eco question

Health Economics Econ 5860 Prof. Kurt Lavetti

The Affordable Care Act (ACA) and Health Insurance Markets in the US

Basic Conceptual Framework  The primary objective is to guarantee access to health insurance

 The focus of the bill is on making insurance premiums affordable, not on reducing total spending or the prices of medical care

 The most basic framework of the ACA is the “three-legged stool” approach

 First leg is an insurance mandate—force everyone into the insurance market

 Second leg is insurance reform—prevent insurance companies from being able to pick healthy patients and deny coverage to unhealthy ones

 Third leg is financing—subsidize insurance for low-income people so that getting everyone into the insurance market doesn’t create too much financial burden

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Outline of ACA Topics

1. Big picture overview on the 3 legs of the ACA  What changed, how does the ACA work, and how does it

fit together

2. Effects of the ACA on adverse selection in individual health insurance markets  What are the effects of each of the 3 legs on deadweight

loss from adverse selection?  Why are all 3 legs required to balance effects on adverse

selection?

3. What are the pros and cons of health insurance mandates?  What do employer health insurance mandates do labor

markets?

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Overview of ACA Leg 1: Insurance Mandate

 Two forms of insurance “mandate”  Mandate on large businesses to offer insurance to workers

 Mandate on individuals to obtain insurance from some source  Note: individual mandate was repealed in 2018 under the tax reform

bill. We will first discuss the ACA as written, and then discuss likely effects of removing the individual mandate.

 Both “mandates” are tax penalties, rather than stronger laws  The main purpose of a mandate is to reduce adverse selection

costs by forcing everyone into the market, preventing death spiral

 Mandates (on their own) are only effective to the extent that they compel everyone to purchase insurance

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Where did People Get Insurance before the ACA?

 64% Private Insurance  55.3% Employer Provided  9.8% Private individual insurance plans

 31% Public Insurance  15.9% Medicaid (Low income, especially children and

pregnant women)  14.5% Medicare (over 65 or permanently disabled)

 18.4% Uninsured  Decreased to 8.8% in 2016, primarily because of ACA

Note: Numbers do not add to 100% because people sometimes have multiple insurance plans

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ACA Employer Mandate

 Larger firms pay a tax for not offering insurance to workers

 Firms with 50 or more full-time equivalent (FTE) workers pay a fine if any of their full time employees receives a tax credit through the insurance exchanges  Fine equals (N-30)*$2000, where N= number of full-time

workers

 Full-time worker defined as 30+ hours per week

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Employer Mandate

 Questions:  Is this a well-designed policy?

 Do you expect any “unintended consequences” of this part of the law?

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Employer Mandate  There is a lot of concern that this could distort labor markets

 Example: Suppose a company has 100 workers that work 40 hours a week, and the firm does not offer health insurance

 Under the ACA this firm would be fined $140,000 per year if even one of their employees buys subsidized insurance on an exchange

 However, if the firm instead hires 139 workers for 29 hours a week (total number of hours is about the same), they will not have to pay any fine, because they have no full time workers

 Typically, sharp cutoffs at which incentives change a lot lead to large “unintended consequences”  Could reduce distortions in labor markets with a more gradual

change in tax as a function of hours

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10 No Evidence of this Distortion

Source: http://blog.recenter.tamu.edu/

11 Why Not? Most Large Employers Choose to Offer Health Insurance Anyway

ACA Individual Mandate

 NOTE: This part of the ACA was repealed by the Tax Cuts and Jobs Act of 2017

 Individual mandate is a tax on citizens and legal residents without qualifying health insurance  Greater of $695 or 2.5% of household income, up to max fine of

$2,085  Mandate was designed to end automatically if health insurance

premiums get too high  If cheapest health plan option in your market costs more than 8% of

annual income after subsidies  For comparison, think about the mandate that drivers must carry

auto insurance  Auto insurance has escalating penalties for repeat offenders, and jail

time in some states  This is a stronger form of mandate because long-term

noncompliance is too costly to be a reasonable option

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Individual Mandate

 Objective of the individual mandate was to reduced adverse selection by making it more costly for healthy people to not be in the insurance pool

 What is the right size tax penalty?  Massachusetts imposed an individual mandate with a tax penalty

2006

 Hackman et al (AER 2015) study this policy change and estimate that the optimal tax penalty is $2,190 per person per year

 This estimate weights the benefits of reducing adverse selection with potential loss in consumer surplus from forcing people to buy something they don’t want. Net effect of these two is a $335 welfare gain per person per year

 Mass. individual mandate tax was very similar to ACA tax level

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Individual Mandate  Individual Mandate penalty under the ACA compared to

