1. Best of Both Worlds:
Darius Lakdawalla
Jay Bhattacharya
Amitabh Chandra
Michael Chernew
Dana Goldman
Anupam Jena
Anup Malani
Tomas Philipson
Best of Both Worlds | 1
A Plan for Uniting Universal Coverage
and Personal Choice in Health Care
The views expressed here are those of the authors alone and do not
necessarily represent those of the American Enterprise Institute.

2. Where does America’s
health system stand?
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3. Best of Both Worlds | 3
1. Rising healthcare spending
• ACA creates new government liabilities ($1.1 trillion)
• Combined with existing liabilities, these threaten
America’s economic well-being

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2. High Uninsurance
• 50 million Americans are currently uninsured
• 10 years after the ACA goes into effect, 20 million still uninsured

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3. Increased fragmentation
• Cheaper Medicaid-participating providers for the poor
• Broad and robust system for rich and middle class
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Private Insurance (left
axis)
Medicaid (right axis)
Enrollment as a percent of population:
private insurance vs. Medicaid
Source: Census Bureau. Health Insurance Historical Tables.
http://www.census.gov/hhes/www/hlthins/data/historical/files/hi
histt1.xls.

6. What priorities should
guide health policy?
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1. Ensuring universal access to basic health care
• There is clear public support for covering the uninsured
• Health policy must return to the principle of basic,
equal access for all.
2. Making health care affordable for the poor and sick
• The poorest Americans are the least insured
• The uninsured die younger and have poorer health
3. Restraining the growth of public spending
• Accounts for well over half of national health expenditures
in the United States
• Rapid public spending growth necessitates higher taxation,
higher debt, or both.

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4. Ensuring the efficient provision
and pricing of health care and health insurance
• Encourage high-value services (beta blockers);
discourage low-value services (heart stents)
• Promote competition among providers
• Reduce inefficient regulations, like state mandates
and community-rated pricing
5. Respecting the diversity of consumer values
regarding the quantity/type of care they wish to receive
• No single health plan will be optimal for everyone
• Permit individuals to choose a plan that best suits them
— allowing them to spend as much or as little as they want,
so long as their choices do not end up costing others.

9. What are the barriers to
implementing priorities?
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1. The Samaritan’s Dilemma
• Society’s altruistic desire to help the sick may discourage
the healthy from protecting themselves against illness
2. Price Distortions
• Opaque prices lead individuals to over-utilize care
that costs more than it is worth.
• Examples: Tax exclusions for employer-sponsored
health insurance benefits and medical care generally
3. Market Power
1. The price of health care is greater than what a
competitive, efficient market would charge
2. Physician licensing agreements and provider monopolies,
drive up prices by 7 and 34 percent, respectively.

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4. Risk Selection in Insurance Markets
• Sicker people purchase more insurance because they value
it more. That makes the insured population sicker.
• Under community-rating regulations, this drives up premiums
for the healthy and discourages them from buying insurance.
That raises premiums even more.
5. Impediments to long-run health insurance
• Outmoded “liquidated damages” law hampers insurance
companies’ willingness to offer long-term insurance contracts

12. A vision for reform
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1. National Health Insurance Exchange
of private insurers, featuring individualized
pricing and premium support
2. Removal of distortionary income tax exemption
for employer-provided health insurance
3. A safety net tax
levied on all Americans except the poorest, and
those whose insurance covers safety-net services

14. National Health Insurance Exchange
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Individualized plan pricing and premium supports
• Firms participating in the exchange will face fewer
restrictions and may price policies based on personal and
family medical history
• Insurers in exchange must offer and quote a basic health
insurance plan whose characteristics would be standardized
by law.
• Federal government provides premium support equal to the
cost of each individual's basic plan to ensure coverage
• Consumers may apply that support to a more generous plan
if they choose.

