Health Care Delivery System - A page from the 401(k) Book

The idea is to use the superstructure of Total Compensation/Defined Contribution design combined with the idea inherent in the Pension Protection Act applied to (k) plans to build a health care delivery solution.

BACKGROUND
Employers NEVER pay for health insurance - employees do by sacrificing money that they would otherwise receive as wages. Therefore, the only rational approach to insurance purchase is a Total Compensation/Defined Contribution approach (DC). The challenge with this approach is the underlying requirement that the consumers are well educated and/or have a strong desire to be engaged in their own personal plan design. A second challenge is that of mandated coverage - which is the inevitable logical requirement of any insurance company that must submit to any form of guarantee issue coverage.

PPA LOGIC AND HISTORY
The Pension Protection Act (PPA) is a result of the maturation of the DC approach to retirement plans. Government has realized that most of us as individuals lack motivation, education, and discipline needed to provide for our own retirement. They have learned that over the years many large employers solved the various testing requirements for (k) plans by using something called a "negative election" - which is now known as "auto-enrollment". The idea here is that all employees are automatically enrolled in the employer (k) plan when they become eligible at a minimum contribution level. Employees may actively "opt out" of the plan by notifying the employer they do not wish to participate. By using this method and relying on basic human inertia and/or "helping people do the right thing automatically", employers have seen participation rates go from 75% to 92%. But that did not solve the real problem - people still do not save enough and they make poor investment decisions.

So the PPA also allows for the initial automatic employee contribution to increase each year by 1% up to a maximum amount. In addition, the plan provided 4 investment options that are a mix of funds and styles based upon the age of the participant - younger to older translates into aggressive to moderate to conservative investment models. Once again, participants my opt out, change the contribution or completely control their own investment choices as they wish. Since these plans have only been in force since 1/1/08 we have no way of knowing the results but is seems likely that people are saving more at least and in the current volatile market, probably making better investment decisions. Everyone has the option of doing nothing and letting things happen however they do, or actively managing their own retirement funding.

401(k) plans also allow for direct investment choices - that is participants may also be allowed (if the plan so provides) to invest in ANY instrument approved by the DOL/IRS. The means individual stock, bonds, etc - even some commodities. Basically what the PPA has done is provide for a series of defaults for those that wish to voluntarily avail themselves of same. Otherwise a (k) plan allows for voluntary participation and selection of investment alternatives is completely up to participant. One might consider this to be a place somewhere between the old Defined Benefit pension plans of yesterday, and Money Purchase plans of today.

APPLY TO HEALTH INSURANCE DELIVERY
Obviously an idea such as this requires significant change in current law/landscape. Medicare must be modified, ETMALA eliminated, various state mandates eliminated and probably the formation of a Federal agency would be required. UGH! But the trade off might be a viable market solution with the Feds making sure we have a level playing field. Finally we must eliminate the tax preference. It simply ruins the demand side of the equation. There is no other way to make health care and insurance to hold a rational place in the economic system. People must face the same post tax options for spending their income for health care and insurance as they do for gasoline, housing and food. And yes - eliminate the mortgage interest deduction too.

For starters we continue to use the employer in this scheme - but only to process premiums. Each employee would have the following options:
1) opt out of health insurance all together WITH complete and total responsibility for all health care expenses. ALL PROVIDERS would have the right to demand payment up front or a bond before providing any care. Yep - someone could make this choice and bleed to death in the street. And we have to leave them there - much the same as we would/could with those the do not purchase mandated auto insurance.
2) Choose any plan offered by any licensed company in the country - and have premium taken from pay on a post tax basis and remitted by the employer.
3) Default to a Medicare Plan offered by the government - or maybe even by private carriers. There would be a number of plans - lets say 4 to start that offer typical benefits for the various life stages. Something like office visits and generic Rx for single folks under the age of 35, same plan plus maternity for couples. Then offer a plan with extensive OV and Rx for families. Then offer an HDHP for age 50 and over. Use the PPA model - default is automatic based upon age and marital status BUT anyone can trump and select any plan they wish from the Medicare menu.
4) Every employee would be allowed to make a new election annually - or opt out.

WHAT DO WE HAVE
This idea gives us complete freedom of choice - which the Libertarians will love. No one has to be in any plan - but they must be made to pay for their own expenses. No whining.

For the vast majority of people that want to have insurance, there will be a national (international?) market that offers every type of plan from comprehensive pre paid plans to true catastrophic insurance - with no state laws to get in the way.

For the huge majority of folks that want insurance without having to think about it, there will be access to "automatic plans" that cover them the way they wish to be covered based upon their age and family status. They can always change but if they do nothing, the decision will be made for them and premiums taken from their pay and remitted to the government.

HOW WE MEET THE CHALLENGES
By using auto enrollment and opt out we pretty much eliminate the insurance company concern about adverse selection. People can only opt in and out once per year - and most won't summon the energy required to go down to payroll and opt out anyway.

But we don't punish those people that want to actively manage their own health and financing. They have complete responsibility and authority to do as they please in this regard. They too don't make a lifetime decision, but only an annual choice.

We let the market work and create products so long as there is enough demand to justify the creation. We have the government as the main player on the default side. We can even eliminate Medicare and replace it with private players that offer plans with specific levels of benefits as with Medicare Supplement plans. They can compete on service and price - but not benefits.

A final word about taxation of health insurance premiums - or lack thereof. Medicare is broke - in complete bankruptcy in 2010. We need money to make this transition and meet promises to people over the age of 65. I suggest we eliminate the tax preference and use the windfall to establish a real and true trust fund for Medicare beneficiaries. As an additional benefit, this would force people to purchase insurance after tax - which would do wonders to bring real market dynamics into the picture.

Respectfully Submitted,

Richard A Matthews, CEBS