Responding to King v. Burwell: Give Benefits to People, Not Health Insurers

(A version of this Health Alert was published at Forbes.)

The Supreme Court is expected announce its decision on King v. Burwell soon. The case hinges on whether Obamacare tax credits can be paid in states that did not establish their own exchanges. If the plaintiffs win, health insurers will lose tax credits that allow them to offer artificially low premiums to Obamacare beneficiaries. About seven million people will suddenly be asked to pay full premiums for their plans. To be blunt, they will freak out, and many will drop out of Obamacare, putting the president’s signature achievement in jeopardy.

This gives Congress the opportunity to present the president with reforms that, while falling well short of the promise to “repeal and replace Obamacare,” can address some of its worst shortcomings. Here is one suggestion: Every single penny of Obamacare’s federal spending on health benefits goes to insurers. Not one penny goes to beneficiaries themselves. How about giving that money to beneficiaries directly, and allowing them to decide how much to spend on medical care directly, instead of premiums to health insurers?

Although Obamacare plans have high deductibles and many Obamacare plans are eligible for Health Savings Accounts, they are not “consumer driven” as properly defined. Obamacare’s plans are regulated by “metallic” tiers: A Bronze plan must pay for 60 percent of beneficiaries’ expected medical expenses over year. For Silver, Gold and Platinum, the proportions are 70 percent, 80 percent and 90 percent.

These bands have a small amount of flexibility, but not much. A Bronze plan can cover 58 percent to 60 percent of medical expenses, a Silver plan 68 percent to 72 percent, and so forth. However, any plan outside these very narrow bands is illegal. Suppose a person would prefer to pay directly for one quarter of his expected medical expenses and buy insurance for three quarters. That is forbidden under Obamacare.

Further, there is compelling evidence that health insurers are designing plans with benefits that adhere to the regulations but seek to enroll the healthy and shun the sick, and that this feature is worse in 2015 than 2014. For example, drugs for HIV, cancer and multiple sclerosis are almost always on the most expensive tier of plan’s formularies, demanding 40 percent co-pays.

Even organizations that strongly support Obamacare have recognized its beneficiaries struggle to pay for care under these conditions. Families USA reports:

Lower- to middle-income adults who were insured for the full year were significantly more likely than those with higher incomes to forgo needed care because they could not afford it: Nearly one-third (32.3 percent) of lower- to middle-income adults didn’t get needed medical care (excluding dental care) because they could not afford it.

The Commonwealth Fund characterizes a household as “underinsured” if it spends at least 10 percent of household income on health care (or five percent for poor households, or if its deductible is at least 5 percent.) Whether or not one thinks this is a meaningful measurement, Obamacare has not reduced it. The percentage of adults with individual policies who were underinsured rose from 17 percent in 2003 to 45 percent in 2012, and then declined slightly — but not statistically significantly — in 2014.

As well as the tax credits (which are used only to discount premiums), the federal government reduces out-of-pocket costs for Obamacare beneficiaries whose household incomes are below 250 percent of the Federal Poverty Level. Just like the tax credits, the cost sharing subsidies are paid to health insurers, who apply them to beneficiaries’ out-of-pocket spending. Beneficiaries are effectively prevented from exercising true consumer choice by making their own decisions about value for money.

According to my calculations for a forthcoming report proposing a responsible congressional response to King v. Burwell, premium tax credits will be about $19 billion and cost-sharing subsidies about $2.5 billion in 2015. Beneficiaries do not see any of this $21.5 billion. And spending on both subsidies increases significantly in 2016 and future years.

Whatever amount is budgeted for subsidies by Congress in response to a King v. Burwell victory, these two accounts should be merged into one, and allocated directly to households. Each household can make its own decision about how much to spend directly on medical goods and services, and how much to spend on premiums for health insurance.

Comments (5)

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  1. Bob Hertz says:

    Good points, thanks.

    The number of $19 billion is smaller than I thought, given the controversy over subsidies.

    In fact I will make two observations about it:

    – the flat tax credits in some Republican proposals would seem to cost a lot more than $19 billion. See Robert Lascewski’s piece in Feb:

    – I still see a terrible imbalance between what Medicare spends on seniors (who may or may not be poor) vs. what we spend on poorer working people.

    Based on the 2015 total of $605 billion, Medicare is spending $19 billion in about eleven days.

    • Yes, because some Republican plans give a universal, refundable tax credit. That is NCPA’s longstanding proposal. However, we cannot achieve that in Obamacare, after King v. Burwell.

      I would not recommend increasing the aggregate amount of the tax credits until another day. However, the structure of the current tax credits can be improved significantly.

  2. Susan says:

    The reality is those are the highest cost drugs not the insurers are shunning those people, in fact due to the risk adjuster they will get overpaid for them

  3. Jimbino says:

    Insurance is a religious practice of the risk-averse. I would like to see a report on the expected return on the Obamacare premium dollar.

    It has to be less than 80 cents, since the “loss ratio” under Obamacare by law has to be 80%, at minimum, but not every cent of the insurance provider “loss” benefits the insured. The young, healthy, single, childfree man, of course, sees a very low return on his premium dollar, since women use 80% more health care than a man does, and older and sicker persons use more as well.

    It would be nice if someone provided a figure that illustrated how miserable a return a man would reasonably expect for his Obamacare premium dollar, so that he could figure out that it would be wiser to reject Obamacare altogether and seek his medical care privately, maybe in Cuba or Mexico.