Thoughts on the Health Care Reform Process
Republicans argue that the ACA has failed and want to repeal it and replace it with something different; although, there is little agreement among Republicans on what plan should replace the ACA. Most Democrats appear to deny or minimize the existence of problems with the ACA. Some sort of government option appears to be the only major ACA reform supported by Democrats.
My view of the situation is that while the Ryan plan would have left many Americans worse off it is possible to devise a plan that substantially improves upon the ACA. The objective of this memo is to outline changes to the ACA that would reduce premiums and improve quality of health plans sold through the state exchanges created under the ACA.
This memo concentrates on four issues — (1) the relative importance of employer-based insurance and state exchanges, (2) rules and incentives concerning the impact of age on premiums and coverage on state exchanges, (3) rules governing use of health savings accounts and high-deductible health plans, and (4) the treatment of extremely expensive catastrophic health care cases.
Issue One — Relative Importance of Employer-Based Insurance and State Exchanges: Currently state exchanges are much smaller than the employer-based market. There exists some evidence indicating that people who obtain their health insurance through state exchanges are less healthy than people with employer-based insurance. Most people with employer-based insurance are better off than people with state exchange insurance because employers often pay a substantial share of premiums. Policy makers need to consider subsidies and rules that encourage the growth of state-exchange marketplaces without making workers and families currently covered by employer-based insurance worse off.
Discussion: Under current ACA rules, employers with more the 50 employees are required to offer health insurance to their employees or pay a fine. The tax credit for people getting insurance on state exchanges is only available for people with household income less than 400 percent of the FPL. The tax credit has led to some small firms dropping offers of employer-based insurance. However, most working-age people and their dependents continue to obtain health insurance through their employer.
The Health Care plan offered by Paul Ryan and ultimately rejected by the Freedom caucus would have eliminated the employer mandate for large firms and would have expanded tax credits for the purchase of state exchange health insurance to people with income over 400 percent FPL. These changes would have induced many firms to eliminate their offer of health insurance to their employees.
One could argue that health insurance should not be tied to employment and that independent state exchanges reduce burdens on businesses and expand state mobility. Moreover, the expansion of state exchanges is needed to make these new markets financially viable.
However, employer-based insurance is financially attractive to many employees. Employers typically pay 70 percent of the premiums on employer-based plans. The employer contribution is not subject to income or Social Security tax. The workers who lose employer coverage under the Ryan plan would become worse off financially. Under the Ryan plan, many people currently obtaining health insurance through their employer would lose offers of employer-based coverage and some of these individuals would find coverage through state exchanges to be inadequate or unaffordable.
There is a need for financial and economic incentives that reduce employer-based insurance and increase the role of state exchange insurance. However, it is important that this reform not make workers who currently have employer-based coverage worse off.
Suggestions: There are several potential policies that might expand state exchanges and reduce the role of employer-based insurance.
- Employers should be allowed to contribute for the purchase of health insurance on state exchanges. These contributions would be an expense for the business but would not be taxable income to the employee. These tax-favored contributions would replace the tax preference resulting from employer-based insurance.
- Subsidies for the purchase of health insurance on state exchanges would also be given to federal, state and city employees and retirees, people on COBRA plans and people on Trade Adjustment Assistance TAA plans.
- Employees at small firms that do not contribute to health insurance on state exchanges would be eligible for a tax credit. The tax credit could be equal to the minimum or average contribution required by large employers.
Note One: The tax credit proposed here is likely to be lower than current tax credits and the one proposed under the Ryan plan because of other subsidies and features of the plan. First, the tax credit proposed here will be linked to the cost of a plan with high cost sharing, as described in issue three rather than the current silver plan. Second, the proposal detailed in issue four for a government funded catastrophic health insurance plan also reduces premiums and the required subsidy.
Note Two: I am concerned that the availability of a tax credit could induce some firms to choose to not contribute funds for the purchase of health insurance on state exchanges. Whether this is an actual problem depends on the design of the tax credit and the rules governing contributions from the employer. I need to think about this issue a bit more.
Concluding thought on the need to increase size of state-exchange markets: If the suggestions presented here were enacted, all working-age people not on Medicaid or government insurance would purchase their health insurance through state exchanges. The mandate for an employer contribution would be needed in order to limit costs associated with the tax credit. However, in my view the mandated employer contribution is less burdensome than pure employment-based health insurance.
Issue Two: There are too few young adults enrolled in state exchanges. Policy makers need to create incentives for increasing the number of young adults who obtain their health insurance through state exchanges.
Discussion: There are two reasons for the shortage of young people insured through state exchanges. One involves a stipulation of the ACA requiring insurance companies to keep young adults on their parent’s policy up to including age 26. The other involves the allowable age-rating ratios under the ACA.