Massachusetts 2006 reform  MA reform successfully reduced rate of uninsurance to 2% by

2010, compared to about 17% nationally

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Source: BCBS Foundation Report, 2012

Summary: ACA Insurance Mandates

 Both mandates have the potential to improve welfare by reducing adverse selection  There are winners and losers associate with doing this  Studies suggest reduction in deadweight loss is large enough to

offset the costs to losers  Eg. In theory could combine a mandate tax penalty with a tax break

for health people to offset burden of mandate

 In theory this could improve adverse selection without making anyone worse off

 Employer mandate reinforces the system of employer- provided insurance  We will return to this topic and discuss employer mandates and

effects on labor markets

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Leg 2: Insurance Reform

 Major part of insurance reform is to create state-based health insurance exchange marketplaces  Exchanges offer online marketplace where individuals and small

businesses can buy insurance

 Idea is to fix the problems of adverse selection in the individual and small-group insurance market  Think back to the death spiral insurance game and the Akerlof

lemons problem with used car auctions

 Since there is an individual mandate and large subsidies, insurance companies that sells plans on the exchanges can expect that healthy people will sign up too  This can help prevent high insurance costs and death spirals

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ACA Insurance Reforms

 All plans sold on the exchange must be guaranteed issue and guaranteed renewable  That is, insurance companies must be willing to sell the plan to

anyone at the posted price

 Cannot decline coverage for people who are sick or have pre- existing conditions

 Cannot drop current enrollees who get sick, or who want to renew their insurance for any reason

 This removes the possibility that insurance companies will decline to cover sick people

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Insurance Reform

 Prices of insurance plans can still vary based on individual characteristics, but in a limited way

 Prices can depend on age, geography, family composition, and tobacco use only

 There are also relative price ceilings and floors by age and tobacco use  Holding other factors constant, the maximum price charged to any

age group cannot be more than 3 times larger than the minimum price charged to any age group

 Ie. The price to a 64 year old cannot be more than 3 times larger than the price to an 18 year old

 Similar price ratio restriction for tobacco users, cannot be more than 1.5 times larger than non-user price

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Exchange Plans

 All plans sold on exchanges have one of 4 standardized benefit categories, for easy comparison  Bronze plans satisfy the minimum qualifying level of health insurance

to avoid mandate penalty, covering on average 60% of medical costs (60% actuarial value)

 Silver plans must have at least 70% actuarial value

 Gold plans at least 80%

 Platinum plans at least 90%

 All plans must have out-of-pocket maximum no more than $6,350 for an individual, $12,700 for a family  For low-income households the out-of-pocket maximum decreases

to about $2,100

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Exchange Plans

 All exchange plans under the ACA are subject to certain general requirements

 Things insurers can no longer do:  Try to discourage sick people from joining (through marketing, for

example)

 Have extremely small provider networks

 Try to hide or manipulate patient satisfaction reviews and quality measures

 Make it difficult for consumers to compare insurance plans (achieved by standardizing plans)

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Regulation of Non-Exchange Plans

 Outside of the exchange, new restriction imposed on how actuarially unfair insurance can be  Illegal to sell insurance with administrative costs plus profit margins

that exceed 15% for large insurers or 20% for small insurers

 Insurers must send refund checks to their customers if this happens

 States can review insurance premium increases each year and prevent insurers from raising premiums too quickly  Insurers must justify why rates are being increased

 All insurance policies in the country must provide coverage to dependent children up to age 26

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23 Does The Age Restriction Matter?

Source: Orsini and Tebaldi 2016

24 Does The Age Restriction Matter?

Source: Orsini and Tebaldi 2016

Orsini and Tebaldi (2016) estimate that • young adults pay

$801 more per year in premiums because of 3:1 age restriction

• Older adults pay $1850 less per year

• Net effect of age restriction: saved the government $2.3 Billion in 2014

Why Age-Based Price Restrictions?

 What are the potential reasons why age-based pricing restrictions could make sense?  Risk protection?

 Ability to afford insurance?









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Why Age-Based Price Restrictions?

 What are the potential reasons why age-based pricing restrictions could make sense?  Risk protection?

 Ability to afford insurance?

