Health Insurance Problems and Potential Solutions
Health care reform has been the dominant issue in the contest for the 2020 Democratic presidential nominations with one set of candidates advocating Medicare for All and another set of candidates advocating reforms of the Affordable Care Act. My views on the best way forward are in the camp favoring the modification of the Affordable Care Act, however, I have substantial concerns on whether current proposals will prove effective.
The objectives of the current paper are to list and describe major problems impacting health insurance markets and to propose potential solutions. The key issues impacting the performance of health insurance markets include:
· Repeal of fines for the individual mandate
· Increased financial exposure from increased cost sharing
· Disparities between employer-based and state health exchange Insurance costs
· High cost of ACA premium subsidies for older households.
· Financial exposure from short-term health insurance plans.
· Limited role of state exchange marketplaces
· Limited access to health care providers for holders of state health exchange insurance
· Surprise medical bills
· Incomplete Medicaid expansion
The analysis of these issues reveals the existence of ubiquitous tradeoffs between two goals — providing affordable coverage and providing comprehensive coverage which effectively insulate households from financial risk. This tradeoff is not substantially reduced by simply adding a public option to state exchanges, by restoring the individual mandate and by extending existing premium tax credits. Alternative potential solutions are presented and discussed.
The Individual Mandate:
The original ACA included penalties for people who did not have health care coverage. The penalties were the larger of two values — a fixed amount or a percent of the household’s incomes. The penalty was prorated based on the number of months without coverage.
The provision of the 2017 tax reconciliation bill, discussed here, maintained the original mandate but abolished fines for its violation starting with the 2019 tax year.
There are two problems caused by the elimination of fines for not having health insurance coverage. First, a U.S. appeals court has ruled the individual mandate is unconstitutional because of the elimination of the fine and has ordered a lower court to consider whether other parts of the law are legally invalid because of the removal of the individual mandate. The Trump Administration still wants to repeal and replace the ACA and supports the court case to overturn the ACA based on the elimination of the individual mandate.
Second, the lack of an enforceable mandate creates an incentive for some healthier adults with limited funds to forego insurance coverage. People who are uninsured can experience catastrophic financial losses or can lack access to treatments if they become ill or injured. However, many lower-income people with debt either cannot afford premium payments or cannot afford health expenses stemming from high deductibles or coinsurance. Some of these people choose to go without insurance and the repeal of the fine for not having health insurance will increase the number of people choosing to forego purchasing health insurance.
A recent study by Treasury economists published by the National bureau of Economic Research tracked taxpayer response to a letter from the Treasury to people who lacked health coverage and were violating the individual mandate. The empirical study found the letter informing people they were in violation of the individual mandate prompted people to purchase health insurance and reduced mortality among the people who were previously uninsured.
There are, in my view, three potential ways to mitigate problems with the elimination of fines for the individual mandate.
The original ACA individual mandate could be restored though the next tax reconciliation bill. This approach would be strongly opposed by the majority leader in the current Republican Senate and probably does not have much support among Democrats.
The Healthy America program, a paper which appears to form the basis of Biden’s health plan, creates incentives for people to maintain continuous health coverage by reducing the standard deduction for people without health insurance coverage. The additional tax incurred from the loss of the standard deduction varies with adjusted gross income, from $935 for people with income between $25,000 and $50,000 to $8,900 for people with income over one million dollars.
Much of the opposition to the individual mandate is based on the libertarian philosophy that government should not interfere with personal decisions. I doubt libertarians would support either the ACA fine or the loss of tax deductions in the Health American Program proposal.
A third approach creates incentives for household to purchase health insurance by the creation of tax credits or subsidies for the purchase of health insurance or credits and subsidies linked to health savings accounts. Existing law already links tax advantages associated with health savings account to a requirement that people have a high deductible health plan. An expansion of these subsidies, contingent on individuals retaining health insurance coverage, are a potential alternative to the individual mandate.
This approach has the side benefit of reducing financial exposure from the increased use of high deductible health plans.
Increased Cost Sharing Between Households and Insurance Firms:
Proponents of the combination of high-deductible health insurance plans and health savings accounts stress three advantages — (1) lower premiums, (2) incentives to economize on health care, and (3) a new source of retirement savings. However, the increased use of health savings accounts has resulted in several problems.
First, the use of health savings accounts has resulted in low-income and middle-income people with relatively low marginal tax rates paying more after taxes for health services than higher-income people with higher marginal tax rates.
