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Health insurance reform will be high on the agenda as the U.S. House of Representatives reassembles after Presidents Day. Cutting through the high-decibel pitches from supporters and critics of the Affordable Care Act (ACA), experts discern a leaner alternative taking shape.
A Republican policy brief notes that under the ACA, or Obamacare, premiums have risen an average of 25% this past year and that nearly a third of all U.S. counties have uncompetitive markets with only one insurer offering plans. It faults the Medicaid program for being too bloated and rendered less effective by fraud, waste, poor oversight and by being misdirected at able-bodied people instead of more vulnerable sections of the population.
The Republican plan put forth last week offers an alternative, promising lower costs, more choices and flexibility for employers in the plans they may offer and also for individuals, who would be able to buy insurance across state lines and also obtain coverage regardless of age, income or pre-existing medical conditions.
Highlights of the Republican plan include: portable, monthly tax credits that can be used towards buying insurance, and that are not tied to employers or to a government-mandated program. Individuals can use the credits to shop for health insurance plans across state lines. It includes a measure to expand Health Savings Accounts (HSAs), which would offer more freedom for contributions by individuals and their spouses, and more flexibility in terms how they spend their savings.
It promises Medicaid reform by empowering states to design their own plans and by putting the program on a tighter budget, something critics read to mean sharp cuts in federal funding with block grants to states to run Medicaid, many of whom would want to make cuts overall. The policy brief offers no details as yet, but that is because the Congressional budget office is reviewing the plan. The latest proposals are based on House speaker Paul Ryan’s plan that he unveiled last year.
“The biggest detail is the little question of money,” said Robert Field, Wharton lecturer and professor of law and health management at Drexel University. He referred specifically to a proposal to grant tax credits based on age instead of income: “How big they will be … everyone’s expecting they will be less generous than under Obamacare.” Age-based tax credits would replace the ACA feature where subsidies kept pace with premium increases so that employees could continue to afford them. Delinking those subsidies from income criteria and linking them with age changes those protections.
Katherine Hempstead, senior advisor to the executive vice president at the Robert Wood Johnson Foundation, pointed to what she described as “two semi-contradictory things going on at once.” On one hand, the motivation in changing the age rating could allow insurers to charge more for older people and charge less for younger people, she said. At the same time, subsidies for older people are aimed making health insurance more affordable to them, she added.
“Do the taxpayers want to be moderately generous to many or highly generous to a few?” –Mark Pauly
“The hope then is that policies for younger people would be affordable enough,” and the “take-up” rates of people buying those policies would improve, said Hempstead. But she didn’t expect the Republican alternative to pan out exactly that way. “Many people suspect that the lower-income part of the market is going to drop out,” she noted. “That is going to have huge implications for the risk pool if that happens. I don’t know how affordable these policies will be for anybody.”
Field and Hempstead discussed the pros and cons of the Republican health care proposals on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
Age vs. Income
At first glance, the move to link subsidies to age and not income seems the right approach. “The reason to have subsidies independent of income is to avoid the relatively high implicit tax on income of Obamacare recipients when your subsidy goes down as your income goes up,” said Mark Pauly, Wharton professor of health care management, and business economics and public policy. He noted that the implicit tax rates were above 100% for some groups.
However, making the subsidy a flat amount regardless of income at a level that still provides adequate help to lower-income people could have adverse effects, according to Pauly. “It means very high additional taxes which also discourage work effort — of everyone, not just the 3% of the population buying in exchanges,” he said. “Or you can set the subsidy low which keeps taxes down but will leave more low income people uninsured.” That situation would arise because the premium those low income people would have to pay will be much more than the average amount they would have to pay if they were uninsured and received charity care, he explained.
“So they have a serious dilemma,” Pauly noted. “Do the taxpayers want to be moderately generous to many or highly generous [in a targeted way] to a few? And probably the credits will be claimed more by the reasonably well-off rather than the lower-income people who will stay out.”
Removing tax exemptions for employer-sponsored plans will “be more efficient because then there will be neutral incentive for people getting insurance through their job or in the individual market,” said Pauly. He did not expect “large firms with good benefits departments” to change their policies, “but it may cause some smaller firms to switch to paying more cash wages and having workers buy their insurance as individuals.” He noted that individual insurance is administratively about five times costlier by than large group insurance.
Hempstead noted that the absence of penalties for not buying health insurance would not help increase take-up rates, either. “If subsidies are based solely on age and not on income, you will have lower-income younger people — particularly those who are 26 or 27 years old who have just moved on from their parents’ policies — who will not be able to afford [coverage] and we will lose them from the market,” she said. She saw an “inherent unfairness” in lower-income younger people not getting much in the way of subsidies, while older people who are quite wealthy would qualify for them.
According to Hempstead, the Republican plan is “much less redistributive than the ACA is,” especially as it relates to deepening risk pools to gain more efficient pricing. “The market is very heavily juiced with public money,” she said. “If you pull a lot of that public money out, there will be consequences.” Such a scenario would also bring up anti-poverty issues, she added.
An End to Employer-sponsored Coverage?
Moves to remove tax exemptions for people in employer-sponsored plans face opposition from unions and employers who use health insurance as an incentive in recruiting, but many on both sides of the political aisle see those bringing longer-term gains. “The idea is that people would get more of their compensation in the form of wages and less in the form of health insurance benefits,” said Hempstead. “That would lead people to ultimately chart a course away from employer-sponsored insurance — which after all is just an historical artifact that a lot of people have gotten used to, but there is no particular reason that your employer should be taking out your health insurance for you.”
