THE COMMON GROUND PROPOSAL

The agreement between the Health Insurance Association of America and Families USA proposes a major expansion of government health programs. The three primary elements of this Common Ground proposal are:

1. A major expansion of Medicaid. Medicaid is a joint federal-state welfare program that is designed to provide health care coverage to the poor and indigent. Beyond basic federal guidelines, eligibility for the program, which currently costs more than $200 billion a year, is determined by the states. Of the estimated 34 million persons covered by Medicaid, 18 million are children.

Under the Common Ground proposal, Medicaid would be expanded to cover all persons with annual incomes below 133 percent of the official federal poverty line, or about $18,820 for a family of three.¹¹ In a departure from current eligibility rules, it would base eligibility for Medicaid solely on a person's income; it would apply to parents, children, or childless adults. Proponents have not supplied a numerical estimate of how many people would be added to the program by this provision, but the number would undoubtedly be large. To guarantee funding for the states, Medicaid federal matching funds would be increased to "well in excess" of the level provided under the current funding formula.¹² Funding would be phased in over time.

2. Expansion of S-CHIP coverage to adults. One of the Clinton Administration's most significant health care initiatives was the State Children's Health Insurance Program (S-CHIP), a $24 billion program focused on uninsured children. Created in 1997, S-CHIP today provides health care coverage for 2.2 million children. Many states provide this coverage through their Medicaid programs.

Under the Common Ground proposal, states at their discretion could expand S-CHIP or Medicaid to cover all adults, without exception, with incomes between 133 percent and 200 percent of the federal poverty line.¹³ States already can offer such coverage to children under S-CHIP; the proposal would expand that coverage to adults. Because many states are using Medicaid already to provide S-CHIP coverage, eligibility for adults based on income would promote another large Medicaid expansion. The expansion of eligibility would be matched by an increased federal contribution to either program. Representatives William M. Thomas (R-CA), Chairman of the House Ways and Means Committee, and Jim McCrery (R-LA) report that the Common Ground proposal would increase the total number of Americans covered by Medicaid by 50 percent and add another $25 billion per year to the Medicaid budget.¹⁴

3. Additional health insurance tax breaks for businesses. Federal law provides unlimited tax relief for both workers and companies that provide health insurance. For workers, the tax break is in the form of an exclusion of employer-paid benefits from taxable compensation; for employers, it is a tax deduction of health insurance benefits as a cost of doing business.

The Common Ground proposal would create a new tax break in the form of tax credits for employers, not employees. Any firm that pays a larger share of the premium for workers with incomes between 133 percent and 200 percent of the federal poverty level than it pays for other employees would get a non-refundable tax credit. Federal poverty determinations are based on family income. According to the authors of the Common Ground proposal, a business that pays 70 percent of premiums for all workers and decides to pay all or part of the remaining 30 percent for low-income workers would receive a tax credit for that additional amount. Specifically,

The employer tax credit would be available only to companies that make contributions to their health plans commensurate with the contribution levels of similarly situated employers. To ensure that this facet of our proposal strengthens existing coverage, the legislation would seek to secure, not weaken, current employer coverage and contributions that workers receive through their jobs.¹⁵

WHY "COMMON GROUND" IS BAD HEALTH POLICY

The initial support for the Common Ground proposal stems from the desire of most policymakers to reduce the number of uninsured Americans. Today, roughly 43 million Americans lack health coverage at any given time, depending on how they are enumerated.¹⁶

While there is nearly universal agreement on the need to reduce sharply the number of the uninsured, and while many proposals before Congress are designed to do so, the Common Ground proposal is not the right approach. Among the many reasons:

1. It would impose unworkable and inappropriate requirements on employers. Any employer who wants to receive the tax credit would have to take on the added responsibility of investigating and verifying an employee's family income to see whether it meets the eligibility requirements. This is the only way to make sure that the firm qualifies to collect the credit. It is, of course, quite conceivable that an employee could have a wage rate that equals an income that falls between 133 percent and 200 percent of poverty but an overall family income that is above or below the income eligibility range.

For the tax credit option to be efficient, employers would have to make sure that the "right" persons were being insured: that they were, in other words, eligible for coverage. Employers would have to match income with eligibility standards by undertaking an accurate collection of family income data in order to comply with the tax credit requirements. This raises both administrative and new privacy concerns. Presumably, employers would also want to make doubly sure that their determinations of eligibility are correct to avoid unpleasant audits by the Internal Revenue Service.

