HMGT 435 WEEK 8 DISC 8

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CHAPTER

2THE AFFORDABLE CARE ACT

The Affordable Care Act (ACA) was enacted in March 2010, and most of its features went into effect in fall 2014. It is the most dra- matic change in US healthcare policy since the enactment of Medicare

and Medicaid in 1965. This chapter will describe the key features of the law, focusing on the individual and employer mandates, the insurance exchanges, and the Medicaid expansion. As part of this discussion, we will describe how the ACA implementation unfolded, how it was intended to be financed, and the early empirical literature on the effects of the law. This chapter takes an overview of these effects; in most of the succeeding chapters, there will be opportunities to examine how the law changed previous practices and what effects the law has had or is expected to have on the insurance market. We will also introduce many of the key changes in the administration of the law that have been introduced by the Obama and Trump administrations and by Congress.

The Uninsured

The fundamental goal of the ACA was to reduce the number of uninsured in the United States. In 2010 there were approximately 50 million unin- sured people under 65 in the country. Exhibit 2.1 reports the Congressio- nal Budget Office (CBO) estimates of the reduction of uninsured resulting from the enactment of the law. Just prior to the enactment of the law, the CBO estimated 29 million without coverage by 2016. The remaining uninsured were largely those undocumented residents who were not eli- gible for coverage (approximately 10 to 12 million) and those who were exempted or declined coverage. However, the United States did not reach these projections. As we discuss later in the chapter, some 17 states did not expand their Medicaid program and its limited coverage. Each year, the CBO updates its estimates for the next 10 years. Exhibit 2.1 shows the most recent CBO estimate, suggesting that the number of uninsured would total 30 to 35 million over the next five years. These estimates incorporate the smaller number of states offering the Medicaid expansion and, of course, reflect the CBO’s assumptions about the growth of the economy.

C o p y r i g h t 2 0 2 0 . A U P H A / H A P B o o k .

A l l r i g h t s r e s e r v e d . M a y n o t b e r e p r o d u c e d i n a n y f o r m w i t h o u t p e r m i s s i o n f r o m t h e p u b l i s h e r , e x c e p t f a i r u s e s p e r m i t t e d u n d e r U . S . o r a p p l i c a b l e c o p y r i g h t l a w .

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The Individual Mandate

The individual mandate requires most US citizens and legal residents to have health insurance. The ACA requires qualifying coverage, imposes a penalty for going without coverage, and provides a subsidy for lower-income people. It eliminates the use of preexisting conditions in health insurance contracts.

Why require people to have coverage? One obvious reason was to ensure that everyone who was eligible would have coverage; the goal was to reduce the number of uninsured. The second reason was adverse selec- tion. Under the ACA, one could not be denied coverage regardless of one’s health status. Under this rule, one should only buy insurance when one is going to use care. We could imagine people signing up for coverage as they are wheeled into the hospital on a gurney—then disenrolling as they are taken out to their car in a wheelchair on discharge. More realistically, those with chronic conditions may enroll while others wait until they need care. An effective mandate would compel everyone to enroll. We will discuss these issues in considerable detail in chapter 5.

In general, most people would satisfy the insurance mandate with the coverage they had through employer-sponsored health insurance. Indeed, firms with 50 or more full-time employees were required to offer coverage. Alternatively, they could buy individual coverage or could enroll for coverage through a government program, usually Medicaid.

Qualifying Coverage

The Congress specified a broad range of clinical services that a qualified health plan had to cover. In part, a common set of benefits would make

2010 0

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

50 50 50

31 26

21 21 22 26

32 34 35 35

2010 estimates 2018 estimates

Source: Data from CBO (2018, 2010).

EXHIBIT 2.1 CBO Estimates of the Number

of Uninsured (in millions)

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Chapter 2: The Affordable Care Act 31

it easier for consumers to compare plans. The covered services are the ten essential health benefits:

• Ambulatory patient services • Emergency services • Hospitalization • Maternity and newborn care • Mental health and substance abuse services • Prescription drugs • Rehabilitative services and devices • Laboratory services • Preventive and wellness services and chronic disease management • Pediatric services, including oral and vision care

This list is broad, but it is not very clear with respect to precisely what services are to be covered. At the time of enactment, many thought the government would assemble committees to define precise benefits. This was not done. Instead, the government asked each state to identify a benchmark plan that would provide the definitions. States could choose one of the three small group plans in the state that had the largest enroll- ment, one of the three largest state employee plans, one of the largest federal employee health benefit plans, or the largest commercial health maintenance organization (HMO) plan in the state. States that allowed the federal government to run their exchanges had to use the small-employer option. Texas, for example, uses the Blue Cross Blue Shield (BCBS) RS26 plan as its benchmark. The benchmark specifies how many days of hospital care and physician visits one may have, as well as the nature of prescription drug coverage, for example. The benchmark’s provisions on deductibles, copays, and coinsurance and network providers are irrelevant, as we will see later in the chapter.

The essential benefits definition led to problems of implementation. You may recall that many people lost their individual health insurance coverage just prior to the first open enrollment period in fall 2013. The problem was that individual policies typically did not cover maternity and newborn care, preventive services, or pediatric services; however, one could often buy them as a rider. As a consequence, these were not qualifying plans and could not be offered. Similarly, so-called mini–medical plans that cov- ered ambulatory but not hospital care, and that were offered individually or through employers, were also no longer available. These events helped foster the claim that proponents had misled when they said that “if you like your plan, you can keep it.”

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Benefit Tiers

Within the individual insurance market, the ACA specified four levels of benefits (bronze, silver, gold, platinum) plus a catastrophic option for people under age 35. Actuaries in an insurance firm would specify the aver- age claims cost of an enrollee. If you bought a bronze plan and had a claim, the plan would pay 60 percent of the cost and you would be responsible for the remaining 40 percent. If you wanted more generous coverage you could buy a silver, gold, or platinum plan, being responsible for 30, 20, and 10 percent of the claims costs, respectively. Obviously, more generous plans cost more. One advantage of this tiering is that one can relatively eas- ily compare plans offered by different insurers because they have identical coverage.

