Challenges in Estimating the Number of People With Nongroup Health Insurance Coverage Under Proposals for Refundable Tax Credits

Posted by Susan Yeh Beyer on
December 20, 2016

Some policymakers have expressed interest in developing proposals to replace the current tax-based subsidies for the purchase of private health insurance in the nongroup (or individual) market under the Affordable Care Act (ACA) with refundable tax credits that would be structured differently from those under current law. Many such proposals would also eliminate or reduce the extent of current federal laws regulating the nongroup market, particularly the rules governing health insurance benefits. Two key questions for policymakers in developing such proposals are what type of insurance products would qualify for tax credits and what role states would have in making that determination.

CBO and the staff of the Joint Committee on Taxation (JCT) anticipate that insurers would respond to such legislation by offering new types of insurance products in the nongroup market, which are likely to differ from existing products in their depth and extent of health insurance benefits. If there were no clear definition of what type of insurance product people could use their tax credit to purchase, some of those insurance products would probably not provide enough financial protection against high medical costs to meet the broad definition of coverage that CBO and JCT have typically used in the past—that is, a comprehensive major medical policy that, at a minimum, covers high-cost medical events and various services, including those provided by physicians and hospitals. (For a discussion about how CBO defines health insurance coverage, see CBO’s blog post on how CBO defines and estimates coverage.)

If there were no clear definition of what type of insurance product people could use their tax credit to purchase, everyone who received the tax credit would have access to some limited set of health care services, at a minimum, but not everyone would have insurance coverage that offered financial protection against a high-cost or catastrophic medical event; CBO and JCT would not count those people with limited health benefits as having coverage. One could thus assess the effects of such proposals on insurance coverage in two different ways—how many people would obtain any type of insurance policy using the tax credit and how many people would obtain an insurance policy that meets the broad definition of coverage described above. If policymakers expressed interest in knowing the number of people who, under those proposals, would purchase private insurance in the nongroup market that met a broad definition of coverage, CBO and JCT would estimate separately the number of people who would receive the tax credits and the number of people who would obtain such coverage. In this blog post, we describe the challenges CBO and JCT would face in estimating the number of people who would purchase coverage in the nongroup market, and the scope of that coverage, under such proposals. (Similar challenges could arise in the group market if tax credits were extended to people with employment-based coverage. However, that discussion is beyond the scope of this blog.) For context, we first provide some background about private insurance and summarize how the nongroup market is regulated under current law, including the changes that were made by the ACA. (For additional information about that market, see CBO’s report about private health insurance premiums.)

What Features of Private Insurance Determine the Share of Medical Costs It Covers?

The amount of financial protection against medical costs that private insurance covers can be described in terms of the depth and extent of coverage. (Another dimension by which private insurance coverage can vary is the size of the provider network. However, that discussion is beyond the scope of this blog post.)

The depth of coverage can be measured by examining the cost-sharing structure and any maximum benefits or limits that apply. The cost-sharing structure is the amount of out-of-pocket costs—typically in the form of deductibles, coinsurance, and copayments—that a person is required to pay when using medical services. Those out-of-pocket costs may be subject to a maximum limit (in a given year or over a lifetime) beyond which the insurer covers most or all remaining medical costs. Another limit may apply to the maximum dollar amount of medical costs that an insurer will pay for. When benefits reach their maximum allowed by the plan, the person is responsible for all remaining medical costs. In general, plans have only one of those two limits (or none at all).

The actuarial value of a health insurance plan is a summary measure of the depth of coverage for a given set of health care benefits. More specifically, the actuarial value measures the percentage of medical costs that an insurer would pay if it covered people with average health expenditures. For example, a plan with an actuarial value of 70 percent would, on average, pay 70 percent of the expected medical costs on covered benefits for a person with average health risks and patterns of use.

The extent of coverage can be measured by examining the scope of benefits—that is, the services and the types of providers whose services are covered by a health plan. Covered benefits for most plans include physicians’ and hospitals’ services and often laboratory services, radiology services, and prescription drugs. More extensive plans cover a broader range of services, such as behavioral health and substance abuse treatment and rehabilitative therapy. Less extensive plans limit the range of services covered and might exclude maternity benefits and prescription drugs.

How Is the Nongroup Market Regulated Under Current Law?

States have traditionally been responsible for regulating health insurance benefits in the nongroup market. Before enactment of the ACA, nongroup market regulations varied widely across states. In 2014, however, many federal regulations that governed the benefits that new policies sold in the nongroup market must provide went into effect as part of the ACA. The depth and extent of coverage in the nongroup market were standardized to a large degree under the ACA, which established a set of “essential health benefits” and a minimum actuarial value for insurance plans (along with a definition of that measure). In addition, plans sold in the nongroup market were no longer allowed to set maximum annual or lifetime limits on covered medical costs for the essential health benefits. The states’ role in defining the depth and extent of coverage in the nongroup market was, thus, substantially reduced after 2014.

The ACA also established several regulations that limit insurers’ ability to deny coverage to people with high expected medical costs. Three regulations, in particular, apply to such people: modified community rating rules, guaranteed issue, and requiring coverage of preexisting conditions. Modified community rating rules prohibit insurers from engaging in medical underwriting (pricing premiums on the basis of a person’s health) and limit the degree to which premiums are allowed to vary by age. Under guaranteed issue, insurers are required to sell coverage to a person regardless of his or her health. The prohibition on excluding coverage of preexisting conditions requires nongroup insurers to cover the treatment of those conditions.

