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UNIVERSAL COVERAGE Rx: TAX-CODE CHANGES, MONEY, INSURANCE POOLS AND A MANDATE
As 2007 started, so too has a renewed emphasis on covering America's nearly 47 million uninsured. Several competing proposals are vying for attention at the national level, while states are undertaking a plethora of approaches—from piecemeal to universal reforms—to cover uninsured citizens. So what does economic research tell us about some of these approaches?

Interview with Jonathan Gruber, Ph.D., Professor of Economics at the Massachusetts Institute of Technology

Bush's controversial proposal to change the tax code to encourage the purchase of health insurance and prospects for Massachusetts' and other state health reform efforts.

Some say President Bush's proposal to give individuals who buy health insurance a flat deduction is not politically feasible at this time. Tell me the value, from an economic standpoint, of changing the tax code to offer individuals and couples a tax deduction for health insurance purchases.

GRUBER: Bush's proposal is a step forward and two steps backward. He's rightly drawn attention to the largest hidden expenditure on health care, the $200 billion a year that we spend on subsidizing the provision of employer-provided health insurance. Basically, people who get paid wages get taxed on those wages, but individuals who are paid in the form of health insurance don't get taxed on that compensation. And if they were, we would raise about $200 billion more a year in tax revenue. This is a very inefficient use of money for several reasons. First, it's very regressive; the richer you are, the bigger tax break you get. Secondly, it's what we call a marginal subsidy; every dollar an employer spends on health care is cheaper than that spent on wages, leading to excessively generous, even gold-plated, health insurance. The third problem is that it props up the system of insurance being tied to employers, extending a number of inefficiencies and distortions in how the labor market works.

However, what the president has done is say 'let's blow up the existing system by taking away the entire employer exclusion and rededicating it to an individual tax break where every person, as long as they were insured, would get an individual tax break of $7,500 or $15,000 per family.' The reason that is two steps backward is that it doesn't address the two things you need to address to get rid of this employer exclusion: 1) he doesn't acknowledge that this system is devoting most of the money to the rich. Under his proposal, the system becomes even a little more regressive than the existing one; and, 2) even more importantly, if you're going to blow up the employer-based system you need someplace else where people can go. Bush doesn't do that, and that's the fundamental flaw. Overall, he has raised an important issue, but he chose to do it in a dangerous context.

If you were going to use the tax code to help expand access to health insurance, what is the most efficient way to do so? And how does the president's proposal fit in with that?

GRUBER: It's clear that you could do the first half of what Bush proposed. You could take us one step forward by getting rid of the employer exclusion. But then use that money to provide refundable, progressive tax credits to individuals and subsidize the creation of alternative pooling mechanisms where people can go, such as state-based pools or other private pools, or basically make sure those pools get started so there are places to go so people can buy health insurance.

Who are those employees who are spurning offers of employer-sponsored insurance?

GRUBER: A number of sources show that employer offers of coverage from the mid-1980s to the mid-1990s were either flat or slightly increasing, and that any decline in coverage was coming from declining take up. More recently, there's been a slight decline in employer offers from small firms. Among larger firms—those with more than 100 employees — all firms offer coverage. We've also seen a slight decline in take-up in recent years. For smaller firms, we've seen both a slight decline in offers and a slight decline in take-up. In both cases, the driving factor is rising health care costs. Small employers are choosing to drop benefits altogether or employees are increasingly declining coverage offered to them, because employers are passing much of that premium increase directly onto workers via higher employee contributions.

So you believe a universal coverage approach is preferable, along with tax code changes and pooling mechanisms. What else?

GRUBER: We need universal coverage, and to get to universal coverage, there are three things you have to address. You have to address pooling, where people can come together in large groups independent of health, like employers, for example. If you don't use employers, you need an alternative mechanism. Secondly, you have to deal with affordability, which the Bush plan doesn't do. In Massachusetts, the average family policy is about $12,000 a year, and that's not affordable for families earning one, two, three, even four times the poverty line. Giving them 25% off, which is what Bush is trying to do, is not going to solve the problem. The final issue is mandates. If you have a voluntary approach, you won't get to universal coverage. Many people today are offered heavily subsidized insurance and they choose not to take it. So if you want universal coverage, you have to mandate that people take it. Those are the three pieces of the puzzle you have to solve for this to work.

