Health Insurance Archives

The Case Against Medicare Advantage

Medicare Advantage plans have significant restrictions on provider choice and a capricious pre-approval process.

It is once again open season for selection of a Medicare plan and the airwaves are insulated with advertisement urging people to select Medicare Advantage over traditional Medicare. The advertisement campaigns for Medicare Advantage are as ubiquitous and as misleading as the advertisements for a political candidate in the closing days of a campaign.

Some Medicare Advantage plans provide good comprehensive health insurance, but some plans are inadequate and the selection of Medicare advantage over traditional Medicare always creates substantial limitations in health care choices and financial risk.

A recent Wall Street Journal article describes the potential catastrophic impacts of the choice of Medicare Advantage on people who choose Medicare Advantage over traditional fee-for-service Medicare. One applicant enrolled in a Medicare Advantage plan found he could not obtain adequate treatment after being diagnosed with prostate cancer and was unable to both switch to a combination of traditional Medicare and Medigap because the best time to purchase a Medigap policy is immediately upon turning 65.

Several government studies, academic papers, and news reports show many Medicare Advantage plans provide limited access to doctors and hospitals.

This article discusses Vanderbilt Health dropping some Medicare advantage plans in Tennessee.

This article discusses the exclusion of some Medicare Advantage plans by a health system in Oregon.

Research summarized here found that Medicare Advantage enrollees in rural areas of California had difficulty obtaining access to specialists.

Another difference between Medicare Advantage and traditional Medicare is that Medicare Advantage plans often require prior authorization for treatments or even to see a specialist while Medicare does not.

A recent survey conducted by the American Medical Association (AMA) found that 94 percent of doctors found prior authorizations delay care, 80 percent of respondents found that prior authorization could lead to patients abandoning a prescribed course of treatment, and one third of doctors stated that prior authorizations led to an adverse medical outcome.

A report by the office of the inspector general from the Department of Health and Human Services found that 13 percent of denials of denials of prior authorization requests by Medicare Advantage plans would have been automatically approved under standard Medicare guidelines. The auditor found in some cases a claim of inadequate documentation by the Medicare Advantage plan was incorrect. Medicare Advantage plans appear to be routinely denying requests for services that the provider deems medically necessary.

Many individuals choose Medicare Advantage plans over traditional Medicare plans to lower premiums and obtain extra benefits. The Biden Administration is finalizing rules targeting misleading advertisements for Medicare Advantage plans.

However, misleading advertisements are not the major problem in this industry. Honest Medicare Advantage advertisement lacks information about the risks inherent to narrow-network health insurance which restricts access to specialists and hospitals and denies requests for medically necessary procedures.

There is considerable support for Medicare Advantage on both side of the political aisle because these plans lower costs to taxpayers and enrollees. Donald Trump signed an executive order expanding Medicare Advantage plan. Medicare Advantage plans were a central feature of the health care reform plan offered by Vice President Harris when she was a candidate for president.

Go here for a better way to balance the need to control costs and provide comprehensive quality health insurance coverage.

Many doctors warn their patients about the risk associated with Medicare Advantage plans but the warnings are drowned out by a barrage of advertisements.

People are making their choice of Medicare plan based on advice from commercials and salespeople rather than health professionals capable of weighing relative risks. Perhaps the best advice on the question of whether one should select a Medicare Advantage plan would be the same advice given by Nancy Reagan to teenagers considering drugs — “Just Say No.”

Authors Note: The author of this newsletter has examined several financial topics including student debt, interest rates, the use of 529 plans to fund a Roth IRA, and the need for people near retirement to prioritize elimination of the mortgage. Please subscribe to Insightful Memos.

Five modifications to the Biden health care agenda

This post describes five policy changes, which would decrease the number of uninsured and underinsured, reduce financial exposure from high out-of-pocket medical costs, and help maintain continuous health coverage during employment transitions.

Introduction:

A previous post evaluated several of the Biden Administration’s domestic policy agendas, including the Administration’s proposals on health care and insurance, student debt and college costs, retirement savings, and the fiscal condition of Social Security.

The evaluation of the Biden Administration’s record on health care found several persistent problems including a high number of uninsured or underinsured people, loss of insurance during economic downturns, and high levels of out-of-pocket costs leading to medical debt or decreased retirement savings have not been fully addressed.

This paper puts forward several new proposals to address these health insurance problems.

Five Health Care Proposals:

Proposal One: Modify tax rules governing access to employer-based Insurance and state-exchange insurance:

Analysis: Current tax rules and regulations result in around 156 million Americans obtaining health insurance through employer-based plans compared to around 16 million people who obtain health insurance through state exchanges. The proposed changes facilitate greater use of state-exchange health insurance.

New rules include:

Tax deductibility of employee benefits for 75 percent of the cost of state-exchange health insurance for each employee.
Modification of employer mandate to facilitate employer subsidies of state-exchange health insurance instead of firm-specific employer coverage. All firms that pay 50 percent of employee costs on state exchanges would satisfy the employer mandate.
A premium tax credit similar to the existing premium tax credit to cover costs for workers without an affordable health insurance option.
Facilitate the purchase of retiree health insurance on state exchanges rather than through existing employer plans.

Advantages of new rules:

Proposal maintains tax-preferred employer payments for health insurance.
Proposal provides access to a wider range of state exchange policies allows workers to find a health plan that matches their needs. Many workers with employer-based insurance have only one insurance option.
The use of state-exchange health plans allows workers to maintain the same health coverage during job transitions including periods of unemployment.
The automatic increases in the premium tax credit due to loss of income from the loss of job facilitate continuous health coverage when a worker becomes unemployed.
Greater use of state-exchange health insurance would make it more difficult for Republicans to initiate plans to weaken or eliminate state exchanges and other ACA innovations.

The possibility that a combination of employer-based and state exchange insurance markets facilitated through tax policy changes might lead to reduced disparities in insurance coverage and continuous coverage through job transitions was discussed here in this blog.

Proposal Two: Modify the use-or-lose provision governing contributions to Flexible Savings Account.

Analysis: Under current rules, contributions to flexible savings accounts that are not used for qualified medical expenditures are forfeited by the taxpayer to the Treasury. The proposed changes would allow the roll-over of unused fund to a tax-deferred retirement plan.

New Rules:

Unused contributions to a flexible savings account will be automatically rolled over into either a 401(k) plan or IRA.
The portion of the ACA that is rolled over into the retirement plan will be taxed as ordinary income.

Advantages:

The proposal encourages greater use of flexible savings accounts, which will reduce the tendency for households to forego necessary health regimens and procedures.
The proposal adds additional retirement savings for workers and reduces the tradeoff between saving for retirement and savings for unanticipated health care costs.

Proposal Three: Replacement of tax deduction for contributions to a health savings account with a tax credit.

Analysis: The current tax deductibility of contributions to health savings accounts provides greater benefits to high-income households than to low-income or middle-income households.

Potential New rules:

Create a tax credit equal to 20 percent of the annual contribution to a health savings account.
The tax credit will not be refundable.

