CATO's Michael Cannon Echoes Calls for Reform—Employer Funded HSA's for Purchasing Direct, Portable Individual Health Insurance Plans

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2 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff recently concluded a comprehensive four-part series on the regulatory origins/causes of America’s longstanding medical pre-existing conditions problem and multiple proposals to solve it, including Donald Trump’s 2017 “Executive Order on Health Care Choice and Competition.” The links to review that series appear in the comments section of this post.

However, CATO’s Michael Cannon has summarized both the history of and solution to pre-existing conditions in a much shorter New York Post piece. Following the cause-and-effect may be slightly tougher sledding without a longer, more detailed description, but his outline touches all the important points in a faster, more efficient analysis.

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https://nypost.com/2019/09/21/how-expanding-health-savings-accounts-could-cure-americas-sick-health-care-system/

From Cannon:

“For 70 years, that tax penalty [non tax-deductible status of health insurance purchased by workers outside of company plans] has fueled the problem of preexisting conditions. Unlike coverage you purchase directly, employer coverage drops you when you leave your job. Data show workers with expensive illnesses were therefore more likely to wind up uninsured if they had employer coverage versus coverage they purchased directly…”

“The Trump administration has taken a small step in the right direction. Starting in 2020, new rules for health reimbursement arrangements (HRAs) will let certain workers avoid that penalty when purchasing portable coverage directly from insurers — whether a costly ObamaCare plan or (in limited cases) affordable, renewable-term health insurance that is exempt from ObamaCare’s hidden taxes.”

“But HRAs don’t let workers save that money and take it with them from job to job.”

“Congress should go further and totally eliminate this tax penalty by expanding health savings accounts (HSAs) — tax-free accounts that consumers own and can take with them from job to job. Congress should apply the tax exclusion that exists for employer premium payments instead to HSA contributions…”

“With these changes, the tax code would no longer force workers into health plans they don’t want. Workers would be free to remain in their employer’s plan; to buy ObamaCare plans; to buy ObamaCare-exempt plans that make coverage more secure for the sick; or just to save their money tax-free for future medical expenses.”

“If employers want to stay in business, they would have to give that $828 billion back to the workers who earned it, either as tax-free HSA contributions or higher wages…”

“…Economists of all political stripes agree the tax preference for employer coverage is ailing America. Large HSAs are the cure.”

The Economics of Healthcare in America #3: Why Are Pre-Existing Conditions Even a Problem? (Part 4 of 4)

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8 MIN READ - The Cautious Optimism wraps up his series on American healthcare and pre-existing conditions by evaluating actual reform proposals from three presidents (George W. Bush, Barack Obama, Donald Trump) and two presidential candidates (Mitt Romney and Hillary Clinton). 

In previous installments of this healthcare series we identified the origins of the pre-existing conditions problem in 1943 when FDR ordered employer-paid health insurance be given tax-deductible status for American companies. We’ve covered two well-meaning but otherwise unworkable proposals to reverse the employer-dependence problem: giving individual plans the same tax-credit status or ending the employer tax credit entirely. 

Finally we mentioned the best proposal, which so far has been limited to free market think tanks: shift the employer tax credit from a deduction for providing health insurance plans to a deduction for depositing health insurance dollars into a worker Health Reimbursement Arrangement (HRA) account with which employees can buy whatever portable plan they wish.

Presidents and presidential candidates going back to Bill Clinton have tried to solve the pre-existing conditions problem, with only two so far getting their proposals passed (Obama and Trump). We’ll review them next.

Keep in mind that these proposals apply only to solving the pre-existing conditions dilemma that the federal government created in 1943, not the broader healthcare cost issue which separate legislative initiatives have attempted to address.

GEORGE W. BUSH

In 2007, after Republicans had already lost control of both houses of Congress, the George W. Bush White House proposed to solve the pre-existing conditions problem by offering workers a large standard deduction on their tax returns to compensate them for buying a portable individual health plan.

The idea was that employers already get a tax credit for providing health insurance to workers, so why not “level the playing field” and give workers a tax credit for buying their own plans and divorcing their health coverage from the workplace?

While the goal of divorcing health insurance from employers is paramount, the tax deduction was a failed idea from the start. The reason was and remains simple: it’s still far cheaper to stay with an employer-subsidized health plan than buy an individual plan on the open market.

