eco question

Health Economics Econ 5860 Prof. Kurt Lavetti

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. Employer mandates: the pros and cons of reinforcing the system of employer provided insurance

5. Overall effects of the ACA so far

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• Lots of discussion in popular media about whether the employer mandate in the ACA would “kill jobs”

• Is there any economic validity to this argument?

3 Labor Market Effects of Employer Mandates

Who really pays for employer- provided insurance?

• Recall from intermediate microeconomics the profit maximizing choice of inputs requires: P*MPL=wage • In a competitive labor market the wage a worker receives is equal

to the value of the marginal product produced by the worker

• Now consider, instead of paying a worker wages, firms pay them with health insurance

• P*MPL is fixed, so if the firm spends more on health insurance, it must spend less on wages

• Therefore a firm offering health insurance will pay workers lower wages, so that the total cost of (Health Insurance + Wage) is fixed

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S

D0

L*L2

W

W0 P

5 Labor Market Effects of Employer Provided Health Insurance

Labor Market Effects of Employer Provided Health Insurance

S

D0

L*L2

W

W0

D'

6

S''

• D0 is demand curve for labor at firm that does NOT offer health insurance • If the firm provides insurance, it pays lower wages, shifting the demand curve

down to D’ • Vertical distance between D0 and D’ equals the marginal cost of insurance

• Now consider the worker:

• Workers supply labor to firms, and choose the quantity of time to sell to firms in order to maximize utility

• Gaining health insurance increases the utility workers get from working, all else equal, shifting their labor supply curve up

• If workers value health insurance at the same amount that it costs to buy, then size of the labor supply curve will equal the cost of insurance

• Eg. Workers are indifferent between the lower wage with health insurance or the higher wage without insurance

7 Labor Market Effects of Employer Provided Health Insurance

S

D0

L*

W

W0

W1 P

D'

8

S'

• If workers value insurance at the same amount that it costs firms to buy, wages drop by exactly the price of insurance, and total employment stays the same.

• The full cost of insurance is paid by workers in the form of lower wages, regardless of how elastic the supply and demand curves are!

Labor Market Effects of Employer Provided Health Insurance

• However, if workers value health insurance by more than it costs firms to buy then the labor supply curve shifts by more than the labor demand curve

• This could occur if it is cheaper for firms to buy insurance than it would be for an individual to purchase the same insurance

9 Labor Market Effects of Employer Provided Health Insurance

S

D0

L0 L2

W

W0 W1

D'

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S' S''

W2

• Workers value insurance more than what it costs firms to buy • Supply curve shifts more than demand curve, wages fall more than cost of

insurance, and employment increases

Labor Market Effects of Employer Provided Health Insurance

Who really pays for employer provided health insurance?

 Empirical consensus is workers pay for about 100% of the cost of health insurance through lower wages  Gruber (1994) looked at the incidence of state-level

changes in mandatory maternity benefits  Found that women of childbearing age saw wage

decreases in states with mandates, but not in states without mandates

 Wage decrease was roughly equal to the average cost of providing additional maternity care

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Explaining the Dominance of Employer-Provided Insurance

 If workers pay for employer-provided insurance, why do we have this insurance system?

 The US is the only high income country in the world in which the primary source of insurance coverage comes from employers  88 % of private health insurance is obtained through

employers (this number is decreasing post-ACA)

 Why does this happen? Is it a good idea?

 Does this link between insurance and jobs distort labor markets, employment rates, or wages?

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Explaining the Dominance of Employer-Provided Insurance

 Potential explanations for this unique coverage system a) Historic determinism

b) Economies of scale (loads and administrative costs)

c) Avoids adverse selection

d) Tax subsidy

e) All of the above

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14a) Historical “Accident” • About 170 million people in the US get health insurance from

an employer (through individual or family coverage) • Why do we rely upon labor markets for providing health

insurance, unlike almost every other country? • Federal wage and price controls imposed during WWII

• Firms couldn’t increase wages to attract good workers, instead shifted towards attractive nonwage benefits to increase compensation

• Health insurance was the main way of increasing fringe benefits

• Historical system has been too difficult to change since it grew to be the primary source of coverage

b) Economies of Scale

• Cost of insurance for large groups is lower than for small groups due to economies of scale

• Potentially caused by: • Costs of selling, negotiating contract • More efficient billing and processing medical claims

• Large employers pay premiums on average about 5% markups above medical costs

• Small groups (1-5) pay about 25-30% markups • By comparison, cost of running all of Medicare equals

about 2% of medical costs

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c) Adverse Selection in Insurance Markets

