An Examination of the Wyden-Bennett Health Reform Plan
Key Issues in a New Approach to Universal Coverage
September 24, 2008
Introduction and Executive Summary
The U.S. health care system suffers from a number of serious problems. According to the latest Census data, 45.7 million individuals were without health insurance in 2007, an increase of 5.9 million people since 2001. Employer-based coverage, the primary source of health insurance across the nation, continues to erode; the percentage of Americans with job-based insurance declined from 63.2 percent to 59.3 percent between 2001 and 2007. Moreover, those without insurance are disproportionately people with low or moderate incomes, and the principal government subsidy for health insurance -- the exclusion from taxes for employer contributions to employees' coverage -- is regressive. In addition, health care costs continue to rise relentlessly and are the primary factor responsible for the bleak long-term fiscal outlook the federal government faces. Finally, while the United States spends more on health care per resident than any other country, it falls short on a variety of quality of care measures compared to other western industrialized nations.
As a result, there is growing consensus that comprehensive reform of the U.S. health care system is essential, with the goals of such a reform effort being both to achieve universal coverage and to moderate health care cost growth while improving the quality of care.
There are several approaches that policymakers could take to achieve universal coverage. They could build on and expand employer-based health insurance and public programs like Medicaid and the State Children's Health Insurance Program (SCHIP), which provide health insurance to the vast majority of Americans. For example, researchers from the Commonwealth Fund have followed this approach in designing a comprehensive health reform plan intended to provide universal health insurance.
Alternatively, one could take a more far-reaching approach by substituting another health insurance system for the current mix of employer-sponsored insurance and public programs. For example, the U.S. health care system could instead rely on a universal public health insurance system (a "single payer" system). Or it could rely on new private insurance pools, or on a revamped, tightly regulated individual market. To achieve universal coverage any of these types of approach would have to be supplemented with a mandate on individuals to have health insurance.
The "Healthy Americans Act" (S. 334), introduced on a bipartisan basis by Senator Ron Wyden (D-OR) and Senator Robert Bennett (R-UT), is the most prominent example of a health reform plan that takes one of these latter types of approach. The plan has a significant number of Senate co-sponsors from each party, and the Congressional Budget Office and Joint Committee on Taxation have estimated that its budgetary effects would be neutral in 2014 (i.e., that it would not increase the deficit). For these reasons, it has garnered significant attention from federal policymakers and the media. Examination of the plan can provide insights into issues posed by an approach to universal coverage that blends new private insurance pools, reforms of the tax treatment of health insurance, and various other reforms, as the Wyden-Bennett plan does.
The Wyden-Bennett plan seeks to achieve universal coverage by creating a new private insurance system for the United States. It would establish state-based purchasing pools, with nearly all Americans (except those in Medicare and the military) required to enroll in a private insurance plan made available through their state's pool. Employer-based coverage would likely be reduced substantially over time (few, if any, small employers likely would continue to offer coverage although a number of large employers probably would do so, at least initially), and Medicaid and SCHIP would be converted into supplemental insurance programs that "wrap around" the private insurance plans offered through the new pools. Premium subsidies would be provided on a sliding scale based on income to help make the coverage provided through the new purchasing pools affordable for low- and moderate-income families.
The Wyden-Bennett plan includes a number of positive features.
- According to the estimates of one independent analysis, it would succeed in providing health insurance to nearly 99 percent of Americans and thereby almost attain the goal of universal coverage.
- It would rely on group health insurance made available through new state-based purchasing pools, rather than the unregulated individual market, to pool risk so coverage is more accessible to people in poorer health as well as to those who are healthy.
- Premiums for the health insurance offered through the state-based purchasing pools would be "community-rated" -- that is, sicker individuals would not be charged higher premiums than healthy people, as is the case in the individual health insurance market in many states today.
- It would set standards for the health insurance plans offered through the new pools, requiring plans to be actuarially equivalent initially to the current Blue Cross Blue Shield Standard Option available to federal employees.
- It would limit premiums and cost-sharing on the basis of income in an effort to ensure affordability for low- and moderate-income individuals. It also would prohibit any cost-sharing for preventive, chronic disease management and chronic pain management services.
- It would automatically enroll families in health insurance plans and enable families to retain the health insurance plan in which they are enrolled when a breadwinner switches jobs or becomes unemployed.
