Healthcare Policy

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The Future of U.S. Health Care: Replace or Revise the Affordable Care Act?

HEALTH CARE

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T he Affordable Care Act (ACA), enacted in 2010, dramatically changed the

U.S. health care landscape. The law's goals were to reduce the number of

uninsured, make coverage more affordable, and expand access to care. To

accomplish this, the law expanded eligibility for Medicaid and created new

marketplaces where people without employer coverage could buy policies directly

from insurers. It uses a carrot and stick approach to promote enrollment. Most

adults are required to have health coverage or pay a fine; and moderate-income

individuals receive premium subsidies to buy policies in the new marketplaces.

Since the ACA's adoption, an estimated 20 million people have become newly

insured, and approximately 24 million people have gained access to subsidized or free

care through marketplace tax credits and Medicaid expansion. Despite these

successes, the law faced strong political headwinds from the outset. There have been

repeated calls from both sides of the political spectrum to repeal the law and replace

it with alternative reforms or to modify the law to address other goals.

Related Links COMPARE

Health Reform Opinion Study

PADSIM

RAND research offers insights about the likely impact of repealing or revising the

ACA. RAND's research on the ACA makes use of an updated version of the RAND

COMPARE microsimulation model, which predicts the effects of health policy

changes at state and national levels. Using COMPARE, researchers have examined

the impact of many configurations of health insurance in the United States,

including:

maintaining the ACA with no changes

repealing the law with no replacement

replacing the law with a single payer system

replacing the law with other measures that address coverage expansions

through Medicaid and the individual market

RAND research has also examined the impact of retaining the ACA while modifying

key provisions, including:

If the ACA were repealed, with no replacement, the number of insured Americans would drop by 19.7 million.

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repealing the individual mandate

modifying tax credit subsidies

revising market regulations

modifying Medicaid expansion

Below, we summarize the impacts of these alternatives, focusing on the effect of

potential changes to the ACA on the number of uninsured and consumer out-of-

pocket costs.

Replacing the ACA

Photo by Brian Synder/Reuters

The ACA remains in effect as of this writing. Under the status quo, analysis

conducted in 2015 estimates that 251.6 million Americans will have health insurance

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in 2017. The number of uninsured is estimated at 26 million. Out of pocket costs for

an enrollee in the individual insurance market average $3200 for the year.

As noted earlier, RAND has modeled three alternatives to the ACA and a fourth that

makes substantial changes (the American Health Care Act [AHCA]). The first would

repeal the ACA with no replacement; the second would replace it with a single-payer

approach; the third (the CARE Act), would overhaul the ACA's market regulations

and Medicaid expansion, as would the AHCA.

Repealing the ACA with No Replacement If the ACA were fully and immediately repealed, with no replacement, the number of

insured Americans would drop by 19.7 million to 231.9 million in 2017 as estimated by

analysis conducted in 2016. Out-of-pocket costs for an enrollee in the individual

market would average $7400 annually, an increase of $4200 over the status quo.

Repeal would increase the federal deficit by $33.1 billion annually compared with the

status quo, largely because it would eliminate the ACA’s revenue-raising provisions.

Replacing ACA with a Single Payer Plan RAND research has also examined the impact of replacing the ACA with single-

payer plans. The analysis looked at two scenarios:

1. Adopting the American Health Security Act, introduced by Senator Bernie

Sanders in 2011. The plan is a Medicare-for-all proposal that would replace the

ACA as well as Medicare, Medicaid, and SCHIP with uniform, single-tiered

coverage managed by the federal government. The plan would not allow

private health insurance. There is little or no cost sharing for enrollees.

2. The Health-Insurance Solution, a plan focused on catastrophic coverage in

which Medicare and Medicaid continue and all other legal U.S. residents have

income-dependent coverage. Individuals also have the option to purchase

supplemental private coverage.

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The analysis, conducted in 2015, assumed that a comprehensive single-payer plan

would provide all 311 million legal residents of the United States with coverage in

2017. The only uninsured would be 11 million undocumented immigrants. Relative to

estimated spending under the ACA in 2017, this scenario would increase national

health care spending by $435 billion and increase federal health care spending by $1

trillion. When other potential savings and costs (i.e., administrative and

implementation costs, reductions in drug and provider prices), the average net effect

on national health care expenditures was $556 billion in savings, but with a very

large range—from a savings of over $1.5 trillion to increased spending of $140 billion,

depending on the actuarial value of the coverage and other design and

implementation details.

Under the catastrophic-plan scenario, the same total number of Americans would

have coverage—311 million in 2017—as under the comprehensive plan, but would

have coverage through a variety of sources. An estimated 203 million Americans

would have coverage under the single payer plan, with other Americans covered by

Medicare, Medicaid, and other sources. This scenario reduces national health care

expenditures by $211 billion and federal expenditures by $40 billion relative to the

ACA.

The study's dollar estimates are not comparable to the other results presented in

this paper because they refer to a different baseline. However, in sum, the

comprehensive scenario with generous benefits would be very expensive, while the

catastrophic scenarios with income-dependent coverage would be cost-saving but

provide fewer health insurance benefits.

The Patient CARE Act

By the Numbers

43% estimated increase in exchange

premiums if the ACA's tax credits

were eliminated

Learn More

The Patient Choice, Affordability, Responsibility, and Empowerment Act (CARE) was

an alternative to the ACA offered by Sens. Richard Burr (R–N.C.) and Orrin Hatch (R–

Utah) and Rep. Fred Upton (R–Mich.) in 2016. It proposed:

eliminating the ACA’s individual and employer mandates,

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loosening regulations on insurers,

rolling back funding for Medicaid expansion, and

eliminating the ACA's taxes and fees.

