“A Contingency Plan for King v. Burwell,” published recently by the American Enterprise Institute, lays out a proposal that Congress and the president could adopt if the Supreme Court invalidates the payment of premium subsidies in states that rely on the federal health insurance exchange rather than building their own exchanges. As one of the nine authors of the “Contingency Plan,” I support the recommendations of that report. However, there are important issues that deserve further discussion and clarification, and there are both political and practical uncertainties that must be resolved if the Supreme Court’s decision opens up a new opportunity to adopt market-based reforms of our health financing system. What follows are my views on several of these issues.
Extension of subsidies for current enrollees
If the Supreme Court rules for King, Congress will feel intense pressure to protect the 6.4 million people in 34 states who are currently receiving premium subsidies on the federal exchange from losing their health insurance. Many Republicans will also want to make substantive changes in the Affordable Care Act (ACA), but they may not be able to reach quick agreement on what those changes should be. The Contingency Plan proposed to extend the subsidies for no more than a year. That timetable would create an incentive for Congress to adopt needed reforms in a timely fashion without the usual procrastination.
It is important to distinguish between legislative action and full implementation of insurance market reforms. Full implementation of the sorts of reforms proposed in the Contingency Plan will require more than one year. States would have to decide whether to create a state exchange or choose an alternative structure that allows their citizens to continue to receive federal insurance subsidies under a more relaxed federal regulatory regime. That will require state legislation, and insurers will need time to develop new insurance options that would be allowed under the new rules.
That takes time no matter when Congress acts. Delaying federal legislation will only mean that consumers will have to wait that much longer to see better insurance options at better prices. An additional subsidy extension beyond the year recommended in the Contingency Plan would be needed to bridge to the new set of insurance market rules.But extending the subsidy for 2 or more years at the outset could halt reform efforts in their tracks by eliminating the sense of urgency needed to motivate our elected officials.
Should Congress extend the subsidies at all? Some argue that doing so is bad politics and bad policy for Republicans. Better, they argue, to reform first and subsidize later.
But politics requires some horse trading—unless one wishes to wait for the next president, who may be no more interested in market reforms than Mr. Obama. Congressional Republicans have already offered a variety of different proposals with the common theme of keeping people insured while reducing the regulatory burden of the ACA. As recently as June 17, Ways and Means chairman Rep. Paul Ryan said that Republicans would have a response if the Supreme Court sides with King. Waiting for Democrats to fold their hand and accept a complete replacement of the ACA does not seem to be on the agenda.
Tax credits or state allotments
The Contingency Plan offers states several alternative tax credit structures for their residents. Tax credits could be set as fixed dollar amounts, with older people receiving larger subsidies consistent with their greater use of medical services. Such credits could also be related to income. In either case, individuals eligible for a premium subsidy would know the exact dollar amount without having to do the complex calculations required by the ACA.
Alternatively, the credits could be set as a fixed percentage of the insurance premium, in essence giving everyone eligible for a credit the same discount regardless of which plan they choose. In dollar terms, the credit would be larger for more expensive plans but so would the amount owed by the consumer. This approach does not distort the relative prices of insurance and does not favor low-premium or high-premium plans.
An advantage of using tax credits is that this mechanism already exists and is in use under the ACA. That is also a disadvantage, as it keeps the IRS in the middle of consumer decisions about their health insurance.
One way to cut the IRS out of the process is to distribute the subsidies to the states in the form of a block grant or a capped allotment—a payment based on the number of people eligible for subsidies, perhaps with adjustments reflecting the varying cost of health care in different states. Such grants could be used by the states to fund a program similar to the Children’s Health Insurance Program (CHIP).
This option is given short shrift in the Contingency Plan, which argues that CHIP has not been sufficiently market-driven and that consumers might be happier with tax credits. Whether those assertions are correct or not, that is no reason to take a capped allotment approach off the table.
States choosing this approach could issue subsidies directly to those purchasing insurance in the individual market, assuring them that they will still be able to afford coverage. With fewer regulatory restrictions and a large pool of participants, insurers would be willing to offer a wider variety of plans that could better meet the demands of consumers. In addition, states might be granted authority to better coordinate Medicaid, CHIP, and the new subsidized market for individual insurance. Medicaid beneficiaries who are working, for example, might be able to use Medicaid funds to help purchase private insurance from their employers.