The idea of promoting insurance coverage through public subsidies to small employers is not new. In recent years, several states have tried to subsidize employer-sponsored insurance to expand coverage for children under S-CHIP. In a recent study of these state efforts conducted for the Academy for Health Services Research and Health Policy, Linda Schofield, a health policy research consultant to the Academy, observes that

The common commitment among these states to leverage private sector funds through ESI (employer sponsored insurance) was matched in each state by a high degree of cooperation and enthusiasm amongst employers. Unfortunately, the bottom line results of these efforts, to reduce the numbers of uninsured children through an eminently and widely politically embraced public private partnership approach, have been discouraging.¹⁷

Perhaps even more directly relevant to the infrastructure created under the Common Ground proposal is the experience of the Kansas Business Health Partnership. Created under a new Kansas law, the program is another example of efforts to broaden coverage through government subsidies to employers. But the Kansas project is burdened with practical infirmities, including a reluctance on the part of small firms to take on the added responsibilities of participating in the effort and the added problem of how to make sure that government funds reach the right employees. As noted in a recent report on the Kansas initiative in The Wall Street Journal, "Another challenge is to avoid paying subsidies to businesses and their workers who are already insured and don't qualify for help under the program rules."¹⁸

The authors of the Common Ground proposal conspicuously ignore what small employers do want in health care tax credit policy: for their employees to have health insurance coverage and for that coverage to be extended through a new system of individual tax credits that go directly to the workers and their families. According to a recent survey sponsored by the National Association of Health Underwriters,

• 84 percent of small employers support a tax credit to help lower-income employees buy employer-sponsored health insurance;

• 76 percent support an individual tax credit without regard to whether it would be applicable to employer-sponsored coverage; and

• 71 percent said they would cooperate in the administration of a program of individual tax credits for the purchase of employer-sponsored coverage.¹⁹

Many small employers realize, of course, that they do not enjoy the economies of scale or the efficiency of administration that are routinely taken for granted by large employers who offer health insurance coverage to large numbers of employees.

2. It would move more Americans into Medicaid instead of getting more Americans off Medicaid and into private health insurance. Advocates of the Common Ground proposal clearly believe that building on existing structures, including employment-based health insurance and government health programs, is a reasonable way to reduce the large number of uninsured. S-CHIP, for example, is popular with governors and with bipartisan majorities in Congress. Though it rarely gets the kind of attention from federal policymakers that is routinely showered on the Medicare program, Medicaid is popular among liberal policy analysts who appreciate its potential for expanding government's role in health care, or who believe that Medicaid or Medicaid-managed care is a sound program for dealing with the health care problems of poor people.

The authors of the Common Ground proposal employ positive rhetoric about the possibilities of expanding Medicaid coverage but overlook the profound shortcomings of Medicaid as a health care delivery system. Medicaid, a welfare program, is a programmatic mess. In 23 states, Medicaid budgets are currently "out of balance."²⁰ The program has huge and growing costs; it delivers poor quality care; and doctors and hospitals do not like having to deal with the Medicaid bureaucracies at the federal and state levels to obtain reimbursement under the program's low reimbursement rates. These rates, of course, affect access to care; the government, by setting them at its own discretion, would be determining how much and what quality of care the newly enrolled millions would get. Price controls impose costs on consumers.

There is solid evidence that, compared with those enrolled in private health insurance, Medicaid patients have a more difficult time getting the services they need when they need them.²¹ Today, if given the opportunity, not many Americans would drop private health insurance to sign up voluntarily for Medicaid. Nonetheless, in sharp contrast to a progressive system of refundable tax credits as proposed by President Bush and leading Members of Congress in both political parties, the Common Ground approach would close off reasonable options for private health insurance for such lower-income Americans and lock them into the Medicaid program. Thus, these Americans would be denied choice, flexibility, and variety in their health plan offerings--the very features that would accompany an individual tax credit approach.

Enrolling more Americans in solid private health insurance is clearly preferable to increasing the Medicaid rolls. Under the Common Ground proposal, however, there literally would be no way out for individuals and families forced into Medicaid. As Representatives Thomas and McCrery observe,

Instead of empowering individuals with the wherewithal to choose the health plan that best suits their needs, it empowers others--employers and HCFA [the Health Care Financing Administration] and state governments--to make these choices for them.²²

A good health policy would get more Americans out of Medicaid and into superior private health insurance. The Common Ground proposal would do exactly the opposite.