Second many mid and lower middle households can only contribute to a health savings account by reducing contributions to a 401(k) plan.
Third, several features of health savings accounts and high deductible health plans have resulted in many people forgoing prescription drugs for chronic conditions. Studies have shown that 20% to 30% of prescriptions are never filled and that around 50% of prescriptions for chronic diseases are not taken as prescribed. The research also indicates that a lack of adherence to prescription drugs contributes to 125,000 deaths, at least 10 percent of hospitalizations, and increased annual health costs ranging from $100 billion to $289 billion.
Fourth, many younger people with limited savings and limited earnings will forego insurance when the only option is a high-deductible health plan with limited premium subsidies. A young adult with income slightly over 400 percent of the federal poverty line (around $50,000) is ineligible for a premium tax credit under existing law and would pay 9.5 percent of her income for health insurance. Under Vice President Biden’s plan this young adult would pay 8.5 percent of her income for health insurance. One simulation model found young adults with a high deductible health plan had an 80 percent chance of claiming less than $500.
There are three potential ways to make high-deductible health plans more attractive to younger households.
The first method involves the creation of a tax credit to match contributions to health savings accounts. The new tax credit makes high deductible plans more palatable and less risky for low-income households and also provides an incentive for people to obtain insurance coverage.
The second method involves expansion of the type of health plans, which allow contributions to health savings accounts. Current law limits health savings account contributions to people with high deductible health plans. A modified law could allow for health savings account contributions by people with a health plan that has a high coinsurance rate even if the plan had a low deductible.
The third method involves modification of rules governing insurance company disbursements for prescription drugs, especially drugs used to treat chronic conditions. Prior to the introduction of high-deductible health plans some insurance plans exempted payments for prescription drugs from the deductible. Many high-deductible health plans do not allow for payments for prescription drugs until after the entire deductible is met. Rules governing high deductible health plans allowing for payments prior to the deductible for preventive services could conceivably be used to require payments for prescription drugs for chronic conditions prior to the deductible.
The new subsidies in addition to reducing risk associated with high deductibles creates a financial incentive for people to hold health insurance.
Disparities between employer-based and state health exchange insurance premiums:
Employers charge one premium for all individual-only policies and one premium for family policies for all of their employees. Many employers pay a substantial share of the entire health insurance premium for their workers. The Kaiser Family Foundation annual report reveals that the average worker share of employer-based health insurance premiums was slightly more than $1,200 for individual plans and slightly more than $6,000 in 2019.
By contrast, the price of health insurance premiums on state exchanges are based on the age of the individual. The premium subsidy for state exchange health insurance is based on age and household income. The premium subsidy caps premium costs to a percent of income ranging from 2 percent for households with income less than 133 percent of the federal poverty line and up to 9.5 for households with income between 300 percent and 400 percent of the federal poverty line. Households with income above 400 percent of the poverty line are not eligible for any subsidies on state health exchanges. Slightly more than half of the population has income greater than 400 percent of the federal poverty line. A household with one person earning $50,000 is slightly above 400 percent of the federal poverty line and would not be eligible for the tax credit.
Many young workers are much better off with employer-based insurance. The cost of an individual-only health plan, generated by the Kaiser Family foundation subsidy calculator, for a 30-year old person making $45,000 per month in Colorado is $3,379 per year or roughly 8.3 percent of household income, almost three times the average employee share for employer-based insurance.
This problem is not fixed by expanding Vice President Biden’s premium tax credit as discussed in a recent Tax Notes article. The Vice President’s proposal caps premiums at 8.5% of household income. This is larger than the average amount paid by workers with employer-based coverage. Also, some young workers obtaining health insurance on state exchanges will still pay the entire premium.
The current ACA premium tax credit could be modified to provide at least some assistance to younger adults and households with income over 400 percent of the federal poverty line.
The new premium tax credit would have two parts — a minimum level of $1,000 combined with the current premium cap.
The tax credits and subsidies for high deductible health plans mentioned in the section on cost sharing could be established exclusively for health plans sold on state exchanges since the employee premium costs are lower for employer-based insurance than state exchange insurance.
There is a fairness consideration motivating increasing subsidies for health insurance obtained on state health exchanges. Employer payments of premium are not taxable income to workers and people with employer-based insurance receive lower cost insurance and a more generous subsidy than people obtaining their insurance through state exchanges. Additional tax advantages for the purchase of state health exchange insurance reduce this gap.
