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Thoughts on the Health Care Reform Process

6 Oct

Thoughts on the Health Care Reform Process

David Bernstein

Bernstein.book1958@gmail.com

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.

Analysis:

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

http://www.tandfonline.com/doi/abs/10.1080/10920277.2008.10597522

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.

http://www.nber.org/papers/w21031

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:

http://www.dailymathproblem.com/2017/02/health-care-expenditure-patterns-across.html

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.

http://milawyersweekly.com/news/2017/03/22/how-reinsurance-may-help-health-insurers/

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:

https://www.jstor.org/stable/41953098?seq=1#page_scan_tab_contents

Concluding Remarks:

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.

 

 

 

 

 

 

 

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Marian Hagler’s Health Care Plan

6 Oct

Marian Hagler, my wife, wrote this health care plan. Marian is an attorney who has worked on international transactions, energy, and start-ups.

Here is her proposal to reform our health care system.

Overview. I became inspired to put together a health care plan after listening to many critiques of ObamaCare coming without concrete proposals for improvement or replacement. I encourage others to go through this exercise. I have a new appreciation for the difficulty in finding something that works and incentivizes stakeholders in a positive way. I can now also read proposals for change with greater insight as to why they are good, even if imperfect, and whether there is a better option.

The following proposal is designed to simplify and improve the existing system, and hit all Republican and Democrat “must haves” (repeal/replace/improve ObamaCare, minimize government involvement and leverage the private sector, reduce premiums, keep increasing the number of people covered, maintain pre-existing conditions coverage, maintain coverage for persons 26 and under, reduce employer admin costs, incentivize people to buy affordable private insurance, guarantee equal rates for men and women, allow people to keep their doctors, and reduce prices of prescription drugs). In addition, it addresses other key problems..

The core of the proposal is to guarantee everyone at least some minimum of free medical insurance that covers them if their medical expenses reach a catastrophic level (“MajorCare”) and give 100% insurance to children (“YouthCare”). Taken together, the proposal essentially provides a safety net for retirees (by keeping Medicare), children and young adults (through YouthCare), the poor (by keeping Medicaid), and for major medical (by introducing MajorCare). It also turns over to broader private competitive market all plans supplemental to these (Private Supplemental Policies or “PSPs”), without the employer necessarily being in the middle and without state barriers.

How we pay for the plan and reduce drug prices is discussed last.

Disclaimer: I have no dog in this hunt other than to see us advance down a path towards a better system. If I have a tilt, it comes from the fact that I am a mother, a lawyer and a Democrat, but I am not a medical professional, nor do I work for a health insurance company, or pharmaceutical company, nor do I own such a company (unless a share or two is buried somewhere in my investment portfolio), although one of my clients is a medical device company. I am not on Medicare or Medicaid. Our family has private group health care insurance that is affordable for us. My sister is on ObamaCare and my parents are on Medicare.

I also work with a number of very inspiring entrepreneurs who sometimes walk the line between ObamaCare and Medicaid. Finally, my husband is a health care economist and has encouraged and helped me think through some of the issues here, together with my 13-year-old son.

Here is the proposal.

I. Medicare is maintained. This keeps retirees out of the private risk pool, which will keep premium and costs down for everyone else. This also keeps a political promise to “not touch Medicare”. We can think about whether to take the opportunity to tweak Medicare to improve it. Private Medicare supplements would still be available.

II. Medicaid is maintained. This keeps the poor covered and keeps them out of the private risk pool, which will keep private PSP premiums down for everyone else. A few key tweaks here: (1) Eliminate the month-to-month review, which is too frequent. Change to every six months. While this may lead to some temporary over coverage, there will be savings from reduced bureaucracy and reduced structural costs from people rolling on and off Medicaid. (2) We get everyone who is 26 and under off of Medicaid. They will be covered by YouthCare. This will help improve the health of the next generations, which should save costs down the road. (3) Develop incentives for the States to improve Medicaid. (4) Find ways to eliminate the problem of doctors who refuse to take Medicaid patients (or cap the number of Medicaid patients), so people can keep their same doctor as they roll on and off of Medicaid.

