Senator Cassidy Introduces King v. Burwell Alternative
(A version of this Health Alert was published by Forbes.)
Senator Bill Cassidy (R-LA) has introduced the Patient Freedom Act, in anticipation of the Supreme Court deciding for the plaintiffs in King v. Burwell, the lawsuit that seeks to force the administration to obey the law by not paying tax credits to health plans operating in states using a federal health insurance exchange (i.e. healthcare.gov).
Victory for the plaintiffs this summer would cause significant disruption in health insurance in the 34 to 37 states without their own exchanges because premiums for up to nine million people would increase significantly. Many would choose to drop coverage if and when they have to face paying full premium for their policies.
Congress must have an alternative to Obamacare ready because President Obama will immediately propose an amendment to change the law to accord with how he is executing it. That is: Let tax credits continue to flow through healthcare.gov and just forget the money paid since January 2014 was illegal. It would be a very simple amendment – just a few sentences. The risk of Congress panicking and simply voting for that amendment, and finally surrendering to Obamacare, is unacceptable.
Americans have had their health coverage upended not only by the Affordable Care Act, but also by the allegedly illegal execution of the law by the administration. Congress has a duty to respond to a court victory with a new law. However, it has to be one that the president will sign, but will not leave the Republican-majority Congress’ fingerprints on Obamacare. This is a tricky needle to thread.
Dr. Cassidy believes he can achieve this by restoring federal funding to states that will lose tax credits, but freeing them from Obamacare. To be clear: If a state wants to restore the Obamacare tax credits, it would be free to do so by establishing a state-based exchange. However, state-based exchanges are a proven failure, which no responsible governor should institute in 2015. It would be an obvious choice to take Dr. Cassidy’s other option: Receive the federal dollars and use them in a way that empowers patients, rather than the federal government.
Having made that choice, the state can then take one of two paths. It can either choose individual tax credits deposited in patients’ Health Savings Accounts (HSAs) or per capita block grants. What it cannot do is take the federal dollars and bury them in the state’s own bureaucracy. Operationally, the tax credit version leaves the state almost completely out of the picture, because the IRS would process the tax credits. The block grant version would allow a state’s healthcare agency to process the grants to individuals and keep a little more control over safety-net funding.
The advantages of this proposal are significant. First, it eliminates Obamacare’s damaging effect on the labor market. Because Obamacare’s tax credits drop off dramatically as household income increases, it imposes a very high marginal income tax burden on workers who increase their hours. The Congressional Budget Office predicted this would lead to 2.5 million fewer full-time equivalent jobs. Businesses in states that adopt Dr. Cassidy’s proposal will have a competitive advantage over states stuck in Obamacare because they will find it easier to add workers when demand increases.
Second, a dollar in federal funding to a state that takes Dr. Cassidy’s offer will go a lot farther than a dollar in a state still in Obamacare. This is because Dr. Cassidy removes Obamacare’s expensive mandates. For example, Obamacare forces insurers to charge 64-year-olds premiums no greater than three times the cost charged to 18-year-olds. Given the difference in average medical costs between the two ages, a range of five to one would be more appropriate. Insurers respond by hiking premiums for younger workers. Ed Haislmaier and Drew Gonshorowski estimate that removing the 3:1 restriction would lead to a 44 percent drop in premiums for individuals in their twenties.
Under Obamacare, net premiums are artificially low because of tax credits that are consumed by health insurers. Under Dr. Cassidy’s proposal, health insurers would take fewer of those dollars, and more young people would be able to control their HSAs, which they can spend directly on medical care or save.
Senator Ron Johnson (R-WI) has introduced another proposal in case Obama is defeated in King v. Burwell. It would restore Obamacare tax credits for two years, while reducing some of Obamacare’s regulatory burden. Dr. Cassidy’s proposal overcomes many (perhaps all) of the shortcomings of Mr. Johnson’s proposal.
However, in seriously gutting Obamacare, Dr. Cassidy risks building a bridge too far for President Obama to cross. The president’s willingness to do so will depend on how clearly governors, businesses and individuals express their demand for that bridge out of Obamacare. Congressional Republicans just might be on the path to a successful response to the Supreme Court finally striking a significant blow to Obamacare.
Thanks for an interesting summary.
Are you saying that the states would be prohibited from taking the grant money and spending it on sports stadiums?
I think so but am curious as to how this gets enforced.
and
if premiums for young people go down, then I assume that premiums for older persons would go up. Isn’t it more important for public health (and for hospitals) that 55 year olds be insured than 30 year olds be insured?