Aren't those the major elements included in the approach Massachusetts is taking toward providing universal coverage?

GRUBER: Yes. The Massachusetts plan has the pooling mechanism, the Health Insurance Connector, which offers enough scale to really work as a place for people to come and get health insurance. The plan also offers affordability to some extent by providing heavily subsidized insurance for those 300 percent below the poverty line. And it has an individual mandate. The biggest issue the plan faces, and any 'shared-responsibility' plan like this, is financing. Now Massachusetts has had some financial advantages over other states, but all states need to face this. One natural source of financing is to look to employers who don't provide health insurance. Massachusetts has a small assessment of about $300 per year per employee. Firms with more than 10 employees that don't provide health insurance for employees pay 4 percent of payroll toward the initiative. That's one big issue.

In Massachusetts, we have the money, but the bigger issue is what you do to address the affordability concern. Here, the issue is at three times poverty the subsidy runs out. Three times poverty is about $30,000 for an individual and $60,000 for a family of four. At three times poverty, health insurance is still expensive. So what do you do? It's what I call the iron triangle problem; you have to do one of three things to make this work. Either you have to find the money to subsidize higher up the income scale. If I had my druthers, I'd go up to four times poverty with some kind of subsidies. Or you have to make an individual buy coverage, a more affordable barebones policy. Or you have to allow some people to drop out of the mandate. In Massachusetts, we have the prospect of an affordability waiver. The law says the mandate is only applicable if health insurance is affordable. It's up to the Connector Board, which I'm a member of, to decide what that means. If we decide in some particular situations if coverage is unaffordable we waive them out of the mandate. So one of these things has to happen to make this work, otherwise it's not feasible to have someone spend 20, 30, or 40 percent of income on health insurance. You have to do one of those. We're trying to do some combination of the other two in Massachusetts and that's what we're struggling with now.

What role did you play in the plan design?

GRUBER: Early on, I worked with the Romney administration on the big-think stage, in terms of, do we want to do this? Is it financially feasible? And whether we should mandate or not. The most important role I played was my micro-theorist model, which basically uses a lot of information from studies like the kind ERIU sponsors to understand how different proposals would affect the number of people who would be covered under a plan and what it would cost the state. The model showed that adding a mandate was critical both to making the plan work and to its financial feasibility. I examined how many people would be covered under a universal access plan, which was everything but the mandate, along with the universal coverage plan, or the mandate approach. I found that the universal coverage mandate would raise the level of those who would be insured by two-thirds more than the other plan—the universal access plan would cover only about one third of the uninsured—but costs went up by about one third with the mandate. I think that was instrumental in convincing the Romney administration to go through with the mandate option. Then I helped out with the legislative details on how the final legislation would look.

In Massachusetts, private insurers are encouraged to provide lower cost plans. Do barebones plans really lower the cost of coverage on their own, or are insurance market reforms also required?

GRUBER: Yes, barebones policies do. In Massachusetts, people who are three times poverty are given fairly comprehensive insurance subsidies. For people more than three times poverty, the Health Insurance Connector is debating what is the level of coverage that will satisfy the mandate, and we're contemplating coverage that the typical person would call 'barebones,' but which we'd call sensible insurance—fairly high out-of-pocket costs but with real out-of-pocket limits. There are no life-time maximum coverages or any of that stuff. It's real insurance, with high out-of-pocket upfront costs. So after you spend $5,000, you're totally covered, along with some preventive care coverage outside the deductible—along the lines of a couple of doctor visits and generic drugs covered before the deductible. The idea is to have the financial protection at the backend, with preventive care at the front end. That's really what economists think insurance should be. Health insurance today is essentially medical prepayment before you go to the doctor. And that's not insurance. Insurance is protection from financial catastrophe. That's what we have in mind.

