If you aren't paying attention to the debate over short-term health insurance plans, you should. It's a mixed-up, muddled-up, shook-up world where Republicans are pushing to expand consumer protections, Democrats are fighting to block them, and the public debate has it exactly backward.
In this morning's Wall Street Journal, I explain:
ObamaCare premiums keep skyrocketing. Rate hikes as high as 91% will hit many consumers just before Election Day. Maryland insurance commissioner Al Redmer warns ObamaCare is in “a death spiral.”
So-called short-term health plans, exempt from ObamaCare’s extensive regulations, are providing relief. Such plans often cost 70% less, offer a broader choice of providers, and free consumers to enroll anytime and purchase only the coverage they need.
But there’s a downside. When enrollees fall ill, either their premiums spike or they lose coverage, leaving an expensive ObamaCare plan as the only alternative. Markets solved that problem decades ago via “renewal guarantees,” which allow enrollees who get sick to keep paying the same premiums as healthy enrollees.
For more than two decades, Congress has consistently tried to prevent sick patients from being to medical underwriting. Yet in 2016, the Obama administration did exactly the opposite. It issued a regulation that exposed enrollees in short-term plans to medical underwriting after they got sick:
In 2016, in an effort to force people into ObamaCare plans, the Obama HHS shortened the maximum duration for short-term plans from a year to three months and banned renewal guarantees. The National Association of Insurance Commissioners complained this reduced consumer protections and exposed the sick to greater risk, including the risk of having no coverage.
The Trump administration has proposed reversing the Obama rule and allowing short-term plans to offer both 12-month terms and renewal guarantees that allow enrollees who get sick to keep paying the same premiums as healthy enrollees (i.e., no more underwriting). Both of these proposals are consumer protections that would protect the sick from medical underwriting and in some cases protect the sick from losing coverage entirely.
Believe it or not, Democrats are opposing these consumer protections! I am tempted to say their opposition is inexplicable, but it's all-too explicable. Democrats want to prevent short-term plans from offering these consumer protections because they fear consumers will find short-term plans more attractive than ObamaCare. Democrats are literally trying to stop Republicans from expanding consumer protections because they would rather protect ObamaCare.
Cato adjunct scholars Charlie Silver and David Hyman have an important oped in today’s Houston Chronicle explaining how third‐party payment increases prices for drugs and other medical goods and services. An excerpt:
If you’re like us, your health insurance coverage includes a prescription drug benefit. The benefit isn’t free, but you’re willing to pay for it because it saves you money every time you have a prescription filled. You are responsible for your co‐pay, and your insurer pays the rest.
At least, that’s how it is supposed to work. But the truth is that your insurer often pays nothing. Your co‐pay is all the pharmacy receives. Not only that, but your co‐pay often exceeds the amount that someone without insurance would have paid for the drug. That’s right: People who don’t have insurance are paying less than you are for the same drug…
The scam works by taking advantage of consumers’ naive belief that their insurers are watching out for them. Suppose you have high blood pressure and your doctor prescribes amlodipine, a medication used by millions. If you have insurance, you probably think your insurer negotiated a great deal because a month’s supply at the pharmacy costs you only $10. But if you paid cash for the same drug at Costco, you’d have to pay only $1.85…
The real problem is that insurance is a terrible way of paying for things that we can and should pay for directly. Price‐gouging does not happen with drugs that are sold over‐the‐counter at retail outlets like CVS, Costco or Wal‐Mart. Those prices are transparent and easy to compare. When people pay directly for drugs, there are no hidden transfers between pharmacies and PBMs either. Competition does for cash customers what PBMs and pharmacies don’t seem able to do for one in four of the prescriptions filled by insured customers — reduce drug prices to the lowest sustainable level.
Overcharges occur throughout the rest of our health care system too, and they drive up the cost of all sorts of procedures. Why? Because insurers don’t care about costs nearly as much as patients do. If we want to get health care spending under control, we should pay for it directly as often as we can.
