Hundreds of Thousands in U.S. Taxpayer Money per Paid HealthSource RI Customer

According to the Center for Consumer Information & Insurance Oversight, under the federal Centers for Medicare & Medicaid Services, the federal government has given $134.7 million in grants aimed, at least in part, at getting Rhode Island’s Affordable Care Act health benefits exchange, HealthSource RI, up and running.  Of that, $99.1 million went directly to the Rhode Island government.

With HealthSource RI having now released detailed results for its first month of operation, it’s possible to begin assessing a cost per enrollment.  As the following chart shows, thus far, U.S. taxpayers have spent $371,268 directly to set up the site for each of the 267 people who’ve officially enrolled.

taxpayercostperHSRIenrollment-102013

Adding in the 925 Rhode Islanders who have completed an application, but have not completed the enrollment process by actually paying their share, the per-person taxpayer cost decreases to $83,162.

Not surprisingly, by far the greatest number of customers, 3,213, have been those who will receive their coverage for free, through the Medicaid program.  Bringing them into the mix brings the per-person taxpayer cost to $22,504… just to set up the site, remember, not to partially or fully subsidize their coverage.

Adding in the $35.6 million that the federal government gave to the University of Massachusetts Medical School in order to benefit all New England states (except New Hampshire), the costs per Rhode Island enrollment increases to $504,569, $113,020, and $30,583.  However, this number does not take into account individuals who may have enrolled in other states’ exchanges, so only a portion of the total is actually attributable to Rhode Island customers.

Report: Moving Forward with Health Reform in Rhode Island

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Even with implementation of Rhode Island’s health benefits exchange under the Affordable Care Act (ACA), HealthSourceRI, close to 100,000 Rhode Islanders may not have adequate options unless additional provisions are made by the state. Access to affordable health care is one of the most important and personal decisions anyone can make.

Previous reports by the RI Center for Freedom & Prosperity have documented both the financial disincentives created by the ACA when it comes to purchasing insurance and identified and quantified the groups of people who are likely to remain uninsured, perhaps up to 97,000 Rhode Islanders.

Anticipated insurance premium hikes are expected to price many individuals out of the market, notwithstanding the subsidies available through the exchange, and other reasons exist for individuals to elect not to purchase insurance, such as lack of perceived value or concern about paying for controversial services like contraception and abortion. With taxes already at overly burdensome levels, it is critical for Rhode Island to identify and promote alternative programs that will provide many more Rhode Islanders with access to health care, without placing further burdens on taxpayers.

State officials are encouraged to seek additional remedies to address this pending shortfall. The free-market programs recommended in this report by our Center are:

  • Mandate-free and mandate-lite, full-disclosure insurance policies
  • Interstate insurance sales
  • Health care sharing ministries
  • Critical illness and accident insurance

Also included in this report are other program recommendations.

It is our Center’s conclusion that it is not feasible that a government-centric, one-size-fits-all approach via the state’s health benefits exchange can adequately address the needs of a highly diverse population. Only with additional patient-centric, consumer-oriented options can we move toward the goal of ensuring that more Rhode Islanders achieve health care and financial peace of mind.

Read our prior Report: Left Behind by Healthcare in RI

REPORT: Moving Forward with Health Reform in RI

With up to 97,000 Rhode Islanders expected to remain uninsured after Obamacare and RI’s health benefits exchange is implemented, our new report recommends free-market policies and solutions to provide affordable health services for many …

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Left Behind by Health Reform in Rhode Island

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Read the first report in this three-part series here …  “Will RIers Purchase Insurance Under Obamacare?”

Read the Part-3 report, Moving Forward with Healthcare in RI

Summary

Arranging for health care is one of the most personal and important decisions any of us can make. Across Rhode Island, families and individuals are seeking access to a wide range of affordable health care options that will provide them with peace of mind, health security, and the financial freedom that will enhance their overall quality of life.

However, the number of Rhode Island residents expected to remain uninsured after implementation of the President’s Affordable Care Act (ACA) could range from over half to up to three-quarters of the currently uninsured population of 124,000, or approximately 70,000–97,000 people in the state.

Consistent with findings from other government and national studies, “Left Behind by Health Reform in RI” further breaks down these figures by identifying the specific groups of people in the Ocean State who are likely to remain without insurance, whether privately owned, subsidized via the state exchange, or via Medicaid.

Despite state government efforts in the past to increase health insurance coverage, the uninsured population has steadily risen over the past decade. So it should come as no surprise that yet another government-centric approach to healthcare, such as the ACA, will not achieve the “near universal” results it was broadcast to produce.

The Center previously published a report (Will Rhode Islanders Purchase Insurance Under Obamacare?) that identified the broad financial disincentives for a significant number of Ocean State individuals and families to obtain private health insurance under ACA and its health benefits exchange. For these and other reasons described in this report, large numbers of Rhode Islanders will continue to lack access to adequate health services.

The summary table below identifies and quantifies the subpopulations of residents in Rhode Island that are expected to continue to include large numbers of uninsured. Detailed discussion of each group is provided in the body of the report.

Rhode Islanders Left Behind: Remaining or Becoming Uninsured

The RI Center for Freedom & Prosperity recommends that public officials in Rhode Island should not sit back on their hands and expect implementation of ACA alone to provide sufficient reform to the state’s health care system to adequately ensure that all residents of the state have access to affordable, quality care. Indeed, our state must not forget about those who will be left behind by ACA. State officials are encouraged to seek additional remedies to address this pending shortfall.

It is not feasible that a government-centric approach can take into account all of the complexities of the vast private healthcare market, or that a one-size-fits-all solution can adequately address the needs of a highly diverse population, as described in this report. Differing financial circumstances and widely varying personal motives for distinct populations cannot be served in this manner. Only a patient-centric, consumer-oriented, free-market approach can solve this riddle.

In this regard, the Center will publish a third report in this health care series that will propose market-based solutions to address the access-to-health-services shortfall… without requiring additional taxpayer funding.

Introduction

The issue of ensuring that all Rhode Islanders have access to affordable, quality health care has long been on the state’s agenda. The state has tried a variety of public policy solutions over the past two decades to address the issue. A few of the measures that have been aimed at reducing the number of uninsured and expanding access to care include:

  • Several expansions of RIte Care eligibility, including covering pregnant and post-partum women between 185 and 350% of the federal poverty level (1994), covering children under 250% of the poverty level (three separate expansions in 1994, 1996, and 1997),  and children of undocumented immigrants (1999).[i]
  • Creation of the premium assistance program RIte Share for Medicaid-eligible persons offered employer-sponsored insurance (2001).[ii]
  • Creation of the RI Office of Health Insurance Commissioner in 2004, with a mission to “broaden the accountability of health insurers,” as well as “Protecting consumers… Encourag-ing fair treatment of medical service providers… Ensuring solvency of health insurers… [and] Improving the health care system’s quality, accessibility and affordability.”[iii]
  • Creation of the HEALTHpact insurance product, first offered in October 2007, to encourage small businesses to offer insurance to employees.[iv]

Despite these and other efforts, however, the number of uninsured in Rhode Island has steadily risen over the past decade. In 2000, approximately 6.9% of the state’s under-65 population was uninsured,[v] accounting for approximately 62,000 persons.[vi] By 2012, the uninsured rate had climbed to 13.4% of the under-65 population, totaling roughly 124,000 Rhode Islanders.[vii]

Rhode Island was not alone in seeing the number of uninsured persons explode over the past decade. As a result, in 2010 Congress passed and the President signed the Patient Protection and Affordable Care Act (hereinafter called “ACA”), which was proposed as a way of achieving “near-universal” health care coverage.[viii]

The state of Rhode Island has chosen to move forward aggressively to implement the ACA, including setting up a state-run exchange for individual and small-group purchasers,[ix] as well as embracing the expansion of Medicaid that the U.S. Supreme Court made optional for states in its 2012 ruling on the constitutionality of the act.[x]

But even with implementation of ACA, there is likely to remain a substantial number of uninsured persons in Rhode Island and nationally. The question then becomes, what can policymakers in Rhode Island do to ensure that the remaining uninsured are able to access and fund the health care they need?

This “Left Behind by Health Reform in RI” paper assesses this question, first by identifying and describing several specific subpopulations that make up Rhode Island’s 124,000 uninsured persons.

In an upcoming report, the Center will explore several options that Rhode Island’s policymakers, civic leaders, and individual citizens might be able to promote or pursue in order to obtain either health insurance as traditionally understood or alternate health care financing sources. That paper will offer several specific policy recommendations for the state, all of which have the benefit of not adding costs to citizens or the state while generally preserving or expanding individual freedom for residents of Rhode Island.

It is the hope of the RI Center for Freedom & Prosperity that this “Left Behind by Health Reform in RI” paper can stimulate thoughtful discussion about how best to address the substantial number of uninsured residents who are likely to persist in that condition even after implementation of the ACA. By taking a proactive lead on this issue, Rhode Island can become a national leader in health care reform and serve as a model for other states to follow.

Uninsured After ACA

Even after the ACA is fully implemented in 2016,[xi] it is widely expected that a large number of persons will remain uninsured.

While estimates vary, depending on source, the Congressional Budget Office and Congress’s Joint Committee on Taxation anticipate the number of uninsured in America roughly to be cut in half after implementation of ACA, reducing the number of uninsured from 56 million persons to only 30 million after implementation.[xii] If this is accurate, the national uninsured rate would decline to approximately 11%, an improvement from the current 20% estimated rate.[xiii]

For Rhode Island, results would likely be modestly better, owing in large part to having an already lower rate of uninsured as well as a smaller-than-average population of undocumented immigrants. The number of uninsured persons in Rhode Island has recently been estimated to be 124,000, or 13.6% of the state’s under-65 population.[xiv] A paper by the Robert Wood Johnson Foundation estimated that approximately 53,000 Rhode Island residents would remain uninsured after ACA implementation, reducing the rate of uninsured to 5.8%.[xv]

But there is good reason to believe that these projections substantially overestimate the number of people who will gain insurance under ACA, while also underestimating the number likely to lose insurance coverage. The key reasons that the number of uninsured in Rhode Island may not decline as substantially as predicted include:

  1. The tax penalty for not purchasing health insurance is lower (often much lower) than the expected after-subsidy out-of-pocket premium for purchasing insurance.
  2. Younger persons are likely to see premiums rise substantially above current rates, pricing many of them out of the market and exempting them from the mandate.
  3. ACA’s “guaranteed issue” and “community rating” requirements create incentive for relatively healthy youths to delay insurance purchase until they are sicker and older.
  4. The IRS is limited in its ability to collect the tax penalty for not purchasing insurance, only being permitted to reduce tax refunds.
  5. Small businesses, which are least likely to offer insurance to employees today, are exempted from the requirement to provide insurance to employees, and tax credits to help with the cost of providing coverage are too small, too complex, and temporary, limiting their ability to expand coverage to employees of small firms.
  6. Large employers subject to the employer mandate generally already provide insurance to employees, and many of those that do not (particularly in the restaurant and retail industries) are able to shift employees to part-time status to avoid the penalty.
  7. Even with the penalty, larger firms employing mostly low- and moderate-income employees may find it financially advantageous to terminate coverage and pay the fine rather than paying health insurance premiums.
  8. Health insurance is considered to be a relatively inelastic good by economists, meaning that a moderately lower out-of-pocket premium payment paired with a weak penalty for not purchasing insurance is unlikely to prompt large numbers of people to purchase insurance.

