Month: November 2017

Proposal One: Increased Financial Assistance for First-Year Students

There is little doubt that failure to reduce college debt levels will dramatically worsen the economic situation of many people who borrow for college.   However, free college or debt-free college is not a viable economic program.   This proposal targeting aid towards first-year students is part of an economically viable program to reduce burdens caused by college debt.

Description of program:  The federal government would provide all accredited four-year and two-year universities with funds to cover 50 percent of the tuition of the average four-year state university for all first-year students with household income less than a threshold.   The subsidy would be phased out for students above the threshold.  Schools and states could differ on the income threshold defining the group of students obtaining a subsidy.  Schools that wish to participate in this program would be required to match 25 percent of the federal contribution.

 Comment One:   The program is far less costly and far less ambitious than the programs offered by Senator Sanders and Secretary Clinton.   The total estimated cost of Senator Sanders’ proposal is $70 billion a year, with around two thirds of the costs of the program borne by the federal government and one third borne by state governments.

Comment Two:   The program described here allows for greater control at the state level than the program advocated by Hillary Clinton.  Hillary Clinton’s proposal would provide grants for tuition assistance only in states that fund public universities at a high level. Her proposal also includes penalties for universities that fail to meet certain goals including reducing costs, earnings of graduates, and reduced tuition. These conditions are problematic because state differ in their resources and priorities. Moreover, this approach would favor state university systems that emphasized research over teaching

This program is designed to allow schools and states to select a sustainable subsidy level.   The subsidies proposed by Sanders and Clinton will prove to be unsustainable during economic downturns.

Comment Three:  The four-year exclusively-for-public university benefit would have a devastating impact on enrollment in all private universities including historically black colleges.  Many of these universities have excellent track records for educating students and preparing students for careers.  This benefit is available at both private and public universities but the total cost of the program is much lower because it targets first-year students only.

Comment Four:  First-year students with no academic track record past high school are more likely to drop out of college than students further along in their academic career.    The possibility of failing academically and incurring debt at the age of 18 may deter some students from entering college even though education past high school is increasingly necessary for career advancement.  Targeting financial aid for first-year students is the most effective way to enroll students who might otherwise be deterred from every trying college.

Comment Five: The government pays interest on some student loans until the student leaves school and starts repayment. On other student loans, the cost of interest is borne by the student as soon as the loan is issued.  Cumulative interest on student debt is highest when debt is issued years prior to the initiation of repayment.   Cumulative interest on student loans are best reduced through subsidies that reduce loans incurred by first-year students.

Comment Six:  Students who drop out of college after one year of school have lower salaries than students who complete more college.  The lower salaries of students who only complete one year of college suggests that a program targeting first-year students will be more progressive than a program targeting all students throughout their entire career.

The lower salaries for students who incur first-year debt and leave school will also result in higher default and delinquency rates.  Programs that reduce loans for first-year students will result in a larger improvement in default or delinquency rates than financial aid programs targeting all students.

Comment Seven:  The requirement that schools publish the percent of first-year students incurring debt will provide valuable information to students on the cost of their education prior to students incurring too much debt.   This requirement will create an incentive for colleges to expand assistance for first-year students, which as shown in the comments here results in substantive benefits for the borrowers and the government lender.

Concluding Comment:   The increased financial assistance in this proposal is far smaller than the increased assistance offered under the more expansive proposals presented by Secretary Clinton and Senator Sanders.   A totally free college program provides extensive assistance to many people who do not need help. Around 30 percent of graduates from four-year institutions finish school with no debt and many student borrowers have sustainable debt levels

The principle, that subsidies should target people who would not otherwise do the socially desirable action is central to proper public policy.  One should not target tax subsidies for fuel efficient cars if people were eager to buy the car without the subsidy.  Similarly, financial assistance should target students who could not enter or complete school without taking out large amount of debt.

Other initiatives including other forms of targeted financial assistance, improvements in loan forgiveness programs, initiatives to improve on-time graduation rates and improved information on school quality and costs will reduce college debt burdens in a way that is fairer to taxpayers than free college for all.

 

Timing of Drug Purchases and Out-of-Pocket Costs for HDHPs

Timing of Drug Purchases and Out-of-Pocket Costs for HDHPs

Background:  A lot of analysts advocate high deductible health plans (HDHPs) for two reason — low premiums and access to tax deductible savings accounts.  These advantages are real.

Less attention has been spent on differences between how HDPPs and standard plans differ in their reimbursement of prescription medicine.  Most standard deductible health plans with low deductibles pay a share of prescription drug costs prior to the deductible even being met.   By contrast, most high-deductible health plans do not reimburse any health care costs until the entire deductible is met.

Moreover, many insurance companies that sponsor both standard and high-deductible health plans have less generous benefits for certain drugs under the high-deductible health plan.

Drugs can be very expensive especially when a generic alternative does not exist. The prices of some commonly used drugs presented below was obtained from a major reputable insurer which offered both a standard deductible and HDHP.