In their highly influential book describing behavioral economics, Nudge, Richard H. Thaler and Cass R. Sustein devote 2 pages to the notion of "bad nudges." They describe a "nudge" as any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives. The classic example of a nudge is the decision of an employer to "opt-in" or "opt-out" employees from a 401(k) plan while allowing the employee to reverse that choice; the empirical evidence strongly suggests that opting employees into such plans dramatically raises 401(k) participation. Many parts of the book advocate for more deliberate choice architecture on the part of the government in order to "nudge" individuals in the social planner's preferred direction.
Thaler and Sunstein provide short discussion and uncompelling examples of bad nudges. They correctly note "In offering supposedly helpful nudges, choice architects may have their own agendas. Those who favor one default rule over another may do so because their own economic interests are at stake." (p. 239) With respect to nudges by the government, their view is "One question is whether we should worry even more about public choice architects than private choice architects. Maybe so, but we worry about both. On the face of it, it is odd to say that the public architects are always more dangerous than the private ones. After all, managers in the public sector have to answer to voters, and managers in the private sector have as their mandate the job of maximizing profits and share prices, not consumer welfare."
In my recent work (with Jim Marton and Jeff Talbert), we show how bad nudges by public officials can work in practice through a compelling example from Kentucky. In 2012, Kentucky implemented Medicaid managed care statewide, auto-assigned enrollees to three plans, and allowed switching. This fits in with the "choice architecture" and "nudge" design described by Thaler and Sunstein. One of the three plans – called KY Spirit – was decidedly lower quality than the other two plans, especially in eastern Kentucky. For example, KY Spirit was not able to contract with the dominant health care provider in eastern Kentucky due to unsuccessful rate negotiations. KY Spirit’s difficulties in eastern Kentucky were widely reported in the press, so we would expect there to be greater awareness of differences in MCO provider network quality in that region.
In two new posts at the Health Affairs blog, I lift the fog of economic jargon to show ObamaCare’s preexisting‐conditions provisions are reducing quality, are wildly unpopular with voters, and are indeed the law’s greatest political vulnerability:
Public opinion surveys show voters support ObamaCare’s preexisting conditions provisions by a two‐to‐one margin. If those provisions have the effect of reducing quality, however, that initial support flips to two‐to‐one opposition. The biggest shift is among Democrats, who swing from 82 percent in favor to 55 percent opposed. Voters turn against those provisions whether the erosion in quality comes in the form of less access to medical tests and treatments, longer waits for care, more surprise medical bills, or less access to top‐rated treatment centers…
In “Is ObamaCare Harming Quality? (Part 1),” I explain that new research shows that ObamaCare is not working how it is supposed to work in theory: the law’s preexisting conditions provisions create perverse incentives for insurers to reduce the quality of coverage; those provisions are reducing the quality of coverage relative to employer plans; and the erosion in quality is likely to accelerate in the future.
In “How To Ensure Quality Health Coverage (Part 2),” I explain why regulators cannot fix this problem, and why providing sick patients secure access to quality health care requires allowing consumers to purchase health plans not subject to ObamaCare’s preexisting conditions provisions.
Part 2 also explains how expanding the definition of “short‐term” health insurance to include policies that include guaranteed‐renewability riders, a change the Trump administration can make on its own via regulation, would free consumers from ObamaCare and pressure Democrats to come to the negotiating table.
President Trump today signed an executive order that urges executive‐branch agencies to take steps that could free millions of consumers from ObamaCare’s hidden taxes, bring transparency to that law, and give hundreds of millions of workers greater control over their earnings and health care decisions.
Background: ObamaCare’s Hidden Taxes
Since the Affordable Care Act took full effect in 2014, premiums in the individual market have more than doubled. The average cumulative increase is 105 percent, equivalent to average annual increases of 19 percent. Family premiums have increased 140 percent. In Alabama, Alaska, and Oklahoma, premiums have more than tripled. Analysts predict an average increase of 18 percent for 2018; premium increases will average 24 percent in Washington State and 45 percent in Florida. Maryland Insurance Commissioner Al Redmer predicts that if these trends persist, the Exchanges “will implode.”
