Republican Presidential Candidates Roll on Health Reform
(A version of this Health Alert was published by Forbes.)
Republican presidential candidates are starting to roll on health reform. I mean that in a good way, like when the pilot accelerates down the runway and says “Let’s roll”. Governor Scott Walker (WI) just released his 15-page “Day One Patient Freedom Plan.” U.S. Senator Marco Rubio (FL) has written an op-ed in Politico that needs more detail, but contains a significant reform similar to Governor Walker’s.
Both Walker’s and Rubio’s proposals are very good. Let’s focus on private health insurance, leaving Medicare and Medicaid aside for now. Both offer refundable tax credits to people without employer-based health benefits. In Walker’s plan, these tax credits adjust with age (from $900 for a child to $3,000 for someone between 50 and 64 years old). Rubio does not specify whether his tax credits would adjust with age. For political purposes, it is likely better that they do (because older people vote).
The important thing is that the tax credits do not phase out as household incomes increase, which is the major problem with Obamacare’s tax credits. Millions of people have been wrangling with the IRS to figure out whether they received enough tax credits or have to pay some back. Even worse, the phasing out imposes extremely high effective marginal income tax rates on people at certain incomes. Obamacare punishes them for working and earning more. This is likely the main reason for the rise in part-time work in this weak recovery.
Walker would restore the regulation of health insurance to the states. This upsets some who think it would lead to a “race to the bottom.” These critics fail to explain why state regulation of other lines of insurance – such as auto or life – works quite well and has not led to the same perpetual crisis that characterizes American health insurance.
Like any campaign document, Walker’s leaves a lot to be fleshed out. Three big ones are: How to pay for the tax credits; how to ensure health plans do not shun sick people; and how to manage the consequences of significantly different tax treatment of health benefits earned at work versus individually.
By repealing Obamacare, Walker would lose a lot of revenue to finance tax credits. He will have to work with Congress to find spending offsets, which will not be easy given the current Congress’ spendthrift ways.
A more fundamental problem is the proposal’s skating too easily over the challenge of underwriting for health status. This is a longstanding Republican blind spot. A tax credit of $3,000 may be great for a healthy 50-year old’s health insurance policy. However, it will not go far to help a 50-year old with diabetes, high blood pressure, obesity, and other ailments pay his premium.
Obamacare addresses this through risk adjustment, whereby insurers which enroll healthy people transfer premium retrospectively to those which enroll sick people. There are other solutions. Walker’s may be simply that it is states’ responsibility to figure this out. It would be a fair answer (and certainly within states’ competence). Nevertheless, he should state that explicitly.
Walker has also adopted the idea that individuals should be able to switch health insurers without underwriting. Such a market cannot be lightly regulated because individuals would choose skinny plans with low premiums when they are healthy, and switch immediately to generous plans when they fall sick. Insurers would avoid that adverse selection by offering only skinny plans. Again, Walker might think this is for states to solve. If so, an explicit statement that demonstrates his understanding of this issue would go a long way to increasing his credibility.
Finally, giving tax credits to people buying insurance individually, while maintaining the exclusion of employer-based benefits from taxable income, would introduce biases in people’s choice of work. Low-income households would prefer the tax credit (and self-employment), while high-income households would prefer the exclusion (and corporate employment). The tax preference for health insurance should not artificially divide the labor market like this. Rubio’s proposal includes a “glide path” to harmonizing the current tax treatment of employer-based benefits with individual tax credits. Given how attached most workers are to the status quo, this is a welcome and reasonable approach.
Now is the time to start building on these firm foundations. Republican presidential candidates’ willingness to get in front of health reform with this level of detail so early in the campaign is a very positive sign that the eventual candidate will have a credible and effective replacement for Obamacare.
I don’t have a problem with providing self employed people with equal tax treatment, just not doing away with the employer exclusion. It will be the fastest way to single payer you can imagine.
You didn’t address the fallacy of selling across state lines. It is an idea that sounds good, rolls off the tongue nicely just like single payer but won’t work. Georgia passed legislation before the ACA to create this marvelous opportunity and not one policy has EVER been sold. No carrier wanted to play either.