Insurers can offer several plans in a benefit tier—each with differing deductibles, copays, and provider networks. One of the key issues that has arisen with benefit tiers is that insurers have narrowed their networks of pro- viders, often eliminating PPO plans and only offering HMOs. We will discuss these issues in chapters 5 and 10.

Penalties

If one is to mandate insurance coverage, one needs an enforcement device. The ACA established financial penalties for individuals who did not obtain health insurance. The penalties were phased in between 2014 and 2016. Initially, they were set at $95 per year or 1 percent of income, whichever was higher. By 2016, the penalty was $695 or 2.5 percent of income per year. Thus, in 2016, for an individual with an income of $50,000, the penalty for not buying coverage would be $2,500. The penalty is collected through the federal personal income tax system. However, it can only be collected as a reduction in the refund one would have received. There- fore, if one owes a penalty but does not have a refund due, the penalty is deferred. Moreover, the penalty is not assessed on people who are not required to file taxes.

The prevailing view at the time of implementation was that these pen- alties were probably too low to have a large impact on enrollment. Frean, Gruber, and Sommers (2017) found only small and statistically insignificant effects of the mandate on enrollment in the exchanges through 2015.

In December 2017, the Congress set the penalty on the individual mandate at $0 or 0 percent beginning in 2019. Some observers are con- cerned that this will significantly erode enrollment in the ACA, but if the empirical work is correct, the effects should be modest.

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Chapter 2: The Affordable Care Act 33

Subsidies

The ACA provides premium subsidies to encourage low-income individuals to enroll in the health insurance exchanges. The subsidies are refundable, advanceable premium tax credits for individuals and families with income between 100 and 400 percent of the federal poverty level (FPL). This stan- dard means that the subsidy is handled through the tax code. If one is eligible for a subsidy of say, $1,000, then one gets a credit of $1,000 toward one’s income tax liability. The credit is refundable, meaning that even if you did not owe $1,000 in taxes, you would still get the $1,000 credit.

The obvious problem with this is that you need to buy coverage in the open enrollment period, but would not get the credit until you filed taxes for that year. That is why the credit is advanceable, meaning that the insurance exchange will use data provided by you to estimate the credit and then use that estimate to reduce the premium by the appropriate amount. When you file income taxes you would report actual income and the precise amount of the subsidy would be calculated. You may get a bigger credit (i.e., a refund) or you may have been given too big a credit, so you would owe the government money for the excess amount. In any event, the ACA allows eligible people to receive their subsidy at the point they are buying coverage in the exchange.

The ACA defines the maximum amount one must pay for health insur- ance as a percentage of one’s income. The difference between the price of the second-cheapest silver plan and the maximum one is obligated to pay is the size of the subsidy. This statement sounds more complicated than it is.

The maximum one must pay for health insurance depends on one’s income.

• 100–138 percent of the FPL: Maximum payment of 2.0 percent of income

• 138–150 percent of the FPL: Maximum payment of 3.0–4.0 percent of income

• 150–300 percent of the FPL: Maximum payment of 4.0–9.5 percent of income

• 300–400 percent of the FPL: Maximum payment of 9.5 percent of income

There is no subsidy for people with incomes below 100 percent of the FPL. This was because the Congress intended that people with incomes below this level would be covered by the Medicaid expansion. As we will see later in the chapter, when the Supreme Court made the Medicaid expansion optional for the states, this created a group of people who were not eligible

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Health Insurance34

for a subsidy and who had no Medicaid coverage if their state chose not to expand its Medicaid program. Note too that there is no subsidy for people earning more than 400 percent of the FPL.

The FPL is determined annually and is based on income and the number of people in the household. Exhibit 2.2 reports the FPL for people in the contiguous United States in 2013 (the first open enrollment period) and 2017.

If an individual’s income was below $12,060 in 2017, they were not eligible for a subsidy. The subsidy declines with income. In principle, a per- son in a household of four with a combined income of $115,000 would be eligible for a subsidy as well. These subsidies would be small—sometimes $0.

Exhibit 2.3 shows how the ACA premium subsidies work. It is drawn from Brazos County, Texas, the home of Texas A&M University. Con- sider Mary Younger. She was 27 and lived alone in 2013 with an income of $17,000. The ACA expects her to pay no more than 4 percent of her income toward health insurance; that is $57 per month. The amount of the subsidy depends on the premium of the second-cheapest silver plan in her county. For someone aged 27, that was $197 per month. Her subsidy was $139 per month ($197–$57). In contrast, Bob Older was 50 years old, living alone on the same $17,000 income. He too must pay 4 percent of his income toward insurance; $57 per month. However, because he is older, the premium for him is $335 per month and thus, the subsidy is $335 less $57, or $278 per month. As we will discuss later in the chapter, premiums in the ACA exchanges depend on where one lives, one’s age, and whether one is a smoker.

EXHIBIT 2.2 Comparison:

Federal Poverty Level

in Initial Open Enrollment

Period

Source: Data from the Office of the Assistant Secretary for Planning and Evaluation (2019).

100% 138% 150% 300% 400%

2013 Open Enrollment Period

1 Person $11,490 $15,856 $17,235 $34,470 $45,960

2 People 15,510 21,404 23,265 46,530 62,040

3 People 19,530 26,951 29,295 58,590 78,120

4 People 23,550 32,499 35,325 70,650 94,200

2017 Open Enrollment Period

1 Person $12,060 $16,643 $18,090 $36,090 $48,120

2 People 16,240 22,410 24,360 48,720 64,900

3 People 24,600 33,948 36,900 73,800 98,400

4 People 28,780 39,716 43,050 86,340 115,120

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Chapter 2: The Affordable Care Act 35

Source: Data from Centers for Medicare & Medicaid Services (CMS) (2019).