Advantages:

The use of the tax credit will facilitate contributions to health savings accounts by low-income and middle-income people who are now less likely to contribute and may forego medical procedures and regimens due to lack of funds.
Refundable tax credits are plausible but monitoring costs would be high and Health Savings Accounts are probably not the best product for people without taxable income.

Go here for the literature on health savings accounts and high-deductible health plans. It is possible that modification of flexible savings accounts as described in proposal two would be a more efficient approach.

Proposal Four: Replace Short Term Health plans with a more comprehensive low-cost health insurance option.

Analysis: Short-term health plans, which were expanded by executive order under the Trump Administration and remain in place provide suboptimal health coverage. Short term health plans often deny coverage for life-saving procedures, fail to cover many conditions including pregnancy and mental health conditions, and leave households with extremely large bills for short hospital stays. The replacement of short-term health plans with viable comprehensive health insurance would eliminate these situations.

Proposed New Rules:

A new health insurance product consisting of a private health insurance plan with an annual limit on total health care expenditures and automatic access to Medicaid once health expenditures reach their annual limit is created.
Private component of new health insurance product would be priced based on age like current state-exchange policies.
Private component of nee health insurance product would cover all essential health benefits like current state exchange health plans. Reasonable deductibles and coinsurance obligations would be allowed and encouraged.
Current short-term health plans which allow for underwriting based on health status, deny essential health benefits, and allow for exclusions based on previous health conditions would be prohibited.

Advantages:

The replacement of short-term health plans with this new low-cost private/public health option would reduce the number of people who were uninsured or underinsured.
The private/Medicaid option provides access to more doctors and specialists than a pure Medicaid option.
The private/Medicaid combination could prove to be less expensive to both federal and state taxpayers than the pure Medicaid option.
The premiums on the private health plan should be reasonable because of the annual limit and cost sharing obligations. The lower premiums would reduce the loss of tax expenditures to the Treasury from government health insurance subsidies.

Go here for a short post on the problems with short-term health plans.

The idea of combining private insurance with an annual expenditure limit with automatic access to Medicaid for patients that exceeded the annual limit is conceptually similar to rules governing access to Medicaid benefits for nursing homes. The proposal was outlined in this paper found at SSRN.

Proposal Five: Facilitate necessary out-of-network treatments of difficult to treat conditions.

Analysis: The passage of the Affordable Care Act (ACA) increased the need to control health care costs and insurance premiums. Narrow network health plans are a popular option on state exchanges for people and plan sponsors seeking to reduce premium payments. However, access to health services in narrow-network plans is often limited, especially in plans with few specialists and a narrow geographic scope.

Proposed Reforms:

Improved network adequacy regulations,
Expanded dispute regulation procedures to cover all medically necessary out-of-network procedures,
Additional government subsidies for certain high-cost medically necessary health care procedures

Advantages:

All three approaches have merit but the improvements in network adequacy and the expanded dispute resolution will increase costs to the insurance plan.
The proposal to expand existing state-level network adequacy regulations might be difficult in states with a relatively small number of providers.
The proposal for expanded dispute regulations procedures could be implemented through modification of the No-Surprises Act.
An additional limited government subsidy for high-risk high-cost cases would reduce insurance costs and premiums.

This issue could partially be addressed by expanding the No-surprises act but I argue here that additional subsidies for high-cost cases, which require an out-of-network specialists would also be beneficial.

Find more details on these policy proposals in a paper A 2024 Health Care proposal.

Insurance Company Abuse of the Medically Necessary Decision

Health Insurance companies often deny benefits for health services that they deem medically unnecessary even when there is no other option and even when the option may be cost effective in the long term. This post examines insurance company abuse of the medically necessary determination and potential policy responses.

Background: Insurance company denials of claims based on the view that the procedure is not medically necessary is widespread and can involve serious life-threatening health care cases.

This Kaiser Family Foundation article shows many requests for benefits are denied and the denials for medical necessity are seldom challenged.

A denial based on the view that a procedure is medically unnecessary can occur when a patient is in great pain and faced with a life-threatening condition. This ProPublica article describes a decision by United Heath Group to deny the only viable treatment for a patient suffering from a severe case of ulcerative colitis.

Symptoms of the disease for this patient included severe arthritis, diarrhea, fatigue, and blood clots. The medical bills were running $2.0 million per year. Bills of this magnitude are not unusual for new biologic drugs. The expensive drugs were the only therapy that worked. The patient could not function and would die without the treatment.

The family responded with a lawsuit, which revealed that employees at United Health Group misrepresented findings and ignored warnings from doctors about risks of altering an expensive drug treatment.

The amazing ProPublica article, reveals that insurance companies will basically lie to avoid expensive claims. The denial in the ulcerative colitis was motivated by the cost of the drug. The insurance company was willing to lie and commit fraud to avoid paying for the expensive treatment.

Insurance companies will also resist making claims when a procedure is economical in the long term. For example, insurance companies have denied patients access to the Coflex medical devise for spine surgery even though there is evidence that the procedure is safe and actually cost effective compared to other procedures.

The denial of benefits in the Coflex device decision was motivated by a desire to force or encourage people with expensive back problems to switch to a different more expensive insurance plan. This process of tailoring benefits away from people who are likely to be big health care spenders or denying benefits for expensive health conditions is a practice call “Cherry Picking.”

Policy Implications: The ACA eliminated lifetime and annual health expenditure limits under insurance plans. Insurance companies responded by restricting access to care and by deeming more procedures medically unnecessary.

One response to this problem might be to move the decision on whether a process is medically necessary to an independent board outside of the insurance company. I doubt this would work.

Most people currently don’t appear adverse decisions and insurance companies have much more resources for the appeal process. However, moving the appeals process to an external board might speed up decisions and encourage more people who are denied benefits to appeal the decision. A streamlined appeals process can be extremely important when the patient has been approved for a less expensive option but is appealing for access to the newer potentially better procedure. (This occurs with denials of access to the Coflex medical devise because patients are often approved for a less expensive, less effective surgery that does not involve use of the device.)

A second more practical approach is to have government pay part of the cost of the most expensive health care procedures through a reinsurance program. I might have government pay 50 percent of all health care costs over $100,000. This type of cost-sharing arrangement would result in several benefit – including lower premiums and tax expenditures on the private health plan, decreased demand for short-term health plans that do not provide comprehensive coverage, and a reduction in claim denials.

An increased use of expensive biologic drugs will lead to either higher denials as discussed in the ProPublica article or higher health insurance premiums. This problem can only be resolved by a partnership where the costs of these high-cost cases is shared with taxpayers.

My first paper on the use of reinsurance to improve health insurance options and increase access to health care can be found here. A cost-sharing program is part of my 2023 Health Care Reform proposal. Go here for a quick outline of the proposal.

A 2024 Health Care Agenda

Progress on health care and health insurance appears to be two steps forward followed by one step back. This memo outlines ongoing health insurance problems and proposed solutions.

Introduction:

The ACA reduced the number of people without health insurance coverage by creating state exchange health insurance markets and expanding Medicaid coverage. The Biden Administration expanded the premium tax credit for state exchange insurance and facilitated additional continuous Medicaid coverage. However, the Biden-era reforms will lapse.

The enhanced premium tax credit will remain in place through 2025. A Covid-era program facilitating continuous Medicaid coverage expired April 1, 2023.

Many health insurance and health care problems persist. Some appear to be worsening.

Cost sharing, including deductibles, maximum allowable out-of-pocket limits, and coinsurance rates, for people with comprehensive health insurance coverage has increased for decades.

People with employer-based health insurance are still susceptible to a loss of health insurance coverage, increased premiums, and additional out-of-pocket costs during job transitions. Loss of coverage and increase uninsured costs will still routinely rise during recessions.

Middle-income adults with state-exchange insurance still pay substantially higher premiums than middle-income adults with employer-based health insurance.

Workers at firms with relatively few health insurance options are usually ineligible for the premium tax credit for state exchange insurance and are often locked into a policy that is not best suited for their needs. (The Biden administration did eliminate the family glitch impacting the affordability of family-plan state-exchange policies. However, many families with an offer of employer-based insurance are still precluded from claiming the premium tax credit for state-exchange policies even when the state-exchange policy is superior to the employer-based policy.)

Many households unable to afford comprehensive health insurance have purchased short-term junk insurance policies that leave them de-facto uninsured and exposed to high medical expenditures.

Despite passage of the no-surprises act many households are still receiving bills from out-of-network providers, especially out-of-network specialists at in-network facilities.

Many narrow-network health insurance plans do not provide sufficient access to top hospitals or specialists.

The memo outlines potential policy responses to these health insurance problems. A more in-depth discussion of the problems and proposed solutions can be found in A 2024 Health Care Reform Proposal available at Kindle.

Potential 2024 Health Care Policy Proposals:

Proposal One: Modify Rules Governing Health Savings Accounts and Flexible Savings Accounts to mitigate problems associated with higher cost sharing between insurance companies and households.

Issues: Health plan deductibles and other forms of cost sharing between insurance companies and households have been increasing for the last two decades. Many low-income and middle-income people either cannot afford to fund their health savings account or can only fund the health savings account by reducing contributions to their retirement accounts. The growth of out-of-pocket health care expenses has resulted in higher levels of medical debt, has caused some people to reduce savings for retirement to fund health savings accounts or flexible savings accounts and has resulted in many people foregoing necessary medical procedures and drug regimens.

Potential Solutions:

Many of the problems associated with the use of high-deductible health plans, health savings accounts and flexible savings accounts can be remedied with changes to tax rules. Proposed changes include:

Expand eligibility for contributions to health savings accounts to people with health plans that have modest deductibles and other forms of cost sharing including high coinsurance rates and high deductibles.

Replace the deductibility of contributions to health savings accounts with a tax credit to better assist low-income and middle-income households. Alternatively, provide a tax credit for contributions to health savings accounts for low-income households and deductibility of contributions for households with income greater than a specific threshold.

Modify rules governing unused funds in flexible savings accounts to allow individuals to transfer some unused fund to an Individual Retirement Account or a 401(k) plan.

Proposed changes to rules governing high-deductible plans and health savings accounts could improve health outcomes and financial security and could increase retirement savings.

Proposal Two: Modify rules governing the premium tax credit for state-exchange insurance and the employer mandate to maintain continuous health insurance coverage during job transitions and to reduce disparities in health insurance outcomes and costs.

Issues: The existence of separate employer-based and state-exchange health insurance markets causes disruptions in coverage during job transitions and disparities in health insurance costs and outcomes. Three issues need to be addressed.

Most people with employer-based insurance must find new health insurance or experience a disruption in coverage during a job transition. Loss of health coverage is always high during economic downturns.

Middle-income young adults with state-exchange health insurance pay substantially more in health insurance premiums than a similarly situated middle-income young adult with employer-based coverage.

Many people with employer-based coverage are ineligible for the premium tax credit for state exchange health insurance even if the employer-based plan is not the best plan for the household.

Proposed Solutions:

Allow employers to contribute to the purchase of state-exchange health insurance instead of purchasing employer-based health insurance.

Allow for conversion of employer-based insurance to state-exchange insurance when employees are being laid off.

Create a new tax credit covering part of the cost of state-exchange insurance for workers at small firms with income less than 400 percent of the federal poverty line.

Maintain a premium tax credit that limits workers share of premiums to 8.5 percent of income.

Modify the employer mandate to guarantee a minimum subsidy of premiums by large employers. The combination of the new tax credit and the employer subsidy will pay the entire health insurance premium for most households. Some low-income households would be eligible for additional assistance through the premium tax credit.

Proposal Three: Outlaw most short-term health insurance policies and create a new private/public low-cost health insurance option.

Issues: A 2019 Trump Administration rule expanded the use of short-term health plans which did not cover essential health benefits. Many problems are associated with the use of short-term health plans.

Short-term health insurance plans provide extremely limited coverage. Common problems include – (1) Denials of benefits for life-saving procedures (2) Strict limits on reimbursements for hospital stays, surgeries and for doctors. (3) Denial of benefits by requiring extensive documentation after a procedure has been conducted. Short-term health plans often lack coverage for pharmaceutical benefits, maternity benefits, and mental health services. People with short-term health plans can often not obtain needed health services or have large financial exposures if they become ill.

Insurance companies are allowed to deny short-term coverage to people with pre-existing conditions and to base premiums on the health status of the individual. As a result, the existence of the short-term market undermines the state-exchange markets.

Potential Solutions:

Abolish all health plans that do not provide coverage for essential health benefits as defined by the ACA.

Create a new lower-cost health plan that imposes an annual health expenditure limit.

Allow automatic enrollment in Medicaid for people with the new low-cost plan that meet the annual limit.

Limit enrollment in the new low-cost health plan to people who cannot afford current state exchange plans with no annual limits.

The combination of private insurance with an annual limit with public insurance coverage above the limit could in principle be applied to all workers. Such an approach would lower costs and provide universal coverage while maintaining private control over health decisions.

Proposal Four: Create additional regulations to limit surprise medical bills and assure that insurance companies provide adequate provider networks.

Issues: Increasingly, health insurance and employers are attempting to reduce health expenditures by limiting access to providers. Many health insurance policies impose higher deductibles and higher cost-sharing for out-of-network services. HMOS prevent consumers from ever going out-of-network. (This approach is in many ways unique to the health insurance and health care industries. In most instance, competition is increased, and prices decreased when consumers have access to many service or good providers.)

Consumers with a narrow-network health plan are most likely to experience a surprise medical bill when they are forced to go outside their network for emergency services or when they go to an in-network facility that hires out-of-network providers. A recently enacted no-surprises law attempts to reduce unexpected costs when consumers are forced to go out-of-network.

The no-surprises law does not fully address issues caused by narrow-network health plans.

The no-surprises law allows consumers to waive their rights to an in-network provider at facilities that offer both in-network and out-of-network providers. It is often difficult to obtain timely non-emergency service without hiring at least on out-of-network provider.

Health care facilities often enter and exit a network. In some part of an in-network facility could be out-of-network. (I recent found that the hospital scheduled to give a biannual heart stress test was inside the network, but the radiology department was outside the network.)

The responsibility of determining whether a network is inside or outside of the network lies on the individual consumer, not the insurance company or the provider. Sometimes information obtained from the insurance company or the provider about network status is incomplete or not up to date.

Some people with narrow-network plans often have a hard time obtaining access to specialists. This problem is most severe for extremely narrow specialties and in rural areas.

Many narrow-network plans do not offer access to top hospitals, especially cancer hospitals.

Proposed Solutions:

Create rules requiring insurance companies to provide reimbursement to all providers working at in-network facilities.

Create and enforce additional network adequacy regulations.

Require insurance companies to cover expenses for all providers working at an in-network facility.

Expand dispute resolution rules under the no-surprises act to cover all out-network situations, especially those involving use of specialists.

Create an insurance subsidy for high-cost health expenditures couple with a requirement that insurance companies provide greater access to top hospitals and specialists.

The recently enacted No-surprises law had bipartisan support. However, the approach leaves many problems associated with narrow network health plans unresolved and does not incentivize insurers to broaden their networks.

Concluding Thoughts: The 2020 health care debate in the Democratic Party involved a discussion on the merits of modifying the ACA versus the merits of replacing the existing health care system with a single-payer system. The single-payer option was both politically and economically unfeasible. The Biden-era modifications to the ACA did not result in meaningful permanent changes to health insurance or health care.

The Biden-era changes to the premium tax credit lapse in 2025. The changes in Medicaid eligibility rules, under the Covid emergency, expire in April 2023. Problems related to cost sharing and high deductibles persist and were not addressed. The issue of future loss of insurance coverage during economic downturns has not been addressed. Despite elimination of the family glitch many disparities in health care price and outcomes persist due to the separation of state-exchange and employer-based health insurance outcomes. Short-term junk health insurance problems still exist. The No-Surprises Act addressed some but not all problems associated with narrow-network health plans.

Long-term permanent solutions to health care problems can only be achieved if the Administration prioritizes health care over other concerns, including the spending in the Build Back Better Bill, some of the proposals for discharge of student loans, and even the expansion of the child tax credit. Several of the health insurance reforms discussed here deserve prioritization over other proposals because the reforms also enhance financial and retirement security.

David Bernstein is the author of the 2024 Health Care Reform Proposal, a memo that is available at Kindle. This paper does a good job discussing the academic literature and providing background on the health insurance problems and policy proposals outlined in this memo.

True-False Questions from the 2024 Health Care Reform Proposal

Test your knowledge on the continuing health insurance reform debate.

The true-false questions presented here are fully explained in the memo A 2024 Health Care Reform Proposal.

Questions:

High-deductible health plans coupled with health savings accounts are more likely to prevent a $25,000 to $50,000 out-of-pocket health expense than short-term health insurance.
The sum of deductibles and worker share of premiums has decreased since the passage of the ACA.
Tax preferences associated with health savings accounts are smaller for low-income people than for high-income people.
The Senate could make major changes to the tax-treatment of employer-based insurance and the premium tax credit based on a majority vote.
Short-Term health plans provide great protection if total health expenditures remain below the annual cap.
The ACA guarantees that people purchasing state-exchange health insurance have access to top cancer hospital if they get cancer.

Answers and Discussion:

True. High-Deductible health plans cap out-of-pocket health expenditures. The current out-of-pocket limits are $7,050 for an individual policy and $14,100 for a family policy. The arbitrary benefit exclusions on short-term health plans can lead to large out-of-pocket expenses for relatively minor health problems.
False. The sum of deductibles and worker shares of premiums has risen since passage of the ACA.
True. HSA contributions are deductible. The value of the deduction is determined by marginal tax rates. This disparity could be eliminated by replacing the HSA tax deduction with a tax credit.
True. if done through the tax reconciliation process. Several tax changes are proposed in the book including the tax credit discussed above and the replacement of the tax subsidy for employer-based health insurance with an employer subsidy of state-exchange insurance.
False: A three-day stay in the hospital could result in thousands of dollars of health expenses for people covered by a short-term health plan. The book points the reader to some papers that found problems associated with short-term health plans could be rectified through reinsurance subsidies or by allowing automatic access to Medicaid for people covered by a policy with an annual cap.
False. In fact, state-exchange health insurance policies tend to have narrower provider networks than employer-based health insurance policies. The book discusses how issues related to narrow network policy might be addressed through network adequacy regulation, expansion of the No-Surprises Act and new subsidies.

I am not looking forward to a 2024 debate between advocates of Medicare for all and people who want to tinker around the edges of the ACA. The memo A 2024 Health Care Reform Proposal makes the case for a centrist-flavored overhaul of health insurance in the United States.

Health Policy Memos: Elimination of short-term health plans

People with short-term health plans often experience catastrophic financial losses despite their insurance coverage. Alternative insurance plans and cost-sharing arrangements that reduce insurance premiums and provide more complete financial protection are considered here.

Background on Short-Term Health Plans:

A short-term health plan is a health plan that does not provide the essential minimum benefits offered by ACA compliant health plans on state exchanges or through employers.

Unlike state-exchange and employer-based health plans, insurance companies can refuse to sell short-term plans to people with pre-existing conditions.

Also, unlike state-exchange and employer-based health plans insurance companies can base premiums on a person’s health status.

A recent report by the Democratic staff of the House Energy and Commerce Committee and a paper by the Kaiser Family Foundation paper identify several general problems with short-term health plans. These problems include:

Denials of benefits for life-saving procedures including treatments for cancer and heart surgery.
Strict limits on reimbursements for hospital stays, surgeries and for doctors. Limits include $500 per policy period for doctor visits, a $1,000 daily limit on hospital reimbursements, a $500 maximum for emergency services, and a $2,500 maximum for surgery services.
Denial of benefits by requiring extensive documentation after a procedure has been conducted,
Rescission of coverage
Lack of automatic renewability. By contrast, since 1996 federal law guaranteed renewability for all other individual health insurance plans.
Existence of annual and lifetime benefit caps. Caps on other plans are prohibited by the ACA.
No annual cap on cost sharing, another departure from ACA rules.
No minimum loss ratio. ACA plans have a minimum loss ratio of 80 percent.

A second paper by the Kaiser Family Foundation discusses the extent to which short-term health plans covered mental health services, substance abuse, outpatient prescription drugs and maternity care. The paper found that:

43 percent of plans lacked coverage for mental health services, 62 percent did not cover substance abuse, 71 percent did not cover out-patient prescription drugs and no plans covered maternity care. In seven states all available short-term health plans lacked coverage in all categories.

An issue brief written by IHPI concludes increased use of short-term health plans will result in increased coverage gaps for pregnant women.

The literature provides numerous examples of people with short-term health plans being responsible for large bills despite ostensibly having insurance.

The report by the Energy and Commerce committee describes several situations. In one a patient received a $14,000 bill for two-day hospital stay for pneumonia. In another the short-term policy only paid $7,000 on a $35,000 bill for an emergency procedure.
A CBPP paper citing work by the American Cancer Society Action Network found that a person with a short-term health plan diagnosed with breast cancer would pay $40,000 to $60,000 out-of-pocket compared to less than $8,000 for a person with an ACA marketplace plan.

Are short-term health plans beneficial?

Most economists oppose government restrictions on financial products that leave low-income people exposed to substantial financial risk. This laissez-faire attitude resulted in the use of subprime mortgages large levels of mortgage defaults and a catastrophic financial collapse.

Most economists also do not oppose the use of short-term health plans based on their view that some insurance is better than no insurance.

My view is that many people with short term health insurance plans including the person with a $60,000 out-of-pocket bill for breast cancer and the person with a $25,000 bill for emergency room services are de-facto uninsured.

Short-term health plans with arbitrary benefit packages and large gaps of coverage do not effectively limit household financial risk. By contrast, high deductible health plans HDHPs, discussed here, require considerable cost sharing do cap total risk.

The expansion of short-term health plans facilitated by the Trump Administration executive order does more than unnecessarily increase financial risk for households that choose short-term health plans. The plans will attract younger healthy adults who receive pay all or most of their state exchange health insurance premium. (The premium tax credit for state exchange health insurance is age-rated leaving many middle-income young adults are responsible for their entire premium. Go here for a discussion of this issue.)

Short term health plans are a bad product that creates additional problems for society.

The growth of short-term policies creates unmanageable risk for policy holders, creates coverage gaps for women who get pregnant, and weakens state-exchange markets.

Alternatives to short-term health plans:

A strong case can be made for prohibiting insurance contracts with vague arbitrary features or contracts that often fail to protect individuals from catastrophic losses. Such a prohibition would increase the number of uninsured but decrease the number of people with insurance who are de-facto without protection.

The most effective way to reduce use and problems from short-term health plans is to create viable lower-cost comprehensive alternatives to short-term health plans.

A lower-cost catastrophic but comprehensive option:

A proposal offered by Senator Alexander and Senator Murray for a new catastrophic health plan offered on state exchanges would substantially reduce premiums and would provide much better coverage than short-term plans. The catastrophic option would have high deductibles and higher cost sharing but would not allow for the arbitrary benefit exclusions that characterize short-term plans. Catastrophic plans of this type could be improved by the expansion in health savings accounts proposed here.

Reinsurance or Medicaid above an annual cap.

Short term health plans reduce costs by imposing annual and lifetime limits on reimbursed health expenditures; however, the annual limits eliminate access to health services and increase financial risk for people with health expenditures above the limit.

One way to keep premium reductions achieved from annual and lifetime reimbursement limits and still protect patients that reach the limit is to allow access to Medicaid once the limit on the health plan is reached. This type of cost-sharing arrangement was first described in this SSRN paper.

It should be possible for the Biden Administration and certain states to implement cost sharing through a Medicaid waiver, which allows states to use Medicaid funds to pay health expenditures for people with health expenditures over their annual cap.

A Public Option:

Another way to eliminate inadequate short-term health insurance plans is the creation of a public option through increased access to Medicaid or Medicare.

Existing public options provide comprehensive health insurance and quick reimbursements to health care providers. Medicaid and Medicare reimbursement rates are low compared to many private insurance plans and some providers do not accept Medicaid or Medicare.

There is also concern that a widely available public option could crowd-out private insurance. However, the combination of a public option and a more generous subsidy for health savings account contributions would likely not crowd out private insurance if the HSA subsidies were only available for people with private insurance.

Concluding Remarks:

Most economists with their pro-market even laissez-faire approach do not support prohibitions against less than complete financial products. These economists did not appreciate the damage done by the growth of the subprime mortgage market and do not currently appear to understand problems created by short-term health insurance plans.

Short-term health plans undermine state-exchange insurance markets and have crowded out proposals for the creation of more viable low-cost insurance options. The adage “some insurance is better than no insurance” is glib advice when arbitrary benefits do not cover serious health problems and the cheap insurance product undermines the market for comprehensive insurance.

Health Policy Memos: Expanded coverage for medically necessary out-of-network procedures

The No-Surprises-Act provides some protections to people receiving surprise medical bills from consumers inadvertently receiving out-of-network care but does not cover many medically necessary out-of-network procedures even when the procedure is not offered in a narrow medical network. An expansion of the No-Surprises Act and some additional federal subsidies for medically necessary out-of-network procedures would alleviate problems with narrow network health plans in a cost-efficient manner.

Background on the No-Surprises Act:

The No-Surprises Act provides protections against surprise medical bills, expenditures on health services inadvertently received out of network.

The scope of the law is extremely limited because the definition of a surprise medical bill is narrow, and many medically necessary out-of-pocket procedures remain uncovered or subject to higher cost-sharing terms even when the procedures are not offered inside a network.

The No-Surprises Act does not cover many medically necessary health care procedures that may not be offered or covered by a narrow-network health care plan.

Surprise medical bills usually occur when patients receive care from an out-of-network emergency room or are admitted to a hospital after the emergency room visit.

Other surprise medical bills include services performed by out-of-network providers who work at in-network hospitals.

The No-Surprises Act pertains to ambulance for air transportation but not for transportation for ambulance by ground transportation.

An article by the Kaiser Family Foundation describes the provisions of the No-Surprise Act. The No-Surprises Act does the following:

Requires insurance companies cover out-of-network claims for surprise medical bills and apply in-network cost sharing arrangements.
Limits charges on surprise medical bills to the in-network cost sharing amount.
Creates negotiations and independent dispute resolution between the insurance firm and the provider on the remaining bill for the surprise medical bill.
Allows some providers to request patients waive their rights under the No Surprises Law.
Requires both the insurance plan and the provider to identify health expenditures that are surprise bills.

The law does not guarantee the automatic elimination of all surprise medical bills. If a medical bill is not flagged as a surprise medical bill the patient must apply for protections under the act. Go here for a CNBC discussion of the appeals process.

The No-Surprises Act pertains both to PPOs that require higher cost sharing for out-of-network health services and to HMOs that do not provide any compensation for out-of-network services.

Analysis of limits of Narrow-Network Health Plans:

The passage of the Affordable Care Act (ACA) created a trend towards the greater use of narrow-provider health plans, especially on the plans sold on state-exchange markets. One study found narrow plan substantially reduced both insurance premiums and federal subsidies on insurance premiums.

However, the use of narrow network plans instead of broad network plans creates financial risks and impedes access to health care

One study published in JAMA found that 15 percent of plans were deficient in at least one specialty.
One study published by the Journal of Oncology found that narrow-network health plans were more than twice as likely to exclude doctors affiliated with the top cancer hospitals.
One study published in Health Affairs found that narrow health plans had substantially fewer mental health providers and that the lack of coverage would likely lead to insufficient coverage for mental health conditions.

The growth of narrow-network plans may increase disparity between access to health care in rural versus urban or suburban areas.

