How can we fix health care?

08-15-2017

Bottom line Health care, which represents 17% of the U.S. economy, was one of the hot-button issues of the presidential election. The Affordable Care Act (ACA) was passed in 2010 without a single Republican vote, and President Trump’s recent repeal efforts did not garner a single Democratic vote. Yet something as significant as health care, which impacts everyone and accounts for such a sizable portion of our economy, should be crafted in bipartisan fashion to achieve multiple goals. We envision the creation of a more efficient, markets-based system in which the patient as consumer has a choice over product, service and price, with a socially responsible safety net for the poor and disabled, whose fiscally prudent financing doesn’t bankrupt the nation.

So where are we now? ACA premiums are soaring, leading doctors and insurance companies to desert the program. The federal government can either prop up the status quo with billions of dollars in subsidies, or allow the ACA to collapse under its own weight. We respectfully suggest a potential third option, which is a bipartisan compromise to keep the elements of the ACA that most people want, with the creation of a more economically sound manner in which to pay for it. We encourage Congress, enjoying its summer recess through Labor Day, to return to Washington refreshed and ready to deal. Shelve the resistance movement; it’s time to do the people’s work.

What aspects of the ACA are worth keeping?

• Expanded national coverage We have reduced the number of uninsured by more than 20 million people
• Keep your kids on your health-care plan until age 26 This is very helpful, given soaring student-loan debt and a challenging labor market for recent college graduates
• No restrictions on pre-existing conditions Continue to forbid insurance companies from discriminating against people with pre-existing medical conditions
• No spending caps Continue to prevent them from artificially capping the amount of money they spend annually or over a lifetime on a patient’s medical care

So what’s the problem? While the achievement of these policy goals successfully check the social-responsibility box, they come with a steep price tag of slower economic growth and soaring federal debt.

• GDP growth It was an anemic 1.5% in 2016, and only 2.2% since we exited the Great Recession in June 2009 through year-end 2016. That is well below trend-line GDP growth of 3.1% in the post-war era.
• Federal debt It soared from $10 trillion in 2009 to $20 trillion in 2016, and the annualized pace of debt creation was 150% faster than that achieved during 2001-2008.
• Fed targets ACA New York Fed President Bill Dudley highlighted the ACA, along with higher tax rates and the automatic spending sequester, as chief fiscal-policy reasons for below-trend economic growth and sharply rising federal debt.

What economic changes can we consider to reduce the economic drag?

Insurance subsidies are simply too generous At present, subsidies are available for up to 400% of the federal poverty line ($25,000), which means that a family of four with an income of $100,000 per year or less (roughly the lower 90% of America) is eligible for subsidies. So large corporations and the top 10% of American taxpayers are currently footing the bill for health care for everyone else.

This redistribution of wealth is causing economic dislocations, as the top 20% of taxpayers disproportionately account for 40% of consumer spending, while corporate capex spending has fallen dramatically over the past six years. The amount these elite taxpayers and companies pay for health care is money that can’t be saved, spent or invested, and what health-care deficits remain are covered with additional federal debt creation.

How can we fix this? Reduce the insurance subsidies from families earning $100,000 to something closer to the median wage in the U.S. of about $56,000. Able-bodied families earning an above-average wage should be responsible for providing health care for themselves. The social safety net must remain in place for the poor and disabled.

Health insurance mandate This is one of the most controversial aspects of the ACA, but one of its most critical financial underpinnings. Under current law, adults who can afford to do so must sign up for health care, or pay an income surtax penalty. Look at auto insurance, as a comparable. If a person wants to drive a car, they are required by law to have insurance. If they don’t want to purchase insurance, they can simply choose not to drive, and hope a car service or public transportation will get them to their destination.

Catastrophic-care plans But if people do choose to drive and to purchase auto insurance, there are many different types of insurance plans they can buy, ranging from a plan with lower premiums that offers catastrophic coverage with high deductibles, to a more expensive plan that covers more services with lower deductibles. People are free to shop around and pick the plan that best meets their needs and budget. Similarly, we need to allow the sale of cheaper, catastrophic-care health plans, rather than mandating high-cost, blue-chip plans, as a means of introducing choice among consumers and reducing the overall cost of health care.