This would require a major commitment by states to revamp their health insurance systems. But like the options made available to states under the Contingency Plan that rely on tax credits, no state would be required to take the capped allotment option. The potential payoff is more effective use of resources from several programs to meet the health needs of low-income residents by promoting a more competitive and better funded private individual insurance market.
Default enrollment
One of the innovations in the Contingency Plan is default enrollment, which attributes catastrophic coverage to anyone who does not purchase health insurance and who would otherwise have been eligible for a premium subsidy. States choosing to shift from the ACA to the alternative structure of tax credits and less restrictive regulations could adopt default enrollment but would not be required to do so.
Individuals who are enrolled in the default coverage would, by definition, not have to apply or take other active steps to gain the coverage. Since they would not be required to pay a premium, the extent of coverage would depend on the amount of premium subsidy individuals would be eligible for. Most likely, the benefit would take the form of a cap on the maximum out-of-pocket payments that the person who enrolled by default would be required to pay during the course of a year.
Because there would be no explicit enrollment process, catastrophic protection would be triggered by the use of medical services. The cost of care received by each person who did not purchase insurance would have to be tracked to determine whether the catastrophic limit had been reached.
That limit, in turn, would depend on how the subsidy is calculated. Default enrollment with a tax credit that depends only on the individual’s age would be more easily administered than under the other subsidy structures since nearly all medical encounters record the patient’s age. Default enrollment would not be able to adjust the subsidy for the individual’s income without a greater degree of cooperation than is likely from someone who has chosen not to cooperate in the first place. Similarly, the subsidy could not be tied to the cost of insurance that the individual chose not to purchase.
It is unclear to what extent default coverage of this sort would provide financial protection for the individual who has not purchased insurance. The out-of-pocket limits could be quite high depending on the subsidy calculation, the number of people likely to receive default coverage, the cost of care in a given market, and other factors. Some—perhaps many—of those who have default coverage may not pay all medical bills up to that limit, either because the person does not have the resources or is simply unwilling to pay.
A person whose medical bills exceeded their ability to pay presumably would like the peace of mind that a lower spending limit would provide but would not receive that level of financial security under the program. A person who refused to pay is unlikely to care. In either case, default coverage could become a new form of payment for uncompensated care, with financial protection (which could be minimal) for health care providers rather than for patients who cannot or will not pay their bills.
This is not an argument for retaining an expensive list of mandated benefits that must be fully subsidized and automatically effective for people who, for whatever reason, do not voluntarily buy health insurance. If we did that, no one would buy their own coverage. It is also not an argument to discard the default enrollment idea. If this provision can be implemented, it could be a modest help in financing some of the care of some uninsured individuals who incur significant health costs.
However, if default enrollment is adopted by a state, its cost would be paid either through smaller subsidies for those who do purchase their own insurance or through higher taxes. More effective catastrophic protection may be desirable, but lowering the out-of-pocket spending limit will inevitably increase the cost.
Too hard a bargain?
The Contingency Plan offers what could be considered a compromise between those who strongly support the ACA and those who would like to repeal it. By allowing states to decide whether they want to remain under ACA rules and subsidy arrangements or move to an alternative regulatory and subsidy structure, the plan would not force the president to repudiate the mandates and other requirements that form the basis for his approach to health reform. If those requirements are truly necessary, states that opt for less regulation will shift back to the ACA as the experiment fails.
Just as it will be difficult to sell the president on an alternative to the ACA at each state’s option, it will be difficult to convince some congressional Republicans that this is a reasonable approach. The Contingency Plan does not abolish the ACA outright. It relies on states to develop new market structures that promote competition and consumer choice. It is complicated, at least compared with the seeming simplicity of a straight repeal bill.
After a period of mutual recrimination following a decision in support of King, the self-protective instincts of politicians are likely to bring both sides to the bargaining table. What emerges could open the door to greater innovation in the way we finance and deliver health care services to millions of Americans.
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