Responsible National Health Insurance Part 2: The Purple Health Plan Would Be A Solid Step Forward - Forbes

In the first part of this series, I hope I convinced most readers that if Americans want responsible national health insurance, BernieCare--the Medicare for All plan supported by Senator Sanders--would represent a huge step in the wrong direction. The annual hidden costs of BernieCare--including deadweight losses, avoidable waste, rationing costs, and social costs of reduced innovation--would together amount to $1.25 to $2.8 trillion every year. Worse, the plan overall would add $61 trillion to the nation's unfunded liabilities tab. This well-intentioned, but hugely misguided plan is the very opposite of responsible national health insurance.

This post will strike a much more positive tone as it focuses on a plan that well illustrates a far more responsible approach to national health insurance: the Purple Health Plan developed by Laurence Kotlikoff, a professor of economics at Boston University. The virtues of this plan are best understood when contrasted with the parallel flaws in BernieCare. So I have organized this post along the same five dimensions I used to critique Senator Sanders plan in part 1.

Deadweight Losses

These would be considerably lower under the Purple Health Plan because it would be a capped entitlement. Everyone would receive a government-funded voucher to purchase a standard health plan, but government spending on these vouchers would be capped at 10 percent of GDP. But because the Plan also requires that the roughly 10 percent of GDP now spent or allocated by federal and state government on health-related programs such as Medicare and Medicaid, as well as on the tax exclusion of employer-provided health insurance premiums, be reallocated to help finance the vouchers, it means total government spending on health care will remain unchanged from current levels [1].

In short, in sharp contrast to BernieCare, which entails tens of trillions of dollars in new tax spending on health care over the next 10 years, the Purple Healh Plan will incur no deadweight losses above and beyond those already being incurred for tax-financed health spending. Indeed, over time, the amount would inevitably would be much lower than it otherwise have been since growth in tax-financed health spending has outstripped growth in the general economy for decades.

Waste

BernieCare is a one-size-fits-all plan that would mirror Canada in prohibiting any sort of patient cost-sharing for services covered by the plan: no deductibles, no coinsurance, no copays, that is, absolutely nothing that might inhibit patients from overusing the system. Regrettably, the standard plan under the Purple Health Plan also would be one-size-fits-all, designed by physicians in light of the 10% cap on vouchers.

However, as part of this standard benefits package, the Purple Health Plan would include a uniform co-pay and uniform deductible specified by Uncle Sam as part of the basic plan. Given that Medicare beneficiaries are well used to deductibles and coinsurance ($1,364 per hospitalization, 20% of physician services etc.), it seems likely that the uniform cost-sharing requirements might well mirror the amounts already in use by Medicare. Medicare has an actuarial value of 80%, which the RAND Health Insurance Experiment implies would result in about 10% wasted spending overall--well below the 30% waste that would be created as a result of completely free care offered under BernieCare.

Moreover, as described by Prof. Kotlikoff "Since all insurers will compete to provide the same basic insurance plan, there will be intense competition to provide the best quality of care and in order to re-sign the participant at the end of the year. This will squeeze out the excessive costs being paid insurance companies for running their businesses so inefficiently. It will also limit what top insurance company managers can afford to pay themselves."

Rationing

BernieCare would entail the same sorts of price controls seen in Canada, e.g., global budgets for hospitals and government-determined fee schedules for physicians along with government-negotiated prices on pharmaceuticals. There would be no private health insurance companies, so all rationing would occur at the point of service by providers.

In contrast, the Purple Health Plan would be much more market-driven. Admittedly, the amount of vouchers would be government-determined. Each voucher would personalized for each patient, i.e., risk-adjusted so that it represented the expected dollar amount of plan-paid care each year plus a "reasonable" profit margin for the health plan. While this sounds potentially complicated we have pretty good experience with similar forms of risk adjustment in both the Medicare Advantage program and Medicare Part D prescription drug program. As a consequence, it is unlikely the Purple Health Plan would result in systematic discrimination against high risk patients since such patients will be paying the plans they join a much higher dollar amount than the average patient and consequently would be more profitable to such plans on a per person basis. As a consequence, plans might well compete very hard for such patients, for example by offering them Centers of Excellence for their unique health needs.

The same sort of fierce competition for plan members described above should likewise minimize any incentives to ration care by waiting around since unsatisfied plan members will be able to switch plans every year. As with most types of business, it will always be cheaper to re-enroll existing plan members than to recruit and sign up new plan members. Plans therefore are likely to find the most cost-effective ways to provide access to care (e.g., Minute Clinics vs. emergency rooms for after-hours care; greater reliance on physician assistants and advance practice nurses etc.).

