A Comprehensive Assessment of Four Options for Financing Health Care Delivery in Oregon

Background

Like other states, Oregon is grappling with how to ensure that all residents have access to affordable, high-quality health care. Although the number of Oregonians without insurance has dropped substantially following implementation of the major coverage provisions under the Affordable Care Act (ACA), an estimated 5 percent of the population remains uninsured (Oregon Health Authority [OHA], 2015a). Coverage gaps disproportionately affect minorities, low-income residents, and young adults (OHA, 2015b). Nearly half of all Oregon residents obtain health insurance through an employer, and these enrollees experienced a 40-percent increase in average deductibles between 2010 and 2015 (Agency for Health Care Research and Quality, 2016). While the ACA ensured that those without employer-sponsored coverage could obtain individual-market plans regardless of preexisting conditions, the individual insurance market in Oregon faces challenges, including premium increases and insurers exiting some areas of the state.

Against this background, policymakers in the state are considering options to reform health care financing, with the underlying goal of improving health care and health outcomes. In this study, we analyzed three specific versions of options for financing health care delivery in the state (Options A through C), based on Oregon House Bill 3260 (HB 3260; Oregon Legislative Assembly, 2013). We projected the impacts of each option relative to the Status Quo (Option D) in the year 2020. Although there are significant uncertainties regarding upcoming federal legislation and administrative actions, our projections of the Status Quo assume that the ACA remains in effect.

Option A: Single Payer

• Overview: Uses public financing to provide privately delivered health care for all Oregon residents, including people currently enrolled in Medicare and Medicaid and undocumented immigrants
• Covered benefits: Essential health benefits (EHBs) for all; Medicaid Early and Periodic Screening, Diagnosis and Treatment (EPSDT) services for eligible children
• Cost-sharing: None for people with income under 250 percent of the federal poverty level (FPL) (100-percent covered); 96 percent of expenditures covered, on average, for others
• Premiums: None
• Health plans: Single state-sponsored plan
• Financing: Financed via pooling of state and federal outlays for current public programs (e.g., Medicare, Medicaid, and the Marketplace), and by increasing state income tax revenues by 83 percent and adding a new state payroll tax (6.5 percent, paid by employers with 20 or more workers)
• Provider payments: Hospital, physician, and other clinical services payment rates are set at 10 percent below the average rates in the Status Quo.
• Other: Employers currently providing health benefits would be required to pass back savings from no longer paying for employee coverage by increasing wages.

Option B: Health Care Ingenuity Plan (HCIP)

• Overview: Would create a public financing pool for coverage in commercial health plans for all Oregon residents (including undocumented immigrants) except Medicare beneficiaries, who would retain their Medicare coverage (including supplemental Medicaid coverage for "dual eligibles")
• Covered benefits: EHBs for all, Medicaid EPSDT services for eligible children
• Cost-sharing: Varies in base plans depending on enrollees' incomes, with the average share of costs covered by the plan ranging from nearly 100 percent for those with incomes below 138 percent of the FPL to 70 percent for those with incomes above 250 percent of FPL
• Premium: Similar to ACA Marketplaces, there is no premium for second-lowest-cost base plan in an area, but insurers with higher premiums can charge for the difference in premium from second-lowest-cost plan; insurers and employers can charge premiums for supplemental coverage.
• Health plans: Commercial carriers would offer competing plans.
• Financing: The plan is financed by pooling state and federal outlays for current Medicaid program and the Marketplace and by adding a new state sales tax (8.4 percent on all goods and services, excluding shelter, groceries, and utilities).¹
• Provider payments: Provider rates are slightly below the rates paid by commercial plans in the Status Quo but are higher on average than under the Status Quo.
• Other: Enrollees could purchase private supplemental insurance to cover cost-sharing and additional benefits; employers would also be permitted to offer private, supplemental coverage to their employees.

Option C: Offer a Public Option on the Marketplace

• Overview: A state-run public plan that would compete with private Marketplace plans; available to citizens and immigrants eligible to purchase on the Marketplace
• Covered benefits: EHBs
• Cost-sharing: Enrollees with incomes between 138 and 250 percent of FPL would be eligible for federal cost sharing reductions.
• Premium: Premiums would be set using 3-to-1 rate-banding on age, as currently required in the health insurance Marketplace. Enrollees with incomes between 138 and 400 percent of the FPL would be eligible for federal advance premium tax credits (APTCs).
• Health plans: The state-run plan would compete with private plans in the Marketplace.
• Financing: As in Status Quo, enrollee contributions and tax credits fund premiums; the state would fund startup costs.
• Provider payments: This version of the Public Option would set provider reimbursement levels equal to Medicare fee-for-service rates and would require providers who participate in other state health programs (including the Oregon Health Plan and any plans offered to public employees) also to participate in the Public Option.