III. MajorCare and YouthCare are created as private insurance programs, with the premiums being paid by the US Government (USG):

A. General. MajorCare is a high-deductible policy designed to cover catastrophic/major medical expenses for everyone over 26 who is not covered by Medicaid or Medicare. YouthCare is a policy for anyone 26 and under, including children (because there is no income test, CHIP children would now be covered by YouthCare along with everyone else). Together, these policies ensure that the 20 million people picked up by ObamaCare will still have some minimum of health insurance at an affordable price (FREE), and we increase this 20 million dramatically by covering EVERYONE.

Also, with MajorCare in place, private policies won’t need to cover high, catastrophic costs, and this should lower significantly premiums paid under private policies. Further, unlike ObamaCare, no one would be required to sign up for MajorCare or YouthCare via a government website that does not work well or be limited by what is offered in their state. At its heart, MajorCare gives everyone peace of mind that they won’t be totally wiped out by medical expenses or incur high premiums because their private insurance company is covering catastrophic risk, and YouthCare ensures all of our children are covered (without the complications of Medicaid), and gets children and young adults in the good habit of going to see the doctor regularly. YouthCare picks up the ObamaCare coverage for people 26 and under and takes it a step further – young adults, and all our precious children, are fully covered, independent of Medicaid/CHIP or their parents’ insurance (or lack) and the limits of their parents’ policies.

B. Objectives. MajorCare and YouthCare should appeal to Republicans, Democrats and Independents. They follow the principle that a minimum amount of health care is a human right (regardless of income level) and our future depends on making children a priority. Importantly as well, these policies are provided and managed by the private sector with minimal USG involvement. USG negotiates the private insurer contract and pays the premiums. Since USG is paying the premiums, there is no higher premium charged to women or for pre-existing conditions and, so, this ObamaCare protection is maintained and even improved.

C. USG Contract Negotiation. The private MajorCare and YouthCare insurers would be selected by the USG in a negotiated process designed to yield USG an optimal policy and premium price. Here, we can take advantage of the Trump Administration’s skills in negotiating private sector contracts and ensure that MajorCare and YouthCare contracts are structured in a way that meets program goals and works within the private sector health insurance industry that will manage them. Also, retirees and non-youth poor, as well as everyday medical care for all non-youth, are all out of the risk pool. So, this lowers the premiums cost to USG. Also, these programs eliminate the problem of people electing to pay the ObamaCare tax penalty and then signing up for ObamaCare once they are really sick. Eliminating this problem helps to stabilize the risk pool, further optimizing the cost to USG.

The winning insurance company may team/reinsure so they can spread the risk/reward with other private insurance companies, so long as they don’t collude in the bidding process. If the YouthCare and MajorCare contracts are too big for a single winner, they may be divided into a series of regional contracts, so that a 25-year old who enters a hospital in Region A would be covered automatically by YouthCare in Region A. A 27-year-old resident in Region B would sign up for Region B MajorCare.

D. Required Bid Terms. Required bid terms for YouthCare and MajorCare would include: (1) pre-existing condition coverage (thus, keeping a key ObamaCare promise and making sure those who need it most are covered), (2) a max deductible ($0 for YouthCare and, say, $15,000 per year for MajorCare), (3) the costs that count towards the MajorCare deductible would include the usual medical expenses, as well as premiums and insured expenses paid by PSPs (see below) and perhaps even discretionary costs (vitamins, gym and sport fees, massages, discretionary therapies, etc.) as part of a “Make America Healthy Again” initiative, (4) seamless transitions between MajorCare/Youth Care and Medicare/Medicaid, so no one falls in a crack (in other words, MajorCare/YouthCare automatically picks up someone who is not on Medicaid/Medicare and, vice-versa, MajorCare/YouthCare continue to cover someone until their Medicaid/Medicare coverage actually commences, (5) MajorCare and YouthCare include prescription drugs and dental/orthodontia (and such expenses would count towards the MajorCare deductible), and (7) financial condition covenants on the winners and a USG guarantee, in case of insolvency/failure as well as other unusual events (epidemics, etc.) paid for by a reinsurance fee (the scope of the guarantee and amount of the fee to be bid by the private insurer) paid to the USG (and perhaps netted from the premium). USG premium payments would be biweekly or monthly (same as premiums currently paid by employers) to minimize exposure and misuse. How the premiums could be invested, and length of contracts would also be negotiated. There are clear risk trade-offs with longer contracts and investment freedom, versus the cost of the reinsurance/ guarantee.