“If there are a lot of really dire projections about people getting thrown out of coverage and about affordability issues, it’s not going to be simple.” –Katherine Hempstead
Hempstead pointed to arguments that reducing those tax exemptions would eventually help create “a much larger and more vibrant individual market.” She thought that scenario would also solve problems in making risk pools more efficient. “But other people are naturally very wary about that, including large employers who see it as a major recruitment strategy and are uncomfortable about transitioning to a phase where they are not the providers of those benefits.”
Field characterized that proposal as “just the Cadillac tax from the ACA in another name.” Under the so-called “Cadillac tax” that is set to take effect in 2020, insurers will have to pay an annual 40% excise tax on high-end employer-sponsored plans that have annual premiums exceeding $10,200 for individuals or $27,500 for a family. “The idea is to make it less attractive to give overly generous plans which encourage people to over-use medical services,” he said. “[The Republicans] are taking something from Obamacare that amounts in a way to a tax increase and firing the shots in terms of making it into policy.”
Hempstead noted that “there is a lot of bipartisan support and empathy for this,” adding that she, too, agreed with it. “I thought the Cadillac tax was a move in the right direction, even if there were some other ways it could be modified.”
Will Wages Really Increase?
However, employees worry that the removal of the tax exemption for their health insurance premiums may not be replaced fully by higher wages, Hempstead said. Another concern is whether they would be able to find “good alternative products” if they were to lose coverage from their employers. In any event, she noted that many people see the push towards employees buying their own health insurance as “inevitable,” although “[it] isn’t going to be an overnight change.” She pointed to some moves already underway in the direction of direct-to-consumer markets, such as with the Medicare Advantage plans and the growth of private exchanges.
Field was skeptical about how the transition to a removal of the tax exemptions would protect employee wages. “If employers stop [offering health coverage] and say they will give employees the money rather than the health insurance, would it be a one-for-one exchange?” he asked. “Would they give you all of the money they would have given the insurance company? I think the answer is no, but how much of it would they give you? Would workers actually see an increase in their paychecks?”
Employees would be worse off in that any wage increase would be taxable, which means they would have less money on hand to buy their health insurance, Field noted. That could have the effect of leaving policies less generous than earlier. “It would have a profound effect on the structure of health finance and health care provisions because the flow of money would change.”
It is imperative to have a well-functioning health insurance market for those changes to work, said Field. “If that is where we are going, then we better have a pretty vibrant individual market,” he argued. “Whatever they do to change those markets better hold up, because we are throwing people into them — and if they can’t buy policies there, where are they going to go?”
Getting Medicaid Right
Money is again central to the plans to reform Medicaid, said Field. He noted that the Trump administration could provide states block grants to manage that program, perhaps on a per-capita basis. “If they do that with enough money, maybe the system will be better, because states could innovate more,” he said. “If they do that without enough money, which is what the critics fear, this could be a major cutback and could lead to a lot of people losing their health coverage.”
The outcomes of a badly run Medicaid program could be serious, according to Field and Hempstead. Field notes that Medicaid is “unloved; everyone likes to take hits at it, but it is the backbone of our safety net hospitals, of our pediatric hospitals. Its influence is beneath most people’s radar, but it’s throughout the system, so if you tinker with it, a lot of harm can be done.” Hempstead noted that Medicaid is the single-biggest category with 72 million people enrolled in it. “It’s a huge lifeline for a lot of providers and [has] widely different beneficiary groups,” she said. “[They are] kids, pregnant women and healthy adults, but also some very sick people, the aged and disabled.”
“If there is a way to provide more coverage for less money, then [Trump has] got a brand new business line, even better than resorts and hotels.” –Robert Field
A policy of caps on per-capita funding for Medicaid must consider how appropriate it is for groups with varying per-capita expenditures, and how those patient populations grow over time, Hempstead said. “You can think about some really bad scenarios, especially for the very vulnerable populations of the aged and disabled, and also some huge shifting of burdens on family caregivers as the programs run out of money,” she added. She noted that many states expanded their Medicaid offerings in recent years to fix deficiencies. “Now you can imagine a lot of transitions that won’t necessarily bode well for vulnerable people.”
The Road Ahead
Health insurance costs could also be tamed by people adopting healthier lifestyles, Field said. He noted that the ACA included provisions to encourage prevention, including making preventive services available with no co-pays or deductibles. It also fostered innovation in payment models. For example, providers get incentives where they are rewarded more for the health of their population than for the number of services that they provide.
But achieving all that is not easy, Field said. “How do you change behavior? We’re not going to shut down McDonald’s, we’re not going to outlaw cigarettes, and we’re not going to force you to go to the gym,” he explained. “There are limits to how far the nanny state can go.” Additionally, even if people make those lifestyle changes, it would take 20, 30 or 40 years before their effects are seen on the health care system, he added.
More on the immediate horizon, Hempstead said there is no certainty that the Republican proposals would become reality. “It’s not clear there are the votes for this,” she added. “If there are a lot of really dire projections about people getting thrown out of coverage and about affordability issues, it’s not going to be simple.” Field said he expected heated debates in the town hall meetings over the proposals. “A lot of people now are scared and angry that they will lose their health coverage, and that will have a big effect on what Congress ends up doing.”
Field, too, is not sure the Trump administration will find a way to make the various disparate objectives of the new plan coalesce into a workable alternative. “If [Trump] has a magic formula, then that is amazing,” he said. “If there is a way to provide more coverage for less money, then he’s got a brand new business line, even better than resorts and hotels. If he can do it, great, but [it is] just a little bit dubious.” Added Hempstead: “We’re taking public money out of the market, which is not going to bode well for people that get coverage and for the markets to really thrive.”