(A version of this Health Alert was published by Forbes.)
The Supreme Court will soon decide King v. Burwell, the case that will determine whether tax credits being paid in at least 34 states without their own exchanges are legal. If the Supreme Court makes the administration follow the letter of the law, billions of dollars of federal tax credits will continue to flow to 16 states, but not the rest. This will result in a political crisis giving Congress and President Obama the opportunity to fix the worst aspects of Obamacare.
Here is one suggestion: Remove Obamacare’s rule forbidding accurate premiums by age. The difference in rates between young adults and older ones can be no greater than three to one. The actuarial consensus is that average health spending for 63-year-olds is five times that of 22-year-olds. However, instead of reducing premiums for older applicants, the rule dramatically increases premiums for younger ones.
Last October, HealthPocket, an online insurance broker, measured the increase in premiums for every age group in 2014 versus the pre-Obamacare individual market and concluded they increased by double digits for every age group. The increase in rates for 63-year-olds was 37.5 percent for women and 22.7 percent for men. For 23-year-olds, the increase was 44.9 percent for women and 78.2 percent for men. There are other mandates driving up the cost of health insurance. Nevertheless, scholars at the Heritage Foundation conclude that Obamacare’s age rating restrictions increase premiums for younger adults by about one-third.
Obamacare disguises these true premiums by offering health insurers tax credits to reduce the net premium people pay, thus fooling many into thinking premiums have gone down.
Although removing all Obamacare’s mandates could reduce the price of health insurance significantly, it is unlikely that a King v. Burwell victory would lead to such an opportunity, because the president could easily grandstand by accusing Congress of wanting to take away benefits. Given the limited opportunity, Obamacare’s age bands would be the best target to engage. This could have the added benefit of significantly reducing the amount of taxpayers’ dollars required for Obamacare tax credits.
Although we do not know the correlation between age and income in the exchanges themselves, we know younger households earn less than older ones. For example, in 2011, the median income for households with a head of household between 15 and 24 was about $25,000, according to my calculations in a forthcoming study on a responsible response to King v. Burwell. People ages 18 through 24 comprise 11 percent of 2015 Obamacare exchange enrollees. These people are surely almost entirely subsidized by Obamacare’s tax credits.
Take an example from the administration itself:
For example, the amount that a 27-year-old woman with an income of $25,000 (218 percent of the FPL) would pay for the second-lowest cost silver plan is capped at $145 per month. If she lived in Jackson, Mississippi, the premiums for the second-lowest cost silver plan available would cost her $336 per month before tax credits. Therefore, the amount of the premium tax credit would be $191 per month — the difference between specified contribution to the benchmark plan and the actual cost of the benchmark plan. Her use of the tax credit would not be restricted to the second-lowest cost silver plan. She could apply the $191 per month tax credit toward any plan of her choosing in any metal level. By applying her tax credit to the lowest-cost bronze plan in Jackson, which is priced at $199 per month, she could obtain Marketplace coverage for just $8 per month after tax credits.
If the age rating restrictions were lifted, the premium for the second-lowest cost silver plan could easily be expected to drop to $270, a reduction of $66. The tax credit would drop by the same amount. $66, which amounts to a drop of over one-third from $191. Aggregated over the entire Obamacare population, this would dramatically reduce Obamacare’s claim on taxpayers.
Good article, but this is only part of the story.
The key sentence is that premiums went up for older persons by 20-30 per cent, and went up for younger persons by 40-70 per cent.
If the ACA was so determined to help older insureds over age 50 — and this is not such a bad goal — then why did their premiums go up also?
The answer is guaranteed issue. In MN, which I know quite well, the high risk pools were closed down and all the high risk persons were pushed into the ACA exchange.
This in itself caused a large increase in premiums, and in fact the increases are getting worse.
Agreed. However, the age rating appears to have a larger effect than guaranteed issue. Plus, if you had to try to convince President Obama to repeal something in the wake of King v. Burwell, do you really think he’d repeal guaranteed issue?
