tax credit. However, the credit could be used for other, more comprehensive policies that would be available to purchasers paying additional premiums. Except for insurance offered for purchase through a tax credit, there would be no required change in the benefit structures of insur- ance offered or in public regulation of it. Hence, affinity groups and other risk- pooling mechanisms would be available in states where they are currently permit- ted. Design Alternative: The new tax credit could be made available to low-income families, giving them the option of enrolling in public coverage or purchasing private coverage on their own with the subsidy. This model could also be com- bined with a subsidy for employers of low-wage workers in the form of tax credits, based on payroll or other business taxes, to encourage them to offer coverage to their employees.

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128 INSURING AMERICA’S HEALTH Prototype 2: Employer Mandate, Premium Subsidy, and Individual Mandate The current amalgam of employment-based insurance and public coverage would form the foundation of this model. The main change from the current system would be mandates requiring all employers to provide coverage for their workers and requiring all workers to take that coverage. Because employers of low-wage workers are less likely to offer coverage and low-wage workers are less likely to take up offered coverage (Kaiser/HRET, 2003), this prototype includes a premium subsidy for employers of low-wage workers to keep the insurance offer affordable to their workers. Subsidized enrollment in private coverage through a purchasing pool or enrollment in a combined Medicaid/SCHIP public program would be required of those who do not obtain coverage elsewhere.3 Employer Mandate and Subsidy: Employers would be required to provide coverage and finance a portion of health benefits for workers and their families, including, at a minimum, a federally defined benefit package. The package would be defined either by specific services or given an actuarial value, likely following the scope of current employment-based coverage, which is generally comprehen- sive. Firms would have to finance a substantial portion of the premium expense for all employees who worked more than some predetermined amount of time per week and their dependents. A protocol would be established to assign coverage responsibility to one employer for employees in families with more than one worker. Small employers and the self-employed would also need to meet these requirements and offer coverage. Because many small employers have low-wage workers, they would be eligible for a premium subsidy. The current tax provision that excludes the employer’s share of the insurance premium from the employee’s taxable income would remain, as would the employers’ tax deduction and the deduction for the self-employed. An additional federal premium subsidy would be provided to employers, including those self-employed, based on the firm’s average wages in order to make coverage (premium and other cost sharing) more affordable for even low-wage workers. States would assist in the formation of large purchasing pools, particularly for small employers, the self-employed, other employers not already providing coverage, and those individuals not able to obtain health insurance through their employer. 3Various aspects of this model are presented in the following articles: Krueger and Reinhardt (1994); McArdle (1994); Steuerle (1994); U.S. Government Accounting Office (2000); Curtis et al. (2001); Feder et al. (2001); Wicks (2003b).

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141 PROTOTYPES TO EXTEND COVERAGE public programs would be somewhat more complex. If the design alternative selected included a tax credit for employers to offer coverage, designing such a program so that it would not penalize those employers already offering and con- tributing to coverage would also add complexity. Prototype 2: Employer Mandate, Premium Subsidy, and Individual Mandate The cost of the federally defined benefit package offered through this proto- type would likely be less expensive than current employment-based plans because the mandated coverage would not be as extensive. Employers could choose to offer more extensive benefit packages reflecting the demands of the labor market or their union negotiations. Premiums and cost sharing could be required of all enrollees but kept at a minimal level for those who qualified for the public programs. Administrative factors such as enforcement of the mandate and creation and regulation of purchasing pools would increase administrative costs of the program. The affordability of this system to employers, the main providers of coverage, would depend on how the federal premium subsidy is defined and calculated. Likewise, the size of the employer tax of the design alternative, which permits employers to pay a tax instead of offering coverage, is important. This prototype would rely on employers, who would continue to contribute a substan- tial portion of the needed revenues. Sustainability: The sustainability of this insurance strategy would depend to some extent on using revenue sources that could readily increase during difficult eco- nomic times when employers might need larger subsidies to provide affordable insurance and the public program would experience an increase in enrollments. The sustainability of the program in the long term would also depend on cost and utilization controls and adjustments to the size of the subsidies. The reduced health costs to state and local governments for uncompensated care, Medicaid, and SCHIP would be significant and have a positive impact on state and local budgets, if no maintenance of effort were required. Under the employer mandate with the “pay or play” design alternative, some firms might drop coverage they currently offer. As a result, their financial support, beyond their tax for not “playing,” would be lost to the health system, and possibly to the employees as well if it were not conveyed through a comparable increase in wages or other benefits. Simplicity and Efficiency: For workers, this prototype would be as easy to use as the current employment-based insurance system. The use of the public programs would be substantially simplified compared to the current situation by combining Medicaid, SCHIP, and the other state coverage programs and by limiting eligibil- ity criteria to family income and lack of private coverage. Health care providers would find this prototype similar to the current system. They would still need to

