Reinventing the 401(k) plan

RAccording to the Bureau of Labor Statistics around 29 percent of people with access to a 401(k) plan choose to not contribute to their plan.  In addition, The Employee Benefits Research Institute (EBRI) reports that in 2015 around $92 billion was removed from 401(k) plans prior to retirement.   The combination of people refusing to contribute to their 401(k) plans and people taking premature contributions will result in many people with inadequate retirement income. The rules governing 401(k) plans need to be changed so that fewer people choose to forego making contributions and distributions prior to retirement are limited to a certain extent.

Current rules governing contributions to 401(k) plans provide significant financial advantages to workers who contribute.   The contributions are not subject to federal or state income tax in the year they are made.  Returns on investments are not taxed until retirement.   Many firms match or partially match employee contributions.   Many financial advisors believe that workers who fail to contribute, especially those at firms that provide an employee match, are irrational.  

There are several rational reasons why some workers forego contributions to 401(k) plans. Recently reported statistics indicate that around 40 percent of households do not have enough savings to cover a $400 bill.  A person without a basic emergency fund could be late on her mortgage or rent, unable to pay for a doctor or emergency room or fix a car.  A decision to place funds in a 401(k) plan that leads to late payments on bills will lead to late fees, a bad credit rating, higher borrowing costs and other adverse financial outcomes.   

A decision to make substantial 401(k) contributions might result in a person selecting a 20-year student loan over a 10-year student loan.  Consider a married couple with $60,000 of combined student debt at a 5 percent interest rate.   Lifetime student debt payments are $19,000 lower if student debt is repaid in 10 years rather than 20 years.   Many student borrowers could only afford the shorter-term student loan by reducing 401(k) contributions.

A decision to make substantial 401(k) contributions might force a person to take out a 30-year mortgage over a 15-year mortgage.   A person taking out a $400,000 30-year mortgage at 3.9 percent would have an outstanding balance of $257.000 after 15 years.   The 15-year mortgage would have been totally repaid, and in addition the borrower would have obtained a lower interest rate.  Again, many student borrowers can only afford the shorter-term mortgage by reducing 401(k) contributions.

In some states a person with assets in a 401(k) plan are not eligible for food stamps or Medicaid for nursing home expenses.   Go here for a paper on how retirement savings impact eligibility for food stamps.   Go here for a paper on how retirement savings impact eligibility for Medicaid nursing home expenses.   The underlying assumption behind such laws is the worker who comes upon bad times must deplete her retirement account prior to receiving any financial assistance from the government.

Many people retire early often because of the loss of a job or for health reasons.   People who retire early and have all of their funds in a 401(k) plan will be worse off than people who have saved both inside and outside their retirement plans both because early distributions from a 401(k) plan are subject to a 10 percent penalty and because distributions from conventional 401(k) plans are fully taxed.

Many older workers must choose between paying off their mortgage prior to retirement or increasing the amount of funds they place in their 401(k) plan.   Financial planners tend to favor additional accumulation in 401(k) plans over more rapid paydown of mortgage debt.  This choice often fails to work out well because people with a mortgage in retirement must, all else equal, make a larger distribution than people without mortgage obligations and the entire distribution from the conventional 401(k) plan is fully taxed.   The higher 401(k) distributions due to the need to make mortgage payments is especially difficult for retirees when a market downturn occurs at the beginning of retirement.

A household that is 401(k) rich and cash poor faces substantial financial risks.  Some households with 401(k) wealth but other financial needs raid their 401(k) plan and pay a 10 percent penalty in addition to tax on their early distribution leading to inadequate funds in retirement.  These problems could be reduced by changing the rules governing distributions from a 401(k) plan.  

Three rules should be modified.  First, workers should be allowed to withdraw 30 percent of funds contributed to a 401(k) plan without financial penalty.   Second, the worker should be prohibited from withdrawing any other funds from the 401(k) plan (the other 70 percent of contributions and all returns if any) until after age 59 ½.   Third, loans from 401(k) plans would be prohibited.

This combination of rule changes incentivizes workers to make additional contributions to their 401(k) plan while assuring that they do not raid their account prior to retirement.  

