Baucuscare and Affordability Alternatives: Yes We Can!

As you're reading this, keep in mind, I'm doing serious back-of-the-envelope math. I'm not the CBO. I don't study health economics for a living. I make bone-headed errors because it's just me and it's easy to forget when you need to divide by two. The professionals at CBO, or CAP, or the Kaiser Family Foundation, or the Kennedy School, or wherever David Cutler works, or any number of other places can give you a much more accurate estimates of the effects of this or that reform. But the numbers are easy enough to work with that we can at least get good ballpark estimates of which ideas are good, and which ideas are a waste of time; provided, of course, that we remember when to divide by two.

But the back of my envelope has some surprisingly good news. You can get a bipartisan bill that's more affordable than the Massachusetts system with three changes:

1. Putting failsafe spending cuts and revenue increases alongside cost-control measures (IMAC, health IT adoption, etc.) as CAP recommends.
   
2. Plowing all the savings from (1) into more generous premium subsidies.
   
3. Convincing Olympia Snowe that this is a good idea.
   

Doing these things would generate enough cost savings to beef up subsidies, pushing average out-of-pocket premiums at Massachusetts levels and still leave some money for other things. You could modestly subsidize insurance for households in the 300%-400% of FPL range, something that Senator Snowe thinks is important (and I think she's right). You could use the extra money to compensate for regional disparities in health spending, by giving higher subsidies to households in high health cost states such as, oh, say ... Maine. You cold set weaker cost control targets on the medical device makers in Minnesota and Indiana. You can pay down Kent Conrad's debt. Or you could do some combination of these things—I imagine you're getting the picture.

I'm surprised at how easy this turned out. At some level, it feels too good to be true. Most likely, there are large political obstacles to implementing the CAP proposal. Perhaps it will anger AARP. Maybe it will anger the AMA. Maybe it will anger large teaching hospitals, which tend to be in urban districts represented by Democrats. Maybe these reforms would require taking "Medicare" dollars and using them to pay for something else, which is a big no-no. I'm not close enough to The Hill to understand the political calculus. But from an accounting standpoint, it seems like a no-brainer. I'm vaguely hoping that someone can prove me wrong, because I'm pretty sure health reform isn't supposed to be this easy.

So let's see how this works.
Warning: long and gory details to follow.

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In the previous post in this series, we saw that Baucuscare isn't quite affordable enough. This is why people like Ron Wyden keep saying things like "it's very clear, at this point in the debate, the flashpoint is all about affordability". The Massachusetts plan, which is popular, has significantly lower monthly payments than the proposed Baucus plan. In fact, even if we were to use the levels of funding in the House bill, there still isn't enough money to get everyone within shouting distance of premium payments in Massachusetts. We can get acceptably low payments for everyone up to 200% of FPL, but that leaves very little money to help the eight million Americans earning 200%-300% of FPL. To get these households to monthly payments near those seen in Massachusetts would require $22 billion per year in additional subsidies, bringing the ten-year cost of the bill to about $1.15 trillion or higher (remember, a lot of this stuff doesn't go into effect until 2013) What else can be done? There are five major levers the government can pull to bring the cost of insurance. Well, okay, there are six—we could just move to single-payer. But, sadly, setting that one aside, there are five options.