 Most people seek jobs for reasons other than their health status  That is, firms aren’t organized based on sorting

workers with similar health risks together

 Employer based coverage provides a mechanism to group uncorrelated risk and negotiate benefits that does not suffer from adverse selection

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d) The Tax Exclusion for Employer Insurance

• If your employer buys health insurance for you, the cost of the insurance benefit isn’t taxed as income

• However, if the employer gives you money that you use to buy insurance, the cost of the insurance is not deductible, and you have to pay income taxes on the money

• Tax benefit creates a large incentive for employers to purchase insurance for their workers

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Explaining the Dominance of Employer-Provided Insurance

 Hypotheses: a) Historic determinism

b) Economies of scale (loads and administrative costs)

c) Avoids adverse selection

d) Tax subsidy

e) All of the above

 ACA further reinforces employer-provided insurance system in the US by imposing employer mandates

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• Lots of discussion in popular media about whether the employer mandate in the ACA would “kill jobs”

• Is there any economic validity to this argument? Overall, probably not. But there are some reasons it may reduce employment:

• If workers don’t value health insurance • Labor supply curve shifts by a small amount

• If wages cannot adjust to reflect cost of insurance • Workers near the minimum wage, for example

• If workers would like to retire, but cannot because they have no alternative source of insurance

19 Labor Market Effects of Employer Mandates

• No effects on shift towards part time work • Moriya, Selden, and Simon (2016) and Mathur, Slovov, and Strain (2016)

• No effect on full time employment levels or hours of work • Kaestner et al. (2015)

• Initial forecasts from CBO predicted 1.5-2% reduction in employment

• This prediction was based on estimates that many people are only in the labor force because they have no other way of getting health insurance

• These people would prefer to exit labor force if they could buy insurance somewhere, and the ACA gives them this option

20 Effects of ACA on Labor Markets

Effects on Labor Markets  No clear evidence that large numbers of workers have

been forced into part time jobs

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• Not obvious that employer-provided insurance is a desirable system

• ACA largely kept this in place because removing it would have been very disruptive to the status quo

• Drawbacks of employer provided insurance: • Individuals have to choose from a limited menu of plans, may not

be offered the type of insurance they would like to have • Empirical evidence: when consumers purchase their own insurance,

they choose much cheaper (and less generous) plans than most firms offer

• Suggests employees may choose higher wages and cheaper insurance if given the option

• Individual insurance is more portable, doesn’t tie workers to employers, and doesn’t distort labor markets

22 Policy Options Going Forward…

• Drawbacks: • Employers may not be sensitive to their workers preferences for

wages versus more expensive health insurance

• The expectation that all “good firms” must offer health insurance causes employers to have inelastic demand, may give insurers pricing power

23 Policy Options Going Forward…

• Positives: • Employer provided insurance can be a good behavioral commitment

mechanism to force consumers to save/pay for insurance • Similar intuition to taking retirement savings out of a worker’s paycheck

• Individual insurance markets can have more problems with adverse selection unless they are intelligently regulated

• ACA policies largely address issues of adverse selection and economies of scale, reducing these two motivations for employer-based insurance

• IRS tax code currently incentivizes employer provided insurance • Allowing all health insurance purchases to be tax deductible would remove

this justification for employer-based insurance

• Going forward: • Removing tax benefit, while keep regulations in ACA marketplaces

could create benefits by shifting away from employers as a source of insurance

• Further reading: Pauly, Percy, and Herring Health Affairs 1999

24 Policy Options Going Forward…

What do we know about the effects of the ACA so far?

Part 1: Effects on insurance coverage

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Rate of Uninsurance Fell  From about 17.4% in Q4 2013 to 9.8% in Q1 2016

 Uninsurance rate among adults fell by over 50% in states that expanded Medicaid

 Q1 2018 uninsurance rate is 115% higher in states that chose not to expand Medicaid

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Rate of Uninsurance Fell  Largest gains for young adults

 Uninsurance rate fell from about 25-30% to about 15-18%

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Rate of Uninsurance Fell

 Large gains for low-income households in states that chose to expand Medicaid

 Much smaller gains in non-expansion states

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Source: US Census Bureau

Geography of Insurance Gains 29

Source: US Census Bureau, American Community Survey

Geography of Insurance Gains 30

Source: US Census Bureau

Who Gained Insurance? 31

Source: https://www.kff.org/uninsured/fact-sheet/key-facts-about-the-uninsured-population/

Most Newly Insured are Low-Income

 53% of people who gained insurance under the ACA have income below 138% of the poverty line (and 95% were below 400% of FPL)

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Source: KFF Issue Brief: Adults who remained uninsured at the end of 2014, Published January 2015

Insurance Subsidies in States with and without Medicaid Expansion  States that chose not to expand Medicaid received more

federal subsidies for low-income private insurance

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Poor Understanding or Active Defiance of Individual Mandate  Even individuals eligible for free insurance ended up

paying large mandate taxes for not signing up

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Effects on Insurance Eligibility  Many uninsured are now eligible for insurance  About 3 million people in coverage gap because of Supreme Court ruling

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Source: KFF.org

What do we know about the effects of the ACA so far?