The provision for penalty-free withdrawal creates an emergency fund inside a 401(k) plan.  The provision for penalty-free withdrawal will allow a worker with student debt or mortgage debt to pursue a more aggressive repayment strategy while simultaneously saving for retirement.

Under current law, workers are allowed to distribute their entire 401(k) account prior to retirement.  This outcome could be forced upon a worker who loses his job in order to obtain Medicaid or food-stamp benefits.   The new rule by prohibiting most distributions prior to retirement will leave all workers with most funds in their 401(k) funds at retirement.

A final advantage of the rule change is that it allows more workers to reduce their tax obligations in retirement.   Under current tax rules, contributions to 401(k) plans result in tax savings in working years and higher tax obligations in retirement.   Some taxpayers use Roth accounts to minimize future tax obligations.  The new rules create a simpler way for workers to minimize their tax obligation in retirement. They can simply transfer 30 percent of their funds outside of their 401(k) account and purchase either stock, which is taxed at long term capital gains rates or an inflation linked Treasury bond, which is taxed at preferential rates.

The current 401(k) rules are not working for a lot of people, especially people with limited liquidity and large debts in relation to their income.   The proposals presented here provides incentives for people who can’t contribute to start savings and also helps current savers reduce their tax obligations in retirement.  

David Bernstein is an economist living in Colorado.   He is the author of a policy primer on student debt, health care, and retirement income titled “Defying Magnets:  Centrist Policies in a Polarized World.”

Should Big Tech be Broken Up?

This post evaluates Senator Warren’s plan to break up big tech firms.  The analysis presented here supports the view that some of her proposals would assist large established firms and would reduce choices for consumers.  Google and Facebook have monopoly power in search and social media, but other large tech firms are capable of contesting these markets, the two firms compete with each other for ad revenue and face substantial competition in many markets from Apple, Amazon, Walmart and other firms. 

Introduction:

Senator Warren proposes major changes to anti-trust law and increased enforcement against big tech firms in her article  “It’s Time to Breakup Amazon, Google and Facebook.” 

Warren’s approach includes the following

She wants large companies with major Internet marketplaces to either sell only third-party goods or its own goods.   Marketplaces serving third-party sellers would be set up as a regulated platform utility.   The rule would require Amazon to separate Amazon Basics from Amazon marketplace, could prevent Amazon Prime and Netflix from selling the movies it produces and would require changes to the Apple Istore.  

She wants the newly created platform utilities to follow a standard of fair, reasonable, and nondiscriminatory dealing with users.  She also wants to restrict data transfer to third parties by platform utilities.

Separately, she would require Google to separate Google Ad sense from Google Search.

She would reverse some previous Tech mergers and make future tech mergers more difficult.  Previous mergers to be reversed include – Amazon’s purchase of Whole Foods and Zappos, Facebook’s purchase of WhatsApp and Instagram, and Google’s purchase of Waze, Nest and DoubleClick.

Warren has a really clear and simple vision of the world.  Google, Apple, Amazon, and Facebook all have monopoly power.   All four companies use their monopoly power to obtain large profits from consumers. The solution to this problem is to break up existing firms, reverse previous mergers, prevent future mergers and increased regulation.  

My view of the world is less black and white than Warren’s view.   Some of the major tech firms have high market shares potentially creating substantial monopoly power.  Some of the previous mergers were anti-competitive and need to be reversed but in some cases the advantages of the previous merger outweighed costs.  Moreover, some future mergers and acquisitions by competitors of Google and Facebook could increase competition and expand choices for consumers. 

In some cases, on-line regulation of Internet marketplaces is desirable but in other cases the regulation would leave the Internet firm at a significant disadvantage compared to traditional retailers. 

Analysis:

The theoretical case for applying antitrust procedures to Internet firms differs greatly from the theoretical case associated with applying antitrust to traditional industries like steel or oil.  Traditional firms attempt to get monopoly power in order to increase price and get large profits.  Many Internet firms like Google and Facebook do not charge anything for their services.  These firms get profit from ad revenue and from the use of their data on consumers.   They are willing to spend money to attract customers because an increase in the size of their network increases the scope and value of their network.  

