The 2019-20 Budget: The Governor's Individual Health Insurance Market Affordability Proposals

The 2019-20 Budget: The Governor’s Individual Health Insurance Market Affordability Proposals GABRIEL PETEK LEGISLATIVE ANALYST FEBRUARY 7, 2019 analysis full gutter 2019-20 BUDGET LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Executive Summary Broad Concerns Have Been Raised About Health Care Costs and Access . . . The Legislature, among others, has raised concerns about underlying costs, efficiency, and access in the state’s overall health care system. . . . As Well as Specific Concerns About Affordability of Individual Market Coverage. In addition to broader concerns about the health care system, the Legislature has raised more specific concerns about affordability in the individual health insurance market. At the Legislature’s direction, Covered California recently released a report that outlines a series of policy options to improve affordability and increase enrollment in the individual market. Governor Proposes Two Policies to Make Individual Market Coverage More Affordable. The Governor’s proposed budget includes elements intended to help address the above concerns. The subset of the Governor’s proposals we review in this report focus more narrowly on encouraging enrollment and reducing consumer costs in the individual market, as opposed to broader questions of underlying health care system cost and efficiency. Specifically, the Governor proposes two policies: (1) the creation of a state individual mandate with an associated financial penalty, to take the place of the federal individual mandate penalty that was effectively eliminated by Congress beginning in 2019, and (2) the use of revenues from the state individual mandate penalty to provide state subsidies to reduce the cost of individual market coverage. Individual Mandate Proposal Merits Serious Consideration. While the full extent of its impact is subject to some uncertainty, the individual mandate may be one of the state’s most effective policy options to increase enrollment in the individual market and reduce the cost of individual market coverage, particularly for households that currently do not receive federal subsidies. The individual mandate does involve trade-offs. In particular, the individual mandate would generate revenue at the expense of individuals who would choose to pay the penalty rather than obtain coverage, perhaps because they do not view available coverage options as affordable. However, on balance, we think the Governor’s proposal to create a state individual mandate warrants serious consideration. We think it makes sense for the Legislature to consider—as the Governor has proposed—the proposed state individual mandate in conjunction with other policies that would improve the affordability of health insurance coverage. This could serve to increase the level of compliance with the mandate, meaning that more people would have health coverage than otherwise. Legislature Has Multiple Policy Options to Increase Individual Market Coverage and Improve Affordability. We recommend that the Legislature consider the Governor’s proposal in the context of a range of policy options, such as those presented in Covered California’s report, and consider what policies would best align with the Legislature’s policy and budgetary priorities. Many Implementation Questions Remain. If the Legislature wishes to create a state individual mandate along with some form of insurance subsidies, as proposed by the Governor, many questions remain to be addressed. In particular, funding subsidies from individual mandate penalty revenues as proposed by the Governor could be problematic. The goal of the individual mandate as a deterrent against forgoing insurance coverage is at odds with the goal of raising revenue for insurance subsidies. To address this issue, the Legislature could consider using whatever penalty revenues are generated to simply offset—at least partially—the cost of subsidies, with other state funds covering any difference. www.lao.ca.gov 1 analysis full gutter 2019-20 BUDGET 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET INTRODUCTION Broad Concerns Have Been Raised About market excludes coverage obtained through Health Care Costs and Access. The Legislature, employer-sponsored insurance and government among others, has raised concerns about the programs such as Medi-Cal.) These proposals underlying cost and efficiency of the state’s overall do not directly address, nor are they intended to health care system, and the extent to which the address, broader concerns about the underlying state’s residents can access quality health care cost of health care services or the efficiency of services through that system. The significant health care delivery systems. number of California residents without health Legislature Has Taken Recent Actions Related insurance coverage—roughly estimated to be to Broader Concerns About Underlying Costs. As 3.5 million people—has been a particular concern. part of the 2018-19 budget package, the Legislature The state’s health care system is complex— set in motion two ongoing, multiyear efforts that numerous factors influence who can access care, are intended to explore issues related to broader how that care is delivered, and at what cost. concerns about underlying costs in the state’s Proposals Reviewed in This Report Focus health care system. Specifically, the Legislature Narrowly on Encouraging Enrollment and provided funding to begin planning and developing Reducing Consumer Costs in the Individual a database that would collect information on public Health Insurance Market. The Governor’s and private health care costs and utilization in 2019-20 budget proposal includes elements the state. The database is intended to be used to intended to help address some of these concerns. increase transparency of health care pricing and The subset of the Governor’s proposals we review inform state policy decisions. The Legislature also in this report focus more narrowly on encouraging established a Council on Health Care Delivery enrollment in health insurance coverage purchased Systems that will develop options for structural on the individual market—where over 2 million reforms to the state’s health care delivery system people obtain their coverage—and on making to accomplish universal health care coverage and that coverage more affordable. (The individual reduced health care costs. BACKGROUND Overview of Health Insurance Over Two Million Californians Purchase Coverage Through Individual Market. Individuals Coverage in California who are not enrolled in insurance through their Most Californians Have Health Insurance employer or public health insurance programs can Coverage. As shown in Figure 1 (see next page), purchase coverage directly from insurers in what we estimate that most Californians—91 percent— is referred to as the “individual market.” As shown have health insurance coverage. (Compared in Figure 1, about 2.2 million individuals had health with other states, California’s rate of insurance is insurance coverage through the individual market roughly in the middle—some states have higher in 2017. As will be described in more detail later, a rates of insurance, while others