A Discussion of the Biden Health Care Plan
The health insurance debate in the United States has revolved around three perspectives — repeal and replace the ACA, modify and improve the ACA, and replace the existing system with a single payer plan. Vice President Biden’s proposal aims to modify and improve the ACA.
I understand the view that the most politically feasible and sustainable way to improve health insurance outcomes in the United States is to build on and improve the ACA. However, whether Vice President Biden’s actual plan would improve health insurance outcomes in the United States is a specific question requiring a thorough analysis of the detailed plan.
This memo evaluates and proposes changes to the Biden health care plan.
Summary of the Biden Health Care Plan:
The Biden health plan seeks to expand health insurance coverage and reduce financial exposure for people with health coverage by modifying and extending the Affordable Care Act. The plan is outlined in two papers, one on the Biden campaign web site and the other in a paper titled the Healthy American Program, written by economists at the Urban Institute.
Specific elements of the Bide approach to health care reform outlined in these two papers include:
- Giving Americans a new choice, a public insurance option like Medicare,
- Increased value of tax credits to lower premiums for health plans sold on state exchanges,
- Expansion of coverage to low-income households,
- An expansion of the premium tax credit for the purchase of state exchange health insurance to middle-class families with income over 400 percent of the federal poverty line,
- An increase in the size of the premium tax credit for the purchase of state exchange health insurance for households with income less than 400 percent of the federal poverty line,
- A reduction in out-of-pocket costs by linking premium tax credits for state exchange health insurance plans to the purchase of a gold health plan rather than a silver plan,
- A potential elimination of the employer mandate requiring large employers to provide health insurance to their employees, (This proposal was mentioned in the Urban Institute paper but not mentioned in the Biden proposal.)
- A rule barring surprise medical bills for out-of-network services,
The Biden campaign also has several proposals to deal with other issues including high drug prices, the level of competition, and reproductive rights.
The two central aspects of the Biden health care plan involve the addition of a public and changes to the tax code designed to make the purchase of health insurance more affordable. The proposed public option and proposed tax change are inter-related.
Discussion of the proposed public option:
The public option debate has two components – the use of existing public health programs like Medicaid and/or a new public option to provide health insurance to low-income adults and a new public option both for middle-income people who might not be able to afford health insurance or people who are dissatisfied with their current health insurance.
The discussion of the public option for low-income households is a follow up to a provision in the ACA to expand Medicaid to all adults earning up to 138 percent of the federal poverty line. The Medicaid expansion was originally intended to be a nationwide expansion; however, a 2012 Supreme Court ruling allowed states to opt out of the expansion. 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, tend to be states with the highest uninsured rates. However, even in states which expanded Medicaid enrollment by low-income adults is not automatic and many remain uninsured.
Medicaid expansion has ramifications for state budgets and there is intense political resistance to Medicaid expansion in some states. Also, Congress cannot force states to expand Medicaid because of the Supreme court ruling that this decision belonged to the states.
The proposed Biden public option for low-income people requires states currently providing Medicaid expansion to continue to fund a premium-free public option. It is not clear why states that have refused the Medicaid expansion should get a better financial deal than states that have expanded Medicaid.
Enrollment into Medicaid is not automatic for all people without health insurance under the Biden plan. Biden’s plan mentions automatic enrollment for people interacting with public schools and programs for low-income populations like SNAP. Many states that have expanded Medicaid already use such enrollment procedures and still miss some low-income people who are eligible for Medicaid. Moreover, the enrollment programs would be immediately cut once a new Administration that was not supportive of the new public option gained political power. The reduction in resources for Medicaid enrollment is one reason for the increase in the number of uninsured during the Trump Administration.
The Biden plan contains language indicating that all Americans should be allowed to choose a public option.
“Giving Americans a new choice a public health insurance option like Medicare. If your insurance company isn’t doing right by you, you should have another better choice. Whether you’re covered through your employer, buying your insurance on your own or going without coverage altogether, Biden will give you the choice to purchase a public health insurance option like Medicare.”
Issues related to the creation of a public option, which would be available to anyone who lacks health insurance regardless of income and anyone with health insurance who is unhappy with their current plan is a more complex issue than the expansion of health insurance exclusively for low-income people.
There are many middle-income people with and without private health insurance who might benefit from a public option. Some young adults without employer-based health insurance cannot afford comprehensive health insurance on state exchanges. Some comprehensive private health plans have deductibles and coinsurance rates that are substantially higher than public plans. Some private short-term health plans do not cover essential health services and leave consumers with substantial medical bills. Many middle-income people who either go uninsured or underinsure could improve their health care situations through access to an affordable public option.
