By KIM BELLARD
It’s December 3 and, to no one’s surprise, Congress has not yet acted on extending expanded health care premium tax credits for ACA. For Congress, the subsidies don’t expire until the end of the year, so they figure they have at least until then to act, or maybe some time after, given the way they handled the recent government shutdown.
On the other hand, consumers who renew or purchase ACA plans face a more immediate deadline; You have until December 15 to register for January 1street. They are already seeing huge increases resulting from a normal renewal increase plus the loss of generous subsidies; Kaiser Family Foundation estimates that your premiums will more than double without them. They cannot wait while Congress makes politics.
There seems to be agreement that something will be done about subsidies, but there is less clarity about what that something is. Some centrists argue that enhanced subsidies should be expanded, but with some adjustments, such as reducing upper income levels and/or requiring everyone to pay at least a minimum premium. To me, that would be a reasonable compromise. But some Republicans, including President Trump, are calling for a more radical change: Instead of giving the expanded premium tax subsidies to those “fat” insurers, give them directly to consumers through health savings accounts (HSAs). They argue that individuals must be put above insurers.
I’m here to tell you: math doesn’t work.
I’m not an actuary, but a long time ago I was a group insurer, setting rates for employer group health insurance, and also a long time ago I was involved in the early days of so-called consumer-directed health plans (CDHPs), including HSAs and high-deductible health plans. I don’t disagree that HSAs and high-deductible plans can play a role, but you have to understand the math that drives healthcare spending.
The central fact of health care spending is that is not evenly distributed. It is a perfect example of the Pareto principle: 80% of spending comes from 20% of the people. The bad thing about this is that about 15% of people have no health care spending in a given year. What insurance does is take money from everyone and use it to finance the expenses of the people who pay the most. that’s what all insurance does it.
Okay, I’ve avoided doing the math as much as possible, but here goes. One proposal calls for $2,000 to be deposited into each enrollee’s new HSA. Let’s keep it simple and say there are 1,000 such people and their average annual health care expenditure is $2,000 (which, of course, is shape low). So we have 1,000 x $2,000 = $2 million in both subsidies and spending. It works perfectly, right?
Not so fast.
Of those 2,000,000 dollars of expenditure, eighty percent (1.6 million dollars) corresponds to only 200 people. They only have $400,000 in HSA funds (200 x $2,000), so they’re really out of luck. 1.2 million dollars without luck.
The remaining 800 people have only $400,000 in expenses ($2 million – $1.6 million) but they have $1.6 million in HSA funds (800 x $2,000), so they just received a huge windfall. They can spend it on non-covered services, like dental or vision, or roll it over to the next year, tax-free. That’s 1.2 million dollars for good.
Of course, at some point the insurance kicks in, but the unlucky 200 people will hit those big deductibles and out-of-pocket limits, while the luckier people will feel comfortable with their new HSA funds mostly intact. It’s big business for them (and for the financial institutions that manage those funds, an angle let’s not forget).
Is our goal to protect people who pay high costs or to benefit the majority of people?
It’s worse than that. Let’s assume ACA premiums are also $2,000 per person, ignoring any administration or insurance gains. So we have $2,000,000 in premiums and $2,000,000 in expenses. But let’s now take that 15% of people without spending. They contribute $300,000 (150 x $2,000) in premiums but receive nothing in return. Now that they’re losing expanded subsidies and seeing their premiums double, they might decide, insurance be damned, that I’ll retire.
This is devastating to the entire insurance risk pool. His premiums now drop to just $1.7 million ($2 million – $300,000), but his claims remain at $2 million. Then it will take an 18% rate increase ($2 million divided by $1.7 million) just to keep up, which will likely cause more people to drop coverage, causing rates to rise again, and soon we’ll be in the grim death spiral.
The ACA required insurers to accept anyone without health coverage or pre-existing coverage exclusions (neither of which were true before the ACA) and it only worked because of subsidies. Without enough healthy people, it is not possible to have a viable health insurance market.
Republicans seem to think that insurers are making too much money from ACA plans, which in their view justifies not paying them the enhanced subsidies. I doubt this is true. I can see insurers benefiting from Medicare Advantage, but I suspect ACA plans constantly teeter on the edge of profitability. Insurers have to get and maintain that right mix of enrollment: enough healthy people, not too many sick.
I’m trying to figure out if Republicans really don’t understand the math, or if they understand it very well but are using the HSA ploy to continue their efforts to undermine the ACA. That is, are they ignorant or cynical?
The expanded subsidies were a response to COVID and no one should have expected them to be permanent. It’s fair to take a look at them and the original subsidies to see what they might be like (for example, the original subsidies never contemplated that states would not expand Medicaid, so they would not go to very low-income people at all). But let’s not fool ourselves into thinking that the HSA approach is an effort to improve something.
Kim is a former e-marketing executive at a major Blues scheme, publisher of the late and lamented Tincture.ioand now a regular contributor to THCB
