# Hypothetical Mean

Commentary from an Actuarial and Economic Perspective

## The \$20,000 Annual Cap on Medical Costs: Healthcare Reform and You, Part II

Part II: The Math of Individual Coverage

The benefit plan defined in the House healthcare reform bill is designed to limit a family of four’s annual healthcare expenditures to under \$20,000 in 2013, assuming they are at 400% of Federal Povery Level (FPL) or lower.  Here’s how they do it.

First, the direct premium subsidies in the bill will limit the premium paid by a family of four to just over \$800 per month, or \$9,680 per year (see Section 243; assuming 400% of FPL and no increase in salaries between today and 2013).

The plan that can be purchased for that price, or lower, is the “basic plan” that will be designed to cover 70% of your allowable medical costs.  For a typical plan that might have \$10,000 in expected allowed costs, this means that the family of four will expect to have \$3,000 in additional copayments and coinsurance amounts.  The total expected outlay would therefore be less than \$12,680 in after-tax dollars.  Impressed yet?  If not, there’s more.

This plan separately caps the household’s potential out of pocket cost.  For that same family in 2013, the House bill promises that you will not owe more than \$10,000 per year.  The total annual out of pocket outlay would therefore be capped at \$19,680 for that family.  This out of pocket maximum is much higher than the expected outlay in 2013.  In later years, the expected outlay will increase faster than the out of pocket maximum, pushing those values closer together.  I’m not sure why they chose to do that.

This maximum \$19,680 will have to come from after-tax income.  Most families at 400% of FPL are in a 15% tax bracket and perhaps a 5% state bracket.  That means that \$24,825 in pre-tax earnings will cover the maximum outlay designed by the basic plan in the House.

For the same family of four earning 200% of poverty, things look much better.  Their maximum premium is \$2,200, with (potentially) the same out of pocket maximum.  Their total maximum out of pocket cost would then be \$12,200.  On average, they would expect to pay “only” \$3,700 in cost in after-tax dollars, however, because they will enjoy another feature of the bill: lower copayments for poorer families.  This after-tax difference of about \$9,000 represents a sizeable implicit penalty that this plan will levy against those who get wage increases, take on second jobs, etc.  When making forecasts, the CBO assumes that this implicit penalty does not signficantly affect the labor market.

For those earning more than 400% of FPL, there is no cap on premiums, but the \$10,000 cap on out of pocket medical expenses remains in the base plan.

Expect the Senate Finance Committee to be much stingier with subsidies, thereby raising these annual cost levels.  Also expect the Blue Dogs to fight to reduce these subsidies, also increasing these annual costs.  Lastly, this bill is planned to increase the size of all deficits in 2013 and beyond.  This increased budget pressure in the second half of this decade will force budget cuts, also decreasing these subsidies.

Therefore, I suspect that the \$20,000 annual cap on costs is a best-case scenario.  We do need healthcare reform.  I’m concerned that the focus on federal deficits and budgets has obscured the fact that this bill does little to solve the average family’s problems.  If anything, it could make it worse.  Sad.

The first part of this series was posted here.