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June 03, 2008

A Fresh Look at Health Care Reform: Part I

Maggie Mahar

Most plans for health care reform that stress “choice” give families the opportunity to choose from a menu of plans that offer insurance at different prices. In effect, families are “free to choose” the health care plan that they can afford. (More accurately, they are “forced to choose” the plan they can afford.)

Imagine, instead, a proposal for health care reform that guarantees free, high quality health care for all Americans. No premiums. No deductibles. Under this plan, the government insists that all insurers offer the same comprehensive benefits to everyone including: office and home visits, hospitalization, preventive screening tests, prescription drugs, some dental care, inpatient and outpatient mental health care and physical and occupational therapy.

These benefits are more generous than Medicare’s and more comprehensive than what 85 percent of all employers offer their employees. (Individuals who want to purchase coverage for additional services like concierge medicine, experimental drugs for serious conditions, complementary medicines or more mental health benefits could do so.)

If this all sounds too good to be true, you need to read Health Care, Guaranteed by Dr. Ezekiel Emanuel. Published this month, Health Care, Guaranteed offers a bold, refreshing plan for health care in America. The charm of the proposal is four-fold:  It faces up to the fact that reform won’t pay for itself, and it offers a funding mechanism that is fair, efficient and could deliver high quality care nationwide. It regulates insurers, forcing them to concentrate on quality.  Finally, and perhaps most importantly, this plan insulates our health care system from the lobbyists who, today, have far too much control over our health care system.

Dr. Emanuel has the background and experience needed to help draft a blueprint for health care reform. An oncologist who also has a Ph.D. in political science and now serves as Chair of the Department of Bioethics at the Clinical Center of the National Institutes of Health, Emanuel is attuned to the ethics as well as the politics of medicine, and he understands the needs of seriously ill patients.

Emanuel’s ambitious plan would replace employer-based insurance with insurance that offers generous benefits to everyone who is not now covered by Medicare, Medicaid or SCHIP.  (Anyone now enrolled in one of these three programs could, if they wish, switch to the new Guaranteed Healthcare Access Plan.  Over 15 years, Medicare, Medicaid and SCHIP would be phased out.) 

Affordable, High Quality Care

Under the proposal, all Americans would receive a health certificate entitling the individual or family to enroll in the health care plan of their choice. In most cases, they would keep their current physician. The certificate would not be a “cash card” to buy services; instead it would be a voucher that gives the individual or family the right to enroll in whatever insurance plan they choose.

Thus, under Emanuel’s plan, all Americans are treated equally. The vouchers are of equal value, and the health plans must all offer the same rich package of benefits. No cheap “Swiss Cheese” plans riddled with hidden holes. No high-deductible plans.  To distinguish themselves, health care plans would have to compete on quality, not on price.

Emmanuel’s plan also eliminates vexing problems like mandates that require all Americans to purchase insurance. No one would be forced to buy insurance; everyone would simply receive a voucher that entitled them to an equal place in our healthcare system—at no charge.

How Do We Pay For It?

But what is most intriguing about the Guaranteed Healthcare Access System is its financing. Emanuel would pay for the nation’s health care with a 10 percent value-added tax (VAT). Revenue from the tax could not be diverted to other uses such as the military or Social Security. No other tax revenues would be use to pay for the Plan.  And although Emanuel calls for a new tax to support the program, in the end, we as a nation would be paying no more than the $2.2 trillion that we now spend on healthcare. The money would simply be collected in a more equitable way and spent in a more rationally, avoiding waste and excessive administrative costs.

Unlike many health care reformers, Emanuel doesn’t shy away from acknowledging the true cost of providing high quality care for all Americans. Unless they are funded, other plans might provide health insurance to everyone, but not affordable health care.

As Bob Laszewski points out today on Healthcare Policy and Marketplace Review, the Massachusetts plan has demonstrated that if we don’t make major structural changes in the system, money can easily become the biggest obstacle to health care reform.  Like most other would-be reformers, Massachusetts underestimated what universal coverage would cost—and did not make the changes needed to reduce waste and contain costs. As a result, Laszewski observes:

“The 2006 Massachusetts Health Insurance Law is looking to be little more than an expensive expansion of Medicaid and that does not bode well for Barack Obama who has used the Massachusetts health reform law as the template for much of his own health care reform plan––as did all major Democratic candidates including Hillary Clinton.”

While the Massachusetts plan has enrolled some 176,000 citizens who qualified for subsidies, “the Massachusetts Health Insurance Law is doing almost nothing for the middle-class because people can't afford the premiums––leading the state to also back-off on the individual mandate for these people,” Laszewski explains. “For example, almost all families would need an income of at least $110,000 a year” in order to afford the insurance.