have lower rates of little less than 1.1 million of these received federal insurance.) Employer-sponsored insurance is the subsidies to reduce the cost of coverage through most common source of coverage. Major public the state’s health benefits exchange, known as health insurance programs, including Medi-Cal, the Covered California. About 150,000 additional state’s insurance program for low-income people, individuals who do not receive subsidies also and Medicare, the federal program that primarily purchased coverage through Covered California, provides health coverage to the elderly, also cover for total enrollment through Covered California of large portions of the state’s residents. a little over 1.2 million at the end of 2017. About www.lao.ca.gov 3 analysis full gutter 2019-20 BUDGET 1 million additional people purchased insurance coverage, which provides coverage for emergency from insurers outside of Covered California— and some pregnancy-related services. However, sometimes referred to as “off exchange.” Federal due to the limited nature of restricted-scope subsidies are not available off exchange. Medi-Cal, we consider these individuals uninsured. Roughly 3.5 Million Californians Are Although the number is uncertain, a portion of Uninsured. While most Californians have health the uninsured are eligible for subsidized coverage insurance coverage, an estimated roughly through Covered California, as will be described in 3.5 million people in the state are uninsured. In more detail later. general, the uninsured are more likely than the Federal Patient Protection general population to be low income. A large and Affordable Care Act (ACA) portion of the uninsured—likely around 1.5 million— are undocumented adults. We note undocumented Significantly Altered Health Insurance adults may not purchase coverage through Covered Landscape California and are ineligible for Medicare and the full The ACA—most of the provisions of which scope of Medi-Cal benefits. Some undocumented became effective in 2014—brought about adults may enroll in “restricted-scope” Medi-Cal significant changes to the way that health insurance coverage Figure 1 is provided in California. Broadly Most Californians Have Health Insurance, speaking, the ACA led to more Obtained From a Variety of Sources comprehensive and standardized 2017 Estimated health insurance options on the individual market, limited Individual Market the ability of health insurers to Subsidized charge higher premiums or deny 1.1 Million (All on Covered coverage to individuals with costly California) preexisting medical conditions, Unsubsidized and provided both incentives and 1.1 Million Uninsured (About 150,000 About penalties to encourage individuals on Covered 3.5 Million to enroll in health insurance California)a Medi-Cal coverage. Below, we describe several key aspects of the ACA in greater detail. Covered California Public Established as Centralized Insurance Medicare Marketplace for Comparing and and Medi-Cal Purchasing Coverage. The ACA Private Insurance provided for the establishment of state health benefits exchanges, Medicare Employer- including Covered California, Sponsored where people in the individual Insurance market can compare health insurance coverage options. Consumers who shop for Other Public Insurance coverage on Covered California can choose among health insurance plans organized into a Remaining roughly 1 million purchased coverage “off exchange.” standardized metal tiers, including Note: Estimates reflect LAO adjustments to California Health Interview Survey 2017 data. bronze, silver, gold, and platinum. 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET These tiers vary in the amount of monthly premiums For those who do not have minimum coverage, they charge and out-of-pocket costs they require the ACA provided several exemptions from households to pay, such as annual deductibles the individual mandate penalty. For example, a and co-pays for medical visits. Bronze plans household is exempt from the individual mandate have the lowest premiums but have the highest penalty if (1) it does not have any “affordable” out-of-pocket costs. For example, bronze plans health insurance options (for purposes of the feature a large deductible that must be met before individual mandate, coverage is considered many medical services are covered. Silver, gold, affordable if it costs less than 8.05 percent of the and platinum plans require progressively lower household’s annual income), (2) it has income out-of-pocket costs, but also come with higher below the minimum threshold required to file a premiums. federal income tax return, or (3) its members are Federal “Individual Mandate” to Require undocumented. In 2016, the most recent year for Most to Obtain Health Insurance Coverage which data are available, almost 600,000 tax filers or Pay Penalty. As originally enacted, the ACA in California paid a total of $446 million in individual imposed a requirement, referred to as the individual mandate penalties to the federal government. mandate, that most individuals obtain specified Federal Subsidies to Reduce Cost of minimum health insurance coverage or pay a Health Insurance Purchased Through Covered penalty. (As will be discussed later, subsequent California. The ACA also created two types of federal action eliminated the penalty beginning subsidies that work together to reduce the cost of in 2019.) The individual mandate was intended health insurance for most households that purchase to discourage people from going without health coverage through Covered California, as described insurance coverage, particularly younger and below: healthier individuals who have lower risk of incurring • Advance Premium Tax Credit (APTC). The health care costs and who otherwise would be less APTC offsets the cost of health insurance likely to enroll in coverage. Increased coverage premiums for households with incomes of younger, healthier populations leads to a more between 100 percent and 400 percent of balanced insurance risk pool and allows the costs the federal poverty level (FPL). As shown in of covering higher-risk populations to be spread Figure 2 (see next page), the APTC effectively more broadly. This in turn reduces the average limits a household’s net premium for a silver cost of coverage and helps to offset the increased plan (after accounting for the APTC) to cost of making individual market coverage more between 2 percent and 10 percent of annual comprehensive under the ACA. income. (This percentage increases as income As outlined in the ACA, the individual mandate increases.) Each year, Covered California required households to certify on their annual estimates the amount of APTC a household federal income tax return that they have health will qualify for before coverage begins and the insurance coverage that meets minimum household can choose to “advance” some or requirements. For those who do not have minimum all of the estimated APTC amount to insurers. coverage, the individual mandate penalty in 2018, This immediately reduces the household’s for example, was set at the greater of a flat amount monthly premiums. At the end of the year, any ($2,085 for family of four) or 2.5 percent of family remaining APTC is claimed on the household’s