Here Are Three Things We Can Do About Obamacare Rate Shock
- Instead of letting healthy people buy insurance cheaply and locking many sick people out of the market, we set common premium rules for everyone, even though that means healthy people will pay more.
- We don't let insurers sell policies with provisions like annual benefit limits that can leave their buyers destitute.
That said, here are three ways we could combat rate shock without undermining either of those goals, in increasing order of political difficulty.
(1) Allow more age-based rating.
The go-to example of someone facing rate shock is a young, healthy man with a moderate or high income who buys health insurance through the individual market. One main reason his premium is going up is that Obamacare limits age-based premium variation to a 3:1 ratio: an insurer may only charge a 64-year-old three times as much as an 21-year-old, even though older people consume much more health care.
Why not just allow unlimited age-based premium variation? If the variation weren't regulated, actual variation would be a little more than 5:1, according to an estimate from the Kaiser Family Foundation, and young people wouldn't face so much rate shock.
The usual answer is that, without the cap on age-based rating, insurance would become too expensive for some adults in the 50-64 age bracket. But it's important to remember that, under the ACA, premiums are already capped as a percentage of income for people making less than 400% of the federal poverty line (about $46,000 for a single adult). Because of the subsidies, older adults making under 400% of FPL will be held harmless from any premium increases: Added subsidy payments will fully offset any premium increase.
Here's whose premiums would change if we got rid of the cap on age-based premium variation: Older adults making over 400% of FPL would pay more, and young adults would pay less. In other words, we'd be repealing an implicit transfer program created by Obamacare from moderate- and high-income young adults to moderate- and high-income older adults. What was the policy justification for that transfer?
(2) Extend subsidies to more middle-income people.
Because of budgetary constraints (i.e., the political desire to hold down the explicit fiscal cost of the law) Obamacare creates a subsidy cliff. People making up to 400% of FPL receive generous premium subsidies, and people making more receive none.
Consider a married couple with no children living in Queens, New York. If they make $62,000 a year, just below the 400% of FPL cutoff, the second-cheapest "silver" level health plan available to them on the New York health insurance exchange will cost $6,371 a year. If they make $63,000, just over the cutoff, they'll have to pay $9,247 for that same plan.
This creates perverse incentives: That couple faces an implicit tax rate of 300% on that extra $1,000 of income, which will encourage them to try to keep their earnings just below 400% of FPL. It's also not fair: Different people in extremely similar financial situations are given wildly different levels of government benefits.
But then, unfairness and distortion are hallmarks of the ways America subsidizes health care. The pre-Obamacare Medicaid system is designed such that returning to work can mean a loss of health insurance. Tax subsidies for employer-provided health care provide the most generous benefits to people with high tax rates and free-spending employers, that is, the people with the least need for insurance subsidies.
I've said before that our health care system is a thicket of subsidies and transfers and I think of Obamacare as an effort to "make the thicket of subsidies and transfers more sensible." One way to do further that would be to extend the premium subsidy range higher (say to 600% of FPL) and offset the cost by restricting the value of the tax subsidy for employer-provided insurance, for example by turning it into a fixed-dollar tax credit.
(3) Allow some middle-income people to buy a Medicaid-based public option.
This is by far the most radical of the three ideas. Medicaid is cheap: Just $3,000 per adult enrollee as of 2010. And that's even though its cost is inflated by the fact that its beneficiaries are very poor and cannot afford significant co-payments or deductibles. We could offer a Medicaid-based option to middle-income adults for whom exchange plans are not affordable, but with added co-payments and deductibles to further reduce the cost.
This would make all sorts of groups go crazy: providers, insurers, pharmaceutical companies, moderate Democrats and of course Republicans. But I include it here because it's a good policy idea and a fairly obvious way to offer an affordable insurance option to people feeling squeezed by what's offered in the ACA.