ObamaCare’s skyrocketing premiums are not due to rising health care prices. They are due to the hidden taxes ObamaCare imposes. The law’s community‐rating price controls increase premiums for the healthy in order to reduce premiums for the sick. The law also requires individuals and small employers to purchase a government‐defined set of “essential health benefits,” including coverage (e.g., maternity care) that many consumers do not want.
The cost of ObamaCare’s hidden taxes is substantial. The Department of Health and Human Services commissioned (and then, oddly, suppressed) a study from the consulting firm McKinsey & Co. estimating their impact. McKinsey found ObamaCare’s essential health benefits mandate has increased premiums for 40‐year‐old males by up to 23 percent over four years. Even more startling, McKinsey found community rating has increased premiums for 40‐year‐old males by a further 98 percent to 274 percent since 2013. Community rating’s impact on premiums has been three to nine times greater than the overall trend in health care prices and spending. Community rating has also been the driving force behind ObamaCare’s narrow provider networks, which McKinsey found have largely or entirely erased the benefit from requiring consumers to purchase additional coverage.
Finally, insurers are fleeing the Exchanges, leaving consumers with little or no choice of carriers. At last count, 49 percent of counties and 2.7 million Exchange enrollees (29 percent) will have only one carrier in the Exchange. Exchange coverage is also eroding because ObamaCare literally penalizes insurers for providing high‐quality coverage to the sick.
Fortunately, Congress explicitly exempted one category of health‐insurance products from ObamaCare’s crushing hidden taxes. While those provisions apply to individual health insurance coverage, the Public Health Service Act states, “The term ‘individual health insurance coverage’ means health insurance coverage offered to individuals in the individual market, but does not include short‐term limited duration insurance.” Congress did not define “short‐term limited duration insurance,” but HHS had traditionally defined them to be health plans with a term of less than 12 months and that were not guaranteed renewable.
After ObamaCare took full effect in 2014, the market for short‐term health insurance policies grew by 50 percent as many consumers sought to avoid the law’s hidden taxes. In 2016, the Obama administration tried to cut off that escape hatch and force consumers to pay those hidden taxes by prohibiting short‐term plans with terms that exceeded three months.
Today’s executive order directs executive‐branch agencies to “consider allowing such insurance to cover longer periods and be renewed by the consumer.”
If the Trump administration allows insurers to offer guaranteed renewable short‐term plans, it would be truly revolutionary. Consumers could avoid ObamaCare’s hidden taxes and low‐quality coverage by purchasing relatively secure insurance that protects them against the long‐term financial cost of illness, and that protects them against their premiums rising if they get sick. Premiums would be far lower than they are in the Exchanges. If the administration gets the regulations right, this change could even allow innovations that reduce the cost of health‐insurance protection by a further 80 percent. In effect, the Trump administration could enact Sen. Ted Cruz’s (R‑TX) compromise repeal‐and‐replace proposal via regulation.
Health Reimbursement Arrangements
The federal tax exclusion for employer‐sponsored insurance effectively penalizes workers unless they surrender a sizeable chunk of their income to their employer and let their employer choose their health plan. Workers with family coverage lose control of an average $13,000. Overall, employers get to control $700 billion per year that rightfully belongs to their employees.
Health savings accounts (HSAs), flexible spending accounts (FSAs), and health reimbursement arrangements (HRAs) allow workers to control a portion of their health care dollars without penalty, but different rules apply to each. Only HSAs give workers true ownership of their health care dollars. But HRAs have the potential to allow workers who purchase health insurance on the individual market to avoid the effective tax penalty the federal government has traditionally levied on workers who purchase such coverage.