15. National Health Insurance Exchange
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Regulation of Insurers
• Health insurers in the exchange would be regulated
uniformly at the national level—not a patchwork of state
regulations.
• Fosters greater competition: An insurer in Texas can now
compete against an insurer in California
• Federal regulation would ensure that plans offered on the
exchange meet minimum standards for benefits and
accessibility

16. National Health Insurance Exchange
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Long-term contracts (LTCs)
• Short-term contracts don’t encourage insurers to invest in
preventions that pay off in the long run
• Exchange would require all insurers to offer at least one
LTC option to consumers
• Exchange would eliminate institutional and legal barriers
that hamper LTCs
• Liquidated damages rules would be reformed to allow
jilted insurers to be made whole
• LTC competition across state lines would foster a more
robust and competitive market

17. Removing the Income Tax Exemption for
Employer-Provided Health Insurance
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Current system
• Encourages employees to overutilize health care
• Encourages use of low-value health care services
• Discriminates against the self-employed
• Promotes “job-lock”: employees remaining with their
company for fear of losing their providers and insurance
Removing exemption would:
• Increase government revenues by $313 billion/year
• Expand the range of health insurance plans available to
employees
• Increase employees’ wages by at least 90 percent of the
employer’s cost of providing coverage

18. Safety-net Emergency Care for All Americans
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Reformed system would:
• Guarantee a minimum level care regardless of
coverage or ability to pay
• Congress would define the precise set of covered services
Financing the care through the tax system:
• Ensures all that Americans pay their fair share
of this cost and avoids the free-rider problem
• Preserves progressivity through the general tax system.
• Exempts individuals whose insurance covers these services

19. Best of Both Worlds:
Evaluating the Plan
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20. Best of Both Worlds| 20
Revenues
1. Eliminating federal and state Medicaid spending
• Low income individuals would be integrated into the national
exchange
• Medicaid spending would be preserved for home health
and long-term care, Medicare premiums for dual eligibles,
and vaccines for children
• Saves federal and state governments $332 billion
2. Eliminating the tax preference for employer-sponsored
health insurance boosts revenues by $313 billion annually
Total: $645 in annual revenue

21. Evaluating the “Best of Both Worlds” plan
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Coverage for the no-cost basic plan:
• Covers “catastrophic expenditures” above a certain
threshold
• Deductibles and copays would decrease as a share of
family income as income decreases, protecting the poor
more than the wealthy
• Deductibles would decrease by 35 percentage points for
households burdened by high medical
expenditures, protecting the sick.

22. Evaluating the “Best of Both Worlds” plan
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Coverage Examples
• All households making less than 150% of the federal poverty level: 0% copay
• Burdened households, same characteristics: 0% deductible, 0% percent copay
• Burdened households earning less than 400% of FPL: 0% deductible, 10% copay
• Burdened households earning 600% of FPL: 25% deductible, 20% copay
Best of Both Worlds vs. ACA
• All healthy households gain financially relative to the ACA
• All households earning less than 500% of FPL ($105,000)
gain financially relative to the ACA
• Households earning more than $105,000 and who
use more care will be asked to pay a bit more.

23. Evaluating the “Best of Both Worlds” plan
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24. Evaluating the “Best of Both Worlds” plan
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25. Evaluating the “Best of Both Worlds” plan
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Budget impact
Our plan saves more than $6 billion annually over the ACA
Savings/Revenues: $645 billion
Premium support expenses: $745 billion
First year cost: $100 billion
10th year cost: $145 billion
Average cost: $121.55 billion
ACA average cost: $127.7 billion
Annual savings: $6.1 billion

26. Summary
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Ensures Universal Access by providing premiums supports that allow
individuals to purchase a basic coverage plan for free.
Protects the Poor and Sick by enabling all to purchase health
insurance, regardless of income. The poor will have no out-of-pocket health
care expenditures
Restrains Cost Growth by promoting competition among private health
insurers and providers, encouraging them to hold down premiums, minimize
overhead, and avoid waste.
Ensures Efficient Provision by eliminating state and federal regulations
that distort prices in health insurance and health care markets.
Respects Diversity by allowing consumers to seek out the types of care
they value and avoid the rest—not forcing them into a single limited plan.