The ACA rule keeping young adults on their parent’s policy up to the age of 26 is one of the most popular provisions of the ACA. It has resulted in a substantial decrease in the number of young adults who lack health insurance. Most parents of young adults get their health insurance from their employer. As a result, most young adults also get their parent’s employer-based insurance policy rather than through state exchanges.
The ACA requires that insurance premiums be based on the age of the insured individual. The maximum allowable ratio of premiums old people to young people allowed under the law is 3 to 1. The Ryan plan increased the ratio to 5 to 1. A 5 to 1 ratio would leave insurance unaffordable to low-income older households. A 3 to 1 ratio is unfair to young adults. The issue of changes in the allowable age-rated premium ratio is in many respects a zero-sum game
Suggested Changes: A first step towards increasing the number of young adults with health insurance through state exchanges would involve changing the age-rated premium ratio. I am recommending a modest initial change from the current ratio of 3 to 1 to a new ratio of 3.5 to 1.
Research has shown that a low old to young age premium ratio is especially problematic when the deductible on health plans is very high. The paper linked below (which I authored) found that more than 80 percent of people between the age of 23 and 32 with a high-deductible health plan receive less than $500 in payouts from their health plan.
Intergenerational Transfers and Insurance Policy Designs
This observation suggests that the issue of premium regulations is linked to the issue of the type of health care plan offered in the market. Issue three below discusses questions involving differences in cost sharing arrangements.
There appears to be little support for changing the provision of the ACA that allows young adults to remain on their parents health plan because this change in health care law is responsible for a dramatic increase in the number of young adults with insurance coverage. However, there may be some policy changes that could induce some young adults to move off their parent’s policy into one obtained in state exchanges.
It might be appropriate to apply a modest annual fee for young adults who remain on their parent’s policy. Funds from this fee could be used to subsidize out-of-pocket expenses for low-income people covered by high cost-sharing plans.
Alternatively, it may be appropriate to give people who turn 24 an extra $2,000 tax credit for a health savings account contribution if and only if they obtain a health plan from state exchanges.
Issue Three: The combination of high-deductible health plans and health savings accounts are unsuitable for many young households with high debt, limited income, and low levels of liquid assets. Alternative cost sharing arrangements should be considered.
Discussion: There are two main advantages of high-deductible health plans. First,
High-deductible health plans result in a substantial reduction in health insurance premiums. The reduction in health insurance premiums stems from the fact that the insurance company makes no payouts, except for some preventive services, until after the deductible is met. Second, as long as the total health expenditures remain under the deductible the insured individual has a strong incentive to economize on health expenditures.
Most of the academic literature on the benefits of high-deductible health plans and health savings accounts involves a discussion of the extent to which these plans reduce the utilization of health services.
The following study by a group of economist found that the use of high deductible health plans reduced spending on out-patient care and on pharmaceuticals. There was no evidence of increased use of in-patient services or emergency room services.
NBER study on impact of high-deductible health plans on utilization of health services.
There is also substantial concern that high-deductible health plans can cause people to forego needed procedures and not purchase needed medicines.
There are several potential problems and unresolved issues with the expanded use of high-deductible health plans.
First, the people who benefit the most from health savings accounts are high-income individuals with higher marginal tax rates. Some conservatives including Rand Paul have argued that all people should be allowed to contribute to a health savings account regardless of the type of health insurance plan they use. Conservatives also tend to want higher limits on the amount that people are allowed to contribute to health savings accounts. This approach provides larger subsidies to people who already have comprehensive coverage.
Second, some households will only be able to fund health savings accounts by reducing contributions to their 401(k) plans. This change has little or no impact on savings and wealth accumulation. It is similar to rearranging the deck chairs on the Titanic.
Third, as noted in my article intergenerational Transfers and Insurance Policy Design an estimated 80 percent of young adults will receive less than $500 in benefits from health savings accounts. The low potential payout for most young healthy adults will result in many young adults foregoing health insurance if a high deductible plan is the only affordable option.
Fourth, higher deductible health plans would be more effective to lower-income households if they were coupled with subsidies for out-of-pocket expenses. The ACA does provide subsidies for out-of-pocket expenses for low-income households. Congress did not appropriate funds specifically for this subsidy. The Obama Administration reallocated funds for this program but House Republicans initiated a legal challenge to this subsidy. Courts are still considering this issue.
Fifth, increased cost sharing creates an incentive to forego needed procedures and/or to not take certain medicines. These decisions could have adverse health consequences.
Suggested Changes: Two suggested changes to the rules governing health savings accounts and high-deductible health plans should be considered.
First, low-income holders of qualified high-cost sharing plans should be given subsidies for some out-of-pocket expenses. It may be desirable to end the litigation on out-of-pocket subsidies by agreeing to fund subsidies only for people with high-deductible or high cost-sharing health plans.
