Ed Gillespie’s Health Reform Plan a Big Step in the Right Direction
Ed Gillespie, the Republican candidate for the U.S. Senate from Virginia has proposed a substantive plan to reform U.S. health care. The Washington Post called it “the most sensible GOP alternative.” An economic consulting firm estimates the plan, which was developed by the 2017 Project, would reduce the federal deficit by $1.13 trillion over 10 years.
There is significant overlap between the 2017 Project’s proposal and the NCPA’s: They both rely on individual tax credits for individually-purchased insurance as a building block for a new, consumer-driven health system.
The 2017 Project’s proposal would give adults under 35 years of age a tax credit of $1,200 a year; those between 35-49 years would get $2,100; and those 50 or older would get $3,000. Those with children would get an additional $900 per child. Those who can buy health insurance for a lower premium can deposit the leftover tax credit in a Health Savings Account.
However, these tax credits would only be available to employees of firms with fewer than 50 full-time equivalent employees. Those in larger firms, who remain in the employer-based market, would retain non-taxable health benefits, up to a limit. However, the tax exclusion would be capped at the 75th percentile of annual premiums. The value of benefits above this cap would be taxable to the employee. (In 2014, the average premium for single coverage in employer-based benefits is estimated to be $6,223. Let’s say that the 75th percentile is $4,667. So, if a person has coverage worth $6,000, $1,333 of that would be taxable.)
The NCPA’s proposed reform, on the other hand, gives everyone a tax credit and includes all employer-based health benefits in taxable income. The 2017 Project’s alternative is more politically palatable because it does not appear to threaten employer-based benefits. (In fact, the NCPA’s alternative does not prevent employers from offering benefits either.) Like the NCPA’s reform, it restores medical underwriting.
The 2017 Project’s proposal has two unintended consequences which will need to be addressed before it can be implemented.
First, an individual’s preference for a tax credit or the current exclusion of employer-based benefits from taxable income is not based on whether he works at a firm with fewer than 50 employees but on his household income. For example, take a single 30-year-old with a taxable income of $50,000 and a combined federal and state marginal income tax rate of 15 percent. (To keep this very simple, we will ignore payroll taxes.) If his health benefits are worth $8,000, and he can buy a policy in the individual market for $8,000, he will be indifferent as to whether he gets employer-based benefits.
Why? If he can wrangle a raise of $8,000 by telling his employer that he doesn’t need $8,000 worth of health benefits, his taxable income will go up by $8,000. He will owe 15 percent of that raise, which is $1,200, in taxes. And he will get that back in a tax credit.
However, things get complicated pretty fast: Some people in that situation will be able to buy individual health insurance that suits their needs for less than $8,000. However, some will not and will prefer employer-based coverage. If they are working in a firm of fewer than 50 employees, this will create tension between the employees, employer and group health insurer (which will see healthy people leaving the group plan and sicker ones remaining).
If working in a company of 50 or more employees, those who could buy lower-priced health insurance individually will wonder why they are being discriminated against versus those who work in small businesses.
Also, if the 30-year-old has a 30-year-old colleague who has $75,000 in taxable income and a combined marginal income tax rate of 25 percent, the value of the tax exclusion of $8,000 in health benefits is worth $2,000. Because the exclusion is worth $800 more than the tax credit, he will resist losing employer-based coverage unless he can buy individual coverage for $7,200, a 10 percent reduction from the group premium. He will be unhappy if the small business employing him drops benefits because most employees prefer the tax credit. For a large business, the lower paid employees would prefer a tax credit in the individual market, but they are not able to claim it.
The complexities of employees’, employers’ and insurers’ decisions in such an environment are staggering. Perhaps this may not be as big a question in 2017 as it is now. By then, Obamacare will have already chewed through many workers’ employer-based benefits. Nevertheless, it is unlikely that this plan will allow politicians to campaign with a promise that “if you like your health plan, you can keep your health plan.”
Second, the 2017 Project’s proposal re-introduces medical underwriting in a deregulated market. However, it allows people to avoid this by maintaining continuous coverage. The plan appears to extend this beyond the pre-Obamacare status quo ante by forbidding all health insurers (not just the one which covered the employee at his previous employer) from underwriting the former employee who seeks individual insurance.
