Wednesday, May 15, 2019

Would Medicare for America phase out employer-sponsored insurance?

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It's often regarded as an open question whether the Medicare for America Act, were it to become law, would lead to a phase-out of private insurance. The bill makes a revamped Medicare available to anyone of any age who wants or needs it, with premiums adjusted by income even if the enrollee has access to employer-sponsored insurance.

The revamped "Medicare" is free to anyone whose household income is below 200% of the Federal Poverty Level (FPL) -- about 30% of the population. For those with incomes over 600% FPL, the premium is 8% of income. Those in the 200-600% FPL range will pay a sliding scale, topping out at 8%. Newborns are auto-enrolled, as are the uninsured. Employers can either pay an 8% payroll tax and direct their employees to the public program, or continue to offer their own health plans. Medicare Advantage continues alongside the public program.

I do not think the bill would kill of employer-sponsored insurance, though it would likely shrink the market to a kind of blue-chip perk for well compensated employees. ESI is likely to persist for several reasons:
  • The bill stipulates that medical providers have to accept "Medicare" payment rates (not identical to current rates, but based on them) from private insurers.

  • The employer tax exemption for health benefits persists. In fact, the ACA's "Cadillac Tax" on especially generous plan (long postponed) is repealed.

  • Most importantly, the 8% of income that affluent people would pay for the revamped "Medicare" is considerably more than many pay out-of-pocket for employer-sponsored insurance.
The average premium for family coverage in ESI was $19,616 in 2018, according the Kaiser Family Foundation's Employer Health Benefits Survey, with the employee footing $5,547, or 28%.  For a couple with one child earning $125,000 -- a shade over 600% FPL -- that's 4% of income.

It's true that if you count the employer share of the premium, which is part of an employee's compensation, the percentage rises to 14% of income ($19,616/$139,089). But if the employer under Medicare for America declines to offer private coverage, it pays an 8% payroll tax -- also effectively part of employee compensation, on top of the 8% of salaried income paid by the employee (though that 8% would be on only a part of the couple's income if there are two earners).

The bill might drive the cost of employer coverage down considerably. Commercial insurance currently pays hospitals about 189% of Medicare, according to the CBO's estimate, and 241% Medicare according to a more recent RAND study. Commercial rates for doctors are about 128% Medicare, according to MEDPAC. Again, these are broad estimates, and in a very opaque environment.

Medicare for America provides coverage more generous than that offered by most employers. The public plan pays 80% of the cost of most medical services, which sounds superficially like 80% actuarial value (a government-fixed measure of the percentage of the average enrollee's annual costs paid by the plan). But actual AV in the public plan is much higher than that.

There are no deductibles in Medicare for America. At 600% FPL, maximum annual out-of-pocket costs top out at $3,500 for an individual and $5,000 for a family. Moreover, the plan pays 100% of costs for preventive care, chronic disease care, generic drugs, brand-name drugs "if medically necessary," substance abuse care, pregnancy, emergency services, "all services for individuals who are medically frail or otherwise have special medical needs," and more. All that equates to AV far above 80%. Duke healthcare analyst David Anderson estimates an AV of 87-89% for the public plan.

For employees at lower incomes, who would pay between 0 and 8% of income on a sliding scale for the public plan it would be hard for an employer to compete with this-- except perhaps toward the upper end of the scale. For employees accustomed to top-drawer private coverage -- union members as well as professionals and executives -- employer coverage might well be competitive. Plans with AV over 90% are not uncommon in some settings.

Conversely, though, there's a kind of false implied equivalence in the 80% AV the bill mandates for employer insurance and the 80% coverage for most medical services in the public plan. The short summary of the bill implies this equivalence, perhaps inadvertently: "Large employers can continue to provide insurance, if it is gold-level coverage with benefits comparable to Medicare for America." The "benefits comparable" may refer to scope of coverage rather than level of coverage (i.e., AV). But at least one publication has equated the benefits offered in the public plan and mandated in employer coverage. In fact, though, employers would to have to offer AV considerably above the mandated 80% to compete with the public plan.

A major fix in Medicare for America 2.0

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