You deal with the adverse selection problem by having insurance penalties that say that if you don’t sign up during open enrollment, you are on your own – period. Young person breaks arm, you own it. This is how you get people in. Dollar penalties set by politicians won’t be set high enough to lead people toward the purchase of insurance.
Thank you. Given my word limit, I did not nit pick every single thing. I have banged my head against the wall of “selling across state lines” again and again for years but to no effect. I let it go this time because it is a red herring that does no harm but would have no effect, as you point out.
Why do you think getting rid of exclusion of employer-based plans from taxable income would lead to single payer?
Does the author foresee any candidates touching on the issue of healthcare portability? Could this be part of the solution in addressing underwhelming wage growth without resorting to detrimental policies such as minimum wage hikes?
I’m not impressed by Governor Walker’s health insurance reform proposal for several reasons.
First, it’s not good enough for a health reform proposal to work for healthy people but not for the sick people who need it most. As noted in your post, the proposed age-adjusted tax credit will be grossly inadequate for a 50-64 year old (and younger people as well) to buy adequate coverage if he or she has significant health issues and may even be deemed uninsurable at any price under traditional medical underwriting criteria. Moreover, the premium for similar coverage can easily vary by 100% or more in different parts of the country and sometimes even within the same state but the proposed tax credit would be the same nominal dollar amount everywhere. State high risk pools, which were around since the 1970’s, never worked very well because the subsidies were inadequate and the benefits package was too.
As for the ability to sell insurance across state lines, what counts are the rules around minimum creditable coverage which could vary a lot from one state to the next. If, for example, some states required coverage at least as good as an ACA Bronze level plan and others allowed mini-med policies to be sold, insurers couldn’t sell mini-med policies in the states that required more comprehensive coverage no matter which state the policy was originated in.
People love the ACA’s ban on allowing pre-existing conditions to be used in pricing health insurance policies but they hate the mandate to buy insurance. You can’t have the former without the latter with the possible exception of offering a one-time opportunity to sign up when you first become eligible. If you don’t buy a policy then, you will be subject to medical underwriting later. Guaranteed issue without a mandate to buy insurance invites adverse selection on steroids.
Finally, Walker’s lack of specifics related to how he will pay for his tax credits needs to be addressed.
With respect to the tax credit, why should taxpayers in low-cost states subsidize the costs of people in high-cost states? (That’s what Medicare does, of course.)
I think the primary cost of living differentiators among states and regions are the cost of housing plus state and local taxes. There are huge differences in housing costs even within states such as CA and NY. In addition, the cost of health insurance is driven by the cost of healthcare which, in turn, is driven mainly by physician practice patterns which can differ materially from one region to another and even within states such as between southern FL and northern FL or the NYC metro area and upstate NY. As a result, health insurance can be expensive even in states that are otherwise low cost. On balance, I think it’s fairer to use subsidies to cap premiums as a percentage of income instead of using a flat nominal dollar tax credit, whether age based or not, that’s the same throughout the country.
Regarding the ACA approach, my preference would be to remove the arbitrary ceiling of 400% of FPL income beyond which eligibility for subsidies suddenly stops. The ceiling was presumably put there for budget reasons but I don’t think it would cost very much to get rid of it, especially since there are not many people above that income level who don’t have employer coverage or Medicare. Except for the income eligibility cap, which would be easy and straightforward to fix, I think the ACA go this aspect of health insurance reform right.
Did Scott Walker actually propose that we go back to traditional strict underwriting in the individual market?
Or did he glide over the issue? I could not tell from the accounts I have read.
For what it is worth, my firm tries to write ACA-qualified health insurance in Wisconsin. The rates and choices are horrible.
I am sure this is not all due to Governor Walker, but it makes one question his competence on the issue.
Bob — If he wants to eliminate the mandate to buy health insurance, guaranteed issue cannot stand except maybe for a one time opportunity to buy coverage when you first become eligible for it.
The only other way to get insurance without underwriting is to prove that you had it before but lost it because you or your spouse lost a job or your employer stopped offering insurance.
I don’t know if Walker spoke to the issue specifically or not.
