The House plan really is progressive reform

See two notes at the end, where I point to one unfinished part of this analysis and also show how my approach is similar to and different from that of Nate Sliver at 538.

With the possibility that a public option won’t be part of the health care reform legislation passed this year, progressives are looking more closely at the rest of the legislation. And some of them have been worried by what they are seeing. For even when subsidies are applied in the Exchange, moderate income families will pay a substantial amount for health care in both premiums and out of pocket expenditures. Some progressive are asking how we can justify asking moderate income families to pay so much for health care?

But, in fact, the health insurance program that would be created under the House legislation would be highly beneficial to moderate income families. Subsidized insurance under the Exchange would be much cheaper than insurance now received by families through employer based insurance or throught he purchase of an insurance policy in the non-group market today. And while families who purchase insurance through the Exchange would pay more for their health care than those who are uninsured today, they would not only receive much more health care  than the uninsured, they would have the peace of mind of knowing that that, because they have health insurance, they are protected from an economic or medical catastrophe.

I want to demonstrate this by presenting some data for four median income families, one that receives employer based insurance today, one that purchares insurance in the non-groupo marekt, one that would purchase insurance under the exchange, and one that is uninsured today. After looking at these four families, I will say a final word about why we are initially so shocked at the costs of health insurance under the House legislation.

Family 1—Employer Based Health Insurance

The median household income in the United States is now about $52,000. So let’s begin with a family of 3 with that income. In 2009, the average cost of insurance for a family plan is $13,375. On average, employees pay 27% of the cost of family health insurance plans, which comes to $3611 while my best estimate of the out of pocket expenditures for heath for such a family is $2300. So, it would seem initially that the family’s cost of health care is 4900 per year, the cost of the employee share of the premium and the out of pocket expenditurs.

But there is an important complication. Almost all economists, from all sides of the political spectrum, believe that employer contributions for health care are a form of compensation that substitutes for wages. So if we want to know how much this family is spending on health care, we have to consider the wages the family forgoes because it (or more likely, it’s union or employer) has decided to take compensation in the form of health care benefits instead of wages. So we need to add both to the total income and the cost of health care paid by the employee, the employer’s share of the health insurance premium or $9764. But since the employer health insurance is untaxed—which is a main reason that employers and employees seek compensation in health care costs rather than wages–we have to subtract the federal tax amount that would be paid by the employee if he received compensation in the form of wages which at a marginal rate of 22% leave the employer’s share of health insurance premium after tax at $7616.

So the first family’s situation looks like this:

Income                                                 $52,000
Forgone wages due to
employer paid health insurance                 $7,616
Total pre-health care spending income     $59,616

Health care spending
  Employer paid premium (after taxes)          $7,616
  Employee paid premiums                           $3,611
  Out of pocket expenses                             $2,300
  Total                                                       $13,527
Income after health care spending               $46,089    

Family 2—Individual Health Insurance

Now to compare the financial circumstances of a family that purchases health insurance on the individual market, we have to start with a family that has not an income $52,000 but, rather an income of $59,616, that is the income of the first family after we include foregone wages due to employer paid health insurance.

The second problem in determining the situation of this family is that I don’t have a good estimate of the cost of a family insurance plan bought in the individual market that is comparable to the kind of plan bought by the average business. So, I’m going to assume that the costs would be the same although we know that non-group rates tend to be higher, and sometimes substantially higher than that available to businesses. (Or, in many cases, people purchase substantially worse insurance policies that have much higher out of pocket costs.) But because the family cannot take advantage of tax break given to employer sponsored insurance, they pay the whole cost of the premium.

So the second family’s situation looks like this:

Income                                                 $59,616
Total pre-health care spending income    $59,616
Health care spending
  Family paid premiums                            $13,375
  Out of pocket expenses                           $2,300
  Total    $15,627
Income after health care spending             $43,941    

A comparison of family 1 and family 2 clearly shows the benefit of employer sponsored insurance as family 2’s income is lower by $2148.

 Family 3—Subsidized insurance under the House plan

Again, to make a fair comparison, we need to begin with an income of $59,616. Under the House plan, a family purchasing insurance in the Exchange would pay $6248 per year and have $3657 in out of pocket expenses.