Innovation

With the exception of government price-setting for vouchers, the Purple Health Plan would be decidedly market-driven, with plans determining what providers to include and what prices to pay them. The kind of competition this will engender should mirror what we already see in Medicare Part C (Medicare Advantage plans) and Medicare Part D (prescription drug plans) where private insurers compete fiercely for patients but are required to take all comers at the same price. The only difference is that in Medicare Parts C and D, risk adjustment payments are made by the government behind the scenes whereas in the Purple Health Plan the risk adjustment is upfront and visible in the tax-financed voucher that each person would hand over to whatever health plan s/he selected.

The point is that such a market-driven system should generally preserve the same incentives for innovation as we now observe in pharmaceuticals, medical devices and medical services more generally. Given that tax subsidies for employer-provided coverage will be eliminated under the Purple Health Plan, private coverage will look a lot more like that in Switzerland--i.e., predominantly non-group coverage rather than a system dominated by employers. This change likely will stimulate more creativity in how care is organized and delivered compared to the current system.

In contrast, as I described in Part 1, we can expect a marked decline in innovation under the single payer model championed by Senator Sanders.

Unfunded Liabilities

Probably the greatest single argument in favor of the Purple Health Plan is that it reportedly would reduce our fiscal gap by roughly $130 trillion. I am not in a position to fact-check this claim but it is consistent with prior estimates I have seen indicating that roughly 55% of the nation's overall fiscal gap of $248 trillion is accounted for by health spending, predominantly Medicare, Medicare and Obamacare subsidies.

What an enormous contrast with BernieCare which not only ignores our existing fiscal gap but would add $61 trillion to the total.

Bottom Line

As should be clear from my discussion of it, the Purple Health Plan is by no means a perfect plan. As I will explain in the next post, there are ways to improve upon it. But when compared either to the status quo or to BernieCare, there is little doubt it offers a far superior health reform alternative. In short, the Purple Health Plan is an excellent example of responsible national health insurance. It easily bests BernieCare on all major dimensions , resulting in much lower deadweight losses, less waste, rationing, less adverse impact on medical innovation and a $130 trillion reduction in the fiscal gap.

That said, it obviously is quite radical in nature insofar as it ultimately would entail replacing Medicare, Medicaid and most employer-provided coverage, ultimately producing a system that rests entirely on privately-provided health insurance coverage subsidized with tax-financed risk-adjusted vouchers. For that reason, there would have to be a generous transition period to reach such a system smoothly.

So from a political perspective, adoption of the Purple Health Plan might well have to be done in stages, folding in Medicare and Medicaid, for example, only after the system has been shown to work well with lower-risk/lower-cost populations. But in the interim, it serves as a very useful benchmark for judging interim health reform initiatives such as the Healthcare Choices proposal put out by the Health Policy Consensus Group last year. More about this idea in the final installment of this series.

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READ CHRIS’ BOOK,    The American Health Economy Illustrated  (AEI Press, 2012), available at Amazon and other major retailers or as a       pdf       at AEI. With generous support from the National Research Initiative at the    American Enterprise Institute   , an       online version  complete with downloadable Powerpoint slides and companion spreadsheets has been made available through the Medical Industry Institute’s Open Education       Hub at the University of Minnesota.

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INVESTORS’ NOTE : The biggest publicly-traded players in Obamacare’s health insurance exchanges are Aetna AET -0.28% (NYSE: AET ), Humana HUM -0.78% (NYSE: HUM), Cigna CI -0.25% (NYSE: CI ), Molina (NYSE: MOH ), WellPoint (NYSE: WLP ), and Centene CNC -2.15%(NYSE: CNC ), in order of the number of uninsured exchange-eligible Americans for whom their plans are available.

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Footnotes

[1] Elsewhere, Kotlikoff has said that the 10% cap "is 3 percentage points more of GDP than the federal government now spends on Medicare, Medicaid, the CHIP program, Obamacare subsidies, and tax breaks for employer-based healthcare."  But in FY2017, Federal Medicaid spending was $375 billion vs. $230 billion for states. Total GDP in 2017 was $19.7 trillion, implying 1.2% of GDP is accounted for by state Medicaid spending. But state Medicaid spending accounts for only 37% of all state and local health spending, implying that state/local tax-financed health spending constitutes a total of 3.1% of GDP. Given that voucher-financed care would essentially displace Medicaid and employer-sponsored coverage for state and local employees it would seem that total tax-financed spending would be approximately equal to today's level. But even a 3 percentage point increase represents less than $600 billion a year--which pales in comparison to the $3.2 trillion in added annual spending expected under BernieCare.  

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