If there was one universal theme that helped the GOP take control of the 2016 elections it was the party’s commitment to repeal the Patient Protection and Affordable Care Act (ACA), commonly referred to as Obamacare. Now that they have settled into office, Republicans are grappling with the moving parts of health care reform and the incomparable bar set for providing coverage to millions of previously uninsured Americans. Will the new version be an adequate replacement, and how might it impact each of us?
We were warned there would be bumps in the road when ACA was implemented, but most people expected those issues to improve with time. Instead, premiums gradually swelled to a crescendo in 2016 with an average increase of 25 percent over the prior year. Almost one-third of all U.S. counties offer only one insurer, leaving little hope that competition will eventually drive prices down as intended. (1)
Over the past two years, four new health reform “blueprints” have been introduced for congressional consideration: (2)
- May 13, 2015 – Rep. Tom Price’s Empowering Patients First Act (Note: Tom Price is now the United States Secretary of Health and Human Services)
- June 22, 2016 – House Speaker Paul Ryan’s “A Better Way: Our Vision for a More Confident America”
- Jan. 23, 2017 – Sen. Bill Cassidy’s Patient Freedom Act
- Jan. 24, 2017 – Sen. Rand Paul’s Obamacare Replacement Act
Each of these Republican plans promise to lower costs, offer more choices and increase flexibility. But what exactly does that mean?
Tricks of the Health Insurance Trade
It’s easy to blame Obamacare for all of our health care woes, but it’s important to understand the way insurance works and the strategies insurers may deploy to help offset their risk. Like other industries, the insurance world must find ways to counteract government-mandated requirements and regulations in order to stay in business and offer individuals coverage.
The tactics used by insurers to keep costs under control won’t necessarily change. Obamacare didn’t mandate these tactics; they were unintended consequences of insurance companies trying to maintain profit margins. Unless “TrumpCare” mandates what tactics insurance companies can and cannot deploy, the tactics will continue to exist and evolve with the next iteration of health care reform legislation. Unfortunately, many of these cost control tactics can create aggravation and a greater financial burden for consumers:
- Higher deductibles, copays and co-insurance
- Requiring patients to see their primary care physician first as a gatekeeper for access to more expensive specialists
- Requiring some physicians to get permission for coverage of certain treatment options
- Annual and lifetime coverage limits (these were addressed/prohibited by ACA)
- Smaller provider networks – Many insurance carriers offered a network of preferred provider organizations (PPO) in the early days of the ACA, which included broad hospital and physician options to choose from. However, many carriers now offer a more narrow selection of health maintenance organizations (HMO). Insurers negotiate lower physician and hospital rates by channeling more patients to fewer providers. Excluding some premier providers potentially reduces the extent of adverse selection in a given plan by discouraging some patients with pre-existing conditions from enrolling in it. (3)
High drug prices remain out of the realm of both government and insurer control unless legislation authorizes capping prices.
Before Obamacare, insurers in the individual market assessed each person’s age, gender and medical history in order to set a premium aligned with their likelihood of needing health care. For example, if you had a previous history of cancer, asthma or mental illness, your premium might be significantly higher than someone without a pre-existing condition. ACA addressed this issue in several ways: (4)
- Pre-existing conditions cannot be used to determine premiums
- Gender cannot be used to determine premiums
- Plans can charge older participants no more than three times that of younger members
While the mandate regarding pre-existing conditions is likely to be retained, age- and gender-based pricing may well return.
Studies have estimated that if insurers are allowed to return to the days of charging older people five times more than young ones, millennials would see their annual premiums drop by 15 percent while pre-retirees would likely experience increases of 22 to 29 percent. (5) On the plus side, this means that younger and healthy consumers generally would be charged lower rates, which should encourage more to purchase health insurance. On the negative side, older and sicker populations would likely face higher premiums and be more likely to drop out of the market. Since they tend to need more medical care, older and sicker consumers may have to rely on community clinics and safety net hospitals supported by taxpayer dollars for their health care. If this happens, we may be back to the days of skyrocketing health care costs with less focus on long-term prevention and health maintenance.
Currently, ACA provides low-income Americans with a tax credit subsidy that reduces the cost of plan premiums to no more than 2 to 9.5 percent of a person’s income, relative to the federal poverty level. Recent Republican proposals have advocated eliminating the income-rated subsidy and replacing it with a fixed tax credit that increases with age, regardless of income. This is designed to offset more expensive premiums incurred by older Americans based on age and underwriting practices.
However, this solution could create several new issues. First, the new fixed tax credit would likely be much lower and therefore less effective at offsetting higher premiums. Second, given America’s rapidly aging population, these credits would inevitably increase each year, which means they would eventually have to be reduced or taxpayers would have to start footing a larger part of the bill. And finally, these subsidies would target older and generally higher-income households instead of younger, lower-income people who are less able to afford health insurance.
All of the Republican proposals favor dropping the individual mandate to buy coverage or pay a penalty tax. Unfortunately, eliminating this provision creates two problems. One, it would reduce funds available to help pay the tax subsidies. Two, if younger/healthier and lower-income people drop out of the market this would create a negative cost impact for the remaining older and sicker insurance risk pool. (6)
Competition Across State Lines
President Trump has suggested that health insurance premiums can be reduced via competition, advocating unrestricted sales across state lines. The problem is that states have always been responsible for establishing their own insurance market regulations, and therefore those regulations vary widely.
Eliminate Employer Tax Deductions
Currently, employers benefit from a corporate tax deduction for their share of health insurance premiums paid on behalf of employees. The GOP has proposed eliminating this tax advantage to generate higher revenues to pay for the law. With no tax incentive, some businesses might stop offering coverage. The idea is that employers might then increase wages so that workers could buy coverage in the individual marketplace.
Like the others, this solution generates numerous caveats. First, it is unlikely wages would increase enough to cover the cost of health insurance, since companies would no longer be incentivized by a corresponding tax deduction. Second, workers would probably pay much more out of pocket since individual policies cost about five times more than large group insurance. (7) That cost could come down, however, if more people entered the individual market. Workers who receive higher wages also would get hit with higher income taxes.
GOP plans for Medicare range from no changes at all, to transforming it into a voucher assistance program, to raising the benefit age to 67. (8)
The Role of HSAs
Health savings accounts (HSAs) allow individuals to deposit funds pre-tax and accrue tax-free earnings. Presently, these accounts can be used only in conjunction with high-deductible health plans, although some legislators have proposed expanding that stipulation. HSA funds can be used tax-free to pay for medical expenses or for any purpose after age 65. Lawmakers have proposed raising the annual contribution limit and even providing a tax credit for contributions. (9)
A New Era of TrumpCare …
“That’s going to be called TrumpCare. Republicans will own that lock, stock and barrel, and we’ll be judged in the election less than two years away.” (10)
— Rep. Tom McClintock (R-CA) on repealing Obamacare and replacing it with a new law
Another option for reform that has not yet been fully explored is providing tax subsidies based on health needs rather than income or age. This would allow the young and the healthy to pay a reasonable premium commensurate with their health needs, while the sickest populations could receive subsidy assistance to help pay their higher premiums. Also to date, the insurance industry has not combined the large group employer and individual market populations into a single risk pool to bolster the coffers and help pay claims for all. For now, the biggest detail is how to pay for a new health reform law that offers many of the same perks without the ensuing costs. While it remains to be seen whether the first iteration of TrumpCare actually achieves those goals, it’s a good idea for every American to devise a long-term strategy to help pay for health insurance coverage, no matter the cost, and work on curbing higher personal health care expenses in the future. Contact your financial advisor to discuss ways to save for and/or position your investments to help pay for health care expenses.