EXHIBIT 2.3 How ACA Premium Subsidies Work

Age Income

Maximum Share of Income

Required to Be Spent on

Insurance

Maximum Dollars to Spend on Insurance

Second- Cheapest

Silver Plan in Brazos

County, TX Monthly Subsidy

Premium After

Subsidy

2013 Open Enrollment Period

Mary Younger 27 $17,000 4% $57/month $196 $139 $57

Bob Older 50 $17,000 4% $57/month $335 $278 $57

Mary Younger 27 $35,000 9.5% $277/month $196 $0 $277

Bob Older 50 $35,000 9.5% $277/month $335 $58 $277

2017 Open Enrollment Period

Mary Younger 27 $17,000 4% $57/month $340 $283 $57

Bob Older 50 $17,000 4% $57/month $580 $523 $57

Suppose Mary and Bob each had incomes of $35,000. Under the ACA, they would have to pay no more than 9.5 percent of their income for coverage ($277 per month). Bob Older’s premium would still be $335, but after accounting for what he has to pay, the subsidy is only $58 per month. Mary must also pay $277 per month, but this amount exceeds the cost of the second lowest-cost silver plan in her county for someone aged 27, so she gets no subsidy. As a result of this formula, those with higher incomes get reduced subsidies and sometimes get no subsidy.

As a further complication consider what happens if premiums increase over time. In exhibit 2.3, the second-least expensive silver plan for Mary Younger in the 2017 open enrollment period was $340 per month ($580 for Bob Older). These were 73 percent increases over 2013. However, typi- cally as long as their incomes are unchanged, the amount they must pay for coverage remains unchanged. In Mary’s case, the subsidy increased to $283 per month and for Bob to $523. These extra costs are paid by taxpayers. It is important to note that if one is not eligible for a subsidy, the entire increase in premium is paid by the individual.

The exhibit identifies the amount of the subsidy and how it is deter- mined. However, the subscriber does not need to use her subsidy to buy the second-lowest-cost silver plan. She could buy a costlier silver, gold, or

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Health Insurance36

platinum plan and apply her subsidy to that premium to pay the remainder herself. Alternatively, she could buy a less expensive silver or bronze plan, spending the subsidy and potentially paying a $0 out-of-pocket premium. The consulting firm McKinsey & Company (2014) estimated that some six to seven million subscribers could have purchased a zero-premium bronze plan during the 2013 open enrollment period. The large increases in premi- ums that occurred in the 2017 open enrollment period provided a greater opportunity to shift to zero-premium plans.

Cost-Sharing Subsidies

In addition to premium subsidies, some individuals are also eligible for cost- sharing subsidies. Recall that if you selected a silver plan, you were respon- sible for 30 percent of the actuarily determined claims costs. Thus, you faced deductibles and copayments. However, if you had income no greater than 250 percent of the FPL, you faced smaller cost-sharing requirements when you used health services.

• 100–150 percent of FPL: 6 percent cost sharing • 150–200 percent of FPL: 13 percent cost sharing • 200–250 percent of FPL: 27 percent cost sharing • >250 percent of FPL: 30 percent cost sharing

Thus, if you had household income between 100 and 150 percent, you only had to pay 6 percent of actuarily expected claims costs as deductibles or copays. This subsidy is only available if you purchased a silver plan.

The Republican Congress challenged the Obama administration in court over whether the Congress had authorized the funding for these cost- sharing subsidies. While the case was pending in autumn 2017, the Trump administration indicated that it did not have the legal authority to make these payments and stopped them. This change had two implications. First, people in low-income groups continued to be eligible and to receive these subsidies. Second, insurers would not be receiving federal government payments for their enrollees who were eligible.

As a result, 2018 premiums were increased to reflect these higher costs. States had some flexibility to raise premiums on all plan levels of coverage or to limit the premium increases to silver plans. Most put all of the additional premium on silver plans. Recall from the earlier discussion of exhibit 2.2 that these higher premiums had no effect on individuals with premium subsidies if their incomes had not changed but did raise premiums, particularly silver premiums, for those without premium subsidies.

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Chapter 2: The Affordable Care Act 37

Allowable Underwriting

Prior to the ACA, health insurers in the individual market used individual characteristics to set premiums, subject to state insurance laws and regula- tions. Thus, they typically used age, gender, location, and health status, among other factors. The ACA prohibited the use of preexisting health conditions, and it prohibited the use of gender to set rates. It also limited the extent to which age could be used; the highest premiums by age could be no more than three times as costly as the least expensive age. However, the ACA does allow up to 50 percent higher premiums for those who use tobacco products. It also requires guaranteed issue; this means that an insurer may not refuse to provide you coverage if you want to buy it.

As we discuss in chapters 5, 6, and 7, insurers have used these char- acteristics to set premiums that reflected the likely average claims experience of the group. As it turns out, on average women have higher claims experi- ence than men until about age 55. So, historically women have faced higher premiums than men. Similarly, those with a history of heart disease would typically pay more for coverage, if an insurer was willing to offer it.

These sorts of regulatory limits have impact only if they are at odds with actual utilization experience. Thus, if older people have actual claims experience five times that of younger people, a law such as the ACA, which sets a maximum premium for older people at no more than three times higher than for younger people, will cause premiums for younger people to be higher. Similarly, if women have higher claims experience, but may not be charged more than men, premiums for women will be relatively lower than prior to the ACA, and premiums will be higher for men. Women have an incentive to join plans, men have an incentive to forgo coverage.

Premiums in the healthcare marketplaces have increased substantially over the first few years of the ACA. Exhibit 2.4 shows the five-year trends

EXHIBIT 2.4 Trends in Average Monthly Premiums for Silver Plans and Percentages of Enrollees Receiving Subsidies

Source: Data from Office of the Assistant Secretary for Planning and Evaluation (2017).

