«CHAPTER 7 Balancing Private and Public Roles in Health Care H ealth care is one of the largest and fastest growing sectors of the U.S. economy, ...»
The employer group and individual markets for health insurance have unique advantages and disadvantages. Employer groups are generally able to pool risk, as individuals within an employer group initially come together for a purpose other than buying health insurance and because larger numbers of covered people makes it easier to predict the average expenditure of the group. Effective risk pooling is often more challenging in the individual market, given the potential for adverse selection, whereby individuals who expect high health care costs are more likely to buy coverage, while those who expect to have low costs may be less likely to do so. If insurers are not able to fully identify the risk of individuals seeking coverage and premiums are set according to the average risk in the population, then there will be insufficient funds to cover the claims that are generated. In most States, health insurers use medical underwriting to assess individuals’ risk for generating medical expenditures based on their demographics, health status, and past utilization.
Another important distinction between the employer group and individual markets is the tax treatment of premiums. For employer-sponsored insurance, premiums that are paid by employers are exempt from the Federal income 208 | Economic Report of the President tax, State income taxes in 43 States, and Social Security and Medicare taxes.
In addition, many employees can pay their share of the insurance premium with pre-tax dollars if their firm offers a “Section 125” plan. The amount of forgone revenue associated with excluding tax on premiums is often referred to as the “tax subsidy” for employer-sponsored health insurance. The tax exclusion encourages employers to provide a larger share of workers’ total compensation in the form of health insurance benefits, leading employers to offer generous coverage with low levels of coinsurance and deductibles. In turn, these low levels of cost-sharing can encourage moral hazard, whereby individuals use more medical care than they would if they were responsible for the full price of that care.
For self-employed workers and their families, there is a partial tax subsidy of health insurance, which allows them to deduct health insurance for themselves and their families from the Federal income tax (up to the net profit of their business) but not from the self-employment tax (equivalent to the combined tax that they would pay for Social Security and Medicare). For those who neither are self-employed nor have an offer of employer group insurance, medical care expenses, including the premiums for coverage purchased in the individual market, are tax deductible only when these expenses exceed 7.5 percent of adjusted gross income.
As discussed before, not all workers have access to employer-sponsored insurance; those who do may have limited choices, particularly if they are employed at a small firm. While the individual market provides an alternative way to acquire health insurance, for many it is not perceived to be as attractive as employer-sponsored insurance. One way to move toward balancing the attractiveness of the employer group and individual markets is to alter the current tax treatment of premiums. Removing the tax exclusion for employer premiums has the potential to eliminate many of the inefficiencies and equity issues associated with the current system; it would also increase Federal Government income tax revenues by up to $168 billion in FY 2009.
The President has proposed replacing the current tax exclusion with a flat $15,000 standard deduction for health insurance for families or $7,500 for individuals. The amount of the standard deduction would be independent of the actual amount spent on a health insurance policy, which would need to meet a set of minimum requirements for catastrophic coverage. Thus, individuals and families would still be able to take the full amount of the deduction from income and payroll taxes, even if their health insurance premium cost less than that amount. Although individuals with small tax liabilities would not stand to gain as much from a tax deduction as individuals with higher tax liabilities, this approach would make health insurance more affordable, particularly for those who do not have access to employersponsored coverage.
Chapter 7 | 209Public Insurance Several programs funded by the Federal Government exist to provide health care to specific populations. These programs include the Federal Employees Health Benefits Program (FEHBP), TRICARE, the Veterans Health Administration (VHA), the Indian Health Service (IHS), Medicaid, the State Children’s Health Insurance Program (SCHIP), and Medicare. The FEHBP and TRICARE are health insurance programs for Federal employees and active duty personnel, respectively. The Federal Government also provides medical care to veterans through the Veterans Health Administration.
Run by the Department of Veterans Affairs, the VHA provided services to
5.5 million patients in 2007, up from 3.8 million in 2000. The Indian Health Service provides health care to members of Federally-recognized tribes and their descendants. This too is a public health care system in the sense that the Federal Government operates the IHS hospitals and employs the program’s health care providers. In 2007, the IHS provided services to
1.5 million American Indians and Alaska Natives.
Established in 1965, Medicaid provides medical assistance for certain children, families, and elderly and disabled individuals with low incomes and low resources. Medicaid is administered by the States and is jointly funded by the Federal Government and States. In 2007, there were approximately 48 million Medicaid enrollees. Another public insurance program is the State Children’s Health Insurance Program (SCHIP), which was created in 1997.
SCHIP enables States to provide health insurance coverage for low-income children who do not qualify for Medicaid. SCHIP is also administered by the States and jointly funded by the Federal Government and the States. States receive an enhanced Federal matching rate for SCHIP that is higher than their Medicaid matching rate but capped at a fixed level. During fiscal year 2007, more than seven million children were enrolled in SCHIP.
Medicare, also begun in 1965, provides health insurance to nearly all individuals aged 65 and older, as well as some younger individuals with permanent disabilities or those who have been diagnosed with end-stage renal disease. Today, there are approximately 44.6 million Medicare beneficiaries.
As discussed in Chapter 6, Medicare consists of four parts: Part A provides coverage for inpatient hospital services, some home health care, and up to 100 days in a skilled nursing facility. Part B provides coverage for outpatient services, including outpatient provider visits and certain preventive screening measures. Part C, also known as Medicare Advantage, provides beneficiaries with the option of enrolling in one of several types of private health plans rather than traditional, fee-for-service Medicare. Finally, Part D provides coverage for outpatient prescription drugs.
