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

By Susan Yeh Beyer and Jared Maeda
Congressional Budget Office, 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

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.

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.

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. 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.…

Although the Republicans have promised to repeal the Affordable Care Act it remains uncertain what the replacement would be. Most likely there would be some form of refundable tax credit to assist with the purchase of coverage in a highly deregulated market of private health plans.

This blog from the Congressional Budget Office is helpful in that we can say, without knowing other details of replacement proposals, that the non-group insurance market will be disrupted with many losing their coverage and many more ending up with grossly inadequate coverage.

It is no wonder that the Republicans are signaling their intent on taking a few years to decide on a replacement proposal, hoping that we’ll forget that they won this election partly based on Donald Trump’s promise that “we are going to replace Obamacare with something so much better.” That cannot happen in a deregulated market of private plans.