HMGT 435 WEEK 8 DISC 8
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PaulFeldstein_2019_Chapter38TheAffordabl_HealthPolicyIssuesAnE.pdf
CHAPTER
623
THE AFFORDABLE CARE ACT: DID IT ACHIEVE ITS GOALS?
When President Obama was elected in 2008, the Democrats achieved majority control of the House of Representatives and a filibuster-proof majority in the US Senate. The Affordable Care Act (ACA) was
enacted in 2010 without the support of a single Republican in either the House or Senate. Given the partisan nature of the vote, Republicans have continually opposed the ACA, while Democrats have felt obliged to support it.
Leading up to the debate over the ACA, the middle class became anxious about changes to their healthcare. To alleviate their concerns, President Obama made a series of promises to the American public. In doing so he raised expec- tations as to what the ACA would accomplish. Among his promises, “If you like your healthcare plan, you’ll be able to keep your healthcare plan, period. No one will take it away, no matter what.”1 “That means that no matter how we reform healthcare, we will keep this promise to the American people: If you like your doctor, you will be able to keep your doctor, period.”2 And, “In an Obama administration, we’ll lower premiums by up to $2,500 for a typical family per year.”3
Given the partisan nature of the ACA, it became a major issue in the 2012 congressional elections. The controversial legislation cost the Democrats control of their House majority, but they maintained their majority in the Senate, although several incumbent Democrats lost their seats. The divided Congress meant that Democrats could not fix problems that had arisen with the ACA because Republicans only favored repealing it.
Republicans brought several lawsuits questioning the ACA’s constitu- tionality. The US Supreme Court upheld the ACA’s individual mandate but ruled that states could not be penalized if they didn’t participate in the Medicaid eligibility expansion. When the Congress failed to appropriate additional funds after 2014 for cost-sharing subsidies on the health insurance exchanges, the Obama administration continued to pay the subsidies to health insurers. The Republican-controlled House of Representatives sued, claiming only Congress has the authority to appropriate federal funds. In 2016, a federal judge ruled that these subsidies were illegal.
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EBSCO Publishing : eBook Comprehensive Academic Collection (EBSCOhost) - printed on 2/6/2023 8:50 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 1907359 ; Paul Feldstein.; Health Policy Issues: An Economic Perspective, Seventh Edition Account: s4264928.main.eds
Health Pol icy Issues: An Economic Perspect ive624
The ACA is the most significant health legislation enacted since Medi- care and Medicaid in 1965. While members of both political parties supported Medicare and Medicaid, the fact that the ACA did not receive similar bipartisan support meant that the ACA would be less durable.
In 2017, the Trump administration continued the cost-sharing subsidies, expecting that a Republican-controlled House and Senate would repeal the ACA. When that did not occur, President Trump stopped the illegal cost-sharing exchange subsidies. With only Republican votes, the Tax Reform Act, enacted in December 2017, repealed the individual mandate penalty. President Trump then permitted “short-term” health plans, which have limited benefits and lower premiums, to be extended for a year and then renewed, thereby provid- ing individuals with a low-cost alternative to ACA health plans. This policy, expected to take effect in 2019, will significantly affect the exchange risk pools.
The ACA is being changed in important ways. Contrary to early claims, the ACA will not have finally resolved the debate over health reform. The ACA affected many aspects of the financing and delivery of medical services. The complexity of the program also included imposing new types of taxes and severe reductions in healthcare provider payments to finance government subsidies for expanding insurance coverage.
Determining the equity and efficiency aspects of the ACA’s taxes would require a discussion of who actually bears the burden of the tax (compared with who is required to pay the tax) and the effects on work effort of the different taxes (e.g., employees might be less likely to work longer hours if their higher income decreases their ACA exchange subsidy or makes them ineligible for Medicaid). Similarly, analyzing the consequences of the reductions in Medicare provider payments, assuming the payment reductions are fully implemented, would necessitate an analysis of the effects on patient access to care. (Given the Medicare actuary’s concern over the drastic effect the payment reductions would have on hospitals, it is unlikely that they will ever be fully implemented.)
Instead of analyzing all aspects of the ACA, this relatively brief chapter analyzes President Obama’s promise to “sign a universal healthcare bill into law by the end of my first term as president that will cover every American.”
How well did the ACA achieve the goal of reducing the number of uninsured? Which ACA approaches have been more successful in this regard? It is important to keep in mind that increased insurance is not synonymous with increased access to care or to high-quality care.
Reducing the Number of Uninsured
Most of the ACA’s provisions became effective in 2014. In 2017, several changes occurred that likely affected the number of uninsured in 2018 unrelated to the ACA. The economy began growing faster in 2017; the rate of growth in
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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 625
GDP increased to 2.5 percent compared with only 2.1 percent in previous years, and as economic activity increased, the unemployment rate decreased to 4.1 percent. Thus, any decrease in the number of uninsured late in 2017 could not be attributed solely to the ACA. Further, the new administration reduced marketing expenses and shortened the enrollment period for exchange enrollees, which might have affected enrollment.
Two types of data are available on health insurance coverage: survey and administrative data. Administrative data do not cover all the insurance categories included in survey data. The advantages of administrative data, however, are that survey data undercount Medicaid and exchange enrollment and, second, the most recent survey data from the US Census Bureau are from June 2016, while Centers for Medicare & Medicaid Services administrative data are for late 2017. Thus, the analyses of the ACA’s approaches for reducing the number of uninsured compare the period 2013 to 2016 based on survey data, as well as to 2017 based on administrative data.4
Exhibit 38.1 presents the number and percentage of insured and uninsured in 2013 and 2016 based on the latest US Census Bureau survey data, according to the major sources of insurance coverage for those younger than 65 years.
Overall, the ACA succeeded in reducing the number of uninsured from 41.1 million in 2013 to 27.5 million in 2016; 13.6 million gained insur- ance. The number of uninsured as a percentage of the nonelderly population decreased from 15.3 percent to 10.1 percent during this period. Based on administrative data, Medicaid enrollment increased by 13 million as of 2017, to 74 million, and the exchanges expanded to 9.1 million (2016) and 9.9 million by 2017.