So the third family’s situation looks like this:

Total pre-health care spending income    $59,616
Health care spending
        Family paid premiums                      $6,248
        Out of pocket expenses                   $3,657
        Total                                               $9,905
Income after health care spending           $49,711    

Here we see the tremendous benefit of the subsidized insurance that would be available under the House plan. Family 3, with insurance under the House plan, is better off than the family that has employer paid insurance by $3622 and far better off than the family that has to purchase insurance itself in the non-group market by $5770.

Family 4—no health insurance

Again we start with a family with an income of $59,616. But let’s assume that the family cannot purchase health insurance because they all have pre-existing medical conditions.

Now the problem is to figure out what their medical spending is. We know that, on average, the uninsured receive less medical are than the insured. The best estimate I can find is that an uninsured adult on average receives about $1590 in medical care each year and an uninsured adult receives about $915. The question then is how much of this medical care do they pay for as opposed to receive for free. I think it is reasonable to assume that at a family income of $59,616, most families pay for most of the are they receive out of pocket, unless they are one of the unlucky few who have massive medical expenditures, much of which they is uncompensated. To be conservative, I’m going to assume that 90% of the usual medical care received by families at this level of income is paid for out of pocket.

So the situation for this family looks like this:

Income                                                 $59,616
Health care spending
       Family paid premiums    
       Out of pocket expenses                    $3,644
       Total                                                $3,644
Income after health care spending            $55,972

As we would expect a family that does not pay for health insurance and only pays out of pocked medical expenses will have more income after health care spending than those who pay for health insurance.

But is such a family better off? Of course, not.For one thing, the uninsured typically get less health care on average than the insured. The last survey I could find suggested that the uninsured get about 40% less health care. Unless we have reason to believe that the uninsured are better than anyone else at knowing what medical care is useful and what not, we can assume that they are missing out in some care that they need to be comfortable, happy, and to avoid long term medical difficulties.

And, second, the uninsured live with an enormous risk of developing a very serious illness that they won’t be able to treat and from which they will suffer and die. Most of us recognize just how scary that situation is, which is why we are willing to pay substantial sums of money for health insurance.

A final comparison: the PA Single payer plan

I want to make one more comparison. Pennsylvania advocates for single payer claim that they can provide health insurance for all Pennsylvanians with no deductibles and no co-pays with a 3% tax on income and a 10% payroll tax. They claim that the payroll tax would be paid by business, but we know that this claim is false. Like the cost of employee paid health insurance, a payroll tax comes out of wages.

So, if we could actually provide health care for everyone with the single payer plan that would tax income at 13%, what would it cost a Pennsylvanian with a family income of $59,616? It would be $7750, leaving the family with an after income of $51,866. This is, of course, better by a little over $2000 than the result under the House health care plan.

But, we should note that the PA Single Payer plan makes assumptions about the costs of health are that are fanciful. According to one of their organizers, Pedro Rodriguez, Pennsylvanians now pay $100 billion for health care. And, single payer advocates expect that they can cover the million Pennsylvanians who are uninsured while offering totally comprehensive insurance to everyone while only spending $80 billion. How do they do this? By, they say, radically reducing administrative costs.

This whole notion is fantastic. As I’ve argued elsewhere, not only is it doubtful that single payer advocates can eliminate as much in the way of administrative costs as they claim, many of the programs that we all know are needed to reduce unnecessary medical spending, such as doing moare research on the effectiveness of medical spending or encouraging doctors to use best practices, will require more not less administrative spending.

So, let’s assume that a single payer plan would cost the same amount of money to provide much better insurance at the same total cost of providing health care in Pennsylvania today. To raise $100 instead of $80 billion, the tax rate would have to be 16.25%. At that rate, a family of $59,616 would pay $9300 in taxes, and their after health care income would be $50,316, which is just $600  under the House plan. Given all the uncertainties of these estimate—and that it is highly unlikely that we can insure an additional million people Pennsylvania without spending any more money–the difference is no more than a rounding error.

What does this analysis show us?

This analysis shows us four very important things about health care.

