How Should the Biden Administration Fix Problems with Short-term Health Plans

Abstract:   People with short-term health plans often experience catastrophic financial losses, despite their insurance coverage.  The Biden health plan would reduce but not eliminate demand for short-term health plans.  Problems with short-term health plans could be fixed through executive order and/or state Medicaid waiver.

Fixing Short-term Health Plans

Many people cannot afford comprehensive health insurance sold on state exchanges.   The Trump Administration responded to this affordability problem by expanding the use of short-term medically underwritten health plans, which are not compliant with ACA regulations and do not cover essential health benefits.

A recent report by the Democratic staff of the House Energy and Commerce Committee found short-term health plans have arbitrary benefit packages, fail to cover many needed health care procedures and often provide households little or no financial protection when faced with an existential medical situation.

Short-term health plans include several features that can lead to extremely adverse health or financial outcomes.   These plans do not cover treatments for pre-existing conditions and exclude coverage for many common medical treatments, preventive care and prescription drugs.

Short term health plans often limit physician office visits, hospitalizations, emergency services and coverage for surgery.  Limits can take the form of number of days or visits of coverage or the reimbursement rate per day or visit.   Some short-term health plans have rescinded coverage for high-risk patients and for cancer patients.

Arbitrary benefit limits often lead to unusual and unpredictable health care bills.  The report by the Energy and Commerce committee describes situations where one patient received a $14,000 bill for two-day hospital stay for pneumonia and another situation where the short-term policy only paid $7,000 on a $35,000 bill for an emergency procedure.

Short-term health plans can cause physical or financial ruin for the customer.   In many situations, people with short-term health insurance plans are de facto uninsured.

Short-term health plans with arbitrary health insurance provisions are fundamentally different than the high cost-sharing arrangements used in conventional catastrophic health plan.   A catastrophic health plan with high deductibles and coinsurance rates can result in high out-of-pocket health care costs and can cause a sick individual to forego some necessary health care treatments.   However, the existence of a high deductible will generally not result in financial ruin when the health plan covers essential services and has a reasonable maximum out-of-pocket limit.

Catastrophic health care plans are a potentially rational choice for people who are willing to tradeoff higher deductibles for lower premiums.   Short-term health plans with arbitrary benefit limits basically do not reduce risk.

President-elect Biden’s health plan attempts to reduce the demand for short-term health insurance plans by offering a more generous premium tax credit for the purchase of state exchange insurance and an affordable public option. The Center for Medicare Services projects that most people selecting short-term health plans have income over 400 percent of the federal poverty line and are ineligible for a premium tax credit.  The more generous premium tax credit offered by President-elect Biden’s plan does not provide much assistance to young adults with income slightly above 400 percent of the federal poverty line.  Young adults with income near 400 percent of the federal poverty line are unlikely to be eligible for the new public option.

There is a need for a low-cost insurance option for people who cannot afford comprehensive health insurance.   This need is likely to persist even if President-elect Biden’s health care reforms are fully enacted. However, the low-cost insurance option should not expose people to catastrophic losses even though on paper they have insurance coverage.

The incoming Biden Administration can fix some of the more flagrant problems with short-term health plans through executive order.  The executive order would create a short-term health plan with higher deductibles and higher out-of-pocket limits than current state-exchange health plans similar to the copper plan considered by Senator Alexander and Senator Murray.

New copper plans could attract healthier people and increase premiums for more generous plans.  This problem could be minimized by targeting copper plans towards people without access to premium tax credits.

The executive order would prohibit many or all of the arbitrary benefit limitations including limits on nights in hospital, use of emergency rooms and doctor visits. The executive order would require short-term health plans to cover all medically necessary health procedures.   The executive order would prohibit underwriting based on health status and any discrimination against people with pre-existing conditions in short-term insurance markets.

The ACA prohibits insurance companies from imposing caps on annual and lifetime health care benefits on all comprehensive health plans with the exception of short-term health plans. Caps on health care benefits used by short-term plans reduce the cost of the health plans but create catastrophic health and financial situations for people who hit the benefit limit.

