Coverage for All

Imagine receiving a voucher from the U.S. government each year to pay for your health insurance premiums. No more worries about paying for prescription drugs, home health care, and nursing home care, which are all covered, or about losing your health coverage if you switch jobs, or being turned down by an insurer for a preexisting health condition.

Laurence J. Kotlikoff

Laurence J. Kotlikoff

Sound impossible? Not to Laurence J. Kotlikoff, an economics professor, research associate of the National Bureau of Economic Research, and fellow of the American Academy of Arts and Sciences and of the Econometric Society. Or to the many government leaders around the world, such as in Germany and the Netherlands, who have successfully enacted universal health insurance.

A passionate advocate for health care reform, Kotlikoff laid out his plan for a U.S. Medical Security System in The Healthcare Fix, published in 2007 by MIT Press. The premise is a simple market-based plan that every American can buy into, he says: insurance companies remain private enterprises and citizens have the freedom to choose their own insurer. And no American, regardless of his or her health condition, is denied coverage.

The government, not insurance companies, must set reasonable fixed rates for basic health care services and for extra oversight of patients with chronic ailments, such as diabetes, hypertension, and heart disease. These patients would receive larger vouchers, thereby giving insurers financial incentive to accept sicker patients. That way, says Kotlikoff, “No insurance company will be able to engage in ‘cherry-picking,’ selecting the patients who are the healthiest.”

Kotlikoff says 90 percent of the funding for his program is already in place. All the government needs to do is rechannel what it already spends on health care—state and federal health care payments, allotments for Medicaid and Medicare, and government tax breaks. Right now skyrocketing health care costs for Medicare and Medicaid are threatening to bankrupt the U.S. government. By setting the annual voucher budget at a fixed share of Gross Domestic Product (GDP), the country remains solvent, he says. Over time, an independent government panel would determine additional new coverage to the basic plan, allowing Americans’ health care benefits to grow at a pace the nation can afford.

“No insurance company will be able to engage in ‘cherry-picking,’ selecting the patients who are the healthiest.”

“The current system will surely collapse,” he says. “What I’m proposing sounds radical, but it’s the conservative option. Right now, what we’re doing is radical. We’re driving off a cliff.”

How much would each American receive on his or her health care voucher? That depends on the person’s objective health conditions. The amount of each voucher would be individually based on a formula known as risk adjustment, says Kotlikoff, perhaps the one already in use by Medicare.

Over the years, the Centers for Medicare and Medicaid Services (CMS) have experimented with risk-adjusted formulas in what is now called the Medicare Advantage program for Medicare HMOs. The most attractive Medicare risk-adjustment formula at this time was developed in the 1990s by Randall P. Ellis, an economics professor, and his colleagues, Arlene S. Ash, a research professor at the School of Medicine, and Gregory Pope, of the Research Triangle Institute. CMS refined and implemented the formula in 2000 and 2004 to pay Medicare HMOs a fair sum to reflect costs.

Randall P. Ellis

Randall P. Ellis

Risk-adjustment methods—there is no one formula—are statistical tools that help gauge medical costs for patients’ health conditions; they are used here in the United States and in high-income countries that have universal health insurance, as part of the response to marketplace economics and the insurers’ demand to “show me the money.” High-risk patients need extra care, and extra care costs insurers money. Insurers are paid more for a 55-year-old female patient with diabetes, for example, than for a woman of the same age with no chronic ailments. If the woman has additional health issues—emphysema, say, or high blood pressure, or heart trouble—extra payments are tacked on to the basic health plan cost for each health problem.

Today Ellis, a principal investigator or co-PI on numerous health care research projects funded by CMS and the Robert Wood Johnson Foundation, is a consultant for the Federal Republic of Germany, which is one of several countries that has moved from risk-adjustment formulas using only demographics like age and gender to more complex, sophisticated diagnosis models. Risk-adjustment formulas are also being used in other areas to assess provider quality, to meet targets for vaccines and screenings, and to offer financial bonuses for keeping hospital rates—and overall costs—low.

Germany, Belgium, Switzerland, and the Netherlands—all of which have private insurance companies and offer residents a choice among competing plans—strive to regulate premiums and promote fair competition, which may help explain why their universal insurance programs work so well, Ellis says. Ninety-nine percent of their populations are enrolled. The United States is unique among high-income countries: 47 million Americans, or roughly 15 percent of the population, do not have health insurance.

“Companies in the Netherlands, for example, don’t avoid sick people,” Ellis says. “Yet they still do very well. In the United States, insurers compete to avoid getting too many sick people, and that’s a sad state.”