Subpopulations

Below are several communities and demographic groups that are likely to continue to see relatively high uninsured rates in 2016 and beyond.

Young & Invincible

A large component of the uninsured population is the so-called “young invincibles,” a group that can be generally thought of as healthy and under the age of 35. For this population, often just starting their careers and earning relatively modest incomes, with few health needs and little worry about paying for medical care, health insurance is simply not something they place much value in, especially if premiums are much higher than might be considered actuarially appropriate. One of the primary purposes of the individual mandate in the ACA is to get this relatively young and healthy population who might not ordinarily purchase health insurance to do so, which should bring down premiums for the rest of the population, if successful.

The past experience of the eight states that enacted both guaranteed issue and community rating requirements in their individual health insurance markets in the 1990s strongly demonstrate why such a mandate might be considered necessary: All eight states saw young and healthy policyholders drop coverage as their rates rose beyond actuarially justifiable premiums, leading to higher rates for remaining policyholders, which in turn set off another round of younger and healthier persons (compared to those remaining) dropping coverage, again raising rates for those remaining. This process continued in all eight states, creating a “death spiral” in premiums that did little to lower the number of uninsured (and may in fact have increased the number of uninsured), drove premiums to levels unaffordable for most, and caused most insurers to exit these markets.[xvi]

However, the mandate under ACA is relatively weak, because for most, the cost of paying the tax penalty is less — in many cases, far less — than paying insurance premiums.[xvii] Moreover, the ability of the IRS even to collect the penalty is extremely limited; it is only allowed to reduce tax refunds, and no criminal or civil charges may be filed, nor wages garnished or bank accounts seized.[xviii] It is therefore highly questionable whether much of Rhode Island’s “young invincible” population will in fact purchase insurance.

For example, a young, single person in his or her mid-twenties in Rhode Island with an annual income of $32,000 (279% of federal poverty level) would under ACA be expected to pay approximately $2,850 out of pocket for a “Silver” level plan, compared with a $695 penalty that can very easily be avoided by minimizing overpayments to the IRS.[xix] For many “young invincibles” who value disposable income over insurance benefits they are unlikely to use, the decision to remain uninsured will be an easy and predictable one.

This has significant ramifications, because Rhode Island’s “young invincibles” comprise up to half of the uninsured.[xx] Of 124,000, approximately 31,000 to 63,500 are likely in this “young invincibles” demographic, most of whom will find it a more sensible decision to remain uninsured and pay a modest or negligible penalty.[xxi] This does not include any currently insured Rhode Islanders who might drop coverage as their premiums rise, which could add thousands or even tens of thousands to the number of uninsured.

Gamers

As discovered by the eight states that passed guaranteed issue and community rating laws in the 1990s,[xxii] individuals can “game” the system by waiting to purchase health insurance until such time as they need to obtain relatively expensive health care. This practice drives up the price of insurance, as insurers end up with a covered population that is less healthy than average, and begins another “death spiral” in premiums that actually increases the number of uninsured, significantly raises premiums, and drives insurers from the market.

ACA effectively imposes guaranteed issue and community rating on insurance markets throughout the country, requiring that insurers accept all who apply and that all insured receive the same premium, adjusted only for age, location, and possibly tobacco use. The law also prohibits limitations on the treatment of preexisting conditions.

In an attempt to ensure that “death spirals” do not occur in insurance markets, ACA contains two provisions designed to minimize the incentive to delay obtaining insurance until expensive care is required. The first is the individual mandate, which requires that most persons obtain health insurance or pay a tax penalty. The second permits states and insurers to limit “open enrollment” to a specific period of time, meaning that those opting to remain uninsured run the risk of not being able to immediately obtain health insurance after discovering they need expensive health care.

Despite these provisions, the guaranteed issue, community rating, and preexisting conditions components of ACA still create significant incentives for persons to avoid purchasing health insurance until they feel they need it.

As noted before, the difference between paying for health insurance and paying the tax penalty for remaining uninsured can be substantial. The difference is especially stark at higher income levels. For example, a married couple, both age 37, with two children and annual income of $82,000 (348% of federal poverty level) would face after-subsidy out-of-pocket premiums of approximately $7,788, while the tax penalty for remaining uninsured would be only $2,085 (again assuming it is collected), a difference of $5,703.[xxiii]

Remaining uninsured may represent an attractive option for this family, especially if either spouse is self-employed. Under ACA regulations proposed by the U.S. Department of Health & Human Services, self-employed persons would be eligible to purchase health insurance year-round with no enrollment period restrictions.[xxiv]

Past research on Rhode Island’s uninsured population found that 11.2% of Rhode Island’s non-elderly adult (18–64) uninsured are self-employed,[xxv] and several thousand more uninsured are likely dependents of these self-employed individuals.[xxvi] This suggests that between 12,000 and 17,000 self-employed individuals and dependents are currently uninsured in Rhode Island, possibly more.

For this population, limits on open enrollment would not be an obstacle to obtaining health insurance only when it is needed, and they and their dependents might find it advantageous to remain uninsured knowing that they could reap substantial savings while still having the ability to obtain insurance when they need it.

It should be noted that the self-employed category tends to generally be older. Nearly 69% of Rhode Island’s self-employed are between the ages of 35 and 64.[xxvii]

An additional population beyond the self-employed that may engage in some degree of gaming will be those Rhode Islanders whose employers drop coverage and raise wages and salaries with the expectation that employees can find coverage in the exchange, and who then elect not to purchase coverage until they feel they need it. This group is discussed below in the “At Risk” section.

Exempted

The previous two groups described were assumed to be subject to the penalty tax of ACA, and that this factor is likely to weigh in the decision-making process of uninsured individuals considering the purchase of health insurance. For the following two groups, however, this is not the case: They are effectively exempted from the law’s requirement to obtain coverage, and for them, the decision to remain uninsured is likely to be an easier one.

The first group are those earning less than 100% of the federal poverty level or who earn 138% or less of federal poverty level and do not have access to affordable employer-sponsored insurance. This population is eligible for Medicaid and can sign up at any time. Nearly half of Rhode Island’s uninsured population is under 139% of the federal poverty level,[xxviii] and most would be eligible for coverage under the Medicaid expansion in which the state has opted to participate. (RiteCare already extends eligibility beyond what current federal law requires, including to parents with children under 18 and family income of 175% of the federal poverty level.)[xxix] This group is exempt from the mandate, and those in it do not have to pay a penalty if they don’t enroll.

Not all Medicaid-eligible persons enroll. Analysis by the Urban Institute found that approximately 13,000 adults in Rhode Island are currently uninsured and eligible for Medicaid.[xxx] An additional 9,500 children are estimated to be uninsured but eligible for either Medicaid or Children’s Health Insurance Program (CHIP) under current eligibility standards.[xxxi] Some of these may enroll as a result of publicity surrounding implementation of ACA, or if the enrollment process becomes less complex. But many are likely to remain uninsured as they are now.

In addition, an estimated 38,000 adults[xxxii] in Rhode Island will become newly eligible for Medicaid under ACA,[xxxiii] many of whom are unlikely to enroll. The Congressional Budget Office estimates that only 57% of newly eligible persons will enroll in Medicaid,[xxxiv] which would leave more than 16,000 Rhode Island adults uninsured in addition to those currently eligible adults and children who are not enrolled in Medicaid.

The other group exempted from the mandate to purchase health insurance is individuals and families who would have to pay premiums in excess of 8% of their income.[xxxv] This group will largely be composed of those with incomes above 400% of the federal poverty level, who would have to pay the full, unsubsidized premium in order to purchase health insurance. According to U.S. Census data, approximately 391,000 Rhode Islanders (including dependents) have a household income of greater than 400% of the federal poverty level,[xxxvi] about $44,680 for an individual or $92,200 for a family of four.[xxxvii]

The rate of uninsured among this higher-income segment of the population is significantly better than for the rest of the population — approximately 5%, nationally.[xxxviii] This figure is generally consistent with Rhode Island’s past findings on the income levels of the uninsured, which found that 12.8% of the uninsured had incomes above 400% of the poverty level,[xxxix] and suggests about 19,500 uninsured Rhode Islanders have relatively high incomes.

Not all of these will be exempt from the mandate, particularly at younger ages. But assuming “Bronze” level premiums of $4,636 for a 55 year old,[xl] individuals between approximately $46,000 and $55,500 (400 and 483% of the poverty level) will be exempt from the mandate because their premiums would exceed 8% of income and be considered “unaffordable.”

The exempt range for couples and individuals is even greater by age and income. A couple aged 54 would be exempt if their combined income were between $62,000 and $111,000, while a family of four with 44-year old parents and incomes between $92,200 and $105,600 would be exempt from the mandate to purchase insurance.[xli], [xlii]

The effects of this exemption is likely to be concentrated among the older uninsured because they face higher premiums and are more likely to earn higher incomes. Because of this broad exemption, it is likely that very few of Rhode Island’s estimated 19,500 high-income uninsured will purchase insurance, and many more currently insured may in fact drop coverage knowing they can obtain it at a later date if faced with significant health care expenses.

Undocumented Immigrants

There is little dispute over the fact that the ACA does not meaningfully address the high number of uninsured among the community of undocumented immigrants. Various provisions of the law, as well as current Medicaid law, specifically prohibit most undocumented immigrants from obtaining any health benefits, such as by enrolling in Medicaid,[xliii] receiving tax credits through the exchange to lower out-of-pocket premium costs, or even purchasing unsubsidized insurance through the exchange.

While the exact number of undocumented immigrants in Rhode Island is not known, most estimates put the number at around 30,000.[xliv] Nationally undocumented immigrants have been estimated to have an uninsured rate of 57%,[xlv] while the combined population of legal noncitizens and undocumented immigrants have an estimated rate of 45%.[xlvi] Noncitizens (both legal and undocumented) are estimated nationally to comprise approximately 22% of the uninsured.[xlvii]

All told, these estimates suggest that at least 17,000 Rhode Island residents, and possibly more, are currently uninsured and will remain so after full implementation of the ACA in 2016.

At Risk

Another group that must also be considered includes those who are currently insured, but who may actually lose their coverage as a result of certain provisions embedded in the ACA.

