How Policies to Expand Insurance Coverage Affect Household Health Care Spending

Abstract

• Issue: The recently passed Inflation Reduction Act extended enhanced tax credits for health insurance premiums first introduced by the American Rescue Plan Act. This legislation could serve as a foundation for additional reforms to further expand coverage and make health care more affordable.
• Goal: Analyze the financial impact for U.S. households of a proposed health reform package that would: 1) fill the Medicaid coverage gap in states that have not expanded Medicaid eligibility; 2) reduce the employer affordability threshold; 3) add a $10 billion reinsurance fund; 4) increase the federal Medicaid matching rate in expansion states; and 5) reduce cost sharing in marketplace plans.
• Methods: Using the Urban Institute’s Health Insurance Policy Simulation Model, we assess changes in household spending on health care, in dollars and as a percentage of income.
• Key Findings and Conclusions: The reforms reduce health spending for targeted households. These reductions would be greatest for households spending the most on health care, both in dollars and as a share of income. Filling the Medicaid coverage gap would lead to substantial savings for low-income households in states that haven’t expanded Medicaid. Households also see significant savings from enhanced cost-sharing subsidies.

Introduction

Enhanced premium tax credits — first introduced under the American Rescue Plan Act and extended by the Inflation Reduction Act (IRA) — substantially reduced marketplace coverage costs and led to a significant increase in enrollment.¹ However, these tax credits leave out many people also needing better access to affordable coverage, particularly those who live in the 12 states that have not expanded Medicaid eligibility as permitted under the Affordable Care Act (ACA). Additional policies are needed to address these gaps and further lower household spending on copayments, deductibles, and other cost sharing.

The impact of health reforms is usually measured by its effects on aggregate costs and coverage, such as the number of uninsured. The distributional impact on household financial burdens is not captured consistently in standard measures, leaving critical benefits of new health policies unknown.

Using a comprehensive measure of household financial burden, we measured the impact of a reform package that builds on IRA tax credits on the distribution of household spending on health care. The proposed reforms we model would:

• Make marketplace premium subsidies available to low-income people in the 12 states that have not expanded Medicaid, which would benefit people with incomes above traditional Medicaid eligibility levels and below 100 percent of the federal poverty level (FPL), and eliminate the employer offer firewall — or the threshold above which employer coverage is deemed unaffordable — for people below 138 percent of FPL.
• Enhance and fund cost-sharing reduction subsidies that reduce copayments, deductibles, and other out-of-pocket payments for people with low incomes.
• Introduce policies to lower the employer coverage firewall to 8.5 percent of income, fund $10 billion in reinsurance nationwide, and increase the federal match rate for Medicaid in nonexpansion states.²

We capture changes in household spending on both premium contributions and expected out-of-pocket spending for health care services because of cost-sharing requirements such as copayments and deductibles. We determine average spending per family member from total household spending so we can look at the distribution of individuals without regard to household size. As health spending is highly skewed — many people spend little while a relative few spend large amounts — we present our results by spending quintiles instead of a simple average to show how reforms would affect those using more health services. Our results are shown both in dollars and as shares of family income to better capture the burden of health care spending on low-income families, who tend to spend a larger share of income on health care costs.

Findings

The Impact of Reforms on Health Coverage

The health reform package would cover 3.7 million more people in 2023 than would be covered under the IRA’s enhanced premium tax credits alone.⁴ Nearly 5.1 million more people would have nongroup coverage, most with tax credits. About 1.6 million people would switch out of employer-sponsored coverage. The two components that would produce the greatest impact on overall coverage are filling the Medicaid eligibility gap in the 12 states that haven’t expanded Medicaid and increasing cost-sharing reduction subsidies.

The Impact of Reforms on Household Spending

Exhibit 1 contrasts the distribution of household health care spending under the baseline (IRA subsidies only) and under the health reform package for the under-65 population with nongroup coverage. We focus only on people with nongroup coverage because the effects of reforms are concentrated in this market (Appendix 3 displays this measure for all nonelderly people, regardless of coverage).

Under the baseline, people in the top quintile of spenders can expect to pay more than $9,000 per year on average on premiums and out-of-pocket cost sharing. We estimate that the health reforms would reduce spending for people in all but the lowest quintile of spenders. This spending reduction is largely the result of savings on out-of-pocket costs for health care services, though spending on premiums would decline in some quintiles as well. People in the middle, fourth, and highest quintile save an average of $256, $583, and $872 respectively under the policy.

In Exhibit 2, we measure spending as a percentage of household income rather than dollars (see Appendix 2 for further discussion of this metric). People in the highest quintile of spending as a percentage of income would see substantial savings in both premiums and out-of-pocket spending under the reforms: those spending 45 percent of income on health care under the baseline would see their costs fall to 25 percent of income under the reforms.⁵ Filling the Medicaid gap would be particularly effective, though the other policies would bring down spending as well.

People in the middle and fourth quintiles also would see small declines in spending under these reforms, with average spending declines of one-half and two percentage points, respectively. The reforms would lead to modest increases in spending as a share of income for people in the lowest and second quintile of spenders. This simply reflects greater access to health care — as the formerly uninsured gain coverage, their health care use and spending increase.

The Impact of Reforms at Different Income Levels

To see how the reforms affect people with different incomes, we examine three groups: under 138 percent of FPL in nonexpansion states, 138 percent to 400 percent of FPL, and above 400 percent of FPL. We focus on the changes to spending among those in the middle, fourth, and highest quintiles of spenders because spending and reform effects are small in the first two quintiles.