income, up to a maximum (just over $13,000 for a federal income tax return. In the event that family of four). Households subject to the individual a household was ultimately eligible for less mandate penalty for that year calculate the amount APTC than was advanced to insurers through of the penalty and pay the amount owed through the preceding year, the household is required their federal income tax return. Most households to pay the difference through the income tax that have paid the penalty have paid the flat return. amount. www.lao.ca.gov 5 analysis full gutter 2019-20 BUDGET Figure 2 Portion of Annual Income Spent on Health Premiums After APTC For a Family of Four in 2019a 12% 10 8 Income Too High to Qualify for APTC 6 4 2 25,100 50,200 75,300 100,400 $125,500 (100% of FPL) (200% of FPL) (300% of FPL) (400% of FPL) (500% of FPL) a Assumes that the household purchases the second-lowest-cost silver plan. APTC = Advanced Premium Tax Credit and FPL = federal poverty level. • Cost Sharing Reductions (CSRs). While the concerns have been raised that individual APTC offsets premium costs, CSRs reduce market coverage may not be affordable for some households’ out-of-pocket costs. Under the households, including those that are currently ACA, the federal government provided CSR eligible for federal subsidies and those with higher funding for insurers on Covered California incomes that are not. to offer three different “enhanced” plan Concerns Among Those Eligible for Federal options that have the same premiums as a Subsidies . . . Although federal subsidies limit silver plan but require lower out-of-pocket the cost of coverage for those who are eligible, costs for covered households. Households there are indications that some households that with incomes between 100 percent and are eligible for federal subsidies still view individual 250 percent of FPL may enroll in these market coverage as unaffordable. According enhanced silver plans. Figure 3 shows to Covered California, almost 30 percent of examples of out-of-pocket costs for a regular households that are eligible for federal subsidies silver plan and the three enhanced silver plan do not take up coverage, making them subject options in 2019. to the individual mandate penalty (unless they are exempt). Among this group (and among the Concerns Raised About Cost of uninsured of all incomes), the cost of coverage is Individual Market Coverage the most commonly cited reason for lacking health insurance coverage. Despite ACA policies intended to reduce the average cost of individual market coverage, 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Figure 3 Enhanced Silver Plans Reduce Out-of-Pocket Costs Cost Sharing for Selected Services, 2019 Enhanced Silver Plans Silver Silver 73 Silver 87 Silver 94 Household income to enroll No income limitations 201 percent to 151 percent to 100 percent to 250 percent of FPL 200 percent of FPL 150 percent of FPL Portion of average annual medical 70% 73% 87% 94% costs covered by plan Annual out-of-pocket maximum $7,550 for an individual $6,300 for an individual $2,600 for an individual $1,000 for an individual $15,100 for a family $12,600 for a family $5,200 for a family $2,000 for a family Selected Co-Pays Primary care visit $40 $35 $15 $5 Specialist visit 80 75 25 8 Emergency room visit 350 350 100 50 FPL = federal poverty level. . . . And Those Above Threshold to Qualify APTC eligibility threshold that have older individuals for Federal Subsidies, Who Face Subsidy or that are located in areas of the state with higher “Cliff.” While the APTC limits premium costs premiums are particularly likely to spend a higher to no more than about 10 percent of income percentage of their income on premiums. for eligible households, federal subsidies end Because net premium contributions are limited abruptly for households with income just above the to a fixed percentage of income for households that threshold to qualify for APTC. The abrupt end of receive the APTC, these households are insulated subsidies is sometimes referred to as the subsidy from changes in gross premiums (premiums before cliff. Households at this income level can pay accounting for the APTC). If gross premiums substantially more than 10 percent of their income increase from year to year, the household’s APTC for coverage. (This percentage declines the further increases so that the net premium cost as a above APTC income threshold a household is.) percentage of income remains roughly the same. Figure 4 (see next page) displays premiums as a However, households that do not qualify for federal percentage of income for a hypothetical household subsidies are exposed to annual increases in consisting of two adults, each age 50, living in premiums. Year-over-year increases in premiums Sacramento. If the household had annual income of in the individual market have been significant. $65,000, their premiums for a silver plan purchased Covered California reports that average premiums through Covered California would be limited to for unsubsidized enrollees with coverage through about 10 percent—close to $6,500 for the year— Covered California grew by over 10 percent in each because of the APTC. If the household’s income of 2017 and 2018. increased to $66,000 per year, they would no Federal Individual Mandate Penalty longer qualify for APTC and their premium costs to Effectively Eliminated Beginning in 2019. As keep the same plan would increase to 25 percent part of the federal Tax Cuts and Jobs Act of 2017, of their income—over $16,000 for the year. If the Congress set the penalty for violating the individual household instead switched to the least expensive mandate’s coverage requirement to zero beginning bronze plan available, their premiums would be in 2019. The requirement that most individuals have 18 percent of their income—almost $12,000 for coverage technically remains in effect, but without the year—and the household would have increased the penalty this requirement is unenforceable. out-of-pocket costs. Households just above the (Because of the timing of tax filing, households that www.lao.ca.gov 7 analysis full gutter 2019-20 BUDGET Figure 4 Premium Costs Higher for Households Just Above Subsidy Threshold Premium Costs as Percentage of Income for Two 50-Year-Old Adults in Sacramento 30% Second Lowest Cost 25 SIiver Plan 20 Lowest Cost Bronze Plan 15 10 Income Too High to Qualify for APTC 5 16,460 32,920 49,380 65,840 $82,300 (100% of FPL) (200% of FPL) (300% of FPL) (400% of FPL) (500% of FPL) APTC = Advanced Premium Tax Credit and FPL = federal poverty level. did not have coverage during 2018 and are subject federal individual mandate penalty is uncertain. to the individual mandate penalty are paying penalty Several research organizations have estimated the obligations during the current tax filing season in potential impact of ending the federal individual early 2019.) mandate penalty on individual market enrollment at End of Individual Mandate Penalty Expected the state and national levels using varying sets of to Lead to Greater Number of Uninsured. By assumptions and methods. These estimates project removing the financial disincentive for not having reductions in individual market enrollment ranging coverage, ending the individual