E. Economic Experts. Health care economists can help USG and insurance companies determine the optimal levels (bang for the buck) for: (1) the MajorCare deductible (recognizing the inverse relationship between deductible level and premium cost), (2) the age for transition from YouthCare to MajorCare/Medicaid, (3) contract term, investment freedom and the USG guarantee/reinsurance fee. For example, data suggests that a $15,000 deductible for MajorCare will alleviate higher costs for only 7% of the population but this will absorb about 80% of all working age medical costs nationwide, which should thus reduce individual PSP premiums for individuals dramatically. YouthCare would cover the approximately $275 billion in annual medical expenses, and MajorCare (assuming a $15,000 deductible) would cover about $595 billion in annual medical costs.

The numbers on use and share of expenditures on expensive health care cases are from the 2014 MEPS survey. Some additional work on this topic can be found here.

http://www.dailymathproblem.com/2017/02/health-care-expenditure-patterns-across.html

IV. Private Supplemental Policies (“PSPs”): To eliminate the gaps in coverage from Medicare, Medicaid, MajorCare and YouthCare, PSPs will be offered in the open private market place, and not through employers or state limited exchanges.

A. Premium Affordability. PSPs should be more affordable than ObamaCare because while they contain the same restrictions (preexisting conditions, same rates for men/women), they exclude catastrophic costs, and all young people (who are covered by YouthCare). In addition, state exchanges and other barriers to national competition would be eliminated, something that has caused frustration due to limited choice. This also was a change that was proposed by Trump during the campaign. The vision is that access, information and competition would also be fostered by private brokers that allow people to compare policies meeting their criteria (similar to LendingTree and QuickenLoan for mortgages).

B. No Mandate. One of the most unpopular aspects of ObamaCare is the tax penalty, which was viewed as a necessity to ensure that healthy people join the risk pools. Under this proposal, because everyone is covered by MajorCare and YouthCare, this mandate can be eliminated and people would also be free to choose not to sign up for a PSP. To cover non-MajorCare/YouthCare costs, they can choose to rely on their own savings (see below re Health Cash) and, if they are healthy, the low probability that they will have unaffordable medical bills. My hope is that by offering everyone MajorCare and YouthCare, there is universal coverage and those risks pools are optimized (both sick and healthy are in) and therefore the adverse economic and societal effects from some (largely healthy) people choosing to not buy PSPs until they are really sick will be far less dramatic and, so, unlike the ObamaCare structure, there is less reason to force them to do so. This also eliminates a costly, economic inefficiency that arises from forcing people to buy plans that they just don’t want or feel they need. Individual discretion will also encourage insurance companies to offer healthy people attractive policies, by offering plans that are properly scoped and affordable.

C. Regulation. USG regulation of the private PSP market would be limited to (1) eliminating state barriers to competition, (2) requiring that pricing and coverage be blind to gender and pre-existing conditions (thus keeping two important ObamaCare benefits), and (3) creating incentives for purchasing PSPs (discussed next). Re pre-existing conditions and gender neutrality, insurers would be required to offer a premium pricing before they know the applicant’s identity (much like what is done now based on standardized pricing matrices depending on plan level and other factors). The cost to PSP insurance companies of covering pre-existing conditions and, as a result, premiums should be significantly reduced, because catastrophic costs are excluded and covered by MajorCare and children are covered by YouthCare.

Other means of regulating premiums in the PSP market would be considered and debated. The important point is that the existence of universal catastrophic coverage will reduce the incentive for insurance companies to cherry pick healthy customers.

D. Incentives.To help and incentivize people to buy PSPs, and stay with the same PSP (and doctors) if they change jobs, a few new rule changes would be introduced:

1) Low-income families would receive a tax credit equal to a certain percentage of the PSP premiums they pay for.