Potential policy solutions to issues cause by narrow-provider networks:

Narrow-network health plans reduce costs and premiums but also result in reduced access to health care when the narrow network does not provide a service or higher costs when the patient obtains services outside of her network. This paper discusses policies that would expand access to service to out-of-network medically necessary health care procedures when the services are not available in a narrow network, while retaining the cost efficiencies achieved by the narrow network plans.

This article by the USC-Brookings Schaefer Initiative for Health Policy looks at two policy initiatives – the regulation of the adequacy of provider networks and dispute resolution measures similar to those in the No-Surprises Act.

A network adequacy regulation might be based on maximum travel time to distance to see a specialist, the ratio of provider to enrollees, or the maximum appointment wait time.

These regulations are insufficient for highly specialized health care procedures. Many surgeries and procedure are best done by doctors with narrow skills including cardiac surgeons and doctors, pediatric surgeons, and eye surgeons. It would be extremely difficult to create a regulatory procedure requiring inclusion of narrow specialists in each network, especially in small markets when few specialists were available.

Network adequacy regulation does not facilitate access to top cancer hospitals which are often excluded from narrow-network plans.

The Brookings paper favors a dispute resolutions procedure to allow for access to outside specialists for out-of-network services when medically necessary. The dispute resolution process for medically necessary out-of-network procedures would be patterned after the dispute resolution procedures established in the No Surprises Act.

Both the proposed network adequacy regulations and the expanded dispute resolution procedures would increase costs for narrow network health plans.

An alternative or additional approach used to facilitate access to medically necessary out-of-network health care procedures involves a federal subsidy for medically necessary out-of-network procedures.

The new subsidy would increase demand for less expensive narrow health care plan and this shift toward narrow plans would reduce federal subsidies on ACA state exchange health insurance thereby offsetting part of the cost of the subsidy. The new subsidy could involve reinsurance compensating insurance companies for high-cost health care cases.

Concluding Remarks:

Narrow-network health plans do a good job in reducing health expenditures, premiums, and federal subsidies on premiums; however, these plans deny many households access to medically necessary out-of-network health. Expansion of the dispute resolutions measures created by the No-Surprise-Act and new federal subsidies for medically necessary out-of-network health procedures could mitigate some of the problems associated with narrow-network health plans and expand their use.

Health Policy Memos: Improving Outcomes from Health Savings Accounts and High Deductible Health Plans

People using high-deductible health plans (HDHPs) are often unable to fund a health savings account (HSA), have substantial financial exposure, and often skip necessary medical procedures and regimens. This post explores proposals designed to reduce these problems.

Introduction:

High-Deductible Health Plans (HDHP) coupled with Health Savings Accounts (HSAs) are the only health plans offered by around 40 percent of employers. This combination can reduce premiums, provides a saving in taxes, incentivizes some people to save on health care, and creates a potential new source of savings for retirement.

This type of health insurance arrangement also creates health and financial tradeoffs, which are most severe for low-income and mid-income households.

HDHPs and HSAs often incentivize people to forego necessary health care procedures and regimens. Studies have shown financial factors result in a lower utilization of prescription drugs for chronic health conditions,
The existence of HSAs to fund high deductibles causes some people to choose between funding their HSA or funding their 401(k) plan,
Some young healthy adults paying the full premium on their health plan may choose to go uninsured or may choose a short-term health plan creating financial risk.

These problems can be rectified by changes in the rules governing HSAs and HDHPs and the creation of additional financial incentives.

Potential Policy Responses:

Three policy changes designed to mitigate problems associated with HDHPs and HSAs are proposed and discussed. Potential modifications include:

A refundable tax credit for HSA contributions,
Expanded eligibility for HSA contributions for additional cost-sharing insurance plans,
Regulations expanding pre-deductible insurance payments for some prescription drugs

These potential modifications are discussed in turn.

Tax Credit:

The current HSA subsidy allowing deductibility of contributions is more generous for households with high marginal tax rates. There are multiple ways to modify the tax treatment of HSA contributions to augment and stimulate contributions to HSA plans by lower-income or middle-income households.

A refundable tax credit of $2,000 for HSA contributions up to $2,000 combined with the elimination of the tax-deductibility of HSA contributions would eliminate the disparity in benefits from HSAs across income groups. The tax credit would cause other beneficial outcomes:

The increase in HSA contributions for low-income households would assist people most likely to have payment problems due to medical expenses.
The tax credit, which is only available for people with comprehensive private insurance, could reduce the number of people choosing to go uninsured or choosing Medicaid over private insurance.
The proposed tax credit, if it did not vary with income, would not discourage work.

The economic impacts of the final tax credit depend on the details of the proposal and could impact and be impacted by other tax credits in existence and under consideration.

A tax credit for HSA contributions could be enacted through by majority vote through the tax reconciliation process.

Alteration of Eligibility Requirement for HSA Contributions:

Current tax law restricts HSA contributions to people with a qualified HDHP. The proposed change to tax law would allow HSA contributions for people with high-coinsurance rates even if the plan had a modest deductible.

Health plans with high coinsurance rates are an effective and equitable cost-sharing mechanism.

People with high coinsurance rates and low deductible retain a partial incentive to economize on health expenditures even after the deductible has been met. By contrast, people with a high deductible and a 0% coinsurance rate lose the incentive to economize on health as soon as the deductible is met.

High deductible health plans do have one important advantage. High deductibles are a highly effective way to reduce premiums and generally the high-deductible plan has a lower premium than the high-coinsurance-rate plan.

A high deductible health plan makes it extremely difficult to pay for health services until the deductible is met leading to possible bad health outcomes.

The choice of health insurance plan often depends on who pays the premium. Households gravitate towards the more expensive plan if premiums are paid by an employer or through a government subsidy and the less expensive plan when they make premium payments.

This change like the proposed premium tax credit could be enacted by majority vote through the tax reconciliation process.

Modification of regulations on HDHP reimbursement for some prescription drugs:

There is substantially variability in health insurance reimbursements for prescription drugs.

Some comprehensive low-deductible health plans make partial reimbursements for certain medicines even prior to the customer meeting her deductible.

Many high-deductible health plans do not reimburse any prescription drug costs until health expenditures reach the deductible.

The lack of reimbursement for prescription drugs until the deductible is satisfied causes some households to forego prescribe medicines. The failure to take prescribed medicines for chronic conditions like diabetes can lead to kidney problems, eye problems, amputation, and heart issues.

A regulation classifying certain medicines as preventive medicines that are exempt from high deductibles under HDHP would reduce incentives for people with chronic health conditions to forego necessary prescriptions. The Department of Health and Human Services could mandate coverage for some prescriptions treating chronic diseases as a preventive method under current regulations.

Financial Impacts:

The proposed modifications to HSA and HDHP rules impact the premiums paid for health insurance plans, tax revenue received by the government, and taxes paid by households.

The proposed tax credit for HSA contributions would increase demand for HDHPs by lower-income lower-marginal-tax rate households. The shift in preferences towards HDHPs would reduce premiums and reduce the tax expenditures for insurance purchases in both the state-exchange and employer-based markets.

