This is a blog about self-employment and entrepreneurship, and access to affordable comprehensive health insurance has always been one of the biggest obstacles to entrepreneurship. That makes the newly-released draft of the Senate’s healthcare reform bill squarely in this blog’s wheelhouse, just as the House’s version was back in March.
First, we need to briefly review the Affordable Care Act and how it made comprehensive health insurance affordable.
The majority of Americans under the age of 65 receive health insurance through their employers. The Affordable Care Act made that insurance somewhat more comprehensive by specifying the “essential health benefits” such plans had to provide, and somewhat more affordable by eliminating annual and lifetime spending limits. If, like most Americans, you work for an employer who provides your family with health insurance, those are the only changes that affected you (the original ACA also included a so-called “Cadillac tax” on especially generous employer-provided health benefits, but it has never been implemented due to repeated delays by Congress). Employer-provided health insurance was already prohibited from discriminating against employees based on their pre-existing conditions and from underwriting their premiums, and the ACA didn’t change that.
Then the Affordable Care Act did something unprecedented in American history: it attempted to make comprehensive health insurance affordable to people who didn’t receive health insurance through their employer. It did this in 4 ways:
- Income up to 133% of the federal poverty level: expanded Medicaid eligibility. Medicaid is an extremely generous single-payer health insurance scheme with low negotiated reimbursement rates for doctors and hospitals, no premiums, and low co-pays on prescription drugs. (For reasons that are unclear to me, the District of Columbia has unusually generous Medicaid eligibility, stretching up to 210% of the poverty level);
- Income up to 250% of the federal poverty level: private marketplace health insurance plans with subsidies and cost-sharing reductions. Since only “Silver” plans are eligible for cost-sharing reductions, in this income range you’re expected to choose such a plan: advance tax credits will cover most or all of your insurance premium, since they’re anchored to the second-lowest-cost Silver plan on the exchange (more on that in a moment), and cost-sharing reductions dramatically lower your out-of-pocket maximum. As a personal example, while living in Wisconsin (a non-Medicaid-expansion state) I chose a Silver plan with a $200.84 monthly premium and received an advance tax credit of $200 per month. Due to the cost-sharing reduction my deductible and out-of-pocket maximum were each lowered to $500 from the plan’s original $5,150 deductible and out-of-pocket maximum.
- Income up to 400% of the federal poverty level: private marketplace health insurance plans with subsidies but without cost-sharing reductions. Here you will receive federal tax credits that cap your premium at a certain percentage of your income, anchored to the second-lowest-cost Silver plan on the exchange, but you’re responsible for the plan’s deductible and co-payments. You can choose a Bronze plan instead and the second-lowest-cost Silver plan subsidy will go further towards paying the plan’s premium, or a Gold plan and the SLCSP subsidy will cover a smaller portion of the premium.
- Income above 400% of the federal poverty level: you’re responsible for paying the entire premium for the marketplace plan of your choice.
Once you understand this simple four-part structure, you can see that there are several dials you can turn up or down to affect the overall shape of the system:
- You can turn the Medicaid dial down and the subsidy dial up, reducing the number of people eligible for the Medicaid expansion and increasing the number eligible for marketplace subsidies and cost-sharing reductions. This would reduce the amount of federal expenditures on Medicaid and increase the amount spent on advance premium tax credits. Since private insurance is more expensive to provide than Medicaid (Medicaid only pays out on actual treatment, while private insurance collects payments whether or not you receive treatment), this would be somewhat more expensive to the federal government but would improve the health profile of private insurance pools, which would help steady premiums in the medium and long term, including for non-subsidized high-income enrollees. The Affordable Care Act struck one balance between those two forces, but perhaps a different balance would be better overall.
- You can turn the cost-sharing reduction dial up or down, increasing or decreasing the number of people with access to lower out-of-pocket costs. An important complaint of people who are eligible for subsidies but not eligible for Medicaid is that people with lower incomes have better health insurance, due to their lower out-of-pocket expenses. This is true: Medicaid is great health insurance, and people with Medicaid are very happy with it. You may not have heard this because doctors (who receive lower reimbursement from Medicaid) have louder voices than the poor, who actually benefit from Medicaid. One solution would be to raise the income limit on cost-sharing reductions, so more people benefit from the lower out-of-pocket costs that lower-income people pay.
- You can turn the subsidy dial up or down, increasing or decreasing the number of people with access to advance premium tax credits to pay for marketplace health insurance plans. Personally, my view is that once you’ve gone to the trouble of calculating the second-lowest-cost Silver plan and basing a subsidy on it, you should simply provide that subsidy to everyone, and pay for it with a progressive income tax, since means-testing is an expensive, flawed bureaucratic nightmare.
The Senate bill smashes all the dials and tips over the mixing board
With this framework we can see what the Senate healthcare bill does on each of these fronts:
- turns the Medicaid dial all the way back to zero, then breaks it off and turns it even further. Starting in 2020, states would receive no additional federal money to cover the Medicaid expansion population. Since expansion states would be responsible for covering that shortfall, most or all would end the Medicaid expansion and dump those low-income adults onto the exchanges. Then the amount provided for the existing pre-expansion Medicaid population will be linked to inflation instead of to the actual health expenses Medicaid enrollees incur.
- turns the cost-sharing reduction dial down to zero. Moving people from Medicaid to the exchanges would be a defensible policy choice if new enrollees received premium subsidies and cost-sharing reductions that kept their premiums and out-of-pocket expenses minimal. However, as explained above, that would increase the cost of covering such people, since Medicaid costs so much less than private insurance. Instead, the Senate bill ends cost-sharing reductions entirely after 2019. That means the new exchange enrollees would be responsible for the entire deductible and co-payments associated with their new private insurance plans.
- turns the subsidy dial way down. In addition to increasing the out-of-pocket costs of the lowest-income population, premium subsidies are also reduced in two key ways. First, eligibility for premium subsidies is reduced to 350% of the federal poverty level, so folks earning between 350% and 400% of the poverty level are cut off completely from premium subsidies. Second, those who continue to be eligible for subsidies will receive subsidies anchored not to the second-lowest-cost Silver plan, as they do today, but rather to the median Bronze plan. What’s the difference? Across the enrolled population, a Silver plan is required to have an actuarial value of 70% (it will cover 70% of the expenses of the enrolled population), while a Bronze plan’s actuarial value is just 58%.
Each of these dials produces cost savings: ending the Medicaid expansion and capping pre-expansion Medicaid reduces the cost of that program by kicking people off Medicaid; ending cost-sharing subsidies reduces the cost of enrolling low-income people on the exchanges; drastically cutting subsidies reduces the amount of aid going to low-income people by forcing them into stingier health insurance plans.
Why do this? Why turn all the dials down, instead of adjusting them so they cover more Americans with more comprehensive, more affordable health insurance? Why make entrepreneurs decide between health care and investing in their business? Why stand by and watch the number of uninsured, the number of medical bankruptcies, and the amount of unreimbursed health care return to its pre-ACA levels?
In order to reduce the marginal tax rate on passive investment income for the very wealthy by 3.8 percentage points.