Transfer. 3D illustration of generic golden coins and pawns over black background.
After the passage of the Inflation Reduction Act, the Medicare Part D average premium jumped 21% from 2023 to 2024 and is expected to grow “dramatically” in 2025. In contrast, it had been remarkably stable, growing by only 9.2% from 2010 to 2023, far below the rate of inflation.
The primary reason for the premium jump is the out-of-pocket cap of $2,000 imposed by the Inflation Reduction Act. No one pays more than $2,000 out of pocket, but everyone pays higher premiums as a result.
The Affordable Care Act has a similar spirit of shifting financial responsibility from a relatively few high-risk enrollees to all enrollees: insurance plans cannot set premiums based on enrollees’ risk profiles, exclude certain services (such as mental health and substance use), or set a dollar limit on annual or lifetime spending.
As a result, the individual market premium jumped by 39% in the two years following the implementation of these provisions, compared to 6% prior. The financial burden of higher premiums was then shifted to taxpayers’ shoulders.
For any type of insurance, when the coverage is narrow, and the premium is low. If we want a health plan to cover all medical needs without a deductible or out-of-pocket requirement for everyone, for the purpose of equalizing medical spending, then we must be prepared to pay extremely high premiums.
However, most Americans do not have high risks—half of the population in aggregate incurred only 3% of the total healthcare dollars, and 90% of the population in aggregate consumed only one-third. The pattern is similar among seniors. Most of us would be better off with more cash than comprehensive insurance plans, and the goal of equalizing medical spending cannot justify forcing everyone to pay for the same expensive coverage.
We have diversified risk profiles and preferences for insurance products. We are allowed to purchase other types of insurance based on our own tastes, but not health insurance. Regulatory restrictions on how health plans offer benefits inevitably leave enrollees unsatisfied.
Individuals who choose a healthy lifestyle, have sufficient risk tolerance, avoid over-diagnosis and over-treatment, and are comfortable with comparison shopping should have the option to purchase health plans with narrower coverage, higher risk exposure, and cheaper premiums. The benefits from premium savings and the reduced moral hazard caused by broad coverage are especially valuable for low-income individuals. More control over their healthcare dollars would also stimulate competition and innovation, exerting downward pressure on prices and upward pressure on quality.
Importantly, high-risk-low-income individuals deserve a much better deal. Direct cash transfers would allow them to pay for higher premiums, out-of-pocket expenses, additional stop-loss coverage, or social determinants of health as they prefer. The current government programs, by indirectly subsidizing insurance premiums or cost-sharing rather than directly assisting individuals, give them no discretionary healthcare fund, no opportunity to financially benefit from health-enhancing activities, and no broad access to providers.
Allowing individuals to purchase insurance as they prefer accompanied by direct cash transfers to high-risk-low-income patients is a much better approach than distorting benefit design to inflate premiums for all. However, this approach, by removing regulatory complexities and shifting more control to patients, can invite opposition from special interest groups and policymakers who benefit financially and politically from perpetuating such complexities and control.
Their opposition would be less effective if we realize how high-risk patients have been underserved and deprived of opportunities to improve their health, and how low-risk individuals have been exploited to pay for things unrelated to medical care or assisting others.
We deserve control over our healthcare dollars, access to insurance plans that suit our needs, and the right to reject any arrangement that prioritizes political and business interests over the interests of all patients.