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.

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.


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 expires 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 Sellwire and 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 Sellwireand 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. David has also written David has also written Alternatives to the Biden Student Debt Plan.

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.


  1. 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.
  2. The sum of deductibles and worker share of premiums has decreased since the passage of the ACA.
  3. Tax preferences associated with health savings accounts are smaller for low-income people than for high-income people.
  4. The Senate could make major changes to the tax-treatment of employer-based insurance and the premium tax credit based on a majority vote.
  5. Short-Term health plans provide great protection if total health expenditures remain below the annual cap.
  6. The ACA guarantees that people purchasing state-exchange health insurance have access to top cancer hospital if they get cancer.

Answers and Discussion:

  1. 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.
  2. False. The sum of deductibles and worker shares of premiums has risen since passage of the ACA.
  3. 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.
  4. 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.
  5. 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.
  6. 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.

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.  

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. 
  • 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.


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.


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.


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.

An Evaluation of the Biden-Harris Health Care Plan


The Biden-Harris Administration seeks to expand health insurance coverage and reduce financial exposure for insured people by modifying and extending the Affordable Care Act.  The Biden-Harris health care 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.  

Their plan includes three key policy changes – (1) the expansion of health coverage through a free public option for people not covered by the ACA Medicaid expansion, (2) the creation of a new public option for all people who either lack health insurance coverage or are dissatisfied with their current plan, and (3) an expansion of the premium tax credit for health insurance on state-exchange health insurance markets. This memo provides an evaluation of both the advantages and the limitations of these three proposed reforms and a discussion of potential modifications or alternatives to these proposals.

The public option for low-income people:

The Biden-Harris proposal for a public option for low-income households is largely an attempt to build on the incomplete ACA Medicaid expansion.  The description of the Biden-Harris proposed public option for low-income households from the Biden-Harris campaign web site is presented below.

“Access to affordable health insurance shouldn’t depend on your state’s politics. But today, state politics is getting in the way of coverage for millions of low-income Americans. Governors and state legislatures in 14 states have refused to take up the Affordable Care Act’s expansion of Medicaid eligibility, denying access to Medicaid for an estimated 4.9 million adults. Biden’s plan will ensure these individuals get covered by offering premium-free access to the public option for those 4.9 million individuals who would be eligible for Medicaid but for their state’s inaction, and making sure their public option covers the full scope of Medicaid benefits. States that have already expanded Medicaid will have the choice of moving the expansion population to the premium-free public option as long as the states continue to pay their current share of the cost of covering those individuals. Additionally, Biden will ensure people making below 138% of the federal poverty level get covered. He’ll do this by automatically enrolling these individuals when they interact with certain institutions (such as public schools) or other programs for low-income populations (such as SNAP).”

There are many potential advantages from an expansion of free or low-cost public health insurance for low-income adults and from improvements in enrollment procedures.   

study by the Commonwealth funds found that around half of the people who are uninsured are eligible for the expanded state Medicaid program or tax credit for state exchange health insurance. An expanded public option for low-income households and improvements in enrollment programs are economically efficient ways to provide health insurance to people currently without coverage.

Low-income people often cannot afford to pay deductibles, copays or coinsurance associated with private health insurance.  The cost sharing benefits for low-income people receiving state exchange health insurance plans is an expensive solution to this problem and is not available to low-income people with employer-based health insurance. Medicaid or a new public option is often preferable to private health insurance for low-income households.

Medicaid and the new public option are often less expensive to taxpayers than the premium tax credit subsidy for state exchange insurance.  (The premium tax credit caps premiums for state exchange health insurance as a percent of income where the generosity of the credit is higher for low-income households.  People with income less than 2 percent of income will pay 2 percent of income for private health insurance.).  The creation of a public option will serve the most expensive cases and could facilitate reductions in the premium tax credit by Congress.

There are some limitations and potential problems with the Biden-Harris proposal for a free public option for low-income households.