Imagine telling American workers “Cancel your employer’s family plan that only costs you $250 a month out of your paycheck and buy a $1,000 a month plan directly. The IRS will let you take a large $12,000 standard deduction for it (which only translates to $250 per month for a taxpayer in the 25% bracket).”

Pay $3,000 a year with your employer? Or $9,000 a year yourself? No one would take the bait. Everyone would remain on their employer plans.

Furthermore, by waiting until 2007 to make the proposal, Bush doomed it from the start. It was killed instantly in the Democrat-controlled Senate in an opposition effort led by, of all people, then-New York Senator Hillary Clinton.

MITT ROMNEY

2012 presidential candidate Mitt Romney also wanted to divorce health insurance from the employer. Yet his proposal wasn’t much different from Bush’s. Romney suggested giving workers' individual plans tax-deductible status by allowing them to pay with their own Health Savings Accounts (HSA) dollars.

HSA contributions can be deducted from one’s taxes, so paying insurance premiums via an HSA would be tantamount to giving insurance purchases tax-deductible status. Again, the strategy was “level the playing field” with employers who also get a tax deduction.

Romney’s plan would fail outright for the same reason as Bush’s: even with the tax deduction, workers would still find it far more attractive financially to stay on health insurance with their employer than paying for expensive insurance out of pocket.

In any event Romney never got the chance to introduce legislation because he lost the presidential election to Barack Obama.

BILL AND HILLARY CLINTON

President Bill Clinton’s plan for solving the pre-existing conditions problem was clear from the start. Almost as soon as he entered office he assigned his wife Hillary Clinton to lead a virtual government takeover of private medicine. Under a government-run system, Americans would be “guaranteed” health coverage paid for and distributed by the federal government. Since Uncle Sam would theoretically always be there to "take care of you,” regardless of your employer or employment status, the pre-existing conditions problem would disappear because Washington, DC would always consider you covered anyway.

Of course the idea of government-run medicine was unpalatable for a majority of Americans in the 1990’s as well as a majority of Congressional politicians (the majority of whom were Democrats in both houses at the time) and the proposal died.

Since then, Hillary Clinton has been staunchly opposed to any plan that makes it easier for workers to move away from corporate (or government) group plans and back to owning their own individual plans, as evidenced by her successful effort to squash President George W. Bush’s individual insurance tax deduction proposal.

DONALD TRUMP

In the Economics Correspondent’s previous report we identified by far the best proposal: allow employers to keep the tax credit, but only for taking the dollars they normally spend on worker health plan premiums and instead depositing them into individual worker Health Resource Arrangement (HRA) accounts. Then employees would take the company’s money and buy whatever plan they want on the individual market. And that plan would be portable from job to job. No more worrying about “losing your job” and losing your employer health coverage.

There are other benefits to the HRA plan such as rolling over unused dollars year after year and accumulating HRA “reserves” that can be used to pay deductibles or to pay premiums if the worker finds himself unemployed for many months.

However to date the Economics Correspondent has literally never heard a president or presidential candidate utter a word about this solution.

Until now.

Just recently the Economics Correspondent learned that in October 2017 President Donald Trump quietly signed the “Executive Order on Health Care Choice and Competition” which allows the creation of Individual Coverage Health Resource Accounts (ICHRA’s, pronounced “ick-rahs”).

The ICHRA concept closely mirrors the HRA concept with only one or two key exceptions, and it went into effect on January 1, 2020. Yes, it's already the law.

https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/new-final-rule-lets-employees-use-hras-to-buy-health-insurance.aspx

Under the ICHRA provision:

-Companies can contribute corporate dollars into employee ICHRA accounts. Workers can then buy whatever individual plan they want with their ICHRA dollars (this was illegal under the Obama administration). Companies in turn can still deduct the cost from their tax bill.

-Employees can also pay for many out-of-pocket medical expenses using ICHRA dollars.

-Unspent ICHRA dollars can be rolled over into the following year.

-Employers must offer the same ICHRA terms for all employees, but are allowed to increase contributions for older workers and workers with dependents (this would partially satisfy the Hillary Clinton-minded politicians who worry about older workers losing subsidies from younger workers via group plans).