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142 INSURING AMERICA’S HEALTH bill many different insurers, and the private insurers would have similar claims processing functions. This model creates new administrative functions: enforcement of the employer’s mandate and calculation of the employer’s federal premium subsidy; enforcement of the individual’s mandate; and regulation of the private insurance market to ensure the availability of insurance with appropriate basic benefits and operation of the public program. The current functions of the existing private insurance market and its related regulation would remain, and new administrative functions related to the purchasing pools and certification that benefit packages meet federal standards would be added. The states would have a new role creating and managing large purchasing pools that would make plans available to employers who do not currently offer coverage, including small employer groups, as well as to the self-employed and individuals. The evidence to date does not show that such purchasing arrange- ments reduce the costs to small employers or pool risks effectively if other group insurance is available with experience-based premiums (Curtis et al., 2001). These arrangements might, however, be more effective when all employers are required to offer coverage and the premium cost is subsidized. Small groups not currently insured, such as small firms, could possibly create a critical mass for the purchasing pools (Wicks, 2002). Prototype 3: Individual Mandate and Tax Credit While the dollar values of the individual tax credit could be set within the annual federal budget process, it would function as an entitlement to all those who met the income requirement and would not be subject to a specific congressional appropriation, similar to the tax credit in the first prototype. There would be no limit on aggregate spending on health care, which would depend on individual decisions to purchase insurance and use services, and on the associated costs. There would also be no limit on the aggregate size of the annual federal commitment, but once the credit amount is set, it would not be affected directly by individuals’ patterns of service use or providers’ charges. Sustainability: Because the tax credits would be based on the federal income tax, it would be built on the most broadly based tax and it would be a sustainable source. The long-term sustainability of the program, however, would depend on cost controls and adjustments in the subsidy level. It would be difficult to directly impose utilization controls because there would be many independent insurers and even more separate plans. Simplicity and Efficiency: The elimination of the federal and state public programs along with their confusing eligibility limits and complicated administrative struc- tures would be a significant simplification. This insurance strategy, however, would likely be less efficient than the current system because more people would

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143 PROTOTYPES TO EXTEND COVERAGE purchase insurance in the individual and small-group market, where administrative and premium costs are highest, and fewer people would obtain coverage through public programs or large employment-based groups, where premiums and admin- istrative costs are lowest. Also, under this tax credit strategy, some employers might be inclined to drop coverage they now provide. Although the individual mandate would mean more healthy people entering the nongroup insurance market, creating a broader risk pool and reducing the adverse selection problem of that market as a whole, it would not eliminate the incentive for insurers to “cherry pick” the healthiest people. To the extent that the current limitations of the small group and nongroup insurance markets are ameliorated, particularly under the design alternative, state regulatory and administrative functions become more complicated. However, to the extent that state purchasing pools attract a sufficient portion of purchasers, economies of scale might result. Choosing their own coverage would not be simple for individuals and fami- lies; some education and guidance would be necessary. Also, the individual man- date and tax credit would require the creation of an administrative structure to pay the credit in advance and enforce its appropriate use, both to ensure that people received the correct credit amount and that it was spent on qualified insurance. Prototype 4: Single Payer This health insurance strategy would greatly reduce, if not virtually eliminate, employment-based insurance; the small group and nongroup insurance market; current federal, state, and local programs to cover the uninsured; and most out-of- pocket health spending by individuals and families. These major changes poten- tially create savings for some current participants and significant new public costs, depending on revenue sources used. While there would be substantial public savings resulting from the elimination of the current tax incentives for the pur- chase of health insurance, they would be balanced by increased tax bills for individuals. Employers’ contributions to their employees’ health insurance could also be lost to the health system if they were not redirected through a business tax, and lost to the employees if not shifted into the remaining compensation package. This prototype would create significant labor dislocations in the health insur- ance and health care industries, although it would likely produce some efficiencies and cost savings for the health sector. Because nearly all health spending would be aggregated under the federal budget, the decision about what society deems affordable would be both very public and unavoidable. Sustainability: The long-run sustainability of the program would depend on containing cost increases; many potential cost and utilization controls would reside at the federal level. The impact additional cost and utilization controls could have on health access and outcomes is unknown. The consolidation of spending decisions would have the advantage of placing some federal controls on aggregate health care spending nationally, where it