President Trump’s executive order directs executive‐branch agencies “to increase the usability of HRAs, to expand employers’ ability to offer HRAs to their employees, and to allow HRAs to be used in conjunction with nongroup [i.e., individual‐market] coverage.” Presumably, this means the administration is thinking of rolling back the Obama administration’s rule that employers could not use HRAs to make tax‐free contributions to their employees’ individual‐market premiums.
If the agencies get the rules right, they could reduce taxes by reducing the penalty the federal government imposes on workers who want to control their health care dollars, and free workers to purchase relatively secure coverage (e.g., on the short‐term market) that does not disappear when they change jobs.
Association Health Plans
The federal government imposes different rules on coverage for individuals, small employers, and large employers. It also imposes different rules on employers who purchase coverage from an insurance company versus employers who “self‐insure” by bearing that risk and basically running their own insurance company. As a rule, large employers and those that self‐insure are subject to less regulation.
Association health plans, or AHPs, are a way for multiple individuals or employers to purchase insurance together. Trump’s executive order directs the Department of Labor to “consider proposing regulations or revising guidance, consistent with law, to expand access to health coverage by allowing more employers to form AHPs.” It appears the goal is to allow AHPs to let groups of small employers qualify as large employers (and therefore become exempt from federal regulations such as ObamaCare’s essential health benefits mandate) and to let them self‐insure (and therefore become exempt from state health‐insurance regulations).
The AHP changes the executive order envisions would not be as clear a win for consumers. They seek to build on existing government favoritism toward employer‐sponsored health insurance, a type of coverage that has the curious feature that it disappears when you get sick and can’t work anymore. Employer‐sponsored insurance therefore does not solve but instead exacerbates the problem of preexisting conditions. It also operates under community‐rating price controls that are similar to those in ObamaCare, and that produce similar effects. (Oddly, while the Trump administration is trying to free consumers from community rating, it boasts that AHPs would have that feature.) If the AHP‐related changes allow employers to avoid ObamaCare’s hidden taxes, that is a step in the right direction. But to the extent they would move even more authority for regulating health insurance from states to the federal government, that would be a step in the wrong direction.
And note: expanding AHPs is not what free‐market advocates have in mind when we talk about allowing consumers and employers to purchase insurance across state lines. The idea is to allow employers and individuals to purchase insurance licensed and regulated by a state other than their own, not by the federal government.
Working within the Law, Not Undermining It
Despite all the hype on both sides, Trump’s executive order is not radical, nor would it undermine ObamaCare. Indeed, by itself the executive order does literally nothing. It merely indicates what some in the administration would like executive‐branch agencies to do.
The changes this executive order envisions would not, as some suggest, be the most significant changes the Affordable Care Act has seen. All three branches of government have already altered the constraints imposed by the ACA to a greater extent than these changes would.
- Congress and President Obama actually repealed parts of the ACA, including the “1099 tax” and the CLASS Act.
- Congress and President Obama curtailed the law’s tax cuts and subsidies by increasing premium‐assistance‐tax‐credit clawbacks and limiting risk‐corridor subsidies.
- In NFIB v. Sebelius, the Supreme Court radically rewrote the ACA by making the Medicaid expansion optional.
- President Obama unilaterally exempted people from the ACA’s health‐insurance regulations when he created “grandmothered” plans.
The changes this executive order envisions would not go nearly so far. They would not alter the constraints imposed by the ACA or other federal statutes. They would work within those constraints.
It is therefore not accurate to claim these changes would somehow “undermine” ObamaCare. They would allow many consumers to avoid the Exchanges and ObamaCare’s hidden taxes—but then again, so did President Obama when he created “grandmothered” plans. They would make the costs of community rating, essential health benefits, and other hidden taxes more transparent—but so did “grandmothered” plans, as well as the steps President Obama took with Congress to increase premium‐assistance‐tax‐credit clawbacks and to limit risk‐corridor subsidies.