Google and Facebook are not like swimming pools where at some point (typically pretty quickly on a hot day) additional swimmers make the pool less attractive.   There is no real cost of additional users to Google and Facebook.   Also, since the basic purpose of these networks is to allow people to interact and work together an increase in the size of the networks increases their value.  Why are Google Docs and Microsoft Office so popular?   People share documents.  An increase in the number of people sharing stuff or interacting can increase the value of the software or network.   

Google and Facebook have overwhelming market share and monopoly power in search and social media respectively.  Both firms have higher profitability levels than they would if the industry was competitive.  Google’s dominance in search allows it to manipulate results and favor certain sellers or merchants over other sellers and merchants.   The unchecked and unregulated power of Facebook has led to privacy violations, misuse of data and political manipulation of Democratic elections by bad actors.  The manipulation of consumers by Facebook may have resulted in Donald Trump being elected president and may similarly impact the 2020 presidential race.

High market share is an important indicator of potential monopoly power and is of great concern to industrial organization economists.   However, high market share does not automatically lead to monopoly power when markets are contestable.   The theory of contestable markets created by William Baumol asserts that high concentration may not lead to problems associated with monopoly if there are low barriers to entry and exit.  The implication of this theory for Big Tech is that the way to deal with the potential search and social media monopolies is to facilitate the entry of additional competitors.

One of the reasons why Google has a monopoly position in search is that both Google Android and Apple phones default to the Google search engine.   Google pays Apple a whole lot of money to make google search the default on its phone.  This side payment is basically an incentive to not compete and is in my view illegal collusion under existing antitrust law.  Warren did not flag this problem in her article.  Anti-trust authorities should end this arrangement.  This change would make the market for search not only contestable but actively contested.

The problem of Google’s monopoly power in search cannot be resolved by separating Google search from Google ads.  Google makes no money from search.   Virtually all of Google’s entire revenue is from its ad division.   A separate Google search division with no ad revenue would probably not be financially viable.

Believers in the theory of contestable markets assert that the key to taking on the Google and Facebook monopolies is to encourage entry and greater competition from existing tech firms. Microsoft with its unsuccessful Bing search engine and with its LinkedIn social network is already in competition with both Google and Facebook.     Ironically, Microsoft could more actively compete with both Google and Facebook by purchasing firms an activity that would be restricted by the adoption of Warren’s approach.  

For example, Microsoft could more easily compete with Google by purchasing Yelp and integrating Yelp with its search engine Bing.  Yelp may be receptive to a partnership with Microsoft because it has accused Google of anticompetitive behavior.   Microsoft would also have to purchase or develop a mapping company to compete with Google Maps, Waze and Apple Maps. 

A useful search engine must be complemented by mapping software for cases where the customer needs to move towards the item or business being searched.  The primary purpose of Google’s purchase of Waze was to prevent another firm from integrating Waze with their search algorithm.  Waze is now experiencing a slow death.  I agree with Warren that Google’s purchase of Waze was anti-competitive and should be reversed.  This type of antitrust action might prompt Apple or Microsoft to start competing with Google on search.  

Microsoft’s ability to compete with Facebook would similarly be enhanced if it purchased the blog platform Medium and integrated it with is social network LinkedIn.   This move would increase the number of LinkedIn members and would also increase activity by current users.

The case for reversing previous acquisitions made by Facebook is weak.   Prior to their purchase, Instagram and WhatsApp had fairly low revenue and income.   These firms may not have been viable on their own and other social media companies including Twitter and Snap did not have the money to make these acquisitions.  

These acquisitions did expand Facebook’s monopoly in social media, but the acquisitions also increased the ability of Facebook to compete with Amazon and Google for ad revenue.   I am unsure how the courts would weigh the benefits and harm of these mergers.  I am pretty sure that prohibiting these mergers would have reduced growth in Silicon Valley, stifled innovation and reduced tax revenues and charitable giving.

The case for breaking up Amazon is also weak at best.  Amazon is huge and has disrupted many industries and firms but large size without abnormal profits is not a reason for antitrust enforcement.    Amazon, aside from the cloud computing division the company, has low profits margins.   Amazon is in stiff competition with many brick and mortgage retail firms including Walmart, Target, CVS and other drug companies. Many of these competitors have higher profit margins than Amazon.  

