Going Deeper on Ron Wyden’s Free Choice Proposal

225px-Ron_Wyden_official_portrait 1

Yesterday I wrote a bit about Senator Ron Wyden’s Free Choice Amendment that would make health reform substantially more ambitious. Right now all the major health reform proposals in congress do a bunch to change the health delivery system for the better, do a bunch to help the poor and near-poor, at least purport to make comprehensive health insurance affordable (Baucus’ bill doesn’t really) for currently uninsured American citizens, and at least purport to bend the long-term cost curve (it’s not clear that the House bill actually does). For the currently insured they offer, basically, peace of mind. If something goes wrong and you lose your coverage, things won’t be so bad. And if nothing goes wrong, then everything will look pretty much the same to you.

Which is in line with the thinking that people fear change, but also at odds with the reality that lots of people want change and that the country could use change. Wyden’s plan, by contrast, would try to modify the approach currently in the Senate bills by offering new choices to the currently insured:

1) Employers that offer group health coverage must offer the equivalent of a minimum benefit plan, contribute at least 70% of the premium, and offer at least one other health plan of greater actuarial value; or

2) Employers that do not offer the choice of a low cost option must offer workers a voucher worth at least 70% of the average of the three lowest cost plans in the exchange; or

3) With an adequate transition, employers can take their entire group to the exchange where they would receive a group discount so long as they provide at least 70% of the cost of average of the three lowest cost plans in the exchange; or

4) Employers that do not offer health insurance choices, a voucher, or go to the exchange, would have to pay a “fair share” fee which would be a percent of the national average of the three lowest cost plans in each state.

Point (4) is a basic pay-or-play employer mandate provision. The other three points mean that instead of being stuck with the one or two insurance options your employer currently gives you, you’ll have more substantial choices. Either as under (1) your employer needs to design more packages for you to choose from or else under (2) or (3) you’ll be able to choose from the menu of plans that exists under the Exchange. This means that if the Exchange mechanism works well, you’ll probably see people and employers drift into it over time leaving us with something more like Dutch health care. If it doesn’t work well, of course, this won’t work but that would be a larger problem.

I think this is a good idea. Yesterday it also struck me as a non-starter, however, because it would violate the president’s promise not to disrupt people’s existing health care arrangements. I thought it would disrupt existing arrangements because basically employer-based risk pools could find themselves thrown perilously out-of-whack by having various employees depart the group plan in favor of the Exchange. I don’t, personally, think it would be a bad thing to destabilize the employer-based system since under Wyden’s plan this wouldn’t actually lead to anyone losing coverage but it goes against things that have been promised.

It turns out, however, that Wyden is envisioning a couple of counterveiling measures to prevent this destabilization from happening. One important element is the establishment of a federally-sponsored (though probably privately administered) reinsurance system that would cover both Exchange- and non-Exchange plans. That would tend to automatically re-balance the distribution of risk in the system and basically stabilize things. The precise mechanics of this would have to be worked out by HHS but it would lean against any kind of dramatic destabilization spiral. The other thing is that even though nobody has talked about this aspect of health reform, the bills under consideration already have substantial provisions for doing risk adjustment to prevent anyone’s risk pool from getting too out of whack relative to anyone else’s. You can find this, for example, on pages 8-10 of Baucus’ mark (PDF) where it includes such thrilling phrases as “If the allowable costs for the plan for the year are greater than 108 percent of the target amount for the plan and year, the Secretary would make a payment to the plan equal to the sum of 2.5 percent of the target amount and 80 percent of the difference between the allowable costs and 108 percent of the target amount.”

Can't talk about risk-adjustment without a photo of the Netherlands (my photo, available under Creative Commons license)

Can't talk about risk-adjustment without a photo of the Netherlands (my photo, available under Creative Commons license)

The upshot of the whole set of provisions, basically, is that side payments would be made in both a forward- and backward-looking way to partially compensate plans with higher risk pools which, again, would reduce the risk of destabilization.

So that’s the pitch: Expanded access to the Exchange plus reinsurance plus risk adjustment will expand the options available to people currently getting insurance from their employers without forcing anyone out of the employer-based pool who wants to stay there. In other words, it’s an effort to hasten the transition out of an employer-based system with carrots rather than sticks. This sounds like a pretty good idea to me—and politically it creates a lot more potential upside for the middle class—but it still strikes me that this is not necessarily what the political system is looking to do right now.