A bi-partisan way to fix to the ACA
Background: Current ACA state exchange market places are small, have relatively few young adults, and have a disproportionately large number of people with poor health status and lower income than the market for employer-based insurance. As a result, many insurance firms eschew state exchange markets. Increasing the size of state exchange market places is a necessary condition to stabilizing these markets.
The most cost efficient way to cover people who cannot afford comprehensive health insurance is through a partnership between private insurance companies and a government fund covering health expenses over a certain threshold. The private-public insurance partnership is Pareto superior to the high-risk pools proposed under Republican plans.
The plan presented here includes changes in rules and tax incentives that will allow and encourage more people to obtain health insurance through state exchanges and will provide an economical private-public health insurance option for all people that cannot afford a private health insurance plan and do not qualify for Medicaid.
Proposed Policy Changes:
- Abolish the current employer mandate, which requires firms with more than 50 full time employees to offer employer-based insurance.
- Replace the current employer mandate with a rule requiring employers with more than 50 full time employees contribute at least 60 percent of the cost of a gold plan on state exchanges for all employees. This new mandate would also require some contribution for part-time employees.
- Create a tax credit roughly equivalent to the above employer contribution for people who do not receive premium contributions from their employer.
- Require all federal, state, and local government employees to purchase their health insurance through state exchanges. The contribution level would be at least 60 percent of the cost of the gold plan.
- Premiums should be based on age; however, the age-rated formula should increase from its current level of 3 to 1 to around 3.5 to 1.
- Create a low-cost hybrid private-government health insurance option for people who cannot afford comprehensive health insurance because of affordability concerns. Under the private-government option, the private insurance plan would cover all insured expenditures under a cap and the government plan would pay most (maybe even all) expenditures above the cap.
Comment One: State exchanges are the poor cousin of employer-based insurance and other venues.
Here are some statistics comparing the composition of the market for state exchange insurance to the composition of other venues, primarily employer-based coverage.
- Around 10 million people obtain their health insurance through state exchanges compared to around 150 million people obtaining their health insurance through employer-based insurance.
- Around 6.8 percent of state-exchange market place participants are between the age of 21 and 26 compared to 8.1 percent of people obtaining health insurance through other venues.
- Around 21.7 percent of people with state exchange coverage are over age 55 compared to 15.1 percent for other venues.
These difference between the composition of ACA exchanges and employer-based insurance and other venues will result in ACA insurance being either more expensive or less generous than employer-based coverage.
The post linked below has some interesting information on the age composition of state exchange market places compared to employer-based insurance.
Comment Two: The disparity between state-exchange coverage and employer based coverage is the result of ACA rules and the extremely generous treatment of employer-based health insurance under the tax code. ACA rule include the employer mandate and a rule that prevents people with offers of employer-based insurance from obtaining a tax credit for insurance on state exchanges. The ACA tax credit is also phased out for workers with household income over 400 percent of FPL. The preferential tax treatment of employer-based insurance results in many employers paying a large portion of their worker’s health insurance premiums.
Comment Three: The health care plan offered by John McCain would have replaced the existing employer-based tax preference for health insurance with a universal tax credit for the purchase of health insurance. The McCain plan offered a tax credit of $5,000 for families and $2,500 for individuals. This plan would have placed everyone in a private market place similar to state exchanges. The proposal offered here would move us in the direction favored by John McCain. Republican proposals of 2017 retain preferences for employer-based insurance over state exchanges.
Article on John McCain’s 2008 Health Plan
Comment Four: There has been a long-term trend for small businesses to drop offers of employer-based coverage. Many small business that are unwilling or unable to offer employer based insurance to their employees may be able to afford some employee contributions.
Comment Five: Both the McCain plan offered in 2008 and the Republican plans offered in 2017 include funding for high-risk pools set up by states for people that cannot get coverage on state exchange or through their employer. High-risk pools are not a cost-effective way to cover people with pre-existing conditions.
Many people have pre-existing conditions and people with pre-existing conditions are expensive to insure. The HHS estimated that around 61 million non-elderly people have pre-existing conditions that qualify them for high-risk pools under the eligibility requirement for high-risk pools that existed prior to the ACA. Moreover, around 133 million non-elderly people would be viewed as having a pre-existing condition under the underwriting procedures generally employed by insurance companies. Under some health care proposals, these people could be either denied coverage or charged higher premiums.
Around 18 million people with pre-existing conditions were uninsured in 2010 prior to the implementation of the ACA. Over $90 billion per year is required to insure these people. Recent republican proposal for new high-risk pools allocated around $10 billion per year.
HHS report on number of Americans with Pre-existing conditions:
The use of high-risk pools to cover people who cannot get insurance in a market place that allows insurance companies to either deny coverage for pre-existing conditions or base rates on insurance premiums would leave many people uninsured.
Comment Six: The proposal for a private-public partnership offered in this paper will cover far more people at lower cost than high-risk pools. Under the private-public partnership the private insurance company will cover all expenses over a certain threshold and the government will pay all or most expenses over the threshold. The private-public partnership could substantially reduce the cost of private insurance depending upon the threshold limiting annual health expenditures by the private insurance firm and the share of expenses for the private firm over the threshold. The cost sharing would also substantially reduce the variability of insurance expenditures, which could stabilize premiums.
One way to implement this program is to provide automatic enrollment into Medicaid for people who purchase a health insurance plan with an annual cap on expenditures (perhaps $40,000). This approach essentially turns Medicaid into a reinsurance program. However, in contrast to some reinsurance schemes, government payments would be made directly to customers rather than insurance firms. The cost of this approach would be borne by the government and would depend on the number of high-cost cases, which is not knowable in advance. However, the cost sharing arrangement would be smaller than a high-risk pool, which insured the same number of people.
For more information on the costs and benefits of this approach see my previous blog on the topic
A proposed public-private health insurance hybrid:
Comment Seven: The current proposal relies on age-rated premiums where age rating is set at 3.5 to 1. As discussed in comment five above, the cost of unrestricted underwriting based on health status would be extremely high. It would be useful to compare insurance premiums and costs of the partnership for the situation where premiums are purely determined by age to a rule where premiums are determined by both age and health status. (For example, premiums would be allowed to vary 3.5 to 1 based on age with a 5 percent penalty for people with pre-existing conditions).
People would be allowed to purchase the public-private partnership based on some formula, like purchase the private partnership if premiums on the purely private plan were more than 9 percent of income. I suspect, but cannot prove, that a rule allowing insurance companies to consider health status when setting premiums would substantially increase government subsidies compared to a rule where premiums are exclusively determined by age. Clearly the most expensive government subsidy would occur when insurance companies could deny all applicants with pre-existing conditions and/or premiums were entirely determined by health status.
Comment Eight: The primary reason why state exchange market places have disproportionately fewer enrollees between the age of 18 and 26 is that the ACA allows young adults to remain on their parent’s health insurance policy and most working-age people have employer-based policy. Polices could be implemented to encourage young adults to leave their parent’s policy in favor of a state exchange policy. However, this may not be necessary.
Polices that move more working-age households to state exchange market places will automatically increase the number of young adults with state-exchange coverage. An empirical analysis based exclusively on people over 26 finds that in this truncated group participants in state exchange market places are younger than people with employer-based policies.
Concluding Remarks: The ACA created a separate health insurance market for working-age people without an offer employer-based insurance. In this case, separate is not equal. The ACA can only be fixed by creating incentives for people to move from employer-based insurance to independent market places.