2) Employers would no longer be required to offer group plans and, instead, all individuals could reduce their taxable income by placing funds (“Health Cash”) into special accounts (“Health Care Accounts” or “HCAs”) maintained at a bank or other financial institution in the same way as current Flexible Savings Accounts (FSAs) and Health Savings Accounts (HSAs). Health Cash would reduce employer costs by eliminating the admin and other costs associated with maintaining mandatory group health plans. So, for example, say an employee is offered $90k today plus a health plan. The employer is paying part of the group health plan premiums and has admin costs relating to managing the group plan. The employee pays taxes on the $90k, including the amount he is paying for his share of the health plan (usually) and out-of-pocket medical and health-related expenses. With Health Cash, the employer can save an amount equal to its cost of old group health plan and the employee can reduce his income tax by reserving some of his income as Health Cash.

3) So that this proposal does unnecessarily disrupt the status quo, employers would still be free to organize and arrange group plans and supplement the cost by giving employees Health Cash as part of their compensation/benefits packages. This way, a large employer could still use its collective bargaining power to achieve premium discounts for its employees from PSP providers. The only changes would be that (1) group plans are no longer mandatory for any employer, (2) premiums would not fluctuate depending on how sick or well the group is (this cost/benefit is spread to the entire PSP pool), and (3) COBRA bureaucracy is eliminated and PSP contracts are individualized, so that individuals can keep their insurance (and doctors) if they lose or change their job.

4) Because contributions to HCAs are tax free, there is no longer a need for a limited deductibility of medical expenses, so this tax rule can be eliminated. This rule was not that useful for a great many families because of the high threshold.

5) The kinds of medical expenses could be paid from an HCA could be expanded to be the same as those that count towards the MajorCare deductible (medical expenses as well as health related expenses), as part of the “Make America Healthy Again” initiative. PSP premiums, for example, would be both payable from an HCA and count towards the MajorCare deductible, as well as gym/sport fees.

6) Unlike HSAs and FSAs, HCAs would never expire and anyone can have them. Importantly, these accounts could be passed on as part of an estate (although like the rest of the estate, an estate tax may apply), and they would be exempt from personal bankruptcy and not count as assets for purposes of Medicaid eligibility. These accounts would solve a few problems: (a) no more use-it-or-lose-it principle forcing people to guess how sick they will be in a calendar year, (b) we uncomplicate the administration of FSAs and HSAs by having one type of account with fewer rules/restrictions, and (c) by encouraging people to shelter and pass on cash in HCA lock-boxes, we build access to, and the affordability of, health care for current and future generations.

7) Contributions to HCAs (either by employer Health Cash or personal contributions) could have no cap or, if needed to control the fiscal hits to USG budgets, they could be subject to an annual cap to encourage good, regular savings habits. This is a point currently being reviewed and debated for HSAs.

8) Finally, people could use HCAs to pay themselves back for PSP premiums and medical costs not paid out of their HCA (e.g., because they did not have an HCA set up at the time or their HCA was depleted). Some cap or carry-forward time limit may need to apply here.

V. How to Pay For It. The cost of the plan needs to be evaluated in terms of how much more it will cost than current outlays under Medicaid, Medicare and ObamaCare, including the premiums to be paid by USG for the MajorCare and YouthCare plans, and the estimated fiscal losses from taxable income being diverted into HCAs, and where the new plan saves USG money (e.g., reducing internal USG admin costs, moving children out of Medicaid CHIP).

Ways to cover the added cost or reduce the cost:

A) negotiate prescription drug prices that will be paid by Medicaid, Medicare, YouthCare, and MajorCare. Reduced drug prices should help reduce costs of Medicaid and Medicare and reduce the premiums charged to USG for YouthCare and MajorCare. However, we need a way to prevent the drug companies from simply transferring the costs of this cap onto consumers who pay for drugs directly or through their PSP premiums.

B) include in the bid requirements for the YouthCare and MajorCare contracts, a requirement that the insurance company remit to USG 50% of any excess profits they make on the contracts. This may also reduce the incentive they have to improve profits by denying or fighting coverage. (Penalties in the contract for bad faith and private rights of action should also be added.)

C) reduce some of the employer tax savings on Health Cash. We still want employers to be incentivized to give Health Cash in lieu of wage income, but we may need to limit the tax savings. For example, FICA and Medicare taxes and may still need to apply to Health Cash payments, avoid fiscal hits to Social Security and Medicare.

