An Overview of Health Insurance Problems

The health insurance system in the United States is in crisis.  The Affordable Care Act (ACA) reduced the number of Americans without health insurance coverage but still left many households without coverage or substantially underinsured.   The number of uninsured started increasing as soon as President Trump replaced President Obama and more recently skyrocketed due to the economic showdown caused by the COVID epidemic.   The number of people with insurance who are underinsured and face substantial financial exposure is larger than ever and problems associated with inadequate health insurance coverage were largely unaffected by the enactment of the ACA.

This memo describes problems impacting health insurance coverage in the United States.  Its purpose is to lay the groundwork for a health care reform addressing these problems.

Barriers to Health Insurance Access for Low-Income People

The ACA reduced the number of people without health insurance coverage; however, many people, especially low-income people, remained uninsured for three reasons.  

First, enrollment and reenrollment in both Medicaid and state exchanges is not automatic leaving many people who are eligible for health insurance uninsured. This report by Brookings discusses potential advantages of automatic enrollment both for public and private insurance programs. 

Second, the ACA Medicaid expansion was reduced by a Supreme Court decision, which found the decision to expand Medicaid belonged to the states not the federal government.  The Medicaid expansion has been adopted by 38 states and the District of Columbia as of August 2020.  States that had not yet expanded Medicaid like Texas, Oklahoma and Georgia, tended to be states with the highest uninsured rates.  

Third, even in states expanding Medicaid the income threshold for Medicaid benefits is quite low (138 percent of the federal poverty line or $17,608 in most states) leaving many low-income adults ineligible for the program.

The limited scope of Medicaid coverage and the lack of a universal public option leaves many relatively low-income people without employer-based health insurance coverage dependent on the premium tax credit for state exchange health insurance.   The premium tax credit is expensive to taxpayers, especially when insuring older low-income households.  A lower cost pubic option automatically enrolling people without private insurance would be substantially less expensive to taxpayers than subsidies for premium tax credits.

Loss of Health Insurance Coverage During Periods of unemployment:

The overwhelming majority of working-age people and their dependents obtain their health insurance from their employer.  The attachment between health insurance and employment often results in disruptions in coverage during periods of unemployment.  A recent study by the Economic Policy Institute found that around 9.2 million people have lost their health insurance due to the COVID pandemic.  

Many people who become unemployed lose employer-based health insurance either because COBRA, the program used to continue coverage for people with employer-based policies, is unaffordable or unavailable in a bankruptcy situation.  

The most obvious way to reduce the loss of health insurance coverage for people who become unemployed is to reduce the link between employment and health insurance coverage by having employers subsidize health insurance coverage for employers through state exchanges rather than sponsor firm-specific health plans.

Inadequate subsidies for middle-income people lacking employer-based health insurance coverage:

Middle-income people without an offer of employer-based insurance are usually charged much higher health insurance premiums on state exchanges than comparable people with an offer of employer-based insurance.  The current premium tax credit phases out at 400 percent of the federal poverty line, around $50,000 for a single person seeking self-only coverage.  Premium estimates obtained from the Kaiser Family Foundation Health Insurance Marketplace Calculator reveal that a single adult age 35 making around $50,000 per year would pay $5,288, the full health insurance premium for a self-only policy.  By contrast, most firms offering employer-based health insurance pay a substantial share of the insurance premium.  Statistics presented by the Employer Benefits Survey conducted by the Kaiser Family foundation indicate the average employee share of premiums for a single-only policy was around $1,250 in 2019. 

President-elect Biden plans to increase the generosity of the premium tax credit and eliminate the income threshold governing eligibility for the premium tax credit. This proposal would, like the current premium tax credit, leave many young adult single workers paying their entire health insurance premium.  This problem could be resolved by altering the premium tax credit to assure a minimum payment for all workers regardless of income.    

New public benefits or programs have the incentive to partially or totally crowd out private benefits.  For example, the more generous premium subsidies offered under President-elect Biden’s plan create an incentive for some firms to eliminate their offers of employer-based insurance.  The crowd-out incentive could be reduced or eliminated by having the government and employers share premium costs for all workers.

Lack of access to premium tax credit for people with offer of affordable health insurance:

ACA rules do not permit people with an affordable health care offer to claim the premium tax credit for health insurance on state exchanges if they have an offer of affordable health insurance from their employer.  The affordability rule creates an incentive for some firms to drop employer-based coverage in order for other workers to claim the premium tax credit.  A decision to drop employer-based coverage would adversely impact people who don’t qualify for the premium tax credit or are only eligible for a small tax credit.