The Biden-Harris plan retains a large role for the federal-state Medicaid program for people who would have been eligible for Medicaid prior to the Medicaid expansion.  Having a federal-state partnership serving extremely poor people and another purely federal program serving people who are only slightly less poor seems cumbersome and inefficient.  

The ACA Medicaid expansion was originally intended to be nationwide. 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 including Texas, Oklahoma and Georgia, tend to be states with the highest uninsured rates. It is not clear how Congress could eliminate the right, granted by the Supreme court, for states to opt out of the Medicaid expansion.

The expanded public option could occur by giving additional financial resources to states that have refused to expand their Medicaid programs.  Some of the language on the Biden-Harris web site appears to suggest that states that have previously chosen to forego the Medicaid expansion will get a better deal than states that chose to expand.  In particular, the Biden plan indicates that states that have expanded Medicaid could move people to “the premium-free public option as long as the states continue to pay their share of the cost of covering those individuals.”   This implies that states that have not previously enacted the Medicaid expansion would get a free ride.   The provision of additional financial assistance to states that have refused to expand Medicaid seem unfair to state that have already expanded Medicaid.

One of the problems with federal-state health care partnership programs like Medicaid and the proposed new public option is the economic impact on state budgets during economic downturns when enrollment in public health insurance programs soars and tax revenue declines. The Urban Institute in a 2009 study found that for every one-point increase in the national unemployment rate one million more people enroll in Medicaid and CHIP and 1.1 million more people become uninsured.  Many states respond to increases in demand for Medicaid by reducing Medicaid benefits.  This PNC insight article includes information on state Medicaid benefit reductions implemented in 2011 and 2012.   The proposed public option if it requires additional contributions by state governments could exacerbate state fiscal problems during economic downturns.    

A federal option serving both the original Medicaid population and the ACA expanded Medicaid population could provide substantial financial assistance to states during economic downturns when demand for public health benefits increases and state revenue declines. Conservative critics would likely oppose a federal public option because they favor state control over health care systems.  However, the potential economic and financial benefits from a federally funded public insurance option during economic downturns are substantial. 

The Biden Harris approach for expanding coverage for low-income individuals also involves improvements to enrollment procedures including efforts to automatically enroll people through public schools and programs like SNAP.  These are good steps that do not go far enough. Enrollment for Medicaid is based on annual rather than multi-year income.  Relatively short-term increases in income can cause people to lose access to public health insurance.  The Biden-Harris plan explicitly states automatic enrollment efforts are limited to people with income less than 138 % FPL.  Potential loss of public health insurance due to increases in income caused by hard work seem extremely unfair and could incentivize people to stay out of the labor market.  

A rule linking eligibility and price of the public health option to multi-year income would provide for more stable health insurance outcomes and better work incentives than the current eligibility rules. Enrollment for and partial payments for the public option could be facilitated through annual tax returns for people claiming the option.  

Critics of the Biden-Harris plan claim any public health option will displace private insurance and is a path to socialism.  This data tabulated by the Kaiser Family Foundation finds that only 28.9 percent of the population had income less 200 percent of the federal poverty line. The overwhelming majority of the public would not be eligible for a public health plan with an eligibility level set at 200% FPL. A free or low-cost public option available to people with income less than 200 percent of the federal poverty line is consistent with the existence of a robust private health insurance for the broader population.  The same claim cannot be made for a public option offered to people with higher incomes.

A Universal Public Option:

The plan candidate Biden highlighted on his campaign web site 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.”

A substantial number of middle-income people without offers of employer-based health insurance either go without health insurance or choose to underinsure.   Empirical work by Goldin and the Center for Medicare Services finds that most of these people are in households with income over 400 percent FPL and are healthy.  Both of these problems are likely to be exacerbated by the repeal of the individual mandate.  The creation of a universally available public health option is probably not the most effective way to help middle-income people who are uninsured or underinsured.

There are several potential problems with the creation of a universal public health option.

The proportion of middle-income and upper income people with health insurance coverage is higher than the proportion of low-income people with health insurance coverage.  Most working-age people with private health insurance coverage obtain coverage from their employer.  The creation of a universally available public option available to everyone regardless of household income could crowd-out existing private health insurance and could reduce the tendency for employers to offer health insurance to their employees and their families.  The new universally public health insurance could also, depending on its form, reduce competition among private firms on state exchanges. 

A public health insurance option would attempt to reduce costs by lowering payments to health care providers.   Recent studies found both Medicare fee-for-service and Medicare Advantage provide lower rates to physicians and hospitals.    Data indicates that on average Medicaid reimbursement rates are around 72 percent of Medicare reimbursement rates, although, there is substantial variability across states and types of services.  

Lower provider payments stemming from the introduction of a public option would reduce provider income and might also adversely impact access to specialists.   The loss of income to health care providers could be considerable.

The lower compensation rates could lead to longer wait times for specialists.  However, some studies indicate patients already have long wait times for procedures in many parts of the United States.    

The new public option could be structured as a traditional large public health insurance program similar to Medicaid or Medicare or a privately run Medicare Advantage plans.   The possibility of structuring a public option as a Medicare Advantage plan was supported by Vice President Harris when she campaigned for the Democratic nomination for President.    There are advantages and disadvantages to both approaches.

Traditional public programs like Medicaid and Medicare exhibit large scale economies.  The traditional programs have large provider networks.  People are free to see and be served by any doctor or any facility that is in network.     

The replacement of current private health insurance with traditional Medicare would cause substantial financial disruptions to private health insurance firms, their workers and shareholders.   These changes could also disrupt financial markets and the economy.  The use of Medicare Advantage plans as a public option would allow private insurance firms to keep their existing business and would not cause financial disruptions to the private health insurance industry.

The expansion of a public option could facilitate expanded political control and interference on private health care decisions.   Currently, Medicaid is governed by the Hyde Amendment a rule prohibiting the use of public funds for abortion. A new public option might also be governed by the Hyde Amendment, depending on the whim of future Congresses or presidents. The Sanders’s Medicare-for-All proposal exempted the public option from the Hyde Amendment, but the actual outcome of this issue would be determined in Congress. 

It might be easier to insulate a public option from restrictions like the Hyde Amendment by structuring the public option as Medicare Advantage plan run by private companies instead of as a traditional fee-for-service public health plan run by the government.

Medicare Advantage plans shift risks by imposing capitated fees for the cost of treating each patient rather than having fees for each service.  Medicare Advantage plans attempt to reduce costs through various restrictions to services. These restrictions include limited provider networks and lack of access or high costs for access to out-of-network providers. In addition, Medicare Advantage plans, like some private HMOs often only provide service in a narrow geographic area.  Some restrictions imposed by Medicare Advantage plans to reduce health care expenditures can impose real costs on people needing specialized care.   

The restrictions imposed by private Medicare Advantage plans are similar to restriction already imposed by many HMOs.  Many people with Medicare Advantage plans and private HMOs are satisfied with their health insurance.  Medicare Advantage plans often have lower copays and offer other fringe benefits.  The restrictions imposed by Medicare Advantage plan, like the restrictions imposed by private HMOs, can reduce out-of-pocket costs

The reduction in health care costs through a reduction in provider reimbursement rates is the main impetus to changes in health insurance outcomes from the creation of a universally available public option.  In some circumstances, the only advantage from the decreased health insurance costs and premiums associated with the introduction of a public option is a reduction in tax subsidies for the premium tax credit. 

Changes to the Premium Tax Credit and State Exchange Health Insurance Markets:

The Biden-Harris health care plan proposes to expand the premium tax credit used to purchase state exchange health insurance for people who do not receive an offer of affordable health insurance from their employer.   The proposal modifies the tax credit in three ways.  First, it makes the tax credit more generous by reducing the maximum amount a person is required to pay for health insurance on state exchanges.   Second, it eliminates the current income threshold restricting eligibility for the premium tax credit (400% FPL) and caps premium payments at 8.5% of income for all households.  Third, it links the premium tax credit to premiums of a more expensive gold plan as opposed to the current silver plan.  

The final Biden-Harris proposal may also include two changes to rules impacting the balance between employer-based health insurance and state-exchange health insurance markets.  

The ACA contains a rule called the employer mandate, which penalizes employers with more than 50 full time employees when employees of the firm obtained the premium tax credit.    The purpose of the employer mandate was to assure that the introduction of subsidies for state exchange health insurance would not result in employers dropping health insurance coverage for their employees.   One version of the Biden-Harris health plan written by economists at the Urban Institute eliminates the employer mandate.

The ACA contains a rule denying people with an “affordable” offer of employer-based health insurance access to premium tax credits for the purchase of state exchange health insurance.   The current definition of “affordable” health insurance used in this regulation based on the cost of self-only health plans results in health insurance being unaffordable for households seeking family coverage.  Analysis by the Center on Budget and Policy Priorities finds that affordability rule increases costs of employer-based health care relative to potential costs for state exchange health care for some low-income households.   The Biden-Harris team and Congressional Democrats support changing this rule so more low-income people can use the premium tax credit for state exchange health insurance.

The Biden-Harris premium tax credit provides a more generous tax subsidy for the purchase of health insurance for people without employer-based health insurance.  However, increases in the premium subsidy are small for some young adults with income near 400 percent FPL.   The improved tax credit will reduce, but not eliminate, the incentive for people with income near 400 percent FPL from going without health insurance.

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.  

The more generous premium tax credit offered under the Biden proposal creates incentives for businesses to drop 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.  

It is difficult to predict the number of firms which will respond to a more generous premium tax credit by eliminating their offers of employer-based health insurance. Each firm will have to calculate the potential advantages and disadvantages of keeping or dropping employer-based insurance.  Firms with a large share of workers eligible for large premium tax credits would be able to attract workers without offering employer-based health insurance to their employees.   

The potential decrease in the size of the employer-based market would be much larger if the final version of the Biden-Harris health plan excludes the current employer mandate.

The decreased availability of employer-based health insurance is likely to adversely impact young middle-income adults seeking single-only coverage.  Calculations from the Kaiser Family Foundation marketplace calculator reveal a family of four with a household head 60 years old earning $75,000 per year would likely receive a subsidy of $1,468.75 per year and pay $531.25 towards premiums on a state-exchange health insurance policy.   A 30-year-old single worker making $60,000 seeking self-only coverage will pay $409 for coverage and will not receive any subsidy.

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 Biden-Harris health plan will likely include a sensible modification to the affordability rule defining eligibility for the premium tax credit for people with offers of state exchange health insurance.  The rule denying a person with an “affordable” offer of employer-based health insurance access to premium tax credits on state exchanges defines affordable in terms of the cost of a self-only health plan even though the ACA requires everyone in the household to have health insurance coverage.   The Democrats are on record of revising this ACA rule through Congressional action.   The IRS could reinterpret the affordability definition so that was in accord with other ACA goals.  Regardless, even if the definition of affordability in the ACA statute is fixed some low-income households with an offer of employer-based health insurance will be precluded from claiming the premium tax credit for state exchange health insurance. 

The Biden-Harris health plan removes the abrupt elimination of the premium tax credit at 400 percent FPL, a change that eliminates substantial tax uncertainty for many households.    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 premium tax credit in advance of knowing their actual yearly income can end up with a large unanticipated tax bill.

The Biden-Harris plan, by limiting premiums to 8.5 percent of income for all households, regardless of income, eliminates large unanticipated tax bills caused by the abrupt elimination of the premium tax credit.   The elimination of the abrupt loss of the premium tax credit removes an incentive for some households to reduce the number of hours they work or to stay of the labor market.

The Biden-Harris 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.  One side effect of this change is to increase premiums and the amount the Treasury has to spend on the premium tax credit for the purchase of state exchange health insurance.  The change in linkage to a more expensive health plan would still leave a tradeoff between premiums and out-of-pocket costs for young middle-income adults who might still be ineligible for a premium tax credit. The Biden-Harris proposal for gold plans on state exchanges does not assist people with high-deductible employer-based plans.  

A large part of financial problems associated with high out of pocket health costs stems from the increased use of high-deductible health plans linked to health savings accounts.  A more effective solution to this problem involves the creation of a tax credit for contributions to health savings accounts by low-income people and changes to the rules governing high-deductible health plans, as outlined in this paper.

Gaps in the premium tax credit results in many middle-income people without offers of employer-based coverage from obtaining insurance or underinsuring.  The Biden-Harris proposal for a more generous premium tax credit is an intuitive response to these problems. However, it is difficult to forecast the full impact of the proposal. 

The enactment of the Biden-Harris premium tax credit will cause some firms to eliminate employer-based health insurance coverage, a decision that could leave some households worse off.  However, even after enactment of the improved premium tax credit it is likely that most working-age people and their households will obtain their health insurance from their employer.   The changes in the premium tax credit will not ameliorate several problems associated with the dominance of employer-based health insurance including the loss of health insurance stemming from disruptions in the economy.  

Concluding Thoughts

The Biden-Harris health plan was shaped by the health care discussion between centrists and progressives during the contest for the Democratic nomination for president.   The centrists wanted to build on the ACA.   The progressives wanted to create a universal public option, which could in theory entirely replace our existing system. The Biden-Harris plan does a better job in forging a political consensus between the center and the left than in resolving health care problems.

The Biden-Harris plan recognizes that failure to fully expand Medicaid left many low-income households uninsured.  However, their plan does not appear to resolve issues caused by the Supreme Court ruling that states can opt out of the Medicaid expansion.   Their plan does also not address economic stress associated with increased demand for Medicaid during economic downturns. These problems might be better addressed by the creation of a single federally funded public option replacing Medicaid and covering all low-income households.

The Biden-Harris team is cognizant of the fact that many middle-income people without offers of employer-based health insurance either go without health insurance or choose to underinsure.  Their proposal for a universal public option is not fully vetted could significantly crowd out private insurance markets and would make some people and the economy worse off.

Their proposal for expanding the premium tax credit retains significant disparities regarding health insurance subsidies received among households in society.  Currently, some people receive completely subsidized health insurance while other households pay 100 percent of their health insurance premium.  The discussion of health care reform starts with tax reforms, discussed here and in my next memo.

Improving Health Savings Accounts & High Deductible Health Plans

Abstract:  The increased use of High Deductible Health Plans and Health Savings Accounts has created substantial financial risks for low-income and mid-income households and has caused many people to decline essential medical procedures and regimens, a practice which can increase future medical costs.  These problems can be rectified through a new tax credit for contributions to health savings accounts and changes in rules governing high-deductible health plans.  Improvements to health savings account and high-deductible health plans are a more effective way to reduce financial risk for people with comprehensive health insurance coverage than ideas under consideration by President-elect Biden and his team.


Most of the focus of healthcare reform proposals is on providing health insurance to the uninsured.   However, low-income and mid-income households with comprehensive high-deductible health insurance face substantial financial exposure.  This memo identifies problems with the use of high-deductible health plans combined with health savings accounts and proposes improvements to this type of insurance.

High-Deductible Health Plans coupled with Health Savings Accounts are growing in market share and are currently the only health plan offered by around 40 percent of employers. Contributions to Health Savings Accounts result in significant tax advantages and the combination of a high-deductible health plan coupled with a health savings account is a sensible health insurance product for many households.  The combination can reduce premiums, incentivizes some people to economize on health care and creates a new source of retirement savings.

However, there are problems with the growing use of health savings accounts and high-deductible health plans.  

The combination of a health savings account and high-deductible health plan is much better suited for high-income households than for low-income households.  The use of health savings accounts has resulted in low-income and middle-income people with relatively low marginal tax rates paying more after taxes for health services than higher-income people with higher marginal tax rates. Low-income and mid-income households have an incentive to fund health savings accounts by reducing contributions to 401(k) plans because they may not have enough income or liquidity to take advantage of both tax deductions.

The use of health savings accounts and high deductible health plans encourage people to economize on health care, which can lead to a reduction in wasteful spending and a decrease in premiums.  A decision to economize on the use of health care can also result in bad health outcomes and higher future health expenditures.  

