Proposed California measures would help create framework for direct primary care and high deductible insurance combinations
Starting this tax year, federal income tax law raises the existing deduction for medical expenses from 7.5 percent of adjusted gross income to 10 percent. California income tax law generally conforms to federal law. However, proposed California legislation, Assembly Bill 1018, would allow medical expenses to be deductible from income by a yet to be specified amount including the cost of care for elderly dependents.
Two other California bills could establish a framework for what’s known as direct primary care covered directly by consumers and not insurance. In such a model, consumers pay their own primary care costs and buy high deductible insurance policies to cover major, catastrophic events such as hospitalizations. Section 1301(a)(3) of the Patient Protection and Affordable Care Act explicitly recognizes direct primary care medical home plans as qualified health plans eligible to be sold on state health benefit exchanges.
Assembly Bill 1028, the Patient Centered Medical Home Act of 2013, would define “medical home” and “patient centered medical home” as a health care delivery model in which a patient establishes an ongoing relationship with a primary care physician. As defined by the bill, a medical home would be a “physician-led practice team to provide comprehensive, accessible, and continuous evidence-based primary and preventative care, and to coordinate the patient’s health care needs across the health care system in order to improve quality and health outcomes in a cost-effective manner…”
Another bill, Assembly Bill 1129, would conform California law to federal tax law allowing deductions for contributions to health savings accounts used in combination with high deductible health insurance policies.
We are the 401%: Middle class households ineligible for exchange subsidies could reignite health reform
A little more than three years ago, steep premium increases in California’s individual market sparked outrage from Sacramento to Washington, providing a political tipping point for the enactment of the then-moribund Patient Protection and Affordable Care Act (PPACA). This fall and into 2014, those without government or employer-sponsored health coverage who earn more than 400 percent of the federal poverty level (FPL) ($45,960 for singles; $92,200 for a family of four) may find themselves outraged yet again by sharp double digit premium increases. Under the PPACA, those earning in excess of 400 percent of FPL are ineligible for income tax subsidies available for qualified health plans purchased through state health benefit exchanges. They will bear the full amount of higher premiums on their own.
Projections of the impact of the PPACA individual market reforms issued this week by the Society of Actuaries (on the medical cost impact of those newly insured under the law) and the actuarial consulting firm Milliman (on premiums in California) suggest premiums for plan year 2014 will rise significantly for these relatively higher income middle class households. The Society of Actuaries estimates the PPACA individual market reforms will drive up claims costs by an average of 32 percent nationally by 2017 and by double digits in as many as 43 states. The Milliman study commissioned by the California exchange, Covered California, estimates those currently insured with incomes exceeding 400 percent of FPL purchasing the lowest cost “bronze” rated plan covering 60 percent of expected costs can expect a 30.1 percent premium hike for 2014. “Currently insured individuals with incomes greater than 400% of FPL will experience the largest increases,” the Milliman study notes.
Those in this income range likely to be hit with the biggest increases are middle class people in their 50s and 60s – the large Baby Boomer demographic not yet Medicare eligible and not covered by employer-sponsored plans. A major potential implication of higher premiums on top of the already relatively high rates paid by this age group (new age rating rules under the PPACA will provide some relief) is many of them may find even bronze-rated coverage unaffordable and go uninsured, contrary to the policy goal of the PPACA to increase affordability and access to coverage.
If 2014 rate increases for 401+ percent FPL households boost the price of the cheapest plans too high, tax penalties built into the law for those without public or private coverage won’t provide incentive for these individuals to purchase coverage. The PPACA’s individual mandate expressly exempts those who have to spend more than eight percent of their incomes to purchase the cheapest bronze plan offered in their geographic rating region. The law also provides for a financial hardship exemption.
Because of the sheer size of the Boomer demographic and Boomers’ willingness to seek political redress of their grievances, if the premium increases for the 401 percenters predicted indirectly by the Society of Actuaries and directly by Milliman materialize, it could create impetus for further reforms in 2014.
The rest of this year and next will reveal in greater detail how competing market forces under the Patient Protection and Affordable Care Act (PPACA) play out in the individual and small group market segments. Health plans are making their opening gambit by warning in a Wall Street Journal story published this week that premiums will rise in response to new market rules that take effect in January 2014 requiring them to offer specified categories of benefits and use community-based rating instead of medical underwriting.
