A Health Care Bailout For the Middle Class

07/09/2009 05:12 am ET | Updated May 25, 2011

It's on. The president's assuming direct ownership of the health debate. Draft bills are beginning to circulate on the Hill. Dozens of policy details are being debated. Universal coverage is one way to describe the objective, but here's one that might be better: We need a health care bailout for the middle class.

High-income Americans will make out fine, and public programs will be strengthened for lower-income groups. But medical illness caused nearly two-thirds of all bankruptcies, and most of these bankrupt debtors had medical insurance. That raises two questions:

1. What's the value of "universal coverage" if "coverage" isn't providing the financial security people need?

2. If we can rescue troubled banks, what are we doing to rescue families whose "toxic assets" consist of unpaid medical bills for urgently needed care?

It's a mistake to assume that health reform will inevitably ease the financial burden for financially imperiled households. Medical problems caused 62.1% of all bankruptcies in 2007. Three quarters of these bankrupt debtors had health insurance. And 92% of them had medical bills of at least $5000, or 10% of pretax family income.

"10% of pretax family income" is also the figure many health policy analysts say families should be prepared to spend for health care under a mandate. But for many people that was a burdensome figure even before the financial crisis. We can't assume that a policy forcing them to spend that much will be either effective or politically popular. Nevertheless, AP reports House Dems are floating the idea of "slapping an unspecified financial penalty on anyone who refuses to purchase affordable health insurance." That's what is known as an "individual mandate."

Insurance was originally designed to eliminate financial ruin for individuals by distributing costs among many people. Does it make sense to insist that people buy coverage that won't necessarily protect them from disaster?

Feelings run high about this issue among us health policy wonks. Most Democratic/liberal analysts insist that reform can't succeed unless all individuals are first mandated to obtain coverage. The idea's based on sound economics: If some people can opt out, the healthiest are most likely to do so. Then the system will be burdened with sicker enrollees, driving up costs and making it harder to achieve universal coverage.

That's why smart and knowledgeable people like Jonathan Cohn can imply, as he does here, that individual mandates are indistinguishable from "good public policy."

I understand the economics, but here's the concern: The underlying concept of "shared responsibility" is sound, but in other countries -- and in Medicare -- that responsibility is mainly shared through the progressive mechanism of taxation. Unless carefully designed, individual mandates run the risk of being overly punitive and politically explosive among middle-income Americans.

Consider Sen. Kennedy's new draft proposal. It offers more generous subsidies than other proposals, with a sliding scale of assistance that goes up to $110,000 in income for a family of four. But a lot can happen beneath and near that $110,000 mark, especially in these perilous times. Yearly premiums for family coverage reached $12,680 in 2008 and continue to climb. That's one reason why families struggling to make ends meet sometimes 'bet' that they won't have catastrophic medical costs. That may be a bad bet, but using the levers of government to force them to pay $8,000 to $13,000 in premiums alone might not be the best solution.

And the assumption that mandates are more politically liberal is just that: an assumption. Mandates could, in fact, be economically regressive. They could also give the GOP a hot-button issue for 2010 and 2012. Proposals like Jacob Hacker's, which limit out-of-pocket premium costs to $2,500, go a long way toward addressing those concerns. But they're also costlier from the government side, so they don't seem to be on the table right now (even if those costs could ultimately be offset by improved compliance).

What's the solution? At least one proposal that has been anathema to Democrats might help. The Democrats campaigned against McCain's plan to tax health benefits. But a health tax, like any other, can be either progressive or regressive. (There's a good discussion of the topic here.)

It's true that a tax on all workers receiving health benefits could be disastrous. And nobody's receiving overly luxurious benefits, despite what some partisans claim. As Merrill Goozner observes, there are no "Cadillac health plans" for employees, though that phrase is has become a buzzword. (And Cadillacs are made by GM, where a little help was also needed.)

Here's one possibility: a health benefits tax that kicks in at high income levels. That could conceivably pay for some Hacker-like caps on premiums. It would also have the added benefit of sensitizing corporate decision-makers to the true cost of medical care in this country. It might even motivate more of them to take a proactive stand on health issues.

There are a number of other possible ways to "bail out" the American middle class in health care, too:

1. Phase mandates in slowly, as overall health costs are reduced through other measures. (This one's unpopular with a number of analysts, but is still do-able.)

2. Emphasize the public plan option. (If you're going to lay a heavy cost burden on the middle class, it's a good idea to give them every choice you can.)

3. Develop innovative ways of helping consumers pay their health debts through easy-to-use financing tools at favorable interest rates.

4. Ensure than health benefits include appropriate caps on out-of-pocket costs.

Universal coverage without universal financial security would be a Pyrrhic victory. The President and Congress can ensure successful health reform by making sure that American families can receive the care they need at a price they can afford.

RJ Eskow blogs when he can at: