Are Health Insurance Subsidies Enough for Low-Income Patients?

May 08, 2017 - Despite financial penalties designed to prompt consumers to keep their health insurance, current efforts to subsidize care for low-income individuals may not be enough to incentivize patients, according to a recent study by economists at MIT and Harvard.

The study measured data from Massachusetts’ subsidized insurance program called CommCare.    Established in 2006, the program offers heavily-subsidized private plans to non-elderly adults below 300 percent of the poverty level who do not have access to insurance through an employer or another public program.

For this program, public subsidies are essential, and leave enrollees with an average premium of $70 per month.  The average full premium is $422 per month. 

The Massachusetts plan does mandate coverage and is enforced by financial penalties if not followed.

However, patients who receive less money from the program are significantly more likely to opt out of health insurance coverage.   “As subsidies decline, insurance take-up falls rapidly, dropping about 25 percent for each $40 increase in monthly enrollee premiums,”the study found.

The average low-income enrollee was only willing to pay three to four times below what their medical costs would be with no assistance from insurance.  For an individual who has expenses of $100 per month, or $1200 per year, that means they would only be willing to pay insurance premiums of about $350 a year.

“Further data indicated that if enrollee premiums were 25 percent of insurers’ average costs, at most half of potential enrollees would buy insurance, and even premiums subsidized down to 10 percent of average costs would still leave at least 20 percent uninsured,” said the study.

The report came to two important conclusions. First, enrollment was “highly sensitive” to premiums.  With each increase in premiums, by relation to the poverty level, enrollment dropped by 25 percent.

For those 150 percent or below the federal poverty level, the least expensive plans are free.  This level of subsidy indicated a 94 percent enrollment rate by eligible individuals. 

With an increase of $39 per month, for those just above the 150 percent poverty level, enrollment drops to 70 percent. The study notes that this occurs even though the subsidy still covers 90 percent of the premium.

The study did take into consideration those who have, or may have recently found out about a chronic condition.  Those rates of take-up were predictably higher.

The second important finding in the study showed that with progressive increases in premiums, that lower-cost enrollees disproportionately dropped out.  This was despite the mandate and penalties.

This resulted in an insured pool of higher-claim enrollees, and higher premium rates for all those in the pool regardless of health status.

The researchers offer potential explanations for this decrease in enrollment, even with substantial subsidies.   The most prominent culprit for low-income individuals to skip coverage was access to care that required no insurance or participant payment, such as community clinics and dental buses.  The researchers pegged this availability of free care to account almost entirely for low-income individuals to drop coverage altogether.

By interpreting data on the value of insurance to low-income individuals, it became apparent that many would rather be uninsured than pay 20-35 percent (or more) for costs of care, even though it was substantially below costs incurred by payers. 

“More generally, our results suggest a fundamental challenge in enrolling low-income people into health insurance markets, even with an insurance mandate: take-up is low not simply because of adverse selection but because people are not willing to pay the (gross) cost of coverage they impose on the insurer.”

“Even if insurers could offer actuarially fair, type-specific prices, at least 70 percent of the market would be uncovered.”

The study concluded there existed two potential justifications for subsidies: “as an offset to the ‘tax’ that uncompensated care imposes on formal insurance, or as a means of redistribution to low-income households.”

The alternative of reducing or removing subsidies entirely would lead to a mass exodus of coverage by low and even middle income individuals, the researchers asserted.   There exists abundant evidence that low-income individuals value health insurance below the cost they impose on the insurance company.

In conclusion, the study suggests a healthcare system that does not involve subsidies may be the solution to extending participation rates and coverage, particularly to those lower-income individuals.