A high deductible and a lack of funds often causes people to forego necessary health care procedures and regimens.  This problem is most pronounced for the use of prescriptions for chronic diseases. Studies have shown that 20% to 30% of prescriptions are never filled and that around 50% of prescriptions for chronic diseases are not taken as prescribed.  The research indicates that a lack of adherence to prescription drug prescriptions contributes to 125,000 deaths, at least 10 percent of hospitalizations, and increased annual health costs ranging from $100 billion to $289 billion.  The decision to decline necessary treatments like prescription drugs for the treatment of diabetes will cause severe complications and often results in people leaving the workforce early with little retirement savings.

The rules governing contributions to and the use of funds in health savings accounts make funds in 401(k) plans and health savings accounts highly substitutable especially for older households.  Often people will reduce contributions to 401(k) plans in order to fund a health savings account.  The greater use of health savings accounts and high deductible health plans will result in sicker people having lower levels of retirement savings than healthy people.  

Finally, some healthy young adults with high levels of debt may choose to go uninsured or seek short-term health plans that do not cover many essential health services.  This problem is most pronounced for people seeking state-exchange insurance who are ineligible for the premium tax credit.  (A person making $50,000 year seeking self-only health insurance coverage pays 100 percent of the health insurance premiums on state exchanges.)  Young adults in this situation are unlikely to receive substantial benefits from a high-deductible health plan and may decline comprehensive coverage.  This decision can lead to potentially catastrophic outcomes.

Potential Policy Responses:

Three policy changes designed to mitigate problems associated with health savings accounts and high deductible plans are proposed and discussed.

Modification One: Taxpayers with family income less than 400 percent of the federal poverty line would be offered a refundable tax credit of $750 for individual plans or $1,500 for family plans to fund their health savings account.   Higher income households could continue to make untaxed contributions to their health savings accounts

Comments on modification one:

This modification directly reduces the economic disparities associated with tax deductions.  High-income people, with high marginal tax rates, receive a more generous tax deduction than low-income people taxed at lower marginal tax rates.

The modification makes a high-deductible health plan more palatable to low-income people. The additional cash given to low-income households should encourage adherence to prescribed medical procedures and treatments.

The tax credit would only be available to people who have active qualified plans.   The loss of the tax credit from a lapse in insurance coverage encourages continuous health insurance coverage.

A generous tax credit for health savings accounts could encourage some young adults to take out their own health insurance and claim the credit rather than remain on their parent’s plan.   This could strengthen state exchange marketplaces.  

This modification could be enacted through the tax reconciliation process, which only requires a majority of the U.S. Senate.

Modification Two:  Contributions to health savings accounts would be allowed for people with higher coinsurance rate plans even if their plan had a relatively low deductible.

Comments on modification two:

The current laws governing health savings accounts only allow contributions from people with a high deductible health plan even though health plans with a relatively low deductible and high coinsurance rates after the deductible may be more effective at encouraging people to economize on health care than high-deductible health plans.

Consider a simple example comparing incentives to economize for a high deductible health plan and a high coinsurance rate health plan.

The first plan has a $5,000 deductible and no coinsurance for expenses over $5,000.   The insured individual may be reluctant to spend anything on health care unless he believes that total expenses will go over $5,000.   Once expenses exceed $5,000 the person has no reason to economize on covered expenses.

The second health plan has a $0 deductible and a 50% coinsurance rate.   The person has a partial incentive to economize on health care starting with the first dollar of expenditure.    The person does not lose this incentive to economize on health care until al health expenses exceed $10,000.

People with high deductibles may refuse to or be unable to fill their prescription until after their deductible is met.   The low deductible but high coinsurance plan provides a partial payment for prescription medicine throughout the year.  The low-deductible high coinsurance rate health plan might reduce the number of people who decline necessary prescription medicines.     

High deductible health plans do have one important advantage.   High deductibles tend to be a highly effective way to reduce premiums.  In most cases, the high-deductible plan will be less expensive than the high coinsurance rate plan because the insurance company does not make any benefit payments until the deductible is met.  