3. It would further contract the private health insurance market by encouraging employers to drop coverage for workers who qualify for the expanded Medicaid program. The private health insurance market would become smaller and less involved in what is supposed to be one of its primary functions: the management of insurance risk. The Common Ground proposal would discourage, not encourage, expanded coverage through the private sector. A major reason: If an entire class of Americans is automatically eligible for coverage under a government welfare program, there is less incentive for employers to cover them and incur the burden of compliance even in exchange for the tax credit. An employer with a workforce that is disproportionately made up of low-income employees will have even less incentive to continue coverage.

The authors of the Common Ground proposal anticipated this problem. They argue that

For all aspects of the proposal, the substitution of taxpayer funds for coverage already provided through private spending ("crowding out") must be minimized. Since crowding out occurs more frequently among higher income populations, it is best to first focus expansion efforts on those with incomes below 200 percent of the federal poverty level.²³

Curiously, the authors of the Common Ground proposal seem to discount the problem of crowding out for lower-income persons with private health insurance. Consider the case of children under the age of 19 in households with incomes below 200 percent of the federal poverty level. According to data compiled by health policy analysts with the American Association of Retired Persons (AARP), the nation's largest senior citizens organization, 56.7 percent of such children in Utah are covered under employer-based plans. In South Dakota, it is 44.5 percent; in Maine, 43.3 percent; and in the District of Columbia, which ranks dead last with employer-based insurance coverage for such children, 20.7 percent are covered by employer-based plans.²⁴

Based on studies of previous Medicaid expansions, there is solid reason to believe that the Common Ground proposal would have similar consequences: a crowding out of private coverage. For example, David Cutler of Harvard University and Jonathan Gruber of the Massachusetts Institute of Technology found that Medicaid expansions accompanied a 15 percent reduction in private insurance between 1987 and 1992.²⁵ Similarly, Lisa Dubay and Genevieve Kenney of the Urban Institute found that Medicaid expansions for persons under the poverty line had little appreciable effect on employer-based coverage; but for pregnant women with incomes between 100 percent and 185 percent of poverty, Medicaid expansions correlated with a significant decline in private employer-based coverage.²⁶

The Common Ground proposal would push Medicaid's already high health care costs even higher, forcing taxpayers to pick up the increasingly larger bill. Given the incentives embodied in the proposal, its likely effect would be to sharpen segmentation of the working population based on income and, possibly, health status. In recent years, tight labor markets, among other things, have slowed the trend toward higher cost-sharing among workers enrolled in employer-based plans. With sharp premium increases in employer-based insurance, that is likely to change. Private insurance for employees who could afford the expected higher cost-sharing that accompanies employment-based coverage could retain coverage, while the same level of cost-sharing would discourage low-income employees from enrolling. As a result, more lower-income employees would end up in Medicaid at taxpayer expense.

4. It would preserve outdated relations between consumers and insurance companies at the expense of consumer control. The authors of the Common Ground proposal correctly point out that low-income persons often have difficulty purchasing private health insurance in today's insurance market. They also correctly point out that, to an overwhelming extent, privately insured Americans get their health care coverage through the place of work and that Americans who enjoy such coverage feel "comfortable" with it.

This is largely true, but this line of argument overlooks the nature of the dissatisfaction with current health insurance arrangements, now firmly dominated by bureaucratic managed care plans.²⁷ This serious dissatisfaction, particularly the unease caused by the loss of control by both doctors and patients, sparked intense congressional interest in legislation establishing a "patient's bill of rights" characterized by a quantum leap in direct federal regulation of health insurance markets in the states, as well as broader avenues for litigation over health benefits. Much of this popular dissatisfaction is rooted in the absence of patient choice. Existing professional literature on the subject strongly suggests a positive relationship between patient satisfaction and patient choice of plans.²⁸ Moreover, as officials of the American Medical Association observe, most employees who change plans today do so involuntarily and have to find a new doctor, and only 17 percent of all employment-based insurance arrangements allow employees to choose plans.²⁹ Only two out of five working adults have a choice of two or more plans.³⁰

With the right policy, Congress can set in motion the dynamics of choice and competition. With a new system of individual tax credits--preferably refundable tax credits--not only would policymakers secure more reliable financing, but they would encourage long-term health insurance contracts between health plans and consumers, thus reducing churning in the market and helping to stabilize premiums. Since the consumer, under an individual tax credit system, is also a directly paying customer, insurance companies would also have a powerful interest in retaining the relationship.

5. It would preserve outdated and inefficient insurance pooling arrangements. The authors of the Common Ground proposal also over-generalize about the efficiencies of employment group purchasing and the contributions of these purchasing and pooling arrangements to the affordability of health insurance.³¹ Large employer-based insurance arrangements work very well in this respect; smaller companies do much less well because their pools are, by definition, artificially small. When one employee gets seriously sick, the premium rates for the small group soar.