D) float from MajorCare and YouthCare reinsurance fee: a current budget receipt v a long term contingent obligation. Note that this fee could be netted directly to reduce the USG premium outlay.

E) it might be possible to reduce USG premiums further and help pay for the plan through the sale of securities backed by the premium contracts for PSPs, YouthCare and MajorCare, which USG would purchase and, in the case of PSPs, guarantee. This would work much like Freddie Mac, Fannie Mae or SLABs (student loan asset backed securities). More analysis is needed to see if this would work and how much savings/leverage USG could achieve.

F) caps on tax deductions for HCA contributions, as discussed above

G) raising the MajorCare deductible to reduce the USG premium outlay, as discussed (we need to be careful here not to narrow the benefit too much)

H) develop incentives on health care industry and insurance companies to reduce costs without sacrificing quality or denying coverage.

I) other taxes

 

A bi-partisan way to fix the ACA

5 Oct

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.

https://healthcarememos.blogspot.com/2016/10/age-composition-of-state-exchange.html

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

http://www.heritage.org/health-care-reform/report/the-mccain-health-care-plan-more-power-families

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:

https://aspe.hhs.gov/system/files/pdf/255396/Pre-ExistingConditions.pdf

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:

https://healthcarememos.blogspot.com/2017/07/a-proposed-publicprivate-hybrid-health.html

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.

Proposal Seven: Providing Information to Consumers on University Value

27 Sep

Proposal Seven: Rank Universities on Basis of Costs Quality, Graduation Rate and Income of Alumni

Background:

In 2013, President Obama announced plans to create a federal rating system that would allow parents and students to easily compare colleges. He also planned to encourage Congress to pass legislation to link student aid to the rating system. President Obama’s proposal was bitterly opposed by college presidents.

On September 12, 2015, the Obama Administration abandoned its proposal to rank colleges let alone tie the ranking of the colleges to student aid and simultaneously introduced a web site providing raw statistics on university performance including
information on annual costs, graduation rates, and salaries after graduation.

Readings on the Obama Era Efforts:

New York Times Article on Announcement by President Obama on plan to rank colleges on results and costs and link financial aid to the college rankings

New York Times Article on Reaction to College Rating Proposal by University Presidents:

Ner York Times article on Obama Abandoning Plan to Rank College

A Discussion of the College Score Card web site:

The web site

https://collegescorecard.ed.gov

introduced by the Obama Administration to provide information on the cost and value of colleges has some interesting raw data and a lot of limitations. The information on this web site for each school includes – average annual cost, graduation rate, salary 10 years after attending school, percent of students receiving guaranteed loans, typical loan amount for student borrowers who finished the program, percent of graduates who earn more than a high school graduate, SAT and ACT scores, demographics of students, and type of programs.

Limitations:

• The debt totals excluded private student loans and PLUS loans. The site also does not have separate information on percent of student using private loans and PLUS loans for each school.   These loans often are cause financial hardship for borrowers. The use of these loans is likely to widely vary across schools. The omission of information on private loans and PLUS loans will have a substantial impact on financial risk measures across schools.

• The ScoreCard software only reports median debt levels by student borrowers at a school.   It is likely the dispersion of debt levels is higher for some schools than for other schools.   It would be interesting to know the percent of borrowers with debt levels exceeding certain amounts ($50,000 or $75,000) at each school or debt levels at the 90th percentile for each school. These alternative statistics are a better measure of the likelihood a student attending a school borrows too much.

• The repayment statistic in the database — the share of students who paid back at least one dollar on their student loan three years after leaving school — is not particularly useful.  Initial repayment rates could be low at a school where many alumni go to graduate school.   The default rate, delinquency rate, and the proportion of students not in graduate school who are on target to finish payment on their student loans in 10 years are all more useful measures of repayment difficulty.

• The benchmarks in the database based on national averages are not particularly useful. Common sense suggests that the College Score Card cannot be used to compare the value of a state university to the value of an elite private institution.   The difference in post-graduate earnings is likely largely determined by the difference in the talent as measured by SAT score of the student body.  The difference in debt is likely determined by the price tag and the amount of available aid.  A ranking that found Harvard University graduates earned more than students from Ohio State but owed more at graduation would not provide new news. However, universities in the same category (highly selective, moderately selective, not selective) could and should be compared with universities in the same category.