An age tax or a youth tax? Currently, people between 50-64 years old can be charged up to three times what younger people pay for the same coverage. Congress is proposing that insurance companies can charge up to five times as much, and old-age advocates are howling discrimination. Back to our auto insurance example, however, we hear nary a peep from these same advocacy groups when newer, younger drivers are required to pay a much higher insurance rate because they are more likely to get into an auto accident than older, more cautious drivers.

The same can be said for health-care coverage, as older, sicker people are much more likely to require expensive medical attention than the young, healthy invincibles. So why is it fair economically for younger people to pay much higher insurance premiums to subsidize the expensive health care for older sicker people? In a markets-based system—with some reasonable limits built in—people should pay for the care that they need, actuarially speaking.

This is why so many young people balked at purchasing the mandated coverage under the ACA. It was cheaper for them to not buy the overpriced insurance, pay the penalty, and purchase medical attention at a clinic on an ad hoc basis when needed. So eliminate both the age tax and the youth tax, and have people pay a fair and reasonable price for the health care they require.

High-risk pools Definitely needed to care for the very sick, due to pre-existing conditions, these would help sick people keep their coverage while making it more affordable for everyone else. States can apply for and receive a federal waiver to use a $100 billion federal government high-risk pool to subsidize coverage to care for older, sicker and more expensive patients. When older, sick people and young, healthy pay the same rates, insurance companies will load up on healthy people and discourage potentially unprofitable sicker people from enrolling by using much higher copays. So high-risk pools are a fairer and more economical solution, rather than forcing some people to pay artificially higher premiums

Selling insurance across state lines This could increase competition, improved quality and lower costs. States could get exemptions that require insurers to offer specific health benefits such as maternity care or hospitalization as well as exemptions from a provision that bans insurers from charging higher premiums to people with pre-existing health conditions. This would allow patients to select the benefits and cost-sharing they want, such as the sale of cheaper catastrophic-care plans, rather than mandated high-cost, blue-chip plans

Tort reform Many doctors and hospitals routinely order more expensive tests than might otherwise be necessary to protect themselves from junk malpractice lawsuits. Reducing the practice of defensive medicine would likely lower medical costs.

Expand and reform Medicaid and Medicare using block grants to the states This would allow them to customize their policies to fit their individual state communities and exert some control over rapidly rising costs. States can charge premiums and establish out-of-pocket spending for Medicaid enrollees, and they can impose higher charges for somewhat higher-income people.

Reduce drug prices Allowing Medicare to negotiate volume discounts and by the safe importation of drugs from countries such as Canada. Also, speeding up FDA approval will increase competition and cut costs on drugs and devices. Creating transparency in drug pricing is essential, such as requiring pharmaceutical companies to disclose their true expenses to justify price hikes. On the other hand, we also need to balance the need for drug companies to generate profits to fund necessary R&D.

Restore health-savings accounts to higher levels According to studies, savings would be used on more primary and preventive care, with fewer missed appointments and less frequent emergency room use. Combined with high-deductible insurance plans, health savings accounts would allow for each health-care dollar to be more efficiently allocated.

Allow tax credits for individuals who purchase insurance privately outside of work That should reduce health-care costs due to more competition.

Re-establish the 40-hour work week As part of the ACA, President Obama reduced the definition of a full-time work week from 40 hours to 30, to mandate that companies with 50 or more employees would cover more of their employees. But many companies simply shifted their employees to part-time schedules and cut their hours to a maximum of 29 per week, making them ineligible for health insurance. The ACA reduced economic growth among part-time workers by 25%, with no incremental benefit of insurance coverage. We should restore the definition of full-time work back to 40 hours. We may not gain any incremental health-care coverage, but economic growth would rise by one-third amongst this pool of part-time employees.

Abolish the ACA taxes, which are impeding economic growth:

• Net investment income tax: 3.5%
• Medical device excise tax: 2.3%
• High-risk tax: $63 annually on all insurance company plans to cover the costs of high-risk pools
• Cadillac tax: 40% on the most expensive insurance plans, to dissuade employers from providing generous health plans
• High-bills tax: On individuals who take a deduction based on having high medical bills
• Health savings accounts tax: Caps flexible spending accounts at $2,500
• Medicine cabinet tax: It prevents health-savings accounts, flexible spending accounts and health reimbursement pre-tax dollars from buying non-prescription, over-the-counter medicines

Research assistance provided by Federated summer intern Victoria Sanzo

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Disclosure:

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Gross domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

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