Fixed-Dollar Tax Credits Would Reduce Individual Health Insurance Premiums

UntitledghgSonia Jaffe and Mark Shepard of the National Bureau of Economic Research (NBER) have written a new paper, which compares the effects of fixed-dollar subsidies for health insurance to subsidies that are linked to premiums. They conclude fixed-dollar subsidies reduce taxpayers’ costs and improve access. Unfortunately, the structure of subsidies in U.S. health insurance has moved in the other direction.

Tax credits that subsidize health insurance offered in Obamacare’s exchanges are based on the second-lower cost Silver-level plan in a region. Intuitively, this implies insurers will not compete too much because that would drive down subsidies. As long as subsidies chase insurance premiums, premiums will be higher than otherwise.

Jaffe and Shepard examine evidence from Massachusetts’ health reform (“Romneycare”), which dates to 2006. Its costs are still spiraling, and Jaffe estimates one factor is its design of subsidies, which is similar to Obamacare’s:

Across several simulation years and assumptions, we find a non-trivial upward distortion in the price of the cheapest plan (to which Massachusetts’ subsidies are linked) of $4-26 per month, or 1-6% of baseline prices. Although modest, these effects imply meaningful increases in government costs. For instance, the $24/month subsidy distortion (in our simulations for 2011) would translate into $46 million in annual subsidy costs for Massachusetts, and over $3 billion if extrapolated nationally to the ACA. We show that absent uncertainty, shifting to fixed subsidies could let the government achieve the same coverage at 6.1% lower taxpayer cost, or 1.3% greater coverage at the same cost.

(Sonja P. Jaffe & Mark Shepard, Price-Linked Subsidies and Health Insurance Markups, Cambridge, MA: National Bureau of Economic Research, Working Paper 23104, January 2017.)

The paper is a heavy read, full of PhD level economic theory and modelling. Nevertheless, it demonstrates replacing Obamacare’s tax credits with a fixed-dollar tax credit to subsidize health coverage is as close to a free lunch as is possible in health reform.

Comments (70)

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  1. Paul Nelson says:

    Bravo!

  2. Jimbino says:

    In fairness to those who do not believe in insurance, like the Amish, Mennonites and me, tax credits need to be available to pay for health care, not just healthcare insurance.

    • Devon Herrick says:

      Yes, any tax credit should be available for direct care. Of course, any person who uses their tax credit for care rather than insurance should not expect charity care in the event they need more care than they can afford. Most people — perhaps 80% — would be fine this way. The 20% would include both those with pre-existing conditions and those who are unlucky (this year at lease). Removing the cross subsidies would encourage more providers to compete on price and encourage insurers to compete on better management.

      • Jimbino says:

        “Pre-existing conditions” is a conceit of the insurance industry. Nobody else has the slightest concern.

        In the real world, a non-sucker for insurance can pay for healthcare like he pays for a car, house or college education. Borrow.

        Furthermore, a non-sucker for insurance has an unlimited network and can seek even experimental treatmenteven overseas, as Steve McQueen did, where your cash dollar goes further and insurance is even more without worth than here in the USSA.

        • Ron Greiner says:

          I had a client get run over by a car when they were traveling overseas. The husband said it was illegal to tell them about options at the other hospital on the island.

          Trust me, they were covered worldwide but they bee lined it back to the states.

          I notice the dying Beatles came to America for treatment. Let it be!

          • Jimbino says:

            I met a Germans vacationing in the Lake District of Chile, some of whose party suffered injury in an auto accident.

            Some, insured to the hilt in Germany, died on the road to a hospital. Their insurance neither saved their lives nor helped them. Maybe their insurance would have paid for treatment; Obamacare sure the hell wouldn’t have.

            You have to be a person who disregards the financial health of you and your family to willingly participate in the superstition of insurance of any kind.

            • Ron Greiner says:

              In Colorado a boulder hit a bus full of Germans and a bunch died. The rest had no insurance because their German insurance didn’t pay in America.

              Like I said, our American insurance had world wide coverage.

