House GOP committee terms employer sponsored insurance “monopolistic,” urges reforming income tax deductibility, codification of ICHRAs to encourage employee enrollment in non-group plans.

The House Republican Study Committee FY 2025 Budget Proposal criticizes employer sponsored insurance that covers the majority of Americans under age 65 as a “monopolistic” arrangement that promotes so-called “job lock” wherein employees remain with a particular employer in order to stay on their employer’s medical insurance plan.

“The sectioning of health insurance products into millions of separate markets has turned the health insurance industry into the most monopolistic, least competitive, and least innovative in the U.S. economy,” the budget proposal states. “It has significantly reduced wages by shifting compensation dollars away from wage and salary increases.”

The budget proposal would facilitate a shift to non-group plans purchased by individual taxpayers by equalizing the tax deductibility of both group and non-group plans and capping the amount of the deduction. Details on the size and mechanism of the cap were not included in the budget proposal.

“This would equalize the tax treatment of all health insurance products and allow the organic development of efficient health insurance products without forcing a change to the existing health insurance market that most Americans rely on,” the budget proposal states, adding the change would also allow employers to band together more easily to create shared plans.

The budget proposal argues the ESI tax exclusion drives hyperinflation and inefficiency of the health care industry, noting the annualized growth of the cost of medical care in the two decades preceding the COVID-19 pandemic outpaced price increases for non-health care goods and services.

Reforming the tax code is preferable than repeal of the tax exclusion entirely because repeal would lead to the “immediate upheaval to the health insurance system that the exclusion has distorted for almost 80 years,” according to the budget proposal.

In 2022, the Congressional Budget Office outlined three alternatives to limit the amount employers can deduct. The options include limiting the income and payroll tax exclusion for employment-based health insurance to the 50th and 75^th percentile of premiums paid and retaining only the employer exclusion to the 50th percentile of paid premiums.

The budget proposal also calls for the codification of administrative rules enacted during the Trump Administration establishing individual coverage Health Reimbursement Arrangements (ICHRAs). “ICHRAs reduce the administrative burden on employers by allowing them to make tax-preferred contributions to a health reimbursement account for their employees, according to the budget proposal. “This relieves employers from the complexity of designing their own health insurance plan and the financial burden of hiring a broker.”

Four-day work week: Implications for employer medical benefit plans

For nearly a century since the Fair Labor Standards Act of 1938, full time employment in the United States has been defined as eight hours a day and 40 hours a week. That could change in the near future. Particularly for knowledge work as the four parameters that have defined it – the same job duties performed in one place (a centralized, commute in office) under the same manager and during a set schedule – are breaking down as a new paradigm emerges, hastened by the public health restrictions accompanying the COVID-19 pandemic that shuffled them.

Proposed legislation is pending in the federal government and about a half dozen states to modify the definition of full-time employment to 32 hours a week. That has generated resistance from some employers, particularly those not in knowledge industries where job duties are less portable and having employees physically present to serve customers or work with employer provided equipment is essential.

However, among those that are, they could opt to set the length of their own work weeks. In so doing, they could also undo an institution that has existed nearly as long as the 40-hour work week: employer sponsored medical insurance (ESI). Here’s an excellent summary of its history:

While its origins can be traced back to 1929, when a group of Dallas teachers contracted with a hospital to cover inpatient services for a fixed annual premium, the link between employment and private health insurance was strengthened by three key government decisions in the 1940s and 1950s. First, during World War II the War Labor Board ruled that wage and price controls did not apply to fringe benefits such as health insurance, leading many employers to institute ESI. Second, in the late 1940s the National Labor Relations Board ruled that health insurance and other employee benefit plans were subject to collective bargaining. Third, in 1954 the Internal Revenue Service decreed that health insurance premiums paid by employers were exempt from income taxation.

It could begin first among smaller employers who are not subject to the employer mandate of the Patient Protection and Affordable Care Act (PPACA) requiring employers of 50 or more full time employees to offer medical benefit plans. Those employers already have incentive to exit ESI since they have less bargaining power with health insurers and consequently pay higher rates than larger employers as annual family premiums for employer-sponsored health insurance average $22,463 in 2022 according to the Kaiser Family Foundation, with employees contributing $6,106 toward the cost.

Employers of 50 or more could avoid the mandate by setting schedules for their employees that have them working an average of less than 30 hours a week or 130 hours a month. That’s the definition of full-time employment that triggers the mandate to offer medical coverage under the PPACA. For example, they could define the work week as three 7-hour days and one 8-hour day per week for a total of 29 hours. That would be part time employment and thus not trigger the employer mandate.

