Finance Memos

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

Questions:

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.

Background on Short-Term Health Plans:

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

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

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

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

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

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

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

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

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

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

Are short-term health plans beneficial?

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

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

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

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

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

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

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

Alternatives to short-term health plans:

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

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

A lower-cost catastrophic but comprehensive option:

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

Reinsurance or Medicaid above an annual cap.

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

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

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

A Public Option:

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

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

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

Concluding Remarks:

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

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

Introduction:

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

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

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

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

Potential Policy Responses:

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

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

These potential modifications are discussed in turn.

Tax Credit:

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

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

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

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

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

Alteration of Eligibility Requirement for HSA Contributions:

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

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

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

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

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

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

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

Modification of regulations on HDHP reimbursement for some prescription drugs:

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

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

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

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

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

Financial Impacts:

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

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

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

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

Concluding Remarks:

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

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