Health Care Legislation, Part 7:
Calculate how much taxpayers would subsidize you

12 Nov 2009 in Regulatory Economics, Legislation

Estimates of the social costs and benefits of health care legislation are hard to find. The Congressional Budget Office estimates federal budget revenues and receipts, and while it is supposed to estimate non-federal costs, it generally does not do so.

The Kaiser Family Foundation has a calculator that tells you how much taxpayers would subsidize your health insurance if your employer did not provide it, and thus you had to purchase it yourself (the "individual mandate").

This calculator provides some very interesting insights about the House and Senate health care bills. Most strikingly, it's possible that a majority of Americans would receive large taxpayer subsidies.

The purpose of the calculator is to help people estimate how much of a taxpayer subsidy they would obtain under three alternative bills:

• HR 3962, the bill as it stood on October 30, 2009, not the version approved by the House
• S 1697, the bill put forward by the Senate Health, Education, Labor and Pensions Committee
• S. ____, the Senate Finance Committee's bill

Here are three caveats provided by the Kaiser Family Foundation that warn against misinterpretation:

• "Specific subsidies for cost sharing and what people might pay out-of-pocket for deductibles and coinsurance are not illustrated on the calculator."
• "In many cases coverage will be more comprehensive and accessible than what is typically available today in the non-group market, so premiums cannot easily be compared to what people buying insurance on their own are now paying."
• "The calculator does not apply to people with coverage available through an employer, where the firm is generally paying for a substantial portion of the insurance premium."

These caveats are extremely broad.

The first is a reminder that the tool isn't really a "calculator," it's an "estimator." Your subsidy could an (and almost certainly would) be different. Moreover, the tool estimates only your insurance premium; it does not attempt to capture your out-of-pocket costs for co-insurance payments and deductibles.

The second caveat is a reminder that you would be buying a different product. Almost certainly, your new insurance would be more extensive and cover many more things. That makes the new insurance plan hard to compare with your current plan. This also is an implicit acknowledgement that, except in rare circumstances, you will not be able to keep your existing plan.

The second caveat also says that "coverage" would be "more accessible than what is typically available today," but that does not mean that medical care would be more accessible. Even if all other factors are held constant and cost is set aside, adding millions of new customers would expand the demand for medical services. Unless prices are allowed to rise to equilibrate demand -- and all bills intend not to allow prices to rise -- the accessibility of medical care must go down.

The third caveat says the tool cannot be used if you obtain health insurance through your employer. That is, the tool only applies to the individual insurance market. in which consumers purchase their own plans using after-tax dollars.

WHAT'S MY SUBSIDY?

Selecting one of the three bills, entering one's age and income, cost area, and selecting individual or family coverage, generates a raft of statistics:

• Actual [sic, should say "estimated"] annual plan premium
• The proposed statutory cap on your premium as a percentage of your income
• Your premium payment
• The percentage of your premium that you have to pay
• What percent of your income you would have to pay
• The dollar amount of the taxpayer subsidy

To be concrete, if you enter 40 years of age, $50,000 per year, medium-cost area (the default), and family coverage, the three bills yield the following results:

From your perspective, the Senate HELP bill is clearly supreme. You have to pay 4.5% of your income, but you receive a subsidy that approaches 25% of your income. HR 3962 is your second-best option, and the Senate Finance Committee bill is the least desirable, though even in the worst case you pay about 8% of your income and only half of the cost. Of course, taxpayers' ranking of these bills is exactly the opposite. (These rankings are shown in rows 7 and 8.)

Age 40 turns out to be an inflection point, because HR 2962 and S 1697 limit to a factor of 2 the amount of health risk that a private insurer can incorporate into rates. (The Senate Finance Committee limits this fact to 4, which is not binding in the example of the family market. It is binding in the individual insurance market. For the plans above, actuarial premiums vary by age by a factor of 4.4.)

Under both bills, the total premium declines with age below 40, but at a rate less than health risk declines. Conversely, the total premium rises with age above 40, but at a rate less than health risk increases. Thus, both bills include, in addition to the taxpayer subsidy, a cross-subsidy from younger and healthier people to older and less healthy people. This cross-subsidy makes an individual mandate essential to prevent "adverse selection," the phenomenon in which people with lower risks decline to buy insurance. (As lower-risk people drop out, the average risk of the pool increases, causing more people to drop out, ad infinitum until the insurance market vanishes.)

The Kaiser estimator also provides insight concerning who gets subsidized by taxpayers and who does not. In the example above, the 40-year old buying family coverage is subsidized until income exceeds about $80,000, give or take a few thousand dollars. The income threshold varies with age; it is lower for younger people and higher for older people.

Candidate Obama promised that the "typical" family would save $2,500 under his plan. Politico's Carrie Budoff Brown says talk about savings seems to have stopped:

Obama was the one who raised expectations of lower premiums. From one city to the next, and during the presidential debates, Obama made the pledge almost as often as he vowed to remove troops from Iraq: “We estimate we can cut the average family’s premium by about $2,500 per year.”

He has barely uttered it since taking office. The last recorded mention by Obama was in May, when he announced that six health industry groups agreed to lower the growth rate in health care spending by $2 trillion over 10 years, resulting in a savings of $2,500 per family “in the coming years.”

If "savings" is defined in terms of the amount of taxpayer subsidy received, the Kaiser estimator can be used to approximate the income level below which subsidies are at least this large. These are reported in row 11 for the example above. For the three plans, subsidies per family exceed $2,500 if income is less than about $66,000, $77,000, and $61,000, respectively.

In 2008, median US household income was $50,303 (90% confidence interval: ± $225). Household incomes significantly greater than the US median qualify for subsidies under all three bills. The Obama campaign never defined "typical," but a strong case can be made that any of these bills fulfills the campaign promise as long as it is interpreted this way.

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