Average Second- Cheapest Silver Plan,

27-Year-Old

Percentage of Enrollees with

Premium Subsidy

Percentage of Enrollees with Cost-

Sharing Subsidy

2014 $218 84 60

2015 224 87 60

2016 242 85 59

2017 300 84 60

2018 411 85 54

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in premiums and participation in both premium and cost-sharing subsidies for the plans offered through healthcare.gov. Over the first five years of the ACA, the average silver plan premium has increased by 88 percent for a 27-year-old. Moreover, the vast majority of those buying coverage in the exchanges receive a premium subsidy and approximately 60 percent received cost-sharing subsidies.

Exchanges: The Healthcare Marketplaces

The ACA required each state to have functioning individual and small business marketplaces or exchanges in place by January 1, 2014. The imple- mentation of the small group or SHOP (Small Business Health Options Program) was delayed twice, but was up and functioning in 2016.

The states had the option of creating their own exchange, using the federally facilitated exchange, or establishing a partnership exchange. State-based marketplaces run their own exchanges; these give the states greater flexibility. Initially 17 states established their own marketplaces. Now 11 states operate their own exchanges and another 5 operate their own exchanges while using the online federal platform to undertake enrollment (Kaiser Family Foundation [KFF] 2018b). Partnership marketplaces share functions with the federal government; 6 states take this approach. Initially 26 states used the federally facilitated approach; 28 do so now.

It may seem surprising that the majority of the states use the federally facilitated model. In my view, this outcome results from the costs of running an exchange and the initial confusion over how an exchange was supposed to operate. The marketplaces are not inexpensive to run. Consulting work for a moderately sized state such as Alabama suggested that some 330,000 people would enroll in an Alabama exchange and the annual cost to run it would be approximately $44.5 million (Carey 2011). Next, the states required rather substantial direction from the federal government on how the exchanges were to operate and how to be in compliance with the law and administrative regulation. Unfortunately, the direction was slow in coming. While the fed- eral government paid for the costs of running a state exchange in the first year and provided some start-up money for development, each state’s exchange was to be self-sufficient by the second year of operation. Thus, I believe many governors and legislatures concluded that the costs and uncertainty, together with the blame if the exchange was not functional, led them to default to the federally facilitated model.

An exchange can adopt one of three roles: it can be a market facili- tator, a selective contractor, or an active purchaser. All federally facilitated marketplaces must be market facilitators, and all other states have taken that approach except California. A market facilitator essentially accepts all

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Chapter 2: The Affordable Care Act 39

insurance plans that are qualified (i.e., offer the essential benefits and meet state insurance regulations). The exchange serves as a neutral source of infor- mation on the plans offered.

In California, CoverCalifornia is an active purchaser. It may help to think of this as the exchange acting in the role of a large employer selecting some plans and negotiating with insurance companies over a range of issues. Selective contractor models allow the state to add conditions in addition to plan qualification before the plan can be offered. These conditions may include, for example, coverage locations, additional services, network com- position, or other features. Proponents of the exchange model argue that over time, marketplaces will evolve away from facilitators to more active roles.

Exhibit 2.5 summarizes the functions of an exchange. While the federal government is responsible for all of these functions in a federally facilitated exchange, a state could opt to undertake Medicaid and Children’s Health Insurance Program (CHIP) enrollment or deal with risk adjustment.

EXHIBIT 2.5 Functions of a Fully Operational Health Insurance Marketplace

Determination of Eligibility

• For Medicaid • For CHIP • For eligibility for a premium subsidy

Enrollment • Enroll people into Medicaid, CHIP • Enroll people in their desired exchange plans

– Solve problems with disenrollment – Manage nonpayment of premiums and changes in

subsidy status • Enroll SHOP employees into the plans they or their

employers selected

Plan Management • Certify qualified health plans • Assign quality ranking to plans • Review marketing, network adequacy, accreditation,

and quality improvement • Work with Department of Insurance on general

oversight of plans

Consumer Assistance

• Single application process—online, in person, or by phone

• Employ/contract with navigators • Provide information for knowledgeable plan selection

– Plan comparisons – Premium calculator

Financial Management

• Perform accounting, auditing, reporting duties • Carry out bill collection or or collect passing-through

premiums • Perform risk adjustment

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In addition, if a state has chosen a partnership model, it may undertake either or both of these two functions, as well as plan management and consumer assistance roles.

Most of the functions are reasonably straightforward—with the excep- tion of risk adjustment, which is listed under financial management in exhibit 2.5. Individual insurers and insurance plans are not allowed to use health conditions to set insurance rates. However, claims experience may differ substantially across plans, allowing some to incur large losses while others have substantial gains. The ACA requires the exchanges to risk-adjust; they are to account for the differences in claims costs by assessing a fee on plans that have enrolled a cohort of disproportionately lower-cost enrollees and pay these fees to plans that had higher costs. We will deal with the issues of risk adjustment in chapter 6.

Exchange Enrollment

Exhibit 2.6 shows the enrollment in the health insurance marketplaces over the first four years. The first-year enrollment was limited to about eight mil- lion, with many attributing the low enrollment to the difficulties people had in negotiating the often-problematic websites used for enrollment.

The vast majority of enrollment was in silver (71 percent in 2017) and bronze (23 percent) plans (CMS 2017). We will discuss the nature of the enrollment challenges later in the chapter.

2014 0

8.1

11.7

12.7 12.2 11.812

2015 2016 2017 2018

Source: Data from KFF (2018a).

EXHIBIT 2.6 Enrollment in the ACA

Exchanges, 2014–2018 (in

millions)

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Chapter 2: The Affordable Care Act 41

Employer Mandate

The ACA required all employers with 50 or more full-time workers to pro- vide health insurance or pay a penalty beginning in 2014. The penalty is $2,000 per worker, after the first 30.

Given the difficulties in implementing the SHOP exchanges, the employer mandate was delayed a bit. The penalty for employers with 100 or more workers was delayed until 2015; for those with 50 to 99 workers, it was delayed until 2016. Moreover, employers were only required to cover 70 percent of workers in 2015 and 95 percent in 2016 and beyond.

