Introduction:
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.
A 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.