One of the advantages of an individual tax credit approach to the problem of the uninsured is that it can contribute to the creation of very large national pools. Large pools, coupled with expanded coverage of mostly younger and healthier uninsured populations, would exert a downward pressure on average claims costs. As Norman Ture and Stephen Entin, economists with the Institute for Research on the Economics of Taxation, have observed,

Large individual-based pools would make it possible for private insurers to handle people with higher risk factors than at present. The pools would contain enough such people to make their claims conform closely to the national average for people with those risk characteristics and would enable the company to charge an actuarially fair risk premium without fear of exposure to an extraordinary level of claims. Consequently, some people currently classified as uninsurable would be insurable in a broader risk pool.³²

6. It would lay the groundwork for even greater government control of America's health care system. Although the Common Ground proposal undoubtedly would reduce the number of uninsured, it would also significantly advance government control of the health care system. By reinforcing the current federal and state tax treatment of employer-based health coverage, it would allow insurance companies, managed care networks, or employers to remain the key decisionmakers in determining the benefits available to workers and their families. What kinds of plans, benefits, doctors, or medical treatments are available, and how and under what circumstances providers will be reimbursed, are major questions and involve decisions that usually are made at only one decision point: the contractual agreement between employers, as purchasers of insurance, and their agents, the health insurance executives. This type of arrangement, in which the decision points are clearly and tightly confined, makes it supremely easy for government officials to regulate and control this sector of the economy. In fact, it is why the health care sector is already one of the most highly regulated sectors of American economic life. Patients, as consumers of the services, are not and cannot be the key decisionmakers in such an arrangement.

The Common Ground approach would exacerbate this loss of patient control over health care decisions and the concomitant growth of government power in the system. Today, roughly half of all health care spending in the United States is directly attributable to government, particularly large government-run programs such as Medicare, Medicaid, and public health programs. If more and more lower-income individuals automatically become eligible for Medicaid coverage, the government share of the health care sector of the economy will increase significantly. Perhaps more than any other group of Americans, Medicaid patients are dependent on the policy decisions of government officials. As a practical matter, they have little or no recourse if they do not get the benefits they need or the quality of care they deserve. Nor can they sue government officials for those benefits, even when they are denied benefits formally "guaranteed" under Medicaid law.³³

Under the Common Ground proposal, health insurance companies would have an opportunity to benefit from new contracts with employers that seek the tax credit. But they would also be retreating from the historic opportunity to cover millions of Americans through a superior system of individual tax credits in a market characterized by consumer choice and competition. Worse, they most likely would find themselves operating in an even more heavily regulated environment.

For employers that wish to take advantage of the short-term benefits of tax breaks for covering the uninsured, there will be new administrative burdens. Within this new regulatory environment, partially sweetened by a new business tax credit, it will be even more difficult for employers to resist the reintroduction of employer mandates to purchase health insurance coverage for employees. That was the core financing component of the failed 1993 Clinton health plan that small employers resisted so stoutly.

Longtime advocates of national health insurance understand the politically appealing aspects of the Common Ground proposal. For example, AFL-CIO President John Sweeney hails the agreement as an "important step" toward "building consensus" on federal policies to deal with the problem of those who are without insurance, and Senator Edward Kennedy (D-MA) praises the Common Ground proposal as an indication that "bipartisan cooperation" on this issue is possible.³⁴ From a public relations standpoint, the agreement between HIAA and Families USA is a politically attractive alliance of industry executives and a top liberal health care lobbying organization. Regardless of the public relations attractiveness of this tactical alliance, however, the strategic consequence of the joint effort will be a significant increase in government control of the health care sector of the economy.

7. It would undercut real, comprehensive, market-based health care reform designed to expand consumer choice and private competition. As noted above, a broad-based intellectual consensus has developed among economists, political scientists, and health policy analysts--liberals and conservatives alike--that the central problem with the America's health insurance market is the federal tax treatment of health insurance.

The current tax treatment of health insurance confines Americans almost exclusively to employer-based health insurance. It undermines portability, consumer choice, and competition; it hides the true cost of health care; and it is dramatically regressive as tax policy: Low-income people get literally nothing; the tax breaks are heavily tilted toward the upper end of the income scale. Hardly any arrangement could be more discouraging to the expansion of private health insurance coverage. Congress should not reinforce this system. It should look for ways to develop a parallel system of tax treatment of health insurance, at the very least for persons who do not or cannot get health insurance outside of the place of work. Such a system should be based on refundable individual tax credits.

