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Pulling it Together: This Could Be the Next Big Issue in Health Reform

No, this is not about “death panels.”

The town hall meetings.  The media coverage of the town hall meetings.  Media polls about how the American people feel about the town hall meetings.  And even the media myth busting and fact checking about the most extreme claims made at the town hall meetings and the Administration’s daily efforts to set the record straight.  All these things have focused attention on a few hot button issues that activists on the right and the left who attend town meetings care about most.  They have diverted attention from the core elements of health reform legislation, and from the core concerns of the American people about their health care costs, which generated the health reform debate in the first place.  When the congressional recess ends, policymakers will hopefully refocus on those concerns.

Possibly the biggest issue—the biggest real issue, that is—standing in the way of movement forward on health reform has been how to finance a plan.  That’s not particularly surprising.  It’s always been expected that generating tax revenues and savings in Medicare and Medicaid to offset the new costs associated with expanding insurance coverage would be difficult and controversial.

There’s been a lot less talk, however, about what people will get for that financing.  What level of subsidies will be available to make coverage more affordable for people?   What kind of coverage will people receive and will it meet the public’s expectations?  These issues are, of course, linked.  If reform is to be deficit neutral at least for the first 10 years (as the President and Congressional leaders have vowed), then the costs associated with reform and the revenues to fund it are a bit like a see-saw.  Revenues or savings and costs have to be in balance.  But, so long as costs and offsets are equal, balance can be achieved at any level—a cost of $800 billion over 10 years, $1 trillion, or $1.5 trillion or more.

They are linked politically, too.  The greater support there is for the positive things that reform will do for people, the easier it will be to gain political support for the revenues and savings needed.  A smaller package—that is, one that costs less—is, from one perspective, more politically palatable.  It increases government spending by a lower amount, and therefore requires lower savings and revenues to avoid raising the deficit.  But, it will ultimately only be judged a success if the benefits provided are perceived as worth the cost of providing them.

If reform legislation advances in Congress, the media and the American people will start to look beyond the cost and financing issues and focus on the coverage and subsidies in the proposals. Will they be viewed as a good deal for the roughly $1 trillion spent over the next ten years and as a fair deal by people who will now be required to have health insurance coverage?  This could be the next big issue in the reform debate, if and when a final bill emerges, and much will depend on whether the American people feel it delivers a reasonable level of relief for the expenditures required.

Here are five things to watch out for as this discussion plays out:

1.  How high up the income scale will subsidies go?

Health insurance is expensive, and therefore out of reach for many Americans.  Who will be eligible for subsidies in the new insurance exchanges?  Everyone with annual income up to 400% of the poverty level?  300% of poverty?  Even less than that if pressure builds to lower the cost of the legislation?  At the point where subsidies stop, people without access to employer coverage will be responsible for the entire health insurance premium, and this could represent a substantial portion of their income.  For example, if subsidies reach people with annual income up to 400% of the poverty level ($88,200 for a family of four), a family at 401% of poverty would pay 11% of income for a $10,000 insurance policy.  But, if subsidies only go up to 300% of poverty ($66,150), a family at 301% of poverty would pay 15% of income for that same policy.  Also, since subsidies generally phase out as the maximum eligibility threshold is approached, taking subsidies higher up the income scale will mean more help for people below the threshold.

2.  Is there an individual requirement to obtain coverage and how severe are the penalties for not complying?

The level of premiums (net of subsidies) that people face under reform will be viewed very differently if everybody is required to buy insurance and penalized if they don’t.  The lower the subsidies available—and, therefore, the more people will have to pay—the more pressure there will be to moderate the penalties for not complying with the individual requirement and/or creating exemptions for people who face premiums that represent a substantial portion of their incomes.  Mandatory insurance also changes the politics of the public’s reaction.  People will be very focused on the cost of coverage to them and the benefits they get, because they will not be able to opt out if they think it’s a bad deal.

3.  What coverage will people get?

This involves a tough balancing act.  With an individual requirement to purchase coverage, some level of minimum insurance needs to be defined.  There will be pressure to keep the minimum low to hold premiums down and avoid forcing many people who are insured today to increase their coverage and the premiums they pay.  At the same time, there is a risk that too parsimonious a package—which does little for people who are underinsured today—will cause people to look at it and decide reform isn’t worth it.  For low and modest income people, in particular, the level of cost sharing they face is key to making health care more accessible.  Even if subsidies make their premiums affordable, will the deductible and coinsurance be affordable too?  An important element is whether the insurance policy has an out-of-pocket maximum that would prevent families from going into severe debt even with insurance.

4.  How much will insurers be allowed to vary premiums by age?

In a voluntary insurance system like we have today, age rating is necessary to avoid having younger (and, therefore, generally healthier) people flee the market.  But in a universal system that  is no longer necessary, and proposals coming out of Congressional committees are looking to limit how much premiums can vary by age.  How age rating is handled is partly a question of values—should younger people subsidize the cost for older people or not?  However, it also interacts with subsidies.  Particularly if the subsidy threshold is low, large variations in premiums due to age could result in older people just above the threshold paying a very substantial percentage of income for insurance.  For example, if premiums were allowed to vary by age by a factor of two to one, the premium for a family of four with a 64 year old head of household could perhaps be $15,000 per year.  At 301% of the poverty level, that would represent 23% of income.  But if premiums were allowed to vary for age by a factor of five to one, the premium for that family could jump to $22,000, or 33% of the family’s income.  Both two to one and five to one ratios are being discussed.

5.  What will be available for the lowest income Americans?

The answers to these questions could affect all Americans, including related changes to the insurance market that would make coverage more accessible and stable for people with health conditions. However, it’s also important to remember that 65% of the uninsured have incomes below 200% of the poverty level ($44,100 for a family of four).  What will reform mean for them?  Will Medicaid—which is now limited by categorical requirements that generally exclude childless adults and income guidelines that vary state to state—be expanded to cover all people and up to what percent of the poverty level—100%, 133%, 150%?

There are tradeoffs in all of this. Expanding subsidies and making coverage more comprehensive costs money, and deficit hawks are hesitant to sign on to a bill that increases government spending by too much, even if it leaves the deficit unchanged over 10 years.  That’s the discussion we’ve been watching play out with the Blue Dog Democrats in the House and the negotiations with moderate Democrats and Republicans in the Senate Finance Committee.  However, there are risks on the other side as well.  People may start to look more closely at the benefits and subsidies that a bill costing $1 trillion or less over 10 years can buy.  Regardless of how Congress and the Administration ultimately navigate this territory, it will be important to look not only at the financing of reform, but also at what people will get for the money.  Once there is a bill in the House and in the Senate that can be scrutinized more closely, the benefits delivered for the money spent and whether or not it meets the public’s high expectations for help with their health care costs could be the next big issue in health reform.