It was often argued that with the implementation of the employer mandate, firms would drop expensive health insurance coverage and simply pay the penalty. Labor economics suggests this would seldom occur. As we will discuss in chapter 14, workers are essentially paid what they are worth. The compensation includes any health insurance, pensions, and other ben- efits, as well as wages and salaries. So, if an employer simply dropped the health insurance coverage, workers would be made worse off and the best of them would get jobs elsewhere. There is one instance in which a small employer may drop coverage in the face of the ACA, but we will save this for chapter 18, which focuses on small employers.

In addition to the mandate to offer employer coverage, employers are also subject to provisions on the affordability and adequacy of coverage. Affordability means that the out-of-pocket premium contribution may not exceed 9.5 percent of the earning the worker reports on her W-2 tax form. Adequacy means that the actuarial value of the plan must be at least 60 percent of claims costs. Thus, it must be equivalent to a bronze plan. The penalties for these infractions are $3,000 per worker who declines coverage and gets a premium credit in the individual exchange.

Buchmueller, Carey, and Levy (2013) reviewed microsimulations of the provision of employer-sponsored health insurance from five different sources, including the CBO, the RAND Corporation, and CMS. The mod- els conclude that the ACA would have only modest effects on the number of people with employer-sponsored health insurance. The estimates ranged from a 1.8 percentage-point decrease to a 2.9 percentage-point increase. To date, however, there does not appear to be post-ACA research on the effects of the ACA on employer-sponsored coverage.

Three other issues relate to employers and the ACA. The first is that the ACA requires coverage for full-time workers with 30 or more hours of employment. Traditionally, full time has been defined as 35–40 hours per week. There was concern that firms would reduce part-time employment and hire fewer full-time workers or reduce individual hours and hire more part- time workers. Work by Garrett and colleagues (2017) used 2000–2016 data

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Health Insurance42

from the Current Population Survey and found that there was a higher-than- expected increase in voluntary part-time employment but less-than-expected increases in involuntary part-time employment. They interpret the findings to suggest that the ACA did not lead employers to implement widespread cutbacks in workers’ hours, while workers may have chosen to reduce the number of hours they worked.

The second issue is the so-called Cadillac coverage tax. The ACA requires a tax on insurers of 40 percent on the value of health insurance ben- efits of more than $10,200 for individuals and $27,500 for family coverage. The tax would, of course, be passed on to employers buying coverage and would also apply to self-insured plans offered by employers. Initial estimates suggested that approximately 16 percent of health plans would be affected when the tax was to be implemented in 2018. However, Herring and Lentz (2011) estimated that the impact would rise to some 75 percent of plans by 2029. The increase would occur because the thresholds for the taxes increase with general inflation, while insurance plan costs have typically increased at twice that rate. However, Congress has delayed the implementation of this tax on two occasions, first in 2015 and then in 2018. The provision is now scheduled to take effect in 2022, and many suspect that the feature will be further delayed (see Turmoil in the Exchanges).

The third issue is the ACA and employers with fewer than 50 full-time employees. They are not subject to the employer mandate. However, they are eligible for a small-employer subsidy. To be eligible, a firm must have fewer than 25 workers and an average wage below $50,000. The firm must buy coverage on the SHOP exchange and the employer must pay at least 50 per- cent of a full-time employee’s premium costs. The subsidy can cover up to 50 percent of the employer’s costs, but it is only available for two years. Scholars have found little evidence that this subsidy has had much of an impact.

Turmoil in the Exchanges

The enactment of the ACA engendered a substantial amount of uncertainty among health insurers. On the one hand, the mandate and the subsidies provided considerable incentives for increased demand for coverage. On the other hand, the prohibition on the use of preexisting conditions to set premiums and the lack of knowledge about the extent of healthcare usage by the potentially large number of uninsured who might join plans provided risks with respect to the medical costs of providing coverage.

During the first open enrollment period, participation by insurers was relatively modest. The dominant insurer in many states, often BCBS, tended

(continued)

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Chapter 2: The Affordable Care Act 43

to offer coverage throughout the state. Other insurers entered some of the market areas in their states but set premiums relatively high. Still others did not enter the market at all. Two things became clear during the first year: enrollment was low, and low premiums mattered for new subscribers. Insur- ers, however, had very little information on actual claims costs, particularly given that they had to file their next premium proposals to the states in mid- summer. They had only a few months of data on a small number of insureds.

In the second year, many more insurers began to offer coverage at pre- miums that were often lower than posted in the first year. In Texas, for example, the number of non-BCBS plans offered in distinct counties increased by 75 percent as insurers expanded the plans they offered and the counties in which they offered coverage. However, as the year progressed, a few insurers began to withdraw and report losses. UnitedHealth withdrew from some of its markets. BCBS of Texas reported a $400 million loss on its individual coverage in the state.

During year 3, insurers still did not have reliable claims data but they were observing losses. Many responded by more aggressively narrowing their provider networks. All of the carriers in Texas withdrew their PPO plans from the exchanges and only offered HMOs. Other insurers lowered their premi- ums relative to the dominant insurer, hoping to attract healthier subscribers who would offset the higher-morbidity enrollees they feared they had enrolled. By the summer of 2016, losses mounted and insurers had more detailed claims data. Many insurers withdrew from the exchanges entirely; others selectively withdrew. Aetna announced it would withdraw from 11 of 15 marketplaces. Humana announced it was pulling out of eight states. Thus, in 2017, there were many fewer insurers offering coverage. In Houston, for example, the number of insurers declined from eight in 2015 to three in 2017. Premiums increased dramatically as well, as insurers set premiums that reflected their new knowledge of the high utilization experience they observed.