The ACA used six approaches to cover the uninsured:
1. Expand Medicaid eligibility from 100 to 138 percent of the federal poverty level (FPL).
2. Impose an employer mandate requiring employers to offer their employees health insurance or pay a penalty.
3. Provide tax credits to small employers to incentivize them to buy insurance for their employees.
4. Impose an individual mandate to buy insurance or pay a penalty. 5. Permit dependent children up to age 26 to be included on their
parent’s insurance. 6. Provide income-related tax credits for use on newly established ACA
insurance exchanges to those with incomes between 138 and 400 percent of the FPL.
Each of these approaches and how well they achieved their objective is discussed.
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Health Pol icy Issues: An Economic Perspect ive626
Medicaid Eligibility Expansion
About 74 million people are enrolled in Medicaid (68 million in Medicaid and 6 million in CHIP), or one in five Americans. The program is funded by state and federal matching funds (Centers for Medicare & Medicaid Services 2018). The federal government and each state have different federal matching formulas, which vary between 50 and 74 percent of the state’s cost.
The ACA expanded Medicaid eligibility from 100 percent of the FPL up to 138 percent of the FPL (which translates to $16,643 for an individual and $33,948 for a family of four, as of 2017). For the first time, these eligibility standards include childless adults.
The ACA committed the federal government to pay the entire Medicaid cost (100 percent) for each state’s expansion population (i.e., from 100 to 138 percent of the FPL) for the first three years; the percentage was decreased to 95 percent in 2017 and then to 90 percent in subsequent years. Given that almost all of the expense is paid by the federal government, an expansion state has little incentive to monitor how well federal dollars are spent.5
When the US Supreme Court overturned the ACA requirement that all states expand Medicaid eligibility, only 30 states and the District of Columbia chose to expand Medicaid eligibility. By 2017, about 13 million new adults had enrolled in Medicaid (Kaiser Family Foundation 2017d). A recent study, however, estimates that only about one-third of the new enrollees became eligible as a result of Medicaid expansion. Those who had been previously
Market Segment
2013 2016
Population (Millions)
Percentage of Total
Population (Millions)
Percentage of Total
Employment-based 161.1 59.9% 164.9 60.8%
Individual (direct purchase)
23.7 8.8% 37.9 14.0%
Medicaid 52.0 19.3% 58.9 21.7%
Medicarea 7.5 2.8% 7.5 2.8%
Military-related healthcare
10.8 4.0% 10.9 4.0%
Uninsured 41.1 15.3% 27.5 10.1%
Note: Numbers may not add up exactly to totals because individuals may receive coverage from more than one source. aThose younger than 65 may be eligible for Medicare if they have end-stage kidney disease and/or are permanently disabled.
Source: Data from US Census Bureau (2017, table HI01).
EXHIBIT 38.1 Sources
of Health Insurance
Coverage of US Nonelderly (Younger Than
65 Years), 2013 and 2016
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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 627
eligible accounted for a much larger percentage—as high as two-thirds—of Medicaid enrollment increases in expansion states (Frean, Gruber, and Sommers 2016). Had all states chosen to expand eligibility, the decrease in the number of uninsured would have been greater. Medicaid expansion states experienced a much greater increase in enrollment than expected.
The ACA’s Impact on Medicaid Increased Medicaid eligibility increased demand for medical services. However, the supply of physicians did not similarly increase. Concerned that Medicaid’s low physician payment rates would limit access to primary care physicians, the ACA required the federal government to pay the additional cost of making Medicaid fees equal to Medicare fees for primary care physicians for just two years (covering the 2014 Congressional midterm elections). After the two years, Medicaid fees were again determined by the states, and they have returned to their previous lower levels, with a consequent decrease in access to physicians.
Several studies have been conducted to determine the effect of Medicaid expansion on the patient’s health status, access to care, use of services, and financial effects (Antonisse et al. 2018; Courtemanche et al. 2018; McMorrow et al. 2017; Miller and Wherry 2017). A consistent finding in these studies is that those who became newly eligible in the Medicaid expansion states felt less stressed regarding their ability to pay for medical care, and were financially better able to pay for additional follow-up care than those in nonexpansion states. The researchers noted that in expansion states, increased waiting times were reported for appointments, which delayed receipt of medical care. These studies generally concluded that health effects have been minimal, although the study periods have only been a few years. More time is needed to determine whether significant changes in health status occurred compared with compa- rable groups of uninsured people.
When the ACA expanded Medicaid eligibility, proponents expected that those previously uninsured would have increased access to care, would receive coordinated care, and would not have to wait many hours in an expensive emergency department (ED) for routine medical issues. Further, having a usual source of care would result in cost savings because Medicaid enrollees would have fewer visits to the ED.
Contrary to these expectations, ED use increased by 40 percent in the first 15 months after individuals enrolled in Medicaid. In a study of Oregon’s Medicaid expansion, which relied on a lottery to randomly select a limited number of new Medicaid enrollees, researchers found that the large increase in ED use by these new enrollees resulted in a greater-than-projected cost increase in the state. In a follow-up study, the authors “found no evidence that the increase in ED use due to Medicaid coverage was driven by pent-up demand that dissipated over time; the effect on ED use appears to persist over the first 2 years of coverage” (Finkelstein et al. 2016, 1506).
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Health Pol icy Issues: An Economic Perspect ive628
Interestingly, the authors found that visits to a physician’s office were not a substitute for going to the ED. For these patients, ED use increased along with physician office visits. Perhaps the physician sent the patient to the ED where more could be done for the patient.
The Oregon Medicaid expansion study is also significant for estimating the health effects in those who enrolled in Medicaid and in those in the lottery who remained uninsured. Those newly enrolled in Medicaid increased their use of medical services; in addition to increased visits to the ED, the number of outpatient visits increased, as did hospitalizations and use of prescription drugs. However, the researchers did not find improvements in three measures of physical health—blood pressure, cholesterol levels, or blood sugar (for diabetes control)—relative to the control group. New enrollees, however, did report a higher level of self-reported health. Similarly, newly enrolled individu- als in Medicaid reported having less medical debt, feelings of greater financial security, and lower rates of depression (Baicker et al. 2013).