The largest potential problem with a public option is that it could crowd out private health insurance, especially private state exchange insurance. Crowding out of private state exchange would reduce competition and choice in state exchange markets, which currently cover only around 6 percent of the working-age population. Currently state-exchange markets in many counties only provide access to one or two private health care providers. A robust widely available public option could further reduce competition in state exchange markets. The actual impact on competition in state exchange markets would also be impacted by Biden’s proposed changes to market and tax rules.
The brief description of the Biden plan on the campaign web sited quoted above appears to give workers with employer-based insurance greater access to the public option than to private insurance on state exchanges. The affordability rule prevents people with an offer of “affordable” health insurance from claiming health insurance the premium tax credit on state exchanges.
The Biden plan does not specify the price of the public option for middle-income people choosing a public option over private plans. A public option that is too inexpensive would likely crowd out private insurance and could lead to a single-payer plan. A public option that is too expensive would not provide a reasonable alternative to inadequate private insurance.
Lower compensation rates to providers give public options a cost advantage over private insurers. However, the lower compensation rates under the public option reduce health care provider income. Some health care providers, especially specialists, refuse to serve patients with the public option. Some rural hospitals in states that have not expanded Medicaid would receive greater revenue. Some hospitals serving large Medicaid populations could also realize higher revenues if the compensation rate on the new public option was larger than the Medicaid compensation.
The lower costs of the public option could reduce costs to the taxpayer if the alternative is the subsidization of private insurance.
The financial impact of a new public health option on both taxpayers and medical care providers depends on the details of the public option and the details of incentives for the purchase of private insurance.
The Biden plan makes three major changes to the premium tax credit. It increases premium subsidies for people with income less than 400 percent of the federal poverty line. For example, the premium limit at the 400 percent threshold is reduced from 9.86% of income to 8.5% of income. It eliminates the current income eligibility threshold for claiming the premium tax credit. Under the Biden proposal, no person purchasing state exchange insurance would pay more than 8.5 % of their income on premiums regardless of their income. It links the premium tax credit to a gold health plan with lower out-of-pocket costs than the silver health plan.
Currently, employers offer employer-based insurance to attract qualified workers. The availability of a more generous state exchange health insurance policy, which is free to the employer, reduces the need for employers to offer this fringe benefit. The more generous premium tax credit offered under the Biden proposal creates incentives for businesses to drop employer-based coverage.
The more generous premium tax credit increases the number of employees who are better off with state exchange health insurance than with employer-based insurance. However, an ACA rule prohibiting employees at firms with an affordable health care option from claiming the premium tax credit will make some people worse off if the firm offers employer-based coverage.
Whether a firm will drop employer-based health insurance coverage due to the more generous Biden premium tax credit depends on the proportion of workers who would be eligible for premium tax credits and the dollar value of premium subsidies employees of the firm will lose if the firm offers employer-based insurance to its employees. The magnitude of the premium tax credit varies with the age, household income, and size of the household of workers in the firm. Firms with a large share of workers eligible for large premium tax credits would still be able to hire workers and would reduce expenditures on worker compensation by dropping employer-based coverage and allowing their workers to claim the premium tax credit.
A firm with a mix of workers with varied ages and incomes has a difficult decision to make. The decision to eliminate employer-based insurance could leave some workers worse off and other workers better off. The changes to the premium tax credit proposed by Biden are more generous to older more established families seeking family coverage than to young adults seeking single coverage.
This tradeoff can be illustrated by considering a two-worker firm. One worker is 60 years old, has a has a family of four, and earns $75,000 per year. The second worker is 30 years old, single with no dependents and makes $60,000 per year. The first worker would likely receive a subsidy of $1,468.75 per year and pay $531.25 towards premiums on a state-exchange health insurance policy. The second worker will pay $409 for coverage and will not receive any subsidy.
Proponents of the Biden plan argue that more generous premium tax credit will result in large savings for many households. Calculations supporting this view are based on a comparison of insurance premiums under the existing premium tax credit to insurance premiums under the new tax credit. This comparison is appropriate for people who are currently obtaining state exchange health insurance and will continue to do so after the tax change. The comparison is not appropriate for people who will move from employer-based insurance to state exchange insurance because their employer eliminated employer-based coverage to allow their employees access to state exchange markets.
Many employers currently pay all or a substantial share of health insurance for their employees. The 2019 employer health insurance survey conducted by the Kaiser Family Foundation found the average employee share of employer-based insurance was 18 percent for self-coverage and 30% for family coverage. The average employee share of an employer-based health insurance policy is $1,294 for single coverage and $6,173 for family coverage. Some workers who currently work at firms that offer and highly subsidize health insurance to their employees will be worse off once the firm eliminates employer-based coverage.