A state like Massachusetts has done a lot in terms of coverage expansions and trying to make the individual and small group market fairer. Does Massachusetts have a considerable leg up when it comes to undertaking significant coverage expansions?

GRUBER: Yes, Massachusetts has had several legs up. First, we have among the lowest rate of uninsured, 9 or 10 percent here, whereas it's 18 percent nationally. Secondly, we have two big financial advantages. We have this large intergovernmental transfer of $385 million a year, which the federal government essentially said they would take away if we didn't provide universal coverage. And we have an uncompensated care pool. Essentially in the U.S., the federal government provides hospitals about $40-$45 billion annually to make up for care they provide that is uncompensated. To make that money back, they raise charges to the insurers. That cost shifting is essentially a tax on insurance in America. In Massachusetts, that tax was made up fortunately in the late 1980s by explicitly taxing providers, insurers and employers and sending that money to a pool, and telling hospitals that when you treat someone who is uninsured, don't raise your prices. Just get reimbursed through this pool. That pool essentially became a pile of money where we could finance reform because when you cover the uninsured, you don't need that pool as much. Whereas California is looking to finance its universal coverage plan in part via a provider tax—2% on doctors and 4% on hospitals—we already had that tax in place; we dealt with that before. So there are a number of advantages we had relative to other states.

Now Maine has used a multi-prong approach toward reaching universal coverage by 2008, but that has had its share of issues. What makes Massachusetts so different?

GRUBER: Maine's big minus is that the state has hardly signed anybody up. It's a complete failure. Basically, they tried a third-way approach, where they didn't have to spend much money and they didn't have a mandate to universal coverage. And that didn't work. You've got to have money and a universal mandate if you want universal coverage. Dirigo Health just shows that these low-cost, volunteer approaches, while they may provide coverage to some people who need it, aren't going to get anywhere near universal coverage.

Vermont's new plan, along with a proposal by Pennsylvania Gov. Rendell, provides subsidies to lower- and even moderate-income families to buy private coverage. What have other efforts shown us about the success of this approach? What's take-up like in such situations?

GRUBER: Large, low-income populations are the best voluntary way to go at this. They are the best target, they are the populations with the most uninsured. Massachusetts even without the mandate would still have covered about one third of the uninsured. Those voluntary efforts can get you large numbers of uninsured but they aren't going to get you more than half without the mandate. You also have to consider that a lot of uninsured have relatively high incomes. In Massachusetts, two-fifths of the uninsured are above three times poverty. So without a mandate you won't get the two-fifths above the subsidy level, and then you'll get people who are eligible for subsidies that might not sign up. I think absolutely it is good thing to be doing, but it's not going to get you universal coverage.

California Gov. Arnold Schwarzenegger has proposed a pay-or-play concept, while also looking to providers to help fund universal coverage. What does economic research on pay-or-play approaches tell us?

GRUBER: It is a natural financing mechanism since it both raises money and offsets the natural tendency of employers to drop insurance when non-employer insurance options are made available.

State Children's Health Insurance Program expansions and other ways to cover kids are politically attractive, but is this the most efficient use of coverage expansion dollars and policy?

GRUBER: Yes, SCHIP has been successful. It's been a good way to expand coverage; it's pretty low cost and it's covered a lot of kids.

Which expansion policies tend to be the most efficient way to extend coverage? Why?

GRUBER: Basically efficiency is directly proportional to targeting. That is, the plans that are mostly targeted to those populations that are ex ante uninsured. So by that theory, SCHIP is a very efficient policy. A much more efficient policy would be to target low-income adults who are uninsured. We're already covering kids who are reasonably high up the income scale, whereas an adult with no income isn't covered at all. So basically that would be more efficient, but SCHIP is pretty efficient by that assessment.

You've shown in work funded by ERIU that providing subsidies to workers who are offered workplace coverage is an inefficient way to expand coverage. What about efforts to extend coverage to young adults who age off parents' policies, or help small employers provide more affordable coverage? Are these well-targeted initiatives?

GRUBER: Those are less efficient than public expansions, but are more efficient than the kind of employee subsides that I looked at under my ERIU work

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