This could be mitigated if the tax credits are larger for older persons. Is this being considered?
“Isn’t it more important for public health (and for hospitals) that 55 year olds be insured than 30 year olds be insured?”
Interesting question. Why do you think so? More important for whom? This is not a challenge, I’m just wondering what unspoken assumptions are implicit there.
We have an upside down economy when young people trying to raise a family and buy a home are subsidizing older folks that have more income and already own homes and have bank accounts! The young are already subsidizing the Medicare population with Medicare taxes on all of their income. How about subsidizing high risks regardless of age. Using age as a substitute for need is a very distorting economic assumption.
It depends if you want insurance or not. You cannot insure against age.
Ron
You have a good idea there – subsidies based on high risk regardless of age
I agree that insurers should be getting some of the subsidies rather than insurers
However how much less of the subsidies can insurers receive and still make the plans sustainable?
Don Levit
From the news over the past week, it would appear that the subsidies in several states are not adequate as they are.
I meant insureds should be getting some of the subsidies
Don Levit
Block Grants and Vouchers simply will not work.
Block Grant money will be diverted to back-fill state treasury’s who gave tax breaks to the wealthy to balance their budgets.
Vouchers will leave a gap between the premium and the voucher. Couple that with an HSA and we are back to square 1.
This will leave people uninsured.
No Thanks,
Erik, you may be right for the wrong reasons. States are just as likely to use block grant money to perpetuate high salaries and gold plated pensions for state employees. That is what they did with a lot of the 2009 stimulus.
John, we need to you to show us how block grant money can be restricted to health care.
Bart, you ask why I seem to care more about insurance for 55 year olds vs 30 yr olds.
Well, I am a man, and this may color my views.
Anyways, I have worked in a hospital. We saw almost no 30 year old males unless they had a violent event or a car crash. These hospital bills could darn near have been covered by car insurance.
Whereas we saw some awful consequences for 55 years old with untreated heart disease or diabetes.
So my assumption is that uninsured 55 year olds cause more financial losses to hospitals than 30 year olds, and have more bad consequences of being uninsured.
This is not a scientific statement on my part. Comments are welcome.
In Dr. Cassidy’s proposal, the money flows straight through to an individual’s HSA.
How does Senator Cassidy’s proposal mitigate problem of high marginal income tax on those earners not quite qualifying for tax credit? Why should we expect that state health care agencies will be significantly more efficient in administering grants than state-based exchanges have been in carrying out their mandates? (Aside: Very modest earned income as non-employee while receiving social security now results in marginal federal income tax liability exceeding 40% – in substance but not in name.)
The tax credit is independent of household income. It would not phase out as income rises.
I am not saying that the state agencies will be perfect in administering the grants. However, they could hardly be worse than exchanges. If I were a governor, I would likely choose the other option, and keep my state bureaucracy out of it entirely.
The other day I provided a quote of health insurance for a couple in their 60’s. Their income was too high to get any subsidy (i.e. over $62,000 a year).
The cost for a $4000 deductible policy was $1200 a month.
And this is AFTER the 3:1 limitation of old to young that John Graham has criticized.
Without the 3:1 limitation, the premium would probably be about $1500 a month for this couple.
The insurance company would collect $18,000 in premiums and up to $8000 in deductibles (for both spouses) before the insurer had to pay any of its own money.
And yet, in a couple of years when this couple turns age 65, they will get a far better policy for a mandatory Part B premium of $220 a month (for both)
I contend again that private sector insurance has no decent product for persons over age 60. Folding these persons into Medicare would probably raise payroll taxes by 2 per cent at most.
At some point we come to a harsh dividing line between private insurance and social insurance. In a private insurance state, you had better save money so that when you are older, you can afford the crumbs that will be offered to you. In a social insurance state, you do not have to save for health care (or college, for that matter) These benefits are provided by broad based taxes.
The social insurance state seems preferable to me.
What is surprising is how little Obamacare has done for the late middle-aged, even with the 3:1 age bands.
“when this couple turns age 65, they will get a far better policy for a mandatory Part B premium of $220 a month (for both)”
Bob, you know that Medicare Part A and Part B coverage is not “far better” than the comprehensive policies offered under ACA – not far better for this couple, nor for anyone else, either. You know that with Medicare Part A and Part B alone, a person could go bankrupt from a catastrophic medical event – exactly the kind of event people seek insurance to protect them from (and that the comprehensive ACA coverage does protect them from). You know that to secure adequate coverage, persons over 65 must buy additional coverage to supplement Part A and Part B, at their own expense. You know all of these things.