Sometimes it appears as though the established firm uses anticompetitive methods to prevent competition from an on-line competitor owned by Amazon.  CVS and Target are refusing to honor their customer’s valid requests to transfer prescription to PillPack and Express Scripts has removed PilPack from its network.

The acquisition of Whole Foods by Amazon resulted in a huge shakeup in the grocery industry decreasing stock prices of several firms.  However, Whole Foods only had slightly more than 1 percent of the U.S. grocery market at the time it was acquired by Amazon, hardly a reason for concern.

Warren’s plan potentially treats a large retail firm like Walmart or Kroger differently than Amazon.   Inside a Walmart and Kroger one can find name-brand products and products produced by the store side by side.  Presumably, the same arrangement would be available on the store web page.  Under Warren’s rule, Amazon would not be allowed to put its own brands up next to a competitor’s brands.   Why should it permissible for Walmart to list name and Walmart options on the same shelf or web page and impermissible for Amazon to do the same?

The growth of Amazon by increasing competition has reduced prices to consumers and has kept inflation low.  The growth of Amazon has hurt some retailers but has helped the economy in many other ways.  An antitrust action against Amazon would do more to strengthen many of Amazon’s large competitors and would not clearly benefit consumers who benefit from the low prices offered by Amazon. 

One of the most interesting and innovative aspect of Warren’s anti-trust approach involves regulation of platform utilities, companies that arrange sales from third parties to customers.    Warren, when explaining the platform utility regulation, says companies should not be allowed to umpire and play in the same game.   

The largest adverse impact of the regulation of platform utilities involves competition in the entertainment industry.  The proposal to regulate Internet marketplaces as platform utilities favors the cable industry, Disney, and network TV over Amazon Prime, Apple, itunes, and Hulu and potentially Netflix.  Many of the best current movies and television shows are now produced by Netflix, Amazon and Apple.   These streaming services have increased choices for consumers and have allowed some people to cut the cord with local cable company monopolies.  

Streaming companies are constantly looking for high quality material from independent producers.  These company gets a fixed monthly fee from consumers who buy a subscription.  They don’t appear to guide people away from independently produced shows and movies towards content they finance. I am not sure what could be gained from preventing companies from distributing their own films.

Another area where Warren’s proposal could have a large impact is in competition for Internet related devises inside a home.  Google purchased Nest but there are still several other makers of smart thermostats.   Amazon own Ring but there are still  several other makers of smart doorbells.     There seems to be plenty of competition in this area and little need for an intervention by antitrust authorities.

Concluding Thoughts:

The growth of companies on the Internet has created a lot of competition for older established companies in the brick and mortar economy.   Consumers have often benefited through lower prices and the introduction of new products.     

Two companies, Google and Facebook, have a significant monopoly position in their respective fields.  Both companies have used their monopoly power to obtain abnormal profits, have not properly safeguarded consumer information and have at times used their power to impede competitors.  

Warren’s stringent antitrust approach would curb the power of large Internet firms but would also favor large traditional established companies.  In some cases, it is the large established firm that engages in anticompetitive behavior. Some restrictions on large Internet companies could result in higher prices and fewer choices for consumers.

 A more effective strategy for expanding competition in the Internet industry involves creating incentives for existing large tech firms to compete with Google on search and incentives for existing large tech firms to compete with Facebook on Social Media.

David Bernstein is an economist living in Colorado and the author of a policy primer addressing issues pertaining to student debt, health insurance and retirement income called “Defying Magnets:   Centrist Policies in a Polarized World.”

Modifications of the Affordable Care Act


The Democrats in the House are currently proposing legislation modifying the Affordable Care Act (ACA). This post summarizes and evaluates the new bill in Congress.

Introduction:

The Affordable Care Act (ACA) created state health insurance exchanges to facilitate the purchase of private health insurance by working-age people and their families without offers of affordable health insurance from their employer. The Republicans have attempted and continue to attempt to repeal the Affordable Care Act. The Democrats are considering a wide variety of health insurance reform plans some of which depend on improving state exchanges.

The state exchange marketplaces currently provide health insurance to around 8 million people, a small number compared to the 160 million people covered by employer-based insurance. The relatively small size of state exchange marketplaces partially stems from the eligibility rules and incentives written in the ACA. The size of the two markets also is impacted by the generous tax treatment of expenditures for health insurance by employers.

