Ryan's Health Care Roadmap
No More Small Steps
By Michael Meulemans
Paul Ryan wants to turn the nation’s health insurance industry on its head. He has proposed a reform that would be the most sweeping change the industry has seen in over fifty years.
Since World War II Americans have largely accessed health insurance through employer-sponsored health plans. Ryan says that unfair tax preferences have distorted health care costs and have resulted in outrageous hidden costs in the health care market. These increased costs have led, in part, to increasing health insurance premiums that have pushed 45.7 million Americans into the ranks of the uninsured. Even the Medicare/Medicaid safety net is unraveling due to health care’s increasing costs as fewer providers participate in federal health programs due to steadily declining reimbursement rates.
Every member of Congress is calling for a redesign of America’s health care system. Yet Ryan stands apart from the pack because he is willing to ruffle feathers throughout the health care industry. Given Ryan’s political compass, he is obviously not pushing for a single payer oriented universal health care bureaucracy, the darling of the left. Rather, Ryan proposes in his Roadmap for America’s Future legislation, health care reform centered on common sense utilizing a market driven approach from an economic and tax reform perspective.
Ryan argues that the tax loophole allowing preferential treatment for high benefit health plans promotes inequity in the marketplace. Many health experts, both Republicans and Democrats nod in agreement when Ryan says that the current tax preference for employment-based health insurance is regressive. Subsidies are related to marginal income tax rates and go disproportionately to higher income workers.
Ryan asserts that, “Providing every American with a tax free voucher specifically for the purchase of health insurance not only levels the playing field, but puts consumers in the position to make the health care choices that make sense to them.”
The Health Insurance Market Doesn’t Work for Anyone
The national health insurance market is dominated by two behemoth buyers: private employers and government. Nationally, more than 230 million Americans currently access health care coverage through their employers or through a government program such as Medicare or Medicaid. As Figure 1 shows, fully 77% of health care is purchased by these two buyers.
For those who do not have access to employer-sponsored health insurance and are not eligible for public programs, the private individual insurance market is a critical source for quality, affordable health care coverage. The individual market currently provides coverage to approximately 8% of the health insurance market. According to a survey of its 1,300 health plan members by America’s Health Insurance Plans, Massachusetts has the highest average annual individual health insurance premium in 2006 at $8,537, while Wisconsin enjoys the lowest at $1,254.
At the same time, some individuals are unable to purchase individual health insurance coverage in the private market because of their health status. In attempting to provide coverage for all, states have enacted guarantee issue and community rating legislation for the individual health insurance market. Predictably, these well-intentioned reforms have often backfired, resulting in higher costs for those who are currently insured and a significant contraction of choices in the market.
Many states also have created high-risk pools that provide subsidized coverage to individuals who have very high health care costs.
Guarantee issue and community rating practices have allowed for increased coverage of the uninsured. However, a study by America’s Health Insurance Plans indicates those states have higher insurance premiums in the individual market than states without those rating mandates. States like Wisconsin that do not have those provisions appear to also have lower individual health insurance premiums. Wisconsin does provide a safety net through its state high risk pool, the Health Insurance Risk Sharing Plan (HIRSP) which currently covers about 18,000 individuals.
Meanwhile there has been a rather dramatic shift in where people acquire health insurance. Let’s look at the track record in Wisconsin. In 2007, 60% of firms offered health benefits nationally, down from 69% in 2000. Small firms (3–199 workers) make up about 97% of employers in America, and this decline in the overall offer rate has been driven largely by a drop in the percentage of small firms that offer coverage. The smallest firms are least likely to offer health insurance. Only 45% of firms with 3 to 9 workers offer coverage, compared with 76% of firms with 10 to 24 workers, and 83% of firms with 25 to 49 workers. Over 95% of firms with 50 or more employees offer health insurance coverage.
In 2005, government health care programs (HIRSP, Medicare, and Medicaid) comprised 30% of Wisconsin’s health care marketplace, up from 22% in 1998. At the same time the commercial health insurance market declined from 64% in 1998 to 59% in 2005. In government programs, HIRSP enrollment stood at 18,300 enrollees and over 800,000 Wisconsinites were enrolled in Medicaid in 2005.
