The Agenda

Why Health Reform Needs a Default Option

In “Why Not Medicare For All?,” Ross Douthat addresses the question of why we ought to oppose a gradual slide towards a two-tier single-payer system, in which Medicare and Medicaid would steadily expand to incorporate younger and more affluent Americans respectively:

So these are the two foundations for the conservative perspective on these issues. First, that our health care sector is oversubsidized and a great deal of health care spending is unnecessary, and second, that controlling this spending through the kind of price controls that other nations employ has long-term costs that are unquantifiable but potentially enormous. Which in turn leads to the basic calculus in favor of the catastrophic alternative: That when it comes to long-run human welfare, for the poor as well as the rich, X (the cost-inflation reductions achieved by cost sharing and price transparency) plus Y (the gains to innovation from maintaining or increasing the role of market forces in American health care) is greater than Z (the costs, financial and medical, of not covering as much care for low-income people as a single payer system would).

And though there is no extant model for the kind of health system conservative reformers aim to build, it is also true that no market democracy, with the partial, hard-to-replicate exception of Singapore, that has successfully restrained cost growth while also delivering a high degree of consumer satisfaction. 

We’ve often discussed the potential virtues of “Caprettacare,” James Capretta’s proposal for a gradual shift to near-universal catastrophic coverage built around an ambitious tax reform (a universal, refundable credit for the purchase of medical insurance in the neighborhood of $2500 for individuals and $5000 for families) and an ambitious Medicaid reform (transform Medicaid into a premium support payment for low-income beneficiaries). One of Capretta’s central arguments is that to expand coverage, we need to introduce a low-cost default coverage option that could be financed entirely by the universal credit. This default option is controversial among conservatives, as it is potentially expensive — those who choose to forego coverage will also forego the universal credit, the default option will by its nature greatly reduce the number of people who choose to forego coverage. And liberals find the idea of the low-cost default option unattractive as well, as a default cheap enough to be financed by a universal credit would almost certainly be a catastrophic plan that wouldn’t cover routine medical expenses.

The idea of a default option comes to mind in light of the difficulties facing the new health insurance exchanges. Even in the absence of technical difficulties, I’m starting to wonder why anyone thought that a substantial majority of healthy young people would sign up for coverage, including heavily subsidized coverage. The threat of a penalty is one obvious reason. Yet the Obama administration and its allies have been reluctant to emphasize the punitive dimension of the individual mandate, for obvious political reasons. Rather than using the threat of a penalty to spur enrollment, coverage expansion advocates have emphasized the benefits of insurance, hence the (apparent) reluctance of the architects of the exchanges to expose consumers to the full, unsubsidized cost of the new insurance options. (Back in July, Ezra Klein and Sarah Kliff reported on how veterans of President Obama’s reelection campaign were working to sell young people on the new exchanges. The article goes into great detail on the challenges facing the coverage expansion effort, and it anticipated at least some of the problems we’ve seen so far.)

Consider Cass Sunstein and Richard Thaler on the case for ”libertarian paternalism” in encouraging on-the-job retirement savings: 

Most 401(k) plans use an opt-in design. When employees first become eligible to participate in the 401(k) plan, they receive some plan information and an enrollment form that must be completed in order to join. Under the alternative of automatic enrollment, employees receive the same information but are told that unless they opt out, they will be enrolled in the plan (with some default options for savings rates and asset allocation). In companies that offer a “match” (the employer matches the employee’s contributions according to some formula, often a 50% match up to some cap), most employees eventually do join the plan, but enrollments occur much sooner under automatic enrollment. For example, Madrian and Shea found that initial enrollments jumped from 49% to 86%, and Choi et al. find similar results for other companies. [Emphasis added]

Keep in mind that the individuals in question are employed by the kind of organizations that offer a generous employer match — the population is presumably more conscientious than the population at large, yet initial enrollments start at 49 percent. Even if one accepts that health insurance is more important that retirement savings, this can’t be encouraging for the architects of the exchanges.

As of 2009, the per capita cost of providing non-disabled low-income adults with Medicaid coverage $3025 – from a low of $1136 in California to a high of $6360 in Alaska. This suggests that Capretta-style default options may well be a realistic option at $2500 per adult, and the higher enrollments that flow from the default would more for healthier risk pools. One could argue that instead of having the private catastrophic policies serve as the default options, we should instead have the Medicare system serve as the catastrophic coverage provider, as Don Taylor of Duke has proposed. Others, myself included, might favor private providers, on the grounds that they would be more open to business-model innovation. But one way or another, it seems that we need to start thinking about the idea of a default option.



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