The Impact of Recent Republican Health Insurance

Reform Proposals

Published by HSI Network LLC

Presented at the American Enterprise Institute, Washington, DC

September 20, 2007

Overview• Previous research findings on consumer

driven health plans• ARCOLA Simulation Model Overview• 2007 State of the Union proposal • 2007 Tax Credit (e.g. Coburn) proposal • Implications

‘Classic’ CDHP Model – HRA

Health Tools and Resources• Care management

program• Internet enabled

Health Coverage• Preventive care covered

100%• Annual deductible• Employer selects

expenses that count toward deductible

• Expenses beyond the deductible usually covered at 80-100%

Health Reimbursement Arrangement (HRA)• Employer allocates $$ to HRA• Member directs HRA• Balance in HRA rolls over at year-end

• Applies toward deductible

Annual Annual DeductibleDeductible

Annual Annual DeductibleDeductible

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HRAHRAHRAHRA

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Health Savings Account (HSA)

Authorized by 2003 law, an HSA account is owned by the enrollee and used to pay for current and future medical expenses

Both employee and employer can make tax-free contributions to HSA

Health plan design is similar to HRA

Bush Administration has proposed refundable tax credits for individuals to purchase health plans with HSAs

HSAs are offered by UnitedHealth, the Blues, Aetna, Cigna, Humana, and Kaiser

Annual Annual DeductibleDeductible

Annual Annual DeductibleDeductible

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Questions Addressed by Previous Peer-Reviewed Research

• Do CDHPs (in the form of HRAs) have national appeal?– Yes. In almost every major market, when introduced, take-

up exceeded 5% of employees offered (range 4% to 85%).• Do CDHPs always have favorable selection?

– No. While there is some evidence of initial favorable selection in one employer, it does not persist. (Parente, Feldman, Christianson, 2004)

• Do CDHPs have different effects on cost & utilization compared with other plans?– Yes. Results depend on benefit generosity. Long run costs

are not less with a generous plan. (PFC, 2004). For less generous plans, preliminary evidence suggest reduction in rate of increase.

– Least cost increase is for pharmacy (Parente, Feldman, Chen, 2007).

• Are HSAs a viable approach to addressing the problem of the uninsured?– Yes. But it is still more a political economy question of

budget priorities. Reductions in uninsured range from 3 million to 25 million with federal costs as high as $100 billion per year. (Feldman, Parente, et al., 2005).

Q. Do CDHPs Generate Adverse Selection for Other

Plan Choices?

A. Yes (HSA) and No (HRA)

HSA/PPO Risk Ratio

Data from 1 large employer representing ~150,000 covered lives with HSA offered in 2006

1.0-2.6

0.75 – 0.99

<0.75

HSA/PPO Ratio

Risk Score based on 2005 Claims data analysis using RxRisk

High-option HRA/PPO Risk Ratio

Data from 1 large employer representing ~50,000 covered lives with HSA offered in 2006

1.0-3.7

0.75 – 0.99

<0.75

HSA/PPO Ratio

Risk Score based on 2005 Claims data analysis using RxRisk

Rank of Association Between Plans and Person Attributes

From Conditional Logistic Regression – 8 possible choices

AgeFemal

e FamilyChroni

c Income

HMO-POS 2 3 8 7 8

HMO Bricks 4 4 3 4 7

HRA High 5* 1 2 2 3

HRA Low 7 6 6* 5 2

HSA 8 8 7* 6 1

POS 3 7 4 1 4

PPO 1 5 1 8 6

EPO 6 2 5 3 5Notes: • 1 is highest rank (most association), 8 is least rank• *results are NOT significant at the .05 level

Summary of HSA Choice when HRA and PPO Also Are

Choices• Risk-splitting between HRA and HSA• Clearly an issue of benefit design• Selection not limited to HSAs. HMOs also

get favorable selection.• Is the risk segmentation of value? Is it too

difficult to fix short of full-replacement?• Next big question: Do HSAs have

better/neutral outcomes and satisfaction, adjusted for risk?

Policy Proposal Simulations

President Bush’s 2007 State of the Union and the Coburn Proposal (S-

1019)

Impacts simulated by the ARCOLA (Adjusted Risk Choice & Outcomes

Legislative Assessment) model

What Does ARCOLA Do?

• ARCOLA models national health plan take-up from policy proposals in the individual and group markets

• Unique combination of attributes:– Uses MEPS for simulation weights– Choices based on claims from 4 large employers

matched with employee demographics and plan choices– Includes HRA/HSA choice data in model– Risk-adjustment (Hopkins ACGs) used to predict both

individual and group market premiums – Model is iterative – Can identify premium elasticity response to policy

options for specific plan choices and the uninsured

Previous Work:2004 State of the Union

Estimates

2007 SOTU Simulation

• Using the ARCOLA model, we predicted the effect of 2007 SOTU on health insurance take-up and costs– Background: Our model predicted the take-up of

HSA plans in the individual market quite accurately (Feldman, Parente et al., 2005)

– Population: adults aged 19-64 who are not students, not covered by public insurance, and not eligible for coverage under someone else’s ESI policy

– Baseline uninsurance: 33.7 million people (edited out military, students, age <18 or 65 and older)

SOTU 2007• A tax deduction of $7,500/$15,000 – but

you have to have health insurance to get the deduction

• Health insurance premiums will be taxable (equal tax treatment of individual and ESI (employer sponsored, a.k.a. group, premiums)

• Complicated incentives created by SOTU cannot be modeled using results from existing economic studies.