  3. Devon Herrick says:

    This study found empirical evidence to support economic theory. The idea that making the second lowest bidder’s product free would not effect bids should be common sense. If your firm wins the bid, you get what you bid. If your firm comes in third, you still get what the lowest bidder bid. In the process of competing to be the lowest bidder, you shoot yourself in the foot. Why not bid less aggressively hoping all your competitors do the same. There is no penalty for not bidding aggressively. There is a penalty (for the entire group) for bidding aggressively. The incentive is to bid less aggressively. Economic theory would also posit that at some point there will be a price leader (probably BlueCross), who will set prices and the others will follow.

    • Ron Greiner says:

      Republican Health Care Reform is fixed tax credits. I just watched Micheal Cannon of the CATO on FOX News saying tax credits are just Obamacare lite, the goofball. Cannon doesn’t pay taxes on his health insurance but he hates poor Americans getting any tax credits.

      Why are we talking about Obamacare? Why don’t you spend any time at all explaining how fixed tax credits would help Americans get portable health insurance instead of the GARBAGE that the NCPA puts on their own employees now?

      Like I told you 15 years ago Devon, when the NCPA’s employees get too sick to work your insurance just terminates the employee insurance. Losing your health insurance 18 months into your cancer is depressing at best and deadly at worst.

      Stop the NCPA from putting their employees in DANGER with employer-based health insurance.

    • Paul Nelson says:

      Thus, an epitome of a “social dilemma” problem.

    • Ron Greiner says:

      Devon, you say, “some point there will be a price leader (probably BlueCross), who will set prices and the others will follow.”

      Blue Cross is the only player on the so-called marketplace in 70% of the counties in Florida. What ever they charge for the 2nd cheapest Silver plan is the new Subsidy, it’s way too bizarre.

      Blue Cross is the only player in NC. MONOPOLY!

  4. Barry Carol says:

    It would be interesting to see some data on what happened to hospital costs in Massachusetts since Romneycare was implemented in 2006. Healthcare costs in MA were always among the highest in the country if not the highest. Part of the reason for this is that a much greater proportion of routine care is performed in academic medical centers in MA, especially in southeastern MA (Boston region), than in other areas of the country. Another reason is the extraordinary market power of Partners Health System, which owns Massachusetts General Hospital and Brigham and Women’s Hospital along with numerous community hospitals, clinics and physician practices. They receive much higher reimbursement rates from insurers than other providers in the region with little or no demonstrable difference in the quality of their care. So, how much did MA’s hospital costs increase since 2006 and how does that compare with increases in health insurance premiums? What impact, if any, did government subsidies or the passage of Romneycare itself have on provider costs and health insurance premiums? How much did provider profits increase, especially PHS’ profits?

    • Ron Greiner says:

      Before Obamacare if a MA child got MS they were trapped in the state because they couldn’t get coverage in the rest of America. With Obamacare these sick MA people are free to leave.

      • Jimbino says:

        The big question is, are these people free to leave for medical care in Cuba or Mexico, or are they captive in Amerika? Once they got a tax credit for medical care, they would be free to shop anywhere in the world.

        I’m now in Rio, where the top price for a colonoscopy is R$1500, some $450 at current exchange rates.

        • John Fembup says:

          “I’m now in Rio, where the top price for a colonoscopy is R$1500, some $450 at current exchange rates”

          Jimbino, you already live in medical paradise and don’t need tax credits.

        • Ron Greiner says:

          Jimbino, I told you that I sold insurance that had world wide coverage.

          You want to ban insurance in the land of the free. You sound like a Socialist Democrat to me.

  5. Ron Greiner says:

    I just talked with Peter Goettler’s (CATO CEO) asst complaining about Micheal Cannon on FOX News saying tax credits is Obamacare Lite when he himself doesn’t pay taxes on his health insurance.

    I told her that the CATO employees will lose their health insurance if they get too sick to work. She said, “That’s why they have disability insurance.” I said, “Excuse me, but disability insurance doesn’t pay the medical bills of a woman with cancer. It’s meant to pay her car payments.” She said, “WOW, you shot me down pretty quick.”

    These think tanks that don’t pay taxes can be a waste of time when you need them.