Since 1998, the Wisconsin insurance landscape has changed markedly with the advent of Badgercare, the Medicaid expansion for poor working families and the expansion of HIRSP. Interestingly, these program expansions have occurred at the same time as the decline of employer-based health insurance in Wisconsin.
It is against this backdrop of rising cost and dwindling employer-sponsored health insurance that Ryan proposes to put individuals in charge of their own health care. He sees the increasing healthcare costs as a sagging burden for business given the tax inequities that exist. Ryan says the tax exclusion for employer-sponsored health coverage “undermines the healthcare market by hiding the true cost of insurance by those covered by it.”
Ryan argues that his tax credits even the playing field and create new incentives for controlling health care expenditures because individuals will have the personal incentive to control costs.
Ryan doesn’t equivocate. He says that putting patients back in the center of healthcare decision-making will have a big impact on controlling rising costs. In the current system employers strive to control costs, according to Ryan, by limiting choice, flexibility and coverage options for their employees. Ryan asserts that the current system not only unduly burdens employers, it discriminates against individuals who do not have access to employer-sponsored health coverage.
Instead of employer-sponsored health insurance access, Ryan argues that ownership should be shifted to those who actually utilize it by providing them with refundable tax credits for health insurance purchase. Ryan’s Roadmap allows every American, except those eligible for Medicare or military health plans, to have the option to receive a $2,500 refundable tax credit for individuals and $5,000 for families. The individual or family could apply their tax credit to either the purchase of an employer-sponsored plan or to another option that suits their needs. The payment is to be made directly to the health plan designated by the individual. If an individual locates a health plan that costs less than the tax credit, the balance will be given to the individual by the health plan. Conversely, if the individual chooses a more expensive plan, he or she will pay the difference. Therefore, the Roadmap provides every American with the incentive to take a stake in holding health insurance premiums in check. In addition, employers who continue to offer health coverage can continue to claim contributions as a business expense deduction.
Ryan would retain the 7.5% itemized deduction for medical expenses. However, taxpayers who claim the new health care tax credit, described above, may not take into account premiums for such coverage for purposes of the itemized deduction under the proposal. This equalizes the tax treatment of health insurance for individuals and those covered through their employers. It would give individuals more freedom to choose a plan that best fits their needs.
Eliminating the tie between health care and employment will also aid individuals and families in reducing the fear of losing health care access if they lose their job. “By addressing the tax issue, Ryan is putting greater equity between employers and individuals. The use of tax credits or deductions is a positive development to help more individuals purchase health insurance,”
according to Phil Daugherty of the Wisconsin Association of Health Plans.
In the politically charged world of health care reform Ryan, the rising Republican star, has received praise from both the left and the right. For example, Oregon Democratic Senator Ron Wyden and Service Employees International Union head, Andy Stern, would like to see the country move away from the employment-based health insurance system.
They see the current tax preference for employment-based health insurance as regressive because subsidies are related to marginal income tax rates and therefore go disproportionately to higher income workers. In fact, a majority of the benefits from the tax exclusion are estimated to go to families with incomes greater than 400% of the poverty level.
The Ryan Roadmap also creates portable health insurance that moves with the individual if they change jobs, reducing worries about preexisting conditions and maintaining provider-patient relationships. With this provision, employees will have a greater opportunity to maximize their employment and not settle for jobs based on access to health care.
In addition, the proposal creates an alternative for small businesses to offer a health care benefit. Currently, unless a business can afford a full-scale health benefit plan, its options are limited in terms of the health care benefits it offers to its employees. The refundable tax credit allows employees to take responsibility for purchasing their own health care with the tax credit. Another vital aspect of the proposal allows employers to make defined contributions to Health Savings Accounts, to fund employees’ health care expenses. Think how this changes the health care equation for small businesses.
Finally, tucked away in a quiet corner of Ryan’s Roadmap is another transforming provision, one that opens up whole new health care markets to people. Specifically, Ryan would allow individuals to utilize the refundable tax credit toward the purchase of health insurance in any state. Allowing interstate purchase of health insurance will open the door for Wisconsin residents to health insurance in any other state. In effect, people can decide for themselves which state health insurance mandates they want to purchase.
This provision is not without its detractors. “Our group is not enthusiastic about the idea of interstate purchase of health insurance,” asserted Wayne Corey, executive director of Wisconsin Independent Business.