mandate penalty from around 7 percent to around 26 percent. is expected to lead to fewer individuals taking Recently, University of California researchers up coverage and a larger number of uninsured. used the California Simulation of Insurance The federal individual mandate was implemented Markets (CalSIM) model to project that enrollment at the same time as several other policies that in California’s individual market would be affected the number of people enrolling in 10 percent lower in 2020 and over 14 percent insurance. This makes it challenging to separate lower in 2023 than it would have been if the the effects of the individual mandate from the federal individual mandate penalty had continued. effects of these other policies. Additionally, states This equates to about 260,000 fewer individual implemented ACA policies differently, so the effect market enrollees in 2020 and about 370,000 fewer of the individual mandate, when enforceable, on enrollees in 2023. The CalSIM researchers also enrollment may have been different in each state. projected the impact that ending federal individual For these reasons, the number of people who will mandate penalty would have on enrollment in discontinue coverage because of the end of the other forms of coverage, as shown in Figure 5. 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET In particular, CalSIM researchers Figure 5 projected that enrollment in Projected Enrollment Change Due to End of Medi-Cal will drop by a few Federal Individual Mandate Penalty hundred thousand people. (Under the ACA, Medi-Cal enrollment Calendar Years 2020 and 2023 grew significantly due to an 2020 2023 expansion in eligibility and as Individual market -260,000 -370,000 previously eligible individuals Medi-Cal -170,000 -350,000 newly enrolled in coverage, the Employer-sponsored insurancea 130,000 60,000 latter sometimes referred to as Net Decrease in Enrollment -300,000 -660,000 the “woodwork effect.” Growth in a Employer-sponsored insurance is projected to increase as more employers offer coverage to Medi-Cal enrollment was driven employees in response to higher premiums in the individual market because of the end of the in part by the individual mandate. federal individual mandate penalty. Source: UC Berkeley/UCLA California Simulation of Insurance Markets projections, November 2018. Accordingly, the end of the federal individual mandate penalty will these premium changes, but the changes would have the opposite effect as people directly affect households in the individual market have reduced incentive to seek or renew Medi-Cal that do not qualify for federal subsidies. coverage.) After accounting for changes across Coverage Affordability and Enrollment Are these forms of coverage, CalSIM researchers Linked. The cost of individual market coverage and projected that 300,000 additional people will be the extent to which individuals choose to take up uninsured in 2020 and 660,000 additional people coverage are linked in two ways. First, a greater would be uninsured by 2023 as a result of the end number of individuals will choose to purchase of the federal individual mandate penalty. coverage at lower costs than at higher costs. At Since 2019 is the first year in which the federal the same time, as a greater number of younger and individual mandate will not be enforced, the end healthier individuals purchase coverage, the risk of the penalty could affect enrollment in coverage mix of the insurance pool improves and premiums purchased on Covered California beginning in decrease relative to what they otherwise would 2019. Covered California recently announced have been. In this way, policies intended to reduce that new enrollment was down 24 percent in the cost of coverage, such as the APTC and CSRs, 2019 relative to the prior year (although a higher can have the added effect of increasing enrollment, number of previous enrollees renewed their potentially leading to additional reductions in coverage, leading to roughly flat levels of plan premiums. Similarly, policies intended to increase selections in 2019 overall relative to 2018). Several take-up of coverage, such as the individual factors likely contributed to these changes, but the mandate, can have the added effect of reducing end of the federal individual mandate penalty may premiums. have played a role. End of Individual Mandate Penalty Expected Legislature Required Report on to Lead to Increased Cost of Individual Market Options to Improve Individual Coverage. Those who choose not to enroll Market Affordability in coverage because of the end of the federal individual mandate penalty are expected to be In light of concerns about affordability in the lower-risk (less costly to insure) than those who individual market, the Legislature directed Covered remain covered. This is expected to increase California to develop options for providing financial average premiums on the individual market. assistance to help low- and middle-income CalSIM researchers estimate that the end of the Californians access health insurance coverage. individual mandate penalty will lead to an increase Covered California submitted a report to the in premiums of between 8 percent and 10 percent. Legislature pursuant to this requirement on Households that qualify for APTC are insulated from February 1, 2019. www.lao.ca.gov 9 analysis full gutter 2019-20 BUDGET Report Lays Out Several Policy Options significantly from other affordability proposals for Legislature’s Consideration. The Covered in that it generates revenue for the state. California report lays out several options for • State Reinsurance Program. Finally, the improving affordability and increasing enrollment Covered California report includes options in the individual market. Specifically, the report that would establish a state “reinsurance” identifies three “market-wide” options that would program. In a reinsurance program, the state generally have a larger impact in the individual would cover part of the cost of particularly market overall but also require a larger commitment high-cost claims on behalf of insurers in the of state funds, as well as eight “targeted” options individual market. This would reduce the that would generally have less impact but would risk for insurers of having to pay high-cost require a smaller commitment of state funds. claims. This, in turn, would allow insurers Some options include a single affordability policy, to charge lower premiums for individual while other reflect a package of policies. The market coverage. The Covered California policies included in the options fall into three main report describes how the state could receive categories: federal funding to offset some of the costs of a reinsurance program through a federal • State Insurance Subsidies. Several of the Section 1332 State Innovation Waiver. More options presented in the Covered California information on Section 1332 waivers is report would provide state subsidies to further provided in the box on page 12. reduce the cost of insurance in the individual market. These subsidies include additional Options Vary in Estimated State Fiscal Impact premium assistance, similar in concept to the and Effect on Enrollment. Figure 6 provides a APTC. Some options include