The Trump Administration and the 2018/2018 Congress made several changes to the ACA, which reduced demand for state exchange health insurance. Congressional Democrats are now proposing a bill, The Protecting Pre-existing Conditions and Making Health Care More Affordable Care Act of 2019, which makes small incremental changes to ACA rules and reverse some but not all recent Trump Administration changes to the ACA.

Go here for the bill:

https://energycommerce.house.gov/sites/democrats.energycommerce.house.gov/files/documents/Health%20Care%20Bill%20Text.pdf

Go here for a useful article on this bill.

https://www.healthaffairs.org/do/10.1377/hblog20190327.894190/full/

Go here for a useful summary.

https://energycommerce.house.gov/sites/democrats.energycommerce.house.gov/files/documents/Health%20Care%20Bill%20Section%20by%20Section.pdf

This paper provides an evaluation of the proposed bill modifying the ACA.

The analysis presented here shows that the proposed legislation makes some incremental improvements, which would strengthen state exchange marketplaces. However, even after the enactment of the new rules employer based health insurance would remain more affordable and probably more comprehensive than state exchange insurance for most of the working-age population. The new rules proposed in this act would still result in ACA state exchanges being a fringe marketplace to the larger employer-based health insurance market.

Summary of the Protecting Pre-existing Conditions and Making

Health Care More Affordable Care Act of 2019

House Democrats have introduced legislation to improve the Affordable Care Act. The main features of the ACA reforms offered by the Democrats are as follows:

· An expansion of tax credits used to subsidize the purchase of health insurance on state exchanges,

· Modification of the definition of “affordable” health care in the rule governing access to tax credits on state exchanges,

· Provide funds for reinsurance for high cost claims,

· Curtail Trump Administration waivers on essential health benefits,

· Reverse the Trump Administration executive order on short term health plans,

· Reverse Trump Administration rules promoting Association Health Plans,

· Several policies expanding ACA enrollment outreach and efforts by the Trump Administration to stifle ACA enrollment.

Analysis:

Issue One: Evaluating the impact of the expansion of the tax credit:

The new bill makes the premium tax credit more generous by capping the percent of income a household would be required to pay for premiums on state exchange policy at 8.5 percent rather than the current level of 9.86 percent.

The new bill also provides for an expansion of the tax credit to households with income greater than 400 percent federal poverty line (FPL) is a step in the correct direction.

The current law does not provide any premium tax subsidy for people in households with income over 400 percent FPL. Around 41 percent of households in the United States have income above this level and are ineligible for any premium tax credit.

The expanded subsidy could in theory attract some higher income households to state exchanges. This expanded subsidy should increase political support for ACA state exchange marketplaces. However, the number of higher income people affected by this change is likely to be small because most higher income people even after all the changes in this bill most high-income households will get better offers of health insurance from their employer than what is available on state exchanges.

The current elimination of the premium tax credit for people in households with income at 400 percent of the FPL leaves many household with a large unanticipated tax bill. The premium tax credit is claimed at the beginning of the year when annual income is difficult to anticipate. The allowable premium tax is based on actual end of year income. Households who earn more than they anticipate and earn more than 400 percent FPL must refund the premium tax credit to the IRS. The expansion of the tax credit could reduce (and depending on how it is structured) eliminate the subsidy cliff where some households owe money to the IRS because they miscalculated their income.

Issue Two: Evaluating changes in the definition of “affordable” in the rule governing eligibility for the premium tax credit.

The affordability rule applied to the premium tax credit is arcane.

Current ACA rules allow taxpayers to claim the premium tax credit if employer-based health insurance is not “affordable.” However, the affordability test is based on the cost of an individual health plan even if the household is larger than one individual.

This interpretation of the ACA was made by the IRS during the Obama Administration because of the exact wording of the statute even though the ACA required the taxpayer provide health insurance to everyone in the household. The IRS ruling is inconsistent with the clear intent of the individual mandate, which involves covering all people in the household.

