Obamacare Is Broken. Here’s How to Help

O bamacare is failing. Several studies have found that government health-insurance subsidies, including those at the heart of the Obamacare exchanges and Medicaid (which Obamacare dramatically expanded), produce large, negative rates of return. In most cases, recipients of the subsidy value it at less than half of what it cost taxpayers to finance. These big, bureaucratic programs don’t maximize patients’ welfare, and they waste taxpayers’ money.

They need to be reformed. But, starting with Obamacare’s exchanges, how? How might its subsidies be restructured to improve overall outcomes for patients, without increasing costs to taxpayers?

We believe there is a way to reform Obamacare’s subsidy structure to enhance efficiency and consumer control without increasing deficits. We call it “the HSA Option.” In a new Paragon Health Institute paper co-authored with Andrew Lautz and Roy Ramthun, we outline a simple idea: Give Obamacare enrollees the option of receiving a portion of their existing health-insurance subsidy in the form of a cash deposit to a health savings account (HSA) that they own and control. Having this option would significantly improve these Americans’ welfare at no additional cost to taxpayers. In fact, if implemented as we recommend, it would reduce deficits.

Obamacare’s mandates and rules have produced an individual market with health-insurance plans that typically restrict access to the best doctors and hospitals. In 2021, 85 percent of plans were restrictive health-maintenance organizations (HMOs) or exclusive-provider organizations (EPOs) — up from 43 percent of all plans in 2014.

And Obamacare plans have high premiums and deductibles because the rules make coverage most attractive to those who expect to use high amounts of medical care and incentivize consumers to wait until they are sick to obtain coverage. As a result, the vast majority of people today who purchase individual market coverage need large subsidies to afford it.

There are two main subsidies. The first is a federal premium tax credit, which is poorly designed and creates a host of economic distortions.

The second subsidy is known as the cost-sharing reduction (CSR) program. It provides lower-income Obamacare plan enrollees with reduced plan deductibles, co-payments, and out-of-pocket limits. This second subsidy is the subject of our reform proposal.

Consider, for example, a single woman earning $25,000 a year. For illustration purposes, assume she chooses a health plan with no cost-sharing. A typical silver plan offered on the exchange today (meaning a plan in which the insurer is likely to pay for about 70 percent of the average enrollee’s medical bills) has a deductible and out-of-pocket limit of about $4,300. Thanks to her income, she qualifies for the CSR program, so her deductible and out-of-pocket limit would be reduced to $1,400. The insurer reduces her plan deductible with the federal government reimbursing the insurer.

Our proposal gives her a second option. She can receive a deposit directly to her HSA rather than the government cutting a check to the insurer to reduce her plan cost-sharing.

HSAs are the most effective financial tool available for people to gain control over their health-care spending. Personally owned and portable, these accounts have numerous tax advantages: deposits, growth, and qualified withdrawals are all tax-free. This enables people to stretch their health-care dollar and save for future health-care costs. Half of Americans have annual health-care expenses below $1,000, so HSA deposits earlier in life can create sizeable wealth that Americans can tap when they require more medical care later in life.

The HSA deposit, like the CSR program, would be funded by the government. We used the Centers for Medicare and Medicaid Services’ actuarial value calculator to provide examples of HSA deposits in various amounts as well as other plan features that would equalize plan actuarial value (the expected percentage of health-care expenses paid by the plan for an average enrollee). The CSR program raises the actuarial value of plans. The HSA Option converts that additional value into tax-advantaged deposits under consumer control.

Under our proposal, the single woman earning $25,000 would qualify for an annual HSA deposit of $3,200 for a plan with a $7,050 deductible and out-of-pocket limit. While she would face higher cost-sharing obligations than under the CSR option, she would have substantial savings available for health-care expenses — and more personal control.

Allowing individuals to direct a portion of their government subsidy to purchase health care they prefer would improve their welfare, as compared with continuing to have taxpayers directly subsidize health insurers.

Here are the key components of the proposal:

1. Enrollees who are eligible for the CSR program may instead enroll in an HSA-qualified health plan that offers an HSA contribution.
2. Insurers offering exchange plans must offer a plan with an HSA option and an associated contribution for each of the actuarially equivalent plans required by the CSR program.
3. The insurer makes a monthly HSA deposit to the enrollee’s account.
4. The enrollee may access the HSA funds only with a bank-issued debit card that ensures the funds are used only for qualified medical expenses.

HSAs enhance consumer welfare in three key ways. First, they can be used for many items and services not typically covered by insurance — such as vision, dental, and hearing services.

Second, they can be used for out-of-network expenses. This feature helps address the “surprise bill” problem by protecting enrollees from unexpected costs of receiving accidental or unintentional out-of-network services, since most exchange plans today employ restrictive provider networks.

Third, they encourage wiser shopping, leading to more competition and consumer savings. Since people will be spending their own resources from their HSA, they will want to ensure that the health care they receive is worth the cost. Seeking to protect their HSA balances, patients will be incentivized to receive regular primary care and avoid unnecessary and costly emergency-room visits. Providers, meanwhile, will have to compete more effectively for consumer dollars and thus will have an incentive to improve their efficiency in delivering care.

Our complete policy proposal would expand consumers’ choices and insurance coverage while reducing deficits — a rare feat. Specifically, we recommend that Congress combine the HSA Option with a CSR appropriation and a prohibition on “silver-loading.”

To understand why this would reduce deficits, a bit of background on silver-loading is necessary. Obamacare mandates that health insurers offer qualified enrollees cost-sharing reductions, but the law did not contain an appropriation of funds to compensate insurers for this cost. Despite the lack of an appropriation, the Obama administration made payments to insurers to reimburse them for the cost of the CSR program, causing the House of Representatives to sue. The courts agreed, and the Trump administration terminated federal payments for the CSR program in October 2017.

Health insurers responded to the loss of the payments by increasing premiums for silver plans. Since Obamacare’s premium tax credit is a function of the second-lowest-cost silver plan, health insurers were able to recoup the loss of CSRs.

According to the Congressional Budget Office, silver-loading results in a net increase in federal spending. A 2018 CBO analysis estimated that a congressional CSR appropriation would reduce federal deficits by $29 billion over the 2018–2027 period, mainly due to smaller premium tax credits for people with incomes between 200 percent and 400 percent of the federal poverty level. Additionally, prohibiting silver-loading would reduce premiums for people who do not qualify for premium tax credits.

While our proposal does not represent a comprehensive reform to Obamacare’s onerous regulatory structure, it does offer significant benefits for patients and taxpayers alike. More importantly, its underlying principles — empowering consumers with more choice and control, helping people rather than insurance companies, and targeting benefits to those who need them — offer a model for the fundamental reform of other government health programs.

Brian C. Blase is president of Paragon Health Institute. Dean Clancy is a senior health-policy fellow at Americans for Prosperity.