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What Makes Insurance 'Affordable'? States Must Look Beyond Premiums To All Health Spending, Say Researchers

Bethesda, MD -- As increasing numbers of states debate ways to expand health insurance coverage, the question of how to determine whether coverage is affordable is front and center. In a Health Affairs Web Exclusive published today, Urban Institute researchers propose basing the affordability benchmark on the amounts now devoted to health spending by privately insured individuals. http://content.healthaffairs.org/cgi/content/abstract/hlthaff.26.4.w463

The researchers stress that affordability thresholds must consider all health spending, not just premiums. “Because of the highly skewed distribution of health care spending and the large potential variation in plans’ actuarial values, affordability must take out-of-pocket liability into account in addition to premiums,” write Linda Blumberg, John Holahan, and Jack Hadley of the Urban Institute and Katharine Nordahl of the Blue Cross Blue Shield of Massachusetts Foundation. “Our analysis shows that total medical spending, including premiums and out-of-pocket expenses, can be very high as a percentage of income, particularly for those with incomes below 300 percent of poverty and for those with high medical needs.”

Massachusetts' Insurance Plan

Blumberg and her colleagues performed the study to help Massachusetts implement two aspects of the pioneering coverage expansion signed into law by then Governor Mitt Romney (R) in April 2006. First, for those with incomes below 300 percent of the federal poverty level, the law establishes a new program of subsidized coverage, the Commonwealth Care Health Insurance Program (CommCare). Second, for those with higher incomes, the law establishes an individual mandate requiring residents to purchase health insurance if “affordable” coverage is available.

A new state authority, the Commonwealth Health Insurance Connector Authority, is tasked with establishing a sliding-scale subsidy schedule based on family income for CommCare. The Connector is also tasked with setting the maximum percentage of individual and family income Massachusetts residents will be required to pay toward coverage under the individual mandate, and with contracting with private insurers for both subsidized and unsubsidized coverage. On April 12, 2007, the Connector’s board issued draft regulations on affordability; the work by Blumberg and coauthors was an important source for these regulations.

“We did our study to assist Massachusetts, but our findings are relevant for any state that is considering requiring its citizens to purchase coverage or attempting to determine appropriate cost-sharing levels,” said Blumberg, a principal research associate at the Urban Institute’s Health Policy Center.

What’s Affordable Varies Greatly
Depending On Whose Spending Sets The Benchmark

Using data from the three most recent Medical Expenditure Panel Surveys, Blumberg and her colleagues found that across all income levels, the median total health spending for individuals and families with nongroup coverage was 16.9 percent and 14.7 percent of income, respectively.

For those with employer-sponsored coverage, the median direct employee spending for individuals and families across all income groups was considerably lower: 3.1 percent and 5.5 percent of income across all income levels, respectively. However, if one assumes, as most economists do, that employees ultimately pay the employer’s share of coverage costs as well -- through decreases in wages and other forms of compensation -- then median total health spending rises considerably, to 12.3 percent of income for individuals and 15.1 percent of income for families.

In addition to looking at overall figures, the researchers also examined how health spending and its impact vary among different income levels. “The financial burden of full-year private insurance is more than most families below 300 percent of poverty are able or willing to bear,” they note. “As a consequence, using the typical spending of a higher income group, such as those at 300-499 percent of poverty, might be preferable as a basis for setting a standard for lower-income people,” although Blumberg and coauthors say that this still might impose too high a burden on lower-income people.

For nongroup coverage, consumers in the 300-499 percent of poverty income range spent a median of 10.4 percent of income for individual coverage and 11.6 percent of income for family coverage. For employer-sponsored coverage, median spending for this group was 2.9 percent of income for individual coverage and 6.1 percent of income for family coverage; counting the employer share, median spending increases to 12.6 percent of income for individuals and 17.4 percent of income for families.

“Our analysis frames some of the important questions surrounding the issue of affordability and provides the type of information that policymakers will need to answer those questions,” Blumberg said. “However, policymakers must still make many practical and ethical judgments in putting together a program to expand coverage.”

Blumberg and her colleagues conclude with one example of such a judgment. Massachusetts chose to exempt from its individual mandate all those who cannot obtain affordable coverage. Particularly since the state decided that plans must provide a fairly robust set of benefits to satisfy the individual mandate, “the number exempted could be substantial, and because of the age rating of premiums, many are likely to be older adults. An alternative would have been for the government to have financed the difference between a benchmark plan in the Connector and the affordability standard, thereby making it possible to include all adults in the mandate.”


ABOUT HEALTH AFFAIRS:

Health Affairs, published by Project HOPE, is the leading journal of health policy. The peer-reviewed journal appears bimonthly in print with additional online-only papers published weekly as Health Affairs Web Exclusives at www.healthaffairs.org.

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©2007 Project HOPE–The People-to-People Health Foundation, Inc.