Employers that drop medical benefit plans would no longer have the tax expense deduction for them. But some could decide it’s worth forgoing given the rising cost trend of the past two decades that Warren Buffet famously described as an economic “tapeworm” in 2010. If a shift away from ESI occurs, it would also have big implications for the non-group market that could grow substantially as well as the use of tax advantaged health savings accounts.

Medicare carve out would benefit California single payer plan

California spends more than $300 billion in health care costs every year. For perspective, that’s more than Newsom’s entire proposed state budget of $286 billion for the next fiscal year. To cover those health costs, Kalra proposes a new payroll tax on businesses with 50 or more employees equal to 1.25% of total annual wages and a new excise tax on businesses of 2.3% of annual gross receipts in excess of $2 million. But Kalra’s plan relies on the federal government for 70% of the funding, roughly $210 billion annually. The legislation assumes that the federal government would agree every five years to grant waivers so California could tap Medicare and Medicaid money to fund the state’s single-payer system. That’s a huge gamble because California wouldn’t have the resources to make up the difference if leaders in Washington refused to go along.

Editorial: California single-payer bill shows state can’t go it alone | The Sacramento Bee

As this editorial suggests, the scope of the proposed CalCare single payer scheme is ambitious. Perhaps a bit too ambitious. It would be easier to get Medicaid waivers since Medicaid is jointly funded by the federal government and states, giving states the option to opt out. Not so with Medicare. In addition, traditional Medicare is itself designed as a national single payer system. Coverage is not dependent on states and is valid in all states for any provider that accepts Medicare reimbursement.

While the legislative proposal faces stiff opposition from commercial payers and providers — particularly because it would disrupt hospital finances and payment for services by basing them on Medicare reimbursement rates — it might be more practical if its scope was reduced to carve out Medicare.

Major reform of U.S. medical care finance won’t happen as long as employee medical benefit plans survive. But they live from year to year — and the future is looking more precarious.

The financial viability of U.S. medical care as currently structured rests upon eight decades of federal policy providing tax incentives for employers to offer medical benefit plans to their employees. By far, the largest proportion of the American population finances care and prescription medications though these plans. The premiums and out of pocket costs these employers and their employees pay support hospital systems heavily reliant on their relatively higher reimbursement rates compared to government insurance programs (Medicare and Medicaid) to fully cover their costs.

But while employer sponsored plans and their reimbursement rates are central to the American structure, they rest on a footing that’s inherently unstable. The terms and condition of its financing are only good for the following plan year, negotiated in the previous year between payers and providers in what’s known in the industry as the annual kabuki dance. It’s more like a perpetual poker game. Both players fold without ever showing their cards and a new hand is dealt the following year. Neither calls the others hand, wanting to keep those watching the game from seeing the cards, treating them as proprietary contractual terms and conditions.

This annual ritual is inherently unstable over the long term because it perpetuates a cycle of cost-push inflation in one of the largest segments of the economy, comprising nearly one fifth of GDP. One year, payers may fold first. The next, it might be providers, depending on the perceived strength (market power) of the respective hands. When payers fold, the chips they forfeit become higher reimbursement rates that get passed onto employer organizations in the form of higher premiums and employee cost sharing.

The rate of this cost-push inflation exceeds the overall rate of inflation and is graphically illustrated in this table showing premium increases for employer organizations.

According to the Kaiser Family Foundation, employer medical benefit plan costs increased by 55 percent in just one decade from 2010 to 2020, more than twice the pace of inflation and wages. This trend representing annual increases of about five percent has a broad macroeconomic impact. Employers shift more of the costs of medical benefit plans to workers, redirecting dollars that might otherwise show up in employee paychecks. Suppressed pay translates into lower overall socio-economic prosperity.

The capacity of employer organizations and their members to continue to underwrite the chip bank funding the annual poker match is limited. At some point, the bank will break. Possibly sooner rather than later. “Things may look different moving forward as employers grapple with the economic and health upheaval sparked by the pandemic,” notes KFF CEO Drew Altman.

Along with these indications of economic stress in the employer group sector, policies and proposals to shift more employees into non-group (individual) plans as well as expanding government plans have grown in the past few years. Only when the bank fails and the rupture occurs will the stage be set for a global overhaul of how the U.S. regulates and finances medical care for its citizens.

Commoditizing medical care to counter “socialization”

Good piece out this week by Reed Abelson in The New York Times indirectly spotlighting the sharp policy divide between the Trump administration and Democratic presidential contenders seeking a larger government role in controlling the cost of medical care and prescription medications. To the Trump administration that’s anathema. Its response to what it terms the Democratic “socialization” of medical care is to commoditize medical care and prescription drug prices — with price tags attached — so people can shop for it like they might a product on Amazon.

That’s highly disruptive to both the sell and buy sides of the market. The sell side is pushing back and wants to keep business as usual. As Abelson reports, the American Hospital Association is taking the administration to court over an administrative rulemaking that will take effect in about a year requiring they post prices online for at least 300 hospital procedures contending the rule lacks statutory authority.

Also generating opposition, Abelson reports, is a proposed rule that would blow up the confidentiality payers and providers have traditionally enjoyed by requiring them to make public contracted reimbursement rates. Payers and providers also dislike proposals by Democratic presidential candidates that would cover more people under Medicare, including expansive “Medicare for All” proposals such as those by Senators Bernie Sanders and Elizabeth Warren. To them, “Medicare for All” means “Medicare reimbursement rates for all” that would pull billions of dollars off the table: more generous reimbursement rates for employer sponsored medical benefit plans. Those rates are double or more that of government determined Medicare reimbursement rates.

As for the buy side, the Trump administration’s hope is consumers will wield market power to force down the cost of care and drugs. Seema Verma, administrator for the Centers for Medicare and Medicaid Services, wrote this in an op-ed this week:

For too long, the health care system has catered to the demands of powerful vested interests led by hospitals and insurers. The decades long norm of price obscurity is just fine for those who get to set the prices with little accountability and reap the profits, but that stale and broken status quo is bleeding patients dry. The price transparency delivered by these rules will put downward pressure on prices and restore patients to their rightful place at the center of American health care.

Verma complains people don’t know in advance what it they will ultimately pay for an episode of care or prescription until after they receive it. In making it a shoppable commodity, her thinking goes, people can know the price for what they need or desire and make an informed buying decision. That’s disruptive because it requires consumers to alter ingrained behavior in how they interact with medical care, when the cost is generally dealt with after care is received.

Commoditization might work for prescription drug prices and web sites such as GoodRx post comparative price information and offer discounts. But medicine is still regarded as an art and practice. No two patients are alike or will necessarily require the same care even with standard best practice protocols for common complaints and treatments.

Moreover, it’s been decades since Americans customarily paid out of pocket for ordinary care. From the 1940s to the late 1970s, “major medical” indemnity insurance as it was called covered only catastrophic care events. Managed care plans and health maintenance organizations followed, removing incentive to shop for lower cost care by creating an expectation that plans should function as all-inclusive medical bill protection or require only nominal out of pocket cost sharing.

Shifting political tides portend big changes in 2020s and beyond

Concern about the cost of medical care and prescription drugs is leading to increasingly more aggressive policy stances by both progressives and conservatives that would have been considered too radical a decade ago. In 2009, the idea of a “public option” payer for the non-group and small group markets didn’t advance as the Patient Protection and Affordable Care Act was being drafted. The fear was a publicly operated payer would work against the market-based principles of the Affordable Care Act, intended to shore up these distressed markets and boost their enrollment and actuarial viability. A public plan without the need to earn a return on investment and pay income tax might end up outcompeting and “crowding out” the private payer non-group and small group markets the law aimed to bolster. Now among candidates seeking the Democratic presidential nomination, revising the Affordable Care Act to include a public option is considered a more moderate position compared to expanding eligibility for Medicare to the late middle aged. Or all Americans – Medicare for All — as favored by the left leaning wing of the party.

Conservatives are turning to market-based approaches that similarly would have been considered too radical and disruptive in 2009 such as importing prescription medications from other countries. The Trump administration has issued a rulemaking effective in 2021 designed to shine a bright light of transparency on hospital pricing in the hope that informing people what hospitals pay health plans for 300 common procedures that can be scheduled in advance, they will shop among hospitals for the best price. Traditional conservative ideology favors freedom of markets and the ability to contract. But hospital and payer interests argue the proposed rule would disrupt markets and violate the sanctity of their contracts.

