The Impact of Recent Republican Health Insurance Reform Proposals

1. The Impact of Recent Republican Health Insurance Reform Proposals Published by HSI Network LLC Presented at the American Enterprise Institute, Washington, DC September 20, 2007

2. Overview • Previous research findings on consumer driven health plans • ARCOLA Simulation Model Overview • 2007 State of the Union proposal • 2007 Tax Credit (e.g. Coburn) proposal • Implications

3. Health Coverage $$ Annual Deductible Preventive Care 100% Annual Deductible ‘Classic’ CDHP Model – HRA • Health Reimbursement Arrangement (HRA) • Employer allocates $$ to HRA • Member directs HRA • Balance in HRA rolls over at year-end • Applies toward deductible • Health Coverage • Preventive care covered 100% • Annual deductible • Employer selects expenses that count toward deductible • Expenses beyond the deductible usually covered at 80-100% HRA • Health Tools and Resources • Care management program • Internet enabled

4. Health Coverage $$ Annual Deductible Preventive Care 100% Annual Deductible Health Savings Account (HSA) Authorized by 2003 law, an HSA account is owned by the enrollee and used to pay for current and future medical expenses Both employee and employer can make tax-free contributions to HSA Health plan design is similar to HRA Bush Administration has proposed refundable tax credits for individuals to purchase health plans with HSAs HSAs are offered by UnitedHealth, the Blues, Aetna, Cigna, Humana, and Kaiser HSA

5. Questions Addressed by Previous Peer-Reviewed Research • Do CDHPs (in the form of HRAs) have national appeal? • Yes. In almost every major market, when introduced, take-up exceeded 5% of employees offered (range 4% to 85%). • Do CDHPs always have favorable selection? • No. While there is some evidence of initial favorable selection in one employer, it does not persist. (Parente, Feldman, Christianson, 2004) • Do CDHPs have different effects on cost & utilization compared with other plans? • Yes. Results depend on benefit generosity. Long run costs are not less with a generous plan. (PFC, 2004). For less generous plans, preliminary evidence suggest reduction in rate of increase. • Least cost increase is for pharmacy (Parente, Feldman, Chen, 2007). • Are HSAs a viable approach to addressing the problem of the uninsured? • Yes. But it is still more a political economy question of budget priorities. Reductions in uninsured range from 3 million to 25 million with federal costs as high as $100 billion per year. (Feldman, Parente, et al., 2005).

6. Q. Do CDHPs Generate Adverse Selection for Other Plan Choices?A. Yes (HSA) and No (HRA)

7. HSA/PPO Risk Ratio HSA/PPO Ratio 1.0-2.6 0.75 – 0.99 <0.75 Data from 1 large employer representing ~150,000 covered lives with HSA offered in 2006 Risk Score based on 2005 Claims data analysis using RxRisk

8. High-option HRA/PPO Risk Ratio HSA/PPO Ratio 1.0-3.7 0.75 – 0.99 <0.75 Data from 1 large employer representing ~50,000 covered lives with HSA offered in 2006 Risk Score based on 2005 Claims data analysis using RxRisk

9. Rank of Association Between Plans and Person AttributesFrom Conditional Logistic Regression – 8 possible choices • Notes: • 1 is highest rank (most association), 8 is least rank • *results are NOT significant at the .05 level

10. Summary of HSA Choice when HRA and PPO Also Are Choices • Risk-splitting between HRA and HSA • Clearly an issue of benefit design • Selection not limited to HSAs. HMOs also get favorable selection. • Is the risk segmentation of value? Is it too difficult to fix short of full-replacement? • Next big question: Do HSAs have better/neutral outcomes and satisfaction, adjusted for risk?