Assumptions & Caveats• Price after tax credit or tax deduction is

actionable at point of purchase of insurance (e.g., don’t want to wait up to 16 month on April 15th for savings to be realized).

• Insurance coverage contract is always available.• Quasi-national individual insurance market.• No new market entrants.• Medical CPI is 4% above general inflation.• We have a subset of the national population

affected. We exclude kids, seniors, students, military and other individuals with govt. insurance. We represent ~75% of target population.

If we let the status quo persist (millions)

YearOur Sample Uninsured

Projected Total Uninsured

2005 34 442009 39 502010 40 522011 41 552012 43 572013 44 582014 45 602015 46 612016 47 632017 48 642018 49 65

Results• Uninsurance is reduced by 65% -

by at least 20 million people. Annual average cost of $250+ billion:– $101 billion subsidy to the individual

market– Rest for a subsidy to the ESI market

with offsetting tax recovery.

Source: ‘ARCOLA’ simulation model, HSI Network, LLC admin@hsinetwork.com

Impact of SOTU 2007 Proposal

New MMA SOTU 2009 SOTU 2009 SOTU 2009 SOTU 2009 SOTU-MMAIndividual Market Population Population Subsidy Tax Recovery Total Impact DeltaHSA 3,156,133 9,553,313 $30,169,486,061 $0 $30,169,486,061 6,397,181PPO High 37,591 2,973 $14,183,205 $0 $14,183,205 -34,619PPO Low 6,046,777 19,351,185 $69,736,000,871 $0 $69,736,000,871 13,304,408PPO Medium 232,105 148,141 $737,644,504 $0 $737,644,504 -83,964Uninsured 27,305,770 7,683,785 $0 $0 $0 -19,621,985

Group Market HMO 18,757,940 8,906,845 $30,131,883,173 $12,638,083,349 $17,493,799,824 -9,851,095HRA 2,205,781 10,338,032 $52,681,274,100 $14,573,951,247 $38,107,322,854 8,132,251Employer-sponsored HSA 77,465 1,454,299 $8,801,195,060 $1,546,716,018 $7,254,479,042 1,376,834Opt-out HSA 34,863 1,635,733 $3,757,825,842 $1,589,443,437 $2,168,382,406 1,600,870Opt-out PPO Low 59,002 16,177,034 $43,049,022,098 $15,441,796,770 $27,607,225,328 16,118,031PPO High 8,421,022 5,333 $32,809,808 $24,903,245 $7,906,563 -8,415,689PPO Low 981,114 12,164,004 $59,906,796,128 $12,385,763,455 $47,521,032,673 11,182,890PPO Medium 38,390,473 25,070,981 $141,231,343,526 $58,224,650,733 $83,006,692,793 -13,319,491Turned Down - Other Private 8,187,222 3,941,717 $0 $0 $0 -4,245,505Turned Down - No insurance 6,431,778 4,252,035 $0 $0 $0 -2,179,743Turned Down - Other Insurance 223,786 116,537 $0 $0 $0 -107,249Turned Down - Public Insurance 960,560 657,035 $0 $0 $0 -303,526

Total Subsidy: $440,249,464,378 $116,425,308,254 $323,824,156,124

Why?• Tax subsidy is quite large, even for low-

income workers• Individuals are sensitive to the prices of

different types of health insurance:– Individual HSA policies will increase from 3.1 to

9.5 million and low-option PPOs from 6 to 19 million

– The subsidy covers the full cost of these policies for many people

• The ESI market is not hollowed out, but expensive PPO plans will disappear

Subsidy cost per newly insured person in the individual market, by

income

$2,041

$3,736 $3,813$4,069

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

0-25 % 25-50 % 50-75 % 75-100 %Income Percentile

Ten Year Impact of SOTU

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Subsidy

Tax Recovery

Total Expenditure

SOTU Ten Year Impact

YearUninsured

SOTUUninsured Status Quo Subsidy

Tax Recovery

Total Federal Expenditure

Uninsured Marginal Cost

2005 33.7 33.7 0 0 02009 11.9 38.6 $440 $116 $324 $12,1422010 14.7 40.0 $385 $102 $283 $11,1602011 15.9 41.4 $372 $100 $272 $10,6682012 17.2 42.8 $360 $98 $262 $10,2162013 18.6 44.1 $347 $96 $251 $9,8182014 20.1 45.3 $333 $94 $239 $9,4872015 21.8 46.4 $318 $92 $226 $9,2252016 23.6 47.4 $303 $89 $214 $9,0132017 25.3 48.2 $289 $86 $203 $8,8412018 26.6 49.0 $281 $78 $203 $9,064