This change in the definition of premium affordability used to determine eligibility for the premium tax credit will have a different economic impact for small versus large firms because only large firms are subject to the ACA employer mandate. The ACA employer mandate imposes a fine on large firms with more than 50 full time equivalent employees where the fine is based on the number of workers claiming the premium tax credit. Large firms in response to the new definition of affordability would have an incentive to change their insurance policies to assure their ESI offer is affordable under the new law. This might be accomplished by increasing their subsidy of the workers share of the premium payment or by decreasing premiums perhaps by increasing out-of-pocket expenses.

The new affordability definition for employer based insurance increases the number of people eligible for premium tax credits on state exchanges. However, some people who are newly eligible for the tax credit due to the change in the definition of eligibility might still prefer their employer’s health insurance offer to state exchange insurance. This would happen if the “unaffordable” employer offer was better than the state exchange insurance.

People often change jobs during the course of the year. A person with state exchange insurance who gets a new job with an offer of affordable health insurance would still under this proposed bill lose eligibility for the premium tax credit.

Currently, around 8 million people have state exchange health insurance compared to around 160 million with employer-based coverage. I have not seen an analysis of the impact of the expansion in premium tax credits and the new affordability definition on the size of these markets. The discussion presented here suggests the impact of this bill may be small. It would be a fun exercise to merge databases and get an estimate of this impact.

The original definition of affordability based on the IRS interpretation always troubled me. I hope it is replaced with a more rational definition.

Issue Three: Discussing an Omitted Issue the Elimination of the Individual Mandate.

The ACA includes a provision requiring most taxpayers in the United States have continuous health insurance or pay a fine to the IRS. One of the most notable “achievements” of the Trump Administration was the repeal of the individual mandate. The individual mandate was considered vital by many health care economists because it forced people to purchase health insurance prior to becoming sick and helped stabilize health insurance premiums. The individual mandate was unpopular and strongly opposed by conservatives and libertarians who considered it an assault on freedom.

The issue of the repeal of the individual mandate is not addressed in this bill. The omission of a remedy for this problem is most likely due to political considerations.

There are other less politically abrasive ways to facilitate continuous health insurance coverage, which could substitute for the repealed mandate. The existence of a tax credit for the purchase of health insurance and/or a tax credit for contributions to health savings accounts, contingent on continuous health coverage would also increase the size of the insurance pool.

Issue Four: Evaluating a Reinsurance Program

The ACA modification bill includes a provision for reinsurance payments to insurance companies for high-risk and high-cost health care cases. Reinsurance payments are generally structured as payments from the government to private insurers or as transfers among insurers. Direct payments from the government to insurance companies are often attacked as corporate welfare. The Republican Congress has refused to fund risk corridor payments approved as part of the ACA. Litigation on these risk corridor payments has moved to the Supreme Court.

Another more politically attractive way to reduce risks associated with high health care costs would have the government make direct payments to patients who need high-cost care. The government could pay part of the cost of an endocrinologist to reduce expenses associated with chronic diabetes. The government could also pay part of the share of cancer treatments, which often occur out of network. Direct government payments to patients for high cost services that are often out of network could lower the cost of health insurance on narrow network plans and reduce lost revenue from the premium tax credit, which is linked to the cost of premiums.

These direct payments, like reinsurance payments, reduce risk for the insurer and reduce out-of-pocket costs for the patient. Payments for some treatments of a particular disease could reduce the incentive for insurance companies to cherry pick and design plans that would discourage enrollment by individuals with certain diseases.

Issue Five: Trump Executive Orders Undermining ACA State Exchanges

The Trump Administration has issued three executive orders — (1) state waivers for essential benefit coverage in health insurance policies, (2) the creation of short term health plans with substantial coverage gaps, and (3) the creation of Association Health Plans — which undermine the ACA.

Waivers of Essential Health Benefits:

The waivers for insurance covering essential health benefits lowers premiums for some healthy people but worsens the risk pool and increases prices for people seeking health insurance with essential health benefits. Health plans with waivers for essential benefits can lead to coverage gaps for routine procedures and conditions. Narrow network HMOs are a better way to obtain lower premiums than plans that curtail essential health benefits. Again, one way to motivate growth of narrow-network health plans is to provide a government subsidy for limited out-of-network benefits when such services are needed.