-Employers can continue to provide traditional health coverage to existing employees while offering ICHRA’s to new hires.

However there are two shortcomings in the Trump ICHRA executive order:

-When the employee leaves the company any unspent ICHRA dollars go back to the company. They are not portable with the employee.

-Employers will still have the choice of either continuing to buy traditional group health plans for their workers OR providing ICHRA accounts for workers.

The first problem is by far the most problematic. In the Economics Correspondent’s opinion, if an employee leaves his company the remaining ICHRA balance should be transferable with him.

One of the enormous benefits of the freer-market HRA concept is that workers will have an incentive to economize and roll unspent HRA dollars over year after year, building an “HRA reserve” with which to pay deductibles in the event of an illness, or (very importantly) to keep paying insurance premiums should he lose his job—long enough to tie him over until he finds a job with another company that resumes contributing to his ICHRA account.

By prohibiting the dollars to follow the employee between jobs, the plan gives workers an incentive to “burn through” as many ICHRA dollars as possible—the antithesis of the “HRA reserve” concept.

The second problem limits the number of workers who will have an ICHRA option. Since the provision permits companies to keep buying health insurance plans outright and deduct the cost from their taxes, analysts estimate only about 11 million workers will be offered the ICHRA option. However if the government were to grant the tax credit for ICHRA accounts only and drop company-bought health plans, virtually every company-covered worker in America would be transferred to the ICHRA funding solution.

This is only speculation, but it was likely considered politically too risky to tell every workplace-covered American “you’re being forced out of your company’s health plan into one of your own choice” at once. Hopefully the longer-term strategy is to gradually ease more and more Americans into portable individual plans over time.

However, the Trump ICHRA plan marks the first time in U.S. history that any president—any federal politician for that matter—has succeeded in realizing a policy that at last begins to steer Americans away from our insane system of reliance of employers for health insurance. For the first time since the 1943 FDR tax credit was introduced, some companies will receive incentives to finally stop creating pre-existing conditions victims.

EVEN BETTER: THE HOUSE GOP AHCA PLAN

Even though the Trump ICHRA executive order is already a huge step in the right direction, the House GOP has its own plan (the American Healthcare Choice Act or AHCA) that retains the same corporate tax credit for individual plans—only using traditional HSA’s as the vehicle and thus allowing reserve funds to follow employees even when they leave their employer.

Successful passage of this bill would represent the second huge step away from dependence on employer health plans and mark the end of 77 years of the government-created pre-existing conditions problem. Healthcare analyst John Goodman predicts approximately 100 million Americans would move towards HSA-purchases of individual health insurance and say goodbye to job dependence for coverage. See here:

https://www.forbes.com/sites/johngoodman/2019/10/22/republicans-have-a-health-plan--finally/

However the key difference between the Trump ICHRA and the GOP proposal is that Trump’s plan is now reality. With the Democrat-controlled House of Representatives obsessed with impeachment and more investigations into all things Trump (except anyone who spied on his campaign), the odds of the GOP AHCA gaining any real traction aren’t promising.

BARACK OBAMA: FORCE, NOT INCENTIVES

Finally former President Barack Obama’s solution was the simplest of all: Obamacare declared it illegal for an insurer to reject enrollees on pre-existing conditions grounds, even though a sick applicant had made absolutely zero premium contributions to that insurer.

His law was akin to forcing an insurer to write a brand new homeowners policy the very day a hurricane destroyed the enrollee’s house. If homeowners never had to buy insurance until they had a major loss, insurers would lose out on premium revenues while still shouldering the burden of large claims.

Trying to force through an alleged “solution” with mandates that insurers “eat the cost” was a major factor (albeit not the only one) in famously driving individual health insurance costs through the roof with 300%, 400%, sometimes 1,000% premium increases.

Under Obamacare controls, uninsured individuals with a pre-existing condition could simply refuse to buy insurance and pay the lower IRS fine so long as they felt healthy, knowing that if they got sick they couldn’t be turned down. If a year later they got sick again, they could go to an insurer, say “you have to accept me,” and immediately dump hundreds of thousands of dollars in medical bills in their lap—all before paying a dime in premiums.

