January 1, 2012 (Vol. 32, No. 1)

Plan Reduces Number of Uninsured by Same Amount as Current Plan Yet Costs Less

In my last column on healthcare spending (GEN, Oct. 15, 2011), I explained why, around 30 years from now, expenditures for many healthcare applications will be significantly reduced, essentially because chronic diseases will be increasingly treated as curable acute conditions. However, over the next 20 years, expensive treatments for chronic conditions, which enable people to live longer, will only drive healthcare spending up.

In the meantime, the huge problem of rising healthcare expenditures is exacerbated by the lack of health insurance for a significant percentage of the U.S. population. It is for this reason that the government enacted healthcare legislation.

The Affordable Care Act, which President Obama signed into law in 2010, continues to generate considerable controversy because of its onerous provisions, such as its huge cost to the federal government and the requirement that people choosing not to have health insurance must pay a not insubstantial fee to the government. Indeed, the U.S. Supreme Court has now decided to review the constitutionality of the law.

According to the 2012 Statistical Abstract of the United States, of the estimated U.S. population of 304 million in 2009, around 51 million persons lacked health insurance coverage.

Yet, according to Congressional Budget Office (CBO) testimony before a congressional subcommittee in March 2011, by 2021, the Affordable Care Act is expected to reduce the number of the uninsured by only 34 million. The gross cost for the 10-year period ending in 2021 is projected to reach $1.445 trillion.

Short of a government-mandated universal healthcare system, there will always be a substantial number of individuals who elect to forgo insurance, even though they could otherwise afford it.

According to the Statistical Abstract, 21% of the uninsured live in households reporting income of $75,000 or greater. Moreover, those whose medical care begins in the hospital emergency room cannot be turned down for lack of insurance or ability to pay.

There is, however, a less costly alternative to the current law, which like the current law is estimated to reduce the number of the uninsured by 34 million.

The basis for this alternative was devised by Stephen T. Parente, Roger Feldman, Jean Abraham, and Yi Xu of the University of Minnesota and presented to the U.S. Department of Health and Human Services in 2008. It was published in June 2011 in The Journal of Risk and Insurance. However, the McCarran-Ferguson Act, which was signed into law in 1945, would first have to be amended.

McCarran-Ferguson allows each state to establish its own mandates and regulations, thereby resulting in health insurers having to be licensed in each state in which they intend to sell insurance.

The many differences in state-level mandates and regulations are responsible for a wide variation in the pricing of individual policies from one state to the next. For example, in 2008, the average costs for a single policy and a family policy in New Jersey were five times the cost in Mississippi and over seven times the cost in Arizona, respectively.

Parente and his colleagues proposed that people be allowed to purchase individual insurance policies across state lines. According to their analysis, this would have a significant impact on reducing the costs of policies and on lowering the number of the uninsured.

When they also factored in former President George Bush’s 2008 proposal that those buying single policies receive a $7,500 tax deduction and those buying a family contract receive a $15,000 tax deduction, the impact was even more dramatic.

What I propose as an alternative to Affordable Care is enabling people to purchase individual insurance policies across state lines and granting them rebates instead of tax deductions. The rebates would be issued to persons willing to purchase individual policies who are currently uninsured and persons under 65 who are currently covered by individual insurance policies.

Such persons desiring to purchase individual policies would apply for the rebates on their tax returns. The rebates would be paid in advance of finalizing the purchase. Following the sale of such policies, the insurance companies would issue a form similar to Form 1098, which is what financial institutions issue regarding the receipt of mortgage interest payments.

Like Form 1098, this new form would be issued to both the customer and the Internal Revenue Service. Anyone who received a rebate and did not purchase a policy prior to when the next year’s tax return is due would be obligated to repay the government in full plus interest.

The rebate would be an income-adjusted amount times the number of people covered in an individual policy but not to exceed the cost of the policy.

The income-adjusted amount would be $1,500 for a household income under $25,00; $1,260 for a household income between $25,000 and $49,999; $1,005 for a household income between $50,000 and $74,999; $750 for a household income between $75,000 and $99,999; and $495 for a household income between $100,000 and $124,999.

Applying an analysis similar to the one developed by Parente et al., I have calculated that the number of persons in each of those income categories who are currently uninsured but who would become insured are approximately 13, 11, 6, 3, and 1 million, respectively.

The total equals 34 million, representing 67% of the 51 million uninsured, the same number estimated by the CBO of the uninsured that would become insured under Affordable Care. The cost to the government for providing these rebates would amount to $43 billion per year.

The estimated numbers of persons in those income categories who are under 65 and currently covered by individual insurance policies are approximately 6, 7, 4, 2, and 1 million, respectively. The cost to the government for providing these rebates would amount to $25 billion per year.

In addition, the government would incur perhaps a maximum of an additional $10 billion annually pertaining to the administration of this program by the IRS. The total annual expense for undertaking this program as an alternative to Affordable Care would, therefore, amount to $78 billion.

The 10-year total of $780 billion would be 46% lower than the corresponding $1.455 trillion projected by the CBO for Affordable Care, yet the number of uninsured would drop by the same amount. Moreover, no one would be compelled to buy health insurance, and the administration of this alternative program would be far simpler than what has been devised to oversee Affordable Care.

J. Leslie Glick, Ph.D. ([email protected]), is an independent corporate management advisor.

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