The findings of the Oregon Medicaid study were disappointing to propo- nents of Medicaid expansion. Medicaid coverage often results in uncoordinated care that is inefficient; it is less valuable than private insurance. When the ACA’s higher Medicaid fees for two years were reduced, new Medicaid patients once again experienced higher wait times for an appointment (Candon et al. 2018). Many physicians refuse to accept Medicaid’s low fees, access to primary care and specialty physicians is limited, and Medicaid managed care firms rely on more restrictive provider networks than those available to privately insured people.
ACA-Mandated Benefits and Regulations
The ACA imposed strict rules regarding the purchase and sale of health insur- ance. These requirements on purchasers and insurers affected the insured, the uninsured, health insurers, and the performance of the health insurance markets, which are large employers, small employers, and the individual health insurance market. The following is a brief description of these ACA rules.
Ten Essential Health Benefits ACA requires insurers to cover a broad range of mandated “essential” benefits, the scope of which is greater and more comprehensive than typical health insurance policies previously sold, particularly in the individual market. Some of the comprehensive benefits are pregnancy, maternity and newborn care, women’s contraceptives (a required benefit even for single men and women past child-bearing age), preventive and wellness services with no copayment, chronic disease management, and pediatric dental and vision services.
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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 629
One problem with requiring the same comprehensive benefits for every- one is that premiums are higher for those who prefer less comprehensive coverage.
Four Types of Health Plans Enrollees must choose from among only four types of ACA health plans. All four types cover the same comprehensive (“essential”) benefits, but they differ according to their premiums, deductibles, cost sharing, and maximum out-of-pocket costs. For each type of plan, the insurer is expected to pay, on average, a maximum percentage of the insured’s medical costs, referred to as the “actuarial value” of the plan. A Bronze plan covers, on average, 60 percent of the insured’s medical costs, a Silver plan pays 70 percent, a Gold plan pays 80 percent, and a Platinum plan pays 90 percent.
Removal of the Preexisting Condition Requirement Preexisting condition exclusions have long been a concern of those with a health condition, such as heart disease or cancer. Many states developed high- risk pools that sold subsidized insurance to those who were rejected by health insurers for having a preexisting condition. These risk pools typically charged premiums that were about 150 percent of health insurers’ premiums for those without a preexisting condition. When the ACA prohibited insurers from denying coverage because of a person’s preexisting condition, states that had high-risk pools closed them.
Medical Loss Ratios The medical loss ratio (MLR) is calculated by dividing the medical claims expense by the total premium. The ACA required health plans to have an MLR of no less than 80 percent (spending 80 percent of the premium on medical expenses) in the individual and small group markets and a minimum MLR of 85 percent in the large group market. Inability to meet the MLR required the insurer to refund the difference to enrollees. For example, if an insurer has an MLR of 70 percent in the individual market, it is required to refund the differ- ence between 70 and 80 percent to enrollees (Kaiser Family Foundation 2012).
The remaining portion of the premium is considered administrative costs, which includes the insurance company’s marketing costs, costs of establishing a provider network, administrative costs of handling insurance claims, costs of monitoring provider fraud and abuse, and profit (see exhibit 7.2). Differences in premiums and annual premium increases are primarily due to changes in the insured group’s claims experience.
The following ACA requirements were particularly important in their effect on enrollment and premium increases in the individual insurance market.
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Health Pol icy Issues: An Economic Perspect ive630
Modified Community Rating The ACA established rules governing how health insurers are permitted to price their health plans. For each type of health plan, insurers are permitted to vary their premiums by family status, county within a state, smoking status, and age. On average, the medical costs of older people, not yet eligible for Medicare, are higher than those for people in their 20s by a ratio of 5 or 6 to 1. The ACA, however, requires that differences in premiums according to age be no greater than 3:1, much less than the actuarial cost differences. (This age-rating rule was supported by AARP because it would lower premiums for older enrollees.)
Regulation of premiums by age, rather than by actuarial cost differences (as would occur in an experience-rated market), fails to consider the enrollment consequences of such a “tax” on the young.
Gender Rating The ACA prohibits using gender rating for individuals (and employers with fewer than 100 employees). Women, on average, use more healthcare services than men of the same age. They visit the physician more often and take more prescription drugs. Because of their higher healthcare costs, a young woman’s premium in the individual health insurance market would be 50 percent greater than that for a young man if gender rating were used.
Similar to age rating, gender rating replaces experience-rated premiums (based on cost differences) and relies on value judgments to determine pre- miums; therefore, enrollment decisions will differ for the two approaches for determining premiums.
Health Insurance Tax The ACA imposed a health insurance provider fee on insurers. Any tax imposed on insurers is shifted to those buying insurance and will also affect their enroll- ment decisions. Imposing the tax on insurers is merely a way to make it less visible to enrollees. (See chapter 23, “Who Bears the Cost of Employee Health Benefits?”) Large employers and their employees are unaffected by the tax because large firms self-insure and, therefore, are not subject to the tax. The new tax is not a specified fee, but is determined annually by the Treasury department to raise a certain amount of revenue. Those most affected by the tax are small employers and individuals buying insurance.
ACA’s Employer Mandate
The ACA employer mandate required that employers with 50 or more employ- ees who worked full-time (defined as at least 30 hours a week) must offer to
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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 631
buy their employees single coverage for an affordable and ACA-qualified health plan. An affordable plan was defined as one in which the employee did not have to spend more than 2.5 to 9.66 percent of her wages (depending on income) on the premium. Qualified ACA health plans consisted of four metal plans (Bronze, Silver, Gold, and Platinum). An employer failing to offer employees an affordable and qualified plan had to pay a $2,000 tax per employee.
The uninsured employee did not have to accept the employer’s offer. If the employee rejected the employer’s offer, the employer was no longer subject to the employer mandate tax.