I am sure he does not think he glided over it but he sort of did.
I think you are correct.
If so, then he probably favors the old Republican non-solution of high risk pools with very little funding.
One GOP bill last year proposed high risk pools with $25 billion of funding over ten years. That was pathetic. Functioning pools need at least that much money every single year.
One suspects that the Walker plan has the goal of lower insurance premiums for healthy persons in the individual market. There are a good chunk of Republican voters in that demographic. That is not a bad goal, but it has to matched with higher income taxes to take care of the bad risks who must be excluded.
Bob —
You’re correct. The main republican alternative to the individual mandate is to return to medical underwriting and use high risk pools to insure sick people. As you note, these pools have been around for a long time (1970’s) but were never close to adequately funded. I saw one estimate by a health economist recently saying it would take at least $20 billion per year individuals including sufficient subsidies to keep their premium affordable depending on their income to insure 2-4 million high risk people.
I think the cost could be significantly higher than that for two reasons. First, there are more people with expensive conditions now like congestive heart failure, advanced diabetes, kidney failure, MS, RA, ALS, cystic fibrosis, and others who can be kept alive longer than in the past with the help of very expensive specialty drugs, mainly biologics. Second, depending on how strictly insurers choose to underwrite, if they know there is a heavily subsidized high risk pool available, they will be tempted to exclude more people from coverage at the margin than they otherwise would and just dump them into the pool.
In the meantime, Walker and others haven’t said how they would pay for tax credits to allow healthy people to buy insurance at comparatively reasonable cost nor have they said how they would replace the revenue from repealing the ACA related taxes on high income people including the 3.8% Medicare tax on investment income for couples with joint income above $250K.
The bottom line is that Walker and others have a long way to go to come up with a credible health insurance reform plan that replaces the ACA including, most importantly, a way to pay for it. It’s not impossible but it will take considerable new revenue in the form of higher taxes which does not seem to be in their lexicon. It will be fun to watch during this election season.
How do you expect our government to fix a problem they do not understand?
Let’s take a look at what our brilliant politicians are doing in Iowa. The incompetence of our politicians has led to the tax payer being fleeced by insurance companies.
Here is a link to the state of Iowa employee benefits.
https://das.iowa.gov/sites/default/files/hr/benefits/documents/2015IUP_Benefits%40Glance.pdf
Let’s compare a hypothetical 40 Year old couple with two kids earning $80,000 a year with a Des Moines Zip code of 50301. With Employer Based Health Insurance and Individual Health Insurance.
One Spouse works for the state of Iowa and the other is self-employed.
As you can see from the link the employee may choose 1 of 4 plans (none of them are an HSA).
1. Blue Advantage has a family premium of $1,315.24 monthly in which the employer pays 100%.
2. Blue Access has a family premium of $1,364.27 monthly in which the employer pays 100%
3. Iowa Select has a family premium of $1,922.78 monthly in which the employer pays $1,634.36 or 85%
4. Deductible 3 Plus has a family premium of $1,938.68 monthly in which the employer pays $1,634.36. of 84%
To keep the math simple we will use the annual cost of premiums and compare the worst case scenario on all 4 plans being utilized to their maximum out of pocket costs.
1. Blue Advantage costs $15,782.88 and has a max family out of pocket of $1,500 for a yearly risk factor (Max premiums + Max out of pocket = Yearly Risk Factor) $17,282.88 worst case scenario.
2. Blues Access costs $$16,371.24 and has a max family out of pocket of $1,500 for a yearly risk factor of $17,871.24.
3. Iowa Select costs $23,073.36 The states pays $19,646.88 and the employee pays is $3,426.48 and has a max family out of pocket cost of $800 for a yearly risk factor of $23,873.36
4. Deductible 3 costs $23,264.16. the state pays $19.646.88 and the employee pays is $3,617.28 and has a max family out of pocket cost of $800 for a yearly risk factor of $24,064.16
Now let’s go look at some individual Health Insurance plans that anyone can buy.
1. My blue 5300 HSA. Has a family monthly premium of $711.94 or $8,543.28 yearly and has a max family out of pocket of $10,600 for a yearly risk factor of $19,143.28.