The incoming Biden Administration and Congress needs to either prohibit short-term health plans from imposing annual benefit caps or consider innovative ways to provide additional coverage to people once they reached their annual or lifetime benefit caps on their short-term health plan.

One approach would involve the government sharing costs above some benefit threshold.   Cost sharing could occur at any level perhaps the annual cap.   The cost sharing could be implemented by direct payments from the government to health care providers for a portion of the health care bill once annual expenditures reach the chosen threshold. Previous risk-sharing programs making payments to insurance companies with a large number of expensive health care cases were criticized as corporate welfare.  Direct payments to providers for servicers above the annual cap would be easier to defend than subsidies to insurance companies.

A new broad cost-sharing subsidy would require Congressional approval.  It may be possible for the Biden Administration and certain states to implement cost sharing through a Medicaid waiver, which allows states to use Medicaid funds to pay health expenditures for people with health expenditures over their annual cap.   This type of cost-sharing arrangement was first described in this SSRN paper.

The focus of most health care reform discussions is on reducing the number of uninsured.   The growth of short-term health plans during the Trump era created a class of people with insurance on paper that would still be subject to potentially catastrophic financial losses or health outcomes.   Even if fundamental efforts for health care reform fail, the Biden Administration can fix some of the problems caused by the growth of short-term health plans through executive order or through the Medicaid waiver process.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Implications of the ACA Supreme Court Case

The Trump Administration presented an amicus brief before the Supreme Court arguing the entire ACA is now unconstitutional because Congress in a 2017 tax law eliminated fines for violating the individual mandate.  This note summarizes the brief, evaluates the likelihood the argument that the ACA is unconstitutional will prevail, and discusses potential actions Democrats can take to protect health insurance.

Summary:

The brief makes four arguments

  • Plaintiffs have the right to sue,
  • Eliminating the fines for the individual mandate means the law is no longer a tax law and is instead an unconstitutional mandate,
  • The individual mandate is inseverable from the guarantee-issue provision and the community-rating provision of the law,
  • The remaining provisions of the ACA are inseverable either due to the repeal of the fine for violating the individual mandate or the finding that guarantee-issue and community-rating provisions no longer apply.

Comments:

Comment One:   I am not a lawyer and cannot comment on standing, which is a pure legal issue.

Comment Two:  The previous Supreme court case decided 5-4 that the ACA was a tax law and not an unconstitutional mandate. This article explains that Roberts saved the ACA by finding that it was consistent with Congress’s tax authority.

Now that the tax rate for violating the individual mandate has been zeroed out it is harder to argue the individual mandate is a tax.

Comment Three: Many Congress people supported the provisions on guarantee issue and age rating in the ACA because the individual mandate forced healthy people to obtain insurance even if they were highly leveraged and struggling financially.   There is a lot of empirical evidence supporting the view that in the absence of the individual mandate fewer healthy people would obtain health insurance and more people would take out short-term health plans leaving themselves underinsured.  The increase in the number of healthy people who go without health insurance or choose to underinsure increases insurance premiums and decreases competition in state exchange markets.

The ACA states that provisions of the law are severable and that the removal of one provision does not invalidate the rest of the law. However, there is no doubt the modification of the law by eliminating fines for the individual mandate alters the risk pool, has a large impact on insurance firms, and was not the outcome desired by many in Congress when they voted for the ACA.

Comment Four: The elimination of the guarantee-rating and community-rating provisions of the ACA would also alter the economic impacts of other aspects of the law including the premium tax credit, annual and lifetime benefit caps, and the employer mandate.

Currently, premiums and the premium tax credit are based on the age of insured households.  A ruling by the Supreme court on behalf of the plaintiffs in this case would allow insurance companies to base premiums on health status instead of or in combination with age.  The actual regulatory authority over premiums would probably revert to state governments.