11. Policy Proposal SimulationsPresident Bush’s 2007 State of the Union and the Coburn Proposal (S-1019) Impacts simulated by the ARCOLA (Adjusted Risk Choice & Outcomes Legislative Assessment) model

12. What Does ARCOLA Do? • ARCOLA models national health plan take-up from policy proposals in the individual and group markets • Unique combination of attributes: • Uses MEPS for simulation weights • Choices based on claims from 4 large employers matched with employee demographics and plan choices • Includes HRA/HSA choice data in model • Risk-adjustment (Hopkins ACGs) used to predict both individual and group market premiums • Model is iterative • Can identify premium elasticity response to policy options for specific plan choices and the uninsured

13. Previous Work:2004 State of the Union Estimates

14. 2007 SOTU Simulation • Using the ARCOLA model, we predicted the effect of 2007 SOTU on health insurance take-up and costs • Background: Our model predicted the take-up of HSA plans in the individual market quite accurately (Feldman, Parente et al., 2005) • Population: adults aged 19-64 who are not students, not covered by public insurance, and not eligible for coverage under someone else’s ESI policy • Baseline uninsurance: 33.7 million people (edited out military, students, age <18 or 65 and older)

15. SOTU 2007 • A tax deduction of $7,500/$15,000 – but you have to have health insurance to get the deduction • Health insurance premiums will be taxable (equal tax treatment of individual and ESI (employer sponsored, a.k.a. group, premiums) • Complicated incentives created by SOTU cannot be modeled using results from existing economic studies.

16. Assumptions & Caveats • Price after tax credit or tax deduction is actionable at point of purchase of insurance (e.g., don’t want to wait up to 16 month on April 15th for savings to be realized). • Insurance coverage contract is always available. • Quasi-national individual insurance market. • No new market entrants. • Medical CPI is 4% above general inflation. • We have a subset of the national population affected. We exclude kids, seniors, students, military and other individuals with govt. insurance. We represent ~75% of target population.

17. If we let the status quo persist (millions)

18. Results • Uninsurance is reduced by 65% - by at least 20 million people. Annual average cost of $250+ billion: • $101 billion subsidy to the individual market • Rest for a subsidy to the ESI market with offsetting tax recovery. Source: ‘ARCOLA’ simulation model, HSI Network, LLC admin@hsinetwork.com

19. Impact of SOTU 2007 Proposal

20. Why? • Tax subsidy is quite large, even for low-income workers • Individuals are sensitive to the prices of different types of health insurance: • Individual HSA policies will increase from 3.1 to 9.5 million and low-option PPOs from 6 to 19 million • The subsidy covers the full cost of these policies for many people • The ESI market is not hollowed out, but expensive PPO plans will disappear

21. Subsidy cost per newly insured person in the individual market, by income

22. Ten Year Impact of SOTU

23. SOTU Ten Year Impact

24. Coburn S-1019, 2007 • A tax credit of $2,000 for single person • Additional $2,000 credit for spouse • Additional $500 credit per child up to a total of $5,000 (assuming two parents) • Health insurance premiums will be taxable (equal tax treatment of individual and ESI (employer sponsored, a.k.a. group, premiums)

25. Results • Uninsurance is reduced by 39% to over twenty million • Annual cost of $160 billion: • $64 billion subsidy to the individual market • $187 billion subsidy to the ESI market with offsetting tax recovery of $91 billion Source: Steve Parente and Roger Feldman, ‘ARCOLA’ simulation model, SParente@csom.umn.edu and feldm002@umn.edu

26. Impact of Coburn 2007 Proposal

27. Coburn Ten Year Impact

28. Coburn Ten Year Impact

29. Summary of Proposals • Could be the most comprehensive US health insurance market proposals ever on both the tax treatment of insurance AND reducing the uninsured by at least 60% • Tax deduction is more effective at reducing the uninsured. Overall cost is higher. • The Coburn proposal is the most efficient, but with far less impact on the uninsured.

30. Political Prognosis • Without an employer mandate, one can significantly reduce the size of the uninsured be ‘leveling the playing field’ of taxes and health insurance. • As long as health care inflation remains significantly above the general inflation rate, almost any proposed expansion will be costly. • Channeling consumers to lower cost plans does occur, but the long term cost savings may be beyond ten years and also swamped due to aging population.