Third Way Proposes To Cap OOP Costs For People With Chronic Illnesses

January 13, 2023

Congress should cap the out-of-pocket spending for Americans who have chronic illnesses and face persistent high health care costs, the Third Way says in a policy response to the centrist think tanks’ recent analysis that found millions of people are consistently spending about the same percentage of their income on medical care as they do on housing.

The spending cap proposed by Third Way would initially apply to consumers who purchase exchange coverage, but eventually expand to people with employer coverage.

David Kendall, Third Ways’ senior fellow for health and fiscal policy and a co-author of the paper, stresses that underinsurance is prevalent in both markets, and hopes the brief will help highlight the need to address high OOP costs faced by people with employer coverage as well as those who purchase insurance on their own.

The think tank also lays out steps Congress could take to implement the chronic care cost cap, which builds off legislation spearheaded by Sen. Jeanne Shaheen (D-NH) that aimed to boost the generosity of Affordable Care Act plans and lower out-of-pocket spending.

“Our health care system is long overdue for much-needed reform, with surging costs putting quality health care out of reach for too many Americans,” Shaheen said in response to Third Way’s report and proposal released on Dec. 19.

“The new data outlined in this report demonstrates that these surging costs are taking a significant portion of families' income each year. That is unacceptable,” she adds. “I've worked to cut health care costs for families by enhancing and extending key health care premium tax credits. And I’ll do everything I can to build on that progress in the next Congress. More must be done to address broader issues in our health care system to ensure cost is never a barrier to care.”

Shaheen’s office did not respond by press time to queries on whether they planned to draft a bill that mirrors the Third Way plan.

Third Way’s report focuses on people who have persistent high costs, or those who spend more than 5% of income on medical bills for two years in a row. According to an analysis of Medicare Expenditure Panel Survey data from 2015-2019, about 10 million Americans live in families with persistently high OOP costs, Third Way finds. For a family with $84,370 median income, that is an average of $5,950 in OOP costs each year, which is on top of the average $6,106 a year for premiums for employer coverage or $6,830 annually for exchange plans.

“That means health care takes a total of at least 14% to 15% of their income, which is about as much as the cost of housing,” according to the analysis, written by Kendal, Nicole Tapay, an independent health policy consultant, and Ladan Ahmadi, who formerly served as Third Way’s deputy director for economic communications and health policy.

The report further drills down to find that the percentage of the population with persistently high health costs is also more likely to have lower incomes, be older, have more chronic conditions, and to live in the Midwest.

The ACA set limits on OOP spending in a single year, but those caps are still too high for many people, Third Way says. For example, the out-of-pocket maximum for someone earning 100% of poverty, or $12,800, for 2023 plans is $2,900, or about 23% of income.

Shaheen’s legislation would mitigate costs for consumers in a single year by switching the ACA’s benchmark plan from silver-tier to the more generous gold tier plan, permanently adopting the enhanced ACA credits and extending cost-sharing reductions -- which require ACA plans to lower OOP costs at the counter -- to people earning up to 400% of the federal poverty level (FPL).

But coverage gaps would remain, Third Ways says, because the ACA spending limits are triggered annually and reset at the beginning of each policy year, which leaves patients vulnerable to cycles of high health costs.

To address the problem, Third Way proposes a new chronic care cost cap that would go into effect the year after a patient with chronic disease hits their OOP maximum; the cap would gradually decrease the enrollee’s required contribution over three years based on income. For example, a consumer earning 400% or more of the federal poverty level who is enrolled in a silver-tier exchange plan -- which covers 70% of medical costs under current law -- and becomes eligible for the program, could get 80% of their costs covered in the second year and 90% of costs covered in year three.

Lower income people would be required to spend even less on services in year three but would always have to pay for at least 1% of the average cost of services under the plan.

Third Way further lays out several steps Congress should take to implement the proposal.

Lawmakers should first lower the existing out-of-pocket spending maximums allowable under the ACA. Moving the benchmark plan from the silver-tier, which must cover 70% of medical expenses, to the gold-tier, which has an 80% actuarial value, would significantly reduce those costs, Third Way says, citing an Urban Institute report.

Congress could then extend eligibility for the cost-sharing reductions -- which would be directly funded by the government and provided via advanceable, refundable tax credits - to people who meet their OOP maximums. Individuals would indicate their eligibility on their exchange applications, and it would be verifiable through tax forms. While the credits would first only be available for exchange coverage, they could be extended into the employer market, Third Ways says. To save costs, the credits could also be limited to specific conditions.

Third Way also recommends Congress build off the Center for Medicare and Medicaid Innovation’s MA Value-Based Insurance Design (VBID) model -- and Rep. Lauren Underwood’s (D-IL) proposal to eliminate cost-sharing for certain chronic care services -- by creating a permanent, independent evaluation of the benefits of lowering or eliminating cost-sharing for chronic care services.

The chronic care cost cap would replace the current tax deduction for medical expenses that exceed 7.5% of income. First, the deduction would be eliminated only for those who have a cap through the exchanges; once the cap is extended to everyone, the deduction would be fully eliminated. The cost of the cap may be further offset by increasing cost-sharing for low-value care. -- Amy Lotven (