At the voter level, the political sentiment is shifting. Conventional wisdom has held proposals to expand Medicare to cover Americans under age 65 won’t fly. Most working age Americans are covered by employee medical benefit plans and are largely satisfied with them, the thinking goes, and thus aren’t inclined to support Medicare expansion to working age families. That may no longer be the case as employee plans become less generous and workers must pay more out of pocket for medical care and prescriptions. This recent report illustrates:

Californians who get health insurance through their jobs are having to spend a greater share of their paychecks on health care costs, according to a new analysis of employer-sponsored health plans to be released Thursday by the Commonwealth Fund, a nonprofit foundation that researches health industry trends. California workers went from spending 8% of their income on health insurance premiums and deductibles in 2008, about $4,100, to nearly 12% of their income on premiums and deductibles in 2018, about $6,900. That is a 68% jump in employees’ health care spending over the past decade — which far outpaces wage growth during the same period. Between 2008 and 2018, median household income in the state grew just 16%, from about $52,000 to $60,000, according to the report. Workers in California went from paying on average $2,600 in premiums in 2008 to paying $4,100 in premiums in 2018. Their deductible costs went up $1,450 to nearly $2,800 during the same period.

While employee “major medical” plans providing only catastrophic coverage might have been acceptable in the 1950s-1970s, they are less so now as more generous managed care medical plans appeared and then dominated in the following decades. That created an expectation that medical plans should cover utilization at the point of care (increasing due to demographics and declining population health) and not provide insurance against bankruptcy. That rationale has been turned on its head. Now people with employee medical benefit plans with high out of pocket cost sharing are forced into bankruptcy protection from medical bills. At the same time, employers must devote more of employee compensation to medical benefit plans, taking dollars away from direct compensation.

These trends point to big change in the 2020s with the primary policy questions being 1) Whether the role of the public sector in medical care finance and delivery should be expanded and 2) To what extent should the government regulate the cost of care and medications.

Given the dominant role of employee medical benefit plans, if Medicare is expanded it likely will be done so gradually over at least a decade, rolling up Medicaid and commercial non-group and small group. Expect large employers of 500 or more to continue to be permitted to provide medical benefit plans as “private option” with a greater emphasis on value.

Trump administration’s reform policy principle based on flawed assumptions

The Trump administration’s efforts to reform how medical care is delivered and financed in the United States is based on the dubious assumption that medical care is not much different from any other market-based consumer service. The administration’s fundamental reform policy is better quality and value can be had by creating a more competitive market by arming consumers with more information on cost and value so they can be more discerning “shoppers.” It also presumes most any type of medical care that can be scheduled in advance is “shoppable” and therefore buy side market forces can be brought to bear to act as a natural check on prices and to promote higher value care and outcomes.

There are several inherent problems with that assumption.

• Simply because medical care can often be scheduled in advance unlike emergency care, with the exception of some elective procedures, it isn’t a discretionary purchase like other consumer goods and services. No one really wants medical care unless they need it – and often tend to put it off — regardless of whether it can be scheduled in advance. Hence, few people will be diligent shoppers.

• Because medical care is for the most part not a discretionary purchase, demand for it tends to be inflexible. Inflexible demand strengthens the sell side for providers and conversely weakens buy side purchasing power for individuals and families. A competitive market requires relatively equal market power on both the sell and buy sides.

• Aside from personal services not covered by payer plans like elective cosmetic surgery, individuals and families who receive medical care do not directly select among providers and bargain for services since their medical benefit plans — and not them — bargain for the cost of procedures. Also, their ability to choose among providers is limited to increasingly narrow provider networks.

• Patients’ heavy reliance on trusted relationships with their doctors to recommend both medical care and the provider, substantially diminishing their exercise of choice.

• More costly medical procedures are performed in hospitals and surgery centers. High staffing, equipment and staffing and patient safety regulation create high cost barriers to competitor entry. Those high costs tend to incentivize provider consolidation and create oligopolistic market conditions in most areas, increasing sell side market power.

• Much of American medical care lies largely outside of competitive market forces in government programs on the payer side – Medicare and Medicaid – as well as integrated providers such as the Veterans Administration and programs for military members and their families.
  

It’s the prices, stupid. Real debate over public option is over Medicare reimbursement rates.

“If there could be an L.A. Care in every county … that would be an improvement, but it certainly wouldn’t be transforming our health-care system overall,” she said. “A national public option that pays providers Medicare rates would have much more dramatic effects on the overall health-care system.”

But many private insurance companies, with some reason, fear that a public option operating on such a reimbursement system would set the country on a path to a government-run, single-payer system. If a public option paid providers that much less, private insurers reason, it could charge much less than they do in premiums and ultimately siphon away most of the insurance market.

Source: What Democrats Can Learn from L.A.’s Public Option – The Atlantic

Why Doctors Still Offer Treatments That May Not Help | The Incidental Economist

“Only a fraction of unproven medical practice is reassessed,” said Dr. Prasad, who is co-author of a book on medical reversals, along with Adam Cifu, a University of Chicago physician.

