Thursday, June 7, 2007

Giuliani Set to Announce a Health Care Proposal--But He Has to Make it Affordable for Everyone

Republican presidential candidate Rudy Giuliani is set to announce a new health plan this summer that would provide incentives to shift private health insurance from the employer group model to the individual health insurance model, according to an article in Thursday's Wall Street Journal.

Details are sketchy. We understand that it would still allow the traditional employer plans to continue, it would provide the same tax benefits to individuals as employees get, and it would allow consumers to cross state lines to find the best coverage.

Such an individual-based proposal would be consistent with Giuliani's prior comments on health care reform where he rejected the comprehensive health care proposals suggested by the leading Democratic candidates to greatly expand on existing public and private employer-based plans. He has called those proposals "socialized medicine."

Giuliani is quoted as saying, "What I would do is change the whole model that we have for health insurance in this country. The problem with our health insurance is it's government and employer dominated. People don't make individual choices."

Giuliani has also endorsed the President's "State of the Union" health care proposal that would end the tax preference on employer-provided health insurance and replace it with a standard tax exemption for all those who have a health insurance policy--individual or employer. He is also a big supporter of health savings accounts (HSAs).

The WSJ report says that he does not favor an individual mandate.

In its current form, the individual health insurance market makes heavy use of age rating and medical underwriting in order for insurance companies to protect themselves from "anti-selection." That is, people waiting until they get sick to sign up or having a disproportionate number of older and sicker people buying the coverage.

To make an individual health insurance market model work insurers have to get a good cross-section of risk. For that to happen it generally takes 75% of those eligible for the coverage to sign-up.

We have a number of existing health insurance markets where insurers get a good cross section of risk--where "anti-selection" is not an issue--and where there is no mandate to participate:
  • Employer plans - People don't have to participate in their employer's plan but generally do because the employer pays for most if its costs.
  • Medicare Part D - Seniors don't have to participate but since the feds pay for 75% of its cost, most do.
  • Medicare Part B - Since the feds pay for 75% of Part B costs, almost all seniors participate.
In all of these cases, participants pay the same rate no matter how old they are and don't have to pass a medical underwriting process, or have any other coverage penalty, so long as they sign-up when the coverage is first offered.

So, an individual health insurance model can work. However, it is clear that for it to work people have to be offered coverage they can afford.

With the average cost of family health insurance now almost $12,000 per year, middle- and lower-income people are going to need lots of assistance in order to be able to join. The experience from existing employer plans, Part D, and Part B tell us that someone has to pay at least 75% of the cost for the coverage to be affordable and attractive.

Making individual health insurance tax preferenced isn't going to help a lot of people who are in lower income brackets and don't pay a lot of taxes. HSAs may cost a little bit less but not enough to make them affordable for these same people without a lot of premium assistance.

And, how many middle-class people could afford to pay $10,000 or $12,000 in health insurance costs even if they had a tax benefit worth maybe a quarter or a third of that?

Coverage has to be affordable for everyone in order to:
  • Get enough people to sign-up to make the insurance market viable.
  • Make it possible for everyone to get coverage--to solve the uninsured problem.
So, Mr. Giuliani's individual market model can work. It can even work without an individual mandate.

But it can't work unless coverage is affordable.

That is the big challenge his proposal will have to address.

He may have to end up offering one of those big expensive government health care plans for that to happen!
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