Premium and Cost-Sharing Subsidies under Health Reform: Implications for Coverage, Costs, and Affordability

Timely Analysis of Immediate Health Policy Issues
December 2009
Garrett, B., Clemans-Cope, L., and M. Buettgens

A major task in the effort to craft a final health reform bill that can be passed in both Houses of Congress is to balance government costs against making health insurance affordable for low- and middle-income families. The levels of premium and cost-sharing subsidies greatly determine how affordable insurance coverage and access to medical care would be for families under reform. Affordability in turn would affect compliance with the individual mandate. Without broad compliance, it would be difficult to maintain the proposed insurance reforms that depend on broad risk pools.

Using the Urban Institute’s Health Insurance Policy Simulation Model (HIPSM), we estimate the household financial burdens under the America’s Healthy Future Act of 2009 (AHFA) proposed by the Senate Finance Committee (including revisions as of October 2, 2009) and under two modifications of the AHFA that use alternative subsidy schedules: those specified in the Patient Protection and Affordable Care Act (PPACA) introduced by the Senate Leadership on November 18, 2009, and those specified in H.R. 3962, passed by the House of Representatives on November 8, 2009. To be specific, we only look at the effects of changing the premium and cost-sharing subsidies that were included in the Senate Finance Committee (SFC) bill, holding all other features of the SFC bill constant. We focus largely on those who would purchase health insurance coverage directly through a new health insurance exchange (the exchange). The vast majority of the subsidies would be spent on these enrollees.

For ease of comparison, these simulations were modeled as if the reforms were fully implemented in 2009, and estimates are for that single year. We find that the number of uninsured would drop from 49 million to about 19 million people under the SFC bill and that the uninsured would decrease by less than half a million more under subsidies of the Senate Leadership bill and by about another 2 million with the subsidies specified in the House bill. Government subsidy costs in 2009 under the SFC bill are estimated at approximately $24 billion. Corresponding costs using the subsidies of the Senate Leadership bill would be $27 billion and costs using subsidies of the House Bill would be approximately $39 billion.

Among those with insurance under reform, people who would obtain nongroup coverage in the exchange would generally face the highest health care cost burdens, so we focus the affordability analysis on them even though they would be a relatively small share of the nonelderly population, about 7 percent. Those eligible for Medicaid or CHIP under reform would face little or no out-of-pocket health care costs after reform if they enroll in those programs. People getting coverage through employers would generally face lower financial burdens than those enrolling in nongroup coverage, even in the exchange, as employers that offer coverage typically contribute significantly to the cost of premiums for their employees.

Family health care costs (premiums plus out-of-pocket spending net of subsidies) for those buying nongroup coverage through the exchange would vary considerably by income and across the reform options. This is because the federal financial assistance provided through subsidies decreases as income increases, and the different reform approaches modeled would provide different levels of subsidization at each income level. Under the SFC bill, the median low-income family (with an income of 133 to 199 percent of the federal poverty level [FPL]) would spend 7 percent of its income on health care, while the median family with somewhat higher income (200 to 299 percent of the FPL) would spend 11 percent of its income. Those at the 90th percentile of the spending distribution, families with greater health care needs and older adults, would face higher burdens due to additional out-of-pocket costs and the effects of 4:1 age rating bands. While premiums generally account for most of household health care costs, the burden of out-of-pocket cost-sharing for those with the highest expenses can reach above 10 percent of income under the SFC bill.

Compared to SFC bill subsidies, premium subsidies under the Senate Leadership bill are lower for low-income families and higher for eligible higher-income families. At both the median and the 90th percentile of spending, the Senate Leadership bill subsidies would decrease family health care cost burdens by about 1 percent of income for those between 200 to 399 percent of the FPL compared with the SFC bill. Substituting the premium and out-of-pocket subsidy schedules from the House bill, which are both larger than those of the SFC bill, would do more for lower-income families—decreasing median family health care cost burdens by about 2 percent of income for those between 133 and 299 percent of the FPL. Under the House bill subsidies, much larger reductions in financing burden would occur among higher spenders due to the additional cost-sharing subsidies that would be provided. A further targeted increase in cost-sharing subsidies beyond those in the House bill can significantly decrease the burdens faced by the highest health care spenders below 400 percent of the FPL while expanding coverage, at an additional cost of about $4 billion to the government.

Each option presented here would greatly reduce the number of uninsured and make health insurance more affordable for millions of Americans. This analysis shows that health care cost burdens under the Senate Finance Committee bill can be substantial for those with incomes from 200 to 499 percent of the FPL, particularly for those with significant health care needs. Expansions of premium and cost-sharing subsidies could be designed such that the largest burdens are substantially reduced for these groups, and doing so would increase overall coverage as well as government costs. Public support for the reforms will be related to the extent to which coverage and the direct costs of care are considered affordable, making it critical to balance such concerns with the government costs associated with comprehensive health care reform.

View full article...