"This"report by the Center on Budget and Policy Priorities reveals a huge affordability problem that I haven't heard discussed: In the House and Finance cmt. bills, out of pocket costs for premiums in the exchange are capped as a percentage of income for the first year only. After that they are indexed to a percentage of the actual premium to be paid. This will lead to a huge increase in the out of pocket expenses for middle-class families. Details after the flip.
As we all know, premiums are increasing at roughly 9% per year while incomes rise roughly in line with overall inflation (3% max). This means that the amount people will be forced to pay for insurance in the exchanges will rise dramatically in future years, far outpacing income growth. I was always under the impression that your out of pocket costs were to be tied to your own income, capping out at 12% for people at 400% of FPL (Federal Poverty Line). I can live with that. But if costs are tied to premiums -- with no public option to fall back on -- the legislation will do more harm than good. Check out the box about half way through the report for details. Building off their example, if you assume a 9% premium growth and 3% wage growth for a family making 40K/yr, their out of pocket expense will rise from 8% (the initial mark) to 10% after just the first 5 years. If the credits were pegged to income growth, their expected contribution would rise in monetary terms but will remain a constant 8% of income. This is a recipe for disaster.
Out of Pocket Costs if Indexed to Income (3% growth)
- 40,242 - with out of pocket costs capped at 8% of income = $3,223
- 41,490
- 42,732
- 44,017
- 45,337 - with out of pocket costs capped at 8% of income = $3,626
Out of Pocket Costs if Indexed to Average Premium (9% growth)
- 11,083 - first year indexed to income = $3,223
- 12,080 - with out of pocket costs capped at 29% of premiums = $3,503
- 13,167
- 14,352
- 15,644 - with out of pocket costs capped at 29% of premiums = $4,536
As the above shows, if out of pocket costs were indexed to income, the sample family would see their expected contribution rise from $3,223 to $3,626 over the first five years (remaining at 8% of income). If affordability credits are indexed to premium growth, the contribution would rise from $3,223 to $4,536 or 10% of income! So in just five years, this middle class family would have to pay an additional $910. This factor will grow exponentially in future years, rapidly making premiums unaffordable for this family. What is more, one can easily imagine a scenario where wage growth was much less than 3% or where premiums increased more than 9% per year, making the situation even worse.
Without significant restraint on premium growth, the current affordability credits are woefully inadequate and are made even more so by the fact they are indexed to premium growth, not income growth. The indexing must be fixed or subsidies must be much larger in the first year of the exchange lest millions of families be forced to pay an ever larger portion of their disposable income on health care in coming years.