The election in 2016 also increased the level of uncertainty. There were meaningful efforts to repeal and replace the ACA in 2017. These failed. The Trump administration stopped payments for the cost-sharing subsidies (see earlier discussion). This action led to substantial increases in premiums, particularly silver premiums, in 2018. In addition, in 2018, the administration promulgated rules for short-term health plans and for association health plans. Both sets of rules will allow people to buy insurance coverage more inexpen- sively than on the exchanges and may lead to the withdrawal of enrollment in the exchange plans. We will discuss these issues in the chapters on adverse selection and the small group market. Also, Congress set the penalty for not having health insurance to zero dollars beginning in 2019.

Source: Data from Morrisey (2016).

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Medicaid Expansion

The second major feature of the ACA was the provision that the Medicaid program would be expanded to cover individuals aged 19 through 64 with incomes below 138 percent of the FPL. A brief bit of context is necessary to understand the Medicaid expansion. Medicaid is a federal–state joint pro- gram that provides health insurance to multiple categories of individuals. As a result, in each state it is a set of programs covering somewhat different groups of people. The federal government sets broad provisions with respect to services covered and who is eligible for coverage. However, the states decide how generous the service provisions actually are and what level of income makes one eligible, all under review and approval from the federal govern- ment. The federal government pays 50 percent or more of the cost of the program. In a wealthy state such as Connecticut, the feds pay a low percent- age; in a poor state such as Mississippi, the federal government may pay three dollars or more for every one dollar provided by the state. The categories of covered individuals include pregnant women, children younger than 19, the disabled, and low-income individuals in nursing homes. Nondisabled folks aged 19 to 65 are covered at very low levels of income eligibility, occasionally as high as 45 percent of the FPL and sometimes as low as 17 percent.

The ACA opened coverage to a wide range of people who were for- merly ineligible. However, because Medicaid is a joint federal–state program, the states must agree to accept the expanded coverage. The ACA provided very strong incentives for states to participate. First, the feds would pay 100 percent of the claims costs for these individuals in 2014, 2015, and 2016, declining to 90 percent from 2020 forward. This rate is much higher than the federal match for other parts of Medicaid. In addition, however, the ACA also said that if a state chose not to expand its program, it would lose the federal matching funds for all the other elements of its Medicaid program: children, pregnant women, the disabled, and the elderly.

It was this last feature that resulted in the Supreme Court decision that part of the Medicaid expansion was unconstitutional. In NFIB v. Sebelius, the court held that the Congress effectively did not give the states a choice to not participate, and the decision allowed states to keep the existing Medicaid fed- eral matching shares for non-ACA Medicaid if they choose not to participate.

As of summer 2018, some 32 states and the District of Columbia have chosen to implement a Medicaid expansion. Most did so in 2014; others entered later. Montana and Louisiana expanded in 2016, for example, and Maine and Virginia had legislative action to expand in 2018. Exhibit 2.7 shows the distribution of states with expansions. States that expanded under the ACA rules are called “traditional” in the exhibit. Eight states expanded by seeking a waiver from Medicaid rules. A federal waiver of existing rules

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Chapter 2: The Affordable Care Act 45

typically allowed the state to impose additional conditions on participants, such as copays or more limited eligibility.

From a purely financial perspective, expanding Medicaid was an easy call for a state, at least initially. The very high federal match brought new federal dollars into the state. These dollars would be spent by physicians, hos- pitals, and others, leading to spending on things such as groceries, gasoline, and personal services in the state. All of this leads to more state tax dollars. Even in low-tax states such as Alabama and Mississippi, estimates by Becker and Morrisey (2012, 2013) suggested that the states would gain more in tax revenues than the state costs of the program in the first seven years.

However, many states had reasons not to expand. First, though the state ultimately may see money ahead as a result of the new tax revenue, at the time of the great recession, many states did not have the existing tax revenue to pay for their share of the Medicaid costs. Second, there was concern that the federal government would renege on its promise to fund the expansion at 90 percent, and the states would be left with an unfunded federal man- date. Third, many states argued that Medicaid was a fundamentally flawed program in terms of eligibility, coverage, and payment systems, and therefore these states did not want to expand it. Finally, some states maintained that the ACA was a bad idea and not well funded nationally.

Prior to the enactment of the ACA, the CBO (2010) estimated that approximately 10 million new Medicaid enrollees would join in 2014, the first year of expansion, with 16 million newly enrolled when the expansion

RI PA

NV NE

KYKS

INIL

CO CA

ARAZ

Expanding — waiver (8 states)Not expanding (17 states) Expanding — traditional (25 states and DC)

Source: Reprinted from Medicaid and CHIP Payment and Access Commission (2019).

EXHIBIT 2.7 State Medicaid Expansions, May 2018

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Health Insurance46

was fully operational. KFF (2016) estimated that in 2016, newly eligible Medicaid enrollment was nearly 12 million. Going forward, the CBO (2018) estimated that enrollment from this group will continue at about 12 million per year through 2021. More rigorous research by Frean, Gruber, and Sommers (2017) found that about 60 percent of the reduction in the num- ber of uninsured was the result of the Medicaid expansion.

Low-Income People in States That Do Not Expand

The decision to make the Medicaid expansion optional has the effect of leav- ing low-income people with few options in states that did not expand. People with incomes at and somewhat above 100 percent of the FPL are eligible for the largest ACA subsidies. However, those below 100 percent of the FPL are not eligible for Medicaid and are not eligible for subsidies. They can buy exchange coverage, but only at the full, nonsubsidized premium.

Affordable Care Act Spending and Revenue Projections

Exhibit 2.8 summarizes the CBO’s (2010) estimates of the ten-year spend- ing and revenue sources for the ACA. At the time the legislation was enacted, the CBO projected that the total ten-year cost of the program to the federal government would be approximately $935 billion. Revenues

EXHIBIT 2.8 Direct Spending

and Revenue under the ACA,

2010–2019 (in billions)

Note: DSH = disproportionate share hospital.

Source: Data from CBO (2010).