Prices of Some Drugs
Atorvastatin $30
Cialis $923
Trulicity $1,994
Metopropol $3.60
Welchol $1,753
Janumet $1,177
Jardiance $1,273

Prices are for 90-day supplies.

This insurer typically  required consumers to pay around 25 percent of the cost of the non-generic drug.   However, I noted that the insurer paid 25 percent of the cost for a 90-day supply of Cialis 5-mg daily use under the standard plan and 0 percent under the HDHP.

Most consumers evaluate insurance plans based on broad reimbursement levers, deductibles, out-of-pocket expense limits, and coinsurance rates.   However, increasingly narrow policy rules including the reimbursement rate for a drug or whether a procedure is medically necessary can have a large impact on out-of-pocket costs and financial exposure.

There is another complexity associated with the use of high-deductible health plans and reimbursement for prescription drugs.   The complexity is the result of the higher coinsurance rate for prescription drugs than for most hospital services.   In some plans the coinsurance rate (the share paid by the customer) is 25 percent for prescription drugs and only 5 percent for hospital visits.    This feature combined with rules governing deductibles can result in the timing of medical services impacting the total amount paid by the customer.

A person who pays $X for a car and $Y for a vacation will pay a total of $X +$Y for both items regardless of when the purchases occur.   However, the amount of out-of-pocket expenses incurred by a person purchasing prescription drugs and a visit to the ER or a hospital can vary quite a bit depending upon when the purchases occur.

The purpose of this post is to show that the timing of drug purchases and visits to the hospital can have a nontrivial impact on out-of-pocket health costs when reimbursement is guided by the rules of a high-deductible health plan with a high coinsurance rate for drugs and a low coinsurance rate for hospital stays.

Examples:

Let’s illustrate the timing effect with a couple of simple examples.

Situation One:   An individual-only health insurance policy has a $1,500 deductible and a catastrophic limit of $5,000.   The plan has a 5 percent coinsurance rate on hospital visits and a 25 percent coinsurance rate on prescription drug purchases.

How much does a person insured by this plan pay if she purchases $1,500 of prescription drugs prior to December 2018 and then has a $1,500 ER visit in the middle of December?

How much does a person insured by this plan pay if she has a $,1500 ER visit in early January 2018 followed by $1,500 in purchases of prescription drugs though out the year?

Assessment of Situation One:

The person who starts off the year with prescription drug expenses pays $1,500 on the prescription drugs and $175 (0.05 x $1,500) for the ER visit.

The person who starts off the year with an ER visit will pay $1,500 for the visit to the ER and $375 (0.25*$1,500) for the drugs.

The difference is around 19 percent of the lower amount.

The lesson here is that you should consider scheduling your ER visits for early in the year.   (Just kidding.  It is obviously very hard to schedule your ER visit.)

Situation Two:   A family has household coverage with $5,000 deductible.   The catastrophic limit on the plan is $13,500.    The family incurs two types of expenses during the year — $5,000 of drug costs and a $20,000 operation.

How much does the person who starts off the year with prescription drug expenses and ends with the operation pay in total out-of-pocket expenses?

How much does the person who starts off the year with the operation and ends with prescription drugs pay in total out-of-pocket expenses?

Assessment of Situation Two:

The person purchasing drugs prior to the operation pays $5,000 out-of-pocket for drugs and $1,000 for (0.05*$20,000) for the operation.

The person with the early operation pays $5,750 for the operation ($5,000+0.05*$15,000) and $1,250 (0.25*$5,000) for the drugs for a total of $7,000.   The difference as a percent of the smaller amount rounds to 16.7 percent.

A Note:   The two examples presented here result in the person who has the major-medical event later in the year incur more expenses than the person who starts the year with a major- medical event.   This is not always the case when the major-medical event is very large.   I hope to address this post in a separate post.

 Implications: I am the first to acknowledge that disparities resulting from timing of drug purchases under a HDHP are not the largest factor impacting health insurance markets.  As many have noted crappy insurance beats no insurance every single time.

However, the issue raised here is non-trivial for a few reasons.  First, a few hundred dollars or a thousand dollars is a non-trivial amount for a household struggling with student debt or just generally living pay check to pay check.   Second, the lack of transparency on this issue reduces the credibility of the insurance industry and the economists and financial advisors who work for it.   Third, based on the calculations demonstrated here some people may underutilize pharmaceutical drugs and/or delay needed medical services.   Fourth, based on the findings presented here policymakers should consider changing the rules governing eligibility for health savings accounts.

Other readings on advantages of different plan types can be found here.

 Health Insurance Math – Problem One

http://www.dailymathproblem.com/2013/12/health-insurance-policy-math-post.html

High Deductibles Versus High Out-of-Pocket Limits

http://www.dailymathproblem.com/2013/12/high-deductibles-versus-high-out-of.html

Health Plan Comparisons:

http://www.dailymathproblem.com/2013/12/health-plan-comparisons.html

My sense from these papers is that lower deductible plans with high catastrophic limits and higher coinsurance rates would benefit both the industry and the consumer.    The decision to only provide tax preferences for holders of high deductibles was a very bad one.

I would be happy to write the definitive study on this topic but funding and data are both needed.