Part 2: Effects on insurance premiums

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Insurance Premiums under the ACA 37

Source: Alder and Ginsburg, Health Affairs 2016 https://www.healthaffairs.org/do/10.1377/hblog20160721.055898/full/

Insurance Premium Growth, 2013-14

 Kowalski (Brookings Papers 2014) estimates that the national average monthly premium increased from $232 to $282 because of the ACA  This is partly driven by removing restrictions for people with pre-existing

conditions, allowing these sicker individuals to enter the insurance market

 The average cost to insurers of paying medical bills also increased, from $189 to $212 per person per month

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Insurance Premium Growth, 2013-14  Heterogeneity is premium increases largely due to states having

different starting points coming into the ACA  Average costs of insured increased a lot in TX, but fell a lot in NY after the ACA

 In NY many policy restrictions caused adverse selection

 In TX unhealthy people may have been unable to buy insurance

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Source: Kowalski Brookings Papers, Fall 2014

Insurance Premiums under the ACA 40

Source: JAMA 2014

Insurance Premium Growth  Insurance premium growth is extremely heterogeneous

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Insurance Premium Growth  An average, premiums decreased about 0.8% in 2015

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Premium Changes 2017-2018

 From 2014-2016, the ACA exchanges were steadily stabilizing, as insurers learned more about enrollees’ health characteristics

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Premium Changes 2017-2018

 From 2014-2016, insurer gross margins were reasonably low, and steady

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Removing Parts of the ACA

 In 2017, two important changes occurred

1. Individual mandate tax was removed, which led to an increase in adverse selection

2. The federal government announced they would stop paying insurance companies for cost-sharing reduction subsidies

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Removing Parts of the ACA

 Individual mandate tax was removed  Estimates from CBO and the Joint Committee on Taxation suggest

this repeal caused: 1. 4 million (primarily healthier) individuals exited the insurance exchange

market

2. Health insurance premiums jumped by 10% nationwide

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https://www.kff.org/health-reform/issue-brief/how-premiums-are-changing-in-2018/ https://www.hhs.gov/sites/default/files/csr-payment-memo.pdf https://www.kff.org/health-reform/issue-brief/how-the-loss-of-cost-sharing-subsidy- payments-is-affecting-2018-premiums/

Removing Parts of the ACA

2. The federal government announced they would stop paying insurance companies for cost-sharing reduction subsidies  By law, insurers must give these subsidies to consumers

 However the government decided they didn’t want to pay for the subsidies anymore, leaving insurers uncertain about what the actual policy is, and whether they will be paid

 Estimates suggest stopping cost-sharing payments led to an additional 20% jump in insurance premiums that will grow to 25% by 2020

 Insurance price increases were so large that stopping these payments is projected to increase the federal deficit by $194 billion over 10 years because of larger premium subsidies

 Insurers explicitly added surcharges to make up lost payments: https://www.kff.org/health-reform/issue- brief/how-the-loss-of-cost-sharing-subsidy-payments-is-affecting-2018-premiums/

 These two changes caused a 32% average premium increase nationwide in a single year (2017 to 2018)

 Prices increase by 35% in Franklin county

 Failure to make payments that were promised also contributed to insurers exiting the market

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https://www.kff.org/health-reform/issue-brief/how-premiums-are-changing-in-2018/ https://www.hhs.gov/sites/default/files/csr-payment-memo.pdf https://www.cbo.gov/publication/53009

What Next?  Healthcare spending has been increasing at historically low rates  Slight increase as ~25 million newly insured added, but growth

was lower again in 2017  Is this an aberration, or new equilibrium?

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Source:https://www.healthsystemtracker.org

What do we know about the effects of the ACA so far?

Part 3: Effects on total healthcare spending and the federal budget

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Budgetary Effects of the ACA

 Medicaid expansion cost about $60 billion in 2018

 Premium tax credits cost another $50 billion

 $21 billion raised from mandates and new taxes on insurers

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Source: https://www.cbo.gov/publication/53826

End of course material!

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52 Open conversation/Q&A on the future of US healthcare reform

 Universal coverage

 “Medicare for all”

 Repealing the affordable care act, without replacement

 Is reform more feasible at the state level instead of federal level?

 Reducing dependence on employer provided insurance