Under ACA, employers with fewer than 50 full-time employees are exempt from the requirement to make health insurance available to their workers. For businesses with 50 workers or more, there is a $2,000-per-employee penalty for not providing insurance to workers. For most Rhode Island businesses with 50 or more employees, the requirement would not impose a new burden, as these firms already provide insurance to full-time and even some part-time workers.[xlviii]

However, in the face of continued rising health care costs and a relatively modest penalty (compared to health insurance premiums) of $2,000 per employee combined with generous subsidies through the exchange for low- and middle-income workers, it is likely that some employers will choose to stop offering health insurance, pay the penalty, and increase employee compensation directly to offset the loss of health benefits. Some estimates predict modest increases in employer-sponsored insurance coverage,[xlix] but most conclude that there will be a net decrease in the number of Americans receiving health insurance from their employer for these and other reasons.[l], [li]

One industry in which there may be pressure to eliminate or reduce eligibility for employer sponsored health insurance is the restaurant industry, especially if premiums continue to rise as expected even after full implementation of the ACA. Several national restaurant chains or their franchisees have announced in response to the employer mandate that they are likely to limit employees to part-time status in order to avoid the penalty, and others will likely follow.[lii] The restaurant industry has expressed considerable concern about implementation of ACA on behalf of both small and large employers in the industry.[liii]

Restaurants typically operate with a relatively slender 4–6% profit margin,[liv] and according to the National Restaurant Association between 54% and 79% of restaurant workers are uninsured.[lv] Because of such slim margins, considerable flexibility in being able to keep employees at part-time status, and the fact that most restaurant workers are relatively low-income and young, it is highly likely that few restaurant owners will add health benefits, and many that currently offer insurance will consider dropping coverage.

The retail industry faces a similar situation to restaurants. There are more than 87,000 Rhode Islanders in the restaurant and retail industries,[lvi] many of whom are currently uninsured and unlikely to gain employer coverage under ACA and some of whom are currently insured and at risk of losing their employer coverage. The average estimate for three major studies of the number of Americans likely to lose employer coverage is 3.3 million,[lvii] while the most recent Congressional Budget Office estimate pegs the number of persons losing employer-provided coverage at 7 million.[lviii] Using this range, between 11,000 and 24,000 Rhode Islanders will likely lose the employer coverage they currently have.[lix] Many are likely to obtain coverage through the exchange, but others are likely to “game” the system, delaying purchasing insurance until they fall ill or are injured, or as members of the “young invincibles” decide to take any extra compensation they receive upon the loss of employer-sponsored insurance and spend it on things other than health insurance.

Conclusion

It is difficult to predict with any certainty how many Rhode Islanders will remain uninsured after full implementation of the Affordable Care Act in 2016. It should be pointed out that there is substantial overlap among several of the groups described above: Some “young invincibles” are likely also undocumented aliens, and some of the self-employed are also likely exempt from the mandate to purchase insurance because their incomes fall in the range at which unsubsidized premiums exceed 8% of income.

An additional factor that prevents any firm estimate of the number of uninsured is that it is impossible to know how many Rhode Islanders will respond to the considerable disincentives embedded in the ACA to immediately purchase health insurance until an illness or injury makes it economically rational to obtain coverage, as well as provisions of the law that substantially increase premiums for younger policyholders.[lx]

Even with these limitations, a broad range of those likely to remain uninsured after full implementation can be estimated. Based on the information described in this report, and using relatively conservative estimates, between 70,500 and 97,000 Rhode Island residents are likely to remain uninsured after full implementation of ACA in 2016,[lxi] which would reduce the uninsured rate to between 7.9 and 10.5%, from the current 13.4%. The bulk of newly insured in Rhode Island are likely to be new participants in the RIte Care program, with relatively modest numbers of previously uninsured gaining coverage through the individual exchange.

Other Papers in This Series

The first paper in this series, published in June, was “Will Rhode Islanders Purchase Insurance Under ObamaCare?” That paper calculated the tax penalty and likely premiums for various age and income groups and concluded that many would have financial incentive not to purchase health insurance.

The Rhode Island Center for Freedom & Prosperity will continue to contribute to this important and highly personal public discussion by publishing one more related paper proposing free-market public policy solutions, as well as private strategies, that can be pursued to address this shortcoming, without requiring any additional taxpayer funding.

For more information, please contact our Center or visit us at www.RIFreedom.org or email info@rifreedom.org.

About the Author

Sean Parnell, an adjunct scholar to the RI Center for Freedom & Prosperity, is president of Impact Policy Management (IPM), a Washington, D.C., area full-service public policy firm, and manages political advocacy projects for free market and limited government causes. Before founding IPM he was president of the Center for Competitive Politics (CCP), a nonprofit advocacy organization focused on defending the First Amendment. Prior to joining IPM Parnell was Vice President of External Affairs at the Heartland Institute.

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[i] Comments by Christine Ferguson, Director, RI Department of Human Services, “Hindsight and Foresight: Lessons for Getting It RIte,” May 18, 2001 Conference Transcript: “Getting It RIte (Rhode Island)” page 62, available at: http://www.ihps.org/pubs/2001MayConf/RI.pdf

[ii] “Rhode Island’s RIte Share Premium Assistance Program: ESTIMATED SAVINGS, State Fiscal Year 2005” p. 2,

RI Department of Human Services, January 2006, available at: http://www.dhs.ri.gov/Portals/0/Uploads/Documents/Public/RCRS/RS_Savings_Report_06.pdf

[iii] Web site of the Office of the Health Insurance Commissioner, available at: http://www.ohic.ri.gov/AboutUs_Mission.php

[iv] Edward Alan Miller, et. al. “ Rhode Island’s HEALTHpact Plan: Lessons for Small-Group Reform,” p. 1, Robert Woods Johnson Foundation, March 2010. Available at: http://www.rwjf.org/content/dam/web-assets/2010/03/rhode-island-s-healthpact-plan

[v] Jane Griffin, MPH, ‘Profiles and Trends of the Uninsured in Rhode Island – 2005 Update,’ p. 3, Table 1,

RI Medicaid Research and Evaluation Project, October 2006. Available at: http://www.dhs.ri.gov/Portals/0/Uploads/ Documents/Public/Profiles%20and%20trends.pdf; see also Colleen Ryan, MPH, et. al., “Achieving Universal Health Care Coverage in Rhode Island: Where Are the Challenges?” Figure 1, Rhode Island Department of Public Health, March 2002, available at: http://www.health.ri.gov/publications/periodicals/healthbynumbers/0203.pdf

[vi] Based on 18–64 population estimate provided by U.S. Census Bureau, available at: http://www.planning.ri.gov/census/2010/demographic.pdf

[vii] Matthew Buettgens, Mark A. Hall, Who Will Be Uninsured After Health Insurance Reform, p. 8, Table 1, Robert Wood Johnson Foundation, March 2011. Available at: http://www.rwjf.org/content/rwjf/en/research-publications/find-rwjf-research/2011/03/who-will-be-uninsured-after-health-insurance-reform-.html

[viii] See Sara Rosenbaum, ‘The Patient Protection and Affordable Care Act: Implications for Public Health Policy and Practice,’ Public Health Reports, Jan-Feb 2011, “the Act establishes… a near-universal guarantee of access to affordable health insurance coverage,” available at: http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3001814/; see also ‘Health Reform and You: How the Affordable Care Act Expands Health Insurance Coverage,’ Commonwealth Fund, January 9 2013, “the Affordable Care Act will deliver near-universal health coverage to Americans,” available at: http://www.commonwealthfund.org/ Multimedia/Videos/2013/How-the-ACA-Expands-Health-Insurance-Coverage.aspx; see also “America’s Future,” The Lancet, Volume 380, Issue 9853, Page 1531, 3 November 2012, “Obama will continue to implement the landmark Patient Protection and Affordable Care Act (ACA), passed in 2010, which aims for near-universal health-care coverage,” available at: http://www.lancet.com/journals/lancet/article/PIIS0140-6736%2812%2961861-3/fulltext; see also testimony of Christine Ferguson, Director, Rhode Island Health Benefits Exchange, to the U.S. Senate Committee on Finance, February 14, 2013, “We are carrying out our work under five guiding goals. In Rhode Island, we will… Achieve near universal coverage,” available at http://www.finance.senate.gov/imo/media/doc/Director%20Christine%20Ferguson%20Testimony%20-%20U%20S%20%20Senate%20Finance%20-%202%2014%20131.pdf. In addition, Governor Lincoln Chafee’s executive order authorizing the creation of an exchange described the purpose of the act as “Providing near-universal health insurance coverage.” See following note.

[ix] Executive order 11-09 of Governor Lincoln Chafee, ‘Establishment of the Rhode Island Health Benefits Exchange,’ September 19, 2010, available at: http://www.governor.ri.gov/documents/executiveorders/2011/Executive_Order_11-09.pdf

[x] “A Guide to the Supreme Court’s Affordable Care Act Decision,” p. 5, Kaiser Family Foundation, July 2012, available at: http://www.kff.org/healthreform/upload/8332.pdf

[xi] The author considers 2016 to be the first year of “full implementation” for ACA because it is the first year the penalty tax for not obtaining health insurance is at its full level. The penalty tax is considered to be the key to getting many of the uninsured to purchase coverage.

[xii] Estimates for the Insurance Coverage Provisions of the Affordable Care Act Updated for the Recent Supreme Court Decision, p. 20, Table 3, Congressional Budget Office, July 2012. Available at: http://www.cbo.gov/sites/default/files/cbofiles/attachments/43472-07-24-2012-CoverageEstimates.pdf

[xiii] Ibid.

[xiv] Matthew Buettgens, Mark A. Hall, Who Will Be Uninsured After Health Insurance Reform, p. 8, Table 1, Robert Wood Johnson Foundation, March 2011. Available at: http://www.rwjf.org/content/rwjf/en/research-publications/find-rwjf-research/2011/03/who-will-be-uninsured-after-health-insurance-reform-.html

[xv] Ibid.

