Three policies to fix health insurance vs. Biden plan to paper over problems with big subsidies

Last week the U.S. Senate released their FY2022 Budget Resolution Agreement Framework. This represents the outline of how Democrats in Congress plan to implement President Biden’s $3.5 trillion budget plan without a single Republican vote under the budget reconciliation process.  Part of this spending spree would go toward making a temporary expansion of Affordable Care Act (ACA) health insurance premium subsidies during COVID permanent. 

If implemented, this expansion would only build off ACA policies that already propelled individual health insurance premiums to unaffordable levels and, as a result, drive further dysfunction in the individual market.  Ultimately, this will end up cementing a level of unaffordability that will make nearly everyone who relies on the individual market dependent on a substantial government subsidy. 

Moreover, by using taxpayer-funded subsidies to paper over the affordability problem, it does nothing to address the overall rise in the cost of health care.  Instead, it adds fuel to America’s health care cost problem by undermining insurers’ incentives to control costs. The big winners from the Senate’s proposal will be health insurers.  Higher health costs combined with larger subsidies will mean higher profits.

Today, Health Affairs published an article I wrote outlining how the ACA led to unaffordable premiums, the ACA’s failure to efficiently cover more people, and the severe consequences of making the expansion of the ACA’s premium subsidies permanent.  The article concludes by offering three policy alternatives that can help build a more functional competitive insurance market. 

The vision behind these policies is a more competitive individual market with lower premiums that middle-income Americans can afford on their own without direct subsidies.  By creating a more functional and competitive market, these policies would help drive down the overall cost of care.  Here are the three policies:

  • Fixed Premium Subsidies. The first policy would shift the ACA’s premium subsidy structure from a subsidy linked to the price of the premium to a fixed subsidy.  Recent research shows how the ACA’s price-linked premium subsidy structure inflates premiums.  The value of the ACA’s premium tax credit is tightly linked to the price of a benchmark insurance premium and, therefore, the subsidy tends to rise lock-step with the increase in premiums.  As result, there’s little incentive for insurance companies to keep premiums down for subsidized people.  A fixed subsidy would eliminate this automatic inflator. 
  • Federal Reinsurance Program. Introducing a federal reinsurance would be an important second step.  Due to the regulatory structure of the ACA, the individual health insurance market now attracts a sicker pool of people with disproportionately higher claims than group health plans.  As a result, it costs more than it otherwise would.  Many states have introduced reinsurance programs that fund a portion of high-cost claims in the individual market, which has helped reduce premiums.  A nationwide reinsurance program structured to help equalize the cost of claims across the individual and group markets would help lower premiums.  Because it only funds a portion of claims, insurers would remain motivated to control costs.
  • Codification of Individual Coverage Health Reimbursement Arrangements. The third policy would explicitly authorize individual coverage health reimbursement arrangements (HRAs) in federal law.  Individual coverage HRAs allow employers to fund individual health insurance market premiums for their employees with pre-tax dollars just the same as funding a group health plan.  This is an important policy that helps equalize the federal tax treatment of health insurance funding.  By extending the same tax advantage to individual policies, more people may join the individual market through their employer.  More insurance customers should attract more insurers, creating more competition to lower premiums. Importantly, these customers will likely improve the risk pool because their decision to join the market will be based on their employment, not their health.  If enough healthier people join the pool from individual coverage HRAs, the claims experience in the individual market may come to mirror the group market and eliminate the need for reinsurance. Unfortunately, there have been legal questions on whether federal insurance requirements limit this arrangement. Codifying individual coverage HRAs in statute would help give employers clarity and confidence to take this option.

The high and rising cost of health care has been a fundamental problem plaguing America’s health care system for decades.  Taking advantage of the competitive forces that drive prices down and quality up in every other sector of the economy is key to controlling health care costs.  Pursuing these policies to create a truly competitive individual health insurance market would be a powerful force to help address America’s health care cost problem at its root.