The battle over health care subsidies has common-sense solutions.
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People with Obamacare insurance aren’t getting any more health care today than they did a decade ago, before the program was started. But the costs of the program keep soaring.
Democrats want more taxpayer dollars to pay for those costs. Republicans are resisting. Both parties should do voters a favor and consider sensible reforms instead of throwing good money after bad.
The problem with Obamacare is not difficult to understand. It was designed to force people to buy a product that few people would buy on their own if they had to pay the full price.
Originally there was an individual mandate to buy the insurance, backed by fines for those who refused. Congress dropped the fines, but the government at various times has taken steps to try to prevent alternatives to Obamacare from being sold on the market or offered by employers.
Initially, Obamacare subsidies were available only for people with incomes up to 400 percent of the poverty level. But as costs kept rising, people not getting a subsidy (especially those who were healthy) began to abandon the market.
Between 2016 and 2019 the unsubsidized part of the market was almost cut in half—exhibiting the characteristics of a “death spiral,” in which soaring costs drive the healthy away, while the remaining pool becomes sicker and more costly. Ever higher premiums are needed to keep the program solvent. Yet as premiums rise, the healthiest of those remaining in the pool begin to leave—contributing to a never-ending cycle.
When Democrats had the power to do so, they passed a second round of subsidies designed to keep the system afloat. Although these are often called “Covid era” subsidies, they really had little to do with Covid. They were enacted to prevent a death spiral from destroying the whole Obamacare program.
Take a 50-year-old with an income of twice the federal poverty level (roughly the age and income for the average enrollee). From 2014 to 2020, the annual premium for this enrollee increased from about $4,500 to $8,000. Yet with Covid-era subsidies, government stepped in to pay almost all the increase in cost. This year, 93 percent of the premium is being paid by federal taxpayers.
So, what’s the alternative? We should begin by recognizing that the way we are subsidizing health care is completely different from the way we approach other essential goods and services, including food, clothing, shelter, etc. With respect to these other necessities of life, we let the private sector meet all the needs it can on the theory that the market is superior to government in meeting needs in almost every respect. We then rely on a government-funded safety net for those needs that are socially important but unmet by the market.
Health care should be no different.
Short-Term Insurance
Right now, the most obvious alternative to Obamacare is “short-term insurance.” The basic product has been around for many years. The reason for the phrase “short-term” is that it traditionally lasted for only 12 months and served as a bridge for people transitioning from a family policy to school, or from school to work, or from job to job.
Short-term insurance is largely unregulated. Obamacare-mandated benefits, for example, don’t apply; and most state regulations don’t apply either. That means these plans don’t have to cover maternity care or substance abuse, although some do. The Obamacare prohibition on discrimination based on health status also doesn’t apply. The plans can and do ask health questions. They can exclude people with expensive chronic conditions.
Importantly, short-term plans can sell for less than half of what (Obamacare) exchange plans cost for similar financial protection. They may also offer a wider range of providers than the Obamacare plans’ narrow networks.
Obama regulations and Trump 1 regulations
Unfortunately, the Obama administration viewed these plans as a threat to Obamacare. So President Obama used his regulatory authority (in a move never approved by Congress) to restrict short-term coverage to three months, with no renewal after that.
One of the most important things Donald Trump did was to reverse that restriction. Under a 2018 Trump administration rule, short-term insurance was allowed to last up to 12 months and it could be renewed for up to three years.
The Trump rule change went out of its way to authorize a separate type of insurance, what I call “change-of-health-status insurance,” to bridge the gap between the three-year periods.
Say you are in a short-term plan and you get cancer. At the end of a three-year period you are likely to be rejected if you try to buy insurance for another three-year period. And if not rejected, you might be charged a much higher premium because of your health condition.
Change-of-health-status insurance protects you against these bad outcomes. It pays any extra cost that arises because of a change in your medical condition, leaving you free to pay the same premium a healthy person would pay.
By stringing together these two types of insurance, we could have the possibility of a market that healthy people could buy into that is guaranteed to be renewable (regardless of declining health condition), indefinitely into the future.
Going forward, we could expect to see insurance companies enter this market, with reasonable premiums and a full menu of benefits. It would be the closest thing we have ever had to genuine free market health insurance.
Biden and Trump 2 regulation
Like President Obama, President Biden saw the short-term market as a threat to Obamacare. As a result, a Biden regulation limited short-term policies to a period of three months with an opportunity of renewal of only one more month.
Another target of Biden regulation was indemnity insurance, which pays a fixed dollar amount, say, for an episode of hospitalization. As I have shown before, it is often possible to obtain much better coverage than Obamacare for less than half the cost by combining high-deductible short-term insurance with an indemnity plan that pays the deductible.
Although President Trump has yet to reinstate the short-term insurance regulations promulgated in his first term, the relevant Trump administration departments have announced they do not intend to enforce the Biden rules. A reasonable inference is that we are back to the regulatory rules envisioned under Trump 1.
Going forward
Short-term insurance should not be viewed as a replacement for the Obamacare marketplace. It should be viewed as a complement. If the short-term market fails to meet someone’s needs, that person or that family should be free to enroll in a marketplace plan. In this way, the private market is free to meet whatever needs it can meet, with a government-funded safety net (the exchange marketplace) serving as a backstop.
Also, we obviously cannot rely on the executive branch to protect this market. Congress needs to codify the regulations promulgated during Trump 1. It needs to protect indemnity insurance as well.
Health reform is invariably tied to the tax system. Obamacare exchange insurance is subsidized by means of tax credits, for example. In an ideal world, tax subsidies should be as neutral as possible–allowing individual choice and market competition to determine who insures with whom.
Currently, we are nowhere near the ideal. But there are some relatively easy improvements. For example, employers are currently able to use Health Reimbursement Accounts (HRAs) to give employees pre-tax dollars to buy individually owned insurance. This insurance must be “Obamacare compliant,” however, and that excludes short-term plans.
An important needed change: Let employers use these accounts to enable their employees to obtain insurance in the short-term market.
Another desirable change: Give people who buy in the short-term market instead of on the exchange a partial tax credit. This would encourage people to chose insurance that better meets their needs and save taxpayer dollars at the same time.
Both parties should recognize the importance of these common-sense reforms.