This would introduce adverse selection far greater than existed in the pre-Obamacare market, because every person working at a small business with fewer than 50 employees would be free to churn in and out of the individual market as he saw fit. In the example cited above, the healthy 30-year-old who could get underwritten insurance for less than $8,000 would buy a new policy, while the unhealthy 30-year-old would seek to maintain group coverage or take advantage of the continuous-coverage provisions to avoid being underwritten.
The 2017 Project’s proposal does not have any risk adjustment, or even open enrollment, to mitigate this. So, health insurers will design their plans to attract the healthy and spurn the sick. Abundant evidence indicates that Obamacare already motivates insurers to do this, despite risk adjustment that has been described as a taxpayer-funded “bailout” of health insurers.
The NCPA has proposed overcoming this problem with health-status insurance, also called “insurance against becoming uninsurable.” Alternatively, risk adjustment similar to that already used in Medicare Advantage would significantly (but not perfectly) mitigate the adverse selection.
Ed Gillespie is on the right track with his proposed health reform. If elected to the U.S. Senate, he and his colleagues will have two years to put the finishing touches on a compelling reform proposal for 2016.
It doesn’t have the administrative simplicity of a uniform tax credit but it’s definitely better than what we currently have. I like the idea of a lifecycle theory of investing for health care in retirement. Young people should be using high-deductible plans with HSAs, and pocketing most of their premium dollars in HSAs. Older people could spend down their HSAs when health costs rise.
One thing I like about a uniform tax credit is that young people could (hopefully) carryover unused funds for use later in life. But, then again, what would sometimes happen is that a credit larger than they needed would lull young people into paying too much for coverage rather than shopping for the best deal (and pocket the savings into an HSA).
As I repeatedly attempted to communicate to the previous author of this blog, the idea of “health status insurance” (HSI) continues to be a fantasy of people who are economists and not experts on the actuarial technicalities of insurance concepts. To split “entry age” health insurance into two pieces, one that is an “underwritten” term component, and the other an increasing “guarantee” component, is never going to be as efficient to the society as a whole as keeping them packaged into a single product. Assuming that a person would not be allowed to purchase only the HSI, but would have to maintain active current insurance as well, there is not much int he way of logic that suggests the combination price would be anything other than higher than having “no underwriting” term insurance, and enforcing participation by all parties in the system. However, it might prove useful to use a variant on the German “reserve value” “whole life” health insurance concept, which in a sense is also analogous to the “package” of products/programs citizens of Singapore must maintain. All of this still requires government funding for persons who don’t have the income levels to appropriately cover the cost of the required components, the safety-net module. However, stand-alone HSI is not a market very many insurers are going to be jumping up and down to enter. As historic evidence, during the merger mania of the late 80’s, consultants were expecting that it would be easy to find insurance for golden parachute health insurance for executives, their families, their unborn grandchildren, etc. They discovered there wasn’t much appetite for offering what amounted to “single premium” entire lifetime health coverage. The marketable rate doesn’t usually stack up with the potential magnitude of the loss, and the same reality exists for the HSI concept. Don’t introduce an unnecessary complexity.
I am not sure I accept that it is too “technical”. What is life insurance if not a status insurance? My health status changes but my life-insurance premium is fixed for as long as I pay premium. That is evidence that markets can price such policies.
A more serious issue, I think, is that people have to maintain continuous coverage. Any failure to pay premium results in underwriting.
If you buy whole life insurance, it includes the guarantee of coverage for, well, life, but if you buy term insurance, it is essentially just a pure mortality cost spread over the contract period. The face amount (let’s not discuss variable life) is fixed, so the “risk” to the insurer is a known quantity, for which very credible and reliable statistics exist to price their product with. Asking an insurer to price an increasing (geometrically) medical cost risk on a basis longer than just a year or so is asking enough without asking them to offer a “rider” that guarantees protection beyond that. Besides, if the product you describe already has both pieces, then why do you think it is anything “new”? Individual policies guaranteed to age 65 already existed. It sounds to me as though your solution is merely the German whole-health market, perhaps with some variations. It still requires interfacing with Medicare eligibility, etc., and it still doesn’t say how you handle the existing un-insurables at the time you would “begin” such a solution.
There are insurance and re-insurance markets for hurricanes and other catastrophes. We can have such markets for medical risks.
Nevertheless, I take your point to a degree (but not with respect to the mathematics: All options can be priced). I appreciate that as long as the health insurer is committed to paying for necessary and reasonable care, we have a very imperfect contract.
