Thursday, July 20, 2017

A Proposed Public/Private Hybrid Health Insurance Plan

A Proposed Public/Private Hybrid Health Insurance Plan

The Proposal:  

State exchanges should offer a health insurance plan with both a private and public component.   The private component of the plan would cover all health expenses (minus deductibles and coinsurance) below a certain threshold, perhaps $50,000. Costs above the expenditure threshold on the private plan could be shared between both plans or paid entirely by the public plan.

The public component of the plan could be created by allowing all people who purchase a private health with a certain expenditure limit automatic enrollment in Medicaid.   This procedure is similar to spend-down rules, used to determine eligibility for the Medicaid long term care benefit. 

Alternatively, Congress could create a fund to cover costs of insurance benefits for people with health care expenditures exceeding the annual cap on the private health plan.

The private component of the hybrid health plan would have deductible and out-of-pocket limits subject to a maximum, perhaps the same maximum applied to high deductible health plans connected to health savings accounts.   The private component of the health plan could be a managed care plan or establish narrow networks of service providers as is the case under current law.

The private component of the hybrid health plan would be required to offer essential health benefits as specified under the ACA.

Potential Advantages of the Hybrid Health Plan:  

The premiums on a public/private health plan would be substantially lower than premiums on a purely private health plan with no annual or lifetime cap.  The extent of the decrease in premiums depends on the details of the private plan including – the expenditure limit, the private plan’s share of expenditures over the limit, the deductible, the coinsurance rate and the maximum allowable out-of-pocket expenditure. 

The hybrid health plan proposed here provides more complete coverage than the Cruz plan, which allows insurance companies to issue plans lacking coverage of essential health benefits.    A person with health plan that does not cover all essential health benefits (say drug or hospitalization benefits) could suffer large financial costs despite having insurance on paper.   

The hybrid health plan does not split the state exchange market into two separate risk pools.   The Crus plan creates two risk pools one for healthy people who could afford comprehensive coverage and one for sicker and poorer people who would have to buy bare-bones policies.

Premiums on the hybrid health plan would likely be 20 percent lower than premiums on a private health plan with no limits on health care expenditures.  

The simulation model used to obtain this estimate is described at link below.

The lower premium on the hybrid health plan would decrease the amount spent on premium subsidies because under current law the premium subsidy is linked to the affordability of the policy, which is a function of the premium.  The lower cost of the hybrid plan could also enable Congress to reduce the tax credit for premiums without reducing affordability.

Most risks associated with setting a premium that is too low involves miscalculating the number of people with high health expenditures. This plan shifts risks associated with high medical costs to the government thereby enabling Insurance companies to more accurately price their policies.

This risk sharing arrangement should reduce insurance company opposition to rules requiring insurance companies insure all applicants and base premiums on age rather than health status.

It would be appropriate to age-rate premiums on the hybrid plan at 4 to 1 rather than 3 to 1 because the public plan provides a larger subsidy to older policy holders who are more likely to exceed the annual cap.

A public/private hybrid of this type with a very low expenditure threshold on the private plan could reduce the number of people on traditional Medicaid.

The cost of the public option proposed here is likely to be far lower than the cost of high-risk pools proposed under Republican plans.

Potential Disadvantages of the Hybrid Health Plan:  

One disadvantage of the hybrid health plan is the direct cost on taxpayers.  Under this proposal, the cost of reimbursements from the public component will be paid by general tax revenue or some new tax.  The cost of the public component of the hybrid health plan could be offset by reductions in premiums subsidies, reductions in the number of people on traditional Medicaid, and elimination of the need for high-risk pools.

Under this plan, the government (through the public option) may have more power over the types of procedures receiving insurance companies.   Many people are more comfortable with these types of life and death decisions being made by private insurance companies than by the government.   

Under this proposal, the hybrid health plan would only be available for people receiving coverage on state exchanges.    This could result in some employers choosing to eliminate offers of employer-based health insurance so their employees can become eligible for the less expensive hybrid health plan.   This problem would be mitigated if the employer mandate enacted under the ACA remained in place.  

The Medicaid reimbursement rate for doctors and hospitals is low; hence, many service providers do not accept Medicaid patients.  The success of this proposal hinges on private practices continuing treatments of patients once the expenditure limit is reached even at lower reimbursement rates.  This problem would be mitigated if the public option allowed more generous reimbursement rates than the current rates allowed by Medicaid. 

Private health insurers might oppose this proposal because it could reduce their market share and profits.

Reinsurance as an alternative to the private/public health plan: 

Private insurers and some Democrats have proposed a government funded reinsurance plan to reduce risk associated with an insurance firm taking on too many high-cost cases. The government reinsurance program re provides cash directly to insurance companies with larger than expected losses.  It is not clear whether these cash payments after the losses would alter pricing behavior or would induce additional insurance companies to enter the market.

There is also a lot of political opposition to reinsurance or any direct subsidy to insurance companies.   A reinsurance program or any subsidy to insurance companies could more easily be discontinued than a plan that directly provided benefits to people.  Proposed reinsurance schemes are susually smaller in scope than the public component of the hybrid plan.

Concluding Thoughts:  

Around 9 million people get insurance through state exchanges compared to around 150 million people who get health insurance through their employer.  Under the ACA, people who have access to an offer of employer-based insurance cannot claim a credit for health insurance on state exchanges.   Individuals can remain on their parent’s policy until age 26; hence, fewer young people get their health insurance through employer-based insurance than through state-exchange insurance.  

The state exchange market would be more efficient and private insurers would be less willing to leave the market if more people got their insurance through state exchanges rather than through employer-based insurance.  This could be achieved by having employers subsidize the purchase of employer-based insurance on state exchanges rather than provide employer-based insurance directly to their employees.  

Bibliography:  I first suggested the idea of combining private health insurance with Medicaid in the previous paper.

Bernstein, David P., Medicaid Spend Down Rules and a Health Care Reform Proposal (July 18, 2008). Available at SSRN:

Authors Note: I have been working very hard on proposals to reduce college debt and improve educational outcomes.  An outline of my work in this area can be found at the following page.

A Pragmatic Education Policy Agenda:

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