How do I know that you know? Because you said so yourself. You said you elected to enroll in Medicare Advantage. You know that Medicare Part A and Part B coverage is inadequate, and that Medicare Advantage benefits are much better. That’s why you chose Medicare Advantage for yourself.
But it’s a mystery why you would advise other people they should be happy to have Part A and Part B – the very coverage you believe is inadequate for yourself. Or, for that matter, knowing what you know, why would you advocate Medicare Part A and Part B as some kind of solution for a wider population of Americans under age 65?
And finally, you know that Medicare Part A and Part B costs roughly $10,000 per year, per person despite its poor coverage. You know that the federal government (meaning the taxpayers) subsidize about 88% of this Medicare cost. it seems to me there’s little to like about such inadequate and at the same time extremely expensive coverage.
Bob –
If the American middle class wanted a health insurance system financed by income, payroll or other taxes instead of insurance premiums nominally paid by employers but actually by employees as part of their compensation and if they wanted college tuition paid for by more of those taxes instead of family income, savings, and government or private loans, they would have voted for it decades ago. Of course, they know, at least instinctively, that to duplicate the European safety net would come at the cost of a European level of taxation which means a tax burden of roundly 50% of income in combined payroll, income, value added and other taxes even for middle class people. They are not prepared to assume that burden and they know there aren’t nearly enough rich people to soak so everyone else can have a free or near-free ride. We’re not Europe. Our values are different and our culture is different. We’re more individualistic, materialistic and entrepreneurial.
By the way, a two percentage point increase in the Medicare portion of the payroll tax that you suggest could finance bringing 60-64 year olds into the Medicare system would be on top of the current Medicare tax of 3.8% of payroll, a 52.6% increase. Social Security taxes are an additional 12.4% of payroll up to a wage cap of around $120K per year.
Part of the European culture as it relates to a comprehensive safety net includes the concept of solidarity which we Americans do not embrace the way they do. Moreover, part of the deal inherent in solidarity, which doesn’t get much publicity, is that you don’t impose unreasonable costs and expectations on your fellow citizens such as insistence on futile or marginally useful but very expensive end of life care or an inclination to want to sue the doctors and hospitals if something goes wrong.
As I often tell my son, everything in life involves tradeoffs. Europeans and Americans have made different choices and tradeoffs which reflect our different cultures and values. Just because they like their system and think it works well for them doesn’t mean it will work for us. It won’t.
I think you are too kind to us Americans: We want it all. We impose an artificial age cut-off of 65 on being in a social welfare state versus being independent.
Note to John F –
I think you may exaggerate the danger of a catastrophic event in traditional Medicare.
Assume a person buys no supplement at all or MA plan.
Under Part A, they face a deductible of $1400 or so and then no costs at all for 60 days. The number of persons who are hospitalized for more than 60 days at a stretch is very very tiny.
Under Part B, they face a deductible of $147 and then a 20% copay. But the copay is 20% of the low low Medicare approved fee. Damn few procedures in Medicare cost more than $20,000. So the risk is in effect capped at $4000.
So, that leaves Original Medicare with an exposure of about $5400 in 99% of cases. And a person gets this policy for a cash outlay of $110 a month.
This leads me to the tough question that John Graham just posed about the age 65 cutoff. I do not like the fact that we subsidize a 65 year old at 88% of his/her costs, but a 64 year old who makes over about $40K a year gets no subsidy at all, even after the ACA.
I admit that when you get rid of age cutoffs, any subsidy program costs more. But I am OK with that.
“The number of persons who are hospitalized for more than 60 days at a stretch is very very tiny”
You know this, because you have researched it, and have found the numbers? Then provide them, or a link to your information, please. For example, over the past few years, what has been the distribution of hospital discharges by days of confinement? How many exceeded 60 days? 90 days? 150 days?
You do not respond to my observation that you recommend for others an insurance program you consider inadequate for yourself.
I guess that’s OK. I can’t think of a good response, either.
Bob –
Lots of people with diseases and conditions like CHF, COPD, asthma, diabetes, mental illness, and cancer, among others can find themselves in the hospital numerous times for comparatively short stays each time. Each occurrence triggers the hospital deductible plus the 20% co-pay at Medicare rates for any Part B services provided. I think those on standard Medicare need a supplemental plan more than you suggest. The exception is the dual-eligibles. A large number of beneficiaries, though, receive a supplemental plan through their employer as a retirement benefit at no out-of-pocket cost to them.