supplemental high-level summary of the parameters of each premium assistance for households with option in the Covered California report, along incomes below 400 percent of FPL that with their estimated impact on enrollment in the currently qualify for the APTC. Other options individual market and their estimated state fiscal include premium assistance for households impact. While most options have a state cost with incomes above 400 percent of FPL that (sometimes net of offsetting revenues or federal currently do not receive federal assistance. funding), one option—Targeted Option 8, which Insurance subsidies described in the Covered would implement a state individual mandate without California report also include additional any other policies—generates revenues. Generally, state-funded CSRs that would further reduce options that result in greater enrollment impacts out-of-pocket costs for some households. have greater associated net state costs, but this is • State Individual Mandate With Penalty. The not always the case. The impact on enrollment per Covered California report includes options dollar of net state cost varies significantly across that would create a state individual mandate the options. Similar to estimates of the potential and an associated penalty, modeled on the impact of ending the federal individual mandate federal individual mandate before its penalty penalty, these estimates are based on a series of was set to zero. The individual mandate differs assumptions and are subject to uncertainty. Overall, however, we find the estimates reasonable. OVERVIEW OF THE GOVERNOR’S PROPOSAL As part of the 2019-20 Governor’s Budget, the state individual mandate with a penalty. Second, Governor proposes two policies along the lines of the Governor proposes to use revenues generated the options presented in the Covered California by the state individual mandate penalty to increase report. First, the Governor proposes to create a insurance subsidies for households purchasing 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET coverage on Covered California. The stated outline of these proposals, with few details on objectives of these proposals include improving structure and implementation. Below, we describe the affordability of health care and increasing the the broad contours of the Governor’s proposal number of people with health insurance coverage. based on information provided by the administration The administration has so far provided only a broad as of the time this analysis was prepared. Figure 6 Summary of Options Presented in Covered California Report Estimated New Individual Estimated State Market Enrollment Fiscal Impacta Options With Greater State Cost Market-Wide Option 1 Provide supplemental premium subsidies and cost-sharing reductions for households under 400 percent of federal poverty level (FPL). 290,000 $2.2 billion cost Provide premium subsidies for households over 400 percent of FPL. Market-Wide Option 2 In addition to policies included in Market-Wide Option 1, enact state individual 648,000 $2.1 billion net costb mandate with penalty, modeled on federal individual mandate. Market-Wide Option 3 In addition to policies included in Market-Wide Option 1 and Market-Wide Option 2, 764,000 $2.7 billion net costb,c establish state-based reinsurance program. Options With More Limited State Cost Targeted Option 1 Provide more limited (relative to market-wide options) supplemental premium 70,000 $425 million cost subsidies for households under 400 percent of FPL. Targeted Option 2 Provide more limited supplemental cost sharing reductions for households under 27,000 $215 million cost 400 percent of FPL. Targeted Option 3 In addition to policies included in Targeted Option 1, provide more limited additional 125,000 $765 million cost premium subsidies for households with incomes between 400 percent and 600 percent of FPL. Targeted Option 4 In addition to policies included in Targeted Option 3, enact state individual mandate 478,000 $409 million net costb with penalty, modeled on federal individual mandate. Targeted Option 5 Provide more limited premium subsidies for households with incomes between 47,000 $285 million cost 400 percent and 600 percent of FPL only. Targeted Option 6 Provide slightly more generous subsidies relative to Targeted Option 5 for 50,000 $324 million cost households with incomes above 400 percent of FPL. Targeted Option 7 Establish state-based reinsurance program. 118,000 $578 million net cost Targeted Option 8 Enact state individual mandate with penalty, modeled on federal individual mandate. 359,000 $526 million revenueb a Where a net cost is shown, reflects net effect of new state spending and offsetting revenues from individual mandate penalties or federal pass-through for reinsurance. b Does not reflect state costs in Medi-cal—potentially in the hundreds of millions of dollars—from increased enrollment under a state individual mandate. c Assumes offsetting federal pass-through revenues, which are uncertain. Net costs could be higher by about $800 million. Source: Covered California “Options to Improve Affordability in California’s Individual Health Insurance Market.” www.lao.ca.gov 11 analysis full gutter 2019-20 BUDGET Create State Individual Mandate that FTB, which administers the state’s personal With Penalty income tax, would implement the proposed state individual mandate penalty. This would be similar State Mandate Would Be Modeled on Federal to the federal individual mandate penalty that Mandate, Before Penalty Elimination. Similar to is administered by the federal Internal Revenue an option presented in Covered California’s report, Service (IRS). the Governor proposes to model a state individual mandate on the federal individual mandate, before Provide State Insurance Subsidies the federal penalty was set to zero. Based on the Additional Subsidies for Households amount of federal penalties paid by Californians Currently Eligible for Federal Assistance. The in 2016, the administration estimates that the administration has indicated that proposed state proposed state individual mandate would generate subsidies would be available to households with roughly $500 million annually in new revenues. incomes between 250 percent and 400 percent Franchise Tax Board (FTB) Would Administer of FPL, households that are generally eligible State Mandate. The administration has indicated Federal Section 1332 State Innovation Waivers and Reinsurance Section 1332 State Innovation Waivers Can Provide Additional Federal “Pass-Through” Funding. Section 1332 of the Federal Patient Protection and Affordable Care Act (ACA) allows states to apply for a waiver of certain ACA requirements in order to implement policies that improve the quality and affordability of health insurance coverage. Policies implemented under a Section 1332 waiver are required to not increase overall federal spending. However, if a policy implemented under a Section 1332 waiver reduces federal spending (such as spending on the Advanced Premium Tax Credit, or APTC), the federal government will pass these savings through to the state. Such funding is referred to as pass-through funding. Several States Receive Pass-Through Funding for Reinsurance Programs. State reinsurance programs