CASE STUDY - THE AFFORDABLE CARE ACT MARKET PLACES

Health Care Reform Is a “Three-Legged Stool”

The Costs of Partially Repealing the A덝ordable Care Act

By Jonathan Gruber | Posted on August 5, 2010, 9:00 am

AP/Charlie Riedel

The “three-legged stool” of health reform

The Affordable Care Act represents the most significant transformation of our health insurance market in more than 40 years. One of the law’s

key goals is to fix the broken small group and nongroup insurance markets—where small businesses and people not covered through their

jobs get their health insurance. Insurance prices are very high and variable in these markets today, and sick individuals who most need

coverage are not able to get it.

At the health law’s core is a “three-legged stool” approach to reforming these markets: new rules that prevent insurers from denying

coverage or raising premiums based on preexisting conditions, requirements that everyone buy insurance, and subsidies to make that

insurance affordable. But some confusion exists about how the stool’s three parts are put together—confusion that’s compounded by claims

that some parts will work without others and by efforts to repeal key elements of the new law

The truth is that all three legs of the stool are necessary to assure affordable coverage.

1. The first “leg” is regulations that require insurance companies to offer insurance to

any applicant with premiums based on age (and tobacco use) and not on

underlying health status. Insurance companies are also prohibited from excluding

coverage due to preexisting illnesses.

This is a highly popular reform, but it doesn’t work in a vacuum. If insurance

companies must charge the same price to people whether they’re sick or

healthy many healthy people will view this as a “bad deal” and not buy

insurance. This results in higher prices that chase even more people out of the

market. The result is a “death spiral” that leads only the sick to purchase

insurance at very high prices. Several states tried such community rating

reforms—offering health insurance policies within a given territory at the same

price to all persons without medical underwriting—in their nongroup markets

over the past two decades, and sharp rises in insurance prices ensued along

with rapidly shrinking market size.

2. This fact motivated Massachusetts in 2006 to add a second “leg” to the stool: a

requirement that all residents purchase insurance. In this way the state could

ensure a broad distribution of health risks in the market and fair “community -

rated” pricing to all.

The problem with this solution in a vacuum, however, is that many families cannot

afford health insurance at those community-rated prices.

3. Massachusetts therefore added a third “leg” in the form of subsidies that make

health insurance affordable for those below three times the poverty line (as well

as some targeted exemptions from the mandate for those who were above the

subsidized level but could not afford coverage). This reform has shown very

encouraging results, with the number of uninsured in the state falling by 60

percent and nongroup premiums falling by 40 percent.

The Affordable Care Act is similarly designed as a three-legged stool. A recent

ballot measure in Missouri and litigation in federal courts would repeal the law’s

coverage requirement and leave other elements unchanged. At the same time,

legislation has been introduced in Congress to repeal some parts of the health law

while keeping others—most notably the insurance market reforms. Critics who

propose to “repeal and replace” the Affordable Care Act don’t seem to understand

that all three legs of the stool are critical for reform. Pulling out any of the legs while

leaving one or two intact will critically undercut gains from reform.

Why repealing certain portions of the law won’t work.

Both the mandate and subsidies are crucial to keeping exchange

premiums low: The simple logic imbedded in the law is that it is potentially

destructive to reform insurance markets without mandating purchase because only

the sick buy insurance and prices remain high. We have seen examples of this in

states such as New York and Massachusetts (before its most recent reform), which

both imposed modified community rating without a mandate and saw prices

skyrocket in their nongroup markets. When Massachusetts implemented its

comprehensive reform in 2006 it saw a striking decline in nongroup premiums of 40

percent.

Comparing premiums for the silver plan in the exchange under the law (column 1)

with premiums for the same plan under the repeal scenarios reveals the mandate’s

importance for nongroup premiums in the exchange. For singles, removing the

mandate (as shown in column 2) raises premiums by 27 percent—in other words,

individuals purchasing insurance in the exchange would pay 27 percent more for

their coverage without a mandate. Insurance reforms without a mandate and without

subsidies (column 3) would have an even more dramatic impact and would double

the single premium in the exchange to almost $16,000 per year. (The impact on

family premiums is more modest, as the selection effects are much stronger for young

healthy singles).

The individual mandate is critical for increasing insurance coverage:

Removing the individual mandate cuts the reduction in uninsured by more than

three-quarters. Rather than covering almost 60 percent of the 55 million uninsured

in 2019, the bill without the mandate would cover only about 12 percent of the

uninsured. If the subsidies are removed—as in the last column—the coverage

effects fall further so that there is essentially no increase in insurance coverage from

simply setting up the exchange with small business credits and insurance market

reforms.

Repealing the mandate greatly erodes coverage by employers: The

Affordable Care Act leads to a modest erosion of employer coverage of 4.1

million persons, or about 2.5 percent of projected coverage. But repealing the

mandate would reduce employer coverage by 13.5 million persons, or over 8

percent of baseline projections. This is because repealing the mandate would

eliminate the enrollment that will come from people meeting the requirement to

purchase insurance from employers o덝ering insurance to employees who need

to meet that requirement.

The mandate means much more “bang for the buck”: While removing the

mandate cuts the legislation’s coverage gains by more than 75 percent, it only

reduces the spending under the legislation by less than one quarter. This is because

without the

mandate the uninsured gaining coverage are the sickest ones taking advantage of

the market reforms and subsidies, while the healthy uninsured remain out of the

system. Repealing the mandate further increases federal spending by creating a

large movement out of employer coverage and into public insurance and the

subsidized exchange.

The mandate and the subsidies are critical to building an insurance

market that includes the healthy and the sick: The exchange insures far

more people under the Affordable Care Act than under either of the other scenarios—

26.8 million people compared to 17.2 million without the mandate and 11.4 million

people without the mandate and the subsidies. The reason is that the larger

exchange under the law includes healthy and sick people. Partial repeal—new rules

for insurance but no mandates and no subsidies—means people are far more likely

to participate only when they need health care, producing the substantial increase in

average premiums, and, ultimately, the “death spiral” in which only the sick purchase

insurance at very high prices.

Conclusion

Removing the Affordable Care Act’s mandate would eviscerate the law’s coverage

gains and greatly raise premiums. And going further by only keeping the market

reforms and the small business tax credit would virtually wipe out those coverage

gains and cause an enormous premium spike. Without all three legs, the stool— and

elective health reform—will not stand.

Download this memo (pdf) Jonathan Gruber is a professor of

economics at the Massachusetts

Institute of Technology