Insurers and their actuaries were well aware of the consequences of this regulation and immediately calculated the additional payout costs they would incur plus the loss of revenues from patients forgoing insurance.

Predictably they passed on the higher costs in the form of sharply higher premiums for those customers responsible enough to retain coverage.

The premium inflation that victims of Obamacare have incurred has largely been a subsidy to the irresponsible who “game the system” by refusing to buy insurance until they get sick.

The contrast between the Trump plan and Obamacare demonstrates the difference in both principle as well as consequence of using adjusted tax incentives versus government force.

With a tax incentive to contribute to employee HRA’s the pre-existing conditions problem would be largely solved and individuals would also economize due to self-interest in spending their own dollars, thus also slightly lowering premiums and cost overall.

With the Obamacare forced mandate incentives became so perverted that premiums skyrocketed while responsible Americans were coerced into subsidizing irresponsible ones.

Nevertheless, the American public generally still supports the Obamacare pre-existing conditions mandate—in large part because they don’t understand why pre-existing conditions is a problem (regulation), why they should never have been a problem to begin with, and why the most effective proposals to fix it employ consumer choice instead of coercion by Washington bureaucrats.

The Economics of Healthcare in America #3: Why Are Pre-Existing Conditions Even a Problem? (Part 3 of 4)

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5 MIN READ - Due to recent developments in healthcare legislation, the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff extends his installment on healthcare pre-existing conditions from three articles to four.

If Part 1 of this healthcare installment we discussed why pre-existing conditions were never an issue in America until FDR’s employer tax-credit executive order of 1943. In Part 2 we discussed two flawed and unworkable proposals to untie the employer-health insurance pre-existing conditions problem: granting the same tax-exempt status to individual insurance purchases and repealing the employer tax-credit entirely.

The Economics Correspondent recommends reviewing those articles at:

http://www.cautiouseconomics.com/2019/11/healthcare04.html

http://www.cautiouseconomics.com/2019/12/healthcare05.html

Now we discuss the best policy recommendation for reversing the pre-existing conditions problem that the 1943 employer health insurance tax credit created 77 years ago.

V. THE SEEMINGLY BEST PROPOSAL

A third and very inventive/positive solution that has been promoted by free-market think tanks like CATO and the American Enterprise Institute for years reverses the dependency on employers for health insurance while avoiding the political fallout of passing huge costs onto workers.

The proposal retains the employer’s tax credit, but not for buying health insurance per se. Rather, employers would receive a tax credit for simply using the dollars they normally pay for employee health plans and depositing them into revised employee Health Savings Accounts called Health Reimbursement Arrangements (HRA's). Employee HRA’s would be individually owned and divorced completely from the workplace, other than whatever dollars were added to it. Americans in fact, not just “employees,” would own this account for effectively their entire careers, and even adult lives, no matter who they work for or even if they don’t work at all.

With dollars in the HRA, workers could pay first and foremost for health insurance premiums, but also for other medical expenses such as insurance deductibles, copayments, or qualifying medicines, devices, etc. In fact the HRA would work very much like the HSA/FSA does today, but with a few crucial differences. Those differences, again, being:

-Insurance premiums could be paid with HRA dollars (today, with very few exceptions, they can’t)

-Employers would make contributions into worker HRA’s and enjoy the same tax credit they receive today for providing medical insurance directly to workers

With this arrangement, workers would no longer get whatever insurance plan their employer hands down to them, but rather pay for whatever plan they find on the individual market that works best for them—using their employer’s contributions to pay for it.

In fact, after many years the U.S. workforce would settle into owning health plans purchased on the open market *long before* going to work for a new company. Americans would shop from the virtually limitless number and variety of plans available on the market, choose the one that strikes the best balance of affordability and benefits, and then the employer would simply provide the dollars to help pay for that same plan’s premium—hence, total continuity in coverage regardless of employment status while retaining the workplace benefit.

If the employee wanted to quit and work somewhere else, there would be no continuity problem. They would keep the same plan they had before their most recent job and the job before that—ie. true uninterruptible portability. The only thing that would change is who is providing the dollars to help the employee pay for it.