Concluding Thoughts:  President Obama’s proposal to rank colleges based on their costs and the value they give their students was slammed by university presidents who proved they have a lot in common with executives running tobacco firms or leaders in the financial services industry opposing regulation after collapsing the financial system. Statistical analysis can and should be used to compare similarly situated universities and statistical information should also be used to guide the allocation of resources.

Proposal Six: Improving On-time Graduation Rates

26 Sep

Policies to Improve On-Time Graduation Rates

Many people incur a large amount of college debt because they spend more than four years in college. Only 50 of the more than 580 public four-year colleges have four-year graduation rates over 50 percent according to a USA Today article.
Breaking the 4-year myth: Why students are taking longer to graduate

At four year-public schools the average cumulative debt is around $27,000 for people who take six years to graduate, around $21,000 for people who take four years to graduate, and around $20,000 for people who graduate in three years. These figures do not include PLUS loans for parents. The article below has a more detailed discussion on how the amount of time it takes students to graduate impacts debt accumulated in college.
The importance of finishing college on time:
http://policymemos.blogspot.com/2017/05/the-importance-of-finishing-college-on.html

The issue of on-time graduation is intrinsically related to the issue of the quality of K-12 education, which is beyond the scope of the current memo. This post describes three narrower policies — (1) programs which improve AP exam pass rates, (2) guarantees of college credit for people who take and pass AP exams, and (3) funding for computer science and language camps and colleges prior to college.

Improving AP Exam Pass Rates:

The post below analyzed grades from the 20 most popular AP exams taken in 2016. The data covered results from over 4 million tests.
http://www.dailymathproblem.com/2016/12/statistics-on-results-of-2016-advanced.html

• The average grade was below a C on 14 out of 20 of the most popular AP exams.

• Around 1.9 million out of the 4.4 million test results were a D or F.

Policies which might improve AP Exam Performance

• Provide funds for students to take on-line or private taught AP exams in schools with low AP exam pass rates.

• Increase in-school AP course time for students taking AP exams. For example, people taking AP exams could have both the regular AP exam course and a second course emphasizing extra readings, labs and/or practice tests. (It may be possible to fund the second course with non-profit funds.)

• Change the content of some AP exams to cover a semester of college content rather than a full year of college content. (This was recently done with the AP Physics tests.)

• Create software that will evaluate AP exam workloads and provide advice on AP schedule, which could increase pass rates. (One goal of the software is to predict which people are likely to fail multiple AP exams and provide appropriate guidance.)

Guarantee the Award of College Credit for Students Passing AP Exams at Any School with Students Using Guaranteed Student Loans

Some major colleges have stopped or restricted awarding college credit to students in some or all AP courses.
https://secure.marketwatch.com/story/as-advanced-placement-tests-gain-popularity-some-colleges-push-back-2017-02-15

This policy change will result in some students taking out thousands more dollars in student debt and losing substantial wage income.

Many states have passed laws requiring public universities and colleges give some credit to students passing AP exams. There are no such restrictions on private universities.

Students at virtually all private universities and colleges take out federally guaranteed student loans. Private schools denying AP credit to students passing AP exams often causes students to incur more federally-backed debt. The government should regulate credit awards when it impacts the financial exposure of students and taxpayers, guaranteeing debt.

Note: The faculty in the university of Pennsylvania chemistry and biology department found that some students who skipped the introductory courses fared worse than students who took the introductory course on upper level courses. The faculty did not publish a paper documenting the extent and the significance level of the future performance differential. Such a paper would also determine whether students with an extremely high grade on the AP exam performed worse in upper level courses if they skipped the introductory level.

The issue of lower performance on upper-level chemistry and biology courses for people who place out should not prevent the school from giving people who passed AP exams with a grade of 4 or a grade of 5 s credits. The faculty should be able to fix performance issues in upper level course by adding some review material or by creating a one credit problem solving class.

