Subsidies for Thee and for Me

by Tim Foley

categories: National Health Exchange, Obama and Congress

Published May 11, 2009 @ 10:40PM PT

We’ve been talking about notion of a Federal Health Exchange where individuals and the smallest businesses could buy comprehensive health coverage on a sliding-scale subsidy since John Edwards unveiled his campaign health care plan in January 2007.  We’ve been debating the bare bones outline for over two years.  Today’s released proposals by the Senate Finance Committee begin to put some muscle on that bone, particularly on the important questions of who gets a subsidy and what does that get you.

Caution: In case it’s not obvious, this post garners a Level Three Nerd Alert warning.  (WHOOP!  Nerd Alert!)  But it’s a crucial topic because how well this National Health Exchange works will depend largely on the transparency of the plans and the generosity of the subsidies.

Here’s what we knew before today:  those without health insurance through their employer would be able to purchase a plan in a national marketplace (the Exchange) which would be operated by the Dept. of HHS, who would also establish the rules of the road.  Rule 1, all plans are “comprehensive” and include the same level of benefits given to a member of Congress.  Rule 2, no private insurance plan participating in the Exchange could deny coverage based on pre-existing conditions, or jack up the prices for sick customers through individual ratings.  Rule 3, the whole thing is transparent – you should be able to go to a Web site or a guide book and compare like to like.  And finally, Rule 4, if you can’t pay for the premium, you’re given a subsidy on a sliding scale based on income.  That’s really all we know, and folks like me were left speculating how those subsidies would look.

Today’s options doc gives a very strong indication of where the Senate Finance Committee is going with this.  First, here’s a much more specific description of what has to be the minimum level of coverage:

[Participating plans would] provide a broad range of medical benefits,including but not limited to, preventive and primary care, emergency services, hospitalization, physician services, outpatient services, day surgery and related anesthesia, diagnostic imaging and screenings, including x-rays, maternity and newborn care, medical/surgical care, prescription drugs, radiation and chemotherapy, and mental health and substance abuse services, which at least meet minimum standards set by federal and state laws.  In addition, plans could not include lifetime limits on coverage or annual limits on any benefits and cannot charge cost-sharing (e.g., deductibles, copayments) for preventive care services.

Honestly, this is a clear, unambiguous step forward, and a great place to start for a national standard for what's in a benefits package.  Lifetime maximum benefits, for one, have never made the conversation before and the prohibition against cost-sharing for preventative care is huge.  When you consider that number of people who only go to the doctor for preventive care, particularly children, this is a tremendous deal.

Similar to the Massachusetts model, Baucus and Grassley then categorize all the plans in the Exchange not by what treatments they cover (since they’re all comprehensive) but by what percentage must be paid by the individual or family.  They go from the “lowest” plan, where your share is capped at 7% of the medical costs through co-pays and deductibles, and the “highest” plan, where you’d pay for 24% of your medical costs.

“What about the damn subsidies, Tim?” perhaps you’re asking – don’t worry, I’m getting there.

So the subsidy is a refundable tax credit (meaning that you get the full amount even if what you pay in income tax is less than the credit) that offsets your premiums.  Since another part of the plan is that Medicaid would full cover those families at or below 100% of the poverty line, we’re talking subsidies between 100% and 400% of the poverty line (better than Massachusetts, not as good as San Francisco).  But here’s the part that’s completely new: your family’s income would then determine which of those benefit categories you get – meaning the percentage you pay for out-of-pocket medical expenses.  Now, the options document doesn’t specify exactly how big the subsidies will be, but they do correlate directly to how much you pay for care on top.

Let’s get to examples of typical families of 4.  Family A is at 125% of the poverty line, making about $25,000 a year.  If we presume the subsidy for the plan is now more or less within reach for them, they also enjoy the lowest co-pays – they get the “high” benefit plan, where they pay no more than 7% of their non-preventative medical costs on top of the premium.  Family B is at 375% of the poverty line makes about $75,000 per year.  They’d qualify for the “low” benefit plan, where they pay no more than 18% of their medical costs.  So not only do they both get tax credits, they both get guaranteed cost-control.  Now, Family B could always decide they want to pay a higher premium to get the “highest” cost-control – they’d have that option, but wouldn’t get an additional subsidy for it.  Now people above 400% of the poverty line get the “lowest” plan with no subsidy, but they can always pay more in premiums to reduce how much they pay out of pocket for care.

Presuming the subsidies are enough that a family at each level could afford the premiums of their plan, this is a pretty good deal.  It’s not just unaffordable premiums that crush lower to middle income families – it’s the high out-of-pocket expense.  Capping the percentage of medical expense helps shelter lower to middle income families from both.  The willingness to go up to 400% of the federal poverty line is also much appreciated and quite necessary.  One of the worst problems with the Massachusetts model is that there are too many people without affordable options above 300% who are then exempted from the financial penalties of the individual mandate - the Massachusetts cut off was just too low.

The short version – this is a lot better thought out than the 5% primary care bonus!  They seem to have done their homework.  Let’s hope the subsidies are generous enough to match.

(Photo credit:  Mark W on Flickr.)