Health care is expensive and we all have to pay

First, it shows us something we knew, that health care and health insurance are very expensive. And people are going to have to pay for health insurance if they want it. It would be nice if we could pay for all of it with a tax on the rich. But, while I would like to see much more progressive taxation than we have now—or than is politically feasible— there really are not enough rich people to rely on taxing them to provide health insurance care for all. Everyone is going to have to pay something.

Many progressives look to the advanced welfare states of France, Germany, and Sweden and imagine how much better life would be in the United States if we could adopt their politico-economic system. I share that view. But I would point out that there is a cost to it: everyone, not just the rich, pay higher taxes for a cradle to grave social welfare state. That would be a good thing to achieve some day, but we won’t do it right away.

And so, if you are shocked by how much middle income money people have to pay to secure health insurance under the House plan, recognize that this is simply the price of health insurance everywhere.

The House plan does provide a progressive subsidy for working people and the middle class.

But while everyone has to pay under the House plan, it does provide a substantial subsidy to people just above the median income. (The subsidy for people lower down the income scale is even greater.) Compared to purchasing insurance in the non-group market, families under the House plan, people will save almost $6000 a year. Compared to employer based insurance, they will save almost $4000 a year. And, under the House plan, the new taxes will come from millionaires.

When was the last time we adopted a public policy that provided this kind of help for the middle class in America?

We don’t always see the costs of health insurance

Third, this analysis shows us that many of us who have health insurance don’t see how much it really costs us, because much of our health insurance is paid for by our employers. Even though what our employer pays for our health insurance actually does reduce our income, it doesn’t come directly out of our pockets. So if the premiums and out of pocket expense in the House plan seem high to you, remember that this is because much of what you pay for health insurance is hidden from you.

The real cost of insurance is to collectively protect ourselves from the risk of catastrophe.

Finally we can see that the reason health insurance is so costly is not that most of us spend so much on health care every year but that some of us are unlucky enough to have major health problems and, when that happens, the health care system spends money on us by the bucket full.

We would all be better off if we didn’t have to pay every year to have health insurance that will cover us when we are really sick. But we need that insurance, because the risk of going into debt or bankruptcy when we fall ill or, even worse, not getting the health care we need, is too great.

Health insurance, in other words, really is a sharing of risks and burdens with our fellow citizens. The new regulations under the House bill, and the tax and subsidy program for health insurance in the Exchange is meant to return health insurance to that noble idea.

For all its limitations, and even without a public option, the House plan goes a long way to achieving that goal.

Note 1: the following analysis remains incomplete in one respect: I am using 2009 figures for health insurance costs in my analysis of group and non-group insurance while the figures for costs of insurance under the House plan use numbers provided by HCAN’s analysis of the bills. I believe taht this analysis is based on a project of health insurance costs when the Exchange begin in 2013. But I’m not sure about that. As soon as I find that out, I’ll re-do this analysis with corrected number. Note, however, that inflation adjusted numbers would show that the House bill is even more progressive than I show here.

Note 2: My analysis here is similar to that provided by Nate Silver on the Senate Bill. http://www.fivethirtyeight.com/2009/12/why-progressives-are-batshit-crazy-to.html. But there is one important difference, I compare the House bill to what insurance looks like if you purchase it through an employer based plan today. I do that for two reasons. First,I want to deal with the “sticker shock” that comes with looking at what health insurance costs under the House bill. It looks high because those of us who purchase insurance by contributing to an employer based plan have no idea how much money we pay in foregone wages as well as premiums for our health insurance.

Second, Silver’s analysis is based on the cost of family plan’s in the non-group market. They are far less than the cost of employer based family insurance, for the simple reason that employer based insurance is much better, with lower deductibles and co-pays. Since I have good data on what out of pocket expenses are for an average employer based plan but the out of pocket expense for non-group family plans vary all over the place, looking at employer based insurance gives us a fairer comparison. It also understates how much better the House plan is than purchasing insurance yourself in the non-group market since insurance similar to the average employer-based plan would probably cost thousands of dollars more than what I assume here. I hope to come up with a good estimate of the difference in a revision of this.