Second, policymakers should allow people with a high coinsurance rate plan to contribute to a health savings account even if the plan has a modest deductible.
The low-deductible health plan with a high coinsurance rate may actually have a higher impact on health care utilization than a high deductible health plan. Consider two plans both with a $7,350 out-of-pocket limit. The first plan has a $7,350 deductible and no cost sharing once the deductible is met. The second plan has a $0 deductible and a 50 percent coinsurance rate until the $7,350 maximum allowable out-of-pocket limit is met. Under the first health plan there is not more cost sharing once total health expenditures reach $7,350. Under the second health plan cost sharing will continue until total health expenses reaches $14,700.
I suspect that wealth accumulated in a health savings account linked to a high cost-sharing plan will be higher than wealth accumulated in a health savings account linked to a high-deductible plan. (I believe I could provide evidence supporting this hypothesis using MEPS data and a simple simulation model.)
Issue Four: Around 5 percent of the United States Population accounts for roughly half of health care spending in the United States.
AHRQ Statistical Brief 497: Concentration of Health Expenditures in the U.S. Civilian Noninstitutionalized Population, 2014 https://meps.ahrq.gov/data_files/publications/st497/stat497.pdf
The share of health care expenditures in a relatively few expensive patients is even higher for children and the working-age population
Health care expenditures across age groups:
The government could provide catastrophic health care coverage for all expenditures or a proportion of expenditures above a specific limit. A universal catastrophic health insurance plan would reduce premiums on private insurance.
Discussion: Prior to the ACA many health insurance plans had annual or lifetime limits. Often people with health expenditures that exceeded the limits on the health care plans were unable to obtain additional health services. The recently withdrawn Ryan health care plan retained the ACA prohibitions on caps on health care expenditures.
A new Freedom caucus version of an ACA repeal bill may very well allow insurance companies to impose annual or lifetime caps on expenditures. This bill is also likely to include high-risk pools that could cover some people denied coverage because of the expenditure caps. Past versions of high-risk pools had limited funds and covered only a small share of the uninsured.
The ACA included a limited reinsurance option that was designed to reduce incentives for insurance companies to avoid high-risk options. This option was stopped when Republicans refused to fund the program. Some states including Minnesota have thought about including a reinsurance procedure in their state exchanges.
Suggested Changes: Create a program where the government will pay or all part of catastrophic health expenses above a certain limit. For example the new government funded catastrophic health plan might pay for 80 percent of all health care expenses over $60,000 per year. The individuals would continue to pay for all out-of-pocket expanses. The private insurance company would no longer have to pay for expenses covered by the new catastrophic health plan.
Note One: The new government funded reinsurance plan reduces premiums drastically for the new standard plan. The higher deductibles or cost sharing also reduces premiums. The lower premium allows the government to substantially reduce tax credits helping lower-income households afford premiums. The cost of the reinsurance subsidy may be partially or even entirely offset by reductions in the tax subsidy depending on the details of the reinsurance program and the details of the new tax subsidy.
Note Two: A replacement to the ACA that allows for insurance companies to impose caps on expenditures would lead to the death of some people once caps are reached. It appears hard to fix this problem without some sort of government program.
Note Three: One way to create a universal catastrophic health plan is to allow for automatic eligibility into Medicaid or Medicare for people with health expenditures that exceed a cap. A second way might involve government purchasing a private catastrophic health plan with some private insurance company or consortium. (This would be one huge contract.)
Note Four: A universal catastrophic health plan would have a large impact on premiums and the reinsurer would only need to make payouts to a relatively few individuals. I need to update my work on reinsurance, which was conducted prior to the passage of the ACA.
Geneva Paper on Reinsurance and Health Insurance in the United States:
Here is the current situation. The ACA has non-trivial flaws that need to be fixed. The Republicans have done and continue to do everything they can to make sure the ACA fails. The Ryan bill would have led to the unraveling of employer-based health insurance and many people currently covered by employer-based polices or receiving tax credits on state exchanges would have been unable to afford health insurance under Ryan’s proposal. The only Democratic plans put forward involve government options or single-payer plans, proposals that are not viable in the current political environment. The Freedom caucus opposes any plan with a new entitlement even if the plan actually reduces the role of government in the health care system
Many of the recommendations discussed in this essay including the expansion of state exchanges, modification of age-rated premium formula, and changes rules governing health savings accounts are based on conservative principles. The plan that I am outlining here also contains a very large new government entitlement – universal catastrophic coverage for all U.S. citizens. The new entitlement allows insurance companies to cap health annual expenditures. This provision reduces premiums on private insurance and tax subsidies.
It is hard to see how issues related to the most expensive health care cases can be mitigated without some government involvement. Even though this proposal contains a new entitlement this proposal should reduce total government involvement in the health care sector. It is my hope a bipartisan group of Senators and Representatives will get behind a specific plan based on this analysis.