Let's Check the Math on Health Subsidies

It’s December 1, and, to no one’s surprise, Congress still has not acted on extending the expanded health care premium tax credits for ACA. To Congress, the subsidies don’t expire until the end of the year, so they figure they have until at least then to act, or maybe sometime after that, given the way they handled the recent government shutdown.

Trust me: the math is not that complicated. Credit: Microsoft Designer

On the other hand, consumers who are renewing or shopping for ACA plans face a more immediate deadline; they have until December 15 to enroll for January 1^st. They’re already seeing huge increases that result from a normal renewal increase plus the loss of the generous subsidies; Kaiser Family Foundation estimates that their premiums will more than double without them. They can’t wait while Congress plays politics.

There seems to be agreement that something will be done about the subsidies, but less clarity about what that something is. Some centrists argue to extend the enhanced subsidies but with some tweaks, such as lowering the upper income levels and/or requiring everyone to pay at least some minimum premium. To me, that’d be a reasonable compromise. But some Republicans, including President Trump, are calling for a more radical change: instead of giving the expanded premium tax subsidies to those “fat cat” insurers, give them directly to consumers through health savings accounts (HSAs). Put individuals over insurers, they argue.  

I’m here to tell you: the math does not work.

I am not an actuary, but long ago I was a group underwriter, setting rates for employer groups’ health insurance, and, also long ago, I was involved in the early days of so-called consumer directed health plans (CDHPs), including HSAs and high deductible health plans. I don’t disagree that HSAs and high deductible plans can play a role, but one has to understand the math that drives health care spending.

The central fact of health care spending is that it isn’t evenly distributed. It is a perfect example of the Pareto principle: 80% of spending comes from 20% of people. The flip of that is that about 15% of people have no healthcare spending in any given year. What insurance does is take money from everyone and use it to fund the spending of the high cost people. That’s what all insurance does.

Pareto principle illustration

OK, I’ve avoided doing the math as long as I could, but here goes. One proposal has called for $2,000 to be deposited in each enrollee’s new HSA. Let’s keep it simple and say there are 1,000 such people, and that their average annual health care spending is $2,000 (which, of course, is way low). So we have 1,000 x $2,000 = $2 million in both subsidies and spending. It works out perfectly, right?

Not so fast. Of that $2,000,000 in spending, eighty percent of it -- $1.6 million -- is accounted for by just 200 people. They’ve only got $400,000 in HSA funds (200 x $2,000), so they are really out of luck. $1.2 million out of luck.

The remining 800 people have only $400,000 in spending ($2 million - $1.6 million) but have $1.6 million in HSA funds (800 x $2,000), so they just got a big windfall. They can spend it on non-covered services like dental or vision or roll it over to the next year, tax free. They’re $1.2 million to the good.

Of course, at some point insurance kicks in, but the unfortunate 200 people are going to hit those big deductibles and out-of-pocket limits, while the more fortunate people are sitting pretty with their mostly intact new HSA funds. It’s a great deal for them (and the financial institutions that get to manage those funds, an angle let’s not forget about).

Do we aim to protect the high cost people, or benefit the most people?

It gets worse than that. Let’s assume that ACA premiums are also $2,000 per person, ignoring any insurance admin or profit. So we have $2,000,000 in premiums and $2,000,000 in spending. But let’s now take those 15% of people without spending. They contribute $300,000 (150 x $2,000) in premiums but get nothing back. Now that they’re losing the expanded subsidies and seeing their premiums double, they might decide, the heck with insurance, I’ll drop out.

That’s devastating to the insurance risk pool. Its premiums now fall to only $1.7 million ($2  million - $300,000), but its claims stay at $2 million. It is then going to require an 18% rate increase ($2 million divided by $1.7 million) just to keep up, which is probably then going to cause more people to drop coverage, which will cause rates to go up again, and soon we’re in the ominous death spiral.

ACA required insurers to take everyone with no medical underwriting and no exclusions for preexisting coverage – neither of which was true pre-ACA – and it only worked because of the subsidies. Without enough healthy people, you cannot have a viable health insurance market.

Republicans seem to think that insurers are making too much money off of ACA plans, which in their mind justifies not paying the enhanced subsidies to them. I’m dubious this is true. I can see insurers profiting off Medicare Advantage, but I suspect ACA plans constantly teeter on the edge of profitability.  Insurers have to get, and keep, that enrollment mix just right: enough healthy people, not too many sick people.

I’m trying to figure out if Republicans truly just don’t understand the math, or if they understand it just fine but are using the HSA ploy to continue their efforts to undermine ACA. I.e., are they ignorant, or cynical? 

The expanded subsidies were a COVID response and no one should have ever expected them to be permanent. It’s fair to take a look at them and the original subsidies to see how they might be (e.g., the original subsidies never contemplated that states wouldn’t expand Medicaid, so don’t go to very low income people at all).  But let’s not kid ourselves that the HSA approach is an effort to improve anything.