Many uninsured employees believed the value of the minimum-qualified Bronze plan, with its large out-of-pocket payments, was not worth even the reduced amount they would have had to pay for it. The Bronze plan included a $6,000 deductible and cost-sharing expenses, and it paid about 60 percent of medical costs. In 2017, the average annual premium for a Bronze plan was $3,200, for which the employee was liable for only 2.5 to 9.66 percent of his income. If the employee wanted to buy a separate health plan for his family, in addition to having to pay the full $3,200 annual premium (plus child cost), the plan also included a $6,000 deductible. Many uninsured, low-income employees declined their employer’s offer because they would have had to pay the additional premium of $3,200 plus two deductibles ($12,000) before they could receive any insurance benefits.
Another significant problem with the ACA employer mandate was that by declining the employer’s offer of single coverage, the low-wage employee and family members became ineligible for premium tax credit and cost-sharing subsidies offered on the health insurance exchanges. Further, once the employee rejected the employer’s offer, he became subject to the ACA’s individual man- date penalty for not having health insurance.
Several studies concluded that the ACA’s employer mandate was inef- fective in decreasing the number of uninsured employees (Duggan, Goda, and Jackson 2017; Frean, Gruber, and Sommers 2016). In addition, it has been estimated that 3.7 million employees have been adversely affected by these ACA rules (Garfield et al. 2017, figure 1).
Small-Business Premium Tax Credit
The ACA exempted employers with fewer than 50 employees from the employer mandate.6 To encourage these employers to buy insurance for their employees, the ACA offered firms with 25 or fewer employees (with an average income of $50,000 or less) a tax credit good for two years, equal to 50 percent of the premium. The employer would have had to pay the other half of the employees’ health insur- ance premiums and buy the insurance through an ACA small business exchange.
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Health Pol icy Issues: An Economic Perspect ive632
The premium tax credit was apparently an insufficient incentive for small employers to buy insurance for their employees. The administrative and financial burden imposed on them was too great. The ACA small business premium tax credit failed to decrease the number of uninsured employees by any appreciable amount.
ACA’s Individual Mandate
The individual mandate was intended to achieve two goals: first, to eliminate the “free rider” problem. Many uninsured are financially able to purchase a high-deductible health insurance plan but choose not to do so. If someone can afford insurance, but is uninsured and suffers a large medical expense, that person will still be cared for. The community will subsidize the medical treatment. That person is shifting the risk—hence, the cost of catastrophic coverage—to the rest of the community.
Second, an individual mandate was to ensure that the individual market risk pool would be larger and would include a greater number of healthy adults to offset the higher medical costs of those who are older and sicker.
To achieve universal coverage, the government must ensure that the two groups without health insurance—those who can afford insurance but refuse to purchase it and those who cannot afford insurance—gain coverage. The intent of the individual mandate was to require everyone above a mini- mum level of income to have health insurance, while the remainder (except for undocumented individuals) became eligible for Medicaid.
Frean, Gruber, and Sommers (2016) concluded that the individual man- date did not appear to increase insurance coverage. The authors, however, quali- fied their conclusion by stating that the tax penalty might have encouraged some uninsured individuals to sign up for Medicaid, even if they were previously eligible but had not done so. (The Congressional Budget Office confirms that if the individual mandate were repealed, many individuals who enrolled in Medicaid to avoid paying the tax penalty would disenroll) (Kaiser Family Foundation 2017a).
Young Adult Coverage Expansion Starting in 2010, the ACA permitted dependent children, up to age 26, to be included on their parents’ employer-based health insurance. About 2 million young adults, whose parents generally had higher incomes, took advantage of this provision (McMorrow and Polsky 2016). It is unknown whether these young adults previously had insurance.
Goda, Farid, and Bhattacharya (2016) estimated that all employees, regardless of whether they had children up to age 26, subsidized those with dependent children in the form of about $1,200 in reduced wages.
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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 633
Health Insurance Exchanges
A New Insurance Marketplace for Individuals The health insurance exchanges were designed to become marketplaces for individuals buying health insurance. In 2016, the individual market consisted of about 38 million people and represented about 14 percent of the total number of insured individuals younger than 65 years. Those purchasing insurance in the individual market tend to be self-employed, students, retirees not yet eligible for Medicare, unemployed, individuals between jobs, and individuals who are employed but have not been offered insurance through their employers. The individual market, although small compared with the numbers enrolled in employer-based insurance, Medicare, and Medicaid, is a major policy concern.
Before the ACA, individuals purchased health insurance through a broker, directly from a health plan, or on the internet. They were able to choose from among a variety of health plans at different premiums. Insurers used an individual’s “risk-rating” to price his premiums, using the person’s age group, gender, and medi- cal benefits desired. Those with a preexisting health condition were often unable to buy insurance; they had to use state high-risk pools when they were available.
Further, premiums in the individual insurance market were higher rela- tive to medical claims (a lower MLR) because enrolling individuals involves higher marketing and enrollment costs than those for large employer groups. MLRs in the individual market were generally between 60 and 70 percent.
The ACA’s approach for decreasing the number of uninsured individuals whose incomes were too high to be eligible for Medicaid was to replace the private individual health insurance markets with federal and state health insur- ance exchanges based on ACA rules. Individuals, regardless of their medical conditions, can buy subsidized insurance on the exchanges. The exchanges offer a choice of ACA plans from competing insurers for citizens and legal residents whose incomes exceed the expanded Medicaid eligibility levels (138 to 400 percent of the FPL). Also eligible for federal subsidies are those who are not offered ACA-compliant insurance through their employers.7
Subsidies Available on the Health Insurance Exchanges Two types of income-related subsidies are available on the exchanges. The size of each subsidy declines at higher income levels.
A premium tax credit lowers the monthly premium for those with incomes between 138 and 400 percent of the FPL; according to the ACA provisions, enrollees do not have to pay more than 2.04 percent to 9.69 per- cent of their income. A cost-sharing subsidy reduces the out-of-pocket liability (deductibles and copays) for those with incomes between 138 and 250 percent of the FPL. Without these cost-sharing subsidies, many low-income exchange enrollees would have difficulty paying their out-of-pocket medical expenses.
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Health Pol icy Issues: An Economic Perspect ive634
Both types of subsidies are based on the premium for the second-lowest-cost Silver (“benchmark”) plan offered in the exchange.