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144 INSURING AMERICA’S HEALTH would be subject to taxpayer resistance to tax increases. There would be disadvan- tages of potentially less consumer pressure to limit spending and problems if the “wrong/inappropriate” level of spending were chosen. It is unclear how, over time, the public’s resistance to more taxation would balance against individuals’ desires for more and better health services with little out-of-pocket payment. If the funding were predominantly through federal taxes, the system could be politi- cally and economically sustainable, as long as the voting public was willing to support the health care system and balance funding with use to ensure affordability. If the public were unwilling or unable to fund the budget fully, constraints in the form of more limited access to some services could develop over time. Nearly the whole populace would likely contribute both through taxes and cost sharing, but the single payer approach would undoubtedly have significant redistributive ef- fects. Simplicity and Efficiency: From the perspective of a potential patient, this system would appear simple because eligibility would not change over time nor would reenrollment be required. While procedures and forms that consumers would need to use would be standardized nationally, the simplicity and ease of dealing with a large bureaucracy would likely vary across the country, depending on the contractors and the priority the federal agency placed on consumer education and service. Single payer systems, such as Medicare, generally are considered to have substantially lower administrative costs than private insurance plans, because the need for advertising, underwriting, and much eligibility and billing work disap- pears. However, evidence of the specific percentage devoted to administrative costs among all participants in the health system is limited, anecdotal, and insuffi- cient to document the costs of comparable functions. A single payer strategy could greatly simplify provider billing procedures. There would be no need to determine the secondary health insurers, and standard forms and procedures for all enrollees would make it easier for those submitting bills. On the other hand, additional administrative functions would include a significant increase in federal regulations needed to ensure standards, procedures for updating the benefit package, and payment rates. With only one benefit package, risk selection would not be a concern because there would be little to attract people based on their level of risk to one plan or another. The costs of the healthy and the sick would be averaged across the entire U.S. population. The supplemental coverage under the design alternative of increased copayments would affect the impact of out-of-pocket cost sharing at the point of service while increasing revenues. One challenge would be determining the level at which cost sharing should be capped for families and individuals so that the copayments would encourage responsible use but not be a deterrent to appropriate use of services, particularly by families with higher than average needs. The level of copayments would require balancing the advantages of cost sharing as a pro-

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145 PROTOTYPES TO EXTEND COVERAGE grammatic financing mechanism with the incentives cost sharing creates for the development of supplemental coverage. If the supplemental coverage did more than “wrap around” the public benefit and covered services in the comprehensive package with related amenities and exclusive providers with shorter queues, there would be less control of total spending but additional revenue for the delivery system. With higher cost sharing, it would also be necessary to collect income data and make provision for special no-premium supplemental policies for lower in- come individuals to avoid inequitable financial barriers to access. With a single payer system, the federal administrative agency would need to decide how and what to pay for various services and providers. This would present both administrative and political challenges. The planning process as well as nego- tiations with providers over payments present both the opportunity for greater visibility of the allocation process and the greater risk that the funds and services used would be mismatched. Health Care Coverage Should Enhance Health and Well-Being by Promoting Access to High-Quality Care That Is Effective, Efficient, Safe, Timely, Patient-Centered, and Equitable Prototype 1: Major Public Program Extension and New Tax Credit The combined federal–state public program would include a comprehensive benefit package, comparable to the current Medicaid benefits, which could be designed to promote appropriate, cost-effective use of services even though cost sharing would be minimal for lower income enrollees and have less impact on use. Employment-based insurance and policies purchased on the independent insur- ance market with the tax credit would meet certain federal standards. There would be a wide variety of benefit packages offered, and with different levels of cost sharing, much as there is today. Cost sharing would be likely to promote appropriate use of services in some but not all plans. The Medicare benefit would be similar to that offered currently. While the public program could design incentives to promote quality in the health system, at least for its enrollees, its share of provider revenues might be insufficient to induce investment in data systems and other costly improvements. There would be no new requirements on employers or insurers in the private market, so quality improvements would occur to the extent currently expected. If significant numbers of people remain uninsured, the quality of the whole health care system would suffer. To the extent that health care is inequitably delivered today, particularly disadvantaging members of minority groups due to lack of coverage, this strategy would reduce that inequity by covering more people. This assessment of equity also is applicable to the following three prototypes.