These changes in premiums would result in either the denial of insurance coverage or prohibitively expensive insurance for people with pre-existing conditions.   It is likely most insurance plans would impose annual and/or lifetime caps on benefits.  These changes would even make health insurance unaffordable or unavailable for some high-income people with pre-existing conditions.

The premium tax credit would be unworkable or would work in a way drastically different than intended by the ACA even if the Supreme Court ruled that it was severable from protections in pre-existing conditions.

Comment Five:  The court may side with plaintiffs on the main issues raised in this case.  Thomas and Alito dissented in the previous case and are likely to do so again. The logic used by Roberts has been undermined by the repeal of fines for the individual mandate.  One Bloomberg law article found that Gorsuch and Thomas are the justices most likely to overturn an entire law because of the removal of a specific item.   However, other justices may be willing to remove the protections for people with pre-existing conditions, which would essentially cripple other aspects of the law like the premium tax credit.

It is easy to envision an outcome to this case where a majority of justices rule the ACA unconstitutional in separate decisions reflecting different legal theories.

Potential Actions by Democrats:

 The overwhelming majority of Republicans in the U.S. Senate (perhaps all) want to kill the entire ACA.  If the Republicans retain control of the U.S. Senate and the Supreme court rules the ACA is unconstitutional, millions will lose their health insurance or gravitate towards inadequate insurance coverage.  The avoidance of this outcome and near-term progress in improving health insurance markets in the United States requires a Democratic sweep in November 2020.

 The legal threat to the ACA before the Supreme court is the result of a tax law change.  The easiest way to save the law is through the passage of a new tax law.  Most legislation requires 60 votes to clear the U.S. Senate.   Tax changes can clear the Senate with a simple majority though a process called reconciliation.  Tax changes addressing issues raised in the case before the Supreme court could conceivably take place before the Supreme Court ruling rendering the current court case moot.

The simplest or most obvious tax change ending the legal challenge to the ACA is is to restore fines for violating the individual mandate.  However, the individual mandate is unpopular, and the fines could be zeroed out again when the Republicans regained power.

The imposition of fines for violating the individual mandate is not the only way to discourage people from foregoing health insurance or underinsuring and assuring stable state exchange health insurance markets.   For example, the tax code could be modified to reduce standard or itemized tax deductions for people forgoing health insurance coverage.  Congress could expand the premium tax credit used to purchase state exchange health insurance markets for middle-income young adults.  Congress could expand volume of transactions and increase competition in state exchange health insurance markets by creating an incentive for employers to subsidize the purchase of state exchange insurance by employees. Readers interested in some potential tax proposals impacting health insurance markets and this case should consider this other article on Medium.

Another way to protect people with pre-existing conditions, if the Supreme Court rules that the individuals mandate and protections for people with pre-existing conditions are inseverable, involves giving people with pre-existing conditions an affordable public option.  This approach requires a 60-vote majority in the U.S. Senate unless the Democrats eliminate the filibuster.

Wouldn’t the creation of a robust public option be an ironic outcome of a court case seeking to eliminate the entire ACA?

Concluding Remark: The Supreme Court is likely to overturn significant portions of the Affordable Care Act.  However, a future Congress and a future President can overturn this result and create a much better insurance system. The future of the ACA and health insurance more broadly depends on control of the U.S. Senate than on the confirmation of a new Supreme court justice.

 

 

Health Care Reform and the Tax Code

Many problems with health insurance markets in the United States are associated with aspects of the tax code.

