GUELPH, Ont. Dec. 4, 2016/ Troy Media/ – The great American health-care debate has begun again but how will they reform a messy system?
President-elect Donald Trump wants to scrap Obamacare, except for the bits he likes. Other Republicans want to gut the whole thing and might succeed.
The U.S. certainly needs some sort of universal, though not government-run, health insurance. And while Obamacare has its failings, none of its critics are facing up to the real problem with the American health-care system – that employer-based health insurance ties your insurance to a particular employer.
Insurance lets us share the financial risk of unpredictable serious illness among a large number of people, each of whom makes a contribution to a pool of funds to be drawn on by whomever becomes sick. Because health insurance companies contract with employers, not workers, and the employer could change carriers, each workplace plan is treated as a separate risk-sharing pool and some of those pools are very small.
Small-pool insurance has two primary drawbacks. One is that administrative costs eat up a larger proportion of premiums than in large-pool insurance. The more serious is that when there are only 20 people sharing the cost of each other’s medical care instead of 10,000, if one person develops a serious illness, the solvency of the whole pool is threatened. In fact, it’s estimated that to be financially sound, a pool needs to cover about 50,000 people. While some public and private sector plans are that large, two-thirds of U.S. private sector employees are in firms of fewer than 5,000 employees, with health insurance pools to match.
U.S. health reformers know all this but haven’t dared touch employer-based plans for fear of political backlash. That can and must change.
The rules supporting employer-based insurance date back to a couple of bad (from the economist’s perspective) decisions in the 1940s and ’50s. Those rules should be changed so workers still get insurance through their employer but without it being tied to a particular workplace. In essence, the U.S. needs to merge insurance pools into a few large pools, organized on a state or regional basis. It needs an American version of the European Sickness Fund system, under which employees would make premium payments through their employers but stay with their sickness fund when they change jobs.
Once the U.S. has pooled employer-based plans into large pools, the road is open for universal insurance. Insurance will have to be mandatory but people who object should look at how much the U.S. spends now on care for the uninsured.
They’ll need to take a long-term view of the mandate: in the German model, people made a long-term commitment to a fund and were protected against premiums rising just because they got older. That model combined insurance against current costs with saving against future costs.
Along with a mandate would go a couple of subsidies. One would be income-based so healthy low-income workers, and their employers, aren’t burdened disproportionately. That could be worked through the income tax system and would have to be accepted as a permanent budgetary item. The other would be a premium subsidy for those uninsured who have a pre-existing condition. If the system is designed properly, that should decline over time, although it might take a while, since it will hinge on new generations entering the pools.
From there, it should be possible to shift the Medicaid population into sickness funds and gradually align the funds with Medicare, making lifetime health insurance virtually seamless.
The European model incorporates competition among funds, with the government mandating a basic plan covering major medical expenses and any preventive care shown to be medically effective. Sickness funds would be allowed to compete on items outside the mandate. Insurance regulation would need to be changed so there were several competing funds operating in each region to avoid a monopoly. But effective competition doesn’t need a lot of suppliers – four or five per region would do.
The biggest obstacle to health insurance reform in the U.S. has always been an urge by reformers to do something right now. Yes, the system is a mess, but quick fixes ultimately just make the mess messier. So take some time, declare nothing out of bounds and look at what’s worked elsewhere.
Handled delicately, shifting to a sickness fund system should be politically feasible and might finally drain the swamp.
Brian Ferguson is a professor of economics at Guelph University and a member of the Macdonald-Laurier Institute research advisory board.
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