2. Coventry one HSA. Has a family monthly premium of $457.44 or $5,489.28 yearly and has a max family out of pocket of $12,600 for a yearly risk factor of $18,089.28
Until the general public and the politicians understand that the difference between an $800 family out of pocket and a $12,000 family out of pocket if you get sick and utilize insurance coverage is minimal. We will never be able to solve the healthcare problem. The public needs to realize that insurance is set up where you are going to pay or you are going to pay. You have a choice to either pay your insurance company monthly in the hopes that you will get sick and use the insurance or you can pay your Doctor and Hospital when and if you get sick. If the same amount of money is going to be spent either way, who would you prefer to pay?
Paying for this is simple. End the tax deductibility of employer based health insurance and take the savings and fund Tax Credits for individuals. Employers will respond by depositing HSA funds directly into employee’s accounts. Employers get the tax deductions they want and employees get a tangible asset they can take into retirement.
Way number 2 is to allow Health Reimbursement plans for premiums only. Obamacare does not have to be repealed it just needs to be changed. Allow companies to once again give premium reimbursements tax free to employees for buying their own individual plans and removing the minimum essential coverage mandate. Group health plans will go the way of the dinosaurs and we will have a rebirth of America when the strain of employer based health insurance is removed from the backs of our small employers.
Thanks to Big Ham for a very informative post.
This is not the first time that I have witnessed big corporate or big state government health plans being wildly more expensive than ACA plans.
Why is this? The corporate or state plans have a lower deductible and a much lower out of pocket maximum.
Is that enough to create such a huge difference in premiums? Something is not tracking for me.
Could it be that the state plans are covering retirees who could actually be on Medicare? Or just retirees between 55 and 65, who tend to file a lot of claims?
Beats me so far.
This blog has written about it. Health benefits are less transparent than cash wages and retiree health benefits have not been properly accounted for like pensions. So it is easier for public-sector unions to negotiate health benefits without ordinary citizens noticing.
Big Ham’s numbers don’t quite make sense to me. I can’t envision an insurer lowering the premium virtually dollar for dollar as the out-of-pocket maximum goes up. For a more meaningful comparison, I think he should try to get a premium quote from his insurer for a policy similar to his but with an $800 OOP. Also, are there any material differences in the breadth of the network between his plan and the state’s plan?
My former employer has significantly more retirees than active workers and most of the unionized workforce gets health insurance as part of their retirement benefits. However, when I retired and needed COBRA coverage for my wife for five months until she aged into Medicare, I was charged $437 per month for a pretty comprehensive plan which was the average monthly cost for the company to insure its ACTIVE workforce. The retirees cost significantly more.
For example, when a relative of mine retired from the City of Philadelphia in 2007, her health insurance was paid by the city for five years. After that, she had to pay for it out of pocket. By then, all she needed was a Medi-gap plan as she and her husband already had standard FFS Medicare. The city’s quote to cover her and her husband: $722 per month. The United / AARP Plan F policy cost less than $400 per month. Go figure.
Also, state and local government employees may have a significantly higher average age than many private sector employers. There are a couple of reasons for this. First, the very generous pension benefits are heavily backend loaded which means you have to stay with the government for 25-30 years or more to collect that benefit. If you leave before 10 years or so, you may get little or even nothing. By contrast, most private companies don’t have defined benefit pensions anymore or, if they do, many have cash value plans which accrue value more evenly over a career. Second, people who work for the government tend to be more risk averse meaning they’re willing to trade some salary for generous benefits and good job security.
The bottom line is that the numbers presented by Big Ham raise more questions than they answer, at least for me. I think more information is needed to draw accurate conclusions.
I agree with Barry that demographics are a big reason for high premiums on government employee health plans. I was on a school board, and while this was just one district, I was kind of stunned at the number of claims for cancer and heart disease from the 55 to 65 year olds.
Another reason why the ACA policies are cheaper (today) would be the 3 federal reinsurance and risk adjustment programs. These programs go right at the $50,000 claims that I saw so many of in a school district.