Editor’s note: This analysis first appeared on the Ethan Allen Institute blog.
The Vermont Legislature is concerned that with the repeal of the Obamacare insurance mandate, individual Vermonters, especially the young and healthy, will choose to go without insurance rather than pay exorbitant premiums out of limited incomes. Hence the Legislature favors its usual remedy of force, to get them to comply with the state’s wishes under the threat of costly penalties.
That threat is motivated by the same idea that underlies community rating, which was enacted as a corporate welfare plan to bail out Blue Cross Blue Shield of Vermont (1991-2). At that time, BCBSVT was rapidly descending into insolvency. Thanks to intense lobbying, the Legislature and two governors agreed to impose community rating for all individual and small group health insurance, thus driving out BCBSVT’s competitors and giving it a near-monopoly in the individual and small group health insurance markets.
Thanks to community rating, healthy young people are made to pay higher premiums to cover the elderly sick. This may seem charitable, but consider this: A young couple in their twenties is typically trying to pay for a home mortgage, cars, children, and often college loans. They are trying to meet these responsibilities when they are at the low end of their career income curve.
But their grandparents have long since typically paid off their educational loans, paid off their home mortgage, and seen their children grow into adulthood. A breadwinner with 40 years of work experience is usually earning his or her highest income.
So, the Legislature changed the insurance law by outlawing age rating. Then statistically less healthy Grandpa and Grandma get lower, cross-subsidized insurance premiums, and their much healthier grandchildren pay the bill with higher premiums. Does this sound fair or reasonable? No, it sounds more like Robin Hood in Reverse — forcing the poorer to subsidize the richer. That’s exactly what Vermont community rating has required since 1992.
Because community rating drives up the price of insurance for young, healthy people, they often choose to decline insurance and take their chances. The individual mandate is designed to take away that choice and make them pay — because their overpriced premiums are needed to pay for their older, sicker grandparents, despite the fact that the older generation is statistically better able to pay those premiums.
A statement on slide 8 says that forcing resisters into the pool will “Spread risk throughout a larger population, enabling lower premiums for everyone.” This is only true in Lake Wobegon, where “every child is above average.” The name of this game is charging undeserved higher premiums on some (young, healthy) people. That emphatically does not “enable lower premiums for everyone” – just everyone else.
It is encouraging that some members of the Working Group balked at a Big Hammer mandate to force the uninsured to buy government prescribed health insurance, or suffer a financial penalty or other affliction.
Whatever Big Hammer is chosen to drive people into buying government-approved insurance, some will necessarily be exempted. The Obama administration, having designed the ACA, proceeded to create fourteen classes of exemptions. Some — incarcerated persons, foreign tourists, persons not liable to the income tax, armed forces, religious objectors, no plans offered in their market — are noncontroversial. The major ACA exemption was “hardship”. That term ended up informally being defined as “not enough money to buy a Bronze Plan even with ACA subsidies.” If there is to be a mandate, the exemption level should be something like 400% of the FPL, to entrap as few working families as possible.
The ACA explicitly provided that families participating in four recognized Health Sharing Ministries were exempt from the ACA mandate. These voluntary networks of Christian concern do not offer insurance; instead, their participants agree to pay every month their calculated share of the medical expenses of all participants. These ministries are superb examples of a civil society of shared concern, whose members cooperate in meeting their health needs. These organizations ought to be strongly encouraged, and their enrolled participants exempted from any mandate. Blue Cross Blue Shield of Vermont’s disgraceful opposition to their exemption should be ignored.
At its second meeting the Working Group was presented with a completely different proposal for encouraging universal coverage. Their collective mind, focusing on designing The Big Hammer to tax or fine Vermonters into compliance, seemingly could not grasp any alternative method, which is regrettable. One such method, advocated by the Ethan Allen Institute for over twenty years, is this:
Faced with the steep cost of insurance, many people — especially healthy young people — choose to go without. Fine — but if they then incur high medical expenses, they ought to accept the primary responsibility for paying for the services they have received.
Consider this proposal: If an uninsured person incurs medical expenses and leaves an unpaid balance, the provider must try for 90 days to collect. At that point the unpaid balance is posted to an account in the patient’s name, managed for the government by a credit-card company. Each year the account manager reports to the patient his or her balance, on the equivalent of an IRS1099 form. When preparing that year’s taxes, the individual must include a stated fraction of that amount in his or her gross income.
The fraction reported would be graduated according to the patient’s income and the amount of the balance due. For a high-income taxpayer with a low account balance, the amount subject to tax the first year might be 100 percent of the balance. For a taxpayer with minimal income, the balance would carry over undiminished to the following year.
Thus the uninsured patient would be required to pay off the unpaid balance via income-tax payments year after year until it is retired. Whether the account balance would be adjusted upward annually to match the depreciation of the dollar, whether interest would be charged on the average balance, whether the IRS would have a claim on a decedent’s estate for the unpaid balance, and whether such liabilities would survive bankruptcy are questions for policy makers to decide. A further question is how much the government would deduct from the tax payments to cover administrative costs before remitting the remainder to the providers who weren’t paid for their services.