The PPACA’s managed competition scheme for these market segments will create countervailing downward pressure in addition to the reinsurance and risk adjustment mechanisms mentioned in the WSJ story to offset pressure for higher rates to account for taking on higher risk populations under community rating. That scheme is based on concentrating much of the market in state health benefit exchanges that will aggregate the purchasing power of individuals and small businesses, spurred along in the individual segment with generous income tax subsidies for those with adjusted gross incomes at 400 percent and lower of the federal poverty level. Small employers won’t get these subsidies (enhanced income tax credits will be available for very small, low wage employers) but would be able to pool their market power into one large purchasing entity, the exchanges’ Small Business Health Options Program (SHOP).
The test of that aggregated market power will begin over the next few months in about a half dozen states where the exchanges have opted to actively screen and select which plans can participate in their individual and SHOP marketplaces. Of these, the most illustrative market is the nation’s largest health insurance market — California — where that state’s exchange, Covered California, has established standardized benefit designs and cost sharing levels for plans it will offer. Covered California is utilizing a competitive bidding and negotiation process based on these standard designs that provides incentive to plans to moderate premiums.
Also part of the PPACA managed competition model and designed to boost competition to exert downward pressure on premiums are the large Multi-State Plans administered by the federal Office of Personnel Management. Multi-State Plans will also be sold on the state exchange marketplaces, initially available in 60 percent of the states once introduced. The PPACA mandates at least two Multi-State Plans be offered in each state exchange and be available in all state exchanges by 2017. Plus the PPACA allows cooperative health plans owned and operated by consumers to compete in the exchange marketplaces with investor-owned commercial health plans.
In this New York Times article, Economist Uwe Reinhardt explains the underlying principle governing what hospitals charge for their services: they are based on the market power of the payer. More market power (i.e. government insurance programs) equals lower prices and vice versa.
The principal implication is there is no competitive consumer market for hospital services since individual consumers have no negotiating leverage whatsoever in terms of what hospitals charge for their services.
Insurance no matter what variety assumes two kinds of risk. First, the underlying peril that could result in a covered loss, such as a windstorm or a fire in the case of homeowners insurance. Second, human hazards that can increase the risk of loss. For example, there’s moral hazard (such as filing a fraudulent claim to collect on the insurance by setting one’s house on fire) and morale hazard. What’s morale hazard? This definition is a good one:
A term used to describe a subjective hazard that tends to increase the probable frequency or severity of loss due to an insured peril. Morale hazard, as contrasted with moral hazard, does not imply a propensity to cause a loss but implies a certain indifference to loss simply because of the existence of insurance. For example, an insured’s attitude may be indifferent if a loss occurs because they have insurance. (Emphasis added)
The emphasized part is directly applicable to and has major implications for health insurance. In the context of health insurance, a clear example of morale hazard would be the failure to engage in health promoting behaviors and lifestyles. For instance, an individual with a family history and propensity to develop cardiovascular disease eating an unhealthy diet and not regularly exercising. Granted, that individual may not want to have a stroke or heart attack. But if they have the attitude that they can shift the risk of costly medical care should that happen to their health plan, they may be less motivated to adopt a lifestyle to help head off those eventualities.
As one strategy to stem rising costs, health plans must strike a balance between providing people the peace of mind that comes with having coverage for potentially financially ruinous medical costs while also motivating those they cover to take responsibility to avoid them.
This becomes especially critical starting this October, when health plans in the individual market must begin pre-enrolling applicants for coverage beginning January 2014 regardless of medical condition or history. No longer will plans be able to practice risk avoidance to control claims costs, rejecting those deemed too risky to cover or charging small employers higher rates based on the medical condition of their employees.
That leaves mitigation of morale hazard as their only remaining form of risk management. Large employers as well as smaller ones are looking to so-called “workplace wellness” programs as a form of addressing morale hazard, including contingent wellness programs that provide employees economic incentive to engage in health promoting behaviors to reduce the likelihood of their incurring major medical costs. Whether such programs have a meaningful impact remains to be seen given mixed outcomes such as reflected in this 2011 survey and a study published this week in Health Affairs.
With limited financial incentives available to both plans and employers to reduce morale hazard, it will likely take a big shift in societal attitudes to achieve a measurable reduction. For example, viewing both personal health and health coverage as a common social good that should be respected and preserved. If the resources to pay for health care are shared and finite – and they are – we should regard them as a societal asset that should be preserved. That change in outlook will also require us to re-examine our values and strive for balance in our lives that supports preserving our individual and collective health.