Defining affordability of health care
Setting A Standard Of Affordability For Health Insurance Coverage
by Linda J. Blumberg, John Holahan, Jack Hadley, and Katharine Nordahl
Health Affairs
June 4, 2007
The definition of affordability for individuals and families of different incomes or circumstances is a critical decision in implementation and is relevant to any state or federal reform requiring individual premium or cost-sharing contributions, or both. This analysis was done to assist the policy design process in Massachusetts and delineates an empirically based approach to setting affordability standards.
The approach to defining affordability explored in this paper focuses on people’s actual spending on health care (health insurance premiums and out-of-pocket expenses), at various income levels. This approach has the strength of reflecting people’s actual purchasing decisions, thereby revealing what they are both willing and able to spend, albeit in the context of a voluntary health insurance system.
Total medical costs.
Nongroup coverage: The median individuals and families with nongroup coverage across all incomes spent 16.9 percent and 14.7 percent of income, respectively, on health insurance and out-of-pocket costs. The median values for those with incomes of 300-499 percent of poverty were 10.4 percent (single) and 11.6 percent (family).
Total spending for employer coverage: At the median, spending was 12.3 percent and 15.1 percent for individual and family coverage, respectively. For those with incomes of 300-499 percent of poverty, these figures were 12.6 percent and 17.4 percent, respectively (mean: 13.2 percent and 18.2 percent).
Role of out-of-pocket liability: Because of the highly skewed distribution of health care spending and the large potential variation in plans’ actuarial values, affordability must take out-of-pocket liability into account in addition to premiums. Our analysis shows that total medical spending, including premiums and out-of-pocket expenses, can be very high as a percentage of income, particularly for those with incomes below 300 percent of poverty and for those with high medical needs. Thus, any effective standard for affordability must consider both out-of-pocket costs and premiums. (This is) an important consideration for the enforcement of an individual mandate, because cost-sharing requirements can be overly burdensome for middle-income people as well, depending upon the out-of-pocket exposure associated with insurance and the intensity of required medical care.
Postscript
The affordability standard set by the (Commonwealth Health Insurance Connector Authority in Massachusetts) does not explicitly take potential out-of-pocket exposure into account. As a result, people with persistently high out-of-pocket costs will face much higher financial burdens as a percentage of income than what our data indicate are typically borne nationally by those at 300-499 percent of poverty.
The Massachusetts approach is to exempt from the mandate all those who cannot obtain the minimum level of coverage at an affordable level.
http://content.healthaffairs.org/cgi/content/abstract/hlthaff.26.4.w463
Comment:
By Don McCanne, MD
Although there is no accepted economic definition of affordability, this paper makes an attempt to set an affordability standard for health care by defining what people are willfully paying for health insurance premiums plus out-of-pocket expenses in our voluntary private health insurance market. Presumably, the uninsured are individuals who find these costs to be unaffordable, and many objective studies confirm that the great majority of the uninsured simply do not have the funds to pay these costs.
The results of this study confirm what we already knew. We are spending a lot for health care - a median of about 15 percent of income for family coverage in both the individual and group private insurance markets, including out-of-pocket expenses. For many families, this constitutes a financial hardship, but they continue with coverage because they recognize the importance of being able to pay for health care when they need it. Many are hanging on, hoping that we will soon provide relief by reforming our method of financing health care.
But the picture is actually worse than this study would indicate. This study was of individuals already insured in the private market. These are the healthiest individuals in our society - the healthy workforce and their young healthy families. If risk pools limited to the healthiest are consuming 15 percent of family income, just think what the costs of funding the pool would be once coverage is universal and includes those with high-cost medical problems.
Also, 15 percent of income is the median amount for a family. The healthiest half pays less, but the other half pays more, and the few with significant health care needs pay much more. Yet one of the most important functions of insurance is to protect the finances of precisely these individuals. We could do that by establishing one single universal risk pool and funding it equitably.
But no. Our politicians insist that the private plans be left in play. Like Massachusetts, we will have to agree that, even with a mandate, we will not require coverage for average-income individuals who cannot afford it.
A brief excerpt from the debate last night of the Democratic presidential candidates:
SEN. OBAMA: But on this issue of mandatory versus non-mandatory, (people are ?) not going around trying to avoid buying health care coverage. And in fact, if you look at auto insurance, in California there’s mandatory auto insurance. Twenty-five percent of the folks don’t have it. The reason is because they can’t afford it.
So John and I, we’re not that different in this sense; that I’m committed to starting the process. Everybody who wants it can buy it and it’s affordable. If we have some gaps remaining, we will work on that. You take it from the opposite direction, but you’re still going to have some folks who aren’t insured under your plan, John, because some of them will simply not be able to afford to buy the coverage they’re offered.
Another brief excerpt:
MR. BLITZER: Hold on one second. I promised Congressman Kucinich.
Go ahead.
REP. KUCINICH: I reject this whole approach. And the American people should know that with half the bankruptcies in the country connected to people not being able to pay their doctor bills or hospital bills, premiums, co-pays and deductibles going so far through the roof — 46 million Americans, no health care; another 50 million underinsured, there is only one way to get health care coverage for all Americans, and that is to have a universal single-payer, not-for- profit healthcare system, Medicare for All. Wolf, I’ve written the bill — it’s H.R. 676 — with John Conyers, supported by 14,000 physicians.
MR. BLITZER: All right.
REP. KUCINICH: And you know what? What Senator Clinton, Senator Edwards, Senator Obama are talking about, they’re talking about letting the insurance companies stay in charge. They’re talking about continuing a for-profit health care system. (Applause.) And I think —
MR. BLITZER: All right. Hold on. No applause.
REP. KUCINICH: — we need a president who’s ready to challenge that. And I’m ready to challenge the insurance companies.
MR. BLITZER: All right. Let’s go to the next question.
http://www.nytimes.com/2007/06/03/us/politics/03demsdebate_transcript.html?pagewanted=all