The choice between a high coinsurance rate plan and a high deductible health plan may depend on who pays the premium.   When employers or government subsidies pay for the premium households are likely to prefer the more expensive plans.  Individuals may be indifferent or prefer the less expensive plan when they are responsible for premium payments.

This change could be enacted through the tax reconciliation process, which only requires a majority vote in the U.S. Senate.

Modification Three:  Regulations governing prescription benefit formulas for high-deductible plans should be modified to require partial payment on prescription drugs for the treatment of chronic diseases prior to the deductible being met. 

Comment on modification three:

Most health care plans have some deductibles.   Today many low-deductible health plans pay most costs for prescription drugs even prior to the deductible being met.  However, many of the new high-deductible health plans do not pay for any prescription drug treatments prior to the deductible.

Patients who receive no prescription drug benefits until a very large deductible is met have a strong incentive to forego prescribed medicines.  This incentive is especially large for people with diseases like diabetes where the patient does not have immediate symptoms.  However, the failure to control chronic health problems can lead to bad health consequences and more expensive health services in the long or medium term.  For example, the failure by diabetics to control blood sugar can lead to kidney problems, eye problems, amputation and heart issues.

One way to reduce the tendency for patients with high deductible health plans to economize by foregoing the use of prescription drugs is to treat these prescriptions as preventive treatments that are currently exempt from the deductible.   The current law allows high-deductible health plan to make payments for some preventive treatments prior to the deductible being met.  The Department of Health and Human Services could mandate coverage for some prescriptions treating chronic diseases as a preventive method under current regulations.   This goal might also be achieved with an executive order signed by the new President. 

Financial Impacts:

The proposed modifications to rules governing health savings accounts and high-deductible health plans have potential financial impacts. 

The proposed modifications are more generous than current rules.   Typically, more generous tax rules result in a loss of revenue to the Treasury.

In this case, the more generous features applied to high-deductible health plans could accelerate a shift from low-deductible or high-option health plans to less expensive high-deductible plans.  The decrease in premiums from the shift toward less expensive but comprehensive insurance results in both a decrease in tax expenditures on employer-based insurance and a decrease in the premium tax credit for the purchase of state exchange insurance.   The reduced tax expenditure from the increased use of high-deductible health plans will offset the more generous benefits.

President-elect Biden’s plan to reduce problems associated with out-of-pocket health care costs involves changing a regulation governing the premium tax credit used to subsidize health insurance premiums for state exchange insurance.   His proposal would link the premium tax credit to a “gold” plan with a higher benefit ratio than the current baseline “silver” plan.  

President-elect Biden’s proposal does not benefit people with employer-based insurance.

President-elect Biden’s increases premiums on subsidized state exchange health plans.  The tax credit for low-income contributions to health savings accounts by low-income households leads premiums and the subsidy for premiums unchanged.   It is a more cost-effective way to reduce financial risk associated with high-deductible health plans than the proposal considered by President-elect Biden and his team.

Another way to partially offset the lost tax revenue stemming from new subsidies for health savings accounts and high-deductible health plans involves prohibiting all non-health related expenditures from health savings accounts prior to retirement.   (Current rules allow for distributions for non-related health expenses with a financial penalty prior to age 65 and taxed distributions without penalty after age 65.)  Restrictions on non-health care distributions prior to retirement would also increase funds late in life for long term care expenses and could reduce Medicaid long term care spending.

Concluding Remarks:   The changes to the rules governing health savings accounts considered here are beneficial for several reasons. The changes reduce financial risks associated with high out-of-pocket costs.  The new rules reduce incentives for people to forego necessary medical treatments, especially prescription medicines for chronic conditions.   This could reduce future medical expenditures from people ignoring chronic conditions.  Additional benefits encourage people to remain insured even when they are healthy and expect to receive very little in reimbursements from their health plan.   The new benefits make cost sharing more palatable, which in turn reduces premiums and tax expenditures on premium subsidies.