Spending Revenue

Exchanges $464 Medicare

Medicare Advantage $136

Reduce fee updates $196

DSH and other $123

Medicaid $434 Tax-penalty payments $65

Small-employer credit

$37 Cadillac coverage tax $32

Fees on manufacturing and insurance $107

Part A tax $210

Other revenue $209

Total $935 Total $1,078

Reduction in deficit –$143

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Chapter 2: The Affordable Care Act 47

(including reductions in spending in other programs) were estimated at $1,078 billion, for a net reduction in the federal deficit of $143 billion. Let us examine the items in more detail.

Spending The costs of the subsidies provided to individuals through the exchanges together with the initial costs of setting up the exchanges were estimated to be the largest expenses: $464 billion.

The Medicaid expansion to cover most adults between 19 and 64 was estimated to be nearly as costly, $434 billion. This estimate was obviously too large, given the Supreme Court decision and the number of states that did not expand.

The small-employer credit of $37 billion relates to the short-term tax credits that employers with fewer than 50 workers can receive for providing coverage. This amount is small, reflecting both the short duration of the subsidy and the expectation that few small employers will use it.

Medicare Program Reductions Much of the revenue to support the expansion in coverage was to come from changes to the Medicare program. There were two major cost-saving elements. The first was reduction in payments to Medicare Advantage plans. Medicare Advantage is the managed care option available to Medicare benefi- ciaries. Approximately 33 percent of beneficiaries are currently in one of these plans. The plans receive a capitated rate per enrollee adjusted for their health status. (We discuss this payment mechanism in some depth in chapter 7.) If the plan’s proposed rate is below the benchmark established by Medicare, the plan must provide additional services and cost-sharing reductions to its enrollees. Congress believed that it was overpaying these plans and estab- lished reductions of $136 billion over ten years. The ACA also imposed a quality-of-care program for Medicare Advantage that enhanced payments. As it turned out, funding to Medicare Advantage plans was not reduced.

Second, Medicare had paid physicians under a mechanism called the Sustainable Growth Rate (SGR) since 1997. The formula took estimated changes in Medicare physician fees and adjusted them for enrollment in the program and changes in the gross domestic product per capita. Physician fees had increased more rapidly than the general economy, with the result that the SGR implied substantial reductions in physician fees in most years. Beginning in 2003, Congress delayed the imposition of these fee reductions in every year (CBO 2006). As a result, if the reductions had been implemented in 2010, for example, they would have implied fee reductions of approximately 20 percent. The ACA required that these fee reductions be implemented as of 2011. The result would be a savings to Medicare of some $196 billion over ten years; these savings were then to be applied to the costs of the cov- erage expansion. However, after enactment of the ACA, Congress continued

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Health Insurance48

to delay the SGR fee reductions and in 2015 eliminated the SGR program, replacing it with a quality-based physician fee program.

Among the other cuts to Medicare was a reduction in disproportion- ate share hospital (DSH) payments. DSH payments are additional payments Medicare and Medicaid make to hospitals that serve a disproportionately large number of indigent and Medicaid patients. This reduction results in cuts of $36 billion. The rationale here is that these hospital payments should be reduced because the ACA reduces the number of uninsured and therefore reduces the uncompensated care burden borne by hospitals. This reduction equates to roughly 75 percent in DSH funds. This reduction now has a sig- nificant impact on hospitals in the states that did not expand Medicaid. They face the DSH reductions without seeing new Medicaid revenues.

Taxes and Fees The legislation also imposed a number of taxes and fees. The most well known is the tax penalty on those who fail to obtain mandated insurance coverage. These taxes were relatively modest, and as a result, they do not raise much revenue (only $65 billion) in the CBO ten-year estimates. The Congress eliminated these penalties effective in 2019. The other well-known tax is the 40 percent tax on generous employer-sponsored health insurance plans, the so-called Cadillac tax. The tax was to become effective in 2018 and only apply to a few firms, so it was only estimated to generate $32 billion in revenue in the first ten years. The Congress has delayed the implementation of this tax until 2022.

Several excise taxes were also imposed on pharmaceutical and durable medical equipment manufacturers and on health insurance companies; these total $107 billion through 2019. These taxes included the following:

• Pharmaceutical manufacturers: $2.8 billion in 2012, increasing to $4.1 billion in 2018 before stabilizing at $2.8 billion per year in 2019 and beyond

• Durable medical equipment manufacturers: 2.3 percent tax on sales beginning in 2013

• Health insurance firms: $8 billion in 2014, increasing to $14.3 billion in 2018, with each subsequent year’s assessment being that of the prior year increased by the percentage increase in premiums

Economic theory would argue that these taxes will be passed on to purchasers.

Medicare Part A Taxes Currently, active workers and their employers each pay a payroll tax of 1.45 percent on all earned income. These revenues are used to pay for Medicare

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Chapter 2: The Affordable Care Act 49

Part A services—hospital, skilled nursing home, and home health care. Beginning in 2013, the Medicare Part A payroll tax was increased by 0.9 percent on income more than $200,000 for individuals and $250,000 for families. In addition, these same individuals will be subject to a 3.8 percent tax on their unearned income (e.g., interest and dividends). These thresh- olds were not indexed for inflation, so more people will be subject to these taxes over time. The CBO (2010) estimated that these taxes would generate $210 billion through 2019. If nothing else, the evolution of ACA revenues and expenditures suggests the difficulty the CBO and others have in reliably predicting programmatic finances.

Summary

• The Patient Protection and Affordable Care Act (ACA) was enacted in March 2010. Most of its provisions took effect in 2014.

• The ACA was anticipated to reduce the number of uninsured people in the United States by approximately three-fifths by expanding Medicaid to adults between the ages of 19 and 64 and requiring all US citizens and legal residents to obtain health insurance.

• The Medicaid expansion was found unconstitutional, and states were given the choice of expanding the programs or not. At this writing, 17 states have not expanded coverage.

• The individual mandate, requiring everyone to have health insurance, includes provisions for tax penalties for those who fail to obtain coverage and subsidies for those with low income. The tax penalty was set at zero dollars effective 2019.