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146 INSURING AMERICA’S HEALTH Prototype 2: Employer Mandate, Premium Subsidy, and Individual Mandate The structure of this prototype would require a federally defined basic benefit package for employment-based coverage and for individually purchased subsidized coverage. It could be defined actuarially or by general benefits to be covered. Some plans might be based on current medical evidence to the extent feasible and designed with cost sharing to promote the use of appropriate services. The re- quired basic benefit package for individual coverage would be less comprehensive than the current average employment-based benefit package, but employers would be allowed to offer richer packages as add-ons to the basic coverage, which some workforces might demand and some labor markets might deliver. Assuming the more comprehensive employer plans receive the same dollar premium subsidy as the basic plan, lower income workers would be more likely to choose the basic plan. Those workers who could not afford or were not offered a more comprehensive policy might go without needed medical care and suffer poorer health, particularly those with expensive chronic needs. Workers with sufficiently low income who were not eligible for employment-based coverage could qualify for the enriched public program. The design of the public program and the premium assistance to individuals could ensure equitable treatment of employees whether their employer offered benefits or not. The challenges to promoting quality improvements for clinical as well as administrative management would be similar to the status quo because federal leverage through provider revenues would not be greatly increased. State purchas- ing pools could also play a role in promoting quality measures. The current incentives for employers to lead in promoting quality would remain. Some pro- gressive employers would continue to pursue quality improvements to the advan- tage of their employees and the health system. With the employer mandate, the motivation for employers to combine their purchasing activities enough to gener- ate quality improvements and cost savings would be stronger than now. Prototype 3: Individual Mandate and Tax Credit The federally defined benefit would be a basic package defined either actuari- ally or by general benefits with little specificity, much like the previous model. Insurance companies would design their own benefit plans, which might, but would not necessarily, include services proven effective by medical evidence or be designed with cost-sharing incentives for appropriate use. As with the employer mandate prototype, if the size of the tax credit were low relative to the cost of the premium for the basic benefit package, it would be less likely that people could afford a more comprehensive package. They might go without needed care and suffer poorer health if they could not afford to purchase the needed, noncovered services out of pocket. For people with multiple or chronic conditions this might be especially true if there were little regulation of private insurance underwriting practices, because their premiums would be higher than average.

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147 PROTOTYPES TO EXTEND COVERAGE Because all purchases of health care would be through private health insur- ance companies, mechanisms currently in place through employers and purchasing pools could promote quality improvements in the health system. Individual con- sumers would be free to switch to plans that they perceived to be of higher quality and collectively could create demand for quality improvements. Prototype 4: Single Payer The comprehensive benefit package would be defined nationally and would cover everyone. The cost sharing could be designed to encourage use of services determined to be appropriate and cost effective, but the effect on use might be minimal because the dollar amount of the cost sharing would be minimal. Because this single payer insurance strategy would be comprehensive, the demand for private supplemental insurance might be limited, although anyone who wanted to purchase noncovered services could pay for them out of pocket. Under the design alternative that includes substantially increased cost sharing and supplemental in- surance policies, the opportunity for cost sharing to encourage appropriate use would be diminished. Because the single payer approach could be designed with strong central controls, national quality standards could be defined, imposed, monitored, and reimbursed uniformly and consistently. Whether or not those opportunities were pursued might depend on political forces at the federal level. The development and implementation or enhancement of data systems might prove to be easier and less expensive than currently because systems and reporting standards could be created and imposed at the national level and payments designed to cover capital and operating expenses. The single payer approach would create a strong incentive to adopt quality measures that would enhance the use of preventive services and cost-effective care because it would reap the benefits of better health and cost savings either in the short or longer term. It would also be uniquely capable of incorporating payment incentives for higher quality care. On the other hand, a strong central bureaucracy could deter creative, innovative quality improvements because of its size, deliber- ateness, or limitations imposed by Congress. Attempts to set high standards and remove providers that did not meet quality standards would probably meet stron- ger resistance than in today’s Medicare program, because there would be few or no other practice opportunities. SUMMARY The assessment of these strategies shows the feasibility of systematically using a body of evidence and a set of principles to guide policy making. The structure of the assessments, based on the principles, gives a straightforward technique to use when designing a new approach. It compares how well the prototypes achieve the principle and highlights which mechanisms are most likely to achieve a particular