[xvi] For a full account, see: Destroying Insurance Markets by Conrad Meier, published by the Council for Affordable Health Insurance and The Heartland Institute, 2005. Full text available at: http://www.cahi.org/cahi_contents/resources/pdf/destroyinginsmrkts05.pdf

[xvii] See Appendix B for an analysis of true out-of-pocket costs v. penalty

[xviii] ‘Technical Explanation of the Revenue Provisions of the “Reconciliation Act of 2010,” As Amended, In Combination With The Patient Protection and Affordable Care Act,’ p. 2 (errata correction), Joint Committee on Taxation, March 21, 2010, which reads: “Although assessable and collectible under the Code, the IRS authority to use certain collection methods is limited. Specifically, the filing of notices of liens and levies otherwise authorized for collection of taxes does not apply to the collection of this penalty. In addition, the statute waives criminal penalties for non-compliance with the requirement to maintain minimum essential coverage. However, the authority to offset refunds or credits is not limited by this provision.” Available at: https://www.jct.gov/publications.html?func=startdown&id=3673

[xix] Calculated using the UC Berkley Labor Center calculator, available at: http://laborcenter.berkeley.edu/healthpolicy/calculator/

[xx] Karen Bogen, Who Are The Uninsured in Rhode Island: Demographic Trends 1990 – 2004, Access to Care, and Health Status for the Under 65 Population, p. 50, Rhode Island Department of Human Services, 2006. According to Bogen, 44% of the uninsured in 2004 were between the ages of 18 – 34. Most young uninsured report themselves as being in “excellent,” “very good” or “good” health, see Ibid at note 8, p. 78, where only 6% of uninsured between age 18 – 39 reported their health status as only “fair” or “poor.” Previous work by Bogen (Who are the Uninsured in Rhode Island, p. 85, Rhode Island Department of Human Services, 2005) find that 57% of Rhode Island’s uninsured consider themselves in “excellent” or “very good” health, significantly below the 72.6% of insured. She notes however that “The uninsured’s self-perception of poorer health may not be based on actual illness prevalence. There are very small differences between the insured and uninsured on reports of asthma, arthritis, disability, depression, and diabetes.” p. 85.

[xxi] The low-end estimate of 31,000 relies on Bogen’s estimates (Ibid at note 23) that 44% of Rhode Island’s 124,000 uninsured are between the ages of 18 and 34, and that 57% of those consider themselves in “excellent” or “very good” health (124,000×0.44x.57). The high-end estimate of 63,500 assumes that Rhode Island’s currently uninsured population closely resembles the more recent national profile of the uninsured and relies on current Census Bureau data (available at: http://www.dlt.ri.gov/lmi/pdf/acs/rhodeisland.pdf) and Centers for Disease Control analysis (available at: http://www.cdc.gov/nchs/data/health_policy/HI_08_to_June11_YoungAdults.pdf), along with Pfizer’s report on the health status of the uninsured (see Ibid at note 19, p. 78). Based on these data the high-end number of uninsured between 18 and 35 in Rhode Island was determined as: (113,562×0.273)+(129,313×0.283)=67,600, which was then multiplied by 0.94 to remove those reporting their health status as “fair” or “poor.” Numbers have been rounded, and adjustments to source data have been made to reflect different reporting ranges in each report.

[xxii] Ibid at note 21.

[xxiii] See Ibid at note 24.

[xxiv] Patient Protection and Affordable Care Act; Health Insurance Market Rules; Rate Review; Proposed Rule, § 147.104 Guaranteed availability of coverage, p. 70612, Federal Register, Vol. 77, Number 227, November 26, 2012. Available at: http://www.regulations.gov/#!documentDetail;D=CMS-2012-0141-0001

[xxv] See Ibid at note 25, p. 57.

[xxvi] An Analysis of Rhode Island’s Uninsured: Trends, Demographics, and Regional and National Comparisons, Appendix, Office of the Health Insurance Commissioner, State of Rhode Island, September 2007. The appendix pages and tables in the appendix are not numbered, table titled “Uninsured < 65 by Labor Force Status” shows data from both the Rhode Island Health Interview Survey and U.S. Census Bureau Current Population Survey suggesting that 43% of self-employed uninsured are parents, meaning at least one dependent.

[xxvii] Rhode Island Indicators: Aging and Work, p. 8, Center on Aging and Work, Boston College, 2008. Available at: http://www.bc.edu/content/dam/files/research_sites/agingandwork/pdf/publications/states/RhodeIsland.pdf

[xxviii] Rhode Island: Health Insurance Coverage of the Nonelderly (0-64) with Incomes up to 139% Federal Poverty Level, available at: http://www.statehealthfacts.org/profileind.jsp?ind=849&cat=3&rgn=41 Although the law generally specifies expansion up to 133% of FPL, a 5% credit in the law effectively raises eligibility to all with less than 139% of FPL.

[xxix] Web site of the Rhode Island Department of Human Services, at: http://www.dhs.ri.gov/People/FamilieswithChildren/HealthCareCoverage/RIteCare/tabid/213/Default.aspx

[xxx] Genevieve M. Kenney, Lisa Dubay, Stephen Zuckerman, and Michael Huntress, Opting Out of the Medicaid Expansion under the ACA: How Many Uninsured Adults Would not Be Eligible for Medicaid? p. 3, Urban Institute, July 5, 2012. Available at: http://www.urban.org/UploadedPDF/412607-Opting-Out-of-the-Medicaid-Expansion-Under-the-ACA.pdf

[xxxi] “Medicaid Facts: Rhode Island” American Academy of Pediatricians, September 2012, available at: http://www.aap.org/en-us/advocacy-and-policy/federal-advocacy/access-to-care/Medicaid%20Fact%20Sheets/RhodeIsland.pdf

[xxxii] See ibid at note 35.

[xxxiii] Because Rhode Island currently extends Medicaid and CHIP eligibility for children up to 250% of FPL, there is no increase in the number of children eligible under ACA.

[xxxiv] John Holahan and Irene Headen, Medicaid Coverage and Spending in Health Reform: National and State?by?State Results for Adults at or Below 133% FPL, p. 36, Kaiser Family Foundation, May 2010. Available at: http://www.kff.org/healthreform/upload/medicaid-coverage-and-spending-in-health-reform-national-and-state-by-state-results-for-adults-at-or-below-133-fpl.pdf. See also Heidi Allen et. al. What The Oregon Health Study Can Tell Us About Expanding Medicaid, August 2010, available at http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3533495/, suggesting a 2008 expansion in Oregon’s Medicaid eligibility resulted in a take-up rate of between 39 and 50%.

[xxxv] Carol A. Pettit and Edward C. Liu, The PPACA Penalty Provision and the Internal Revenue Service, p. 3, Congressional Research Service, April 30, 2010.

[xxxvi] Rhode Island: Distribution of Total Population by Federal Poverty Level, Kaiser Family Foundation. Available at: http://www.statehealthfacts.org/profileind.jsp?ind=9&cat=1&rgn=41&cmprgn=1

[xxxvii] 2012 HHS Poverty Guidelines, U.S. Department of Health & Human Services, available at: http://aspe.hhs.gov/poverty/12poverty.shtml/12fedreg.shtml

[xxxviii] The Uninsured – A Primer: Key Facts About Americans Without Health Insurance, p. 3, figure 2, Kaiser Family Foundation, October 2011. Available at: http://www.kff.org/uninsured/upload/7451-07.pdf

[xxxix] See Ibid at note 25, p. 55.

[xl] See Appendix A for proposed premiums for Blue Cross & Blue Shield of Rhode Island, effective January 1, 2014.

[xli] Ibid.

[xlii] The Kaiser Family Foundation performed similar calculations based on national data and CBO estimated “Bronze” level premiums and determined that a family of four with income between $98,000 and $150,000 would be exempt from the mandate. See “The Individual Mandate: How Sweeping?” March 21, 2012, available at: http://policyinsights.kff.org/ 2012/march/the-individual-mandate-how-sweeping.aspx. Similarly, the Office of the Actuary at the Centers for Medicare & Medicaid Services estimated that individuals and families with incomes between 400% and 542%, about 16% of the population, would be exempt from the mandate to purchase insurance because of the affordability standard; see: Richard Foster, “Estimated Financial Effects of the ‘Patient Protection & Affordable Care Act,’ As Amended,” p. 7, Department of Health & Human Services, April 22, 2010.

[xliii] Medicaid does allow for pregnant undocumented immigrants to receive care, including childbirth. Aside from this provision, however, they are effectively barred from receiving any benefits under ACA.

[xliv] Unauthorized Immigrant Population: National and State Trends, 2010, p. 23, Table A3, Pew Hispanic Center, 2011. Available at:  http://www.pewhispanic.org/files/reports/133.pdf

[xlv] Stephen Zuckerman, Timothy A. Waidmann and Emily Lawton, Undocumented Immigrants, Left Out of Health Reform, Likely to Continue to Grow as Share of the Uninsured, p. 2000, Exhibit 2, Health Affairs, 30, No. 10 (2011).

[xlvi] Margaret McDonald and Robin P. Hertz, A Profile of Uninsured Persons in the United States, p. 12, published by Pfizer, Inc., 2008.

[xlvii] Ibid at p. 11.

[xlviii] State-Level Trends in Employer-Sponsored Health Insurance: A State-By-State Analysis, p. 24, Table 10, “Trend in Private Sector Employers Offering ESI, by Firm Size and State,” Robert Wood Johnson Foundation/State Health Access Data Assistance Center (SHADAC), June 2011. The study found that 98.3% of RI firms with 50 or more employees offer health insurance, compared to only 51.5% of firms with fewer than 50 employees. Of firms that offer insurance, the percentage of eligible workers was roughly equal in Rhode Island, at 75.6% for small firms and 76.4% for larger firms (p. 26, table 12).

[xlix] According to a Congressional Budget Office review of studies, microsimulations from the Centers for Medicare & Medicaid Services, RAND Corporation, and Urban Institute showed increases in net employer sponsored insurance of  200,000, 4.2 million, and 4.1 million, respectively. Another analysis by the Employment Policies Institute projected a 4 million net increase in employees receiving insurance through employers. See Patient Protection and Affordable Care Act: Estimates of the Effect on the Prevalence of Employer-Sponsored Health Coverage, pp. 10–12, Congressional Budget Office, July 2012.

[l] Ibid, pp.10–14. Booz & Company projects 3–4 million Americans will lose employer health coverage, the Congressional Budget Office initially predicted a net decrease of 4 million persons, and the Lewin Group estimates 2 million people will lose employer-sponsored coverage. In February 2013, the Congressional Budget Office increased its estimate of the number of persons losing employer-sponsored insurance to 7 million, see note 56.

[li] See, McKinsey & Company – Benefits Package Decision Makers Study, p. 162, February  2011 available at: http://www.mckinsey.com/features/us_employer_healthcare_survey, which found that 26.4% of employers with 50 or more employees would “definitely” or “probably” drop coverage in response to the ACA; see also Douglas Holtz-Eakin and Cameron Smith, “Labor Markets and Health Care Reform: New Results,” p. 5, American Action Forum, May 27, 2010, available at: http://americanactionforum.org/files/LaborMktsHCRAAF5-27-10.pdf, which finds that up to 35 million Americans are at risk of losing employer-sponsored coverage under ACA; see also “HR Policy Association: 2011 Annual Chief Human Resource Officer Survey,” available at http://www.hrpolicy.org/downloads/2011/CHRO%20Report%20Draft_FINAL%20REORDERED_HC%20Only.pdf, in which 6% of HR department heads said their companies would “give serious consideration to discontinuing providing health care benefits.”