What Are Some Alternative Proposals to the Current Tax-Based Subsidies to Purchase Private Insurance in the Nongroup Market?

Currently, tax credits for nongroup policies sold through the ACA marketplaces vary in relation to the premium of the second-lowest-cost “silver” plan in a market that offers the policies and in relation to certain characteristics of enrollees, including family size, income, age, and tobacco use. To qualify for tax credits under current law, a person must purchase a plan offered through a health insurance marketplace that covers 10 categories of benefits defined as essential and meets a minimum actuarial value, among other features. In addition, cost-sharing subsidies reduce the cost-sharing amounts for low-income people who select a silver plan.

Some policymakers want to replace the current tax-based subsidies to purchase private insurance in the nongroup market with alternative proposals. Under some proposals, refundable tax credits would generally be based on a fixed dollar amount and might vary by age or family size. The amount of such credits often does not depend on an enrollee’s income or a plan’s premium. A key question for federal policymakers is what types of insurance products would qualify for the tax credits. Often, such proposals would allow states to regulate the nongroup market. In that case, regulation of the nongroup market would probably vary widely from state to state. Without a federal standard, some states might not impose any regulations that would govern the depth and extent of coverage and that would define what insurance products qualify for tax credits.

What Are the Challenges of Estimating the Number of People With Nongroup Coverage Under an Alternative Refundable Tax Credit Proposal?

CBO and JCT face several challenges in estimating the number of people who would purchase private insurance coverage in the nongroup market under an alternative refundable tax credit proposal. It is difficult to predict what regulations states would impose on the nongroup market, what types of products insurers might offer given those regulations, and which types of insurance products people might purchase based on their preferences and their characteristics (such as age, income, and health).

One way to predict the types of plans that people might purchase is to look at the types of plans that existed in the nongroup market before enactment of the ACA. Before then, nongroup market regulations varied widely across states. Only a few states required guaranteed issue and implemented modified community rating rules. Although many states specified a set of services that insurers had to cover, no states regulated the depth of coverage or the amount of cost sharing. Most plans sold in the nongroup market included major medical benefits that provided comprehensive coverage for a range of services, including care by physicians and at hospitals. But certain services, such as maternity benefits and prescription drugs, were not always covered. Many of those plans also had very high deductibles and maximum annual or lifetime limits on benefits. Nevertheless, many of them would meet the broad definition of coverage that CBO and JCT have typically used in the past.

Other plans that were less commonly sold offered benefits that were even more limited. Such plans included fixed-dollar indemnity plans that paid a certain amount per day for illness or hospitalization, or plans that covered only preventive care and routine office-based physicians’ services but did not cover hospitalizations. Such limited plans would generally not meet the broad definition of coverage.

Looking back at the pre-ACA nongroup market is not enough to determine what might happen under a tax credit proposal, however, because no such financial incentive to purchase health insurance existed in that market. Plans that were previously offered in that market might be offered again in the future, and new products might also be offered. In the absence of a clear definition of what type of plan qualifies for a tax credit, some plans would probably have premiums that covered minimal services and would be priced close to the amount of the tax credit. Such plans have been offered in the past in response to a similar incentive: They were used in conjunction with a tax credit related to child health that was in effect in 1992 and 1993, and the depth and extent of coverage that people purchased were often very limited.

In addition to the response by states and insurers, people at different income levels might have different preferences for the depth and extent of their insurance coverage. For example, low-income people might prefer coverage for preventive services and routine physicians’ visits to keep their monthly expenses low, even if such a policy did not cover more costly services such as hospital care. High-income people might not care as much about predictable monthly expenses and might prefer catastrophic coverage to protect their assets against high medical costs.

People’s preferences for insurance products might also vary with other characteristics, such as their sex or health. In states without regulations that limit insurers’ ability to exclude people with high expected medical costs, however, those individuals would probably face high premiums or have access to insurance plans with only limited coverage.

In response to a future policy that had minimal federal or state regulations, CBO and JCT expect that some new insurance products would be offered that limited coverage to the amount of the tax credit. Some of those insurance products purchased by people using a tax credit would probably not offer much financial protection against high out-of-pocket costs. Depending on the size of the tax credit, however, the depth and extent of coverage and the premiums of plans could vary. As discussed in another blog post about how CBO defines and estimates coverage, CBO does not count plans that have very limited benefits in measuring the extent of private insurance coverage; in such an assessment, it counts only people with a comprehensive major medical policy as having private insurance.

Under such proposals, CBO and JCT would separately estimate the number of people who would receive the tax credits and, if policymakers expressed interest in such estimates, the number of people who would purchase private insurance in the nongroup market that met a broad definition of coverage. In that case, the latter estimate of the number of people with coverage would probably be smaller than the estimate of the number of people who would receive the tax credit.

Susan Yeh Beyer and Jared Lane Maeda are analysts in CBO’s Health, Retirement, and Long-Term Analysis Division. This blog post was prepared with guidance from Jessica Banthin, a deputy assistant director in that division.