reduce average premiums for health insurance coverage purchased in the individual market. Since the amount of APTC a household receives is tied to the level of premiums on the exchange, reinsurance programs generally reduce federal APTC spending. Several states, including Alaska, Minnesota, Oregon, Maryland, Wisconsin, Maine, and New Jersey, have received approval of Section 1332 waiver that included reinsurance programs and federal pass-through funding to offset the costs of these programs. The ratio of federal pass-through funding to the cost of the reinsurance program varies by state and depends on the risk profile of the state’s individual market. Amount of Potential Federal Pass-Through Funding Subject to Some Uncertainty. The Covered California report estimates that California could potentially receive federal pass-through funding equal to about 66 percent of the total cost of the program. However, the amount of federal pass-through funding is uncertain, in part because it could depend on whether a state reinsurance program is packaged with other state affordability policies for purposes of a Section 1332 waiver. Many other policies, including state insurance subsidies and a state individual mandate, are projected to increase individual market enrollment and therefore increase federal APTC spending. If the state were to adopt a package of policies that included policies that both increased and decreased federal APTC spending, the federal government might require that all of these policies be considered together when determining the amount of federal pass-through funding. This would result in less federal pass-through funding than if a reinsurance program was considered on its own. 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET for federal subsidies. It is unclear whether these and 600 percent of FPL, households that are not subsidies would be structured similar to the APTC, currently eligible for federal subsidies. The structure CSRs, or some other form of assistance. of these proposed subsidies is similarly unclear. New Subsidies for Relatively Higher-Income Covered California Would Administer State Households Currently Not Eligible for Federal Subsidies. The Governor’s proposal assumes that Assistance. The administration has indicated that Covered California would administer the proposed proposed state subsidies would also be available subsidies. Details on implementation are yet to be to households with incomes between 400 percent determined. LAO ASSESSMENT Governor’s Proposal Would Likely costs for administration) and in fact would generate state revenues. Reduce Number of Uninsured and . . . But Could Indirectly Result in Increased Improve Individual Market Affordability State Costs in Medi-Cal. As noted previously On Its Own, State Individual Mandate With and shown in Figure 5, some of those projected a Penalty Would Likely Increase Take-Up and to discontinue coverage because of the end of Reduce Premiums. As noted previously, the full the federal individual mandate penalty would have extent of the negative impact on insured levels and otherwise been enrolled in Medi-Cal. Decreased premium costs of the end of the federal individual Medi-Cal enrollment will result in reduced state mandate is uncertain. Accordingly, the full extent of costs. Under a state individual mandate, most or the impact of enacting a state individual mandate all of the individuals who otherwise would have with penalty is similarly uncertain. However, by not enrolled in Medi-Cal would still enroll, likely avoiding or mitigating reductions in coverage eliminating any reduced Medi-Cal costs otherwise and premium increases associated with the end associated with the end of the federal individual of the federal individual mandate penalty, a state mandate penalty. While very uncertain, these individual mandate could potentially be one of the changes could result in state Medi-Cal costs in the state’s most effective policy options to increase hundreds of millions of dollars annually that would coverage and reduce premiums. As shown at least partially offset penalty revenues generated previously in Figure 6, Covered California projects by the state individual mandate, but would also that implementing a state individual mandate on its reflect a reduced number of uninsured. Even own would result in 359,000 additional individuals after accounting for these potential state costs in with coverage, 235,000 of whom would be Medi-Cal, a state individual mandate likely remains potentially eligible for federal subsidies. Covered a very cost-effective option from a state budgetary California further estimates that the state individual perspective for increasing coverage and reducing mandate would also reduce premiums for currently premiums. unsubsidized households off exchange by a Enacting State Individual Mandate Involves projected $24 per month. These are a large effects Some Trade-Offs. A state individual mandate in comparison with most individual policy options in would have additional costs beyond the state the Covered California report. budget. Unlike other policy options that directly State Individual Mandate Penalty Generates subsidize consumers, the individual mandate State Revenues . . . Unlike some other policy reduces premiums primarily by bringing additional, options that directly subsidize household insurance lower-risk individuals to the insurance risk costs, the state individual mandate could increase pool. These individuals would have the cost of enrollment and reduce premiums without significant purchasing coverage they otherwise would not state spending (other than some relatively limited have purchased, although they would also benefit www.lao.ca.gov 13 analysis full gutter 2019-20 BUDGET from greater access to health care services and of the trade-offs associated with implementing a reduced financial risks from not having insurance. state individual mandate, we think the Governor’s Revenues from the individual mandate would proposal to consider the individual mandate in come at the expense of individuals who choose to conjunction with proposals that would reduce the pay the penalty instead of obtaining coverage. In cost of coverage makes sense. addition to the cost of the penalty, these individuals Multiple Policy Options to Increase would not benefit from insurance coverage. Coverage and Improve Affordability Modeling State Mandate on Federal Mandate Has Benefits . . . Since the federal individual Should the Legislature wish to enact policies to mandate has been in effect for a few years, accomplish the twin goals of improving affordability households are now generally familiar with its and increasing coverage in the individual market, structure. Closely modeling a state mandate on the there are several options to choose from, in place federal mandate could make understanding and of or in combination with those included in the complying with a state mandate easier. Additionally, Governor’s proposal. Available options include policies have already been developed for the those presented in Covered California’s report, operation of the federal individual mandate. The such as variations on additional state-funded state could create a state individual mandate more premium subsidies or