Opinion: A fix for the individual health care market


Judith Gregory

The Problem: Because of adverse selection and pent-up demand, health insurance premiums are unaffordable and benefits have been reduced to catastrophic care.

People will stop purchasing health insurance and pay the tax penalty. This will further limit and skew the risk pool adversely, further driving up premiums. Premiums have risen in large part because insurance companies can no longer deny coverage because of pre-existing conditions—a very popular requirement of the Affordable Care Act.

While removing gender rating, the ACA allows age rating and indeed, premiums rise every year with one’s age and with the inflation in health care. Correspondingly, insurers have been reducing benefit coverage in part to offset the rise in premiums.

An example: A 62-year-old friend of mine must buy individual coverage. He is healthy but feels at his age, he must have insurance. The best deal he got in Montana with the Health Co-op for 2017 was a monthly premium of $750, or $9,000 a year.

His deductible is $6,050 a year, but it does not count his copays for office visits. After the deductible is met, he must pay 50 percent of remaining costs until his out-of-pocket reaches $75.00. The cost if he becomes ill: $17,050. This is very expensive catastrophic insurance, nothing else.

In addition, my friend cannot begin to deduct any of his medical costs until they reach 10 percent of his adjusted gross income. And he is not eligible for a Health Savings Account because of his high deductible. And he is not alone. Just ask any of your over-50 friends in this market.

The proposed solution: Offer Medicare to those over age 50 for whom group insurance is not available. Utilization of health care services rises after age 50, so this will remove a population of higher medical risk from the individual market place, making premiums more affordable for those under 50. This will likely encourage them to buy insurance and thereby broaden the risk pool for those under 50.

How to pay for this:

♦ Charge those under age 65 opting for Medicare a premium of $350 a month with a higher deductible than that offered to those over 65. In 2017, Medicare recipients will pay $134 a month for part B premiums with a Part B deductible of $183. A supplement policy, usually reasonably priced, would cover the 20 percent of Medicare-determined reasonable costs (not provider charges!) that are not covered under part B. Quite a contrast to what my 62-year-old friend has to pay and the benefit he receives.

♦ Lower the earning threshold for the increase in Medicare premiums that in 2017 is $85,000 individual or $170,000 joint adjusted gross income. Or alternatively, increase the premiums for higher earners over 65. There is room for this, especially if it affords better insurance for the rest of the population. I would gladly pay more than $1,600 a year for wonderful coverage while my 62-year-old friend pays $9,000 for terrible coverage. Especially if it benefits the whole health insurance market.

♦ Have participants in the employer group market pay the Medicare payroll tax with after-tax dollars. Today they pay with pre-tax dollars, which, when combined with the pre-tax social security payroll tax, is the largest tax preference item. My friend pays $9,000 a year with after tax dollars that are largely non-deductible!

♦ Allow Medicare to negotiate drug prices with the pharmaceutical companies. Do I even need to say this?

A side benefit of offering Medicare to a subset of those over 50 would be an immediate increase in the number of people retiring, since having to buy health insurance is a huge impediment to those considering early retirement. This would open up jobs for younger people and reduce the unemployment rate. Since we are already at full-employment, this might help raise wages that have been stagnant for so long.

As we consider tax reform, I would also recommend allowing first dollar deduction of medical costs. I can deduct all my property taxes, all my mortgage interest and even the interest I pay when I borrow from my brokerage account. But not first dollar of my medical costs? It is nuts.

Also, refundable tax credits should replace the premium tax credits of the ACA, especially if they could be made available in advance of filing a tax return. A little-known fact is that Healthcare.Gov and the IRS use different formulas in determining the current premium credit. I am a tax preparer and have seen moderate income taxpayers, who have accurately estimated their income in advance, have their entire Healtcare.gov tax credits taken away by the IRS formula when they file their taxes.

Republicans realize the popularity of disallowing pre-existing conditions, but unless we do something to modify the risk pool, disallowing pre-existing conditions will only drive up premiums and lead healthy people to opt out of health insurance. Fewer people will be insured and hospitals will bear higher uninsured costs.

The cost spiral will continue, as witness the New York experience with eliminating pre-existing condition requirements but not addressing the risk pool issues. The ACA addressed the risk pool effect of eliminating pre-existing conditions by mandating insurance coverage, but with age-rating, pent-up demand and private insurance companies, it is not working. We need to directly address the costs of those over 50 not covered by employer plans.

Consider the Haves and the Have Nots in our society.   Children have CHIP; those over 65 have Medicare; those with employer-based plans have reasonable coverage and an enormous tax benefit in that their share of the premiums are paid pre-tax. Those buying health insurance outside of these groups are terribly disadvantaged. It is time to rectify this major inequality in our society. Allowing insurance companies to compete across state lines will not address the fundamental risk problem—sorry, Paul Ryan.

Eventually, our society will have to address the problem of the high cost of health care. My recommendations are a first step.

Judith Gregory worked for 20 years in health care finance in Boston before retiring to Red Lodge. She has a tax preparation practice and serves on several finance committees for local nonprofits in Red Lodge. She is the owner of the pub and restaurant at the recently opened Last Chance Pub & Cider Mill on Montana Avenue. Her son, Sam Hoffman, owns the cider mill associated with the business.

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