How to Close the Coverage Gap

I’ve written several posts explaining the twin problems of health insurance: adverse selection and moral hazard.  Rather than solve these twin problems, the two main health insurance proposals, Medicare For All (MFA) and The Public Option (TPO), would exacerbate them.

MFA would solve adverse selection by providing health insurance to everyone without premiums or out-of-pocket expenditures, but would cause run away moral hazard, e.g. long wait times, wasted resources on ineffective treatments, high taxes, etc.). It would also crowd out private insurance, thus eliminating one’s choice between a relatively more expensive provider and a less expensive one.

With its reliance on cost-sharing, TPO would cause less moral hazard, but because it would charge a premium, there would still be adverse selection, i.e. the coverage gap and the need for an individual mandate. And like MFA, it would crowd out private insurance, albeit more slowly.

So how do we close the coverage gap (i.e. adverse selection) without wasting resources (i.e. moral hazard) and without eliminating the private insurance market (i.e. crowding out)?

In brief, these three goals can be achieved respectively by: (1) offering a “free” public option, (2) providing it in the form of a managed care organization (MCO), and (3) making private and public insurance complements rather than substitutes. And here’s the kicker: do all this without increasing the burden on taxpayers from what it is now.

You might be skeptical that a “free” public option is even feasible. [I put the word “free” in quotes because as an economist I am duty-bound to point out that nothing is truly free, even public health insurance that does not charge a premium. The cost of this new public insurance will be borne by taxpayers and private insurance consumers, just like the current one]. You might ask, how would it leave room for private insurance and not be ruinously expensive?

I believe this new system is feasible for a number of reasons. First, the current system is so expensive and inefficient that we have a lot to play with here. In 2017, government-financed third-party payments to providers of healthcare to the under-65 population totaled $460 billion. That was 40% of all healthcare expenditures for that age group.

Second, calling it a public option is a bit misleading. Since there is no premium, everyone qualifies for it by default. The public “option” would actually be an entitlement that depends on one’s household income. You have it whether you want it or not, whether you even know it exists or not. That is the only way to get universal health insurance. On this point, I agree with the proponents of MFA. The real option is whether to purchase private insurance or not.

Lastly, this new system is feasible because it and the current one have more similarities than differences. Like the current system, nearly 100% of healthcare expenditures for households with low annual incomes will be paid for by the government. And also like the current system, nearly 100% of healthcare expenditures for households with average annual incomes or higher will not be paid for by the government.

For the households in between, this new public insurance system would amount to a high deductible, catastrophic coverage insurance policy. The government would only pay for unusually high healthcare expenditures. The rest would be paid for by private insurance or the patient herself.

As I have explained in earlier posts, the ACA premium subsidies have increased the demand for private insurance (i.e. shifted the demand curve to the right). This has pushed premium rates higher than they would have been without the subsidies. Private premium rates are already elevated due to Medicare and Medicaid refusing to pay providers the capital costs of providing healthcare.  So, families without access to group insurance and that make too much income to qualify for a premium subsidy are forced to pay exceptionally high premiums.

As I will explain in future posts, this new system should lead to decreased private insurance premiums for these middle-income households and also stabilize the private insurance market. The ACA has setup an unstable system that is likely to collapse during a future recession.

Another question you might ask is, if this new system is feasible, has it been proposed before and, if not, why? I’m not aware of this kind of public health insurance being proposed before. As to why, my only guess is that it contradicts long-held conventions of the insurance industry. Some of it might even seem counterintuitive.

Why this new system is feasible and even efficient hinges on converting private and public insurance from substitutes into compliments. I’ll explain that in my next posting.

Published by TheLoneEconomist

I am a PhD economist who studies just about anything and proudly specializes in nothing.

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