The cost to the Treasury of the new tax credit for HSA contributions would be partially offset by a decrease in Treasury subsidies on health insurance premiums. The elimination of deductibility of HSA contributions would also partially offset costs stemming from the new tax credit.

The proposed changes in rules governing insurance company reimbursements for drug payments would result in a modest increase in insurance premiums for HDHPs. The change might increase demand for HDHPs, which could lower average premium payments since HDHPs would still be less expensive than low deductible plans.

Concluding Remarks:

The proposed changes to rules governing HSAs and HDHPs are beneficial for several reasons. The changes reduce financial risks associated with high out-of-pocket costs, reduce incentives for people to forego necessary medical treatments and may incentivize some health people to retain comprehensive health insurance.

The plans proposed here reduce out-of-pocket costs both for people insured in state-exchange and employer-based insurance markets. By contrast, many of the reforms implemented by the Biden Administration and by Congress, including changes to the premium tax credit, the use of gold plans as a default, and cost-sharing subsidies only address problems in the state-exchange market.

Health Policy Memos: Fixing Disparities in Health Insurance Premiums and Outcomes

Several disparities in health insurance outcomes in the United States could be resolved by combining employer-based and state exchange insurance markets, by modification of the premium tax credit for state exchange insurance, and through the creation of new low-cost insurance options.

Introduction:

Nearly 12 years after enactment of the Affordable Care Act (ACA), substantial disparities in the cost of health insurance still exist. Some middle-income young workers without access to employer health insurance receive no premium subsidies and cannot afford state-exchange premium payments. Some low-income households with an offer of “affordable” employer-based health insurance are precluded from claiming the premium tax credit for state exchange insurance. This post discusses potential changes to ACA rules that would address these problems.

Background:

The Affordable Care Act (ACA) created state exchange health insurance markets for people without employer-based health insurance. The creation of a viable state-exchange market created an incentive for some firms to eliminate employer-based insurance.

The ACA maintained a dominant employer-based health insurance system through the inclusion of two rules.

The first rule described here disallows the premium tax credit for any person working at a firm that offers “affordable” employer-based health insurance. Affordable insurance was defined as self-only insurance costing less than 9.61% of household income.

The second rule, commonly called the employer mandate, described here, is a fine applied to large employers that do not provide affordable comprehensive insurance to 95 percent of full time employees.

These two rules have limited the size of state-exchange marketplaces. Currently, around 12 million people obtain their health insurance from state exchange compared to around 156 million people obtaining health insurance from their employer.

The American Rescue Plan (ARP) enacted by Congress and the Biden Administration includes provisionsmaking health insurance on state exchanges more affordable. The ARP increased the generosity of the premium tax credit for lower-income households, capped benefits at 8.5 percent of household income, and eliminated the rule denying any benefits to households with income exceeding 400 percent of the federal poverty line FPL.

These provisions of the ARP expire after 2022 unless extended by Congress. The Biden Administration has not altered the affordability rule, or the employer mandate and employers are still the source of health insurance for most working-age people and their dependents.

Analysis of Disparities in Health Insurance Premiums:

The existence of a large employer-based insurance market coupled with a fringe market for households without offers of employer-based insurance has caused disparities in health insurance premiums and outcomes.

State-exchange subsidies fail to assist young middle-income people seeking self-only coverage:

The premium tax credit provides a generous benefit to older households seeking expensive family-plan policies. However, the premium tax benefit often provides very little or even no assistance to young adults seeking self-only coverage.

The premium tax credit is not available to employees at firms offering employer-based insurance. Management of firms that decide to end offers of employer-based insurance to assist older workers seeking family coverage often substantially increase health insurance costs for young workers seeking self-only coverage.

The impact of the decision to offer employer-based coverage on two workers is illustrated with data from the Kaiser Family Foundation state exchange market-place calculator and data on the cost of employer-based coverage from the Kaiser Family Foundation annual survey.

The KFF state exchange premium tax calculator reveals a 30-year-old individual making $80,000 per year seeking self-only coverage would pay $4,664 for health insurance on a state exchange. This worker would not receive any premium tax credit. The average annual premium paid by a worker with employer-based insurance with self-only coverage is $1,299.

The KFF state-exchange premium tax calculator was used to find the premium and support provided to a family making $80,000 a year with two adults aged 50 and two children one age 12 and one age 15. The estimated financial help from the government in the form of a premium tax credit was $16,406 per year. The average cost to the family was $4,840 per year. The average cost to the worker for the family plan policy is $5,969 per year.

Many firms that offer employer-based health insurance subsidize all or part of the premium. The average subsidy in 2021 was $6,440 for single coverage and $16,253 for family coverage.

Small firms not subject to the employer mandate can avoid these costs by eliminating employer-based insurance. The decision to eliminate employer-based coverage helps older workers with families and creates additional costs for young adults seeking self-only coverage.

Health insurance issues for people who cannot afford their share of premiums of employer-based insurance:

Many people with an offer of employer-based insurance are ineligible for the premium tax subsidy for state exchange insurance even if the state exchange marketplace offers more affordable and more comprehensive health insurance options.

People with an offer of affordable health insurance from their employer are precluded from claiming the premium tax credit because of the affordability rule. The definition of affordable health insurance is based on the affordability of self-only health insurance leaves employer-based family coverage unaffordable for over 5 million families. These five million families are ineligible for premium tax credits but cannot afford a health insurance plan covering their entire family offered through their employer.

Many people believed the IRS incorrectly interpreted the affordability definition in the ACA because the original law contained an individual mandate. The repeal of the individual mandate may make this argument harder to make since people are no longer fined for lack of coverage.

The Biden Administration has not altered the employer mandate or the affordability rule. The definition of “affordable” in the affordability rule continues to be based on the cost of self-only insurance leaving around 5 million households unable to afford a family option.

The alteration of the affordability rule could cause some small firms to eliminate offers of employer-based insurance, could cause some large employers to pay fines under the employer mandate and could increase insurance costs for some firms.

The decision by the Biden Administration to leave the “affordability” rule and the employer mandate in place limited the impact of the more generous premium tax credit on the size of state exchange markets.

Reforms to health insurance markets designed to reduce the disparities in health insurance premiums:

Many disparities in health insurance premiums can be addressed by combining the employer and state exchange markets, by modifying the premium tax credit and through the creation of new low-cost but comprehensive health insurance options.

The proposed health insurance marketplace has the following rules.

All employers would be allowed to purchase health insurance for their employees on state exchanges rather than sponsor an employer-based policy exclusively for their own employees.

The employer subsidy for state exchange insurance would be a deductible business expense and would not be subject to personal income tax, as with the current treatment of employer expenditures on employee health insurance.

Employees would be allowed to use the employer subsidy for the purchase of any health insurance plan on a state exchange.

The state exchange would offer a public option or a new low-cost copper option.

Large employers choosing the new premium subsidy would be required to provide a subsidy equal to 60 percent of the cost of the state-exchange policy for every full-time employee.

Employers providing a subsidy on state exchanges would be required to provide the subsidy to all full-time workers.