  • A large tax preference for employer-based insurance often results in discontinuities in insurance coverage during job transitions and periods of unemployment.
  • The preferential treatment of employer-based insurance reduces competition and adversely impacts insurance outcomes in state exchange markets.
  • The reliance on tax preferences for employer-based insurance favors workers at large profitable firms over workers at small less profitable firms.
  • Tax rules prevent low-income workers at firms with an offer of affordable health insurance from claiming the premium tax credit for purchase of health insurance on state exchanges even when the state exchange plan is superior to the employer-based insurance.
  • Middle-income people without offers of employer-based insurance are not eligible for the premium tax credit used to purchase state exchange insurance.
  • Tax incentives favoring the use of high-deductible health plans impose hardships on low-income and middle-income households, create an incentive for some people to forego necessary treatments or prescription drugs and create a tradeoff between saving for retirement and saving for health care.
  • The 2017 Tax Reconciliation bill zeroed out fines for the individual mandate, increasing incentives for people to forego health insurance or underinsure and led to a court case challenging the constitutionality of the entire ACA.

The purpose of this memo is to propose and evaluate tax policy changes, which would reduce imperfections in health insurance markets.

Modify tax preferences for employer subsidies of health insurance to promote the increased use of ACA state exchanges:

The ACA maintained long standing tax preferences provided to employer-based insurance and included rules favoring employer-based coverage over state exchange coverage.  Employer payments for health insurance premiums are deductible to the employer and untaxed to the employee.  Currently, around 11 million Americans obtain health insurance from state exchanges compared to around 157 million who obtain health insurance from their employer.

The continued dominance of employer-based health insurance has resulted in several problems including — discontinuities in insurance coverage during periods of job transitions or during unemployment and a lack of competition and choice in state exchange markets.  A merger of employer-based and state exchange insurance markets by having employers subsidize health insurance purchases for their employees in state exchange markets would benefit participants in both markets.

Employer contributions to state-exchange health insurance would facilitate continuous coverage during job transitions.  A person switching jobs with state exchange insurance would keep the same health insurance plan and would not have to meet a new deductible in order to receive benefits.

A single health insurance market separate from the employer facilitates lower cost continuous coverage for the unemployed.  COBRA allows unemployed people to maintain their current employer-based health insurance; however, the worker is responsible for the entire cost of the health insurance plan plus a 2 percent administration fee.  COBRA is unaffordable to many unemployed workers.  By contrast, unemployed people with state exchange health insurance who experience a reduction in income and a loss of their employer subsidy might automatically become eligible for a premium tax credit that covers part of the cost of state exchange health insurance.

The possibility of keeping an employer-based health insurance plan through COBRA payments is often not possible in a bankruptcy situation.   Employers experiencing a Chapter 11 bankruptcy often eliminate coverage or reduce subsidies.   Chapter 7 bankruptcy generally results in the termination of all employer-based health insurance including COBRA.  By contrast, state exchange health insurance is unaffected by corporate bankruptcy.

The increased ability for the unemployed to retain continuous affordable health insurance coverage would greatly benefit the current economy.  A recent study by the Economic Policy Institute found that around 9.2 million people have lost their health insurance due to the COVID pandemic.

The creation of large statewide health insurance markets serving both people with employer-based subsidy and people with state exchange health insurance will expand health insurance choices for many households.

Currently, most people with an offer of employer-based health insurance will not qualify for premium tax credits on state exchanges and the employer health plan is often insufficient or not affordable for lower-income households. The creation of a single health insurance market allows workers to use employer subsides and also claim the premium tax credit if the worker’s income was low and the employer subsidy was insufficient to cover the entire health insurance premium.

Many employers, especially small firms, only offer a single insurance option.   The proposal presented here would allow all people access to any insurance plan offered on state exchanges.

The plan increases competition and offerings of health plans on state exchanges.  A report by the Kaiser Family Foundation found in 2020 two state exchanges were served by only one insurance company and another fourteen state exchanges had two insurance companies offering products.  Research has revealed that health insurance plans offered on state exchanges often lack access to top hospitals or specialists.  The larger single market would result in more competition, which should improve insurance plan quality and reduce premiums.

Most people who forego health insurance are both healthy and lack subsidies for insurance premiums.  The decision of healthy people to forego health insurance until they become sick increases insurance premiums.   The larger state exchange health insurance market including people with employer subsidies will have a smaller share of people who forego health insurance coverage.

