Your health insurance: probably bad and getting worse

“A good life for American families also requires the most affordable, innovative, and high-quality healthcare system on Earth. Before I took office, health insurance premiums had more than doubled in just five years. I moved quickly to provide affordable alternatives. Our new plans are up to 60 percent less expensive — and better.”  POTUS, State of Union Address, 2020

Health care is the number one issue for voters this year, and that should come as no surprise. Health care concerns have been in the top three since 1992, ranking higher for Democrats, women, low- and moderate-income voters and older adults. More voters are feeling the impact of the rising costs of health care — even those with insurance. They face not just higher premiums, but more cost sharing from higher deductibles, coinsurance and copayments. 

About 12% of adults in the U.S. are uninsured, but 45%, or 44 million, are underinsured — meaning they had coverage gaps or high out-of-pocket costs and deductibles causing them to go without healthcare. The greatest growth of underinsured adults occurred among those with employer coverage — 17% were underinsured in 2010, increasing to 28% in 2018. For adults with individual coverage — not through an employer—about 15 million are underinsured. That’s 42% of people with individual coverage.

Approximately 155 million workers relied on their employer or a family member’s employer to cover their health expenses last year. But employers have been trying to hold down premium growth by shifting health care costs directly to workers by using higher deductibles and cost sharing. Employers have also been offering more high deductible health plans with savings options — up from 8% of covered workers in 2009 to over 30% today. 

Since 2001, the number of employers on Fortune’s “100 Best Companies to Work For” list who provide full health coverage to employees has dropped from 34 percent to just 9 percent. 

Employees are feeling the pain — their wages are not keeping pace with health care inflation. The average premium for family coverage has increased 22% over the past five years and 54% over the past ten years, significantly more than either workers’ wages or inflation. 

Today only 61 percent of the workers in firms offering health benefits actually enrolled in their employer’s plan–that’s down from 70% in 2001. This significant reduction is likely tied to the repeal of the insurance mandate and the high cost of coverage. 

Twenty years ago the average cost of employer-sponsored health insurance for a family was $8,000. Today it’s $28,000—3.5 times as much. With a median salary of $47,000, that is 60% of wages, and 50% of median household income. Employers share of the health insurance premium averages about 59%. Employers spent over $750 billion on health benefits, a number that has been increasing 5% each year. 

This is often thought of as the employer cost, when in actuality it is part of the total compensation for employees, so it should be thought of as part of salary, but paid in kind with insurance rather than with cash.

The upshot: People are taking home less pay because of the skyrocketing cost of health insurance.

It’s a big tax cut — but at what cost?

Purchasing insurance through your employer benefits employees because of the tax advantage — employer-paid or employee-paid portions are exempted from income and payroll taxes. So if you are in the 22% tax bracket you receive a 22% discount on your insurance. Wealthier households receive larger discounts because they are in higher tax brackets—thus this tax treatment is regressive.  

The tax treatment for health insurance amounts to a $300 billion government subsidy —forgone federal and state tax revenue. This subsidy is two to three times the total public subsidies paid to low-income Americans under the ACA. In fact, this health benefit tax exclusion is the single largest tax expenditure, and third largest health care expenditure after Medicare, which costs $600 billion and Medicaid, which is $350 billion. 

This is a bigger federal tax break than the mortgage interest deduction, which costs a comparatively cheap $80 billion.

Those who buy individual coverage, outside their employer, do not get the same tax discount — they are using income after it has been taxed. This helps explain why a higher percentage of those with individual coverage are underinsured: They face a higher price of insurance due to the lack of the tax discount. We should even the playing field — either give everyone the same health insurance tax treatment or eliminate it altogether and use the savings to provide lower costs for health insurance in other ways. 

Health insurers are not holding down costs, so now what? 

What does all of this suggest? These numbers are a powerful indicator that the private health insurance sector failed to control the growth of health spending. The problem of affordable health care is affecting everyone.

There are some bright spots. A new federal policy in 2020 provides a useful option for businesses — the Individual Coverage Health Reimbursement Arrangement (HRA). This program can be used to reimburse employee premiums for an individual health insurance plan selected by the employee. The employer can contribute any amount and this contribution is not considered taxable income to the employee. This option should reduce the number of underinsured, if employers take advantage of this program and adequately contribute to the premium. The insurance choices under this program could also be an excellent place to introduce the potential savings of a public option. 

So given these facts, what actually was Trump referring to in his State of the Union address? Premiums did rise after the ACA was implemented, partly due to better coverage by policies. People with pre-existing conditions got access to coverage. Insurers could judge risk based on age, tobacco use and geographic area — but not your health conditions. Yes, premiums were greater, but so was the value of the insurance coverage, and when subsidies were included premium increases were less than prior to the ACA. Premiums did not double — that was based on faulty assumptions by the White House that are easily debunked. 

The claim by Trump that health plans are more affordable and “better” is, in reality, not true. The affordable alternatives he is referring to are junk insurance — high deductible policies through associations, Christian purchasing clubs that are really not insurance, and short-term limited duration policies, some of which include caps on coverage. No one has been able to verify the claim of a 60% reduction in costs. 

The new short-term health plans authorized by Trump’s administration are cheap for a reason — they cover less and provide minimal protection, leaving insured people vulnerable to having to avoid care, not fill prescriptions, or risk bankruptcy due to very high out of pocket costs.

In the end, we need to look for real changes — not shell games — in health care. We need to pursue reform ideas that align incentives and drive down the growth of health care costs. We can start by changing how we pay for health care services by looking at models of direct contracting with providers and giving them a lump some of money for a group of patients rather than paying them each time they perform a test or procedure. Payments to providers should be based on improving population health rather than paying for services that may not improve health or quality of life.