Medicare Advantage for All – A Conversation with Chuck Phelps

by Sara Khor, Yilin Chen, and Joyce Jiang

From left to right:  Brennan Beal, Joyce Jiang, Yilin Chen, Jacinda Tran, Sara Khor, Charles Phelps

The coronavirus disease 2019 (COVID-19) pandemic has shone a spotlight on the shortcomings of the current US health care system.  There is an urgent need to address the problems with healthcare access, costs, and equity.  Conversations related to health care reform have been and will continue to be front and center in the upcoming presidential election.  Many health care reform proposals have been put forward, including the expansion of the Affordable Care Act, Medicare-for-All, and Medicare expansion that maintains a role for private insurers.

Earlier this year, Dr. Charles Phelps, a renowned health economist and the author of the Health Economics textbook, visited the CHOICE Institute and gave a lecture on his proposed health care plan: Medicare-Advantage-for-All.  Under this proposal, all permanent residents will be able to choose among a wide variety of private insurance plans, similar to the Medicare Advantage program that is currently available to the older US population.  All individuals will have health care coverage, with the minimum coverage being a high-deductible health plan with a health savings account.  The health savings account can be filled up based on income levels.  High value care such as preventative medicine can bypass the deductible.

We had the honor of sitting down with Dr. Phelps to talk more about his proposal. 

Part 1 – On health care costs:

What are the most important drivers of the current cost growth in the healthcare system?

Dr. Phelps identified two main drivers of the healthcare cost growth:  introduction of new technologies and the aging population.  In the long run, he said, the introduction of new technologies, which includes diagnostic tools, pharmaceuticals, and genetic-based medicine, will increase costs.  As treatment and drugs become more targeted, they will be sold in smaller quantities for focused populations.  While these new advances will produce a lot of value, they will also drive cost growth. 

As the size of the older population continues to expand, the age distribution pyramid (where the bottom is the youngest age group and the top is the oldest) will be shaped more like a cylinder. “When you look 20 years from now, this cylinder is going to have a great big hat on,” says Dr. Phelps.  “The widest group on this cylinder… is going to be the oldest group at the top”. 

This has important implication for healthcare costs, because the current way we are financing Medicare is through the payroll tax.  The ratio of workers (who pay the payroll tax) to retired individuals (who use Medicare) is shrinking.  “At the beginning of Medicare, this ratio was 4.5,” says Dr. Phelps.  “In a couple of decades, this ratio is going to be 2 workers per retiree.  The payroll tax mechanism of paying for Medicare has to change”.

How would the Medicare Advantage-for-All Plan address these cost drivers?

In a single payer system, usually one agency (e.g. CMS in Medicare) makes the determination about which new technology to introduce into the system.  “They can make mistakes both by being too generous, letting too many things in the door, or being too stingy,” said Dr. Phelps.  According to Dr. Phelps, the current US Medicare system is too generous, as it has not built in any cost constraints, while the British National Health Service has very tight cost-effective criteria for approval of new technologies.

The Medicare-Advantage-for-All plan would allow different plans to make cost-effectiveness evaluations.  The exact details of the plan still need to be decided, but Dr. Phelps said that technologies that are very cost-effective, ICER between $50,000 to $75,000/quality-adjusted life year (QALY) gained, will be mandatory in the basic plan, and others will be left to the discretion of the insurance plan to cover it.  “People will buy insurance plans to fit their needs, just like they buy different cars with different degrees of safety and pizzazz.”

What is the potential cost impact of Medicare Advantage for all?   How is this cost impact compared to Medicare for All?

“Medicare-for-All is ghastly expensive, not because it offers universal health coverage, but because it eliminates all co-pays.”  The RAND Health Insurance experiment and the Oregon Health Insurance experiment have demonstrated that medical use will increase when there is no co-pay or deductible.  Dr. Phelps worried that the lack of co-pays will “unleash the monster in the evolution of new technologies,” referring to how moral hazard— the price sensitivity of demand for health care – may incentivize the use of low value care and technologies.  He was concerned that healthcare costs will continue to rise unless there is a very tight constraint on new technologies. 

In a way, Medicare-Advantage-for-All is similar to Medicare-for-All if everyone’s health saving account is filled up.  When determining how much should be in the health saving accounts, Dr. Phelps said that “it will be an experiment through time to trade off the risk bearing and cost control,”  adding that essential medicines and services, such as birth control or insulin for diabetes, can completely bypass the deductibles and co-pays. 

Right now, Dr. Phelps said it is unclear how the different program parameters should be set in order to balance costs, new technology introduction, and equity considerations, but he is trying to devise an instrument that would allow users the flexibility to tweak parameters over time.

