The critical question of how to pay for health care reform seems more difficult than it needs to be because Congress has chosen to rely on a reform strategy that depends on competition among traditional insurance companies. The assumption is that, to win and retain customers, insurers will find ways to keep their prices low in order to persuade individuals and families to buy their coverage. But indemnity insurers that pay providers fees for each service they provide do not have the means to do that without undermining the value of the coverage.
Insurers have few tools for keeping costs down. They can reduce what they pay for services, but some providers are likely to cope by increasing volume. They can impose prior authorization and other administrative requirements to make it harder for patients to receive covered services and for providers to be paid for them. They can segment the market and discourage potential high users of service from buying their policies in the first place.
Insurers use these tactics now. In fact, one of the goals of reform is to eliminate them so that more people can have coverage and obtain the care they need. Regulation can mitigate their effects. Requiring insurers to accept any applicant and to renew any policy can reduce inequities. Requiring them to use community rating to set prices can keep premiums affordable for many higher risk people. Requiring them to cover a comprehensive set of services will provide access to the services subscribers need. Enforcement will be a challenge, and insurers are likely to continue to raise prices each year -- constrained only by competitors that are up against the same forces.
A simpler solution is available that will achieve the main reform goals and avoid most of the problems from relying on price competition among insurers. In this first post, I describe where the money would come from. In the next one, I talk about how it would be used.
Here is the idea: Require that everyone contribute an income-related amount (that is, more for higher-income people than for others) to a dedicated pool of funds for paying insurers and health plans. Then issue vouchers which entitle everyone to choose a health plan or insurance policy.
Before dismissing this idea for the cardinal sin of raising taxes, consider these facts: If everyone is covered, per capita costs will be much lower than currently because everyone will be in the risk pool, including millions who will need few or even no services. Also, the currently uninsured who now rely on expensive hospital emergency departments could select community-based primary care physicians. And the vast sums now spent on administrative functions - by insurers to keep from spending money on care and by providers to cope with the vast variations in coverage - would no longer be needed.
Furthermore, for people who are currently insured, this "tax" will not only be lower, but will substitute for the premiums they pay now. Employers would pay either a percent of payroll or an amount based on their taxable income. Since the rates will be determined by the size of one's income, the burden should be manageable for everyone. People with pre-existing conditions and other risk factors will not pay more. Those who don't earn enough to pay taxes would be covered, too. Cost-sharing amounts, if any, would be kept small so as not to be a barrier to utilization as they are for many in today's system. Medicare beneficiaries would not need to worry about their coverage. On the other hand, if Medicare (and Medicaid) were folded into the program, the taxes currently supporting those programs would be unnecessary, too.
The contributions will be set to create a fund large enough to cover the following year's projected health care costs for everyone. A key feature is that the amount available to be spent on care would be known at the beginning of the year (instead after all the bills are added up at the end).
Costs would rise only modestly. And the best part is that all would be covered and costs would rise only modestly. In my next post, I will discuss disbursing the funds and how the rest of the plan could work.
Davidson, a Boston University School of Management professor, is author of the forthcoming book, In Urgent Need of Reform: The U. S. Health Care System.