Expanding Health Insurance Coverage

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

This proposal - designed to expand health insurance coverage - was written as a component of a Robert Wood Johnson Foundation-funded project which was directed by The Economic and Social Research Institute (ESRI). Nine other proposals were also written by other authors under the auspices of this project, "Covering America: Real Remedies for the Uninsured." All 10 proposals can be accessed through the ESRI web-site www.esresearch.org.

Overview

We propose a new consolidated federal-state health insurance program based on five principles:

1. Substantial new federal subsidies to finance expansion of coverage with state discretion to participate and to modify rules.
2. Equity among individuals with similar incomes and among states in a new program that would also end the complexity in current public programs.
3. Spread excess health risks broadly across the general population.
4. Organize the purchasing of subsidized health insurance.
5. Choice—all privately insured can keep their current arrangement if they prefer.

These principles would be implem en ted in the following ways.

Substantial new federal subsidies to finance expansion of coverage with state discretion. In those states that choose to participate, full subsidies are provided for those with incomes below 150 percent of the federal poverty level (FPL), and partial subsidies are made available for those with incomes between 150 percent and 250 percent of FPL. Within minimal federal standards—for example, minimum benefit packages—states are given broad leeway to design and organize purchasing arrangements that work best for their local conditions. Our federalism model is the current State Children's Health Insurance Program (S-CHIP), with high federal contributions and considerable state flexibility. The federal share of the total subsidy in our plan is 30 percent higher than today's Medicaid matching rates. Our model would differ from S-CHIP in that there would be no fixed budget all ocations and states could not limit enrollment arbitrarily. State participation is voluntary, and, after five years, states are free to impose an individual mandate if they choose. Participating states also receive the higher match on their residual Medicaid program, including long-term care benefits to the elderly, and wrap around benefits for the non-elderly. As discussed below, participating states can keep their disabled residents in the residual Medicaid program or bring them into the new program (under special arrangements). Non-participating states would continue to receive their current Medicaid and S-CHIP matching rates. The higher federal share of expenditures in the proposed program is designed to ensure that the net incremental cost to states is relatively low and, thus, is intended to give strong incentives for state participation.

Equity. All people at the same income levels in each participating state are eligible for equal subsidies, whether they are currently enrolled in Medicaid, S-CHIP, or private plans, or they are uninsured. This simplifies complex and conflicting eligibility rules that discourage coverage expansion. The primary condition for receiving subsidies is to purchase insurance through a state-organized purchasing pool. States receive the same federal matching funds for all of their enrollees, unlike the current system, which provides higher federal shares for higher-income S-CHIP children than for lowerincome Medicaid children. Finally, individuals with incomes below 150 percent of FPL are treated equally in every participating state, and those between 150 percent and 250 percent are treated similarly across the states as well. The federal government imposes a floor on the subsidy levels between 150 percent and 250 percent of FPL.

Spread excess health risks broadly. No one, regardless of his or her personal health risk, is charged more for insurance than the hypothetical (and computed) statewide community rate, and this guarantee is financed with public (federal plus state) dollars. The statewide community rate is the rate that would be charged by a competitive insurer for a person of average risk for the standard benefits package. This is a key new concept, and we devote considerable attention to it. This explicit subsidy for higher-risk individuals is available only to those who purchase through the new state-organized purchasing pool. At the same time, private insurers would be free to price products outside the pool as they see fit. The key design feature is that the financial consequences for higher-than-average risks are shared across all citizens, because those inside and outside the state pool pay taxes, the source of financing for our proposed subsidies.

Organized purchasing of subsidized health insurance. The primary new institution is a purchasing pool composed of Medicaid and S-CHIP recipients and all others who choose to join. Federal law requires this pool to be open to all at community rates. Administrative efficiencies, risk pooling, bargaining power, and data collection for risk adjustment and community rate determinations are all enhanced through this kind of purchasing entity and risk pool. States have broad discretion to design their purchasing pools within federal guidelines, and they can choose to enroll all state and local employees in the pool as well, or give them the choiceof enrolling, as might any other employer. Certainly the uninsured, but those with private insurance who might prefer to purchase standardized benefits packages through this pool at a statewide community rate as well, are free to join, or they can maintain their existing arrangements. This choice—to join the state pool or make their own private arrangement—is a central element in our plan and our fifth principle, explained below. The state-organized purchasing pool—which can be operated by a private vendor—is required to operate (or contract for) its own managed fee-for-service (FFS) health plan and may choose to manage competition among private plans as well. The purpose of requiring a state FFS plan is to ensure sufficient enrollment capacity and to provide the state with a basis of comparison for premium rates submitted by private insurers who wish to sell their plans through the pool. The state assumes the insurance risk for this FFS plan.

Choice. All of the privately insured who want to can keep their current arrangements may do so. No new regulations are imposed on insurers outside the state's risk pool, and states are free to repeal insurance market regulations not required for compliance with the Health Insurance Portability and Accountability Act (HIPAA). Employers are free to offer coverage or not. If they do, they can offer their coverage exclusively through the state pool, or they can offer it both inside and outside the state pool. In either case, the employer selects its preferred contribution level. All workers must have access to the pool because subsidies will be available only to pool enrollees. In addition, anti-discrimination rules require that firms offering coverage inside and outside the pool must make equal contributions to both. Any individual in the state is always free to join the state pool during open enrollment.

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Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.