The creation of a larger insurance market where a larger share of people automatically purchase health insurance due to generous employer subsidies will reduce the need for an individual mandate because the small share of people foregoing health insurance will have a relatively small impact on insurance premiums.

Modify the tax code to promote additional employer contributions for small firms and firms with low-income workers:

The current tax code treats employer payments on employee health insurance premiums as a tax-deductible business expense.   The value of this deduction is larger for more profitable companies than less profitable companies.   The current tax code also exempts insurance premiums from taxable income of households creating a benefit that is more valuable to taxpayers with high marginal tax rates.

The expansion of and modification of the small business tax credit could promote additional contributions for employer-based health insurance on state exchanges targeting small firms with low-income households.

The modified program would be available for firms subsidizing insurance for employees on state exchanges rather than firms providing employer-based insurance.   The modified program would be open to all firms where more than half of the employees had a salary less than a certain threshold rather than the average salary of all employees.

The proposal to expand tax benefits associated with health insurance subsidies for smaller firms with low income workers is similar in structure and spirit to a a new Biden 401(k) tax proposal which expands tax breaks for contributions to 401(k) contributions to low-income households.

Make several modifications to rules governing health savings accounts and high-deductible health plans to make these plans less burdensome to low-income households and people with expensive health conditions:

 Health savings accounts coupled with high-deductible health plans passed as part of the 2003 Medicare law are growing in popularity.  The use of high-deductible health plans reduces insurance premiums.   The use of health savings accounts creates pre-tax savings for health expenses.  However, current health savings accounts and high deductible health plans create several problems for low-income and middle-income people including increased out-of-pocket expenses, reduced adherence to prescription drug regimens and a tradeoff between saving for retirement and saving for health care.

Four policy changes, which could mitigate problems associated with increased use of health savings accounts and high deductible plans, are proposed and discussed below.

The first two proposals attempt to mitigate financial hardship imposed on households from increased cost sharing.

  • A tax credit for contributions to health savings account would be established for households with income below a particular threshold.Higher income households would continue to make untaxed contributions to health savings account.   This provision would encourage use of less expensive health plans by lower income households and reduce disparities occurring because of the difference in the value of tax subsidy stemming from differences in marginal tax rates.
  • Rules governing contributions to health savings accounts would be modified to allow contributions to health insurance plans with higher coinsurance rate plans even if their plan had a relatively low deductible.The current laws governing health savings accounts only allow contributions from people with a high deductible health plan even though health plans with a relatively low deductible and high coinsurance rate allow for substantial cost sharing and can provide better outcomes to households than a high deductible plan.

Many low-deductible health plans pay most costs for prescription drugs even prior to the deductible being met.  However, many of the new high-deductible health plans do not pay for any prescription drug treatments prior to the deductible.  The more onerous rules on prescription drug payments by high-deductible health plan have created an incentive for many people to forego or cut short necessary prescriptions.  This incentive is especially large for people with diseases like diabetes where the patient does not have immediate symptoms.  The failure to control chronic health problems can lead to bad health consequences and more expensive health services in the long or medium term.  For example, the failure by diabetics to control blood sugar can lead to kidney problems, eye problems, amputation and heart issues.

Two additional proposals are presented to address potential problems associated with reduced use of prescription medicines stemming from increased use of high-deductible health plans.

  • Regulations governing prescription benefit formulas for high-deductible plans should be modified to require partial payment by insurance firms on prescription drugs for the treatment of chronic diseases prior to the deductible being met. Current law allows high-deductible health plan to make payments for some preventive treatments prior to the deductible being met.It should be possible for Health and Human Services to mandate coverage for some prescriptions treating chronic diseases as a preventive method under current regulations.
  • Congress could establish a fund to directly pay part of the cost of necessary health prescriptions for low-income and middle-income households.The funds for this effort could be obtained through an excess profit tax on pharmaceutical companies.