[lii] See Jessica Lipscomb, “John Schnatter Papa John’s CEO: Obamacare likely to raise costs, employee’s hours being cut,” NaplesNews.com, November 8, 2012, available at: http://www.wptv.com/dpp/news/state/john-schnatter-papa-johns-ceo-obamacare-likely-to-raise-costs-employees-hours-being-cut; see also “Applebee’s targeted after franchisee mulls hiring freeze in response to Obamacare,” Twitchy.com, November 9, 2012, available at: http://twitchy.com/2012/11/09/applebees-targeted-after-franchisee-mulls-hiring-freeze-in-response-to-obamacare/; see also Julie Jargon, “Chili’s Feels Heat to Pare Costs” Wall Street Journal, January 28, 2011, available at: http://online.wsj.com/article/SB10001424052748704307404576080340742759346.html#articleTabs%3Dcomments

[liii] “Regulatory comments of the National Restaurant Association,” p. 2, October 31 2011, available at http://www.restaurant.org/pdfs/advocacy/20111031_hcr_irs_hhs_nra_sra_comments.pdf

[liv] Ibid. See also “A Better Approach to Government Business Mandates,” p. 4, The Profit-Per-Employee Coalition, October 2011, available at: http://profitperemployee.com/yahoo_site_admin/assets/docs/PPE_OVERVIEW_OCT_2011.264154218.pdf, which found that the restaurant and hospitality association had average profits per employee of only $754 annually, well below the all-industry average of $10,252.

[lv] Information contained in news release from National Restaurant Association, May 21, 2010, available at: http://www.restaurant.org/pressroom/pressrelease/?id=1959

[lvi] U.S. Bureau of Labor Statistics, available at: http://www.bls.gov/oes/current/oes_77200.htm#35-0000. The numbers show nearly 53,000 employees in the restaurant industry and approximately 34,000 cashiers and retail sales workers.

[lvii] Ibid at note 49, pp. 10–12. The Congressional Budget Office originally estimated 4 million Americans would lose coverage, the Lewin Group estimated 2.4 million, and Booz & Company estimated 3–4 million. While other studies reviewed in this paper estimate increases in employer provided insurance (RAND, Urban Institute, Centers for Medicare & Medicaid Services), the author believes these studies do not account for the significant incentives that employers, particularly in low-wage industries with considerable scheduling flexibility such as restaurants and retail outlets, will face once ACA is implemented. In particular, the exemption of employers with fewer than 50 employees, the complex, temporary, and relatively modest subsidies available to small employers, and the fact that the penalty for not providing insurance is in many cases less than the cost of providing insurance, all combine to reduce the likelihood of employers’ being willing to offer coverage that was previously not provided, and increase the likelihood that employers will drop coverage. This view is also supported by the results of several surveys of employers (see Ibid at note 49), and numerous anecdotal accounts in the media of employers considering reducing or dropping the availability of health insurance for employees (see Ibid at note 50).

[lviii] The Budget and Economic Outlook: Fiscal Years 2013 to 2023, p. 60, Table A-2, Congressional Budget Office, February 2013, available at: http://www.cbo.gov/sites/default/files/cbofiles/attachments/43907-BudgetOutlook.pdf

[lix] Author’s calculation, based on Rhode Island’s population comprising 0.341% of the U.S. population. Source: http://quickfacts.census.gov/qfd/states/44000.html. Numbers have been rounded to the nearest 1,000.

[lx] See Alex NussbaumAetna CEO Sees Obama Health Law Doubling Some Premiums,” Bloomberg, Dec 13, 2012, available at http://www.bloomberg.com/news/2012-12-12/aetna-ceo-sees-obama-health-law-doubling-some-premiums.html; see also Jonathan Block, ‘Young Americans Could Experience Shock When Exchanges Go Live,’ AISHealth.com, December 7, 2012, available at: http://aishealth.com/blog/health-reform/young-americans-could-experience-shock-when-exchanges-go-live; see also Miles Miller, ‘Obamacare architect: Expect steep increase in health care premiums,’ Daily Caller, February 11, 2012, available at
http://dailycaller.com/2012/02/11/obamacare-architect-expect-steep-increase-in-health-care-premiums/#ixzz2KoXv8dfh

[lxi] These are conservative estimates based on adding the total number of ‘Undocumented Immigrants’ persons to .5 of both the high and low estimates for the “Young Invincibles,” “Self Employed,” “Exempt – Medicaid,” “Exempt – 400%+ FPL” and taking the low end of the “At Risk” estimate.

Will Rhode Islanders Purchase Insurance Under Obamacare?

June 10, 2013

Download: PDF version of this report

Read the Part-3 report, Moving Forward with Healthcare in RI

Summary

There will be a broad financial disincentive in Rhode Island for a significant number of individuals and families to obtain private health insurance coverage under the President’s Affordable Care Act. As a result, Rhode Island should be prepared to see enrollment through the Rhode Island Health Benefits Exchange that is significantly below current expectations.

Based on proposed insurance rates in the Ocean State, and given the individual mandate penalties specified in the national law, for most income and age categories earning more than 200% of the federal poverty level for individuals, and 250% for families and couples, there are often substantial pocket-book reasons not to purchase insurance, even when subsidized via the state’s pending health benefits exchange.

This perverse economic incentive runs contrary to the stated goal of Obamacare to significantly decrease the number of uninsured Americans and will likely leave tens of thousands of Ocean State residents without adequate insurance coverage. This financial disincentive could also lead some people actually to drop insurance altogether, resulting in an increased number of uninsured as well as a rise in uncompensated hospital and emergency room costs.

At Issue

On October 1, 2013, Rhode Island’s health benefits exchange will open to the public, allowing residents to purchase health insurance that becomes effective January 1, 2014. The purpose of the exchanges, and the federal Patient Protection and Affordable Care Act (PPACA) that created them, is to expand health insurance coverage and substantially decrease the number of uninsured.

For many Rhode Islanders the premiums for insurance will be capped under PPACA and the federal government will pay the premiums in excess of the capped amount. Subsidized coverage will be available to those between 100 and 400% of the federal poverty level (FPL) who do not have access to “affordable” coverage through work.

The subsidies are supposed to work in tandem with the so-called “individual mandate,” which requires most citizens to obtain health insurance or pay a tax as a penalty. By offering subsides to low- and moderate-income individuals and families while imposing a penalty for failure to buy insurance, PPACA is essentially trying a “carrot and stick” strategy to expanding coverage.

Key to the success of this strategy will be how individuals and families perceive the pocketbook tradeoffs between obtaining coverage or paying a tax. The question boils down to: Will the stick be large enough and swung hard enough to get most people to buy the carrot? This healthcare brief attempts to provide insights into the economic incentives that may serve as the basis for the answer to that question.

The Data

The following table depicts the financial tradeoff between the expected after-subsidy out-of-pocket cost of obtaining insurance through the exchange and the cost of not purchasing insurance and instead paying the tax. Positive numbers (in green bold) indicate that, from a strictly financial perspective, individuals and families can save money by paying the tax penalty rather than purchasing insurance. Negative numbers (in blue italics) indicate that it would be less expensive to purchase insurance than pay the tax.[1]

Healthcare Premiums vs. Individual Mandate Penalty Tax in RI

Proposed insurance rates in RI will generally increase by 18% over last year, with younger individuals seeing increases of up to 50% in their premiums while older persons see lower premiums as a result of the implementation of the Affordable Care Act’s requirements and the operation of the exchange.

Discussion

As the table demonstrates, at most income levels and ages the financial incentive is to avoid purchasing insurance and to instead pay the penalty. This suggests that the Rhode Island Health Benefits Exchange may have substantial difficulty in attracting a significant number of customers.

That said, the age groups and income levels for which the incentive is to purchase insurance (or at least the disincentive is not large), the young and those with low incomes, are the populations most likely to be uninsured.[3] Many of these are likely to be eligible for Medicaid, however, reducing the number that might decide to purchase insurance through the Exchange.

Additionally, the table only looks at the financial incentives and does not consider two other factors that might lead an individual or family to purchase health insurance despite these incentives. In the first instance, Rhode Islanders who tend to be risk-averse and concerned about the possible need to pay for expensive and unexpected health care needs might overlook the pure financial incentives and obtain insurance. In the second instance, Rhode Islanders who already have substantial health needs such as diabetics, heart disease sufferers, or other chronically ill persons will generally find it to their financial advantage to buy insurance because the after-tax savings for not buying insurance are still less than their out-of-pocket costs for needed care.

Unfortunately, if individuals with greater health needs than average are more inclined to purchase insurance, it will lead to adverse selection in the health insurance market and set off a “death spiral” causing premiums for non-subsidized (and some subsidized) individuals to rise, leading even more individuals and families to drop coverage, until only those with extremely high medical bills are left paying extremely high premiums.[4]

Another factor not included in the financial analysis is the impact that social expectations might have. It is possible that even though it may not be seen to make financial sense to purchase insurance through the exchange, the fact that there is a penalty for not doing so will lead some to decide that purchasing insurance is the responsible thing to do, and that not purchasing insurance is an act of poor citizenship.

On the negative side, the disincentive to purchase insurance may be even greater in many people’s view because of the nature of the insurance. The Blue Solutions for HSA Direct 5000 plan, which is the plan used here for most of the analysis, features a $5,000 deductible for an individual and $10,000 for a family.

The least expensive Silver plan, Blue Solutions for HSA 2600, features a $2,600 deductible for an individual and $5,200 for a family, and costs nearly 30 percent more than the Blue Solutions for HSA Direct 5000 policy.

This means individuals and families considering whether to purchase insurance or pay the tax will also be looking at the benefits they might get from being insured. In the case of a family of four with two adults age 34 earning $82,425 (350% of FPL), they would not only consider whether it’s worthwhile to spend about $3,000 more on insurance than they would pay in taxes for being uninsured but also recognize that they would still need to pay $10,000 out of their own pockets before getting benefits from their policy in the event of a catastrophic illness or injury.

Because very few individuals and families will see medical expenses approaching $13,000 (adding the $3,000 difference between the tax and out-of-pocket premiums to the $10,000 deductible),[5] it is highly likely that many individuals and families will see little value in insurance that is expensive while still exposing them to substantial financial risk, and will choose to remain uninsured, paying for their relatively few medical expenses out-of-pocket and saving a substantial amount of money.

An additional factor to consider is the “moral hazard” created by requiring that insurers accept all applicants at standard rates, with no exclusions or limits on care for pre-existing medical conditions. This effectively tells Rhode Islanders weighing whether to buy costly insurance or pay a relatively modest tax if they choose to remain uninsured that they can delay purchasing insurance and still be able to obtain coverage at a later date to pay future medical expenses in the unlikely event of a catastrophic injury or illness.

This has the potential to further tip the decision towards remaining uninsured, although the limited open-enrollment period may mitigate this impact somewhat (the rate filings by Blue Cross/Blue Shield of Rhode Island indicates an annual open enrollment period between October 15 and December 7).