How about administrative costs?  Dr. Phelps said that single payer plans, like Medicare-for-All, definitely reduce administrative costs. He argued that this administrative cost, although pricey, is giving us choice, and is controlling the costs by negotiating with providers about how much to pay for things instead of having fixed fee schedules.  “Our society really values choice,” Dr. Phelps added.  A one-size-fits-all plan takes away choice.  Using an analogy in car shopping, Dr. Phelps said having just one healthcare plan is like saying: “You can buy any car you want, as long as it is a Honda Accord.”

Instead of simply comparing the administrative costs between a single-payer government-funded plan and Medicare-Advantage-for-All plans, Dr. Phelps emphasized the importance of taking into account the welfare loss and tax distortions that arise from the increase of taxation in a single-payer government plan. “Every dollar of tax we collect distorts the economy in some fashion…If you raise income tax, you change the labor supply.”

Part 2 – On choices and health technology assessment (HTA):

If there are many Medicare-Advantage-for-All health plans and each plan uses a different threshold, how do consumers make informed decisions about which plans to choose?

“Advisors will emerge,” said Dr. Phelps. Like the advisors for buying automobiles or financial advisors for the stock market, Dr. Phelps believed that a service for advising people on healthcare insurance and utilization will develop, and so would competition.  These advisors could be independent or affiliated with big health plans.  The emergence of these advisors, he added, will “depend on having access to electronic medical records that people can share.”

What role will HTA play?  What role would an organization like the Institute for Clinical and Economic Review (ICER) play? 

 Dr. Phelps felt that the current way of conducting cost-effectiveness analyses is incomplete.  Individuals who want to maximize their own utility do not necessarily think about everything that the society thinks about.  While the QALY is a very important component of the overall value index, Phelps argued that the value index should include other things that are not necessarily built into a single individual’s utility, such as the fear of contagion and equitable distribution of health services.  “Policies about Ebola, Zika, and now the coronavirus, are not made on the cost-effectiveness of vaccines.  People would pay anything to get a coronavirus vaccine right now.  The fear of contagion dominates public discourse and public policies.  That is not captured in cost-effectiveness analysis.” 

Ideally, Dr. Phelps says, there will be competition among HTA organizations to produce estimates with quality control by the government, similar to how the FDA has control over the new drugs that come on to the market.  “I can see different insurance plans, [especially] some of the large ones, creating their own HTA shops.  ICER would continue and offer [assessments] to smaller insurance plans.” 

Part 3 – On equity:

Under Medicare-Advantage-for-All, multiple plans with varying premiums and deductibles mean that people who are better at navigating the system (e.g. more able to afford an advisor) or can afford the higher premiums may get more comprehensive care, potentially creating a situation where there is differential access and differential outcomes across the population based on education or wealth.  How should we think about this?

“A plan that has absolutely equal access to health care…is imaginary”.  Dr. Phelps argued that as long as people have different incomes, there would be differential care.  Even under the British National Health System, those who can pay more can seek additional or better care with private insurance.  In Ontario, Canada, where there is universal health coverage, some Canadians opt to purchase insurance to buy medical care in the U.S.  One thing that the Medicare-Advantage-for-All plan can guarantee, Dr. Phelps added, is minimal level of access to quality care for everyone.  The minimal plan could include an independent advisor.

How will international students be included in the plan?

International students are often in the U.S. for a few years.  They are not permanent residents, but they are also not temporary visitors.  It will be important that there are ways for these individuals to get access to the health plans.  Some suggestions that Dr. Phelps had were to charge individuals an actuarially-based fee to join the plans, or to negotiate bilateral exchanges with different nations. 

Part 4 — On political economy: 

What are some of the potential political pushbacks related to this proposal?

The country is very heavily divided between those who want a single-payer plan (e.g. Medicare-for-All) and those who want to continue with private insurance.  Those who are proponents of single-payer plans will not like Medicare-Advantage-for-All because it continues to use, as a central feature, and quite deliberately, private insurance plans.  In this political climate, Dr. Phelps said, “My forecast would be…that there is zero probability that a Medicare-for-All plan would pass through the congress.”

“The high deductible health plan creates some anxiety among some people…for two reasons”, he continued.  “One is that they say it discriminates against the poor.”  Dr. Phelps said he can completely eliminate this concern by filling up the health savings accounts on an income-related basis.  Another concern is that people in the high deductible plans will stop using the care that they need.  A short run fix, Dr. Phelps explained, is that all highly-valued services and medicines, like diabetes medications, bypass any deductible and copayment.   

“The long run fix is to vastly repair our vulnerable K-12 education system,” said Dr. Phelps. Higher education helps people navigate the highly complex health care system.  There is also a very steep education gradient on lifestyle choices that are bad for your health, like tobacco smoking and binge drinking.

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