  6. Bob Hertz says:

    This discussion of low bidding runs the risk of underestimating how complex the health insurance business really is.

    What I mean is that with health insurance, a carrier does not know if it will make a profit or lose big-time for at least a year.

    In the state of MN, a new carrier called Preferred One offered the lowest premiums throughout 2014. By 2015 they were virtually out of business and begging the state for rescue funds.

    In a commodity business, let’s say paper clips, you make a bid knowing what it will cost to make and deliver the product. If you win the bid and get the business, you make money.

    In health insurance, if you do not really know your risk pool, a low bid can be disaster. And this applies to group insurance too. Sometimes a huge group plan will get very few bids, because the insurers are wary of bidding too low and getting a disastrous client.

    • Jimbino says:

      Risk assessment is the only true contribution insurance of any kind makes to society. If they can’t do that, we should outlaw insurance!

  7. Lee Benham says:

    It seems the Democrats are now taking a new approach and are now demanding Medicare for all.
    Universal health care, Medicare for All, will establish cost efficiency that eliminates major medical bills and medical related bankruptcies. It will simplify our way of paying for health care and lower the total cost for the United States. It will be good for the physical and financial health of Americans and America.
    All other 29 free-market countries (1) implemented their versions of universal health care between 1883 and 1972. Their citizens of all ages get health care and have life expectancies significantly longer than ours. They pay less than half of the per-person cost of the United States, which pays 250% (2.5 times) the cost per person of the other countries. Their efficient way to pay for health care helps their economically competitiveness, including contributing to the movement of some of our health care and manufacturing activities that are now conducted in their countries.
    Does this seem like something the United States should have?
    Our universal health care can:
    — replace Obamacare, the Affordable Care Act.
    — be a dramatically improved version of the Medicare that we have now.
    — be the best universal health care in the world.
    We need to establish strong support among the members of the United States Congress for the establishment of universal health care, health care for all ages, via an Improved Medicare for All.
    We will launch a campaign to help get the support in the U.S. Congress that is needed.

    • Ron Greiner says:

      Medicare only pays 80% so many couples pay $500 a month for a Medicare supplement. A family of 4 would pay $1,000 a month?

      No wonder Bernie lost the election.

      • Lee Benham says:

        Rich people will buy the Medicare supplement policies so they can go anywhere they want for health care. The majority of people will take Medicare Advantage plans. They will take the large out of pocket risks to have an HMO pay for the yearly minor stuff. Hillary wins. UGH

        • Ron Greiner says:

          Darn you Lee, you are the only one that knew that. But remember, Obama wanted to do away with that option.

        • John Fembup says:

          Lee you seem to be assuming that all Medicare Advantage plans are HMOs. I’m in a Medicare Advantage PPO with a $300 deductible. What “large out-of-pocket risks” do you feel I may be taking?

          (btw, the Medicare Advantage plan I’m in covers all emergency or urgent care I may require while out of the country; the plan bases its reimbursement on Medicare allowables which I would expect are adequate to cover charges in most countries outside the US.)

          • Lee Benham says:

            John,
            I was just generalizing. Yes there are ppo plans. usually for a higher price. The more populated the county the more plans are usually available. In the markets I sell in very few will take out a ppo plan that costs $75 a month and has around a $3000 out of pocket max vs the HMO plans that are zero cost to the insured but have closer to a $5,000 max out of pocket. Broke people don’t like premiums go figure.

    • Jimbino says:

      I’m a libertarian who deeply resents the continuing intrusion of gummint, religion, superstition and compulsory insurance into my life.

      Let those who believe in insurance or other superstition pay for it and stop limiting my life choices.

    • Jimbino says:

      How can you call countries that mandate insurance “free-market countries”? It’s the antithesis of free-market. I suppose you like mandatory church taxes like “free-market” Germany imposes?

      • Ron Greiner says:

        I think you should be able to fly naked and not have insurance.

        But you have to stop saying that insurance won’t pay out of the country. That is not true.

        • Jimbino says:

          Are you saying that an Amerikan, foolish enough to participate in Obamacare, can get his gummint premium subsidies for a plan that will cover his medical and drug expenses in Cuba? Sounds great. Please explain.