This “moral hazard” could also manifest itself if many of the currently insured in the individual market as well as some receiving insurance through their employer respond to the incentives embedded in PPACA and the exchange and elect to drop coverage.

Finally, the analysis here uses the tax amounts for 2016, and assumes the tax will be collectable by the IRS. In 2014, the tax for remaining uninsured will be the larger of $95 per person or 1% of taxable income, rising in 2015 to $395 or 2%, making the incentive to remain uninsured for at least these two years substantially more than the table above indicates.

There is also some doubt about the ability of the IRS to actually collect the tax, given that they are prohibited from pursuing civil or criminal charges for nonpayment, and are not able to garnish wages, seize assets, or levy additional penalties or interest for nonpayment. The only mechanism available to the IRS for collecting the tax for being uninsured is to take it out of tax refunds, which can be easily avoided by adjusting how much tax is withheld.

Methodology & Sources

The financial incentives to obtain health insurance coverage (subsidized or unsubsidized) or be uninsured and pay the tax depend on several factors: age and how much an individual or family earns as a percentage of the federal poverty level (FPL) in adjusted gross income; what the Bronze and Silver level premium for their age/family composition would be; what their premium subsidy would be; and what their tax for being uninsured would be. Once this information is known, it is fairly easy to calculate how much any particular individual or family would have to pay to obtain health insurance as well as what their tax would be for being uninsured.

Age levels for the purposes of this analysis were set at 24, 34, 44, 54, and 64 years old. Income levels for this analysis were selected to be 150, 200, 250, 300, 350, 400, 401, 600, and 800 percent of FPL, using 2013 poverty guidelines.[6]

Bronze level premiums were assumed to be the lowest-cost Bronze plan submitted to the Rhode Island Office of Health Insurance Commissioner on April 15, 2013, in this case the Blue Solutions for HSA Direct 5000.[7] The Silver premium cost used was VantageBlue Direct 3000. Premiums for a couple of the same age are calculated to be two times the individual premium, and the family premium assumes two adults of the same age and two children under age 21.

The premium subsidy was determined by subtracting the maximum out-of-pocket amount (as determined by PPACA’s guidelines)[8] from the Silver premium. This amount was then subtracted from the Bronze level premium, with the remainder being what individuals, couples, and families are expected to pay for coverage through the exchange. In some cases, the result was negative, in which case “zero” was substituted for the subsidy.

The premium for the Catastrophic plan was used where it was less than the subsidized Bronze premium for those eligible to purchase it, defined in PPACA as those age 30 and under and those for whom out-of-pocket premium costs would exceed 8% of income.

The tax levied on being uninsured was calculated using the 2016 tax rate, the time at which penalties under PPACA for being uninsured will first be in full force. Income subject to the tax equals income minus the tax filing threshold ($9,750 for an individual in 2012, $19,500 for a married couple) multiplied by 0.025 in 2016, or $695 per uninsured adult and half that amount for each uninsured child, whichever is larger.[9] Individuals and families for whom purchasing insurance would cost more than 8% of income are exempt from the tax if they elect not to purchase insurance.

Once this information was obtained and calculated, a simple analysis was performed subtracting the tax for being uninsured from the out-of-pocket premium. The difference represents the financial incentive or disincentive for purchasing insurance under PPACA.

Conclusion

While advocates of the Rhode Island Health Benefits Exchange are optimistic about its ability to substantially reduce the unacceptably high number of uninsured in the state (along with the Medicaid expansion), there is substantial reason to be concerned that it will not attract large numbers of individuals and families.

As demonstrated here, for many age and income levels, the clear financial incentive is to not buy insurance and instead pay (or possibly avoid altogether) the tax. In some instances this incentive is relatively weak, only several hundred dollars. But for many more the incentive is thousands of dollars in difference between buying insurance or remaining uninsured, and more than $10,000 for many who are older, have children, and are in higher income brackets.

This strongly suggests that public officials and community leaders in Rhode Island should be prepared to see enrollment through the Rhode Island Health Benefits Exchange that is significantly below current expectations, leaving a substantial number of Ocean State residents uninsured.

Future Related Papers

The Rhode Island Center for Freedom & Prosperity will continue to contribute to this important and highly personal public discussion by publishing two related papers in the coming months.

First, identifying and quantifying the groups of people who are likely to remain uninsured after the PPACA takes effect.

Second, to propose free-market public policy solutions, as well as private strategies, that can be pursued to address this shortcoming, without requiring any additional taxpayer funding.

About the Author

Sean Parnell, an adjunct scholar to the RI Center for Freedom & Prosperity, is president of Impact Policy Management (IPM), a Washington, D.C., area full-service public policy firm, and manages political advocacy projects for free market and limited government causes. Before founding IPM he was president of the Center for Competitive Politics (CCP), a nonprofit advocacy organization focused on defending the First Amendment. Prior to joining IPM Parnell was Vice President of External Affairs at the Heartland Institute.

 


[1] Technically the penalty for being uninsured cannot exceed the cost of the national average for a Bronze plan, meaning that in cases where the tax is greater than the Bronze premium (a negative number), the actual difference between the maximum out-of-pocket premium and the tax is close to zero. In order to demonstrate how close or far each income level is from this point, we have kept the originally calculated number.

[2] The table here presents only final findings, based on the data and calculations described in the Methodology and Sources section. The full spreadsheet including all data and formulas used is available to anyone who requests it, please contact info@rifreedom.org

[3] For a more complete discussion of the composition and characteristics of the uninsured in Rhode Island, see Karen Bogen’s Who Are The Uninsured in Rhode Island: Demographic Trends 1990 – 2004, Access to Care, and Health Status for the Under 65 Population prepared for the Rhode Island Department of Human Services in 2006, available at: http://www.dhs.ri.gov/Portals/0/Uploads/Documents/Public/Who%20are%20the%20uninsured.pdf

[4] For a full discussion of the ‘death spiral’ phenomenon, see: Destroying Insurance Markets by Conrad Meier, published by the Council for Affordable Health Insurance and The Heartland Institute, 2005. Full text available at: http://www.cahi.org/cahi_contents/resources/pdf/destroyinginsmrkts05.pdf.

[5] A review of data available from the results of the Medical Expenditure Panel Survey (MEPS) conducted by the Agency for Healthcare Research & Quality shows that in 2010 the median healthcare expense was $875 for persons age 18 – 44 and $2,124 for those age 45 – 64. Mean expenditure for these age groups were $3,230 and $6,429, respectively. MEPS has repeatedly found that medical expenditures are highly concentrated among a small percentage of the population, typically older and Medicare-enrolled. See reports available at: http://www.ahrq.gov/research/data/meps/index.html

[6] 2013 Poverty Guidelines, U.S Department of Health & Human Services, available at: http://aspe.hhs.gov/poverty/13poverty.cfm

[7] BCBSRI Individual Market Submission to Rhode Island Office of Health Insurance Commissioner, p. 93 4/15/2013, available at: http://www.ohic.ri.gov/documents/2013%20Rate%20Review%20Process/2013%20Rate%20Review%20Submissions/1_2013%20BCBSRI%20Individual%20Market%20Submission%2041513%20Final.pdf

[8] Health Reform Subsidy Calculator, Henry J. Kaiser Family Foundation, available at: http://healthreform.kff.org/subsidycalculator.aspx

[9] “Payments of Penalties for Being Uninsured Under the Affordable Care Act,” Congressional Budget Office, September 2012, available at: http://www.cbo.gov/sites/default/files/cbofiles/attachments/09-19-12-Indiv_Mandate_Penalty.pdf

Second-Year Report Card: Lack of Bold Action = Lack of Improvement

Related Links: 2012 Report Card

It isn’t surprising that a year of no bold legislative or executive action to free the Rhode Island economy or education system from its shackles, or to lighten the heavy hand of government, was a year of no significant improvement in the RI Center for Freedom & Prosperity’s annual Report Card on RI Competitiveness.

What changes the Ocean State saw in the report card’s ten major categories came in large part due to changes of the subcategories, a technical change in the Center’s methodology, and tiny shifts that were able to cross a line into a new letter grade.  In 2012, Rhode Island had five grades of F, two of D-, two of D, and one of D+. In 2013, the tally is three of F, four of D-, one of D, and two of D+. (One of the lost Fs was purely a change in the method of ranking states.)

The sheer number of below-average grades does much to explain Rhode Island’s continuing economic decline and population exodus.

“For all the talk last year about the positive legislative steps we supposedly took, the state’s dismal grade point average has barely moved”, said the Center’s CEO, Mike Stenhouse. “We’ve all seen the depressing headlines, but when compiled into a single report, the report card shows how poor public policy is strangling economic opportunities for families in our state.”

The report card organizes 53 national rankings into the following major categories:

  • Tax Burden (D-)
  • Business Climate (F)
  • Spending & Debt (D-)
  • Employment & Income (D-)
  • K-12 Education (D+)
  • Energy (D+)
  • Infrastructure (F)
  • Public Sector (D)
  • Health Care (D-)
  • Living & Retiring in RI (F)

Whether the decision is thoroughly researched or simply based on impressions, these are the categories on which the Ocean State is judged when businesses and individuals make important decisions about their lives and their economic well-being. Having the information all in one place may be discouraging, but it gives those with a vested interest in the health of the State of Rhode Island clear guidelines for what problems must be addressed.

Center Estimates Waste & Fraud in Rhode Island be as High as $185 Million

The release by the Chafee Administration of a redacted report on waste and fraud in Rhode Island’s human services programs failed to provide the total taxpayer dollars discovered by Ken Block’s Simpatico software firm that were spent on illegal or other inappropriate activity; instead the report was limited to examples of impropriety and generalities of findings within the state’s Medicaid and food-stamp program.

Based on a brief analysis of related national findings and anticipated state budgets, the RI Center for Freedom & Prosperity estimates that up to $185 million dollars may be currently wasted in the Ocean State. With planned Medicaid expansion, this total could approach a whopping $221 million in future years, almost three times the amount of the 38-Studios debacle … every year.

The biggest portion of the fraud likely comes from Medicaid abuse. Common estimates of such waste and fraud nationally assume that 10% of related spending applies. In our updated report on the Zero.Zero sales tax initiative, the RI Center for Freedom & Prosperity referred to a U.S. House of Representatives Committee on Oversight and Government Reform document that uses that number.

Estimates from the federal Department of Health and Human Services, however, put current “improper payments” at 7.1%, with 6.4% as the target.

The governor’s budget document for fiscal year 2014 revises the current estimate of what the state will spend this year on “medical assistance” (i.e., Medicaid) to $1.616 billion, going up to $1.743 billion next year. Using the 2013 estimate puts the range for waste, fraud, and abuse for Medicaid alone at between $114.7 million and $161.6 million.

