Proposal to Expand Subsidies Up to $150,000 for a Family of Four Will Have Huge Unintended Consequences
The average annual family health insurance premium in Massachusetts costs more than buying a new compact car (over $21,000/yr), so it is understandable that some are calling for ways to shield patients from this ever-increasing expense. However, the latest proposal on Beacon Hill to expand insurance subsidies up to 500 percent of the federal poverty level (FPL) (i.e. $150,000 for a family of four or $73,000 for an individual), could have long-term irreversible impacts that merit its rejection.
How Did We Get Here?
The original 2006 Massachusetts “Romneycare” passed with health insurance subsidies for people with incomes up to 300 percent of the federal poverty level (FPL). But critically, the law also contained a strict “anti-crowd out” provision which restricted access to publicly financed subsidies if your employer offered you coverage. And the law aimed to prevent small companies from dropping coverage and moving their employees over to these taxpayer-funded subsidies. The federal Affordable Care Act (ACA or Obamacare) repealed that provision and applied an affordability test instead, opening the door to some employees enrolling in publicly financed subsidies instead of their employer’s plan.
More recently, in response to the COVID-19 pandemic, Congress passed laws that temporarily expanded subsidies to higher income levels and made more individuals eligible by lowering the affordability test. Now Massachusetts lawmakers are considering expanding subsidies to those with incomes up to 500 percent of FPL. While it is intended to help offset the high cost of health insurance for some, its unintended impacts could have numerous long-term negative consequences for patients and employers, without addressing underlying cost issues that are driving up the price of care and insurance premiums for everyone.
Here are realities of this proposal that should give pause in passing it into law.
1. Middle-Class Subsidies Could Push the Small Business Market into a Death Spiral
The small group market has been shrinking for well over a decade, and this change could sound its death knell. In 2006, more than 800,000 Massachusetts residents bought their insurance in the small business market. By 2022, that figure had dropped by 59 percent to just 330,000. This trend is a warning sign that if the underlying cost and regulatory burden issues are not addressed, this decline is likely to continue. This decline in enrollment was recently highlighted in a Boston Globe editorial.
By expanding subsidies, the state could accelerate the demise of this market segment. As the market shrinks, the risk pool will likely be made up of sicker and sicker patients that remain, which drives up the cost of premiums, and drives even more enrollees out of the market; this is called a death spiral. At some point the state may have to step in and prop up or further subsidize the market, at a very high cost to taxpayers.
2. Middle-Class Subsidies Don’t Decrease the Number of Uninsured
Some may think that the purpose of increasing subsidies is to decrease the number of people who are uninsured. With an insured rate of almost 98 percent, the proposed subsidy expansion would do little to cover those without insurance. According to a recent report from the Blue Cross Blue Shield of Massachusetts Foundation, 30 percent of the remaining uninsured would not qualify for subsidies based on immigration status, and 70 percent of the uninsured make under 300 percent of FPL. This means new spending would go to people who already have coverage and would largely replace private spending with government spending.
3. A Temporary Subsidy Expansion Creates a Huge Cliff in Two Years
The extra federal subsidies for those with incomes up to 400 percent of FPL is set to expire in 2025. Should Massachusetts adopt the proposed two-year 500 percent of FPL subsidy expansion, it would have to shoulder the entire cost of this coverage, and potentially the extra federal ones in 2026, or drop coverage for those made eligible by these expansions. If small employers drop coverage during that time period, individuals may not have that as an option to return to.
4. A Subsidy Expansion Diverts Public Resources Away from Those Truly in Need on Other Programs
The federal government will not cover the additional cost of subsidies from 401-500 percent of FPL under the expansion plan, so the state will divert funding away from education or other priorities to pay for this expansion. According to the 2020 Census, nine out of 10 residents in Massachusetts making between 400 and 500 percent of the FPL have health insurance, so many who would sign up under the expansion will be from employers that drop coverage. This means that taxpayers, or individuals on other worthy public programs, would pay for someone whose employer previously paid for at least a portion of the coverage.
For those wishing to direct money to the disabled, public education, public safety, social services, or another priority, the state would continue to write big checks to insurance companies at the expense of these other public priorities.
5. Middle-Class Subsidies Move Money Away from Those with Lower Incomes to Wealthier Populations
The subsidy structure limits premiums to a certain amount based on household income, regardless of the age of the household members or the actual premium amount, rather than setting the subsidy amount based on the enrollees’ income. The effect of this is to provide greater financial benefits to higher-income households. Subsidies should be a set amount based on the enrollees’ income, not the amount at which an insurer sets the premium, as that has led to premium inflation.
6. Moving from Employer Insurance to Publicly Funded Insurance Can Hurt Those with Preexisting Conditions
Generally speaking, those on job-based coverage in the Commonwealth have better access to providers and more care options. This is especially true in Massachusetts, where most of the plans on the Connector have narrow networks and look more like Medicaid plans. This approach does save some money as expensive health systems are cut out of their networks, but it can place a substantial burden on those with a preexisting condition who lose their health insurance when small companies drop coverage as subsidies expand to higher income levels. In addition, for some, the switch to exchange plans can mean higher out-of-pocket spending compared to their
employer’s plan before insurance kicks in.
Imagine how this impacts a 40-year-old woman with diabetes who gets coverage at work. She sees her doctor regularly to properly manage her diabetes, and her medications mean she maxes out her insurance out-of-pocket responsibilities every year. She may have to pay more each year on the exchange, and her long-time, trusted specialists may not be available in her more narrow network exchange plan on the Connector, forcing her to switch to new doctors that know nothing about her history. Or, if she wanted to stay with her current doctors, she would have to pay for that care herself.
7. Middle-Class Subsidies Can Lead to Less Full-time Work
As the Congressional Budget Office projected for the original ACA subsidies, they can discourage full-time work. Some workers switch to part-time work to reduce their income below the eligibility thresholds to remain eligible for subsidized care. At a time of acute labor shortages, policies that in any way discourage work should be examined closely for unintended consequences.
8. Middle-Class Subsidies Pad Insurer Profits, Without Dealing with Cost or Access Issues
The subsidy checks go directly to the insurance companies, even if a new enrollee never uses any care or they improperly utilize the healthcare system.
Access has remained an issue in Massachusetts, and many patients may prefer a different kind of coverage or way to interact with the health system, yet the state will likely spend tens of millions of dollars to subsidize insurers, instead of tackling the high prices of healthcare, or removing barriers to allow a more flexible or patient-centered health system to emerge. Insurance coverage does not equal access to affordable care, and policymakers need to step back and reexamine the best pathway forward in a state with an over 98 percent coverage rate. Spending more money on subsidies makes it look like action is being taken on healthcare policy, but they fail to address the larger issues that need to be tackled—issues that are not going away.
A Different Approach is Needed
The General Court must focus its reform efforts on ensuring that incentives are properly aligned to stabilize the commercial insurance market for small businesses and reward those contributing to the cost of care while taking steps to make health insurance more affordable for all.
The state should:
- Focus reform efforts on ensuring that incentives are aligned to reward those offering high-value care.
- Reward patients with incentives to seek out high-value care, inside and outside of an insurer network.
- Utilize reference-based pricing to set a benchmark for care to ensure patients are protected from unjustified high prices.
- Allows small businesses access to their claims data, similar to how large companies do now.
- Demand greater transparency from nonprofit health systems to ensure they are providing a level of charity care at least equal to the tax advantages they are granted as a nonprofit.
- Offer additional coverage options for small companies.
Simply expanding subsidies may sound like a helpful solution at first glance, but it doesn’t fix the real issues in healthcare for patients in the Commonwealth.