Bipartisan Tax-Free Solution To Health Care Financing: Coupling HRAs With A Public Option

A combination of health insurance initiatives by the presumptive 2020 Democratic and Republican presidential nominees could expand health care coverage and significantly reduce costs, without raising taxes. Along the way, the combination could revitalize private plans.One initiative, proposed by former Democratic Vice President Joseph Biden, requires a Public Option so non-seniors can enroll in Medicare. The other initiative is President Donald Trump’s rule that enables employees in small and medium sized enterprises (SMEs) [...]to use pre-tax funds, which their employers deposit in Individual Coverage Health Reimbursement Arrangements (ICHRAs), to buy Section 1301 qualified health plans in the individual market. Using an Executive Order to designate the Public Option as a “qualified health plan” for purposes of Internal Revenue Code section 36B(c)(3)(A) would enable covered employees to purchase Public Option coverage with tax-free contributions from employer-funded ICHRAs.

How Would The HRA-Public Option Work?

Under this HRA-Public Option combination, the employee could buy a suitable ACA plan that would be administered by Medicare, with its substantial economies. She would be newly insured, pay less for her health insurance than she otherwise would have, and have commensurately more disposable income.As we illustrate below, this HRA-Public Option combination could reduce the premiums not only of the approximately 20.1 million uninsured SME employees and family members (40 percent declining coverage in firms under 200 employees times 59 million in firms with fewer than 500 employees), but also those of the 3.4 million Americans in the individual market who pay entirely for their own insurance with after-tax dollars. Further, it could lower Medicare’s average medical care expenditures by newly including these enrollees, whose average medical expenses are lower than those of the elderly. (These numbers, of uninsured SME employees and unsubsidized individual market enrollees, change over time; in particular, COVID-19-related job losses have surely reduced the number of uninsured SME employees as some laid-off workers have become newly eligible for coverage under the ACA or Medicaid. The numbers in this paragraph are used below as the most current information available with the understanding that savings amounts from our proposal would vary depending on economic conditions.)Some contend that the Public Option’s low-cost premiums are falsely achieved by shifting Medicare’s costs to private insurers, but Medicare’s massive scale—61.2 million enrollees—delivers genuine efficiencies. Medicare pays hospitals 35 to 65 percent less than private insurers for the same services.Despite these economies, Medicare is underfunded. The $37 trillion 2020 liability arising from the cumulative effect of the underfunding is kicked down the road. In 2018, Medicare’s payroll taxes and premiums accounted for only half of expenditures. Pricing Public Option premiums on an actuarially valid, pay-as-you-go basis would avoiding worsening these fiscal challenges and could even help address them. The Public Option should also avoid government accounting: independent accountants should verify that the Public Option’s pricing complies with the generally accepted accounting principles of private health insurers.Using 2018 data (the most recent year for which all relevant data is available), exhibit 1 below illustrates how a pay-as-you-go Public Option could lower the price for the 3.4 million people who now buy unsubsidized Bronze, Silver, and Gold insurance plans from the Obamacare exchanges, as well as SME employees. In this calculation the Public Option is offered by a licensed health insurer who pays Medicare’s rates to providers. (For the purposes of this example, we assume Medicare pays providers 50 percent of the rates paid by private plans, at the midpoint of the 35 percent to 65 percent Medicare discounts reported by researchers.) The average premium would likely decrease for a Silver plan by $3,588 when compared to ACA premiums and $3,609 compared to those paid by SME employees.

Exhibit 1: Difference in premiums of ACA and SME versus Public Option plans, 2018

	Bronze	Silver	Gold	SME
A. Current ACA and SME individual premium	$5,208	$5,976	$7,044	$7,218
B. Spending on medical benefits @ 80% medical loss ratio [A x 0.8]	$4,166	$4,781	$5,635	$5,774
C. Medicare payment for Public Option @ 50% reduction (p. 11)[B x 0.5]	$2,083	$2,390	$2,818	$2,887
D. Reduction in Medicare spending from healthier enrollment [exhibit 2]	($496)	($480)	($458)	NA
E. New Public Option premium at reduced Medicare cost and spending [(C + D) ÷ 0.8]	$1,984	$2,388	$2,950	$3,609

Source: Authors’ calculations.We compute these premiums via the following steps:

1. Calculate ACA and SME medical benefit costs based on the 80 percent medical loss ratio required by the ACA of individual and SME plans (Row B).
2. Calculate comparable Public Option medical benefit costs based on Medicare’s 50 percent cost advantage (Row C).
3. Calculate the reduced spending in Medicare medical benefits from adding ACA unsubsidized uninsured to Medicare’s risk pool (Exhibit 2 and Row D).
4. Calculate the comparable Public Option premia by dividing the Medicare benefit costs and reduced spending by 80 percent (Row E).