“The cost for the program in its first year––July 1, 2007 to July 1, 2008––was first estimated to come in at $472 million when the bill was passed in 2006” Laszewski points out.. “Now, in May, in a statement to bond rating agencies, the Governor has estimated that the fiscal year 2008-2009 costs will be more like $1.1 billion––a 50% increase over the original estimate from less than two years ago!”

By contrast, Emanuel begins by calculating costs, and estimates that a 10 percent value-added-tax (VAT) could raise enough money to provide free, comprehensive health care for all citizens—with minimal co-pays and no deductibles. 

Isn’t a VAT Regressive?

Granted, at first glance, a VAT sounds like an extraordinarily regressive solution. A VAT, like a sales tax, adds to the cost of everything that we buy. This can place an unfair burden on low-income families that must spend a much higher percentage of their incomes just to buy necessities.

But before considering the impact of the VAT on middle-class families, take a look at how it works.  Under a VAT system, consumption is taxed throughout the chain of production, not just at the point of consumer purchases. When a manufacturer purchases raw materials from a supplier, it pays a tax to the government; when the manufacturer turns around and sells the good to the retailer, the retailer again pays a tax with its purchase; and the consumer pays the VAT when he or she buys the final product from the retailer. The amount that each player pays is a fixed percentage of the transaction price (in Emanuel’s plan, it would be 10 percent).

Critics who argue that a VAT is regressive have a point. But instead of just looking at how the taxes are collected, you need to look at how those tax dollars are distributed. Do that and you discover that because, in this case, the VAT is used solely to fund health care, working-class and middle-class families would receive more-than-full-value for their VAT dollars.

For example, a median income family earning $50,000 a year might well spend the entire $50,000  on housing, food, utilities,  clothing, transportation, etc. Under a 10 percent VAT, they would pay $5,000 a year to help fund universal coverage. But, in return, Emanuel points out, they would receive health insurance worth at least $12,500 (the going price for an employer-based family plan).

But what about high-spending, high income families—would they think a VAT was fair?  Consider the impact of a 10 percent VAT tax on a family that earns $200,000 and spends $170,000 a year.  Suddenly, that household would be paying an extra $17,000 in taxes. Granted, it would be receiving health insurance worth $12,500.  But today, most families in that income bracket already have insurance through their employer. And, as we’ve discussed here on HealthBeat, the typical “higher-wage” worker pays only about 25% of the premium, or roughly $3,000 for a family plan. Under Emanuel’s plan that family would be paying an additional $14,000 dollars ($17,000 in VAT taxes minus $3,000 that they no longer pay toward the premium).

But, Emanuel points out, if employers are no longer required to offer health benefits, workers can expect a one-time raise roughly equal to what the employer was paying toward the employee’s benefits.  In a phone interview last week, Emanuel acknowledged that not all employers would be that generous, but if they wanted to hold onto their most valuable employees, most would hand out raises. In that scenario, the family earning $200,000 would be likely to receive a $9,000 raise— roughly equivalent to what the employer was paying toward its healthcare. That family is now spending only $5,000 more than they had in the past ($14,000 minus the $9,000 raise.)

And it’s likely that, for a family earning $200,000, a cut in state taxes would more than cover the extra $5,000. Today, the average state spends more than one third of its budget on health insurance for state employees, Medicaid and SCHIP. The very first year, states would no longer have to cover employees, and both Medicaid and SCHIP would begin to shrink. Ultimately, as those two programs were phased out, the savings would be enormous. ““What state governor wouldn’t like to be able to cut taxes by, say 25 percent, and still have change left over to improve education?” asks Emanuel.

For high-spending, affluent families who would be paying more in VAT taxes pay raises and state tax cuts would probably make up for the extra taxes. But middle-income families also would benefit from lower taxes and higher wages. Moreover, Emanuel expects that since employers would no longer be burdened with health benefits, they might well hire more employees, which would be good for workers on every rung of the income ladder.

In part 2 of this post, I’ll answer three questions:

  • Why introduce the possibility of a new tax into an already fraught health care debate? If we do ultimately need to raise taxes to fund health care reform, why not just raise income taxes in the upper brackets?   
  • How exactly would this plan control costs so that we don’t have to raise the VAT every other year?
  • How does Emanuel shield his plan from the lobbyists and politicians who might ruin it?


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Life Insurance Canada

Seems good, but will it really work? "The money would simply be collected in a more equitable way and spent in a more rationally, avoiding waste and excessive administrative costs." How can you be so sure? Anyway, it's at least fresh idea...

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