Uninterruptible coverage for workers who voluntarily change companies would also end the common phenomenon of workers being “trapped” in their jobs for fear of losing their health benefits. Employees would be unchained—free to work wherever they please without a care in the world about health insurance plans since employers would no longer be providing them, only the dollars to help subsidize the employee’s already established individual plan.

Under this HRA proposal if the employee got seriously sick, started insurance-paid treatment, and then suddenly lost their job there would also be no problem (other than continuing to pay premiums—more on that in a moment). He/she still owns the same plan which continues to pay their medical bills throughout regardless of who they work for. The insurer doesn’t know and doesn’t care what the worker’s job status is so long as they keep paying the premiums—just like car insurance or home insurance.

If the worker is hired by another company two months later, again no problem. They still have the same policy that is still paying for their treatment and won’t reject them due to “pre-existing conditions” since it’s the same insurer throughout the entire process.

In other words, health insurance would work a lot like car insurance, which companies have never received a tax credit for providing and thus never given to employees. People stay with the same auto insurer for years, even decades sometimes, as they go through five or six jobs. Likewise they would stay with the same health insurer through five or six jobs. If the worker wants to switch to another insurer, they’re free to do so. But if they’re in the middle of a major illness they are obviously going to do the smart thing and stick with their current plan. After all, when a house is heavily damaged no one drops their homeowners insurance at the very moment their insurer is paying for repairs either.

VI. WHAT IF’S

For the proposal to work smoothly there would have to be a few other rules to iron out potential loopholes.

-No annual “use it or lose it” provision. You aren’t required to spend all your annual HRA contributions on insurance premiums by the end of the year. “Use it or lose it” provisions would have the unwanted effect of driving workers to look for the most expensive insurance plan possible to ensure all the dollars are burned up.

But expensive plans usually offer very low deductibles or copayments which experience has repeatedly shown leads to massive overconsumption of medical services—particularly discretionary medical services—since the patient feels little financial consequence out of their own pocket (the “what do I care, someone else is paying” malady).

But by presupposing “use it or lose it” provisions and allowing leftover dollars to roll over into the following year, workers would shop around and look for the plan that works best for them at the lowest price (ie. competition at the consumer level). Besides, they know if they lose their job they will want to hang onto a plan that they can still afford during brief periods unemployment, hence not load up on the most expensive plan possible just to burn through dollars before the end of the year.

-Another benefit of allowing end-of-year balances to be carried over to the following year: Over time individuals can build HRA “cushions” as a reserve in case they lose their job one day and need money to continue paying their premiums until they find another employer. In the event of a major illness, a rollover reserve cushion could also provide the funding to pay out one’s deductible in full, even over several years if the illness requires long-term treatment.

Many years of accumulated rollover dollars could serve as a reserve for when the policyholder enters their senior years and insurance premiums rise to reflect greater health risk. The reserve could even earn interest on pre-approved safe investment instruments much like term-life insurance plans grow in value over time.

-Since HRA dollars must be spent only on health insurance and medical expenses, there would be no temptation to “blow” the money on extravagances like a vacation cruise or a new car. But since the HRA balance is still the accountholder’s money (viewed as “my money”) individuals would have more incentive to conserve their balances instead of simply looking for ways to spend the funds on nonurgent/unnecessary medical consumption.

-Finally, the HRA dollars method would allow small businesses that currently can’t afford to provide worker health insurance a tax credit for making a partial contribution. Today, the standard for qualifying for the tax credit is offer your employees a plan. However if a small business feels it can only afford to contribute partially to a plan it receives no tax benefit. However with an HRA a business can at least “get in the game” by contributing whatever amount it can afford and filing the contribution as a deduction. That way workers can at least get partial financial assistance from the workplace that employers currently have no incentive to give.

This proposal is the most innovative the Economics Correspondent has seen yet for untying the garbled mess that FDR's employer-paid health insurance (which most policy analysts have called "an insane way to cover Americans") executive order created during World War II.

However it's hardly a new idea. Think tank analysts who oppose big government screwing up medicine even more than it already has have been aware of this idea for at least two decades, but in the past no major Washington politician has had the economic insight or political courage to propose it.

In the fourth and final installment on this pre-existing conditions series, we’ll discuss legislative attempts from Washington, DC to solve the pre-existing conditions dilemma, including the very recent proposed solution from the Trump White House.