The following originally appeared at The Upshot (copyright 2014, The New York Times Company).
There are generally two ways that people with insurance pay for health care in the United States: premiums, which get you insurance before you receive care, and a variety of cost-sharing mechanisms — like deductibles, co-pays and coinsurance — that come into play when you do receive it.
While Medicaid, our safety net program for the poor, has used cost-sharing mechanisms for some time, it has been prohibited from asking people to pay premiums. In the last couple of years, federal regulators have started lifting that prohibition, which is likely to lead to some negative consequences.
Cost-sharing mechanisms are specifically intended to encourage people to consume less health care. As I have discussed in previous articles, a large body of research shows that increased cost-sharing leads to decreased utilization. The more you ask people to pay at the point of care, out of their own pockets, the less likely they are to obtain it.
As a recognized means to reduce health care utilization and spending, insurance plans have been using cost-sharing for decades. Almost all state Medicaid programs allow for cost-sharing, usually as some form of minimal co-payments for services or drugs.
Premiums, however, are different. They are the mechanism by which insurance companies collect the vast majority of the money that they need to cover health care costs for their beneficiaries. They are not intended to affect health care spending, as they are collected before any actual care is used. They’re the means by which most of health care spending is paid for. When health care spending goes up, insurance companies raise premiums accordingly. Now that increases are regulated on exchanges by the federal government, private insurance companies must justify premium growth with data showing that spending on health care has gone up enough to warrant increases.
Premiums are not a means to influence whether or not an individual uses services. They’re a means to purchase insurance. It is for this reason that, until recently, premiums were not allowed in any Medicaid programs at all for anyone earning up to 150 percent of the federal poverty line. After all, if people were poor enough to qualify for Medicaid, there’s simply no way that they could afford any substantial part of its cost.
This year, the average annual premiums for an employer-sponsored insurance plan for an individual were slightly more than $6,000. Just two years ago, Medicaid spent an average of $6,641 per person covered. In order to be below 150 percent of the federal poverty line, a person needed to earn less than $16,755 that year. The reason we traditionally provided Medicaid for such people without charging them any premium is that, after paying for the necessities of life, there really is no way that they could cover any significant percentage of the costs of their health care.
Nevertheless, a number of states are now, for the first time, asking recipients to pay a premium for their Medicaid. In Indiana, the proposed Medicaid expansion, known as HIP 2.0, requires people making up to 138 percent of the poverty line to pay up to $25 a month to receive coverage. In Iowa, Medicaid recipients making more than the poverty line are expected to contribute $10 a month in premiums; those making 50 percent to 100 percent of the poverty line may need to pay $5 a month. In Pennsylvania, individuals making more than the poverty line may be asked to pay $25 a month. In Michigan, those making more than the poverty line must pay 2 percent of their income in premiums.
Many might argue that these are not large sums of money. Indeed, when compared with the cost of care for the average Medicaid beneficiary, they are insignificant. That’s the point. Premiums are supposed to cover much of the cost of care. That’s why insurance with a higher actuarial value has higher premiums.
But when it comes to Medicaid, the proposed premiums barely cover any of the cost of care at all. In fact, it’s possible that the administrative costs of collecting them may be significant compared with the amount collected. If so, why bother? Proponents of these premiums often use terms like “personal responsibility” and “skin in the game.” But these are terms usually used to justify increases in co-pays, coinsurance or deductibles; they are rarely thrown around when your private insurance plan needs to raise its premiums.
And cost-sharing is how these “premiums” may actually play out. A recent study in the journal Health Affairs found that a $10 increase in monthly Medicaid premiums resulted in a 6.7 percent reduction in Medicaid and the federal Children’s Health Insurance Program coverage for families earning between 100 percent and 150 percent of the poverty line. It also resulted in a 3.3 percent increase in the uninsured. These small premiums may lead people not to obtain insurance.
This mirrors work published earlier this year by Laura Dague in the Journal of Health Economics. She looked at how small premiums affected enrollment in the Wisconsin Medicaid program, and found that the creation of a $10 monthly premium was associated with a 12 percent reduction in the likelihood of people remaining enrolled in Medicaid for a full year.
In other words, these premiums may be functioning as cost-sharing. They may be driving people away. They may be discouraging people from obtaining insurance.
This may, of course, be part of the purpose. It’s estimated that more than280,000 people would be eligible for a Medicaid expansion in Pennsylvania. Getting 12 percent of them to refuse coverage would save the government more than $200 million. That’s a very rough estimate, of course, but the potential savings from disenrollment greatly outweigh whatever Pennsylvania might collect in premiums from the people who do enroll.
It’s reasonable, although sometimes inadvisable, to ask people to pay more when they are actually about to obtain medical services. Cost-sharing is a mechanism to prevent people from overusing health care. Signing up for health insurance isn’t the point at which we do that, though. Premiums aren’t supposed to be a means to discourage people from gaining access to the health care system. But that seems to be how they’re functioning in Medicaid.