- It would make the financing of federal subsidies for health insurance, particularly those provided through the tax code, more progressive than under the current system.
- It seeks to tackle the problem of rising health care costs by incorporating a number of financial incentives designed to encourage individuals to enroll in more cost-effective health insurance plans and to slow the rate of growth in health spending over time. It also includes a number of financing mechanisms. As noted, the Congressional Budget Office and the Joint Commission on Taxation together estimate that the plan would be roughly budget-neutral by 2014, assuming the plan was enacted in 2008.
The approach that the Wyden-Bennett plan takes also raises serious questions. These questions reflect a number of complex and difficult issues that arise as a result of a reform effort such as this, which largely replaces the current reliance on employer-based coverage and public programs like Medicaid and SCHIP with a new system of state-based purchasing pools through which individuals would enroll in private insurance plans.
This analysis examines the Wyden-Bennett plan in depth as a way to focus on some of the key questions that such an approach raises and that will have to be addressed successfully for such a plan to attain its laudable goals. Such questions include, but are not limited to, the following:
- Would the new system of state-based purchasing pools sufficiently reduce the risk of "adverse selection" -- that is, the separation of healthier and less healthy people into different insurance plans -- that otherwise could make coverage increasingly unaffordable over time for people in poorer health?
- Would access to needed health care for low-income Medicaid and SCHIP beneficiaries -- particularly those with disabilities and special health care needs -- be protected adequately if these public programs are converted into supplemental programs that "wrap around" the new private insurance plans?
- Would the subsidies provided under the plan be sufficient to make the private health insurance coverage provided through the new purchasing pools reasonably affordable for the many low- and moderate-income families who are currently uninsured?
The Wyden-Bennett plan does not provide all of the detail necessary to be able to answer these questions conclusively. It appears, however, that the plan would fall short in a number of these areas, thus highlighting the challenges that this approach to achieving universal coverage presents.
- Under the plan, there is a substantial risk that instead of the private health insurance plans in the state-based purchasing pools competing solely on the basis of cost and quality, they would compete in significant part on the basis of which plans could best attract healthy individuals and discourage enrollment by people in poor health. Some adverse selection likely would result, with healthy individuals choosing low-cost health insurance plans, like high-deductible plans attached to Health Savings Accounts, while people in poorer health opted for more comprehensive plans. If that occurred, sicker individuals would, over time, face increasingly unaffordable premiums for the coverage they need.
- Medicaid and SCHIP serve a unique role in the U.S. health care system, providing health insurance coverage to people excluded from the private insurance market and providing needed services to low-income individuals with disabilities and special health care needs that are beyond the scope of private insurance. While converting Medicaid and SCHIP into effective supplemental wrap-around programs is possible in theory, it is quite difficult to do in practice. Experience with supplemental coverage has been mixed at best. Medicaid also serves a role well beyond directly providing health coverage, by helping to finance health-related services that states provide to very vulnerable low-income individuals -- particularly children and adults with very serious disabilities -- as part of an integrated package of social, educational, supportive and health services. This essential role would likely be at risk. There also is concern that some states could decide to scale back existing eligibility, benefits and cost-sharing protections in Medicaid and SCHIP if they are no longer primarily responsible for the health care needs of their low-income residents. Under the plan, millions of low- and moderate-income people who are now uninsured would gain insurance, but a substantial number of low-income people covered through Medicaid or SCHIP could be placed at risk and lose access to some needed care.
- The overwhelming majority of the uninsured population consists of people with low incomes. The Wyden-Bennett plan would provide relatively generous subsidies on a sliding scale based on income, up to 400 percent of the poverty line. It would provide additional subsidies through a new standard income tax deduction, while eliminating the current tax exclusion for employer-sponsored insurance. The subsidies made available under the plan would make coverage much more affordable for low-income individuals who now lack health insurance. At the same time, it is likely that a substantial number of low-income uninsured individuals would find the premiums and cost-sharing they would face difficult to afford. Because they would be required to enroll in the state-based health insurance plans irrespective of ability to pay, some low-income families and individuals -- especially those who face high costs for other necessities -- could find themselves with health insurance but without sufficient remaining income to pay for other essentials such as rent, child care, or adequately heating their homes.