The IRS definition of affordable health insurance, based on the cost of insuring a single individual, results in family plans from employer-based insurance being unaffordable for many households.   Analysis presented by the Center on Budget and Policy Priorities found the affordability rule increases costs of employer-based health care relative to potential costs for state exchange health care for some low-income households.  

The solution to this problem favored by President-elect Biden and Congressional Democrats involves altering the definition of affordable health insurance.  My preferred approach involves having employers subsidize employer-based insurance on state exchanges and the creation of a partial tax credit for the purchase of health insurance for all workers.  These changes would allow all workers access to the health plan that best suits their needs and budget. 

Increased Deductibles and out-of-pocket health expenses for people with comprehensive health insurance coverage:

Around four of ten employers now only offer a health savings account with a high-deductible health plan.  The higher deductibles reduce insurance plan premiums and provide substantial tax advantages for some households.  However, the deductibility of contributions to health savings accounts is much more favorable to higher-income taxpayers.

High out-of-pocket expenses under high deductible health plans encourage many people to forgo necessary medical procedures or treatments, resulting in future health problems or costs.  Studies have shown the use of health savings accounts and high-deductible health plans substantially reduce use of prescription drugs for chronic diseases. The lack of adherence to prescription drug treatments has contributes to 125,000 deaths, at least 10 percent of hospitalizations, and increased annual health costs ranging from $100 billion to $289 billion.

President-elect Biden proposes to reduce adverse impacts of high-deductible health plans by linking the premium tax credit for the purchase of state exchange health insurance plans to a health plan that imposes lower out-of-pocket expenses on households than the current default state-exchange health plans.   This approach increases premiums for all households purchasing state exchange health insurance.   A less expensive and more efficient way to assist people with high out-of-pocket expenses is through subsidies targeting low-income people and for extra benefits for some prescription drug regimens.

The growth of short-term health plans:

Many middle-income people without an offer of employer-based health insurance and with income near the eligibility threshold for the premium tax credit often cannot afford a comprehensive health insurance.  A Trump Administration executive order expanded the use of short-term health plans and made it easier for middle-income young adults to underinsure.  

Short-term health plans with arbitrary benefit provisions, large deductibles, and no out-of-pocket limits create substantial financial exposure for people they cover. The rules governing the purchase of short-term health plans do not guarantee coverage for people with pre-existing conditions and allow for premiums to be based on the health of the individual applying for insurance.    Since most people seeking short-term health plans are healthy, a shift towards short term health plans results in higher premiums for state exchange plans covering essential benefits.

There have been a number of cases where people covered by short term health plans have, despite their coverage, been responsible for large medical bills. Short term health plans need to be outlawed and replaced with automatic enrollment in either a public health insurance option or a lower-cost private option that covers all essential medical needs.

The growth of narrow network plans and lack of access to top hospitals and networks:   

Many insurance plans have small provider networks and offer limited access to top hospitals and specialists.  The literature on this topic finds that health plans sold through state exchange markets are more likely to have small inadequate networks.   (See a study in JAMA which revealed one in seven ACA health plans did not provide access to in-network doctors in at least one specialty.  Also, see an Associated Press survey which found many top cancer hospitals do not accept people with state exchange coverage.)   The disproportionate number of narrow-network health plans in state exchange markets may be caused by the low number of firms serving many state-exchange markets.

Narrow network health plans with relatively few provider networks also exist in the employer-based market. Some small firms only offer a single possibly narrow-network health plan to their employees.

The problems of narrow networks in state-exchange health markets would be reduced if there were more competition and choice in state-exchange markets.   The level of competition in state exchange markets would be increased by combining state-exchange and employer-based health insurance markets where employers subsidize the purchase of health insurance for their employees on state exchange markets.

There may also have to be some regulation mandating insurance firms provide adequate medical networks because the prevalence of firms with inadequate networks is a factor contributing to surprise medical bill.  

Growth of surprise medical bills:

Surprise medical billing occurs when a person is treated in an in-network facility by a health care provider that is not inside the network.  Out-of-network medical bills can also occur when a person goes out of network because there are no available in-network options.

An analysis of surprise medical bills by the Kaiser Family Foundation, found 18 percent of emergency room visits and 16 percent of in-patient hospital stays involve at least one out-of-network charge.  Surprise medical billing was larger in rural areas and was also affected by differences in level of competition and state regulations. 