In sum, the proposal says to the person who prefers not to obtain insurance: “Your government will not fine you for failing to buy health insurance. But if you are unlucky enough to run up a big medical bill that you can’t pay from your assets, you will be paying a piece of it off every year at tax time, possibly for the rest of your life. Are you sure you wouldn’t prefer to invest in a high-deductible insurance policy with limited mandates and a cap on out-of-pocket payments, or if you’re uninsurable, buy into a high-risk pool, and make payments from your own tax-free Health Savings Account?”
It will be objected that it might be years — if ever — before an ordinary individual could pay off a large hospital bill through annual income-tax payments. That’s true. But the proposal at least fixes the economic responsibility for paying for services received upon the person benefiting from the services, and it sets up a virtually effort-free mechanism for paying.
To the extent the government returns the tax collections from this provision to the unpaid providers, the proposal will reduce the otherwise unavoidable cost shift to the premiums of insured persons.
This plan is a clear conceptual alternative to the government’s Big Hammer forcing every citizen to buy government-approved insurance. The uninsured patient will be spared an oppressive government mandate to buy coverage. But the patient will know that if he or she suddenly requires expensive medical care, the consequence of having failed to enroll in suitable coverage will be reduced after-tax income. That will emphasize that the unpaid bill remains the patient’s responsibility, not society’s.
No scheme is perfect. If expenses are incurred, somebody has to bear the burden. But by obviating the argument for an illiberal individual mandate, such an income-tax-based recapture plan has a lot to recommend it.
I would have been glad to present this alternative proposal, with its pros and cons, to the Working Group. Alas, fixated on The Big Hammer, they weren’t interested.
To make health insurance more affordable, in a free society, we should:
- Strongly reinforce the principle that the primary responsibility for maintaining wellness and paying for health services rests with the informed individual and family, not with the government.
- Spend public dollars to educate citizens – and especially young people – in the consequences of healthy and unhealthy lifestyle choices.
- Stimulate, support and recognize a wide range of citizen-led initiatives for maintaining health and managing chronic illness, such as Operation Access (North Carolina), health care cooperatives, free clinics, Remote Area Medical clinics, friendly societies, church-based clinics, lodge practice, health sharing ministries, and facilitated networks.
- End the notorious practice of the State declaring more and more people eligible for free health care, then failing to pay the full costs of that care, thus forcing the providers to shift those costs onto private insurance premiums.
- Offer the acute care Medicaid population a Healthy Indiana plan, where patients purchase care with their contributions to their own POWER accounts, supplemented with matching Medicaid dollars, with performance incentives and state-provided catastrophic coverage.
- Repeal Certificate of Need review, a process that strengthens monopoly power and produce higher patient and insurer costs.
- Repeal age-based community rating that forces young healthy people to cross subsidize premiums for their older, sicker, but richer grandparents.
- Replace guaranteed issue with a state high risk pool – preferably like Maine’s “invisible” pool – to pay the exceptional costs of the one percent of the population that is uninsurable
- Reduce insurance coverage mandates especially for pregnancy, substance abuse, and ill-defined mental health conditions, especially those that consumers don’t want or will likely never use.
- Install an income tax based recovery requirement for persons who get medical care, are able to pay for it, but won’t.
- Encourage use of modern health management technology, including remote health monitoring devices.
- Enact medical malpractice reforms, such as a pre-trial medical review board, creating a patient negligence formulary, and imposing fines for bringing frivolous cases.
- Scrap the Big Hammer approach of fines, taxes and penalties to drive people into coverage that may not meet their needs.
One final thought: Gov. Scott, taking note of the demographics of Vermont’s future work force, asked the 2017 Legislature to fund several relocation enticement programs — “Think Vermont/MOVE” — to attract healthy working age immigrants into the state. Said he, “First, we’ll focus on those most likely to move to Vermont: People who lived here but left, who came here for college, who vacation or do business here, and maybe even those who haven’t been here before, but share our values and want to raise their family in the safest and healthiest state in the country.”
Now, assuming the Legislature adopts a Big Hammer to force everyone into minimum essential coverage, let’s add a candid extension to that appeal:
“For those of you who are young and healthy, choose to come here, and want to create your own company or take part in the gig economy, I should remind you that unless you go to work for an employer who offers approved coverage, you will have to purchase government-approved health insurance offering “minimum essential coverage.”
“The premium rates you’ll pay don’t take into account that you’re young and healthy. In fact, our community rating rule taxes people like you to subsidize the old and sick, even though the older generation is notably wealthier than yours. Why? Because the Legislature wanted to subsidize the medical bills of the older and more politically influential generation, and decided to send the bill to you via much higher premiums, instead of to older voters who don’t like high insurance costs or taxes.”
“What happens if you don’t buy the required insurance? Don’t worry – you won’t go to jail. You’ll just be hit with a tax or fine sufficient to make you reconsider your choice not to buy coverage (or your choice to come to Vermont in the first place).”
“Please check our website for prospective immigrants who want to join ‘our socially responsible culture’. It lists the dates and places of our “immigrant mixers”, where you’ll get a block of cheese, a quart of maple syrup, a free ice cream cone, and the price list for health insurance policies you can select from to avoid the annoyance and expense of the penalties provided for dissenters.”
“PS: There are other states with lower taxes, fewer regulations, a warmer climate, lower energy costs, and no insurance purchasing mandate, but they can’t offer our socially responsible culture!”