• The law established health insurance marketplaces, which determine eligibility for Medicaid and for the subsidies for the purchase of private coverage. These exchanges provide an online place where individuals and small employers may compare and purchase qualified health plans.

• Each plan offered by the exchanges must cover essential health services at one of four levels of generosity. These levels cover 60 to 90 percent of the actuarially determined expected medical costs.

• Although employers with fewer than 50 full-time employees are not required to provide coverage, larger firms must do so or pay a penalty.

• The ACA calls for the expanded coverage to be financed largely by reductions in Medicare and the creation of several taxes and fees on pharmaceutical and durable medical equipment manufacturers, the health insurance industry, and higher-income individuals.

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Discussion Questions

1. The ACA imposed a tax penalty on those who did not buy health insurance. Is it really necessary to impose such a penalty? Is a tax penalty of $695 per year, or 2.5 percent of one’s income, adequate to encourage people to buy coverage? Who would be least likely to buy? Most likely? How large an effect would the elimination of the penalty have on the number of covered people?

2. As a result of the Supreme Court decision, states may voluntarily expand Medicaid coverage. What incentives do they have to expand? What are the costs of doing so? What interest groups are likely to line up on each side of the issue?

3. Is a large employer likely to stop offering health insurance to its employees and simply pay the fine for not doing so? Why?

For the Interested Reader

Frean, M., J. Gruber, and B. D. Sommers. 2017. “Premium Subsidies, the Mandate, and Medicaid Expansion: Coverage Effects of the Affordable Care Act.” Journal of Health Economics 53: 72–86.

Morrisey, M. A., A. M. Rivlin, R. P. Nathan, and M. A. Hall. 2017. Five-State Study of ACA Marketplace Competition. Brookings Institution and Rockefeller Insti- tute of Government. Published February. www.brookings.edu/wp-content/ uploads/2017/02/summary-report-final.pdf.

References

Becker, D. J., and M. A. Morrisey. 2013. “An Economic Analysis of the State and Local Impact of Medicaid Expansion in Mississippi.” Unpublished report to the Mississippi Health Advocacy Program, Jackson, MS.

———. 2012. “An Economic Evaluation of Medicaid Expansion in Alabama Under the Affordable Care Act.” University of Alabama at Birmingham School of Public Health. Published November 5. www.soph.uab.edu/files/faculty/ mmorrisey/Becker-Morrisey%20Study%20of%20Alabama%20Medicaid%20 Expansion%202012.pdf.

Buchmueller, T., C. Carey, and H. G. Levy. 2013. “Will Employers Drop Health Insurance Coverage Because of the Affordable Care Act?” Health Affairs 32 (9): 1522–1530.

Carey, R. L. 2011. “Financial Sustainability of the Alabama Exchange.” Alabama Depart- ment of Insurance. Published November. www.aldoi.gov/PDF/ Consumers/ Exchange%20Financial%20Sustainability%20BMA10T9.pdf.

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Centers for Medicare & Medicaid Services (CMS). 2019. “FFM QHP Landscape Files: Health and Dental Datasets for Researchers and Issuers.” Accessed September 16. www.healthcare.gov/health-and-dental-plan-datasets-for- researchers-and-issuers.

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Congressional Budget Office (CBO). 2018. Federal Subsidies for Health Insurance Coverage for People Under Age 65: 2018 to 2028. Published May 23. www.cbo. gov/publication/53826. files/cbofiles/ftpdocs/114xx/doc11439/whcc_ presentation-4-12-10.pdf.

———. 2010. “Letter to the Honorable Nancy Pelosi.” Published March 20. www. cbo.gov/sites/default/files/cbofiles/ftpdocs/113xx/doc11379/amendre conprop.pdf.

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Frean, M., J. Gruber, and B. D. Sommers. 2017. “Premium Subsidies, the Mandate, and Medicaid Expansion: Coverage Effects of the Affordable Care Act.” Jour- nal of Health Economics 53: 72–86.

Garrett, A., G. A. Bowen, R. Kaestner, and A. Gangopadhyaya. 2017. “Recent Evidence on the ACA and Employment: Has the ACA Been a Job Killer? 2016 Update.” Urban Institute. Published February 15. https://ssrn.com/ abstract=2922288.

Herring, B., and L. K. Lentz. 2011. “What Can We Expect from the ‘Cadillac Tax’ in 2018 and Beyond?” Inquiry 48 (4): 322–37.

Kaiser Family Foundation (KFF). 2018a. “Marketplace Enrollment, 2014–2019.” Accessed October 16, 2019. www.kff.org/health-reform/state-indicator/ marketplace-enrollment.

———. 2018b. “State Health Insurance Marketplace Types, 2018.” Accessed Octo- ber 16, 2019. www.kff.org/health-reform/slide/state-decisions-for-creating- health-insurance-exchanges/.

———. 2016. “Medicaid Expansion Enrollment.” Accessed Ocotber 16, 2019. www.kff.org/health-reform/state-indicator/medicaid-expansion-enrollment.

McKinsey & Company. 2014. Individual Market Enrollment: An Updated View. Published March 6. https://healthcare.mckinsey.com/sites/default/files/ Individual-Market-Enrollment.pdf.

Medicaid and CHIP Payment and Access Commission. 2019. “Medicaid Expan- sion to the New Adult Group.” Accessed September 16. www.macpac.gov/ subtopic/medicaid-expansion/.

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Morrisey, M. A. 2016. “Turmoil in the Health Insurance Marketplaces.” Leonard Davis Institute of Health Economics at University of Penn- sylvania. Published October 27. https://ldi.upenn.edu/brief/turmoil- health-insurance-marketplaces.

Office of the Assistant Secretary for Planning and Evaluation. 2019. “Prior HHS Poverty Guidelines and Federal Register References.” US Department of Health & Human Services. Accessed October 16. https://aspe.hhs.gov/ prior-hhs-poverty-guidelines-and-federal-register-references.

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