In theory, surprise medical billing could be a larger problem for HMOs than for fee-for-service insurance companies because HMOs are designed to provide all service inside their own exclusive network.  Some large HMOs like Kaiser are highly effective at working out these issues.

President-elect Biden as a candidate supported barring “health care providers from charging patients out-of-network rates when the patient doesn’t have control over which provider the patient sees.”   This approach does not reduce incentives for insurance companies to maintain insufficient provider networks or the incentive for specialists to join practices charging higher out-of-network fees.  An outright ban of surprise medical bills could result in the shortage of specialists in some rural hospitals.   Solutions to surprise medical billing probably require some regulation of insurance network adequacy and the creation of some incentives for doctors to refrain from charging high out-of-network prices.

Erosion of ACA during the Trump Administration:

The Trump Administration and the Republican Congress repeatedly voted to repeal the ACA and took several steps to undermine the law.  Effort to repeal the law failed but some Trump Administration actions have undermined the ACA.

The most notable success involved a provision of the 2017 Tax Reconciliation Act, which repealed fines for violating the individual mandate and created a set of legal and economic problems impacting health insurance markets.  The individual mandate discouraged healthy people from opting out of insurance coverage and quickly purchasing health insurance should their health status change.  In the absence of the individual mandate, fewer healthy people would obtain health insurance and more people would take out short-term health plans leaving themselves underinsured.  The decision of healthy people to forego continuous comprehensive health insurance coverage increases insurance premiums and impacts the viability of state-exchange health insurance markets.  The Supreme Court is considering a legal case seeking to invalidate part or all of the ACA because of the zeroing out of fines for the individual mandate.

The Trump Administration executive order allowing people to purchase short-term health plans increased demand for comprehensive health plans on state exchanges.  See discussion of short-term health plans above.

The Trump Administration reduced the budget for advertising and promoting enrollment in ACA state exchanges from $100 million to $10 million.  The best way to mitigate state exchanges from future budget cuts to enrollment efforts is to make the enrollment process automatic.

The Trump Administration cut off direct federal funding for cost sharing on state exchange health insurance plans, although, some cost sharing payments are still available.  Several court rulings have found that insurers are entitled to cost-sharing subsidies that were cut by the Trump Administration.   Future cost sharing payments would be better insulated from political pressures if the payments were made directly to households, perhaps through a tax credit for contributions to health savings accounts, than to insurance companies.

Several  Medicaid waivers approved by the Trump Administration increased premiums for Medicaid recipients, cut some Medicaid benefits and imposed a work requirement of eligibility for Medicaid.   The future role of state waivers to the Medicaid program could be reduced through creation of a public option entirely funded with federal funds.

The Trump Administration has cut risk-adjustment payments to insurers who took on a high number of high-cost patients.   Risk adjustment payments would be better insulated from political pressures if they were made directly to health care providers treating households incurring high health care costs than to insurance firms.

Concluding Remarks:

The ACA initially reduced the number of uninsured Americans by around 20 million people.  However, the number of uninsured increased early during the Trump Administration, largely due to Trump Administration policies, and skyrocketed during the pandemic.   

Moreover, the ACA did not reduce financial exposure of people with health insurance coverage.   Today, people with comprehensive health insurance have higher deductibles and higher out-of-pocket expenses than people 15 years ago because of the growth in the use of high-deductible health plans.  The Trump Administration executive order expanding the use of short-term health plans that fail to cover essential health benefits is creating substantial financial risk for people selecting these bare-bone health plans.

Many of the health insurance problems identified in this memo including the large loss of health insurance in periods of high unemployment and problems associated with the lack of competition in state exchange markets are caused by a tax code that favors employer-based insurance over state exchange insurance. These problems could be resolved or mitigated by tax reforms that partially decouple the responsibility of health insurance from employers.  This could be accomplished by a new rule allowing employers to subsidize health insurance for their employees on state exchange rather than pay for firm-specific health plans and a new tax credit where the Treasury would pay part of the cost of health insurance premiums.  The case for combining the employer-based and state-exchange health insurance markets is made here.

The proposed tax changes differ from the approach outlined by the incoming Biden Administration.   The Biden approach increases the generosity of the premium tax credit but maintains separate employee-based and state-exchange markets.   

The dominant factor increasing the number of uninsured and underinsured people is affordability.   A successful health care reform effort requires the creation of a low-cost public option or a lower cost private option providing comprehensive health coverage.   A comprehensive low-cost private option could only be achieved through cost sharing arrangements with the government.

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