• Make the employer mandate real. The Baucus bill doesn't have an employer mandate or pay-or-play rule. Instead, it has the Worst Idea Ever. This is a shame, because employer mandates seem to increase the number of people using employer-provided insurance, even with a seemingly small penalty. In Massachusetts, the pay-or-play provisions induced employers to provide insurance to about 20% of the uninsured. Some employers started offering insurance. More importantly, a number of middle-class or "young invincible" individuals who currently decline insurance to get a few extra bucks in their paycheck started using their employer's insurance plan. If we ended up with the same results nationwide, the individual insurance market would shrink from 46 million to 37 million. However, it's difficult to estimate how this would impact the government's ability to provide premium subsidies. It would depend greatly on the income levels of the people who left the individual market and bought insurance through their employer. If 15% of households earning 133-200% of FPL bought insurance through an employer, 20% between 200% and 300%, and 30% above 300%, the smaller pool in the subsidized individual market, monthly subsidies would increase by about $20 per person, or $75 for middle-class family of four if we start from the "House+low-income tilt" baseline.
• Expand Medicaid to 150% or 167% of FPL. Medicaid pays slightly less per enrollee than the cost of individual insurance, while offering lower co-payments and deductibles. Of course, the low payments are one reason providers tend to dislike Medicaid. Still, if you mitigated provider opposition by increasing Medicaid payouts from adults from its current level of $2150/enrollee to $2400/enrollee, you would still spend slightly less money and get slightly more health services. You'd also shrink the pool of uninsured by at least 5 million, leaving fewer people who will need subsidized insurance. At best, though, this would increase the subsidy level by another $25-30 per person, or $90 for a family of four using the "House funding+low-income tilt" baseline.
• Stick it to the drug companies. Congress could choose to ignore Barack Obama's secret deal with PhRMA that may or may not exist. That agreement reduced the government's 10-year cost for prescription drugs by $80 billion. Nancy Pelosi and others have suggested there's another $80 billion on the table. Plowing those savings into subsidies would reduce premiums by about $50/month per individual, or, if we use the House scenario tilted towards low income spending, would reduce premiums for a family of four between 200% and 300% of FPL by another $160/month (in this scenario premiums for working-class households are already at acceptable levels).
• Give SCHIP to more children. Children are relatively cheap to ensure; nationwide, spending per SCHIP enrollee is roughly $1700 per year. In addition, 69% of uninsured children are in households earning less than 200% of FPL, compared to 66% of the total population. Therefore insuring children through SCHIP is modestly progressive; it will do more for working-class and poor households than it will do for the middle class, even if they all receive full coverage. Insuring middle-class children through S-CHIP would also enable their parents to purchase individual or individual+spouse plans instead of full family plans. That would cut premiums by $200-250 per month. However, S-CHIP expansion provide no benefit to singles, nor to couples without children. Parents and children account for only half the uninsured population, so only half of those on the individual market would see any benefit.
  
  In Massachusetts, all children in households earning less than 300% of FPL are fully covered. You can afford to do adopt this policy nationwide and still enough money left over to provide decent subsidies to adults in the 200%-300% FPL range.
  
• Hope the CBO is wrong. Much ink has been spilled over the question of whether or not the CBO is being too conservative in calculating how much impact the cost-cutting measures will have. Perhaps they will be proven wrong. But hope is not a plan. One solution to this is CAP's proposal to include failsafe policy changes that force cost cutting or tax increases in the event that savings don't materialize. This would allow the CBO to "see" the savings that we expect IMAC and other reforms will realize. This would almost certainly make enough difference in the scoring of the bill, since the Cutler/Feder paper estimates that there are $580 billion in savings on the table. That's huge. It's enough to get Baucuscare into the realm of affordability all on its own; we could provide premiums equal to what Massachusetts provides and still have money left over to subsidize insurance between 300% and 400% of FPL.

Returning at the graph, it's clear that compared to the initial Baucus proposal, there are three policy levers and three smaller ones. From largest to smallest, those levers are:

• Adopt failsafe spending cuts & tax increase in the event IMAC can't deliver cost control
• Boost funding from Baucus levels ($850B) to House levels ($1.04T)
• Expand full SCHIP coverage to 300% of FPL, with partial coverage up to 400% of FPL.
  

There are also three small levers. Again, from largest to smallest, they are:

• Play hardball with PhRMA
• Expand Medicaid eligibility
  
• Make the employer mandate real
  

If I had to pick one big change and one small change, I would adopt CAP's failsafe spending cuts, and replace Baucus's awful free-rider provision with a real employer mandate. That, along with doing everything Wendell Potter says, would leave us with a bill that's a serious improvement on the status quo.