          • Ron Greiner says:

            It’s called worldwide coverage. Do you want me to draw you a picture?

            • Jimbino says:

              YES, and at what cost premium?

              • Ron Greiner says:

                The 1st tax free MSA was a 24-year-old in 1996 and he had worldwide coverage and his premium was $24 a month.

                I think the insurance company would prefer people to go to India for their treatment because it is cheaper. I can’t remember of any going though.

                • Jimbino says:

                  Neither Medicaid nor Medicare covers me here in Rio.

                • U.S. health insurers would prefer that if they could capture most of the economic rent. Because patients capture most of the economic rent in medical tourism, U.S. health insurers are uninterested in pursuing it.

                  • Ron Greiner says:

                    John, How do patients capture most of your so-called economic rent? If a client has a $5,000 deductible and travels to India so the treatment cost drops from $400,000 to $60,000 the insured still owes the deductible plus travel expenses. The insurance company isn’t going to pay $400,000 but only $55,000 after the deductible is met. The travel expense is a non-covered expense but they could use tax-free HSA funds for travel.

                    • The patient would capture more economic rent because his premium would drop significantly. In a competitive market, all insurers would have to cover medical tourism. Health insurance is a cost-plus business. Networks and fee schedules are fictions to confuse us into believing insurers negotiate prices down from what they would be in a free market. The more dollars of claims processed over the same base of capital is better for insures and that relies on expensive claims. I have often wondered why auto insurers did not seek to replicate the health insurance model by lobbying Congress for the same tax preference: “Just think of how people’s out-of-pocket costs would drop if we covered oil changes and tire rotations and gasoline. We’ll even buy your car for you, as long as it is an approved model from an in-network dealer.”

                    • Allan says:

                      “Networks and fee schedules are fictions to confuse us into believing insurers negotiate prices down from what they would be in a free market.”

                      Right on.

                      There also seems to be an aura of collusion between insurers and hospitals where both of these parties benefit from these ridiculous fee schedules.

                      When patients open up their hospital bills they thank the good lord that they carried insurance. If they realized all they would have had to pay was the reduced rate the hospital got it doesn’t seem like such a good deal. The hospital gets to bill the uninsured many multiples of their average receipts so people are satisfied when the bill is reduced to a smaller multiple.

                    • Ron Greiner says:

                      Allan, my son had a surgery and they brought in a surgeon that was there for 2 hours and billed $35,000. He was out-of-network so instead of getting NOTHING like on an HMO, my son had to pay a penalty but the insurance paid this crazy doc’s price.

                      Then Allan you agree with John’s goofy comment of, ““Networks and fee schedules are fictions to confuse us into believing insurers negotiate prices down from what they would be in a free market.”

                      On every EOB the doctor charges $140 and the insurance company negotiated price is dropped to $36 and that is all that the consumer pays if the doctor is in network. Please tell us again how wonderful these doctors would be if they could just barter with the uninformed consumer. Trust me, if you ask a doc how much a service or supply is they will be off by a factor of 10. They have no idea how much they charge themselves. YOU TWO.

                      I had a doc tell me a procedure was $50 and then she billed $750. I had no insurance and I paid the bill because she sent it to a bill collector, she was a sweetie doc. YOU TWO

                    • Allan says:

                      Ron you were talking about traveling to India so I was referring to hospital services and what I said is quite accurate. Physician services are a different story. Physicians no longer know prices because prices are created by third parties, however, billing a patient who has to pay cash the physician generally knows what his prices are as long as the care is standard. This is especially true with Medicare services if the particular service may not be covered by Medicare.

                      I don’t know what you are trying to say when you say “YOU TWO”.

                      I can’t speak for other doctors, but you are describing things I didn’t see with the physicians I dealt with.

    • Allan says:

      The nation has been looking for how to make today’s Medicare sustainable. I await your solution.

