A Rubik’s cube of health care
The University of Massachusetts Medical School released the fourth Vermont single-payer health care study done since 2001. Each has confirmed that both health care security and substantial savings are possible.
UMass makes perhaps the most compelling case for single-payer of them all. Without reform, Vermonters in 2017 will be paying more than $2 billion in private insurance premiums, plus more than $800 million in out-of-pocket medical expenses — the product of the current relentless race-to-the-bottom competition for higher co-pays and deductibles — compared to $1.6 million in local financing under a single payer that insures everyone and upgrades the coverage of those now underinsured.
The real challenge will be with crafting financing of that $1.6 billion in a way that will transmit those savings where we want them to go and not cause serious economic dislocation. Do we switch over to taxes? Do we continue to use premiums? In order to answer that, we need first to understand the current financing system. It’s not what you might think.
Employment-based health insurance covers about 355,000 of Vermont’s 625,000 residents. Employers pay about three-fourths of that premium cost. Any tax financing system will want a “maintenance of effort” that mirrors the existing contribution as much as possible. It is likely that tax financing would include an employer payroll tax that replaces the premium contributions they otherwise would be making for their employees.
This sounds simple enough at first blush, except that more than half of all Vermont businesses do not now offer coverage at all. Most of them are very small firms that are exempt from any requirement to do so under the federal Affordable Care Act.
Furthermore, the small firms that do provide coverage tend to be indirectly cross-subsidized by larger firms. Two-earner households tend to get their family’s insurance from the larger of their respective employers. Large employers end up insuring in a greater proportion of the population than their share of either employment or payroll. Consequently, health insurance contributions tend to take an increasing bite out of payroll as firms get larger.
In other words, what we have right now is an informal system that, despite its many imperfections, generates substantial employer contributions, is graduated, exempts the majority of small business, and on average provides a level of coverage nearly equal to the “platinum standard” under the federal Affordable Care Act. We won’t want to scuttle that.
Because of this, a flat-rate payroll tax will make losers of small businesses and winners of large employers. In addition, a flat payroll assessment will raise more money from small, non-insuring businesses than is required to cover the uninsured. It is little wonder we have heard so many business owners oppose payroll tax financing, given the flat payroll tax rates that have been suggested.
So what about a graduated payroll tax that mimics the contribution that employers are already making? Unless small firms are exempted altogether or pay a very low rate, the firms not now offering coverage — a majority of all firms — will still experience considerable sticker shock, likely dooming the single-payer enterprise politically.
Requiring all small firms to contribute substantially could also result in adverse wage effects. Lower-paying jobs tend to be concentrated in smaller businesses. It is generally recognized that health insurance is a fringe benefit paid out of a firm’s wages fund and causes downward pressure on wages.
So a tax-based system may want to craft a small firm exemption. But small firms consist of well-paid professionals in addition to mom and pops and struggling start-ups. So who is in? Who is out?
A switch to a tax-based financing system may also mean a big loss for organized labor. While most unorganized employees pay about 25 percent of the premium cost under their employer-sponsored coverage, the employee contribution paid under most collective bargaining agreements is much lower than that.
So as the 2001 Lewin report suggested, do we allow employers to pay a higher percentage of their payroll into the single-payer than the statutory rate? Do we exempt collectively bargained health plans from tax contributions altogether and allow them to buy into single-payer coverage by paying a lump sum premium? Or do we just say “tough luck” to unions who have traded wage gains for better coverage?
The UMass report has already broached the use of over $300 million in private premiums as part of single-payer financing. This raises the option of a single-payer that is even more significantly premium-financed, at least for the population not Medicaid- and Medicare-eligible.
Under this approach, Green Mountain Care single-payer coverage would have to be included as part of any coverage offered by an employer or purchased by an individual, akin to a Medicare Part C policy that includes Medicare plus any supplemental coverage.
A premium-based approach would dispense with much of the “new taxes” bogeyman (which always neglects to mention that the “new” taxes are replacing the “old” premiums). According to the Hsiao report, premium financing would transmit reform savings across the board to all businesses. But the approach has it own set of problems.
It would keep coverage tethered to employment. It would require financing an ongoing tax-financed subsidy for individuals not offered coverage at work so that, like under the Affordable Care Act, premiums are capped by income. That would require the added administrative expense of maintaining a means-tested subsidy system. And the track record of such subsidy systems has yet to show that it could attain universal coverage.
But such dilemmas are the Rubik’s cube of health care reform and will have to be resolved no matter which path is chosen. The Legislature needs this session to begin the discussion of the menu of reform financing options and these trade-offs.
Otherwise when the next biennium rolls around and decisions have to be made, the question of system financing will present a seemingly insurmountable challenge that could stymie the remainder of the reform effort altogether.
John Franco is a Burlington attorney who has been active in health care reform for more than 25 years.