Justin Sydnor on Rising Costs for ACA Health Insurance Plans

Frederica Freyberg:
The whole government shutdown was over extending enhanced tax credits for Affordable Care Act policies, with Democrats warning of big increases in people’s monthly premiums come January if they’re not kept in place. Aside from those extra subsidies going away, why are marketplace plans proving more expensive and what of Republican calls to do away with the ACA altogether in response? We ask Wisconsin School of Business professor of risk and insurance Justin Sydnor. And thanks very much for being here.

Justin Sydnor:
Thanks for having me.

Frederica Freyberg:
So is it in dispute that ACA premiums could more than double without the extension of the enhanced tax credits?

Justin Sydnor:
No, there’s really no uncertainty about that. You know, it’s basically pretty straightforward, simple math. The way the tax credits work is that they’re tied to a share of the percent of your income. And the enhanced tax credits increased or decreased the share you would have to pay and increase the income range for people who are eligible. So they’ll definitely go up. The share that you’re responsible for paying goes up if those subsidies expire. How much depends a lot on your income level. And in particular, we could maybe think about a nice example here. So take a 50-year-old couple, so married couple in Wisconsin, 50 years old, no children. They’re facing a total premium of about $18,000 for a middle plan this year in the ACA marketplace in Wisconsin. If they had the enhanced tax credits and they made $85,000 or more a year, that’s 400% of the federal poverty line. They’d get about $11,000 subsidy, and they’d have to pay about $7,000 themselves. So if those subsidies expire, they’re on the hook for that whole $18,000. So that’s an $11,000 increase. Now for people who have lower incomes, the subsidies protect them more, even if the enhanced subsidies expire. So let’s take that same family and move them way down the income spectrum. Make them at $25,000. Now they’re just above the poverty line. In the enhanced subsidies, they don’t pay anything for that middle tier plan. They’re paying zero. But without them, they’re paying about $500 a year. So about a $500 increase. So that range, you know, in the ballpark — some it’s $500 a year, some people it’s $10,000 or more a year.

Frederica Freyberg:
You know, there’s so much political consternation around not just the tax credits but the ACA altogether. Is the Affordable Care Act in a freefall?

Justin Sydnor:
No, I don’t think there’s any reason to think of it as being in a freefall. It’s actually been quite stable. So if you look at the cost of plans for ACA marketplace plans, both in Wisconsin but also nationally over the last five years or so, those premiums have actually been very stable. And in fact, they haven’t risen in the same way that the employer-sponsored premiums that we’ve seen for, you know, that most people get through their employers have. Those premiums have been up about 25% over the last five years. ACA premiums are pretty stable.

Frederica Freyberg:
What’s driving that 25% increase?

Justin Sydnor:
Yeah, so overall in the U.S., our healthcare costs are just high. So we pay about $15,000 a person per year in health care costs across the entire country. You know, and those costs reflect a lot of things. They reflect our market-based system. So our costs are about twice what they are in, say, Europe or Canada. And, you know, that’s partly a tradeoff. We have a market-based system. So we have a lot of innovation. We have good access. We have the best technology. So if you get very sick, you probably want to be here. On the other hand, it means that our prices are set by competitive forces and the market doesn’t always hold down prices that well through those competitive forces. So if you think about why are they increasing, why this steady rise over time? You know, there’s a confluence of factors. So we have an aging population. So we have sort of more demand for health care and the expansion of health care services. How many nurses you can bring on? How many doctors you train? Hospital systems don’t always keep up with that rising demand. Well, we’ve also seen a big explosion of newer pharmaceutical drugs. You know, innovations in genetics have allowed us to treat rare diseases. Those tend to be very costly. Now, of course, they’re also highly beneficial. If you have a rare disease, you’re really happy that there’s a new drug for it. But that’s been a big part of the cost. And then there’s also just overall inflation. So there’s been inflation in all parts of the economy and that also hits the health care prices.

Frederica Freyberg:
So I wanted to ask you, I know that President Trump and members of the GOP talk about giving people direct payments like $2,000 or something to pay for their health care and a health savings account or something like that. What do you think of that?

Justin Sydnor:
Well. So, you know, it’s hard to react too much. So, you know, the details and specifics really matter in health care. And so far, the proposals haven’t been very detailed. But if you instead gave people direct money that could be spent on anything – health care premiums or out-of-pocket cost – you expose them to some more risk. If those subsidies don’t keep up with the rising costs of health care, well, they’re going to see that. On the other hand, you create more competitive pressure and forces, so there’s some good economic tradeoffs there that are worth exploring.

Frederica Freyberg:
Professor Justin Sydnor, thanks very much.

Justin Sydnor:
Great. Thank you.