People with incomes below 138 percent of FPL in nonexpansion states. Exhibit 3 shows the effects of the health reform package for people in this income group in the 12 states that have not expanded Medicaid under the ACA. We focus only on nonexpansion states because the reform with the greatest effect on this group is the closing of the Medicaid gap.

People in the highest quintile of spenders would save substantially. Gaining access to generous coverage without premiums would lead to considerable savings on out-of-pocket spending and savings on premium costs for people with employer-sponsored insurance or unsubsidized nongroup coverage. Average spending for people in the highest quintile would decline by $3,736 under this policy. People in the middle and fourth quintiles would also save an average of $109 and $451, respectively.

Exhibit 4 expresses the change in spending as a share of household income for the same group. People in the highest quintile of spending to income would see a dramatic decline in spending as a percentage of household income, from 100 percent before the policy reforms down to 11 percent. This large drop is driven by a 36-point decline in premium spending and a 53-point decline in out-of-pocket spending. People in the middle and fourth quintiles would see average total declines of 0.2 and 1 percentage points, respectively, driven mostly by out-of-pocket savings.⁶

While it may be surprising to see the top quintile of health care spenders in this group report spending amounts equal to 100 percent of annual household income, this is not uncommon in very-low-income households.⁷ In the previous exhibit, we saw average spending of about $5,000 per year in the top quintile, and in this exhibit, the average annual household income per person is just under $5,500 in the top quintile.

Some of these households may have misreported their income in the underlying survey, perhaps because of the wording of the questions, or failed to reflect their full financial situation. This could include people with irregular income sources (like child support or withdrawals from retirement or savings accounts); people with premium contributions that are paid for by someone outside the family unit; people omitting in-kind income (for example, in the form of meals or accommodations); and older adults with low income but some liquid assets.

People with incomes between 138 percent and 400 percent of FPL. Enhanced subsidies that reduce cost sharing like copayments and deductibles have the greatest impact on spending for this income group (Exhibit 5). Average spending for people in the highest quintile would decline from $7,262 per person to $6,251 under the reforms.

Enhanced cost-sharing subsidies drive most of these savings by reducing out-of-pocket spending, but lowering the firewall and adding a reinsurance fund also bring down average premium contribution spending modestly. Average spending would decline by $97 and $358 for people in the middle and fourth quintiles, respectively, driven entirely by out-of-pocket savings from the enhanced cost-sharing subsidies.

Exhibit 6 shows the impact of reforms on spending as a percentage of income for the same group. People in the highest quintile would see average spending fall from 33 percent to 25 percent of household income. People in the middle and fourth quintiles would see average spending decline by 1 and 3 percentage points, respectively. As with Exhibit 5, savings are largely driven by lower out-of-pocket spending from the enhanced cost-sharing subsidies, though lowering the firewall and adding a reinsurance fund also bring down premium spending modestly for those in the highest quintile.

People with incomes above 400 percent of FPL. Exhibit 7 shows average spending for those in the middle, fourth, and fifth quintiles of this income group declines by $141, $251, and $516, respectively, under the health reforms. These savings are driven entirely by lower spending on premiums under the final two reforms: adding a reinsurance fund and providing enhanced cost-sharing subsidies. By covering some costs for those with the highest expenditures, the reinsurance fund reduces insurers’ risk, allowing them to lower total premiums. Additionally, the enhanced subsidies would be directly federally funded under the reform package — instead of through indirect federal funding under the baseline — which would eliminate silver loading and reduce marketplace premiums.⁸

The reforms have a relatively limited effect on premium spending in other income groups, because these groups are largely insulated from the direct costs of premiums by the premium tax credit percentage-of-income limits. Many people in this income group have incomes too high to be eligible for tax credits, so these individuals would save money as premiums fall.

Exhibit 8 shows the results as a percentage of income for the same group. People in the middle, fourth, and highest quintiles would see average spending declines of 0.2, 0.7, and 1.5 percentage points, respectively, under the health reforms. As with Exhibit 7, savings are largely driven by lower premium spending from providing (and funding) enhanced cost-sharing subsidies and adding a reinsurance fund.

Discussion

Household financial burdens, an important dimension of health care reforms, are often overlooked in favor of aggregate coverage and cost effects. When financial burdens are examined, models often focus on the average impact across a given population. But given that many policies have large impacts on certain subpopulations and very little impact on others, it’s useful to measure the distributional effects of reforms.

Our analysis shows that the health reform package evaluated here would have the largest impact on the lowest income groups. People with nongroup coverage and incomes below 138 percent of FPL would see larger savings, in both dollar terms and as a share of income, than people in higher income groups.

Further, these policies are well targeted at reducing spending for Americans currently facing the highest spending burdens. In all the populations we evaluated, those in the highest quintile of spenders would see the largest reductions in spending; these savings would be particularly dramatic for the highest quintile of spenders in the lowest income group.

Overall spending changes, however, aren’t huge, since these policies primarily affect the nongroup insurance market. Many more people have employer-sponsored coverage or Medicaid than nongroup coverage, so reforms to the nongroup market will not result in major changes for the whole population.

Closing the Medicaid gap would have substantial effects, expanding coverage and significantly improving affordability. Other reforms would have more limited effects, but these can be significant for the affected groups. For example, providing and funding enhanced cost-sharing subsidies would reduce out-of-pocket expenses considerably for those directly targeted by the policy — people with incomes between 200 percent and 400 percent of FPL. People with incomes above 400 percent of FPL also would save on premiums, which fall because they are no longer silver loaded.