Dr. Prasad’s work is part of a growing movement to identify harmful and wasteful care and purge it from health care systems. The American Board of Internal Medicine’s Choosing Wisely campaign identifies five practices in each of dozens of clinical specialties that lack evidence, cause harm, or for which better approaches exist. The organization that assessed the value of treatments in England has identified more than 800 practices that officials there feel should not be delivered.

It’s an uphill battle. Even when we learn something doesn’t make us better, it’s hard to get the system to stop doing it. It takes years or even decades to reverse medical convention. Some practitioners cling to weak evidence of effectiveness even when strong evidence of lack of effectiveness exists.

This is not unique to clinical medicine. It exists in health policy, too. Much of what we do lacks evidence; and even when evidence mounts that a policy is ineffective, our political system often caters to invested stakeholders who benefit from it.

Source: Why Doctors Still Offer Treatments That May Not Help | The Incidental Economist

“Priced out” or “fleeing the market.” Whatever the preferred terminology, the economic upshot is the same: market failure.

The non-group market has functioned as a remainder market, a market of last resort for those who don’t qualify for government and employer medical benefit plans that cover about 90 percent of those with coverage. Non group plan issuers have thus labored with comparatively lower economic clout when it comes to negotiating the price of medical care with its providers, additionally hindered by high turnover among plan members that might be expected in a market of last resort.

Historically, that has meant relatively higher premiums and cost sharing that makes non-group particularly vulnerable to adverse selection and its dreaded “death spiral.” The market entered this troubled state starting in the early 2000s as premiums rose and threatened to circle the drain if the adverse selection trend wasn’t quickly reversed. The Patient Protection and Affordable Care Act came to the rescue with a mix of incentives and disincentives to preserve the viability of the non-group market with state health benefit exchanges, a ban on medical underwriting like that employed by life insurers, modified community-based rating, and advance premium tax credit (APTC) subsidies. The latter two reforms however only partially succeeded. Modified community-based rating allowed age to be used in setting premiums, though narrowing the differential between younger and older people. The tax credit subsidies didn’t apply to the entire market, but only for households earning less than four times the federal poverty limit. That exposed a portion of the non-group market to market failure, particularly the demographic aged 50-64 likelier to be in their high earning years and who also face higher premiums by virtue of their years.

The U.S. Centers for Medicare & Medicaid Services (CMS) has issued a report Trends in Subsidized and Unsubsidized Enrollment Report. According to CMS, the most recent year of enrollment data shows average monthly enrollment across the entire individual market decreased by seven percent nationally between 2017 and 2018 at the same time premiums increased by 26 percent. It attributed the drop entirely to those ineligible for APTC subsidies, noting unsubsidized enrollment declined by 24 percent, compared to a four percent increase in APTC subsidized enrollment.

“The report shows that people who do not qualify for APTC continue to be priced out of the market,” CMS stated in a news release today.  CMS reported an enrollment drop of 1.3 million unsubsidized people in 2017 and another 1.2 million unsubsidized people leaving the market in 2018. The declines among unsubsidized enrollees coincided with increases in average monthly premiums of 21 percent in 2017 and 26 percent in 2018, according to CMS.

“As President Trump predicted, people are fleeing the individual market. Obamacare is failing the American people, and the ongoing exodus of the unsubsidized population from the market proves that Obamacare’s sky-high premiums are unaffordable,” said CMS Administrator Seema Verma.  

“Fleeing the market” or “priced out.” Whatever the preferred terminology, the economic upshot is the same: market failure. When any product or service is priced above a level that’s affordable by its intended market, there can be no sustainable market unless prices fall or incomes or subsidies rise — or some combination thereof. The federal tax code allows self employed taxpayers to deduct premiums for non-group plans. That provides some benefit, but doesn’t help with affordability.

California with its larger non-group population is attempting to prop up the weak plank of insufficient subsidies by expanding eligibility limits to households earning 600 percent of federal poverty levels starting in plan year 2020, supported by state income tax penalties levied on those without some form of commercial or government coverage. If it has a meaningful impact on affordability in the challenging older subset of the non-group market, federal candidates in the 2020 election cycle who favor keeping the Affordable Care Act’s reforms of the non-group market intact and/or boosting tax credit subsidies won’t be able to point to the state’s success since the results won’t be in until after the election.

Ultimately, market failure in the older age cohort of the non-group segment may lead federal policymakers to conclude it makes better sense to move forward with proposals to bring that population into Medicare via an early “buy in” option rather than tie themselves in knots trying to create a viable market for a relatively small number of Americans.