Cost of ACA premium subsidies for older households:
Premiums for health insurance sold on state exchanges are linked to age. The premium subsidy is related to household income. This combination results in extremely high subsidies per person for older Americans purchasing health insurance on state exchanges.
For example, the total health insurance premium for a sixty-year-old person making exactly 400 percent of the federal poverty line purchasing the U.S. average individual-only health plan on state exchanges is $11,744. The total cost paid for by the insured individual is 9.5 percent $49,960 (400 percent of the federal poverty line) or $4,746. The premium subsidy paid by the government is $6,998 ($11,744–4746). The subsidy would be even larger for a sixty-year-old American with lower income.
The cost of Medicare is far lower than the cost of ACA state health exchange insurance for older American. A program allowing people without access to employer-based insurance providing some subsidies for the purchase of Medicare would likely reduce government expenditures and the government deficit.
The creation of a Medicare buy-in option creates the side benefit of reducing deductible and the need to invest in health savings accounts allowing these households to contribute more funds to their 401(k) plan.
Short Term Health Insurance:
Short term health plans were originally designed for people between jobs and were limited to 90 days under the Obama Administration. The Trump Administration altered rules extending plans to 364 days and allowed for renewals up to 36 months. There are two major problems with the growth of short-term health plans. First, short term health plans create substantial financial exposure for people they cover. Many people insured by short term health plans will end up with extremely large unpaid health bills. Second, since households that purchase short term health plans tend to be in better health than people seeking comprehensive health coverage the growth of short-term health plans can erode markets for comprehensive ACA policies covering essential benefits.
Short-term health plans often have arbitrary benefit provisions, large deductibles, and no out-of-pocket limits.
Short term health plans have a substantially lower payout than ACA compliant health plans. The office of the actuary for the Center or Medicare and Medicaid Services projects that short-term health plans will pay out a benefit of roughly half of premiums. By contrast, payouts on ACA compliant plans are roughly 80 percent of premiums.
Short term health plans need not have an annual cap on cost sharing. It is not uncommon for the cost sharing cap to be in the $10,000 to $20,000 range. ACA plans have an annual cap of $7,350. Virtually all short-term health plans have an overall benefit limit, ranging from $100,000 to $2,000,000. ACA plans do not have any annual or lifetime benefit limits.
A study of short-term health plans by the Kaiser Family Foundation found major coverage gaps in short-term plans. The study found that 43 percent of short-term plans lacked mental health benefits, 62 percent lacked benefits for treatment of substance abuse, 71 percent of short term plans lacked benefits for pharmaceutical drugs, and 100 percent of short-term benefits lacked maternity benefits. Short term-plans that do provide these benefits often cap the benefits in some way. By contrast, ACA compliant plans should pay for all services that are deemed medically necessary.
The less generous benefit package leads to lower premiums, which tends to attract healthier individuals and individuals who are not eligible for state exchange premium subsidies. The Center for Medicare Services projects that 90 percent of healthy individuals with incomes over 400 percent of the Federal poverty level (and therefore unsubsidized) who have non- group coverage, and roughly one-third of healthy individuals with incomes between 300 and 400 percent of the Federal poverty level who have non-group coverage, would ultimately choose to purchase a short term health plan.
The Democrats currently have a bill in the House undoing the Trump Administrative executive order expanding the use of short-term health plans. This rollback would reduce the number of people with inadequate health insurance and would increase demand for comprehensive health plans. However, some people currently with short term plans might not afford comprehensive coverage and could go uninsured, especially without restoration of some sort of individual mandate.
The roll back of the individual mandate does not address the reason why some people are willing to purchase health plans that does not cover essential benefits. Comprehensive health plans are unaffordable for many people. The proposed expansion of the premium tax credit offered by Vice President Biden would make comprehensive health plans affordable for some people but would not benefit many young adults with income slightly above 400 percent of the federal poverty line.
An alternative approach involves creation of a low-cost health insurance option. The most commonly cited approach involves the creation of a public option on state exchanges. The creation of a low-cost public option reduces financial risk for people currently covered by short term health plans. However, an expansion of the public option that attracted healthier individuals could increase premiums in state exchange markets.
Another way to create lower cost insurance options involves the creation of a hybrid public/private health plan where the government would pay a portion of health care expenses for high-risk health care cases. This could be implemented through the creation of health plans with annual expenditure caps combined with automatic entry into Medicaid for people once health expenditures exceed the annual cap as outlined in this 2008 paper.