The issue as I see it is that the faculty at Penn would rather their students take on thousands (perhaps tens of thousands) of dollars in additional debt and forego a year of wage income rather than do a little bit of work and figure out how to more efficiently transmit their valuable knowledge. The article on college debt including a quote from a Penn faculty member stating that college students would prefer a fifth year of college rather than graduate early. This preference is not surprising. College is fun and students don’t consider the full costs of repaying their loans or the cost of loan forgiveness to taxpayers. The Penn faculty should be more focused on the long term economic needs of their students rather than their short-term fun.

Expand resources for teaching of computer science and language prior to college:

In general, most school districts are focused on teaching the basic subjects – math, history, English and the sciences.

There is a shortage of students ready to enter STEM fields and in students trained in certain languages. In 2015, fewer than 60,000 people graduated with a bachelor degree in computer science. Relatively few high schools offer computer courses. Computer science is not generally a required subject. There is a shortage of qualified language teachers in many schools

There are two ways to improve education of computer science and language.

• Allow private firms to teach these schools in public and charter schools to take advantage of economies of scale. (This approach would improve outcomes at schools with modest budgets, which are struggling to fund basic subjects.)

• Fund scholarships at summer camps specializing in language and computer science. (This approach helps students at lower and middle income students who cannot currently afford expensive camp-based educational programs outside of school.)

The Trump Administration with the support of major tech companies are moving to support STEM education efforts outside the class room.

Concluding Remarks: One reason some student borrowers incur too much debt is that they fail to graduate on time. Policies that improve on-time graduation rates will reduce college debt.

Some colleges do a better job in educating students, helping students find a job and having students graduate on time than other colleges. Students and their parents need information on college quality and educational outcome prior to selecting a college. The last essay describes rules requiring colleges provide additional information to students and parents.

Proposal Seven: Improving Information for Consumers of Education
https://economicmemos.com/2017/09/27/proposal-seven-providing-information-to-consumer-on-university-value/

Proposal Five: Potential Changes to Bankruptcy Laws

25 Sep

Impact of Bankruptcy Law on Student Debt

Background: The discharge of government guaranteed or issued student debt has always been extremely difficult and rare. Most courts require that the borrower show a “certainty of hopelessness” for his or her financial situation over the repayment term of the loan. An August 31, 2012, New York Times article describing the petition of a legally blind, unemployed man illustrated the hurdles a student loan borrower must clear in order to have student debt discharged in bankruptcy.

The enactment of the 2005 bankruptcy reform law severely reduced rights of all debtors in bankruptcy. The most documented aspect of the new law was to make it much more difficult for debtors to obtain a chapter 7 bankruptcy and immediately get unsecured loans discharged. Other procedures imposed additional hardships on people with student debt.

Prior to the enactment of the 2005 bankruptcy law private student loans were dischargeable in bankruptcy. The 2005 bankruptcy law changed this rule and made it very difficult to discharge private student loans in bankruptcy.

Note the discharge of private student loans in bankruptcy does not adversely impact taxpayers. In fact, the discharge of private student loans in bankruptcy should free funds for debtors and accelerate the repayment of guaranteed student loans in bankruptcy.

Financial outcomes of borrowers in bankruptcy are also affected by the rules governing whether a debtor can obtain a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.

Student debts are not forgiven in chapter 7. Student debt does not generally have priority over consumer debt in most Chapter 13 repayment plans. Student loan borrowers in Chapter 13 can petition the bankruptcy court to allocate a greater amount of their payment plan to the repayment of student loans and a lower amount to the repayment of other unsecured credit card debt. However, most courts tend to favor a payment plan that does not discriminate against any class of unsecured creditors. As a result, many student loan debtors emerge from the bankruptcy process five years older with a substantial amount of unpaid student loans. Many individuals experience decreases in income and have fewer job prospects after age 50. A delay in repayment of student loans caused by a forced entry into a Chapter 7 bankruptcy plan will increase financial exposure to taxpayers, increase student loan default rates, and decrease collection rates.

Potential changes to the bankruptcy code that would benefit over-extended student borrowers:

There are four potential changes to bankruptcy law, which could assist over-extended student borrowers.

First, the law could be modified to make it easier for debtors to obtain immediate debt relief under chapter 7 rather than file a payment plan under chapter 13. The immediate discharge of consumer would free up funds that could be used for the repayment of student debt. However, the borrower after leaving bankruptcy could incur new debt and forego student loan payments.

