Many people make New Year’s resolutions, with popular ones being to get healthy and save money. In that spirit, we’re highlighting three very interesting December studies that focus on families’ spending on health care and a new federal proposal to encourage the use of health reimbursement accounts (HRAs).

Collins, S., et al. The Cost of Employer Insurance Is a Growing Burden for Middle Income Families. Commonwealth Fund; December 7, 2018. Although media attention has focused on the individual market in recent years, roughly half of Americans receive their health insurance through their employer. While employer-sponsored insurance (ESI) has been the bedrock of coverage in this country for most people under 65, researchers at the Commonwealth Fund find that rising out-of-pocket costs associated with ESI have had a disproportionate effect on middle-class workers.

What It Finds

• Average premiums for employer plans increased 4.4 percent in 2017 after years of small increases, with annual premiums above $7,000 for a single individual in eight states.
• Employee contributions to premiums are growing faster than overall ESI premiums, spiking 6.8 percent for a single-person plan in 2017.
• Employee contributions to plan premiums consumed 6.9 percent of U.S. median income across single and family plans in 2017, a 35 percent increase from 2008.
• Annual deductibles across single and family plans nearly doubled as a portion of median income, rising to 4.8 percent in 2017 from 2.7 percent in 2008.
• When combining premium contributions and potential out-of-pocket payments made in order to meet a deductible, spending rose to 11.7 percent of median income in 2017, up from 7.8 percent in 2007. In some states, like Mississippi and Louisiana, this spending amounted to 15 percent or more of median income.

Why It Matters

The cost of health care is top of mind for most Americans. There is good reason for that. While the health insurance offered through employers has been the primary source of coverage for middle-class families for generations, it is starting to fray in the face of rising health care costs (or, as Gerry Anderson and Uwe Reinhardt would say: “It’s the prices, stupid”). The Commonwealth Fund’s research demonstrates that as employers pass on an ever-greater share of those costs to their employees, it is having a real impacts on the financial vitality of middle-class families, lowering take-home incomes and reducing their ability to spend on other goods and services.

Farrell, D., et al. Cash Flow Dynamics and Family Health Care Spending: Evidence from Banking Data. Health Affairs; December 13, 2018. Research has shown that personal finances affect consumers’ decisions about obtaining health care services. For example, lower incomes contribute to delayed care. Using banking data from Chase, researchers at the JPMorgan Chase Institute look at short-term cash flow fluctuations to see how they influence consumers’ decisions about health care spending across all income groups.

What It Finds

• Consumer health care spending increases by 60 percent the week after receiving a tax refund. Consumers with low-balance bank accounts have an even larger percent increase. Similarly, consumers receiving a downward adjustment on their monthly mortgage increased health care spending by 16 percent or more.
• Between 2013 and 2015, following increases of 4-5 percent in cash balances or take-home income, 17 percent of families made at least one “extraordinary” health care payment (defined as payments amounting to at least $400, more than 1 percent of annual income, and unusual compared to the family’s typical monthly healthcare spending). These payments averaged $2,089 each.
• One year following an extraordinary payment, families’ liquid assets stayed on average 2 percent below their normal baseline, and revolving credit card balances (the portion of credit card spending that goes unpaid at the end of a billing cycle) remained elevated by 9 percent.
• When unemployed but without unemployment insurance, consumers cut health care spending 24 percent.
• During the 2017 hurricanes Harvey and Irma, consumers in affected areas experienced a 20 percent decrease in cash flow, which led to a 65 percent drop in health care spending in Houston and a 53 percent drop in Miami. Drops in spending lasted longer than 12 weeks after the storms passed.

Why It Matters

With consumers’ out-of-pocket expenses on the rise for all forms of private health insurance, research on how a family’s cash flow affects health care spending – and ultimately health outcomes – is important. This study shows that cash fluctuations affect whether and how consumers spend money on their health, particularly among those who do not have significant amounts of cash savings.

Fiedler, M. Effects of Weakening Safeguards in the Administration’s Health Reimbursement Arrangement Proposal. Brookings Institution; December 28, 2018. The Trump Administration released a proposed rule in late October that would greatly expand employers’ ability to discontinue offering group health plans and instead subsidize their employees’ purchase of individual market insurance through health reimbursement arrangements (HRA). The proposed rule includes some safeguards to mitigate the risk that employers will “dump” sicker employees from their health plans. These safeguards include:

• Prohibiting employers from offering a traditional group plan alongside an HRA. This is to prevent employers from designing a group plan that is unattractive to sicker workers, thereby incentivizing them to leave the group plan for ACA-compliant individual coverage.
• Requiring employers to offer HRAs on the same terms to all “similarly situated” employees. This reduces the risk that employers would target sicker workers with the offer of an HRA.
• Requiring the HRA to be integrated with an Affordable Care Act-compliant individual health insurance policy. This reduces the risk that employees will self-sort themselves according to health status, with healthy employees gravitating to low-cost underwritten products (like short-term plans), and sicker workers opting for the guaranteed issue, community-rated ACA-compliant market.

However, the proposal’s preamble suggests that the final policy could weaken or eliminate these safeguards. Matthew Fiedler of the Brookings Institution simulates the effects of an HRA rule without safeguards to prevent employers shifting older or sicker employees to the individual market.

What it Finds

• If only 10 percent of employers elect to use HRAs to shift sicker workers to the individual market, premiums in the individual market would rise by 16-17 percent. If all employers shift sicker workers to the individual market, premiums would likely increase by between 85 and 93 percent.
• Between 11 and 24 percent of enrollees would shift from ESI to the individual market if 10 percent of employers elected to use HRAs to engage in worker-level shifting, and between four and 12 percent of enrollees would shift the individual market if all employers chose to engage in such worker-level shifting. Four percent of all ESI enrollees is about 6.24 million people, almost half of those enrolled in ACA-compliant individual market plans in 2017.
• Employers would see savings on the effective price of coverage, between 21 and 23 percent if 10 percent of employees engaged in worker-level shifting via HRAs, and savings of between 11 and 12 percent if all employers engaged due to higher individual market premiums as more workers shift.

Why it Matters

The majority of Americans under age 65 are insured through ESI, but only a small portion is insured through the individual market. As a result, even slight shifts from ESI to the individual market can greatly affect its risk mix. If just one of the above-described safeguards are eliminated, a significant percentage of firms would likely engage in worker-level shifting via HRAs, and individual market premiums would rise. When individual market premiums rise, the federal government must offset those premiums through premium tax credits for the vast majority of enrollees. Unsubsidized enrollees will bear the full weight of the premium increases, while those using an employer-funded HRA could find that it doesn’t keep pace with their rising premium costs. As the Administration weighs whether to maintain the proposed safeguards in the rule, understanding the effects on federal taxpayers and consumers purchasing insurance is critical.