- Finally, the Wyden-Bennett plan is designed in such a way that the health benefits the insurance plans would cover, as well as some of the subsidies to help people purchase health insurance, would erode each year, with the erosion likely to become substantial over time. These features of the plan lower its overall cost and constrain growth in health care spending. They help permit the plan to be roughly budget-neutral by 2014, according to CBO and the Joint Committee on Taxation. But they also would likely have some adverse side-effects. For low- and moderate-income people in particular, the steady erosion in the benefits packages and the subsidies could result over time in such individuals being enrolled in health insurance plans with significant and growing gaps in coverage that these individuals could not afford to fill.
These problems are not insurmountable. The Wyden-Bennett plan could be modified to try to address them. Doing so would entail substantial changes in various elements of the legislation, including the following:
- The plan could be modified to better minimize the risk of adverse selection. The plan could preclude the state-based purchasing pools from offering high-deductible plans attached to HSAs, since those plans would primarily attract people who are healthier than average. Equally essential to minimizing adverse selection would be greater standardization of the benefit packages the plans can offer; this is necessary to limit the otherwise relatively unconstrained ability of insurers to design benefits in such a way as to "cherry pick" -- that is, to encourage enrollment by the healthy and deter enrollment by those in poorer health. These steps would significantly improve the long-term ability of the new purchasing pools to pool risk effectively.
- The Wyden-Bennett plan could better ensure that Medicaid and SCHIP beneficiaries actually receive the supplemental benefits for which they would be eligible, both by placing additional requirements on private insurers participating in the new purchasing pools to improve access to care and by assigning vulnerable beneficiaries to plans that best meet their health care needs. The plan also could be modified to establish explicit new funding streams to support the integrated state services for vulnerable low-income populations that now receive funding through Medicaid, and it could provide financial incentives to states to encourage them to maintain adequate Medicaid and SCHIP eligibility and benefit levels over time, thereby preserving access for vulnerable low-income people to needed supplemental coverage.
- The plan could better ensure affordability by increasing the subsidies it provides to low- and moderate-income individuals. In addition, an overall limit on total out-of-pocket costs (premiums, deductibles and co-payments) as a percentage of family income could be established, at least up to certain income levels. The mechanism for adjusting the value of the benefit package each year also could be modified so that low- and moderate-income individuals do not increasingly become underinsured over time. These steps to ensure affordability would add to the legislation's costs and would likely require additional revenues beyond the existing financing sources the Wyden-Bennett plan now taps.
This analysis is not applicable only to the Wyden-Bennett plan. As the body of this analysis indicates, these suggested changes constitute essential features of any health reform plan that adopts a universal coverage approach similar to that of the Wyden-Bennett plan in substituting a new system of state-based purchasing pools offering a choice of private insurance plans for the current reliance on employer-based coverage and public programs like Medicaid and SCHIP. This analysis yields the following lessons regarding such an approach to universal coverage:
- Whatever the specific design of a new private insurance system, it should include standardized benefits packages and restrict the availability of plans that are very likely to provoke adverse selection such as high-deductible plans attached to HSAs.
- Replacing Medicaid and SCHIP and converting them into supplemental (or wrap-around) insurance may be appealing in theory but is much more difficult to accomplish successfully in practice without causing the loss of access to important health services by some of the nation's most vulnerable individuals. Very careful attention needs to be paid to how low-income beneficiaries -- many of whom have disabilities, chronic illnesses and special health care needs -- fare under such a system. Attention must also focus on the likely impact of a plan that largely replaces Medicaid with private insurance on the integrated state programs that serve very vulnerable populations, as well as on state finances and state health coverage decisions. Under certain reform plans, it may be more appropriate to exempt such populations -- that is, to retain Medicaid coverage for them -- than to shift them to the new system.
- Reform plans must both achieve affordability and constrain health care spending growth. Achieving one without the other will ultimately lead to serious problems. On the affordability side, a plan with an individual mandate must ensure that low- and moderate-income individuals are able to afford other necessities while complying with the mandate to purchase health insurance, and that the insurance they obtain does not result either initially or over time in large gaps in coverage that they cannot afford to fill. To achieve these two essential goals without sacrificing one or the other, it very likely will be necessary to consider other revenue sources outside the existing health care system and to go beyond the financing sources that the Wyden-Bennett plan includes.
 Cathy Schoen, Karen Davis and Sara Collins, "Building Blocks for Reform: Achieving Universal Coverage with Private and Public Group Health Insurance," Health Affairs, May/June 2008.