Is There A Better Way To Subsidize Private Health Insurance? – Forbes


With millions of people losing their jobs, and maybe their employer-provided health insurance as well, it is a good time to ask, how does the federal government encourage private coverage – both at work and for those who buy their own? And is there a better way?

The short answers are: the current system is an incoherent mess; and of course there is a better way.

Let us look at what the federal government is doing now.

Employer-provided coverage escapes income and payroll taxes – a generous subsidy that can amount to as much as half the cost of the insurance. But this is a highly regressive form of subsidy – one which gives the most help to employees with the highest incomes. In fact, families in the top tenth of the income distribution as a group get about 30 times as much subsidy as people in the bottom tenth.

Recommended For You

For people who purchase their own insurance, Obamacare subsidies lower buyers’ premiums and in some cases their out-of-pocket costs. Unlike subsidies in the workplace, this system is highly progressive. The lower the buyer’s income the greater the amount of help. But it is also a subsidy that phases out rather quickly. An individual who earns as little as $50,000 gets no help at all.

What about people who lose their jobs? Under a provision called COBRA, they can continue their employer coverage for up to 18 months if they pay the full premium. But they get no tax subsidy, as they did at work. Individuals can deduct the cost of health insurance premiums and out-of-pocket health care expenses, but only to the degree that these exceed 10 percent of income. An individual who earns, say, $50,000 will probably be able to deduct only a small share of her expenses.

Individuals can forgo the COBRA option and seek an Obamacare subsidy. But even if they qualify, the deductible is likely to be much higher than under their employer’s plan and access to providers much more restricted. So in all likelihood the insurance will be inferior.

How could things be different and better?

My colleague Laurence Kotlikoff advocated a Purple Health Plan when he ran as an independent candidate for president in 2016. The proposal has been endorsed by economists of many different political persuasions, including quite a few Nobel Prize winners.

Patterned after the highly successful Medicare Advantage program, the plan would offer a subsidy to every American not in a government plan (such as Medicare or Medicaid). People would get the subsidy when they enrolled in a private health plan. Importantly:

1.  People would buy insurance through an exchange, where qualified health plans compete.

2.  The federal subsidy would replace all existing forms of subsidy.

3.  People would receive the same subsidy, whether they are employed or unemployed, and the amount would depend on the individual’s income.

4.  There would be no discrimination on the basis of health status.

More recently, Avik Roy and the Foundation for Research on Economic Opportunity have endorsed a similar approach. Like the Kotlikoff proposal, the goal would be universal coverage at premiums people could afford.

There are two problems with this approach.

First, the reason why Medicare Advantage plans work so well is risk adjustment. The MA program is the only place in the entire health care system where doctors can review medical records and request a premium adjustment based on the patient’s health condition. In this way, health plans receive a total premium for each enrollee that equals the expected cost of care for that enrollee.

Medicare is able to do this because all the enrollees have signed up for Medicare. Part A is free and the government deducts the Part B premium from the senior’s Social Security check.

Managing the system for everyone not in Medicare would be quite a challenge. The Obamacare exchanges have had to deal with numerous technical difficulties and risk adjustment in that system is far from perfect.

Second, some large employers may have health plans that are better than a typical MA plan. Moreover, it’s difficult to ask employees to give up plans they like for a system they are unfamiliar with. Yet that is what Medicare Advantage for all would require.

Fortunately, a comprehensive health reform sponsored by Rep. Pete Sessions (R-TX) and Sen. Bill Cassidy (R-LA) achieves the same goal without the two problems.

Under their proposal, people could remain in their employer plan. But the government subsidy would be the same as it would be if they were purchasing coverage on their own. State governments would be the regulators of the individual market (where people buy their own insurance) as they are today. And state governments would provide risk-adjusted payments to health plans so that all applicants (the healthy as well as the sick) would be equally attractive from a financial point of view.

Even more important, health plans would be able to make private arrangements for risk payments when enrollees move from plan to plan. In this way, we could have market-based risk adjustment, rather than bureaucratic risk adjustment.

Under the Sessions/Cassidy proposal, people would not lose health insurance just because they lose their job. Not only would they have health insurance, most people who leave their employer would stay in the same health plan.