CSRs for households below efficiently by adapting existing federal policies and 400 percent of FPL, new premium subsidies for structures for the California context. households above 400 percent of FPL, and a . . . Although the Legislature Could Consider state reinsurance program. Different policy options Some Changes. At the same time, in enacting to improve affordability and increase coverage a state individual mandate, the Legislature could present different trade-offs. Choosing which, if consider some changes to the federal individual any, policies to enact will require weighing these mandate, depending on its policy priorities. For trade-offs against the Legislature’s priorities. example, the state individual mandate penalty in Below, we outline some key decision points for the Massachusetts is generally lower than the federal Legislature’s deliberations. penalty, particularly for lower-income households. Assistance for Currently Subsidized Versus Such changes could potentially serve to reduce Unsubsidized Households. One decision point is the impact of the penalty on certain populations, whether to focus assistance on households below but would need to be balanced against potential 400 percent of FPL, households above 400 percent weakening of the mandate’s deterrent effect and of FPL, or both. Some policy options, such as the possible increased complexity of implementation state individual mandate and reinsurance, would and administration. primarily have the effect of reducing premiums in State Subsidies Would Be Relatively the individual market. These policies would directly Modest . . . Assuming that total state spending lower the cost of coverage for households currently on the Governor’s proposed insurance subsidies enrolled in individual market coverage without would be roughly $500 million (consistent with federal subsidies, since these households are the rough estimated amount of penalty revenues exposed to the full premium charged by insurers. from the individual mandate), the subsidies would For this reason, these policies are projected to be relatively modest compared to the existing significantly reduce costs and increase enrollment federal insurance subsidies. By comparison, among unsubsidized households. federal spending on individual market subsidies in However, premium changes that result from California is estimated to be over $6 billion in 2018. these policies (the state individual mandate . . . But Would Likely Ease Compliance With and reinsurance) would not significantly affect State Mandate. At the same time, these subsidies households that are currently receiving federal would reduce the cost of coverage for households subsidies, since the APTC would adjust downward that are eligible to receive them and would ease to reflect reduced premiums so that subsidized compliance with a state individual mandate. In light households’ net premium cost would remain the 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET same. (The individual mandate is projected to on coverage and affordability may be possible, increase enrollment among current subsidy-eligible but would require a substantial commitment households not because of its effects on premiums, of state funding. Projections in the Covered but primarily because the penalty provides an California report provide a helpful guide for gauging incentive for people to remain insured.) Instead, in the impact on coverage enrollment of various order to reduce the net premiums for individuals options and spending levels. This can facilitate currently receiving subsidies, the state would need balancing potential state spending on insurance to provide additional premium subsidies on top of subsidies against other state funding priorities. the federal APTC. Alternatively, providing additional The Legislature will also need to decide whether to assistance to reduce out-of-pocket costs, such as use revenues from an individual mandate penalty through state CSRs, is another avenue to provide to fund affordability policies, use other funding assistance to households currently receiving federal sources, or a combination of both. subsidies. Initial Comments on Premium Assistance Versus Reduced Implementation Issues Out-of-Pocket Costs. Another decision point is whether to focus on reducing premiums, In this section, we highlight several issues related out-of-pocket costs, or both. Research suggests to implementation that could arise in relation to the that consumers are more sensitive to the premium Governor’s proposals or alternative policy packages cost of insurance in the individual market than the Legislature may evaluate. they are to the level of out-of-pocket costs. As a Funding Subsidies Solely From Penalty result, policies that reduce premium costs, such as Revenues Could Be Problematic. If subsidies premium subsidies and reinsurance, are more likely were to be funded solely from penalty revenues, to result in larger increases in new enrollment than problems could arise for a few reasons. First, policies that are intended to reduce out-of-pocket the goal of the individual mandate penalty as a costs, like state CSRs. However, reducing deterrent against people foregoing health insurance out-of-pocket costs can be a goal in its own right, coverage is at odds with the goal of generating as it can increase access to health care services. funds for insurance subsidies. Prioritizing the goal Reducing out-of-pocket costs may also make it of deterrence would mean maximizing compliance more likely that individuals that take up coverage with the mandate and minimizing penalty revenues, remain insured. If increased new enrollment is a which would have the effect of reducing funding priority, then policies that reduce premiums would available for subsidies. Prioritizing the goal be preferred. Policies that reduce premiums can of funding subsidies would mean maximizing also result in reduced cost sharing to the extent penalties, or minimizing compliance with the that households take advantage of lower premiums mandate. to purchase more comprehensive, higher-tier plans. Second, the effects of the state individual However, if improving access to health care and mandate and insurance subsidies will interact— encouraging the currently insured to remain insured increasing enrollment through the individual is the priority, then CSRs may be more direct and mandate will make state subsidies more costly, may be the preferred policy. and reducing the net cost of coverage with state Funding Level. The Legislature would also need subsidies will in turn increase the number of people to determine at what level to fund affordability taking up coverage, reducing the amount of penalty policies. The Governor proposes to fund state revenues generated. Accounting for this interaction subsidies consistent with the amount of penalty would be a key part of designing subsidies that revenues generated by a state individual mandate. would be funded solely from penalty revenues. As noted previously, subsidies funded at this level Finally, if the amount of penalty revenues would likely be relatively modest compared with collected is not stable over time, there could be federal subsidies currently available. As outlined a need to update the structure of state