Firms could make tax free subsidies up to 100 percent of the cost of a gold plan on state exchanges.

Self-employed people and people without an employer-based subsidy would receive a premium tax credit.

The new premium subsidy would have a floor of 40 percent of the cost of a silver plan and a ceiling like the existing premium tax credit based on household income.

The state exchange will offer a public option already offered in some states or a low-cost private option, patterned after the copper plans considered by Alexander and Murray.

Comments on the proposal:

Comment One: Businesses and workers could continue with employer-specific plans if insurance companies continue to provide the product. It is likely that workers and firms would prefer state-exchange subsidies because workers could choose any plan on the state exchange best meeting their needs.

Comment Two: Unions would negotiate the size of the health insurance premium and workers at firms with generous premium subsidy offers could purchase the most expensive state-exchange health plan.

Comment Three: The smallest permissible subsidy from employers and from the revised premium tax credit should be enough to cover the cost of the copper plan or the public option.

Comment Four: The floor of 40 percent of the cost of health insurance of a silver plan on the premium tax credit is less generous than the floor on employer-based insurance but it assures that a young adult seeking self-only coverage would obtain some support and does not dissuade companies from offering a more generous subsidy to attract talent in a competitive job market.

Comment Five: The public option proposed here is not free. The person could choose to spend its subsidy for a low-cost private or public option or could choose to purchase a more expensive private plan. The new system puts private insurance on a relatively even footing with the government option.

Comment Six: The new low-cost private and public options would be superior to short-term health plans that leave people with substantial financial exposure and do not protect people with pre-existing conditions.

Comment Seven: The existence of private high deductible health plans with tax-preferred health savings accounts could induce many households to select a private plan over the public option to take advantage of the tax savings from contributing to private health savings accounts. This tax savings would not be available for public insurance plans or for private comprehensive insurance plans.

Comment Eight: Some aspect of this proposal could be enacted through the tax reconciliation process by majority vote as described here.

Concluding Remarks:

Many disparities in health insurance outcomes could be resolved by having firms subsidize the purchase of state exchange health plans, through the modification of the existing premium tax credit and the creation of low-cost but comprehensive health public and private health insurance options.

Financial Tip #8: Make contributions to a health savings account a high priority

Households with high-deductible health plans (HDHPs) need to contribute to their health savings account (HSA) even if lack of funds and limited income causes them to decrease savings for other goals.

Tip #8: The growth of high-deductible health plans (HDHPs) has increased financial risk and created an incentive for many people to reduce expenditures on essential health services. People with high-deductible health plans need to contribute to a health savings account (HSA) to offset these risks. When funds and income are limited, the increase saving for health care will reduce savings in retirement accounts and general liquidity.

Background on Health Savings Accounts:

An HSA is a tax-preferred saving vehicle for people who enroll in an HDHP. The primary advantage of an HDHP is reduced premiums for the employer and the insured person. The primary disadvantage is the insured must pay a large share of health expenses.

The minimum deductible on a HDHP in 2022 is $1,400 for individual coverage and $2,800 for family coverage. The maximum allowable out-of-pocket limits in 2022 are $7,050 and $14,100. It is permissible for the HDHP deductible to be as high as the out-of-pocket limit. A typical HDHP policy requires the insured person pay a share of all health care expenses after the deductible is met and until the out-of-pocket limit is reached.

HSAs, created as part of the Medicare, Prescription Drug Improvement Act of 2003 are now a major insurance option. An HDHP is the only plan offered by around 40 percent of employers and is sometimes the most affordable option through employers or on state exchanges.

People with high-deductible health insurance coverage are often exposed to large medical bills, take on high levels of medical debt, and often choose to forego necessary medical treatments. The health consequences can be especially severe for people who forego prescription drugs for chronic conditions.

People can reduce the adverse health and financial impacts associate with HDHPs by contributing to an HSA. However, this study by JAMA reveals that one in three people with an HDHP do not have an HSA and that 55 percent of people with HSAs failed to contribute to their account. An article by SHRM cites work by EBRI which found more than half of people initiating contributions to HSAs do so by reducing contributions to 401(k) plans.

The IRS caps the amount of funds a person can contribute to a health savings account. In 2022 the caps on health savings account contributions are $3,650 for self-only plans and $7,300 for family plans.

Contributions to HSAs result in significant tax advantages. The contribution to the account is not taxed during the year the contribution is made. The funds are never taxed if they are used for a qualified medical expense. Funds used for non-medical purposes prior to age 65 are subject to a 10 percent penalty. There is no tax penalty after age 65.

After age 65, funds disbursed from a HSA are fully taxed but are not subject to penalty. Funds placed in a traditional 401(k) plan are always fully taxed but are not subject to a penalty after age 59 ½. Fund placed in a Roth account and investment returns from funds in a Roth are completely untaxed after age 59 ½. In addition, withdrawals of contribution to a Roth are completely untaxed at any time.

Allocation of Resources between HSAs and other saving vehicles:

People with limited income and high debt have a difficult choice between saving for health-related expenses through a health savings account or saving for other priorities. There is no one-size fit all approach to the appropriate savings strategy.

Finance Tip #2, concluded that it was okay for a person entering the workforce with high student debt to forego contributions to a 401(K) plan to prepare for emergencies, maintain a solid credit rating and rapidly reduce their student debt. An HSA reduces taxes and allows for the use of funds for medical expenses. Young adults who have high debt and are dependent on a HDHP should likely contribute to an HSA instead of a 401(k) fund.

People with access to a 401(k) plan that does not match employee contributions are likely better off with a combination of a Roth IRA (see finance tip #3) and an HSA. The HSA gives some tax relief in the year of the contribution while the Roth IRA provides substantial tax savings during retirement.

Workers at a firm that matches employee contributions to a 401(k) plan should maximize receipt of the employer match, as discussed in finance tip #5 and then contribute additional funds to a mix of a Roth IRA and an HSA.

The choice between contributing the last dollar to a Roth or the last dollar to an HSA is affected by several factors.

The HSA is the only preferential savings plan that I am aware of that allows for a tax-free contribution and distribution. HSA distributions for qualified medical expenses are never taxed. The Roth contribution is fully taxed but all distributions after age 59 ½ are tax free and the distribution from the Roth does not increase tax incurred on Social Security benefits. Workers nearing age 59 ½ will often prioritize Roth contributions because the tax-free distributions could be used for any purpose.

HSA funds can be used to fund retirement after age 65, however, funds not used for medical expenses are fully taxed. It makes sense to spend HSA funds for health care and retirement funds for general consumption.

Concluding Remarks: The process of saving for retirement is complicated. Simply plowing everything into a 401(k) is not an optimal strategy. As noted in Financial Tip 2 people drowning in debt should even forego matching contributions into a 401(k) plan until they can bring their debt down to a manageable level.

The growth of HDHPs complicates the savings process. The increased likelihood of incurring high health care expenses increases the need for an emergency fund. A health savings account, like a 401(k) contribution, provides both immediate tax savings and funds for medical emergency. The analysis presented here and in previous supports the need for investors to use diverse savings vehicles.