THE BETTER APPROACH TO HEALTH POLICY REFORM

Members of Congress, working with the Bush Administration, have an historic opportunity to change the terms of the national health care debate, reverse the dynamics of the health care policy, reduce the numbers of uninsured, and put more direct control of health care decisionmaking into the hands of individuals and families. Specifically, they can:

1. Create a system of refundable tax credits to expand health coverage. President George W. Bush and a growing number of Senators and Representatives of both parties agree on the need to provide tax incentives--in the form of tax credits or subsidies--for Americans who do not have health insurance through the place of work to buy their own coverage. They are proposing a variety of plans with different levels of subsidies for individual and family coverage. For example, Representatives Richard Armey (R-TX) and William Lipinski (D-IL) are sponsoring the Fair Care for the Uninsured Act of 2001 (H.R. 1331), with tax credits of $1,000 per person up to $3,000 per family; Representative Nancy Johnson (R-CT) is sponsoring the Health Insurance Affordability and Equity Act (H.R. 1181), which would provide a tax credit of $1,500 per person and $3,000 per family; and Senator James Jeffords (I-VT) is sponsoring a bill (S. 590) to provide $1,000 for an individual and $2,500 for a family, with lesser amounts for employees already enrolled in an employer subsidized plan. Tax credits, depending on their structure, can make coverage affordable for millions of Americans.³⁵

The objective of such a policy initiative is not just to broaden access to coverage or to expand insurance coverage, but also to expand personal freedom and give people a real choice of options in an open and competitive market. Such a system, grounded in patient satisfaction, would reward high-quality health care services and reimburse doctors, hospitals, and other providers for providing better value for consumers' dollars.

There is a genuine and broad consensus on this policy objective, and a rich diversity of alternatives on how to achieve it. While most analysts agree that to be effective, tax credits or subsidies should target low-income persons, the structure of these credits could vary.

• Tax credits could be fixed or vary with income or health care costs or health risk.

• Tax credits could be combined with new health insurance arrangements that are designed to minimize the problems of risk selection, such as large risk insurance pools or innovative reinsurance arrangements.

• Tax credits could also be combined with employment-based insurance or association plans; employers could serve as brokers of insurance options in competing pools or as agents to sign up workers and their families for competing plans.³⁶

Not only would there be greater efficiencies, driven by consumer demand, in a market in which individuals and families make the key decisions over cost and coverage, but there would also be a superior system of health care delivery in which the watchwords would be quality and patient satisfaction.

2. Allow S-CHIP funds to be used for individual tax credits. As part of the Balanced Budget Act of 1997, Congress authorized the creation of the $24 billion State Children's Health Insurance Program (S-CHIP) to expand insurance coverage for millions of children not covered by health insurance. The conventional approach of state officials has been simply to enroll eligible children in the troubled Medicaid program; but the authors of the S-CHIP legislation, in their conference report language, encouraged state policymakers to use S-CHIP funds for tax credits or vouchers for the purchase of insurance.³⁷ HCFA, under the Clinton Administration, did not encourage such tax credit options, and developing an ambitious tax credit program under S-CHIP still presents some technical difficulties. That said, however, there is no reason why the Bush Administration cannot encourage such state policies and press for remedial legislation to facilitate an expansion of that option for innovative state officials.

3. Reject any incremental step that leads to an increase in government or even employer control of health care decisions. Most Americans, with the assistance of their doctors, want to make their own sensitive health care decisions. The frustration of individuals and families who have little or no choice of plans or benefits in the employment-based system is largely feeding the debate over a "patient's bill of rights." Unfortunately, Congress has refused to address this central issue.

The Common Ground proposal is the latest in a series of health care initiatives since the ill-fated Clinton plan of 1993 that have been designed to concentrate decisionmaking in the hands of government officials. Many of the Clinton plan's strongest advocates have adopted an "incremental" approach to achieve their objective, and the legislative process has achieved tiresome predictability: After all-night negotiations, Members produce huge bills packed with impenetrable provisions on the finer points of health policy that virtually no one reads before they go to the floor for a vote. Press releases are issued praising how the bills resolve or improve some flaw in the current system. But any honest reading of the fine print shows that the consequences of their incremental "reforms" will be to make the health care system more controlled, managed, or run by government, accompanied by major increases in health care costs, regulation, and paperwork. Congress and the Administration can break this cycle.