This Public Option could be purchased by the 3.4 million people who bought unsubsidized insurance in the individual market and it could also lure the 20.1 million uninsured SME employees and family members. These enrollees would not require subsidization.The addition of these younger, healthier individuals to the Medicare pool would materially reduce average Medicare spending. While the exact reduction would be driven by the proportion of Americans opting for the Public Option, the average Medicare benefit spending, $11,513 per year in 2018, would certainly be reduced.The reduction in Medicare spending if all the 3.4 million unsubsidized insured opt for the Public Option and all buy one of the three ACA plans is shown in exhibit 2 and calculated as follows:

1. The Medicare benefit cost is $704.6 billion.
2. The average Medicare benefit cost per person is $704.6 billion divided by 61.2 million enrollees, or $11,513.
3. To compute Medicare’s benefit costs with the 3.4 million enrollees newly added, we multiply the benefit cost of each of the Bronze, Silver, and Gold Public Option plans in Exhibit 1, Row C by 3.4 million and add it to the current Medicare benefit cost.
4. To compute the reduction in Medicare benefit cost, we (i) divide the total in Step 3 above by the sum of Medicare enrollees and ACA uninsured and (ii) subtract this figure from the current average Medicare benefit cost.

Exhibit 2: Reduction in Medicare spending if unsubsidized ACA insureds join the Public Option (2018)

Current Medicare benefit cost: $11,513, 61.2M enrollment	Average Medicare Spending Reduction
Bronze: Private MLR $2,083, 3.4M enrollment($704.6B + (3.4M x $2,083)) ÷ (61.2M + 3.4M) = $11,017Reduction $11,513 - $11,017 = $496	$496 reduction in average Medicare spending if all bought the Bronze plan
Silver: Private MLR $2,390, 3.4M enrollment($704.6B + (3.4M x $2,390)) ÷ (61.2M + 3.4M) = $11,033Reduction $11,513 - $11,033 = $480	$480 reduction in average Medicare spending if all bought the Silver plan
Gold: Private MLR $2,818, 3.4M enrollment($704.6B + (3.4M x $2,818)) ÷ (61.2M + 3.4M) = $11,055Reduction $11,513 - $11,055 = $458	$458 reduction in average Medicare spending if all bought the Gold plan

Source: Authors’ calculationsDue to data limitations, we cannot estimate the additional expenses of the Public Option that would accrue for currently unaccounted Medicare expenses, such as the undercapitalization of plant and equipment in Federal agencies found by the U.S. Government Accountability Office when it compared them to comparable private firms. This undercapitalization leads to lower depreciation expenses in public versus private plans. These increased costs would be unlikely to reverse the substantial cost advantage of the Public Option.In addition, the Public Option could be priced to reduce Medicare‘s unfunded liabilities. This amortization of the expenses of the unfunded liabilities could be accomplished in many ways, such as charging them to all taxpayers, all Medicare recipients, or only higher-income recipients. In exhibit 3, we show the effect on the Public Option if all taxpayers were responsible for amortization of this liability. Including amortization of the liabilities in the price of the Public Option would still reduce its price relative to those of the ACA and SME plans. We calculate the amortization by:

1. Dividing the Medicare unfunded liabilities, $37 trillion, by the number of U.S. taxpayers, 162 million, and the 75 years used to compute the present value of the liabilities (exhibit 3, Row F).
2. Adding the amortization figure above to the projected Public Option premium (Row G).

Exhibit 3: Reduction in Public Option price advantage over ACA and SME if including amortization of Medicare unfunded liabilities (2018)

	Bronze	Silver	Gold	SME
E. New premium at reduced Medicare cost and spending [(C + D) ÷ 0.8]	$1,984	$2,388	$2,950	$3,609
F. Amortization of unfunded liabilities	$3,045	$3,045	$3,045	$3,045
G. New premium at reduced Medicare cost and spending, and increased cost for unfunded liabilities [E + F]	$5,029	$5,433	$5,995	$6,654
H. Current individual premium	$5,208	$5,976	$7,044	$7,218

Source: Authors’ calculations.Would the Public Option become a dumping ground for the sickest enrollees? The HRA Rule contains nondiscrimination guardrails that would curtail employers’ dumping only their sickest employees into the Public Option.The Brookings Institution worried that large employers with sicker employee pools would enroll their entire pool in the government option under insurance industry pressure. But consumers are so resistant to changes in their health plans that President Obama noted that a favorable aspect of the ACA was, “If you like your health plan, you can keep your health plan.” It is thus less likely that these employers would move their employees out of traditional private insurance into this version of the Public Option. In any case, the health care expenses of employers with sicker labor forces are likely to be lower than those of the average retired Medicare enrollee.

Awakening Sleepy Private Plans

Simultaneously, combining HRAs with the Public Option would finally spur somnolent private health insurers to compete by using their massive scale to reduce the bloated U.S. health care system. They could compete by reducing the estimated waste in the health care system of $900 billion; experts estimate that at least $250 billion could be saved without diminishing the quality of care.Private insurers could also newly compete by offering policies that are politically infeasible for public insurance. For example, they could offer policies that transport members for care from high-cost locations to high-quality, low-cost ones. In addition, legislation should enable them to sell across state lines in the individual and small-group markets and bundle health and liability products for efficiency.Currently, private insurers can afford to remain sleepy: in nearly half of the largest population centers in America, one private insurer has at least 50 percent of the market. The loss of enrollees to the HRA-enabled Public Option would surely wake them up. Among other benefits, private insurers would be highly motivated to assure that the Public Option is accurately priced.All in all, the combination of HRAs and the Public Option would break even, decrease prices for those insured by small and medium-sized businesses and the self-insured, reduce average Medicare costs, likely expand coverage, and spur long dormant private insurer competition.This combination joins some of the best ideas of both sides of the political aisle, and is a practical, viable solution to improving the U.S. health care system.