Why Federal Healthcare Vouchers?

Our American Farm Bureau Deficit Task Force spent several two-day meetings in Washington, D.C. discussing healthcare reform with leading experts.  All the experts agreed costs are rising at an unsustainable pace and quick action is urgently needed.  What disappointed and surprised us was that none of the experts provided us with a solution—a comprehensive approach to reforming our current system.

The Task Force’s charge is to find ways to reduce the looming federal deficits.  We could not finish our work without recommending a way to deal with the most important cause of future deficits—soaring healthcare costs.  After much discussion, we decided the best approach is federal healthcare vouchers:

… the federal government should provide each citizen with a voucher sufficient to purchase a bare‐bones, private health insurance policy. These health care vouchers could be used only for insurance plans that incorporate the reforms necessary to reduce the growth in health care costs. To encourage innovation, the requirements that health insurance plans must meet to be eligible for voucher financing would be determined on a regional basis.

I believe we were all surprised by our vote to support vouchers—I certainly was.

I voted “yes” last May for two main reasons.

1. Vouchers offer the best hope of getting key reforms implemented quickly enough to avoid a government takeover of our healthcare system.

Health insurance premiums in the U.S. more than doubled between 2000 and 2009.  According to the Kaiser Family Foundation, the cost of a family health insurance policy now averages $13,375 per year.  When out-of-pocket costs are included, the total is close to $16,700.  Since median family income in the U.S. is approximately $60,000, total healthcare costs are now a quarter of family income!

This year, employers paid on average $9,860 of the $13,375 cost of health insurance for a worker and his family.  Many workers with employer-provided insurance believe they don’t need to worry about rising healthcare costs because their employer is picking up their tab.  These workers are suffering from an illusion.   Good evidence exists that employers recoup the rising cost of health insurance by reducing future wage increases—so workers do ultimately pay the full cost.  Over the last twenty years, output per hour in U.S. businesses has increased by over 150%.  Hourly wages in manufacturing (adjusted for inflation) have declined slightly.  Productivity growth should cause wages to rise, but rising health insurance costs are siphoning off all the extra income.

If healthcare costs continue to grow at their current rate for nine more years, the average cost of health insurance for a family is projected to be $38,000 or ½ the family’s income.  Our current system of private insurance, mostly provided by employers, will self-destruct before that happens.

Our market-based healthcare system has many strengths—including patient choice, rapid innovation, and competition among private insurance companies, hospitals and doctors.  As I discussed previously, its inability to control costs stems mainly from an over-reliance on fee-for-service payments.  Fee-for-service payments—combined with a physician’s dual role as a provider of both diagnoses and of treatments—encourages too much ineffective and costly treatment.  How can doctors’ and hospitals’ incentives be changed quickly without direct government regulation, while still preserving the good features of our current system?

Our recommendation is to have the federal government offer all citizens a voucher redeemable for a bare-bones health insurance policy from one of many competing private insurance companies.  Additional coverage could be purchased and added on if desired.  The tax deductibility of health insurance would be eliminated.  Insurance companies would be required to accept all applicants, but would receive a bigger voucher payment for covering an applicant with a pre-existing condition.  Medicaid would disappear.  Senior citizens currently on Medicare could stay in the Medicare program.  However, younger citizens would stay with vouchers and private insurance when they turned 65 years old.  Hence, Medicare would phase out over time and all citizens would eventually finance their basic healthcare with vouchers.  Finally, the most important change—to be eligible to accept vouchers, insurance companies would be required to change the way they pay hospital and doctors.  Fee-for-service would be phased out and new methods introduced to encourage better outcomes and discourage costly, ineffective treatments.  For example, insurance companies would be required to increase the use of bundled payments, capitated payments, electronic medical records, and self-monitoring by doctors in each local area (Accountable Care Organizations).

2. Vouchers would establish a national healthcare budget and allow the U.S. to control the growth in healthcare spending.

 

The AFBF Deficit Task Force didn’t make a recommendation on how the healthcare vouchers should be financed.  I’m convinced that financing should come from a new dedicated consumption tax—i.e., a value-added tax  (VAT) or a national sales tax.  The level of the tax would depend on how “bare-bones” is defined.  Martin Feldstein recently argued that the federal government could provide everyone with a high-deductible health insurance policy by using only the extra $220 billion in tax revenue gained by eliminating the tax deductibility of employer provided insurance.  However, if deductibles are set too high, the poor would still need Medicaid and many low and even middle income Americans would need subsidies to pay their deductibles.  One of the great attractions of the voucher idea is that income-based subsidies aren’t required.  Subsidies that vary with income (such as those included in all the healthcare bills now working their way through Congress) are complicated. They also dramatically increase the marginal taxrate faced by those who receive them and would have bad effects on incentives.

Emanuel and Fuchs provide details on the funding of healthcare vouchers.  They estimate that a 15 percent VAT would be needed to provide all Americans, including the elderly who would now be on Medicare, with a voucher for health insurance coverage similar to the plan now covering members of Congress.  Adding a 15 percent consumption tax would represent a significant increase in federal taxes.  However, healthcare vouchers would provide important other benefits:

 

1. As Medicare phases out and seniors transition to vouchers, the VAT rate would need to increase from “10 to 12 percent to approximately 15 percent.”   However, the 2.9% Medicare payroll tax would be eliminated.

2. The federal government currently spends about $220 billon on Medicare above what is collected by the Medicare payroll tax.  Medicaid also costs the federal general fund about $200 billion. The tax deduction for employer-provided health insurance reduces federal revenue by about $220 billion.  Vouchers would eliminate the need for all three. The federal government would have approximately $600 billion that could be used to reduce the federal deficit.

3. State budgets are currently under severe strain due to the rising cost of Medicaid, SCHIP and employee health insurance premiums.  These programs currently take up approximately 20% of state budgets.  Vouchers would eliminate these state expenditures and should cause a reduction in state and local taxes.

4. Employer-provided health insurance would be eliminated and individuals would pay only for “add-on” coverage above what their voucher provides.  Since an employee must now accept his employer’s choice of a health plan, vouchers would give individuals more choice and increase competition in the private insurance market.  As employer-provided health insurance phases out, wages should start rising again in line with productivity growth.

5. Since vouchers would be financed by a dedicated tax, the U.S. would—for the first time—have a national healthcare budget.  If healthcare costs increased faster than the growth of the economy, either the VAT tax would be raised or changes would be made in our healthcare delivery system to reduce the growth in costs.  Since everyone would bear the cost of a tax increase, our nation would finally have an incentive to deal with the hard choices that we must eventually make—how much to spend on end-of-life care, when to pay for very expensive new medical equipment, how to modify the fee-for-service payment system, etc.

6. Finally, by replacing Medicare and Medicaid with vouchers funded by a new, dedicated tax, the U.S. would eliminate almost all of the federal deficits projected to be such a problem over the next fifty years.  Vouchers would also eliminate the need for large future income tax increases.  Vouchers funded by a dedicated tax would, by themselves, solve the problem that caused our Deficit Task Force to be created.

 

References:

Ezekiel J. Emanuel and Victor R. Fuchs, “A Comprehensive Cure: Universal Health Care Vouchers,” The Hamilton Project, The Brookings Institution, July 2007.

Laurence J. Kotlikoff, The Healthcare Fix—Universal Insurance for All Americans, 2007

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