Fix is needed for sub­si­dies

Re­duc­ing the min­i­mal amount of cov­er­age may be best way to tweak ACA

Modern Healthcare - - OPINIONS | COMMENTARY - Don­ald Suss­wein

The Pa­tient Pro­tec­tion and Af­ford­able Care Act was de­signed to ex­pand pri­vate health in­sur­ance cov­er­age through four key re­forms to the health in­sur­ance sys­tem. Al­though th­ese four re­forms were in­tended to fit to­gether like pieces of a jig­saw puz­zle, in re­al­ity they fit like pieces from four dif­fer­ent jig­saw puzzles. This flaw must be ac­knowl­edged if the ACA—or some im­prove­ment thereon—is to achieve its ob­jec­tives.

The ACA’s pri­mary goal is to en­sure that ev­ery Amer­i­can not el­i­gi­ble for Medi­care or Med­i­caid is cov­ered by a “bronze” in­sur­ance pol­icy hav­ing a min­i­mum cost of ap­prox­i­mately $10,000 for a fam­ily of four—or $3,600 for a sin­gle adult. Un­for­tu­nately, when ex­am­ined as a whole, it is clear that the ACA’s four key re­forms do not re­quire any­one to ac­tu­ally bear th­ese costs—nei­ther the in­sured, nor the in­sured’s em­ployer, nor the govern­ment.

The first key re­form is the rule re­quir­ing in­sur­ance in the in­di­vid­ual and small-group mar­kets to be of­fered and priced with­out re­gard to pre-ex­ist­ing con­di­tions. With­out this im­por­tant re­form an in­di­vid­ual with a pre-ex­ist­ing con­di­tion gen­er­ally would only be able to get rea­son­ably priced in­sur­ance through an em­ployer’s large group plan. Un­for­tu­nately, this re­form elim­i­nates one of the rea­sons why large em­ploy­ers have viewed em­ployer-pro­vided group health in­sur­ance as an im­por­tant com­pet­i­tive ad­van­tage in at­tract­ing em­ploy­ees. If in­sur­ance can be read­ily ob­tained in the in­di­vid­ual mar­kets, there may be less of a per­ceived need for em­ploy­ers to pro­vide it.

The risk that em­ploy­ers might re­spond by drop­ping their large group plans, or re­duc­ing their sub­si­dies for such plans, led Congress to adopt the sec­ond key re­form, the em­ployer man­date. How­ever, de­spite its real or per­ceived bur­den to many em­ploy­ers, the ac­tual eco­nomic ben­e­fit to the worker from this re­quire­ment is quite small.

For ex­am­ple, for a 45-year-old hus­band and wife, each mak­ing $25,000 and each work­ing for a large em­ployer, the em­ployer man­date would only re­quire each em­ployer to pro­vide around $1,225 of sub­si­dies or a to­tal of $2,450 to­wards an in­sur­ance pack­age that would cost ap­prox­i­mately $10,000 for a fam­ily of four (ac­cord­ing to the Kaiser Fam­ily Foun­da­tion). That $1,225 is the ex­cess of the $3,600 cost of a self-only pol­icy for a 45year-old worker over 9.5% of that worker’s wages, or $2,375. Thus, even af­ter re­ceiv­ing $2,450 of em­ployer sub­si­dies, this fam­ily must still pay $7,550 to­wards the $10,000 cost of the “bronze” fam­ily pol­icy the act in­tends them to have.

The third key re­form, a tax credit sub­sidy, was in­tended to help make this cost af­ford­able. Un­for­tu­nately, no fam­ily will qual­ify for any tax cred­its if ei­ther spouse works for an em­ployer that of­fers them a self-only pol­icy with the min­i­mum sub­sidy re­quired un­der the em­ployer man­date—$1,225 per worker in this ex­am­ple. Thus, our fam­ily with in­come of $50,000 must still pay $7,550 to­wards the cost of their $10,000 in­sur­ance pol­icy.

Most em­ploy­ers are ex­pected to com­ply with the man­date, thus mak­ing their em­ploy­ees in­el­i­gi­ble for tax cred­its. Al­though $1,225 is not a triv­ial cost for many em­ploy­ers, it is less costly than a nond­e­ductible penalty of $2,000 for ev­ery em­ployee or the al­ter­na­tive penalty of $3,000 for each em­ployee that ob­tains a tax credit sub­sidy. This was in­tended. By de­sign, the tax cred­its will likely be avail­able only for the rel­a­tively small num­ber of in­di­vid­u­als or fam­i­lies where no one works full-time for a “large” em­ployer.

The fourth key re­form, of course, is the in­di­vid­ual man­date. Un­der that rule, our hy­po­thet­i­cal fam­ily would face a choice be­tween in­cur­ring $7,550 of pre­tax costs for a $10,000 pol­icy or pay­ing nond­e­ductible penal­ties of ap­prox­i­mately $2,100. Un­for­tu­nately, be­cause of the first re­form re­quir­ing that in­sur­ance be of­fered with­out re­gard to pre-ex­ist­ing con­di­tions, it is easy to pro­ject that many such fam­i­lies will de­lay pur­chas­ing in­sur­ance un­til it is needed, ef­fec­tively as­sum­ing the risk of health ex­penses they in­cur un­til the next an­nual open en­roll­ment pe­riod. As many have pre­dicted, that will likely send the cost of in­sur­ance at the ex­changes higher, pos­si­bly mak­ing the ex­changes com­pletely non­func­tional.

Given the way th­ese four key re­forms fit to­gether, or fail to fit to­gether, the only way to fix the law is one of the fol­low­ing:

Re­duce the amount of min­i­mally re­quired in­sur­ance for all Amer­i­cans.

In­crease the sub­si­dies re­quired un­der the em­ployer man­date.

In­crease the penal­ties for vi­o­lat­ing the in­di­vid­ual man­date.

Shift the en­tire bur­den to the tax­pay­ers by ex­pand­ing the avail­abil­ity of tax cred­its (ei­ther di­rectly or in­di­rectly by re­peal­ing the em­ployer man­date which would en­able more in­di­vid­u­als to qual­ify for the tax cred­its).

As the last op­tion would ob­vi­ously have po­ten­tially se­vere bud­getary con­se­quences, and the sec­ond and third op­tions ap­pear to be po­lit­i­cally prob­lem­atic, the first op­tion may have to be con­sid­ered.

Don­ald Suss­wein, a for­mer tax coun­sel to the Se­nate Fi­nance Com­mit­tee, is a

prin­ci­pal at Wash­ing­ton-based McGladrey, a tax

con­sult­ing firm.

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