The actual impact of the Biden proposal on the size of state-exchange and employer-based insurance markets depends on whether the final proposal includes the employer mandate. The employer mandate fines firms with more than 50 employees that do not provide health insurance to their employees. The retention of the employer mandate would limit the reduction of employer-based insurance to firms with fewer than 50 employees. The elimination of the employer mandate would allow larger employers with more than 50 full time employees to also eliminate employer-based coverage.
The combination of a more generous employee tax credit and the elimination of the employer mandate could result in a large number of firms dropping employer-based health insurance coverage and increased costs for many households.
The Biden plan has several other tax implications.
Under current tax rules, the premium tax credit is entirely phased out once household income reaches 400 percent of the federal poverty line. People who claim the advanced premium tax credit and end up earning more than 400 percent of the federal poverty line will lose the entire tax credit and end up with a large end of year tax bill. The Biden plan, by removing the phase out of the tax credit at 400 percent of the federal poverty line eliminates unanticipated tax bills from this ACA feature.
The current and proposed premium tax credit increases with income for people with household income below the 400 percent of the federal poverty line. The marginal tax rate also increases with income. The increase in both insurance costs and taxes for households with income below 400 percent of the poverty line penalizes and discourages work.
The Biden plan attempts to insulate households from high out-of-pocket costs by linking the premium tax credit to the cost of a more expensive gold plan instead of a silver plan. This decision increases taxpayer expenditures on the premium tax credit. The more generous premium tax credit would not assist many young adults earning around 400 percent of the federal poverty line who because of their income and age are not eligible for the premium tax credit. Changes to rules governing health savings accounts and high-deductible health plans might be a more effective way to insulate households from out-of-pocket costs.
The decision to link the premium tax credit to a gold plan with lower deductibles and lower out-of-pocket costs than the silver plan will lead to higher premiums. The cost of the higher premiums is borne by taxpayers when households can claim the premium tax credit and is borne by households for households that are not eligible for the premium tax credit.
Suggestions and Concluding Remarks:
The two key elements of the Biden health plan involve the creation of a public option and a more generous premium tax credit.
The part of the plan involving the creation of a public option appears intentionally vague. To better understand the economic impact of an expanded public option we need to have information on who is eligible to purchase the option and the cost of the option for different people. The public option would be more effective if people without private coverage were automatically enrolled.
Tax returns and tax penalties could be used to facilitate automatic enrollment. Taxpayers without health insurance could be automatically enrolled in a public option. The cost of the public option would be loss of some of the taxpayer’s standard or itemized deduction with the actual amount linked to adjusted gross income. Enrollment in the public option would be free for all low-income households without private health insurance coverage. Individuals with income over a particular threshold (perhaps 200 percent of the federal poverty line) could choose a public health plan over a private health plan but would lose some or all deductions.
This loss of a tax deduction for enrollment in the public option would replace the individual mandate.
Currently, some people who cannot afford essential health plans on state exchanges often enroll in short-term health plans that do not provide adequate coverage. Short-term health plans of this type could be eliminated and replaced with a public option paid for by a reduction in the taxpayer’s standard or itemized deduction. Even if comprehensive health care reform cannot be immediately achieved it should be possible to quickly enact a reform eliminating current short-term health plans are replacing it with access to a public option.
Around 156 million people currently obtain health insurance from their employer compared to around 11 million people obtaining health insurance from state exchanges. Many current state exchange markets are small and served by only one or two insurance markets. The impact of the Biden proposal on the relative size of employer-based and state exchange health insurance markets is uncertain. A public health insurance option would increase competition among private firms in state exchange markets. Biden’s more generous premium tax credit could expand state exchange markets if it resulted in employers eliminating employer-based coverage.
The Biden health plan does not address problem caused by the continued dominant role of employer-based insurance. The current system results in employees routinely losing access to coverage if they become unemployed, an especially difficult problem now because of the loss of jobs from the COVID pandemic. ACA rules governing access to affordable health care prevents employees with an offer of affordable health care from claiming a premium tax credit even when state exchange insurance would provide the household with a better outcome than employer-based coverage. A merger of employer-based and state-exchange health insurance markets could in addition to solving these problems increase competition among private insurance firms.
The revised Biden plan should maintain the current linkage of the premium tax credit to silver plans rather than the more expensive gold plan. The economic burden of high out-of-pocket costs to low-income households would be mitigated through other subsidies including a tax credit for contributions to health savings accounts. This approach is likely to be less expensive to taxpayers and could provide greater benefit for people who are not eligible for the premium tax credit and must pay the entire health insurance premium.
A more detailed health insurance plan building on these observations will be available shortly.
David Bernstein, the author of this post an economist, retired from the U.S. Treasury in 2012 and is now living in Denver Colorado. He is the author of a policy primer Defying Magnets: Centrist Policies in a Polarized World.