The health-status contract would also entail moving more towards a schedule of allowances.
I technical point. A statistical consultant appears to be needed. The 75th percentile is very unlikely to be 75% of the average. We need to be clear about what we are proposing. I think the 75th percentile is probably a good point to tax above. But it is very unlikely, as I said before to be 75% of the average. Perhaps The proposal meant 75% of the 50th percentile?
Well spotted, Mr. Blandford. That is why I wrote “Let’s say the 75th percentile is….”, not “the 75th percentile is”! I don’t know the actual distribution of premium.
“Those who can buy health insurance for a lower premium can deposit the leftover tax credit in a Health Savings Account.”
So, a young family of 4 in Idaho earning the median income in Idaho’s most prevalent work sector ($22,000) can receive a $3000 (1200+900+900) Federal tax credit. Since the average health care policy is now $16,834 (2014 avg. cost from Kaiser) exactly how much would they be able to tuck away in an HSA?
The major problem with the credit scenarios is that they still leave lower income people without being able to afford insurance. Back to where we started in 2008. Can the GOP just improve on what we already have?
“The major problem with the credit scenarios is that they still leave lower income people without being able to afford insurance.”
The crux: Polarity of health status, wealth status, and insurance status
That is a very good point. There still appears to be a need for Medicaid, or something like it, in this plan.
I still think it best to distinguish between healthcare and poverty relief. Not being able to afford health insurance because poor health makes it unreasonably expensive is one thing. Not having the income to afford typical insurance costs (or anything else) is a different problem requiring a different solution.
Absolutely! Few people seem to appreciate this: They muddle together income transfer with socializing the risk. We need to separate the two to discuss them independently.
@ H D Carroll
There are not two separate plans. As in Medicare Advantage, the insurer receives one premium. Part of it (the community rated part) is paid by the enrollee. The other part is paid by the previous plan or by Medicaid or by a risk pool or by some other insurer.
Here is another, more balanced assessment of the plan:
http://www.independent.org/newsroom/article.asp?id=5000
We need an insurance component
Which grows 35 percent a year guaranteed
As long as benefits each month for 80 percent of the participants significant savings are available
Last week we wrote a self funded group of 1600 with projected savings of $2 million a year
Don Levit
Managing Partner National Prosperity Life and Health
I meant to write as long as the benefits each year grow faster than the claims for 80 percent of the participants significant savings are available
Don Levit
I’m all for repealing the prohibition on underwriting, at least back to pre-ACA levels, but fail to see the justification for a universal tax credit for underwritten coverage.
Even if you assume that young people who can’t spend it yet will bank it away until they get old, the interest-free loan still amounts to largess.
Isn’t this giving away money that will likely be spent anyway on risk pools and risk adjustment for people who don’t qualify for low-cost underwritten coverage?
Thank you. I’ve never been a fan of risk pools. They are a feature of the Project 2017 plan. I just wanted to focus on the tax and selection issues in this article.
Fair enough. But to address Gillespie’s tax and selection problem, the simple solution is to permit underwriting without making underwritten coverage eligible for the tax credit.
Non-underwritten coverage can be discounted with a tax credit without introducing adverse selection, provided the tax credit is not overly generous.
In which case, I think, you have the healthy indirectly subsidizing the sick.
What is wrong with that?
Don Levit
I just wanted to make sure Bart I. considered that. My comment was value-free.
The ACA for all its faults made some real strides in helping persons without employer coverage.
Al Baun has the right idea though his numbers are a little off.
Last year, a 35 year old couple with two children could get a silver family policy for about $9400 a year before subsidies. This is a silver plan with a $4 deductible.
If their family income was $40,000, they would get a subsidy between $6000 and $7,000.
So their out of pocket was $2400.
In the uniform tax credit plan, they would get a credit of $3000 but their out of pocket would be about $6500.
As Al Baun says, this will plunge some families back into the category of the uninsureds.
Can someone prove me wrong?
NCPA’s plan proposed a tax credit equal to the dollar value of Medicaid coverage. Bigger than this one. I agree that the 2017 Project plan leaves us with a need for Medicaid or something like that.
A silver plan with a $4200 deductible, sorry.
I think the bottom line is that any alternative to the ACA that can’t reduce the number of uninsured people below what the ACA has already achieved and will likely achieve in the next few years probably isn’t viable either politically or practically.
