The Risk Pool Question


by Reihan Salam

Source: National Review Online

John Goodman of the National Center for Policy Analysis has been calling for market-oriented health-system reform for decades, and he is one of the architects of health savings accounts and the broader embrace of consumer-directed health plans. He now finds himself immensely frustrated with recent Republican divisions over health reform, e.g., the recent failure of House Majority Leader Eric Cantor’s bid for shifting resources from the Prevention and Public Health Fund established under the Affordable Care Act, which the Obama administration has been using to finance the creation of state-based exchanges, to high-risk pools. Goodman has many thoughts on what has gone wrong with conservative health reform efforts, but his fundamental contention is that because there has been very little intellectual collaboration and exchange across right-of-center think tanks on the subject, conservative lawmakers haven’t come close to reaching a consensus about “what is to be done.”

For Goodman, the most problematic aspect of the Affordable Care Act is that it creates serious horizontal equity problems, i.e., households at the same level of income are treated very differently, depending on whether they acquire health insurance via employers or via the state-based exchanges, etc. And so along with health economist Mark Pauly of Wharton, he has long championed fixed-sum tax credits. Liberal critics have objected to fixed-sum tax credits on the grounds that the tax credits envisioned by Goodman and others are not generally large enough to finance the purchase of comprehensive health insurance policies, and many fret that fixed-sum tax credits would lead to the rapid unraveling of employer-sponsored insurance, thus shifting tens of millions of Americans to a fragmented and flawed individual insurance market.

But Goodman, like Yuval Levin and Ramesh Ponnuru, among others, maintains that the fixed-sum tax credit would create a powerful incentive for private insurers to create attractive insurance products that cost no more than the fixed-sum tax credit. This insurance products would look different from comprehensive health insurance prodicts, in that they would tend to employ narrow networks and they would have somewhat higher deductibles. Yet they would shield households from catastrophic expenditures, and their narrow networks would tend to encourage medical providers to become more cost-effective, so that they would be more likely to be included as providers of choice.

One of the more intriguing aspects of Goodman’s proposal, to me, is that he suggests that households be allowed to buy into the Medicaid program. The core elements of the Goodman program includes: (1) fixed-sum tax credits worth $2500 for every adult and $1500 for every child (an amount that would have to be revised over time); (2) money that is not claimed by individuals will flow to state and local governments to be spent on medical care for the indigent; (3) the federal government would make certain benefits fully or partially conditional on proof of insurance, to encourage the expansion of continuous coverage; (4) and finally, households would be allowed to spend their fixed-sum tax credit and some additional income-contingent amount, starting at zero for low-income households, to buy into Medicaid. (Medicaid beneficiaries would also be permitted to exit the Medicaid system if they’d prefer to use their fixed-sum tax credit to purchase private insurance.) Under Goodman’s framework, state Medicaid programs can thus serve as a “public option,” offering a backstop for those who would prefer not to navigate the private insurance market and who are comfortable with Medicaid’s limitations. (See this recent post by Don Taylor Jr. to get a sense of Medicaid spending across beneficiary categories.)

This weekend, I had the pleasure of reading David Goldhill’s Catastrophic Care. Avik Roy published a lightly-edited excerpt from the book back in January, outlining the basics of Goldhill’s proposed health-system reform. My sense is that the chief objections to Goodman’s proposal from the center-left will be that it leaves room for adverse selection and that its fixed-sum tax credits will be insufficiently generous, though there will be additional wraparound subsidies for low-earners. My concern, which Goldhill addresses, is that I’m not sure that high-risk pools are sufficient to address the challenges facing individuals with high health costs. Over time, for example, there is a danger that politicians will expand high-risk pools to woo voters, as Avik has suggested. Then there is the possibility that the ranks of the truly uninsurable might increase over time as we learn more about the genetic propensity of individuals to contract various chronic diseases. And so one of the foundations of Goldhill’s proposal is a universal “true catastrophic insurance” system, run by a publicly-sponsored non-profit corporation. Others, like Harold Luft, have proposed public reinsurance mechanisms to achieve the same basic goal of creating a unified risk pool to cover the risks of hospitalization and chronic illness. Goodman, in contrast, is more inclined to support John Cochrane’s approach of using health-status insurance to protect continuously-insured individuals against the danger of developing medical conditions that would raise their insurance premiums. While I find many aspects of Goodman’s approach attractive, this risk pool question is immensely challenging.