subsidies. in the Covered California report, larger impacts This could be disruptive for administering agencies www.lao.ca.gov 15 analysis full gutter 2019-20 BUDGET and for households that receive the subsidies. as households file their taxes. Closely following One way to address these issues would be to use this model in California would involve households whatever penalty revenues are generated to simply reconciling their advanced credit amounts on their offset—at least partially—the cost of subsidies, with state income tax returns. This final reconciliation other state funds covering any difference. may provide an additional level of accuracy and One-Time State Funding Might Be Required increase program integrity, but would also add to Until Penalty Funds Are Available. Assuming administrative complexity and cost. Other states a state individual mandate penalty is modeled that have state premium assistance (Massachusetts after the federal penalty, revenues from the and Vermont) fully advance the assistance to penalty would first be collected through state immediately reduce premiums and do not reconcile tax returns in the months following its first year subsidy amounts at the end of the year through of implementation. In contrast, many options their tax system. (In this sense, the state premium for providing state subsidies, such as premium subsidies in these states are not actually tax credits assistance that is advanced throughout the year, like the APTC.) As the Legislature evaluates the would result in costs in the same year that the possibility of providing a state-funded premium assistance is provided. If the Legislature wished to subsidy in California, it could consider whether use penalty funds to cover some or all of the costs reconciling premium subsidies through the tax of subsidies but wants to avoid the penalty being system adds sufficient value to justify the additional in place before subsidies are available, the state costs, or whether to adopt an approach similar to may need to provide one-time startup funding from that used in these other states. other sources to cover the costs of the first year of State CSRs Likely More Challenging to subsidies. Implement and Administer Than State Premium In General, Closely Modeling Premium Subsidies. For at least two reasons, state CSRs Subsidies on Federal APTC Would Reduce would likely be more complex to administer Implementation Complexity . . . Covered than state premium subsidies. First, initial California and health insurers have developed implementation of federal CSRs was complex and systems and processes to administer the federal involved extensive reconciliation activities. Second, APTC. These include Covered California information the current federal administration determined in technology systems that collect household October 2017 that it lacked the authority to make information, verify this information against electronic CSR payments to insurers and discontinued the data sources, estimate APTC amounts, and allow payments. In response to this change, California households to apply APTC to a chosen health plan. and many other states adopted a strategy under Processes also exist for regular reconciliations which the cost of continuing to provide enhanced among Covered California, the federal government, silver plans is largely covered by increased federal and health insurers to account for changes in APTC. It is unclear how the state’s strategy in household circumstances that impact the eligible response to the end of federal CSR payments might tax credit amount after it has been advanced. If affect the implementation of a state CSR subsidy. the Legislature wished to provide state premium If the Legislature wished to pursue state-funded subsidies, closely modeling them on the federal CSRs, these and potentially other implementation APTC could allow the state to utilize systems questions would need to be addressed. and processes developed for the APTC, reducing Legislative Guidance Would Be Needed on implementation complexity and cost. Desired Level of Mandate Enforcement by FTB. . . . But Some Adjustments to Final Finally, how FTB would administer a state individual Reconciliation Process Worth Considering. mandate, and at what cost to the state, will The federal APTC—specifically the portion that significantly depend on what level of enforcement is advanced—is adjusted throughout the year the Legislature desires. Stronger enforcement of to reflect changes in household circumstances, a state mandate would likely require enhanced with a final reconciliation at the end of the year coordination and data-sharing among agencies and 16 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET additional resources for FTB to review tax filings. proceeds with a state individual mandate, it will Increased enforcement could also increase the be important to consider the benefits of additional deterrent effect of the mandate. If the Legislature enforcement against its costs. RECOMMENDATIONS Individual Mandate Proposal Warrants federal mandate. For example, the Legislature could Serious Consideration. While the full extent of consider adjusting the amount of penalties paid at a state individual mandate’s impact on improving different income levels or types of exemptions that insured levels and reducing individual market are available. Additional state assistance to reduce premiums is subject to some uncertainty, it may be the cost of coverage could also help alleviate the one of the most effective policy tools available to negative impact of the individual mandate penalty the state to accomplish these twin goals. Because on some households. it raises revenues (likely at least partially offset by Consider Proposed State Subsidies increased state costs in Medi-Cal), the individual Among Range of Additional Policy Options to mandate is also very cost-effective from a state Improve Affordability. The administration has budgetary perspective. However, a state individual so far provided few details on the structure of mandate would result in costs for some households the Governor’s proposed insurance subsidies. purchasing coverage that otherwise would not, and However, we think it makes sense to consider a others paying penalties while remaining uninsured. state individual mandate in conjunction with policies On balance, we recommend that the Legislature to further reduce households’ insurance costs. give serious consideration to the Governor’s We recommend that the Legislature consider the proposal. Governor’s proposal in the context of a range of To address some of the trade-offs inherent in policy options, such as those presented in Covered the proposal related to increased costs borne by California’s affordability report, and consider what individuals that do not comply with the mandate, policies would best align with the Legislature’s the Legislature could consider making adjustments policy priorities and desired level of General Fund to the structure of the state mandate relative to the commitment. www.lao.ca.gov 17 analysis full gutter 2019-20 BUDGET LAO PUBLICATIONS This report was prepared by Ryan Woolsey and reviewed by Mark C. Newton. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 18 LEGISLATIVE ANALYST’S OFFICE