Exhibit 38.2 shows the premium tax credits and cost-sharing subsidies available for a single person, aged 40 years, according to different income levels. Exhibit 38.3 presents the same information for a family of four. These exhibits illustrate the approximate financial burden of the premium and deductible on individuals and families at different income levels in 2017. In addition to paying the premium and deductible, enrollees are responsible for copays to provid- ers. A Silver plan covers 70 percent of a person’s expected medical expenses (deductible and copays). Thus, in 2017, the maximum liability for an enrollee with a Silver plan was $7,150 (excluding the premium); for a family of four, the maximum liability was $14,300.
After receiving a premium tax credit and a deductible cost-sharing sub- sidy, a single individual with an income of $30,150 (250 percent of the FPL) would still have to pay $5,342 or 17.7 percent of her income before receiving any insurance benefits. The financial burden increases as the enrollee’s income rises. An individual with an income of $42,210 (350 percent of the FPL), who is ineligible for the cost-sharing subsidy, would have had to pay $7,638, or 18.1 percent of their income, before receiving any insurance benefits in 2017.
After receiving a premium tax credit and a deductible cost-sharing sub- sidy, a family of four with an income of $61,500 (250 percent of the FPL) would have to spend $10,808—or 17.6 percent of their income—out of pocket before receiving any insurance benefits. Further, a family of four, with an income of $86,100 (350 percent of the FPL) (ineligible for a cost-sharing subsidy), would have to pay $15,480 (18 percent of their income) out of pocket before receiving any insurance benefits.
Those with incomes below 250 percent of the FPL receive the largest subsidies and spend the smallest portion of their limited income on health insur- ance. Enrollees with incomes above 250 percent of the FPL must spend almost 20 percent of their income before their insurance covers any medical expenses. These out-of-pocket payments for premiums and deductibles represent a signifi- cant portion of a person’s or a family’s income. Someone faced with such a large expenditure for unknown medical risks must weigh the value of being insured against other necessary household expenses. It is not surprising then that many people with incomes greater than 250 percent of the FPL, who must spend nearly 20 percent of their income on insurance, have decided to remain uninsured.
Adverse Selection in the Health Insurance Exchanges
In 2010, when the ACA was enacted, the Congressional Budget Office pro- jected that the health insurance exchanges, which became effective in 2014, would enroll about 23 million people by 2017 (Congressional Budget Office
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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 635
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Health Pol icy Issues: An Economic Perspect ive636
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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 637
2010, table 4). Many health insurers viewed the exchanges as a new business opportunity and eagerly entered the exchange markets.
The Failure of the Individual Mandate to Expand the Risk Pool The elimination of the preexisting medical condition requirement was expected to increase the number of high-cost enrollees. The individual mandate, however, was expected to expand the risk pool to include young and healthy individu- als whose lower medical costs would offset the higher medical costs of other enrollees. The ACA anticipated that the higher costs of those with a preexisting condition would be small when spread over a large number of healthy enrollees.
The individual mandate, however, failed to expand the risk pool for three important reasons. First, the penalty for not buying insurance was too low. In 2014, the penalty was the greater of $95 a year for an individual or 1 percent of income. By 2016 (and into the future), the tax penalty increased modestly to $695 (or 2.5 percent of taxable income), which is only $1,250 for a person with an annual income of $50,000. Someone buying the lowest-cost ACA-qualified Bronze plan in 2017 would have had to spend $3,200 for the premium plus $6,000 for the deductible before she would receive any insurance benefits. Many healthy individuals concluded that the value of being insured did not exceed the penalty for being insured.
Second, the Internal Revenue Service failed to enforce the already low penalty for being uninsured. In 2015, 23 million people lacked health insurance; 6.5 million tax filers paid the individual mandate tax, 12.7 million uninsured claimed an exemption from the mandate on their federal income tax forms (Norris 2018), and 4.3 million did not check the box indicating whether they had insurance or paid the penalty tax. The federal government processed these tax forms as usual, and the IRS did not follow up with those who had not checked the box (Internal Revenue Service 2017).
Third, the size of the exchange risk pool decreased as a result of an admin- istrative ruling to reduce opposition to the ACA. When the ACA exchanges started, millions of individuals who previously purchased individual health insur- ance received cancellation notices from their insurers because their coverage did not meet the ACA’s mandated benefits. To continue being insured, they would have had to buy more expensive insurance on the new exchanges. Many people did not want to change their health plans, and their anger at no longer being able to keep their health plan and their physician, as President Obama promised, created a great deal of adverse publicity for the ACA. In response, President Obama “grandfathered” these health plans, with the stipulation that insurers could not reduce the plans’ benefits. About 2 million individual enrollees preferred to remain in their grandfathered plans than switch to the new ACA plans (American Academy of Actuaries 2017, 8).
The inability of the exchanges to enroll a greater number of young and healthy adults resulted in an older and sicker risk pool than insurers had
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Health Pol icy Issues: An Economic Perspect ive638
estimated. Adverse selection occurred; the risk pool was more heavily weighted toward higher-cost enrollees. Insurers suffered large losses, many exited the exchanges, and those remaining sharply increased their premiums.8 The ACA exchanges failed to achieve the projected decrease in the number of uninsured. In 2017, 9.9 million people enrolled in the exchanges, fewer than the projected 23 million (Centers for Medicare & Medicaid Services 2017).
The Use of Cross Subsidies in the Health Insurance Exchanges The ACA rules provided a disincentive for the young and healthy to enroll in the exchanges. The ACA relied on cross subsidies among the insured, increasing premiums on young enrollees, instead of using federal subsidies to lower the premiums of higher-cost exchange enrollees. The purpose of using redistribu- tion among enrollees was to lower the federal cost of the ACA.
The ACA exchanges require that a form of community rating be used to narrow the differences in premiums between young and older adults. Age-rated premiums could not be greater than 3:1 for different age groups, even though the medical costs incurred by older adults are five to six times greater than those incurred by adults in their 20s and 30s.The increasing divergence between the premiums and actuarial cost for young adults was an important reason for many to remain uninsured.