The cost sharing could also occur under an arrangement where the government pays a share of high cost conditions (burn treatments and cancer) and the private firm pays for more basic care. This approach encourage enrollment in HMOs that are adept in basic treatments because the government option creates access to advanced hospitals and treatments if needed.
Limited Role of State Exchange Marketplaces:
State exchange marketplaces currently serve around 11 million people compared to around 160 million people who obtain their health insurance through employer-based insurance. At the time the ACA was created government economists predicted that state exchanges could serve around 25 million people. State exchanges have not had a larger impact because many features of the law favor employer-based insurance over state exchange insurance.
First, under current rules, households receiving an offer of affordable health insurance from their employer are not allowed to claim the premium tax credit. Whether a health insurance plan offered by an employer is affordable to a household depends entirely on household income and premiums and does not consider other factors such as cost sharing or size of provider network. Moreover, the affordability test is based on the cost of an individual only health plan even if the household has more than one individual needing health insurance. This rule substantially restricts the number of households eligible for subsidized premiums on state exchanges.
Second, the ACA contains a provision called the employer mandate, applied to employers with more than 50 full-time equivalent employees, which results in most employees in large firms receiving an offer of employer-based insurance and becoming ineligible for state exchange insurance.
Third, the premium tax credit phases out for households at 400 percent of the federal poverty line, which results in around half of the population paying full price for state health exchange insurance. The lack of a subsidy for premiums on state exchanges results in some small businesses offering employer-based health coverage.
The limited size of state exchange health insurance markets is a problem for several reasons. First, administrative burdens on small firms could be reduced if all employees obtained their health insurance from state exchanges. Second, concentrating health insurance purchases through state exchanges would allow people to keep their health insurance when they switched jobs. This would reduce out-of-pocket expenses because each time individual switch jobs the insured needs to meet a new deductible. Third, an increase in the number of people obtaining health insurance in state exchanges would lead to increased participation by insurance companies and potentially increased size of provider networks. Currently, the small number of participants in some counties has resulted in relatively few insurance options on state exchanges.
The Biden approach to this problem is to expand and increase the premium tax credit and to modify the definition of “affordable” health insurance, which determines eligibility for state exchange coverage. This approach would increase the size of state exchanges; however, employer-based insurance would still be the more affordable health option for many employees, especially employees with income exceeding 400 percent of the federal poverty line and for young employees near this income threshold.
An alternative subsidy involving tax credits to employers for the purchase of health insurance on state exchanges rather than the current employer-based insurance option would allow employers to continue to partially fund employee health plans and would help expand state exchange markets.
The proposed subsidy could involve a $2,500 for employer contributions of $5,000 for individual plan and $5,000 for $10,000 in contributions for a family plan. Additional premium tax credits would be available for people who do not receive assistance from their employers and for costs above the employer contribution.
Limited Access to Health Care Providers for Holders of State Exchange Health insurance
State exchange health insurance plans have smaller networks lacking access to some key providers and specialists in an effort to reduce costs and premiums. This U.S. News article found that many doctors and hospitals do not accept people with ACA insurance. A study in JAMA revealed that one in seven ACA health plans did not provide access to in-network doctors in at least one specialty. An Associated Press survey found evidence that many top cancer hospitals do not accept people with state exchange coverage. An analysis from Avalare found average network size of state exchange plans smaller by 34 percent in several states.
There are two reasons why insurance policies purchased in state health insurance markets tend to have smaller networks with fewer providers than employer-based policies.
First, there is less competition among insurance firms in the small state exchange markets. Some counties have relatively few providers. The low level of competition among insurance firms allows firms to offer products with small networks and fewer choices.
Second, there is constant cost cutting pressure in state exchange markets because many people pay far more for health insurance on state exchanges and have higher levels of cost sharing than people with employer- based health insurance. The constant tradeoff between premiums and benefits causes some people to purchase a plan with relatively few options because of the lower premiums.
Problems caused by health plans with small provider networks could be eliminated by the creation of a hybrid private/public partnership health plan. The private component of the health plan would be responsible for reimbursements for basic health care services. The government component of the hybrid plan would involve payments for more complicated and expensive services like cancer and burn treatments.