“…age rating appears to have a larger effect than guaranteed issue.”
That’s a surprising statement. It seems counter-intuitive, at least.
Age banding is just a form of partial underwriting, and the whole community rating -versus- underwriting issue seems to hinge on the details of who is unfairly roped into paying for whom. If underwriting consists of using markers to predict risk, there will always be someone who is tagged with a high-risk marker who later turns out not to get the disease. Was he really at risk in the first place, or was the prediction simply inaccurate?
If the latter, that person will have been much worse off (in terms of unfair insurance costs) under the underwriting regime than under community rating.
In a nutshell, are all 60-year-olds at comparably high risk? Obviously not, even though the healthiest 60-year-olds are at higher risk than the healthiest 20-year-olds.
Thank you. Quite the opposite: The risk of aging is zero. That is, in ten years I will be ten years older than I am today (unless I am dead).
In ten years, will your risk of illness be the same as it is now?
No, and the type of illness that I’m likely to get will change. Nevertheless, the distribution of health costs (5 percent account for 50 percent of costs, etc.) is the same within each age group.
The primary socialist idea of Obama care is to transfer wealth from the young, childfree, single, healthy male to the old, the breeders, the marrieds and the sick and pregnant women.
The secondary idea was to support the insurance and healthcare industries.
Last comes actually providing health care to the Amerikan people.
You are forgetting one thing. One of the reasons for the narrow rate bands between ages was to reduce the premiums for older and sicker people. If you reduce the rates for the younger ones, the rates for older ones will go up even more than they already have. Taxpayers will be on the hook for increased subsidies for older people that will probably completely offset the subsidy reduction for the younger ones.
But taxpayers should be on the hook. If society decides it wants to subsidize health insurance for people in middle age, it should collect the revenue to do so openly through the tax code.
There is less of a transfer in Obaamcare than Medicare, because the middle-aged people earn most income. So, if we are artificially squeezing age bands and increasing taxes to pay for higher overall premiums, we are (to some degree ) robbing Peter to pay Peter.
True, people in the last year of life tend to work less.
Bart is absolutely right.
Medicare is an example of a (fairly) straightforward subsidy.
Congress decided in 1965 to give all persons over 65 a health insurance program. Payroll taxes have settled in at 2.9%, and the scope of these taxes has expanded. This pays for Part A (hospital insurance). Part B is paid for in small part by seniors’ premiums, and mainly by federal income taxes.
I am not revealing any state secrets here. I just wanted to show a semi-honest on-budget program.
Compare this as Brad suggests to how the ACA subsidizes older insureds and those with chronic illnesses.
First the ACA raised premiums on younger people. That is not “on budget.” Then the ACA offered something call tax credits to the insureds, which sounds like it is off budget though it impacts as spending.
The honest approach would have been this:
Tell the public that expanding Medicare down to age 60 or age 55 would require a raise in the payroll tax of. let’s say, 3%. The 3% could be divided into employer and employee portions. There might also need to be an increase in the income tax tables.
Our current Congresses lack the honesty to talk like this.
I suppose that the Grover Norquist pledges have something to do with this.
But it comes down to mobilizing voters, and it should. If a payroll tax hike to expand Medicare was on the ballot, I am not sure it would lose.
It’s hard for me to see how an additional 3% payroll tax benefiting only people between 60 and 65 would be popular.
And there’s the projected Medicare shortfall; today’s 2.9% payroll tax isn’t really sufficient to cover projected costs.
Between ongoing demographic changes and the fact that today’s 2.9% payroll tax is paying for seniors who contributed less than 2.9% when they were working, there is still a hidden transfer from young to old.
…although you did use the qualification “(fairly) straightforward.”
“would require a raise in the payroll tax of. let’s say, 3%”
3% of what, Bob?
When it comes to the bad labor-market effects of Obamacare, I think you are on the right track. But the notion that Congress would do this in a fiscally responsible way is surely unrealistic.
Further, the demographics are moving away from you. The baby boomers are three years into Medicare. They would vote to close the door behind them, not extend it to others.