We used a microsimulation modeling approach to analyze how each of the three options would affect health insurance enrollment and financial outcomes, including payments made by Oregon households to support health care (comprising direct payments for their own health care, as well as tax payments to support coverage expansions), total health care expenditures and administrative costs in the state, macroeconomic effects, state budgetary outcomes, and provider reimbursements. Our analysis is based on projections for calendar year 2020, and we compare the three options to a Status Quo (Option D) that reflects current law in the state of Oregon. We also used literature review and interviews with state officials to consider such factors as administrative feasibility and legal and regulatory hurdles.

Results

Coverage and Cost Impacts on Individuals and Employers

Coverage

Figure 1 illustrates changes in health insurance coverage sources under the different options. Both Single Payer and HCIP increase coverage relative to the Status Quo and reduce financial barriers to accessing care. By design, Single Payer would insure 100 percent of Oregon residents (including undocumented individuals), an increase from the 95 percent insured under current law. The HCIP option would also insure 100 percent of Oregon residents by enrolling the majority of Oregonians in commercial health plans. The elderly and certain disabled populations would continue to access Medicare. The reach of the Public Option is limited because it primarily affects the individual market, which covers only about 6 percent of Oregonians, and the small-group market (OHA, 2015a). Adding the Public Option to the Marketplace would result in 32,000 Oregon residents gaining coverage, and the share of the population with health insurance would increase from 95 to 96 percent.

NOTE: "Other" includes health benefits through the Federal Employees Health Benefits Program, the Veterans Health Administration, and the Indian Health Service.

Payments by Households for Health Care

As shown in Figure 2, Single Payer and HCIP significantly alter how, and how much, households would pay for health care.

• The Single Payer option would significantly reduce out-of-pocket payments for health care and financial barriers to accessing care, particularly for low-income Oregonians. The key financing sources would be income-based state and federal tax payments, and this option would significantly redistribute the burden of financing health care from lower- to higher-income individuals.
• HCIP is partially financed through a sales tax, which would impact all residents of and visitors to the state. HCIP reduces the burden of financing health care for lower-income residents by reducing out-of-pocket health care spending. Higher-income individuals would tend to bear more of the burden of financing health care because they purchase more goods and services than lower-income individuals and would, therefore, pay a disproportionate share of the sales tax. An estimated three-fifths of those who would enroll in HCIP plans would obtain supplementary insurance to reduce cost-sharing. Including supplementary coverage, health plans would pay for an average of almost 90 percent of covered health expenditures, slightly higher than the share covered in the Status Quo.
• Adding a Public Option to the Marketplace has smaller impacts than Single Payer and HCIP on the aggregate outcomes in our analysis. However, the Public Option could benefit the roughly 200,000 Oregonians currently enrolled in individual market coverage on and off the Marketplace and could also benefit enrollees in small-group employer-sponsored plans. We estimate that payments per person for health care would drop by an average of $190 per year if a Public Option were implemented.

NOTE: "Other premium payments" includes Medicare premiums for Part B and supplemental coverage and TRICARE premiums.

Changes in Health System Costs

Under the Single Payer option, demand for health care services would increase by 12 percent because of the increase in insurance coverage and the reductions in cost-sharing for the currently insured. However, we specified that the state would exercise its power as the sole purchaser and set payment rates for most providers 10 percent below the Status Quo on average. This version of the Single Payer option achieves universal coverage with little change in health system costs because the increase in patient demand would be offset by lower provider payment rates and by administrative savings. In general, we assume that reducing provider payment rates would lead providers to prefer to supply fewer services (Clemens and Gottlieb, 2014; Hadley and Reschovsky, 2006; White and Yee, 2013; Decker, 2009). Expanding coverage while constraining provider supply would increase nonfinancial barriers, such as increased wait times or distances traveled to receive care (Gaudette, 2014; Acton, 1975).