 Restrictions on age-based pricing are strange from an economic perspective for several reasons:  Young people have lower income and lower savings, less able to

afford to give money to older people

 Aging is not a risk that needs to be insured against, it is perfectly predictable  Counterargument: retirees may not have expected medical costs to

grow as quickly as they have---there is still some risk associated with aging is growth rates are hard to forecast

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Leg 3: Subsidies and Affordability

 Affordability achieved through combination of:  Expansion of Medicaid eligibility for adults up to 138% of federal

poverty line

 Income-based insurance premium credits and subsidies for insurance purchased on the exchanges, up to 400% of federal poverty line

 Tax credits for small businesses that provide insurance for employees

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Medicaid Expansion

 Prior to ACA, state Medicaid programs could choose whether to offer Medicaid for adults (other than pregnant women)  Some states voluntarily chose to offer limited coverage, but most

(44/51) didn’t

 Under the ACA as originally written, every person in the country would be eligible for Medicaid if their income is below 138% of FPL (Federal Poverty Line)

 To finance expansion of the program, federal government pays for 90% of costs of newly eligible enrollees, states pay remaining 10%  New expansion imposes much lower costs on states (per Medicaid

enrollee) compared to before the ACA

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29 Percent of Medicaid Costs Paid by Federal Government

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Medicaid Expansion

 In 2012 the US Supreme Court in National Federation of Independent Business v. Sebilius ruled that the mandatory Medicaid expansion part of the ACA was unconstitutionally coercive to states, since the penalty for noncompliance was very large  As a result, states were given a choice whether to implement

Medicaid expansion component of the ACA

 Ohio passed a law stating that they will accept Medicaid expansion as long as the Federal Govt continues paying 90% of the cost

 Congressional Budget Office initially estimated that ACA would reduce number of uninsured from 56 million to 31 million  About 12 million of the 25 million newly insured come from Medicaid

expansion

 Would have been 6 million higher (18 instead of 12) if not for ruling

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Source: http://www.cbo.gov/sites/default/files/cbofiles/attachments/43472-07-24-2012- CoverageEstimates.pdf

Medicaid Expansion  36 states have now chosen to expand Medicaid under the ACA, 14 declined  In 2014 28 states initially chose to expand

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Medicaid Expansion

 Current Medicaid eligibility varies hugely by state

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Childless Adults

Medicaid Expansion

 Smaller disparities for parents of dependent children

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Insurance Exchanges and Medicaid

 Only families earning between 100%-400% of the poverty line can get subsidies to purchase insurance on the exchanges

 Law was written so that Medicaid would cover lowest income group, and exchanges would cover people with slightly higher incomes

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Insurance Exchanges and Medicaid

 Due to unexpected change in law from Supreme Court decision, in states that opt out of Medicaid expansion there will now be a gap between Medicaid and exchange subsidies

 Many families earning below 100% of the poverty line but above the Medicaid threshold in their state will remain uninsured, and will fall into a coverage gap

 Even larger gap for non-parent adults in poverty in opt-out states

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Insurance Premium Credits

 Federal credits to purchase insurance through exchanges

 After credits, price of insurance faced by consumer is capped at:

 2% of income if income between 100-133% of FPL  3-4% of income if income between 133-150% of FPL  4-6.3% of income if income between 150-200% of FPL  6.3-8.05% of income if income between 200-250% of FPL  8.05-9.5% of income if income between 250-300% of FPL  9.5% of income if income between 300-400% of FPL

 Credit amount is based on the price of the second cheapest “silver” plan in the area  Amount of credit equals price of 2nd cheapest silver plan minus price

cap based on income rules above

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Insurance Premium Credits 37

Source: Wall Street Journal

Cost-Sharing Subsidies

 In addition to subsidizing the premium, there are also subsidies for copayments, coinsurance, and deductibles for plans purchased through exchanges

 For low income households, government subsidizes part of the deductible and coinsurance to make the plan more generous  Income between 100-150% of FPL:

 Only pay 6% of medical spending on average, instead of 30%

 Income between 150-200% of FPL: pay 13% of medical spending

 Income between 200-250% of FPL: pay 27% of medical spending

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How Will Consumers Figure All of This Out?

 Healthcare.gov website automatically adjusts the prices and generosity shown on the website to that individual’s situation https://www.healthcare.gov/see-plans/

 Makes it easy to compare plans without needing to know all the complicated rules

 However, has drawbacks:  If you earn more money than expected may have to pay back

some of premium subsidy (but not cost-sharing subsidy).