While the group does not like business regulation, Corey acknowledged that Wisconsin’s insurance regulations are far more favorable than most other states. He believes the Wisconsin regulatory process should prevail. “Health plans sold in Wisconsin, but regulated by other states, Corey believes, is not in the best interest of Wisconsin business and consumers.”
Skepticism is also coming from the Wisconsin Association of Health Plans (WAHP), whose members are regulated by the Wisconsin Insurance Commissioner. WAHP’s Phil Daugherty says interstate purchase of health insurance “would put Wisconsin health plans at a competitive disadvantage” in the marketplace against insurers in other states who deal with less strict regulations.
This creates an uneven playing field causing Wisconsin health plans to compete against those from other states for the same client while dealing with much stricter regulations, according to Daugherty.
The allowance of interstate sales would also alter the price structure of current individual health plans in Wisconsin. In the end, insurers, consumers and employers would face considerable confusion in dealing with a number of differing regulations.
This points out how revolutionary Ryan’s proposal is. Rather than having politicians, insurance commissions and employers decide what is best for the individual; he would let health care consumers decide what is best for themselves. Congressman Ryan’s proposal would take decisions away from regulators and put them in the hands of consumers while increasing the available options.
Putting the Roadmap into Practice
Small business is fed up with the high cost of health insurance and a health insurance industry that treats them shabbily simply because they are small. Take a close look at the information in Table II. This is a business sector that is reaching a boiling point with health insurance and Paul Ryan knows it.
But Ryan’s plan is risky, if for no other reason than the fact that the public is so accustomed to having employers provide health insurance. The individual health insurance market is often unfamiliar territory and not well understood by most consumers. The average individual consumer has limited experience in researching individual health insurance options. Because individual health insurance is not subsidized by employers, each consumer pays the entire cost, deciding whether the coverage justifies the premiums. As a result, consumers in this market tend to be very price sensitive. Some consumers wait until they perceive they will need health services before purchasing coverage, resulting in higher premiums within insurance pools. A family or individual may utilize the tax credit described earlier to purchase an employer-sponsored plan if they choose.
From the employer side, the change allowing the elimination of employer-based health care, would be an economic boon to employers and save them thousands of dollars each year per employee. It’s possible the savings would be shifted toward increases in employee salaries.
In most states, premiums for individual coverage are allowed to vary by age, which can help encourage younger people to purchase coverage. Likewise, Wisconsin and most states allow insurers to medically underwrite new applications for coverage. This provides a powerful deterrent against waiting to purchase insurance until becoming ill, since the likelihood of illness increases with age. Through medical underwriting insurers can decline coverage for individuals they deem to risky or impose increased premiums for those with serious medical conditions.
Individual health insurance in Wisconsin is affordable largely because the state does not mandate “guarantee issue” or “community rating” of individual policies. Guarantee issue means that individuals cannot be declined health insurance and community rating means that all applicants pay the same premium regardless of age. Instead individuals in Wisconsin who are declined insurance can access it through the state’s strong and effective high risk pool, HIRSP. Wisconsin has not instituted either provision and therefore has lower premiums because underwriting is allowed. This is a primary reason why Wisconsin ranks high among states in having the fewest number of uninsured individuals.
Thus, in bringing together all of these factors including consumer oriented individual health insurance market regulation and the resulting low insurance premiums, the Wisconsin individual health insurance landscape would provide a compelling incubator for the implementation of Ryan’s Roadmap.
For a country frustrated by the incremental changes seen coming out of Washington, Paul Ryan is a free market, common sense champion. He’s breaking the mold and writing his own playbook. A confluence of factors makes Ryan’s Roadmap for America’s Future an intriguing proposal, specifically given Wisconsin’s regulatory framework, and its low-cost individual health insurance market. Wisconsin’s insurance regulations have made individual health insurance premiums the most affordable in the nation and create a business climate where transition to individual based insurance may be workable. Thus, Ryan’s Roadmap offers both a workable solution and increased options in the marketplace. In an era with too much talk and too little substance, Ryan and his Roadmap for America, provide real solutions and more options for a marketplace starved of practical alternatives.
Michael Meulemans is a Health Insurance Consultant and Owner Write Resources, LLC.