Short Term Health Plans:

The primary advantage of short term health plans is their lower premiums. However, coverage is often inadequate with many common procedures not covered. The policies also do not cover pre-existing conditions even though critics of the ACA have acknowledged a need to maintain protections for people with pre-existing conditions. This article does a good job in documenting problems with short term health plans.

Article on Problems with Shot Term Health Plans

https://familiesusa.org/product/seven-reasons-trump-administrations-short-term-health-plans-are-harmful-families

The Democratic bill simply repeals short term health plans.

An alternative approach would allow private short term private health insurance in partnership with Medicaid. The private plan would cover people with pre-existing conditions and cover all essential health benefits up to a $50,000 expenditure limit. This approach would authorize automatic Medicaid enrollment once the $50,000 limit was breached. This new approach essentially converts Medicaid into a reinsurance program. This proposal for a private insurance/Medicaid partnership was outlined in a 2008 paper.

Medicaid Spend Down Rules and a Health Care Reform Proposal

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1162887

The private health insurance/Medicaid partnership approach would be combined with repeal of existing inadequate short term health plans.

Association Health Plans:

The proposed Association Health Plans would allow small businesses to purchase their health plans from an industry group that creates an Association. Association health plans have been tried in the past and have resulted in a lot of fraud and insolvency.

Commonwealth Fund Article on Insurance Scams:

https://www.commonwealthfund.org/publications/issue-briefs/2003/aug/health-insurance-scams-how-government-responding-and-what

Commonwealth Fund Article on Muti-employer Plan insolvency

https://www.commonwealthfund.org/publications/issue-briefs/2004/mar/mewas-threat-plan-insolvency-and-other-challenges

These Trump Administration executive orders by undermining ACA state exchanges assure that employers must play a larger role in providing health insurance to their employees. The Republican party backed by conservative economists was at one point interested in replacing employer sponsored health insurance with market places where workers could directly purchase private health insurance policies. In 2008, Senator John McCain offered a plan where employer tax preferences associated with the provision of insurance were replaced with an individual tax credit for private insurance purchases.

The Republican party no longer appears interested in reducing the role of employer in the provision of health insurance to the public.

Issue Six: The Cost of Annual Re-enrollment

The ACA requires people to reenroll each year. By contrast, people with employer-based insurance remain enrolled until they change jobs.

The annual reenrollment requirement results in state exchanges having large reenrollment costs. This bill seeks more funds for annual reenrollment efforts.

A more effective approach would involve changes to ACA rules that would allow for permanent enrollment. One impediment to permanent enrollment in ACA policies involves the loss of premium tax credits for people once they obtain an offer of affordable employer based health insurance. A second issue leading to annual reenrollment is the fact that premium payments by the individual change with annual income.

Further alterations in the premium tax credit and rules governing eligibility for the credit might be needed to facilitate permanent enrollment in ACA state exchange health plans.

Concluding Remarks:

The concept of state exchange market places for health insurance policies was originally a Republican idea. The Trump Administration is vigorously undermining state health exchanges created by the ACA. Many of the plans offered by the Administration including Associated Health Plans and Health Reimbursement Accounts will result in small businesses playing a larger role in the provision of health insurance to their employees. This creates costs both in terms of time and money for small business owners.

The proposal analyzed here takes some good steps in reversing these Trump Administration policies and includes some other provisions strengthening the ACA. However, even after enactment of these proposals, state exchange marketplaces will represent a small fraction of the market for health insurance. Even after enactment of these proposals, many people will remain ineligible for premium tax credits on state exchanges and the tax advantages associated with employer based insurance will remain substantially better than tax advantages associated with state exchange insurance.

Not all Democrats are in favor of saving and strengthening ACA state exchanges. Both Medicare for all and Medicare for America (a version of Medicare for all with an opt-out provision) would eliminate state exchanges and the need for this bill. This bill and further expansions of state exchanges would be essential if the Democrats chose to add a public option to state exchanges because the public option would decrease the already relatively low demand for private insurance on state exchanges.

Authors Note: David Bernstein retired from the U.S. Treasury in 2012 and became a freelance writer and consultant. He is the author of “Defying Magnets: Centrist Policies in a Polarized World,” https://www.amazon.com/Defying-Magnets-Centrist-Policies-Polarized/dp/179668015X