Similarly, gender rating was prohibited in determining an enrollee’s premium. Because women have higher medical costs on average than men, the rule resulted in increased premiums for men to subsidize women.
Insurers are required to include more comprehensive benefits in all insurance plans. These “essential benefits” exceeded what many were willing to purchase. For example, older men and women and young single men are required to buy coverage for maternity care.
Finally, the ACA imposed a new health insurance tax (HIT) on insurers, which, when shifted to enrollees, serves as a further disincentive for those not receiving premium tax credits to remain uninsured (Burton 2013).
The overall effect of these rules, which increase premiums on all or some segments of the individual market, is higher premiums and a lower demand for insurance. Many individuals, even those eligible for exchange subsidies (7.9 million), preferred to be subject to the penalty for being uninsured rather than buy insurance whose cost exceeded its perceived value (Kaiser Family Founda- tion and Health Research & Educational Trust 2016).
Consequences of the ACA Legislation on the Health Insurance Exchanges
Health Insurers The individual mandate’s low penalty, IRS’s lack of enforcement of the penalty, retention of grandfathered plans for 2 million people, ACA rules that increased
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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 639
premiums, and imposition of cross subsidies on younger adults reduced much of the demand for insurance and decreased the size of the risk pool. Further, about 7 million people preferred to purchase ACA-compliant individual insur- ance outside the exchanges. Consequently, the exchange risk pools became more heavily weighted with costlier enrollees. Premiums, based on insurers’ expectations of a larger risk pool with a lower average risk level, failed to cover the medical costs of enrollees.
Insurers incurred large financial losses, and many exited the exchanges. Competition among insurers decreased as many geographic areas had few remaining insurers. Many exchanges were left with only one insurer. Sharply increased premiums after 2014 reflected insurers’ realization that the risk pools would be more costly (Cox et al. 2016).
As fewer healthy people enrolled and the risk pool consisted of a greater proportion of higher-risk enrollees, insurers complained that some enrollees bought health insurance and then stopped paying premiums once they received treatment. This behavior exacerbated adverse selection on the exchanges and contributed to higher medical costs and premiums.
Exchange Enrollees The consequences of sharply higher premiums differ for the three income groups enrolled on the exchanges. Those with incomes at or below 250 percent of the FPL and those with incomes up to 400 percent of the FPL (groups 1 and 2) are not affected by rising premiums because the premium tax credit is based on income; enrollees in these groups contribute no more than 2.04 to 9.5 percent of their income for a benchmark plan (Kaiser Family Foundation 2017b).
However, the insurer offering the benchmark (second-lowest cost) Sil- ver plan often changed each year. Thus, to be unaffected by rising premiums, the individual had to keep switching insurers (and their provider network and physician) to enroll in the benchmark plan. Doing so is troubling for many people, who may be in a higher-risk group and receive care for chronic condi- tions. If they stayed with their previous year’s plan, they would have had to pay a higher premium.
Although average actual premiums increased by 21 percent in 2017, those with incomes of less than 400 percent of the FPL were able to pay the same after-tax credit premium that they paid in 2016, as long as they enrolled in the benchmark plan.
The financial burden of sharply increasing premiums has been especially difficult for those with incomes above 400 percent of the FPL. In some com- munities, premium increases have exceeded 100 percent. For many middle-class individuals and families who rely on the individual insurance market, the high premiums, together with large deductibles and copayments, have become a financial hardship that has made health insurance unaffordable. This middle-class
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Health Pol icy Issues: An Economic Perspect ive640
group faces the choice of paying sharply higher premiums and deductibles (which consume about 20 percent of their income) or being uninsured (Pear 2016). The high cost of insurance was the reason given by 45 percent of unin- sured adults for being uninsured (Kaiser Family Foundation 2017c).
In 2017, the ACA exchanges enrolled about 9.9 million; 70 percent were in group 1, with incomes up to 250 percent of the FPL. These enrollees received both premium tax credits and cost-sharing subsidies. They benefit the most from the ACA exchanges.
Proposed Changes to the ACA to Further Reduce the Uninsured
Decreases in the number of uninsured resulted from ACA subsidies in the health insurance exchanges to those with low incomes and from Medicaid expansions. It is unlikely, however, that the health insurance exchanges will be able to further reduce the 28 million uninsured. Several approaches are avail- able that can expand coverage by lowering premiums and reducing adverse selection in the exchanges. Implementing any of these approaches requires legislative changes to the ACA.
Increasing the individual mandate penalty would incentivize more unin- sured to buy insurance. However, public opinion polls show that the penalty was very unpopular, and it was repealed by the Republican-controlled Congress as part of a tax bill in 2017.
To reduce the cost of insurance for young adults and increase their enroll- ment, Congress should replace the exchange cross subsidies (requiring young adults to subsidize older adults [age rating]) with refundable tax credits, which would be based on age and income. Older adults would still receive a subsidy, but it would come from the federal government (taxpayers), not from young adults. (The same approach should be used to eliminate the gender rating.) Insurers would then base their premiums on the expected medical costs of different age groups.
The HIT is another example of redistribution. All exchange enrollees pay the tax, and the government uses the proceeds to subsidize those with low incomes. Similar to age and gender ratings, removing the tax would lower premiums; the subsidies could then be funded on a more equitable basis.
ACA-qualified health plans include the same “essential” benefits, but vary according to premiums and the percentage of out-of-pocket expenses. Exchange enrollees differ in many ways, among them being the amount they are willing to pay for a plan and the degree of financial risk they are willing to bear. Decreasing the number of “essential” benefits would lower premiums and provide more choices. The type of health insurance demanded would then reflect enrollees’ preferences.9
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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 641
The ACA regulates health insurers’ MLR. If the intent of the ACA was to force insurers to reduce their administrative costs, then establishing the MLR as a percentage of premiums is unnecessary. Insurers are unlikely to waste administrative dollars if their goal is to maximize profits. They would only increase administrative costs, such as fraud detection or marketing, up to the point at which the additional revenue gained equals the additional cost incurred (i.e., marginal revenue equals marginal cost).
