Let’s Check Out the Mathematics of Health Subsidies – Healthcare Blog
Author: Kim Berard
It's December 3, and not surprisingly, Congress has still not taken action to extend the ACA's expanded health care premium tax credit. For Congress, the subsidies don't expire until the end of the year, so given the way they handled the recent government shutdown, they don't think action can be taken until at least then, or possibly some time after that.
On the other hand, consumers renewing or purchasing ACA plans face a tighter deadline; they have until December 15 to sign up for January 1Yingshi. They've seen huge increases due to normal renewal increases coupled with the loss of generous subsidies; the Kaiser Family Foundation estimates that without them, their premiums would more than double. They can't wait for Congress to play politics.
There seems to be consensus that something will be done about subsidies, but what exactly that will be is less clear. Some centrists advocate extending the enhanced subsidies but with some adjustments, such as lowering high-income levels and/or requiring everyone to pay at least some minimum premiums. To me, this is a reasonable compromise. But some Republicans, including President Trump, are calling for a more sweeping change: Instead of providing expanded premium tax subsidies to fat cat insurance companies, they could instead provide subsidies directly to consumers through health savings accounts (HSAs). They believe individuals should be prioritized over insurance companies.
I'm here to tell you: the math doesn't work.
I'm not an actuary, but a long time ago I was a group underwriter setting rates for employer group health insurance, and a long time ago I was involved in the early development of so-called consumer-directed health plans (CDHPs), including HSAs and high-deductible health plans. I don't agree that HSAs and high deductible plans have a role to play, but people have to understand the math that drives health care spending.
The central fact about health care spending is that it is unevenly distributed. This is a perfect example of the Pareto Principle: 80% of spending comes from 20% of the people. In contrast, about 15% of people have no health care expenses in any given year. What insurance does is take money from everyone and use it to fund expenses for high-cost people. That's it all Insurance does.
Well, I've avoided doing the math as much as possible, but here it is. One proposal calls for $2,000 to be deposited into each enrollee's new HSA. Let's simply say there are 1,000 of these people and their average health care expenditure is $2,000 per year (of course, this is Way low). Therefore, our subsidies and expenses are both $1,000 x $2,000 = $2 million. It works perfectly, right?
Not so fast.
Of the $2 million spent, 80% ($1.6 million) was borne by just 200 people. They only have $400,000 in HSA funds (200 x $2,000), so they're really out of luck. $1.2 million bad luck.
The remaining 800 people only have $400,000 in expenses ($2 million – $1.6 million) but $1.6 million in HSA funds (800 x $2,000), so they just received a windfall. They can use it for non-covered services like dental or vision, or carry it forward tax-free to the next year. They donated $1.2 million.
Of course, at some point, insurance kicks in, but the unlucky 200 will face huge deductibles and out-of-pocket limits, while the more fortunate can ride it out with their new HSA funds mostly intact. This is a great deal for them (and the financial institutions that manage these funds, let’s not forget this angle).
Is our goal to protect the high-cost population, or to benefit the most people?
Things will get worse. Let's assume that ACA premiums are also $2,000 per person, ignoring any insurance administration fees or profits. So we have $2,000,000 in premiums and $2,000,000 in expenses. But now let's take the example of the 15% who don't spend money. They contributed $300,000 ($150 x $2,000) in premiums but received nothing in return. Now that they've lost the expanded subsidy and premiums have doubled, they may decide, screw his insurance, I'll quit.
This is devastating for insurance risk pools. Its premiums have now dropped to just $1.7 million ($2 million to $300,000), but claims have remained at $2 million. It would then require an 18% rate increase ($2 million divided by $1.7 million) to keep up, which would likely cause more people to drop coverage, which would cause rates to rise again, and soon we'd be in an ominous death spiral.
The ACA requires insurance companies to cover everyone without medical coverage without excluding those who already have insurance (neither of which was really the case before the ACA), and it only works because of subsidies. Without a sufficiently healthy population, there cannot be a viable health insurance market.
Republicans appear to believe insurance companies make too much money from Affordable Care Act plans, which they believe justifies not paying them increased subsidies. I doubt this is true. I can see insurance companies making money from Medicare Advantage, but I suspect the ACA plans have been teetering on the edge of profitability. Insurers must obtain and maintain just the right mix of enrollees: enough healthy people, but not too many sick people.
I'm trying to figure out if Republicans really just don't understand math, or if they understand it well enough but are using HSA tactics to continue their efforts to undermine the ACA. That is, are they ignorant or cynical?
The expanded subsidies are a response to the coronavirus pandemic, and no one should expect them to be permanent. A fair look at them and the original subsidies to see what they might have looked like (e.g. the original subsidies never contemplated that states wouldn't expand Medicaid, so weren't offered to very low-income people at all). But let's not fool ourselves into thinking that the HSA approach is about improving anything.
Kim is a former electronics marketing executive for a large blues program and editor of The Late and Regretful tincture.ionow a regular THCB contributor