$3,427 $951 $2,476Millions Billions

Coburn S-1019, 2007• A tax credit of $2,000 for single person• Additional $2,000 credit for spouse• Additional $500 credit per child up to a

total of $5,000 (assuming two parents)• Health insurance premiums will be

taxable (equal tax treatment of individual and ESI (employer sponsored, a.k.a. group, premiums)

Results• Uninsurance is reduced by 39% to

over twenty million • Annual cost of $160 billion:

– $64 billion subsidy to the individual market

– $187 billion subsidy to the ESI market with offsetting tax recovery of $91 billion

Source: Steve Parente and Roger Feldman, ‘ARCOLA’ simulation model, SParente@csom.umn.edu and

feldm002@umn.edu

Impact of Coburn 2007 Proposal

New MMA S-1019 2009 S-1019 2009 S-1019 2009 S-1019 2009 S-1019-MMAIndividual Market Population Population Subsidy Tax Recovery Total Impact DeltaHSA 3,156,133 9,253,010 $15,586,274,136 $0 $15,586,274,136 6,096,878PPO High 37,591 2,921 $10,472,541 $0 $10,472,541 -34,670PPO Low 6,046,777 18,464,547 $48,137,089,783 $0 $48,137,089,783 12,417,770PPO Medium 232,105 144,033 $532,599,617 $0 $532,599,617 -88,071Uninsured 27,305,770 8,874,886 $0 $0 $0 -18,430,884

Group Market HMO 18,757,940 8,233,716 $19,107,882,869 $12,053,069,183 $7,054,813,686 -10,524,225HRA 2,205,781 7,776,621 $26,649,009,211 $11,920,011,806 $14,728,997,405 5,570,840Employer-sponsored HSA 77,465 1,070,034 $4,897,749,773 $1,407,490,115 $3,490,259,658 992,569Opt-out HSA 34,863 1,293,600 $988,011,586 $1,283,337,346 -$295,325,760 1,258,737Opt-out PPO Low 59,002 8,275,988 $13,536,465,392 $7,874,632,518 $5,661,832,874 8,216,985PPO High 8,421,022 29,774 $136,590,828 $126,603,055 $9,987,773 -8,391,249PPO Low 981,114 11,378,405 $41,704,216,627 $13,349,802,291 $28,354,414,336 10,397,291PPO Medium 38,390,473 19,007,462 $80,413,177,412 $43,981,102,769 $36,432,074,643 -19,383,011Turned Down - Other Private 8,187,222 13,753,270 $0 $0 $0 5,566,048Turned Down - No insurance 6,431,778 11,807,173 $0 $0 $0 5,375,395Turned Down - Other Insurance 223,786 379,591 $0 $0 $0 155,806Turned Down - Public Insurance 960,560 1,713,951 $0 $0 $0 753,390

Total Subsidy: $251,699,539,775 $91,996,049,083 $159,703,490,693

Coburn Ten Year Impact

$0

$50

$100

$150

$200

$250

$300

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Subsidy

Tax Recovery

Total Expenditure

Coburn Ten Year Impact

Year UninsuredUninsured Status Quo Subsidy

Tax Recovery

Total Federal Expenditure

Uninsured Marginal Cost

2005 33.7 33.7 0 0 02009 20.7 38.6 $252 $92 $160 $8,9102010 23.1 40.0 $233 $84 $149 $8,7742011 25.4 41.4 $215 $77 $138 $8,6372012 27.7 42.8 $199 $71 $128 $8,4632013 29.7 44.1 $185 $66 $119 $8,2392014 31.6 45.3 $172 $63 $109 $8,0022015 33.4 46.4 $161 $61 $101 $7,7412016 35.1 47.4 $152 $59 $93 $7,5672017 37.2 48.2 $141 $57 $84 $7,6372018 38.7 49.0 $139 $59 $79 $7,681

$1,849 $690 $1,160Millions Billions

Summary of Proposals• Could be the most comprehensive US

health insurance market proposals ever on both the tax treatment of insurance AND reducing the uninsured by at least 60%

• Tax deduction is more effective at reducing the uninsured. Overall cost is higher.

• The Coburn proposal is the most efficient, but with far less impact on the uninsured.

Political Prognosis• Without an employer mandate, one can

significantly reduce the size of the uninsured be ‘leveling the playing field’ of taxes and health insurance.

• As long as health care inflation remains significantly above the general inflation rate, almost any proposed expansion will be costly.

• Channeling consumers to lower cost plans does occur, but the long term cost savings may be beyond ten years and also swamped due to aging population.