The point you make about subsidies I agree with though. I don’t think it’s right that someone with an income equal to 400% of the FPL receives a significant subsidy but at 401% of the FPL there is no subsidy at all which I call a cliff phaseout. If it were up to me, I would remove the income cap for subsidy eligibility and I don’t even think it would cost all that much though I haven’t seen any numbers addressing that point.
To offset at least some of the cost, the Medicare Part B premium could be raised to cover 30% or even 35% of the program’s cost from the current 25% and the Part B deductible could be raised from $147 to $500 or so. I suspect the AARP and Tea Party types would vigorously oppose that change though because they want somebody else to pay for their benefits which they contributed to during their working lives but did not fully “earn” because the taxes they and their employer paid then won’t come close to covering the healthcare costs they are likely to incur during their years on Medicare.
Note to John F:
Interesting video presentation from a doctor on why the risks of Medicare are exaggerated. Note however that he got over 100 responders who disagreed with him.
https://www.youtube.com/watch?v=cApRgSGGOQY
bob hertz
Bob, that’s nice, but have you located the facts on the distribution of hospital discharges over the past few years by days of confinement?
btw, it’s not surprising that there are physicians, such as Dr. Belk (an internist) who have their own views about Medicare, Medicare Supplements, and Medicare Advantage. It is also not surprising (at least to me) that most people commenting on the video you posted, seem to disagree with Dr. Belk.
Let’s not forget that you yourself enrolled in Medicare Advantage. Your Dr. Belk argues that Medicare Part A and Part B alone is sufficient coverage. Seems to me that gives you something to think about.
A couple of years ago, one of my relatives wound up in the hospital for 43 days, 21 of which were in the ICU. Even at Medicare rates, the hospital was paid over $70,000 and the doctor bills were thousands more.
Medicare supplemental plans are quite profitable for insurance companies. At an investor meeting not long before I retired, former CMS Administrator, Tom Scully, told our group that the average MLR for supplemental plans is about 65% and they’re exempt from the minimum loss ratio rules under the ACA.
What Belk’s presentation misses, I think, is the each individual needs to understand what the consequences of being wrong (not having a supplemental plan with standard FFS Medicare) means for him or her. With the plan, you are paying out a certain amount of money each month that’s known and that you can budget for. Without it, you subject yourself to uncertainty which may cost you a lot of money or may not. While most people don’t generate large bills in any given year, nobody can predict with certainty whether they will or won’t.
While MA plans eliminate the need for a supplemental plan and cap out-of-pocket exposure at a reasonable level, the tradeoff is less provider choice. Indeed, many of the better hospitals and doctors in my area don’t accept MA plans because they pay poorly but do accept standard Medicare. Standard Medicare maximizes provider choice and offers better protection when traveling outside of your home area. The tradeoff is greater out-of-pocket cost exposure which you can protect against with a supplemental plan. As long as you can comfortably afford the supplemental plan, it’s a reasonable choice to mitigate risk in my opinion.
For the record, my wife and I have standard Medicare, a supplemental plan that costs approximately $190 per month for each of us this year, and a Part D plan that costs $54 per month each plus, of course, Parts A and B. We’re also subject to the IRMAA surcharge. While not cheap, it works for us.
Barry,
“uncertainty which may cost you a lot of money or may not. While most people don’t generate large bills in any given year, nobody can predict with certainty whether they will or won’t.”
Il think this is exactly right. Controversy arises, I think, because people have come to expect that insurance must pay them back at least their premiums or, if that doesn’t happen, they’ve been ripped off.
But this expectation ignores two important facts. First, the point you raise – that insurance is protection against risk of having expenses you could not handle alone; that has value. Second, insurance could not exist if everyone got at least their premiums back. Even government insurance could not long exist under those circumstances.
Agreed: If you go to your deathbed without crashing your car, I doubt you will complain that your auto insurance premiums were wasted.
Actually, Sen. Cassidy hasn’t introduced a *bill* yet — only “sometime after Memorial Day.” So far it’s just a press release and a bunch of powerpoints. The “devil is in the details”, so let’s see some legislative language before deciding whether to embrace or disavow it.
Absolutely. And I like it when a politician sticks his neck out. What I can’t stand is when leadership writes a bill in secret and rams it through Congress. (See: Medicare Access and CHIP Reauthorization Act of 2015.)