The creation of hybrid health plans where the government makes direct reimbursements for high health care costs will reduce the cost sharing pressures and will directly assure access to more and better providers. The expansion of the state exchange health insurance markets to include more employees and owners of small businesses will increase the size of and competition in state exchange health markets. By contrast, the creation of a public option in competition with state exchange health insurance would reduce private choices in state exchange markets.
Surprise Medical Bills:
Surprise Medical Bills occur when a health care provider in an in-network hospital is out-of-network. An analysis of surprise medical bills by the Kaiser Family foundation found that 18 percent of emergency room visits and 16 percent if in-patient hospital stays involves at least one out-of-network charge. The study also found large inter-state variability in surprise medical bills due either to inter-state differences in competition or difference in state regulations.
A tentative deal allowing for increased arbitration of surprise medical bill was considered in 2019 but scuttled in the last minute by the Chairman of the House Ways and Means Committee. There was significant pressure to scuttle the deal by trade groups representing hospital and by groups of doctors that have been purchased by Wall Street hedge funds.
The decision to scuttle the deal on surprise medical bills was unfortunate. The solution was not by any means perfect, but it was representative of the centrist Democratic approach of incremental progress. Ironically, Centrist Democrats killed this bill perhaps undermining their credibility with the left wing of their party. How will progress be made on larger issues If compromise on surprise medical billing is impossible due to centrist Democrat and Wall Street opposition?
The compromise solution for surprise medical billing did not deal with some underlying problems. First, many insurance networks are too small and are excluding viable specialists and hospitals to reduce costs. The current proposals don’t mitigate this problem. Second, many doctors choose to charge out-of-network prices because of they need to repay their high medical debt. The centrist health care reform efforts do not consider ramifications of high student debt.
Two policy changes might mitigate surprise medical billing. First, the number of doctors seeking to charge higher out-of-network prices could be reduced if the government paid off student debt for doctors. The decision to accept student debt relief could be explicitly tied to an agreement to limit prices for services or accept in-network rates. Second, additional government payments for health insurance under the hybrid private/public health plan would involve strict limits on out-of-network prices.
The Medicaid Expansion:
The ACA initially expanded Medicaid to all adults in households with income less than 133 percent of the federal poverty line. A 2012 Supreme Court decision allowed states to reject the Medicaid expansion. Currently, 14 states have not expanded their Medicaid program.
A recent NBER working paper found reductions in mortality for near-elderly adults in Medicaid expansion states compared to states that refused to expand. A study in JAMA surgery found that Medicaid expansion was associated with patients obtaining care earlier in their disease course and with an increased probability of receiving optimal care for those conditions. A JAMA study on dialysis found lower mortality rates for dialysis patients in Medicaid expansion states versus states that did not expand.
Also, a United Health Care group study found that Medicaid expansion is 43 percent less expensive than state exchange coverage. State exchange coverage is expensive both because of premium subsidies and cost sharing subsidies.
It seems unlikely that this Supreme Court will revisit its decision to allow states to opt out of the ACA Medicaid expansion. The decision of the 14 states to reject the Medicaid expansion, given the evidence in support of the program both in terms of health improvements and cost reductions is inexplicable.
The most effective way to eliminate health care disparities caused by states turning down the Medicaid expansion involves a significant public option available in all states and funded entirely by the federal government. This program should cover all households without offers of employer-based health insurance with income up to 200 percent of the federal poverty line. The increased cutoff from 138 percent of the federal poverty line to 200 percent of the federal poverty line could be less costly than expansion of state health exchange insurance. Moreover, the transfer of people with income lower than 200 percent of the federal poverty line would facilitate restructuring and expansion of the premium tax credit.
One potential problem with expanding Medicaid is the potential reduction in number of people purchasing state exchange insurance in some counties could leave to the exit of some private insurance companies.
The underlying factor impacting health care costs and risks for many households is the constant pressure between the need to lower premiums and obtain affordable health insurance and the need to obtain comprehensive coverage, which reduces financial risk. The tradeoff between the two goals is pervasive leading consumers to purchase higher deductible plans, reduce coverage and expenses on prescription drugs, the growth of short-term health plans omitting coverage for essential benefits, and health plans with narrow networks lacking access to top health care providers.
It is not apparent that Vice President Biden’s proposed public option and expanded premium tax credit would lead to a substantial reduction in the tradeoff between controlling premiums and limiting financial exposure from inadequate health insurance. Many of the proposals presented in this paper including additional subsidies for health savings accounts and cost sharing between private and public health plans could reduce premium costs and household financial risk associated with out-of-pocket health care costs.