210 | Economic Report of the President Revitalizing and strengthening Medicare Advantage has been a key priority for the Administration. As an alternative to traditional Medicare, beneficiaries may enroll in one of several types of private health plans, including health maintenance organizations (HMOs), preferred provider organizations (PPOs), and private fee-for-service (PFFS) plans. For the past 3 years, 100 percent of Medicare beneficiaries have had at least one Medicare Advantage plan available in their local geographic market, up from 75 percent in 2004. Currently, nearly 10 million people, or over 20 percent of all Medicare beneficiaries, are enrolled in Medicare Advantage plans.
Many beneficiaries are attracted to Medicare Advantage plans because these plans typically cover services that are not covered under traditional Medicare, such as dental care, certain preventive services, and care management for those with chronic conditions. Additionally, Medicare Advantage enrollees may have lower out-of-pocket costs. For 2008, Medicare Advantage plans offered an average of approximately $1,100 in additional annual value to enrollees in terms of cost savings and added benefits. Of course, it is important to acknowledge that beneficiaries who enroll in Medicare Advantage plans must comply with the particular policies of those plans when using services. In some cases, this may include using only providers in the plan’s network.
One of the most significant changes in Medicare during this Administration was the creation of Part D, a voluntary program in which beneficiaries are able to purchase prescription drug coverage from private health plans that contract with Medicare. On average, beneficiaries pay 25.5 percent of the cost for standard drug coverage, while the Federal Government subsidizes the remaining 74.5 percent. Each year, beneficiaries can choose a drug benefit plan from a large number of diverse plan offerings. This variety ensures that beneficiaries are able to select the insurance policy that best meets their preferences.
Before Part D was created, beneficiaries could obtain drug coverage by using an employer retiree plan, if they had one; purchasing a private Medigap plan; enrolling in a Medicare managed care plan; or using Medicaid coverage if they were dually eligible. Chart 7-4 illustrates the change in prescription drug coverage among beneficiaries between 2004 and 2006, the year that Part D was fully implemented. In 2004, 24 percent of Medicare beneficiaries lacked prescription drug coverage. By 2006, many of these Medicare beneficiaries obtained prescription drug coverage by choosing a stand-alone drug plan or a Medicare Advantage (MA) plan.
Part D has had important effects on beneficiaries’ out-of-pocket spending and their adherence to the medication protocols they have been prescribed.
Recent analyses from the Health and Retirement Study data found that the introduction of Part D has been associated with a median decrease of
Chapter 7 | 211$30 per month in out-of-pocket spending among the newly insured population, compared to median baseline spending of $100 per month. When prescription drugs are not affordable, individuals may not adhere to their prescribed regimes. They may skip doses, reduce doses, or let prescriptions go unfilled. Recent work finds a small but significant overall decrease in cost-related medication non-adherence following the implementation of Part D. Both the revitalization of Medicare Advantage and the creation of Medicare Part D represent important steps for ensuring that beneficiaries have affordable choices for their health insurance.
The Uninsured An important issue facing policymakers today is that a large number of individuals lack health insurance in the United States. In addition to providing important financial protection, health insurance can help people obtain timely access to medical care. Research has shown that having health insurance is positively related to having a usual source of medical care, receiving preventive services, and getting recommended tests or prescriptions. Based 212 | Economic Report of the President on U.S. Census data, the current number of individuals who lacked insurance during the calendar year is estimated to be 45.7 million people, or roughly
15.3 percent of the population. It is important to note that some people in Federal survey-based counts of the uninsured actually may have access to public insurance, but do not wish to report their program enrollment due to the possible stigma, or have not yet enrolled despite their eligibility. Also, others in Federal survey-based counts of the uninsured may have access to private insurance but have chosen not to purchase it.
The uninsured are diverse in terms of their employment and demographic characteristics. Individuals in households that have a full-time, full-year worker make up about 62 percent of the non-elderly uninsured population.
Even with strong ties to the labor force, many people may not be offered employer-sponsored coverage. Even if such coverage is available to them, many people may choose not to buy insurance because it is not affordable or they do not place much value on having insurance. Individuals who lack insurance also tend to be younger.
In 2007, roughly 58 percent of the uninsured were under the age of 35.
Finally, the uninsured are more likely to be from lower-income households, although a significant proportion of the uninsured population is made up of people in higher-income households. As shown in Table 7-1, among households earning less than $50,000 per year, more than 20 percent of those households are uninsured. This contrasts with the highest household income category, where only 7.8 percent of individuals lack insurance.
Going forward, it is important that as the Federal Government continues to work on increasing the number of Americans who have health insurance, it uses approaches that effectively target those who are the greatest risk for being uninsured.
Less than $25,0000
Greater than $75,000
Source: Income, Poverty, and Health Insurance Coverage in the United States, 2007, U.S. Census.
Note: Due to rounding, percentages do not add to 100.
Strengthening Community-Based Health Care The Health Center Program is a Federal grant program that offers funding to local communities for providing family-oriented primary and preventive health care services. Health centers serve as an important safety net for people who need medical care but are underserved, including those without health insurance. Health centers provided care to more than 16 million individuals in 2006, and they are located in all 50 States and the District of Columbia.
In 2002, the President made a commitment to create 1,200 new or expanded sites—a goal that was attained in 2007. Additionally, Federal funding for health centers has increased to $2 billion annually.