The other large portion of wasteful government spending in the report pertains to the food stamp program – also known as the “Supplemental Nutrition Assistance Program” (SNAP) – which uses electronic benefit transfer (EBT) cards to distribute the funds.

As predicted by a post in The Ocean State Current prior to the report’s release by the Chafee administration, and based on report on government waste that U.S. Senator Tom Coburn (R, OK) published in October, dead people in Rhode Island often receive food-stamp benefits.

Coburn’s report actually provides a low-end, for our purposes, estimating around 3% in “improper payments” nationwide. The more official number from the Department of Agriculture is 3.8%, however the Associated Press reported that Rhode Island’s “error rate” for the food stamp program in 2012 was 7.69%.

Governor Chafee’s revised expenditure for SNAP in 2013 is $298.2 million, recommended to hold steady through 2014. That puts the range for food stamp waste, fraud, and abuse between $11.3 million and $22.9 million.

In summary, our Center estimates that the total amount of criminal and abusive activity in Rhode Island’s current human services programs is in the range of $126 million to $184.5 million.

However the story does not end with today’s figures. With the Governor, Lieutenant Governor, and the Secretary of Health and Human Services opting to support expansion of Medicaid, as provided under the Affordable Care Act, the RI Center for Freedom & Prosperity expects that an additional $36.5 million of taxpayer money will be abused as part of the anticipated $365 million in new Medicaid spending in future years.

This could bring the total amount of waste and fraud up to $221 million per year.

Projo Omits the Real Story of Health Benefit Exchanges

The Providence Journal’s article checking in on the progress of Rhode Island’s ObamaCare health benefits exchange ignores the major policy questions and potential objections that have made the exchanges a subject of controversy across the country.  With the exchange’s executive director, Christine Ferguson, as its only source, the article is little more than a preview press release for an expensive government service that is of dubious origin, questionable promise, and dangerous potential.

Here is a mere sampling of the conspicuous omissions:

  • The article ignores the controversy of more states’ refusing to set up exchanges than agreeing to do so. Oklahoma is leading the way in a lawsuit challenging the authority of the Internal Revenue Service (IRS) to impose a fee on medium-sized and large employers that do not offer healthcare benefits in states that will have federally run exchanges.
  • The article glosses over the distortion of the employment market caused by the employer mandate. With the threshold of 50 full-time employees before businesses are required by the law to offer healthcare benefits or pay the IRS penalty, the law is creating perverse incentives that are leading employers nationwide to limit workers to part-time status and potentially not to hire them at all.
  • The costs of the exchange and the Medicaid expansion to the state are not mentioned. The initiation of ObamaCare in Rhode Island looks like a windfall of federal dollars for the state, but within a few years, the additional local costs will add strain to the state’s annual struggle to balance its budget. With data from the Kaiser Family Foundation, the RI Center for Freedom & Prospeity estimates that the cost of the Medicaid expansion to Rhode Island taxpayers will be approximately $50 million per year.  When it comes to paying for the exchange itself, Rhode Island may follow Massachusetts’ strategy of charging a 3% fee on top of premiums.
  • The planned expansion of the exchange as a “unified infrastructure” is nowhere to be found. The officials behind Rhode Island’s health benefits exchange are also planning to integrate it with other state subsidies and services, such as welfare and food stamps. The Center has dubbed this strategy a “dependency portal,” because it would potentially create an automatic “on ramp” to dependence on government handouts.
  • The article also ignores the interests on the exchange’s board. In populating the governing board of the exchange, Governor Lincoln Chafee paved the way for expansion of services supplied through the exchange, without appointing any board members who might act as a counterweight to the special interests around the table.

Rhode Islanders deserve a government that treads cautiously when dabbling in such costly and radical changes to the critical services of the health care marketplace.  And they definitely deserve a state-level press corps that exposes government inadequacies and the risks and costs that it incurs.

R.I. Creating an Expressway to Dependency

The Issue. Rhode Island is leading the nation in the advancement of a larger entitlement culture via its planned expansion of social services through a health benefits exchange, a component of the controversial federal healthcare law. When collecting detailed personal financial and household information from individuals seeking health insurance support, the state intends to proactively enroll participants in other state programs for which they are eligible. Will this create and expanded culture of dependency?

Statement from CEO, Mike Stenhouse. “This is an extreme case of misguided public policy. The expansion of government and special interest control over our personal healthcare decisions, along with the culture of dependency being freely advocated by this administration, should be viewed as an assault on our deeply held American value of self-reliance.

“Imagine turning to the RI health benefits portal because your employer cancelled your insurance and finding yourself on a government-created expressway to a life of dependency. Wouldn’t we all be better off, instead, if the state encouraged residents to become independent, productive members of society?”

Related LinksMike Stenhouse discusses the ‘Dependency Portal’ on the Helen Glover radio show … click hereDependency Portal Pieces in Place;

What the Center is calling a “dependency portal.”  The dependency portal is a not-so-hidden goal of Rhode Island’s version of the health benefits exchanges described in the Patient Protection and Affordable Care Act (PPACA, commonly known as ObamaCare).

Although the final design has not been developed in specific detail, the idea of the exchanges is to enable healthcare consumers to use a government Web site to review their available options for insurance and to determine their eligibility for public subsidies.  Most likely, a series of Web-based forms will ask the user for a variety of highly personal information regarding health, income, and family circumstances in order to determine what health plans and public assistance amounts he or she is eligible for.

Whether such information will be requested of all residents who seek to use the site or only of those explicitly seeking subsidies remains an open question.

The exchange will become a dependency portal when other forms of public assistance — from food stamps to cash-payment welfare to child-care subsidies — are integrated into the system and promoted to the exchange user based on information that he or she provides while seeking health coverage — perhaps automatically enrolling people with the merest expression of consent.

At a recent press conference, Rhode Island Health and Human Services Secretary Steven Costantino referred to this “hidden element” of the exchanges as “one-stop shopping.”

Why is that bad? As a free market think tank, the Center is certainly not opposed to practices that encourage efficiency and the use of technology to improve the access that customers and clients have to services. Information technology, in particular, has empowered individuals to accomplish easily and inexpensively tasks that once required expert consultants.

From a business perspective, the Internet and the proliferating technologies that use it, now including smartphones and tablets, smooth the path from a potential customer’s initial interest all the way to final purchase.  Technology enhances businesses’ ability to market and sell their products and services, and they seek to accomplish those ends in order to grow their revenue and expand their market share.

That model is not appropriate to government in dispensing taxpayer-funded services.

In the private sector, bundling of services has become commonplace, and it is easy to understand why companies would pursue the strategy.  Think of the merging technologies of television, Internet, and telephone; it makes sense for a company with an advantage in, say, television, to use various marketing techniques, such as reduced-price packages, cross advertising, and one-stop shopping, to gain an edge in other markets.

However, the public clearly has a sense that these methods can go too far.  Indeed, at the turn of the millennium, the federal government sued Microsoft on the grounds that it was hindering competition by using its operating system dominance (with Windows) to gain an insurmountable advantage in the Web browser market (with Internet Explorer).

In the case of government, all of the same incentives exist for the organization to expand its reach.  The difference is that government has three inherent competitive advantages:

  1. In its ability to simply confiscate money to pay for, or at least subsidize, its services
  2. In the fact that the people whom it entices to its services are not paying their full cost
  3. In its control of the marketplace by means of regulation

Over time, government programs are therefore less and less “public services” that taxpayers agree to support through the people whom they elect and more and more bureaucratic offerings that use the enrollment of some citizens as justification for claiming more authority and confiscating more money from others.

One can see evidence of this intention in the process by which Rhode Island’s exchange was initiated.  In the face of (to be mild) public uncertainty about the PPACA, the Democrat president and Congress pushed it through.  It creates financial incentive for states to build the exchanges (by making taxpayers from other states pay for it), and it hands an astonishing amount of policy discretion to the unelected Secretary of Health and Human Services.

In Rhode Island, Governor Lincoln Chafee broke with common understanding of separation of powers in order to create the exchange by means of executive order, committing the state to pay for the site’s maintenance once it is operational.  Similarly, the state executive branch has simply determined to agree to a related Medicaid waiver, expanding free healthcare services in the state and adding to its expenses.  No legislative input; no public hearings; in short, no public statement of agreement with the programs being developed in the people’s name.

As the government exchanges claim increasing shares of the market nationally, unelected state and federal officers will be authorized to determine everything from minimum benefits to price controls to payment schedules.  The board that Governor Chafee appointed to initiate the exchange illustrates that special interests will have an outsized role, as well.

With the addition of other welfare programs to the mix, it will be even more difficult for the people of the state to change course.

What it means for you. Losing control of activities done in the public’s name may not be the most dire consequence of the dependency portal approach.  Rather, the fatal part of the trap is the fast lane to a culture of universal reliance on government and a pervasive sense of entitlement.

Whenever the topic of welfare arises, conversation turns toward those who “know how to work the system” and thus become the fabled “welfare queens.”  For them, incentives toward good behavior have been reduced or reversed, and democracy has devolved into an exchange of political power for handouts.

The real danger of the dependency portal is that it sets up a chute so that previously self-reliant Rhode Islanders will increasingly fall into an entitlement existence.  Why else would the exchanges offer health care subsidies to a family of four with income of $92,200?

Just as technology has simplified tasks that once required expert consultants, the dependency portal will make “working the system” a simple matter of clicking a few buttons.

Tracing the progress of the portal in Rhode Island. RI Health & Human Services Secretary Steven Costantino, Health Benefits Exchange Director Christine Ferguson, and Lt. Governor Elizabeth Roberts describe Rhode Island’s nation-leading steps toward the dependency portal (June 28, 2012):

 

Elaboration on why Rhode Island and the United States should resist the pull toward dependency portals:

RI Center for Freedom & Prosperity first identifies the dependency-portal dynamic as one reason to reject the health benefit exchange and the Medicaid expansion:

The pieces needed to turn the exchange into a dependency portal are being put into place:

RI officials acknowledge intention to implement Medicaid expansion, without any indication of legislative or public input:

Documents related to the dependency portal begin to reveal the direct connection between those pushing the concept and those involved with Rhode Island’s health benefits exchange:

The dependency portal in concert with eliminated work requirements for welfare may mark the return of the “welfare queen” and a “majority coalition” for big-government activists:

Documents. The federal government and national non-profits describe the dependency portal and the related “express lane eligibility”:

Why RI Should Opt Out of Exchanges and Medicaid Expansion

Quick Links: download a printable PDF of this brief here;   go to our Healthcare home page here ; read our policy brief about a Healthcare Freedom Act here;   

News Coverage: GoLocalProv article – good discussion in the comments section

High Cost of State Implementation

The federal government’s healthcare law — the Patient Protection and Affordable Care Act (PPACA) — if fully implemented in Rhode Island, will impose a high cost for the Ocean State in terms of budgets, jobs, dependency, and privacy. In upholding the law as constitutional, the Supreme Court alleviated one very narrow area of uncertainty but did nothing to repair problems with the policy.