If the purpose of the MLR was to limit an insurer’s profit, the best way to achieve this is to ensure that insurers compete. The unintended consequence of using the MLR to limit an insurer’s profit is that it provides insurers with an incentive to raise their premiums. An insurer can only increase the absolute size of its profit by applying the MLR to a higher premium. If insurers are less forceful in curbing providers’ prices, enrollees’ medical costs increase and, consequently, premiums, along with insurers’ profit. Most exchange enrollees are unaffected by higher premiums because their premium payments cannot exceed a certain percentage of their income.
Providing care for those with a preexisting condition is a necessary requirement for health insurance reform. The issue is how that coverage should be provided. Allowing those with a preexisting condition to buy insurance, combined with a weak individual mandate, causes adverse selection. The risk pools are more heavily weighted with older and sicker individuals than expected, and the higher premiums discourage healthy adults.
Prohibiting exclusion of preexisting conditions has not been a panacea for those with serious medical conditions. A recent study found that the ACA’s ban on discriminating against those with preexisting conditions has led insur- ers to design their provider networks and drug formularies so that individuals with serious medical problems do not receive high-quality care. Specifically, exchange insurers have narrowed their provider networks, excluding costly can- cer centers and teaching hospitals, and limiting access to costly drugs (Geruso, Layton, and Prinz 2016).
Alternative approaches would be more favorable to those with a preex- isting condition and would also benefit individuals currently required to cross subsidize them. Allowing the exchange risk pools to reflect the actuarial costs of different age groups would have two positive effects. More young adults would become insured because their premiums would be lower. Second, for older adults, subsidies should be paid by the government. Moving toward experience rating with subsidies based on income and age, insurers would be less concerned with adverse selection. Subsidies and premiums for older and higher-risk groups (including those with preexisting conditions) would reflect their higher medical costs.
Alternatively, a separate, federally funded, high-risk pool could be established to subsidize those with a preexisting condition. The ACA initially
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Health Pol icy Issues: An Economic Perspect ive642
established such a risk pool; it was closed when the exchanges opened. The advantages of a separately funded high-risk pool are twofold. First, premiums in the individual market would be reduced, thereby encouraging more healthy individuals to buy insurance. Second, those in the federally funded risk pool, who require more specialized medical services, would have improved access to cancer centers and teaching hospitals; they also would have a greater choice of physicians (and specialists in particular).
The federal government also could establish a reinsurance program to protect health insurers from the very high cost of covering some patients. A federal reinsurance program was established for Medicare Part D insurers to protect them from the very high drug expenses of some patients (Frank and Zeckhauser 2018). Like the other proposals discussed, a reinsurance program for the exchanges would reduce premiums and ensure high-quality care for costly patients, because those costs would be shifted from insurers to the government.10
Summary
Prior to implementation of the ACA, about 41.1 million nonelderly individu- als (or 15 percent of the nonelderly population) were uninsured. The major accomplishment of the ACA has been the 13.6 million decrease in the number of uninsured, to 27.5 million (10 percent of the population) in 2016 (exhibit 38.1). This happened because of Medicaid eligibility expansion (13 million) and income-related subsidies to those in the nongroup health insurance exchanges (9.9 million) (Kaiser Family Foundation 2017d). The other ACA approaches to reduce the number of uninsured, namely the employer mandate, the small business tax credit, and the individual mandate, were ineffective in expanding coverage.
The employer mandate, backed by a significant penalty, failed to increase employees’ coverage. Many employees chose not to accept their employer’s coverage offer because their premium contribution and the deductible in the ACA-qualified plan exceeded their perceived benefits. Employees would also have had to buy separate insurance for their families and pay the full premium, plus bear an additional deductible. Once the employee rejected the employer’s insurance offer, he could not purchase subsidized health insurance on the exchanges.
The temporary small-business tax credits were an insufficient incentive for many small businesses to offer health insurance to their employees. Low- income employees, whether in large or small firms, still need affordable coverage.
The ACA’s removal of the prohibition against insuring people with a preexisting condition was beneficial to those with health problems. They could
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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 643
no longer be denied coverage in the individual insurance market. To prevent adverse selection by having a risk pool consisting of many high-risk individuals, the ACA included an individual mandate to require large numbers of healthy young adults to buy insurance. However, the penalty was too weak to be effec- tive, exemptions from the penalty were readily available, and the IRS failed to enforce the penalty. The greater proportion of high-cost patients in the risk pool led to sharply increased exchange premiums.
After suffering large financial losses, insurers have exited the exchanges, thereby limiting competition and patient choice. Insurers that remained sharply increased their premiums to reflect the higher costs of their enrollees. Many exchange-eligible individuals (particularly young, healthy adults) decided that they preferred being uninsured to paying high premiums (greater than their actuarial value) and large deductibles, as well as being required to use narrow networks, for comprehensive insurance they didn’t believe they needed.
Exchange enrollees, particularly those with incomes at or below 250 percent of the FPL, have benefited most from the premium tax credits and cost-sharing subsidies. They have not been affected by double-digit premium increases, as long as they switch to the new benchmark Silver plan each year. The exchanges will continue to provide them with affordable health insurance. However, many with serious medical conditions are limited in their choice of providers; having to switch to the lower-cost benchmark plan and change providers causes great anxiety.
Shortcomings of the ACA make it unlikely that further decreases in the 28 million uninsured will occur without significant legislative changes. Many middle-class families buying individual coverage face a financial hardship from sharply rising premiums and high deductibles.
Few of the ACA’s cost-control measures have been effective in reducing costs. They have either failed to produce significant savings (accountable care organizations) or have not been implemented (a 40 percent tax on “Cadillac” plans exceeding $27,500 for family coverage and the Independent Payment Advisory Board).
The ACA is likely to be seen as an extension of Medicaid, serving those with incomes below 250 percent of the FPL and those who have preexist- ing medical conditions. The exchange insurers are also becoming similar to Medicaid HMOs, limiting patient access by using narrow provider networks.