Currently, employer spending on health benefits is excluded from taxable income for federal income and payroll taxes, creating an implicit subsidy for state residents with employer-sponsored coverage. Under the Single Payer option, employers would no longer make tax-advantaged premium payments and would instead pay the new state payroll tax. Those employer-paid payroll taxes would, like employer Federal Insurance Contributions Act (FICA) contributions, be excluded from employees' taxable income, which would roughly preserve the current tax advantage.

Relative to the Status Quo, HCIP would lead to higher health system costs. This increase results from two factors. The first is an increase in utilization driven by expanded coverage and, for some residents, lower cost-sharing, which increases patients' demand for care by 2 to 3 percent. The second is the fact that Medicaid enrollees and the uninsured would be shifted into commercial health plans, which typically reimburse providers at significantly higher rates than the Medicaid program. These higher payment rates would increase system costs and expand the supply of providers and availability of care.

Under HCIP, employer payments for health benefits would be significantly reduced. Although employers would not be required to do so under HCIP, we assumed that those premium savings would be passed back to workers in the form of increased taxable wages. We estimate that these wage passbacks would increase federal tax payments by Oregon residents by $1.8 billion, and we assumed that amount would be returned to Oregon as additional federal funding for HCIP. That federal funding stream is important to the financing of HCIP, but it is dependent on uncertain negotiations with the federal government over the appropriate concept of budget neutrality.

The Public Option reduces system costs slightly, mainly because it shifts some people from commercial health plans into the state-run plan, which we specified would pay providers Medicare fee-for-service rates.

Administrative Savings

We estimate that under the Status Quo, $2.8 billion will be spent on administrative activities by Oregon's health system in 2020 (8.2 percent of total health care expenditures). These include all the costs of health plan operations (except payments to providers), as well as oversight and administration by government agencies. Administrative savings are estimated for each of the three proposed options based on projections of enrollee movement between private and public insurance options. The greatest annual savings (around $600 million in state, federal, and private administrative costs) are expected under the Single Payer option. The HCIP option and the Public Option are both estimated to save just under $300 million a year in administrative costs.

Implementation Feasibility and Administrative Considerations

For both the Single Payer and HCIP options, we assume that one state agency would administer the new coverage model. As these models also will cover the full state population, we assume that the lead agency would contract with an administrative services organization or similar entity to perform at least some of the functions currently performed by OHA and the Department of Consumer and Business Services for this larger enrollee population.

The Single Payer option would represent a substantial change from the Status Quo and would significantly impact health care providers and insurers. In addition, federal waivers would be needed to enable Oregon to redirect federal outlays for Medicare, Medicaid, and the Marketplace. Beyond the waiver challenges, the Employee Retirement Income Security Act of 1974 (ERISA) could pose a major hurdle. ERISA preempts states' regulation of self-funded employer-sponsored health plans. Because the Single Payer option would provide universal coverage and use payroll taxes to help fund the system, self-funded employers operating in Oregon could argue that the option effectively compels them to discontinue their current health plans and offer alternative benefits. Unless the state were able to obtain a federal exemption from ERISA, the Single Payer option would very likely be challenged in court by self-funded employers.

Like the Single Payer option, HCIP could face an ERISA challenge, although the threat may be lower because HCIP would be financed through a sales tax levied on consumers rather than a payroll tax paid by employers. The state could argue that it has the authority to levy a sales tax and that HCIP does not explicitly require that employers offer specific health benefits or modify current ERISA plans. A possible counterargument is that HCIP would create a "Hobson's choice" for ERISA plans, meaning that employers would have no reasonable option except to modify or eliminate their plan (Abel et al., 2008). Relying on a sales tax may help withstand the ERISA challenge, but it puts the state in the position of relying on recaptured savings stemming from the federal tax advantage associated with employer insurance.

Adding a Public Option to the Marketplace would be relatively straightforward compared with the other options and would not require a federal waiver. A major hurdle that policymakers would face in establishing a Public Option would be setting provider payment rates low enough to make the plan affordable while also achieving broad provider participation. We assume in our analysis that the state would leverage provider participation in the Oregon Health Plan (OHP) and plans offered to public employees and would adopt Medicare's administrative contractors and payment systems, including rates and performance incentives. That approach to setting provider payment rates allows the Public Option to offer a competitive premium that attracts enrollees, which, in turn, leads to a reduction in total health care expenditures in Oregon. Increasing provider payment rates in the Public Option would attenuate, or eliminate entirely, that reduction in expenditures.