Rhode Island will experience multiple negative ramifications if a state-based exchange and the Medicaid expansion options are put into practice, including:

  • Unfunded budget costs that Rhode Island does not have the capacity to absorb
  • Job-killing employer mandates and penalties that would otherwise be avoided
  • Increased dependency on government for health care and other services
  • Government intrusion on privacy in the highly personal areas of healthcare and family finances

Despite its lofty claims, PPACA will not lower health care and insurance costs and will do nothing to increase the supply of quality healthcare services in our state. The law will also lead to new federal and state taxes and cost the economy even more jobs.

State officials are already envisioning the exchange as what might be termed a dependency portal. Using information that residents enter for the purpose of determining health program eligibility, the exchange will alert users to a menu of other benefits for which they qualify, expanding Rhode Island’s public welfare system to an unknowable degree.

Policy Recommendation

The RI Center for Freedom & Prosperity recommends that the state of Rhode Island halt its headlong lunge into expensive and intrusive policy changes concocted in Washington, D.C., and join with other states that have taken a more skeptical view of the promises of the poorly vetted health care reform.

  1. Repeal the executive order creating RI’s health benefit exchange and replace it with patient-centered, market-based reforms, as described in the Center’s Healthcare Freedom Act policy brief.
  2. Opt out of the Medicaid expansion program, declining partial federal funding that would increase dependency on publicly financed health care and lead to increased budget deficits.

The Health Care End Game

Within two hours of the Supreme Court’s determination that the Patient Protection and Affordable Care Act (PPACA) is constitutional, three Rhode Island public officials held a related press conference. Lieutenant Governor Elizabeth Roberts has made health care a focus of her time in office; Secretary Steven Costantino heads the Executive Office of Health & Human Services; and Christine Ferguson is the newly appointed director of the Rhode Island Health Benefits Exchange.

During the conference, the trio promoted the inchoate exchange as more than a Web site for comparing products. Rather, they described what small-government advocates might see as a dependency portal. Based on information that users provide in order to determine eligibility for health premium subsidies, the site would also offer other forms of public assistance and subsidies that they could claim.

The prudence of government’s promoting its services as if they were private-sector products is a matter of legitimate debate. But the idea of a dependency portal does highlight one critical fact: The exchange, and PPACA generally, will expand the size, cost, and scope of state government.

Compounding Government Costs

Much has been made of the federal government’s 100% coverage of direct expenses for expanding Medicaid under PPACA. All childless, able-bodied residents with household income below 133% of the federal poverty level (i.e., individuals below $14,856 in 2012) will for the first time be eligible for health care through Medicaid.

Under the assumption that the state and federal governments will be somewhat aggressive in promoting enrollment, the Kaiser Family Foundation estimates that these new Medicaid recipients in Rhode Island will cost an additional $1.8 billion from 2014 to 2019, or about $301 million per year. However, costs will not be evenly distributed across those years, with increasing participation as time goes on. In 2019, the total cost for these newly eligible Medicaid recipients will be approximately $414.0 million.

The federal aid covering the Medicaid expansion will have phased down from 100% in 2014 to 90% in 2020. Therefore, in the unlikely event that total Medicaid spending does not increase from 2019 to 2020, the annual cost to Rhode Island taxpayers that year will be about $41.4 million. (The RI Center for Freedom & Prosperity inferred this annual total using the ratio of total state and federal spending in 2019 to total state and federal spending for 2014-2019, as provided in Table 4 on page 38 of the Kaiser report.)

But that total doesn’t account for the “woodwork” effect, which suggests that people who are currently eligible for Medicaid but have not applied will do so as implementation of the reform draws attention to the program. In Rhode Island, this population includes:

  • All children under 19 and pregnant women in house-holds at 250% of the poverty level, as well as all parents with children under 18 and household income below 175% of the poverty level.
  • Seniors (over 65) and disabled adults who qualify for Supplemental Security Income (SSI) or have income below the federal poverty level and have limited resources.

The federal government will assist with this new spending at its standard rate, which Kaiser estimates at 53-1/8% for Rhode Island over the six years, leaving the state to cover $30 million of the $64 million tab. (Note that the latest RI Executive Office of Health and Human Services Annual Medicaid Expenditure Report puts the federal contribution “typically” at 52.47%.)

Again, this spending will not be evenly distributed by year. With the same assumptions for 2020 as above, the annual cost to the state at the end of the examined period will be $6.9 million. In total, therefore, the Medicaid expansion portion of PPACA will represent new annual service costs to the Rhode Island taxpayer in the neighborhood of $48.3 million.

A third cost component that must be added to the total is administration. A 2010 Heritage Foundation study found that “administrative expenses add an average of 5.5 percent in addition to total (federal and state) benefit costs, and that, on average, the federal government pays 55 percent of total administrative costs.”

Taking all of these factors into account, the push for expanded enrollment will result in around $452.3 million in annual Medicaid spending. Of that, the State of Rhode Island will be responsible for $58.9 million in 2020. At that time, about one in four Rhode Islanders will be directly dependent on the Medi-caid program for health care.

The good news, from the Supreme Court’s ruling, is that states cannot be forced to participate in the expansion through the threatened loss of all federal Medicaid assistance.

Exchanges: More Costs

Where Medicaid leaves off, at 133% of the federal poverty level, subsidized premiums through the health care exchange will pick up, providing public money to families up to 400% of the poverty level. That’s $92,200 for a family of four, in 2012. The subsidies will come via advance federal tax credits, but there are five major cost factors of concern at the state level.

First, federal assistance toward start-up and operation expenditures for exchanges will end after 2014. Stan Dorn, of the Urban Institute, notes that states will thereafter have to come up with some reliable funding source — perhaps “surcharging insurance premiums; assessing health plans, employers, or individuals; appropriating state General Fund dollars; or otherwise.”

In Massachusetts, as part of its recent state-based health care reform, the exchange charges participating insurers a fee equivalent to 3% of premiums. Writes Dorn, “The insurers then pass on this cost to purchasers of coverage.”

Second, Rhode Island taxpayers will have to subsidize costs, through the exchange, associated with benefits that the state requires plans to offer beyond federally designated “essential benefits.” According to the RI Center for Freedom & Prosperity, Rhode Island leads the nation in health care mandates.

Third, state-based exchanges will be the mechanism for imposing penalties against “large” businesses (those with 50 or more employees) that either do not offer health benefits or that require employees to share more than a federally designated maximum amount of their cost.

Consider a business with 50 employees who work at least 30 hours per week, but that is unable to provide health care benefits beyond its other compensation. If a single employee acquires a subsidy through a state-based health benefit exchange, the employer will be responsible for $40,000 in annual penalties. For many, that will be substantially higher than the costs of hiring an additional employee.

Fourth, PPACA imposes tighter “community rating” standards on the individual and small group markets, within and outside of exchanges. Broadly speaking, in the “small group” market (employers with 100 or fewer employees), Rhode Island’s already-restrictive statutes forbid insurers from varying their premium costs by more than four times. That is, one family plan covering a spouse and children cannot differ by more than four times another such plan. PPACA reduces the differential to three times and limits family types to “individual” and “family.”

Plainly put, community rating lowers prices for plan members who actuarially should pay higher premiums by increasing them on those who should pay lower premiums.

This relates to the exchanges because, if Rhode Island decides to open its exchange to large groups, then the community rating scheme will apply to all such plans in the state for the first time ever. This rule apparently applies even if no insurers utilize the exchange for this purpose.

Finally, state officials’ vision of an expanded dependency portal will produce an unknowable increase in recipients of food stamps, cash payments, and other forms of public welfare whom the exchanges rope in as a bonus feature. These costs will span multiple layers of government and will be compounded to the extent that they require additional expenses to administer and maintain.

None of these five cost drivers applies if the state does not initiate and maintain a health benefit exchange.*

Danger Cubed: More Regulation, Less Freedom, Lost Privacy

Arguably more substantial than the direct financial costs of the Medicaid expansion and health benefits exchange is the danger created through the new authority that PPACA grants to the state and federal governments.

That danger comes first through dependency. Under the Medicaid expansion, 25% of Rhode Islanders will be direct wards of the state, when it comes to health care. Under the state exchange, up to 57% of Rhode Islanders will be eligible for health care handouts. And the expanded menu of the dependency portal will deepen families’ reliance on the state.

The danger comes second through a new ease of regulation. As health benefit exchanges absorb a greater percentage of the industry, local and national bureaucrats will be able to introduce new mandates and requirements not as legislation passed by duly elected members of the General Assembly or Congress, but simply as new requirements in order for plans to qualify for the exchange. Alternatives will be increasingly diffi-cult to procure, and costs will be forced upwards.

The danger comes third through the loss of privacy and financial intrusion. In order to qualify for Medicaid coverage and health care subsidies, Rhode Islanders will regularly have to inform the state about minute details of their lives. Indeed, it is likely that even families that receive no assistance at all will be faced with the same standardized application process.

In this way, two of the most intimate aspects of a person’s life — finances and health — will be collected through a single agency in a single location for the great majority of Rhode Islanders.

Conclusion

For all of this expense and intrusion, the state will not likely experience any reduction in the overall cost of health care, and Rhode Islanders will likely see the quality and availability of the care that they receive worsening. A Beacon Hill Institute study of Massachusetts’ health care reform, after which much of PPACA was modeled, found cost increases across the board — in and out of government, in an out of public assistance programs, and across tiers of government.

The reason, according to the researchers, was that the reform increased the demand for health care services without increasing the supply. The most alarming manifestation of this dynamic appeared in the state’s emergency rooms.

Across the country, there has been a noticeable decline in enthusiasm for exchanges among states that had begun work on them shortly after PPACA passed Congress. North Dakota, New Hampshire, Idaho, and South Carolina are among the states resisting the federal timetable to implement these insurance “marketplaces.” Kaiser Health News reports that, by the end of June, “only 14 states and the District of Columbia have so far passed legislation authorizing the exchanges.”

At Rhode Island Lt. Governor Roberts’s June 28 press conference, the three public officials made the familiar point that the availability of preventative, regular care might reduce the utilization of more-expensive emergency services. To the contrary, with wait times likely to increase for family physicians, and with greater portions of the population accessing subsidies for premiums and other expenses, the savings for which Rhode Islanders are being asked to sacrifice privacy and self-reliance may never materialize.

 

* Whether employer penalties ultimately depend on state-initiated exchanges is likely to be the subject of political dispute and litigation. However, the penalties are triggered by employees’ receipt of premium assistance, and PPACA Sec. 1401, which creates those subsidies, refers to “an Exchange established by the State under 1311.” Sec. 1311 describes state-initiated exchanges, but not federally initiated exchanges. It is Sec. 1321 that empowers the Secretary of Health and Human Services to create a federal exchange for use in a state.