If I were advising Republican candidates, I would suggest that they focus their efforts on lowering the cost of healthcare through price and quality transparency tools for both patients and referring doctors plus sensible tort reform.
To get the needed price transparency, we need to eliminate the confidentiality agreements between providers and insurers that currently preclude the disclosure of actual contract reimbursement rates.
I think insurers have to get out of the business of fixing fees paid to providers. Transparency is not an end in itself.
Barry, in my view anyone who really wants price transparency should get behind laws about Surprise Billing. New York passed such a law in March of this year.
http://stopsurprisemedicalbills.org/
Now I would dearly love to see Republicans embrace this kind of consumer protection. However, some of them give you the feeling that they have voted against every piece of social legilation since the introduction of barbed wire on the prairie.
John and Colleagues:
This is an argument worth pursuing. Even more thinking would be good along the lines of a World Future Society Consultant. Do a simulation model with alternatives for each element, from eligibility, underwriting, age, income, prior coverage, levels of tax credit or subsidy, and net cost to the subscriber. Model the alternatives then check against putative goals–lowest personal outlay, predictability, little moral hazard, and others. Then shake out the best few combinations, test and rank them. We are attempting to make policy via written opinions, reports, etc, that are not fully quantified and not readily subject to factor by factor comparisons. Lots of fun for bloggers, but not totally convincing; too many questions, and assumptions left unstated.
Glad to hear from you John Goodman. Miss you.
Wanda Jones
San Francisco
Thank you Wanda. Let’s do it! Call me to refer the funders: I think we’d need at least $100,000 to get it off the ground.
A correction on the 2017 Project’s taxation of employer-based benefits:
So, I thought I was helping people understand “percentile” when I estimated that the 75 percentile of benefits would be worth $4,667. Unfortunately, all I did was confuse the issue.
Mr. Blandford pointed out that $6,223 is the average premium. So, the 75th percentile must be higher! But I was still too thickto understand his point.
Jeff Anderson of the 2017 Project also informed me of my error, and that the 75th percentile would be $8,000. So, a health plan worth more than $8,000 would be taxed on the value in excess of $8,000.
I regret the error.
HD
Great comparison of yearly renewable health premiums to yearly renewable life premiums
Health premiums increase faster than life premiums for the risk of a medical claim far exceeds the risk of a death claim
And the medical claim is usually far lower than the death claim
One way to counteract health premium increases is to lower the coverage when the claim
Is made
This is practical with 2 separate entities taking the risk
In the self funded market normally the employer takes all risk up to the stop loss attachment point for that individual
If a second entity took on the first dollar risk for the employer there would be 2 reserve pots
One pot owned by the employer
The second pot with the same dollars would be owned by NPLH on behalf of the employer
The employer’s pot may grow at 2 percent
NPLH’s pot grows at 35 percent guaranteed for 5 years
Over time the employer’s pot gets smaller and
NPLH’s pot grows larger
This lowering of the employer pot is due to lower risk assumed by the employer and higher risk assumed by NPLH
We wrote a 1600 life case last week in which $2 million is saved every year starting in year one
Don Levit
Managing Partner
National Prosperity Life and Health
Thank you. How is NPLH “writing” when it is not licensed yet?
We are writing self-funded employers which are regulated by ERISA and the Department of Labor.
The employer bears the ultimate risk, not an insurer. The employer has fiduciary responsibilities, not any insurer involved in a self-funded plan.
When we begin to write in the fully insured market, we will need a certificate of authority.
The problem the Texas Department of Insurance is having is how to classify us. They have never seem a product like ours before.
Don Levit
So, you are re-insuring? The employer has to satisfy himself that you are solvent?
Yes.
Look at it this way, John.
Normally, the employer has one pot into which reserves and premiums are directed.
The same monies – only a much smaller portion – goes to the NPLH pot.
So, there are two pots with the same dollars.
Our dollars grow at a 35% rate guaranteed, for up to 5 years.
Because our pot would (normally) grow faster than the employer’s pot, and because our benefits typically exceed the average claims per person every year, our pot grows bigger, the employer’s pot grows smaller, and the employer frees up reserves and premiums.
If 80% of the claims come from 20% of the people, our return on contributions is a mathematical and actuarial certainty.
Go to nationalprosperity.com to learn more.
Don Levit