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148 INSURING AMERICA’S HEALTH principle and which strategies might need adjustment. One can also use the assessments to examine an individual prototype by checking its section under each of the five principles. The assessments are summarized in Table 5.2. By comparing the assessments, one sees that some principles could be achieved better under one model than another. For example, the voluntary approach repre- sented by Prototype 1 is least likely to achieve universal coverage, compared with any of the prototypes incorporating mandates. Each prototype has strengths and weaknesses, achieving some principles more fully than others. All of them offer improvements over the status quo. Some balancing among the objectives emerges: a comprehensive benefit package is more likely both to achieve better health and to cost more than a basic package. If the personal costs of coverage for individuals were reduced, the costs to society would be likely to increase, given a standard benefit package. Although individuals would likely pay for the increased public costs through taxes, there would be a significant shift from current burdens. The four prototypes were selected to illustrate the broad range of proposals currently circulating and to serve as examples in the preceding analytic exercise. They were described simply, as basic models of each type. It becomes clear in the assessment that each prototype has weaknesses that could be ameliorated through more complex and less “pure” designs. In fact, many proposals under discussion in the public arena take into account some of the limitations highlighted here. The potential to alter a prototype to improve its ability to achieve a specific principle could affect the trade-offs among the principles and could affect the general attractiveness of a particular approach. Not only could the models be improved with further adjustments, but some of the stronger elements in one model could be incorporated into another model. The Committee leaves the debate about the design of a comprehensive, major reform to the public, policy makers, and elected officials. Universal coverage can be achieved if there is political support. The principles used in the assessment come from the Committee’s previous research on the consequences of uninsurance and represent its conclusions on important goals for any strategy to extend coverage. In the next and final chapter the Committee presents its recommendations for extending coverage.

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149 PROTOTYPES TO EXTEND COVERAGE TABLE 5.2 SUMMARY ASSESSMENT OF PROTOTYPES BASED ON COMMITTEE PRINCIPLES

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150 INSURING AMERICA’S HEALTH TABLE 5.2 Summary Assessment of Prototypes Based on Committee Principles Prototype 1 Major Public Program Extension and Principles Status Quo New Tax Credit Coverage should be Not universal; Would not achieve universality universal 43 million uninsured because voluntary, but would reduce uninsured population Coverage should be Not continuous; income, age, Family- and job-related continuous family, job, and health- gaps in coverage related gaps in coverage Coverage should be Private coverage unaffordable More affordable than current affordable for individuals to many moderate- and system for those with low or and families low-income persons moderate income Strategy should be Not affordable or sustainable All participants contribute; affordable and for society; uninsurance is aggregate expenditures not sustainable for society growing; cost of poorer controlled; new public expenditures health and shorter lives is for only the public program $65–$130 billion; some expansion and tax credit; participants contribute; no sustainability of public program limit on aggregate health depends on revenue sources expenditures or on tax and political support; size of expenditures—spending is credit depends on political higher than other countries, support sustainability of current public programs depends on economy and political support Coverage should enhance Quality of care for the Opportunities to promote health through high- population limited because quality improvements similar quality care one in seven is uninsured to current system

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151 PROTOTYPES TO EXTEND COVERAGE Prototype 2 Prototype 3 Prototype 4 Employer Mandate, Premium Subsidy, and Individual Mandate Individual Mandate and Tax Credit Single Payer Coverage likely to be high; Depends on size of tax credit, Likely to achieve universal depends on enforcement enforcement, and cost of coverage of mandates individual insurance Brief gaps related to life Minimal gaps Continuous until death or age and job transitions 65 Yes for workers, assuming Subsidy based only on Minimal cost sharing, but could adequate employer premium income and family size be problem for lowest income assistance; public program leaves older, less healthy, designed to be affordable for and those in expensive areas all enrollees with less affordable coverage All participants contribute; No limit on aggregate Nearly all participants basic package less costly than health expenditures or on contribute; aggregate current employment coverage; tax expenditure, though expenditures controllable, revenue from patients in federal costs relatively utilization not directly or public program; sustainability predictable and controllable centrally controlled; high cost to depends on revenue sources through size of credit; federal budget; administrative for employers’ premium sustainable through federal savings; sustainability depends assistance and public program income tax base; size of on revenue source and political credit depends on political support support Could design quality incentives Similar incentives to current Potentially yes; depends on in expanded public program private insurance system, proper design and basic benefit package; consumer could choose current employer incentives quality plans for quality remain