Second, the rules governing payment plans in chapter 13 could be modified to give student deb priority over consumer loans. A revision of Chapter 13 bankruptcy rules that gives priority to student debt payments over other unsecured debt payments in bankruptcy would provide student loan debtors with a fresh financial start and would ultimately reduce taxpayer losses. Unsecured creditors would still enjoy greater collection rights than existed prior to the 2005 bankruptcy law. This change would also benefit taxpayers guaranteeing student debt repayment,

Third, bankruptcy law should be changed so that private student loans are dischargeable in bankruptcy. Many private student loans have high interest rates and have more in common with consumer debt than traditional student loans. The restriction on the discharging of private student debt in bankruptcy does not provide clear direct benefits to taxpayers.

Fourth, whether a private student loan is dischargeable or not in bankruptcy could become contingent on the characteristics of the loan. Many private student loans have characteristics closer to high-risk high-fee consumer debt than they do with government guaranteed student debt. Private student loans with high fees and high rates should be classified as consumer debt not student loans for their treatment in bankruptcy. Moreover, unless private student loans can be consolidated in the IBR program they should not be dischargeable in bankruptcy.

Concluding Thoughts: The 2005 bankruptcy law imposed substantial hardships on many households. It was enacted shortly before the collapse of the housing market and financial systems. The law, by reducing forgiveness of student debt caused many borrowers to default on their mortgage.

Today the lack of relief on consumer loans in bankruptcy, the treatment of private student loans in bankruptcy, and the rules governing chapter 13 repayment plans have made it more difficult for borrowers to repay student debt.

The changes to the bankruptcy code would benefit both student debtors and taxpayers, guaranteeing student debt.

Next Up: Debt relief is a last resort. We all prefer to lower the amount of debt incurred. Students who graduate on time incur less debt. The next post discusses policies to improve on-time graduation rates.

Proposal Six: Improving On-Time Graduation Rates
https://economicmemos.com/2017/09/26/proposal-six-improving-on-time-graduation-rates/

Proposal Four: Interest Rate Reductions on Student Loans After Several Years of Payments

25 Sep

Proposal Four: Interest Rate Reductions on Student Loans After Several Years of Payments

The previous post concluded that IBR loan programs will likely prove ineffective at providing debt relief. First, many people who are initially good candidates for the IBR program end up paying more on their loans when their financial status and marital status change. Second, burdensome annual qualification process means very few people will eventually receive loan forgiveness.

Proposal four is a potential improvement over IBR.

Proposal Four: Reduce or eliminate interest on student loans after 12 years of scheduled payments. The loan agreement would also allow for more years of partial negative amortization of interest when the borrower’s income was low. However, the loan agreement would not allow for forgiveness of principal.

Comments on this Proposal:

The elimination of interest rates after 12 years reduces lifetime interest costs for all people where the loan maturity is greater than 12 years. However, people with a loan maturity of less than 12 years (10 years is standard) will pay less in interest than people with longer maturities.

Delinquent borrowers would be reported to credit bureaus, penalties could be applied to overdue accounts, and overdue accounts would be handled by collection agencies, even after the interest rate was reduced or eliminated.

The lower interest rate on this loan after 12 years could be coupled with a shortening of the loan’s amortization schedule. The more affordable payment could result in the government being repaid quicker than otherwise. In one example, the elimination of interest after 20 years reduces the annual interest rate from 4 percent to 3.53 percent while reducing loan maturity from 20 years to 18.8 years.

Cash flows to the lender under the interest rate reduction proposal are more predictable than cash flows under the IBR program. As a result, it may be easier to securitize student loans with an interest rate reduction provision than IBR loans.

Concluding Remark: I believe that lenders and many borrowers will be better off under a proposal which eliminates interest rates after12 years than under IBR. This proposal targets people with demonstrated need without creating an incentive for people to over borrow. However, this proposal will not provide enough debt relief for borrowers in extreme difficult. These borrowers could benefit from modifications to the bankruptcy code, which currently favors creditors over both debtors and lenders.

Proposal Five: Potential Changes in Bankruptcy Law
https://economicmemos.com/2017/09/25/proposal-five-potential-changes-to-bankruptcy-laws/