When healthy consumers flee the Exchanges, premiums could rise even faster than they already are, and the Exchanges could indeed collapse as Maryland’s insurance commissioner predicts. If so, we must understand that as a manifestation of ObamaCare’s unpopularity. If community rating and other provisions of the law were as popular as ObamaCare supporters claim, consumers would be lining up to pay the resulting hidden taxes. But they won’t–and even Democrats know it. So when Democrats object to reforms that would let consumers avoid ObamaCare’s hidden taxes, they are actually implicitly conceding that even the ObamaCare provisions that they claim are popular are actually unpopular. What Democrats appear to mean when they complain this executive order “undermines the law” is that it could undermine their illusions about ObamaCare’s popularity and sustainability.
In the latest issue of Cato Journal, I review Casey Mulligan’s book, Side Effects and Complications: The Economic Consequences of Health‐Care Reform.
Some ACA supporters claim that, aside from a reduction in the number of uninsured, there is no evidence the ACA is having the effects Mulligan predicts. The responsible ones note that it is difficult to isolate the ACA’s effects, given that it was enacted at the nadir of the Great Recession, that anticipation and implementation of its provisions coincided with the recovery, and that administrative and congressional action have delayed implementation of many of its taxes on labor (the employer mandate, the Cadillac tax). There is ample evidence that, at least beneath the aggregate figures, employers and workers are responding to the ACA’s implicit taxes on labor…
Side Effects and Complications brings transparency to a law whose authors designed it to be opaque.
After six-plus years, congressional Republicans have finally offered an ObamaCare-replacement plan. They should have taken longer. Perhaps we should not be surprised that House Republican leaders* who have thrown their support behind a presidential candidate who praises single-payer and ObamaCare's individual mandate would not even realize that the plan cobbled together is just ObamaCare-lite. Don't get me wrong. The plan is not all bad. Where it matters most, however, House Republicans would repeal ObamaCare only to replace it with slightly modified versions of that law's worst provisions.
Here are some of ObamaCare’s core private-health insurance provisions that the House Republicans’ plan would retain or mimic.
- ObamaCare offers refundable health-insurance tax credits to low- and middle-income taxpayers who don’t have access to qualified coverage from an employer, don’t qualify for Medicare or Medicaid, and who purchase health insurance through an Exchange. House Republicans would retain these tax credits. They would still only be available to people ineligible for qualified employer coverage, Medicare, or Medicaid. But Republicans would offer them to everyone, regardless of income or where they purchase coverage.
- These expanded tax credits would therefore preserve much of ObamaCare’s new spending. The refundable part of "refundable tax credits" means that if you're eligible for a tax credit that exceeds your income-tax liability, the government cuts you a check. That's spending, not tax reduction. ObamaCare’s so-called “tax credits” spend $4 for every $1 of tax cuts. House Republicans know they are creating (preserving?) entitlement spending because they say things like, “this new payment would not be allowed to pay for abortion coverage or services,” and “Robust verification methods would be put in place to protect taxpayer dollars and quickly resolve any inconsistencies that occur," and that their subsidies don't grow as rapidly as the Democrats' subsidies do. Maybe not, but they do something that Democrats' subsidies don't: give a bipartisan imprimatur to ObamaCare’s redistribution of income.
- As I have tried to warn Republicans before, these and all health-insurance tax credits are indistinguishable from an individual mandate. Under either a tax credit or a mandate, the government requires you to buy health insurance or to pay more money to the IRS. John Goodman, the dean of conservative health policy wonks, supports health-insurance tax credits and calls them “a financial mandate.” Supporters protest that a mandate is a tax increase while credits—or at least, the non-refundable portion—are a tax cut. But that's illusory. True, the credit may reduce the recipient's tax liability. But it does nothing to reduce the overall tax burden imposed by the federal government, which is determined by how much the government spends. And wouldn't you know, the refundable portion of the credit increases the overall tax burden because it increases government spending, which Congress ultimately must finance with additional taxes. So refundable tax credits do increase taxes, just like a mandate.
Read the rest of this post »