The USA has about $6 trillion a year in payroll income, and $8 trillion a year overall. This is from the 2012 Statistical Abstract, so is somewhat out of date.
3% of payroll income would produce $180 billion of new revenue.
If an extra 25 million older persons joined Medicare at $8000 each in costs, the total bill would be about $200 billion.
($8000 each is of course less than the $11,000 each that current Medicare requires for persons between ages 65 and 100+. This needs refinement of course.)
As for the popularity of such a new tax, that is an interesting question.
I assume that everyone between ages 45 and 65 would approve such a tax. That is a large percentage of registered voters.
Then you have the hard core Democrats of all ages would approve the expansion of Medicare almost no matter what the taxes.
Would that overcome the opposition of libertarians, conservatives, and younger voters who are not Democrats?
I am no political scientist, by far, but I think it is not an open and shut case either way.
“3% of payroll income ”
Thank you.
And compared with the present 2.9% of payroll, that would be an increase of . . . uhh, what percentage would that be?
Those taxes go to the Treasury’s general
fund and are spent like all undedicated taxes
Treasury securities are issued as collateral for the FICA taxes
These securities are an asset to the trust fund and a liability to the Treasury
The net value is zero
The Social Security and Medicare trust funds hold zero dollars from a government wide perspective
Don Levit
John F, you are correct. My hypothetical reform would double the payroll tax.
A person making $50,000 a year would see their tax go up by $750 a year (1.5%), and the employer’s share would go up the same. A self-employed person would bear the entire increase of $1500.
The question is, would 51% of Americans consider this a worthwhile trade off? Millions of Americans right now see increases in their health insurance premiums of a lot more than $750 a year (although this is a little bit apples and oranges).
I keep going back (and somewhat unconsciously) to the ideas of Dr Uwe Reinhardt on social solidarity.
http://www.pbs.org/healthcarecrisis/Exprts_intrvw/u_reinhardt.htm
In Dr Reinhardt’s view, if you have a sense of social solidarity with the 50-65 year olds, you pay the tax because you are slmost certain to get there yourself some day.
Many readers of this blog would not agree with this of course. They might say that HSA accounts, if started young enough and un-drained by severe illness, would be better than raising taxes.
There is not much international evidence for the success of voluntary HSA accounts. Whereas there are quite a few wealthy nations who enforce large payroll taxes and are still wealthy.
I wouldn’t support this even though I’m in the proposed demographic. It seems unethical: I assume today’s 60-year-olds would benefit even though they haven’t paid the new tax, while 20-year-olds would have to pay in for 40 years before they start to get their money back. Unless you were planning to phase it in over 40 years, of course.
The problem with Reinhardt’s social solidarity is that it’s too ambiguous to translate into public policy. Exactly what does it entitle you to? A to-be-determined baseline level of care, or does everybody in this big family receive the same level of care? And what level of obligation does it imply for an individual? Something voluntary like tithing to a church, or are individuals legally obligated to pay as they can afford? Should the entitlement be considered a “right” or charity?
I just don’t believe that “because it’s expensive” is sufficient justification for a new entitlement. Especially one that’s not even means-tested.
“John F, you are correct. My hypothetical reform would double the payroll tax.”
Yes it would double the payroll tax. Thank you.
“A person making $50,000 a year would see their tax go up by $750 a year (1.5%)”
So in your very next sentence you’re back to 1.5% again?
Seems to me you are trying mighty hard to represent the impact of your idea as small and negligible. But you would double the existing payroll tax. That’s not small or negligible.
Besides, the employed and self-employed alike would pay the additional $1,500 because employers would count “their” half of the $1,500 as compensation – which would reduce employee wages. So I doubt paying your additional %1,500 tax would be embraced by many wage-earners.
And anyway, your additional tax would not exist in a vacuum. It would be added to the existing tax burden that people bear. Even the slightest straws eventually break the camel’s back when you have piled on enough of them.
But what do I know? You should run for office on this platform. Maybe you would be elected.