  8. Lee Benham says:

    they are starting to use republican talking points

    https://berniesanders.com/issues/medicare-for-all/

    Under Bernie’s plan, Americans will benefit from the freedom and security that comes with finally separating health insurance from employment. That freedom would not only help the American people live happier, healthier and more fulfilling lives, but it would also promote innovation and entrepreneurship in every sector of the economy. People would be able to start new businesses, stay home with their children or leave jobs they don’t like knowing that they would still have health care coverage for themselves and their families. Employers could be free to focus on running their business rather than spending countless hours figuring out how to provide health insurance to their employees

    • Ron Greiner says:

      These are not Republican talking points which they should be. Devon never says any of this.

      Lifting the cost of health insurance off the backs of American employers with Republican age-based tax credits will make the economy soar like NEVER before.

    • Jimbino says:

      Bernie’s plan is exactly the way Uber works, and like their contract workers, I easily avoided employer “benefits” even while earning a yuuge wage premium working as a contract programmer.

      • Ron Greiner says:

        Jimbino, Bernie wants Socialize Medicine in Medicare for all. Wake up in Rio.

        • Jimbino says:

          That’s exactly the problem. The contract worker could avoid employer health insurance in return for a higher wage, but never has been able to avoid the FICA tax that goes to pay for SS disability, support for up to 5 ex-spouses and all the children, none of whom have ever paid a cent into the system. In Obamacare, the subsidy that the single and child-free, the young and male pay to support the married breeders, the old and female, is just as well hidden.

  9. Lee Benham says:

    You have to admit getting rid of employer based benefits is a complete reversal of any Democratic proposal. They usually want the evil companies to pay for everything.
    He could have at least said if we lift the burden we have placed on companies maybe our NAFTA plan might have worked a little better.

    • Ron Greiner says:

      That is correct. Democrats passed the law that employers must offer health insurance.

    • Jimbino says:

      Employers don’t ever pay for benefits. Employees pay for 100% of them. That’s why contract workers who refuse benefits gain a fortune in higher wages.

  10. Lee Benham says:

    In the last 7 days acritical are popping up all over the place

    Medicare for all
    There are aspects of this plan that rarely get discussed. Imagine what it would be like for employers to unload the burden of paying for health insurance. Workers’ compensation policies would no longer be necessary. Medical portions of auto insurance could be eliminated since everyone would already be covered.
    Certainly, the insurance industry would not be happy. Yet how much longer must we be held captive to its increasing rates and declining quality of product?

    • Ron Greiner says:

      PLUS, the embedded cost of health insurance in all of our products would be eliminated so products and services would drop in price.

      Lee Iaccoca said the $1,500 per car in 1979 was the albatross around his neck.

      Age-based tax credits will make America great again.

    • Jimbino says:

      Medical portions of auto insurance pay the victim without charging him a co-pay. With no cap. And they also pay for others injured in a crash. Obamacare doesn’t.

      • Barry Carol says:

        Actually, here in NJ, medical claims related to accidents involving a vehicle are paid by car insurance on a no-fault basis. That means each person’s insurance company pays for each driver regardless of fault and providers must look to car insurance first to get paid. My own policy has a $250 deductible for medical bills and a 20% copay on the next $4,750 for a maximum out of pocket of $1,200. If the other driver was at fault, I have to sue to recover my out-of-pocket cost. My insurer cannot subrogate medical claims, only liability and property damage, etc.

  11. Lee Benham says:

    Well this would bankrupt the country quickly!

    https://www.congress.gov/bill/115th-congress/house-bill/676/text?r=26

    SEC. 102. Benefits and portability.
    (a) In general.—The health care benefits under this Act cover all medically necessary services, including at least the following:
    (1) Primary care and prevention.
    (2) Approved dietary and nutritional therapies.
    (3) Inpatient care.
    (4) Outpatient care.
    (5) Emergency care.
    (6) Prescription drugs.
    (7) Durable medical equipment.
    (8) Long-term care.
    (9) Palliative care.
    (10) Mental health services.
    (11) The full scope of dental services, services, including periodontics, oral surgery, and endodontics, but not including cosmetic dentistry.
    (12) Substance abuse treatment services.
    (13) Chiropractic services, not including electrical stimulation.
    (14) Basic vision care and vision correction (other than laser vision correction for cosmetic purposes).
    (15) Hearing services, including coverage of hearing aids.
    (16) Podiatric care.
    (b) Portability.—Such benefits are available through any licensed health care clinician anywhere in the United States that is legally qualified to provide the benefits.
    (c) No cost-Sharing.—No deductibles, copayments, coinsurance, or other cost-sharing shall be imposed with respect to covered benefits.