Millions of middle-class individuals and families, however, whose incomes are too high for premium tax credits, those buying insurance in the off-market, and the uninsured (45 percent of whom state that cost is a reason for being uninsured) find the high premiums unaffordable (Goddeeris, McMorrow, and Kenney 2017). Premiums for 2017 increased, on average, by 21 percent; some exchanges, such as in Phoenix, reported increases as high as 145 percent (Cox et al. 2016).11 These individuals are experiencing great anxiety and financial
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Health Pol icy Issues: An Economic Perspect ive644
hardship, and many consider reducing their working hours and income to qualify for subsidies. Revisions to the ACA must address the economic insecurity of these middle-class individuals and families, which will require a bipartisan consensus.
Discussion Questions
1. What were the ACA’s approaches for reducing the number of uninsured?
2. What change did the ACA institute that was of major importance in the individual market that any replacement plan would likely maintain in one form or other?
3. How effective was the individual mandate in expanding the exchange risk pools?
4. Why did adverse selection occur in the health insurance exchanges? 5. How did health insurers respond to adverse selection? 6. What are alternative approaches for subsidizing health insurance for
those with a preexisting condition?
Notes
1. The ACA required that all health plans be ACA compliant, which made previous health plans, particularly in the individual market, noncompliant with the law. A public outburst occurred as many millions of individuals were shocked to find that they could not keep their health plan as promised. They were forced to buy new, more costly health plans on the ACA exchanges. PolitiFact, a nonpartisan organization, has called President Obama’s “If you like your healthcare plan, you can keep it,” the Lie of the Year for 2013 (National Public Radio 2013).
2. Those buying insurance on the exchanges were shocked and angered when they realized that not only could they not keep their health plan but they also could not keep their physician. To control higher-than- expected medical costs, insurers narrowed their provider networks, requiring enrollees to use network physicians and hospitals. Further, the benchmark Silver plan kept changing as insurers entered and exited the market. To avoid higher premiums, enrollees had to keep switching insurers, which also included changing their provider networks, including their physicians.
3. The Obama administration claimed that it would “bend the cost curve.” Instead, the ACA increased the rate of growth of medical expenditures. In the years before the ACA, there was a slowdown in
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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 645
the annual percentage increase in health expenditures. The slowdown was generally attributed to the recession and the growth of high- deductible health plans. The ACA’s expanded coverage resulted in an increase in use of services and higher prices, both of which increased per capita and total healthcare spending (Weiner, Marks, and Pauly 2017). Health expenditures increased from 17.2 percent of the gross domestic product in 2013 to 17.9 percent in 2016. On a per capita basis, health expenditures, adjusted for inflation, increased from 1.7 percent annually in the six-year period before the ACA was enacted to 3.2 percent annually for the three-year period from 2014 to 2016. Premiums in the highly volatile nongroup market increased, on average, 8 percent in 2016 and 21 percent in 2017. Some cities experienced very high premium increases; in Phoenix, they rose 145 percent (Cox et al. 2016).
4. Enrollment data for the health insurance exchanges and for Medicaid expansion differ based on their data collection methods and time periods used. Some sources use a broad definition of the individual marketplace, such as “nongroup,” while others use a narrower definition, such as “exchange enrollment.” Enrollment estimates may be based on administrative data or surveys, which vary according to the methods used, such as personal or telephone interviews, sample sizes, and geographic area (e.g., state, county). Data for exhibit 38.1 are based on the US Census Bureau’s Current Population Survey Annual Social and Economic Supplement because this survey is the primary source of annual health insurance information in the United States. Administrative enrollment data vary according to time of year; for example, 10.8 million enrolled in an exchange plan in 2016, but by December 2016, enrollment was only 9.1 million. Similarly, 12.2 million selected an exchange plan in January or February 2017, but as of June 2017, only 9.9 million had actually paid their first premium (Centers for Medicare & Medicaid Services 2017). The more accurate definition of exchange enrollment is the number paying their premiums.
5. Archambault (2017) stated, “When California first expanded ObamaCare, the state predicted enrollment would max out at 910,000 able-bodied adults. As of July 2017, expansion enrollment sat at 3.8 million. . . . California initially predicted that its ObamaCare expansion would cost roughly $11.6 billion in the first three fiscal years of the program. The actual cost during that time? An astounding $43.7 billion.”
6. Mulligan (2017) estimated that designating a large firm by the number of full-time employees affects hiring decisions. To be exempt from the employer mandate tax, many small firms reduced the number of employees to below 50. This change resulted in the loss of approximately 250,000 employees.
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7. In states that have not expanded Medicaid eligibility, the premium tax credits are for those with incomes between 100 and 400 percent of the FPL. About 2.5 million people in states that did not expand Medicaid eligibility would otherwise have fallen into a “coverage gap,” having incomes between 100 and 138 percent of the FPL (Garfield and Damico 2017).
8. The ACA had already caused adverse selection in “child-only” health insurance policies. An ACA rule, which took effect in 2010, prohibited insurers from excluding children younger than 19 years who were diagnosed with a preexisting condition. Many parents purchased child- only plans because their small employers’ health insurance policies did not cover children. Concerned that they would experience adverse selection (and the associated high costs) by enrolling large numbers of children with preexisting conditions, many insurers exited the market, and others stopped selling child-only policies. Parents who previously had enrolled their children faced much higher premiums and many disenrolled, while other parents were unable to buy child-only plans (Keith, Lucia, and Corlette 2012).
9. Allowing greater choice of health plans that differ in their benefits is similar to the introduction of Medicare Advantage (MA) plans. Initially, Medicare permitted MA enrollees to switch to traditional Medicare with 30 days’ notice. Adverse selection occurred in traditional Medicare. When a person required a great deal of medical treatment, he would leave the MA plan and enroll in traditional Medicare, which permitted a greater choice of specialists and hospitals. Adverse selection was reduced when the 30-day period was lengthened to an annual open-enrollment period.
10. Medicare appears to have solved the problem of adverse selection in Medicare Part B (physician and outpatient services) and Part D (outpatient prescription drugs), which are both voluntary. Concerned that the aged would wait until they were sick to enroll in these programs, Medicare charges a higher premium the longer a person delays enrollment.
11. If it had not been for deductibles rising much faster than premiums in 2016, it has been suggested that premiums would have risen even more (Kaiser Family Foundation and Health Research & Educational Trust 2016).
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