Both approaches have advantages and disadvantages.  The adoption of a regulation requiring greater insurance payments for prescription drugs would increase insurance premiums.   The creation of a new fund subsidizing insurance payments for prescription drugs would not increase premiums but would have to be enacted through new legislation.

All four of the proposals presented here could make cost sharing between insurance firms and household more palatable to low-income households.  Any proposal that shifts households to a plan that imposes more cost sharing could reduce premiums and tax expenditures for premium subsidies.

Note also, that a new tax credit associated with health savings accounts requires households have a particular form of insurance coverage would also reduce the number of households forgoing health insurance.

Modify the premium tax credit to include some assistance for middle-income households and eliminate the:

The current ACA premium tax credit does not provide any assistance to people with income over 400 percent of the federal poverty line, around $50,000 for a person seeking an individual only health plan.  This abrupt cutoff of benefits creates two problems.

  • People with household income under 400 percent of the federal poverty line often forego health insurance or underinsure.
  • Many people claim an advanced tax credit to pay for their health insurance prior to knowing their actual annual income.People who earn more than 400 percent of the federal poverty line lose access to the entire tax credit and often owe substantial tax payments to the Treasury.

The most effective way to fix both of these problems is to modify the premium tax credit and guarantee a minimum tax subsidy (perhaps $1,000 for an individual and $2,000 for a family).

The minimum tax credit could be given either to all people without access to an employer-based insurance plan or all people in the population.   The former approach would be less expensive to taxpayers but some small firms could decide to forego employer-based subsidies so their employees could claim the premium tax credit.   The later approach by having firms and taxpayers share the cost of premiums would reduce cost to employers.

The proposal presented contrasts sharply with Vice President Biden’s proposal to extend the premium tax credit past 400 percent of the federal poverty line and increase the generosity of the tax credit.  Vice President Biden’s plan does not provide any assistance to many middle-income households. For example, based on calculations obtained from the Kaiser Family Foundation Health Insurance Marketplace Calculator a 30 year old person making $60,000 per year seeking an individual-only health plan would pay $409 per month and receive no support from the premium tax credit. (Figures presented here are based on average U.S. insurance premiums.)

Reduce standard or itemized deductions for people who choose a public health insurance plan over a private health insurance plan:

People who are uninsured and healthy tend to forego health insurance and immediately seek coverage if they become ill or injured.  In order to deter this behavior, the ACA included a financial penalty in the form of a tax fine for people without health coverage.   The individual mandate was resented and opposed by many individuals.  The 2017 tax reconciliation bill zeroed out fines for the individual mandate.  The repeal of fines led to litigation, brought by some state attorney generals, claiming that the entire ACA without the individual mandate was unconstitutional.   The fifth circuit federal appeals court agreed that the ACA is unconstitutional without the individual mandate and this court case is now heading to the Supreme Court.

It is difficult to predict with certainty the outcome of any Supreme Court case.    The court upheld the law in a 5-4 decision in a previous case.   The new more conservative court is more likely to repeal the law.

A 2017 tax reconciliation bill modified the individual mandate and led to the current challenge.  Depending on the outcome of the 2020 election, a 2021 tax reconciliation bill could either restore fines for the individual mandate or create some other financial incentives designed to assure that people maintain continuous health insurance coverage.

One way to create incentives for people to maintain continuous health insurance coverage and to address legal concerns about the constitutionality of the entire ACA is to create a new financial penalty for people choosing to forego health insurance coverage.  The financial incentive could be implemented in the form of the loss of some standard or itemized deduction for people who do not have health insurance and need not be as large as the original fines for violating the individual mandate.

Concluding Remarks on Tax Policy and Health Insurance:

The tax proposals presented here expand the size of state exchange markets, reduce the number of people who forego health insurance coverage, improve the quality of health insurance coverage, and obviate the need for an onerous individual mandate.  The passage of these tax reforms would address legal concerns stemming from the litigation following the passage of the 2017 tax reconciliation bill.