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Small Business Tax Credits

 For small businesses with 10 or fewer workers and average annual earnings of $25,000 or less, business can purchase insurance for workers through the exchange and get a tax credit of 50% of the employer’s contribution to the premium

 Tax credit phases out from 50% to 0% as size of firm increases from 10 to 25 workers, and as average annual income increases from $25,000 to $50,000

 Tax-exempt small businesses can get credits too, but credits are 30% smaller

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Outline of ACA Topics

1. Big picture overview on the 3 legs of the ACA  What changed, how does the ACA work, and how does it

fit together

2. Effects of the ACA on adverse selection in individual health insurance markets

3. The economics of individual health insurance mandates

4. The effect of employer mandates on labor markets: employment and wages

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ACA Conceptual Framework: Impacts on Adverse Selection

 Financing  Subsidize insurance for low-income

 Mandates  Tax individuals without insurance and large employers that don’t offer

insurance

 Insurance reform  Insurers selling plans on the exchange cannot charge different prices

based on health status or pre-existing conditions

 Insurers cannot deny coverage to anyone

 Questions:  How do each of these components affect adverse selection in health

insurance markets?

 What would happen if we keep some components but remove others?

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Effect of Insurance Subsidies on Adverse Selection (Akerlof Model) 43

Price

Percentage of Population with Insurance

Demand

Average Cost

0 100%

Marginal Cost

P*

Q*

Effect of Insurance Subsidies on Adverse Selection (Akerlof Model) 44

Price

Percentage of Population with Insurance

Demand

Average Cost

0 100%

Marginal Cost

P*

Q*

• Question: what is the deadweight loss from adverse selection in this health insurance market?

Effect of Insurance Subsidies on Adverse Selection (Akerlof Model) 45

Price

Percentage of Population with Insurance

Demand

Average Cost

0 100%

Marginal Cost

P*

Q*

• Answer: the shaded area.

• This area is the total difference between WTP and MC added up over everyone who is priced out of the market because of adverse selection

Effect of Insurance Subsidies on Adverse Selection (Akerlof Model) 46

Price

Percentage of Population with Insurance

Demand

Average Cost

0 100%

Marginal Cost

P*

Q*

• If there were no adverse selection, this area could have been included in consumer surplus and/or producer surplus

Effect of Insurance Subsidies on Adverse Selection (Akerlof Model) 47

Price

Percentage of Population with Insurance

Demand

Average Cost

0 100%

Marginal Cost

P*

Q*

• Question: what happens to the deadweight loss if health insurance is subsidized?

Effect of Insurance Subsidies on Adverse Selection (Akerlof Model) 48

Price Demand

Average Cost

0

Marginal Cost

POld

QOld

• Question: what happens to the deadweight loss if health insurance is subsidized?

Demand Plus Subsidy

PNew

QNew Percentage of Population with Insurance

100%

Effect of Insurance Subsidies on Adverse Selection (Akerlof Model) 49

Price Demand

Average Cost

0

Marginal Cost

POld

QOld

• As the subsidy increases, demand shifts further upward

• This reduces prices for everyone, increases Q, and decreases deadweight loss

Demand Plus Subsidy

PNew

QNew Percentage of Population with Insurance

100%

Effect of Insurance Subsidies on Adverse Selection (Akerlof Model) 50

Price Demand

Average Cost

0

Marginal Cost

POld

QOld

• A large enough subsidy can induce everyone to buy insurance, and eliminate all of the deadweight loss

Demand Plus Subsidy

PNew

QNew

Percentage of Population with Insurance

100%

Effect of Insurance Subsidies on Welfare 51

Price Demand

Average Cost

0

Marginal Cost

POld

QOld

Demand Plus Subsidy

PNew

QNew

Percentage of Population with Insurance

100%

• Eliminating deadweight loss increases welfare by

• What are the other welfare effects?

Effect of Insurance Subsidies on Welfare 52

Price Demand

Average Cost

0

Marginal Cost

POld

QOld

Demand Plus Subsidy

PNew

QNew

Percentage of Population with Insurance

100%

• Effect 2: equilibrium price falls, increasing CS by

Effect of Insurance Subsidies on Welfare 53

Price Demand

Average Cost

0

Marginal Cost

POld

QOld

Demand Plus Subsidy

PNew

QNew

Percentage of Population with Insurance

100%

• Effect 3: requires raising tax revenue. Total cost of subsidy is

• Raising this tax revenue may cause deadweight loss in market being taxed

• Welfare effect = marginal cost of public funds *

Pros and Cons of Subsidizing Insurance

 Welfare Gains:  Reduction in deadweight loss from adverse selection

 Subsidy counteracts the negative externality imposed by sick people on healthy people

 Because information is asymmetric, insurers cannot charge higher prices to sicker people

 Sick people drive up average costs in the insurance pool

 This causes healthy people to be priced out of the market

 Welfare Losses:  Money required to pay for the subsidy must come from somewhere

 Taxation generally imposes some deadweight loss in whatever market is taxed

 Empirical Question: are the welfare gains from reducing adverse selection large enough to justify imposing taxes and using them to subsidize insurance?

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