Options Assessed Using HB 3260 Criteria

Table 1 provides an overview of the three assessed options, using the criteria listed in HB 3260 as the elements of a future best system for the delivery and financing of health care in Oregon.

Table 2 summarizes our assessment of the estimated effects of each policy with respect to the key outcomes that we considered.

Policymakers will have difficult decisions to grapple with as they decide on an approach. A Single Payer option with aggressive payment negotiation would insure all Oregonians without necessarily increasing total health system costs. The state could apply payment reductions selectively to certain types of providers, such as hospital outpatient clinics and specialist physicians. To achieve this goal, providers would need to accept lower payment rates. Accepting lower reimbursement may not be feasible for all providers, possibly leading some to exit the state or reduce their supply of care. In turn, this could lead to difficulty getting appointments and other access constraints. It is unclear whether a single-payer approach would affect quality of care. The federal Centers for Medicare & Medicaid Services (CMS), which are currently experimenting with alternative payment models in the Medicare program, require quality reporting to ensure that payment changes do not adversely affect patient outcomes. Oregon utilizes quality reporting in its Medicaid program and has built this approach into its current Medicaid 1115 waiver. Oregon could expand this or a similar quality reporting system to monitor the impact of a single-payer plan.

HCIP insures as many people as the Single Payer option, but it relies on the private sector rather than the state to develop and administer insurance plans. Commercial plans generally pay providers much higher rates than Medicaid, and so shifting Medicaid enrollees into commercial plans will increase average payment rates and expenditures relative to the Status Quo. While this approach could increase buy-in from providers and reduce concerns about access, we estimate that HCIP would increase rather than reduce total health system costs.

Both HCIP and the Single Payer option would significantly redistribute the burden of financing health care, reducing the burden for lower-income residents of Oregon and increasing it for higher-income residents. Support for such a change will depend on taxpayers' taste for this type of redistribution, a factor that we did not address in our analysis. In addition, both HCIP and the Single Payer model would require waivers from the federal government to allow federal outlays for current programs to be redirected to finance universal coverage. The process and outcome of these waiver negotiations are highly uncertain. In addition, both the Single Payer option and HCIP may require a federal exemption from ERISA. Adopting a less-sweeping reform, such as adding a Public Option to the Oregon Marketplace, would not require a federal waiver and could be done without new tax revenues. However, the benefits of the Public Option would reach less than one tenth of the Oregon population.

Recommended Next Steps

Should Oregon want to achieve universal coverage, Single Payer and HCIP are the most promising options. Adding a Public Option to the Marketplace will not expand coverage substantially over current levels.

• To effectively implement a Single Payer plan, Oregon should:
  • Prioritize discussions with federal government officials regarding the feasibility of the necessary waivers or other federal authorities, and seek legal counsel to determine whether an ERISA challenge is likely and how to avoid one.
  • Review CMS approaches to payment and seek input from providers to assess how payment changes could be enacted in a manner that promotes high-quality health care and maintains sufficient provider engagement. Approaches that reward providers for increasing use of high-value services while reducing unnecessary care could be promising.
• If Oregon wishes to pursue the HCIP approach, several important next steps would be to:
  • Identify and implement solutions to reduce the overall cost of HCIP. These could include offering a public plan to compete with private plans or prohibiting or limiting supplemental coverage. The state has also implemented policies to reduce unnecessary utilization in OHP, including the Prioritized List (which defines the scope of services covered by Medicaid, as permitted by the state's Section 1115 waiver) (DiPrete and Coffman, 2007) and coordinated care organization quality incentives (Broffman and Brown, 2015), and those could be applied to private plans in HCIP.
  • Work with federal policymakers to identify a mechanism for recouping the estimated $1.8 billion in new federal tax revenue that would result from wage passbacks.

If state policymakers want to take a more incremental approach to change, the Public Option provides a step short of universal coverage that could have modest positive impacts and would be simpler to implement and less disruptive in the short term than the other two options assessed. Implementing a Public Option could be used as a step toward more expansive reform. For example, the Public Option could provide a prototype for developing a single-payer plan. Such an approach would allow Oregon to start small and work out important administrative issues—such as ensuring that the plan functions well and is able to maintain sufficient provider engagement—before expanding beyond enrollees in the nongroup Marketplace and small-group plans.