    • Jimbino says:

      (a) In general.—The health care benefits under this Act cover all medically necessary services, including at least the following:
      (1) Primary care and prevention.
      ==> funds for prevention are mostly wasted.
      (2) Approved dietary and nutritional therapies.
      ==> nutritional therapies are pseudo-medicine
      (3) Inpatient care.
      (4) Outpatient care.
      (5) Emergency care.
      (6) Prescription drugs.
      ==> I can get them close to FREE in Mexico, Brazil
      (7) Durable medical equipment.
      ==> for million-dollar wheelchairs
      (8) Long-term care.
      (9) Palliative care.
      (10) Mental health services.
      ==> Scientologists and I don’t like this
      (11) The full scope of dental services, services, including periodontics, oral surgery, and endodontics, but not including cosmetic dentistry.
      (12) Substance abuse treatment services.
      (13) Chiropractic services, not including electrical stimulation.
      ==> Chiropractice is a religion.
      (14) Basic vision care and vision correction (other than laser vision correction for cosmetic purposes).
      (15) Hearing services, including coverage of hearing aids.
      (16) Podiatric care.
      (b) Portability.—Such benefits are available through any licensed health care clinician anywhere in the United States that is legally qualified to provide the benefits.
      ==> This is a mandated windfall to USSA healthcare providers. Cuba would charge less with better outcomes.
      (c) No cost-Sharing.—No deductibles, copayments, coinsurance, or other cost-sharing shall be imposed with respect to covered benefits.

      We should ask the Amish to design a healthcare system for this country. And they would do it all without using electricity!

  12. Bob Hertz says:

    John, your comment above is provocative….

    “The more dollars of claims processed over the same base of capital is better for insures and that relies on expensive claims.”

    I am honestly curious how that works. Are referring to the insurers who rely on ASO service agreements for large, self-funded plans? Do they get a richer contract from employers if the claim volume is larger?

    I would tend to doubt that, but I have no inside knowledge of this market.

    In the fully insured arena, I see a number of Blue Cross plans who have lost money big time due to a high volume of claims, which seems to go against your point.

    Thanks for any clarification.

    • Barry Carol says:

      When I was still working, my self-funded employer paid it’s ASO contractor (Highmark Blue Cross) about $20 PMPM for the active employees and around $40 PMPM for the retirees who had significantly more claims. The fee was the fee, though, regardless of the actual number of claims for each class of covered lives.

  13. Bob Hertz says:

    Thanks Barry, but you are I think talking about $240 or $480 a year in ASO fees. In the world of health care this is not a lot of money.

    John Graham’s comment implied a much larger and rather hidden cause of high health care costs, and that is what intrigued me about it.

    • Barry Carol says:

      Bob — Yes, the administrative costs associated with large self-funded employer health insurance costs are quite low, probably in the high single digits which is competitive with Medicare’s administrative costs properly defined. I also heard a presentation a number of years ago that stated, on average, self-funded plans for a given large employer are approximately 6%-10% less expensive than a full risk plan would be.

      While the profit margin for health insurers on ASO business is quite high, the average profit dollar opportunity per member is approximately five times higher on full risk business than on ASO business even though the profit margin on full risk revenue is far lower.

      • If you look at dollars, rather than percentage, I am pretty sure you will find self-funded plans administrative costs are higher. However, it would be hard to figure out.

        • Ron Greiner says:

          Dr. Graham, do you think the self funded plans would experience higher claim costs if they were not slamming their employees who are too sick to work onto Individual Medical (IM) insurance AND letting us poor self-employed people pay all of their medical costs?

          As soon as an employee become a liability the self funded plans are experts on making self-employed people in America pay for it.

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