It also offered tax credits to low-income individuals to help them purchase

insurance, but using a structure different from the tax credits under the ACA. The

CARE Act would offer a "premium support" type tax credit, meaning that—even

though they are based on income and family size—they are not adjusted to account

for regional variation in premium levels or health care cost growth, and thus

enrollees are responsible for any difference between the amount of the tax credit

and the cost of the premium.

We analyzed the effects of the CARE Act on insurance enrollment, premiums, federal

spending, and out-of-pocket costs, relative to current law. Based on modeling

conducted in 2016, the analysis estimated that, in 2018, the CARE Act would reduce

federal spending but increase the deficit by $17 billion, relative to current law. This

increase results from the Act's elimination of many revenue-generating mechanisms

built into the ACA. The CARE Act would increase the number of uninsured

individuals by 9 million, and leave some population segments, including low-income

individuals and older adults, with substantially higher costs for health insurance

and medical care.

The American Health Care Act

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U.S. Speaker of the House Paul Ryan speaks to the media about the American Health Care Act at the Capitol in

Washington, D.C., March 15, 2017

Photo by Aaron P. Bernstein/Reuters

The American Health Care Act (AHCA) is an alternative to the Affordable Care Act,

first introduced in the House of Representatives in March 2017, and eventually

passed by the House, with amendments, in May 2017. Though not technically a

repeal, the AHCA makes sweeping changes to the ACA. Its main features include:

Repealing the individual and employer mandates

Instituting a continuous coverage requirement under which individuals must

maintain coverage without a gap else face an automatic one-year premium

surcharge of 30 percent

Changing the ACA's age-based rate banding from 3:1 to 5:1

Replacing income-based subsidies in the individual market with fixed, age-

based subsidies whose generosity increases with age

By the Numbers

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Converting federal Medicaid funding to a per-capita allotment, ending the

option for states to expand Medicaid in 2019, and, after 2020, providing new

enrollees with the same per-capita allotment as adults who were eligible before

2014

The key amendment to the bill as passed in May 2017, would allow states to apply for

waivers in order to:

1. Set age rating at higher than 5:1

2. Define their own essential health benefits rather than using the 10 set forth in

the ACA and preserved in the AHCA

3. Let insurers use health status to set premium prices for those who allow their

coverage to lapse

The amendment also included additional funding for states that receive waivers to

provide financial support to high-risk, high-cost enrollees to obtain coverage in the

individual market.

Our analysis estimates that, exclusive of waivers, the American Health Care Act

(AHCA) would reduce health insurance enrollment by 14 million people in 2020, and

the loss of health insurance would increase to 20 million people by 2026. The AHCA

would have increased the federal deficit by $38 billion in 2020 while reducing the

deficit by $5 billion in 2026.

Most adults ages 50 to 64 and most people with incomes under 200 percent of the

federal poverty level (FPL) would have paid more for individual-market insurance

under the AHCA than under current law. The higher costs for older adults partly

reflect that the AHCA's tax credits do not increase as steeply with age as premiums.

Modifying the ACA

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Repealing or Replacing the Individual Mandate The ACA uses a carrot-and-stick approach to promote enrollment. The carrot is the

tax credit that subsidizes premiums for low to moderate income people who buy

insurance in the marketplaces. These subsidies are progressive, providing the largest

amounts to low-income individuals. The stick is the individual mandate, which

requires most adults to obtain coverage or pay a fine. In 2017, the fine for not having

coverage was $695 per adult and $347.50 per child or 2.5 percent of income, whichever

is larger.

The individual mandate has generally been unpopular and has been criticized and

challenged by opponents, sometimes on grounds that it is intrusive and

burdensome, sometimes on more pragmatic grounds that it is ineffective as a spur to

enroll. Proponents argue that it is critical to promoting enrollment, especially in the

marketplaces.

Senator Ron Johnson (R-WI), accompanied by Senator Lindsey Graham (R-SC), speaks during a press conference

about their resistance to the so-called Skinny Repeal of the Affordable Care Act on Capitol Hill in Washington,

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July 27, 2017

Photo by Aaron P. Bernstein/Reuters

Repeal with no replacement

Analysis conducted in 2015 estimated that that 12 million fewer people would have

insurance in 2017 if the individual mandate were repealed, and no other provision

(such as a continuous coverage requirement) replaced it. Individual-market

enrollment would decline by about 25 percent, with the largest losses among the

young and healthy. Premium prices in the individual market would increase by 8

percent. These results are consistent with findings from other research

organizations, which have estimated coverage reductions in the range of 8 million to

16 million following repeal of the individual mandate.

Replace with a continuous coverage provision

Several Republican proposals, including the AHCA, have replaced the individual

mandate with a requirement that people maintain continuous insurance coverage or

face a penalty. Like the individual mandate, a continuous coverage requirement is

intended to discourage individuals from waiting until they get sick to buy insurance.

Under this requirement, individuals who let their coverage lapse risk being denied

coverage in the future. When these individuals attempt to re-enter the market,

insurers can charge higher prices, refuse to cover specific health conditions, or deny

coverage altogether. It is likely that repealing the individual mandate would tend to

cause healthier people to drop coverage in the individual market, which would also

lead to an overall increase in premiums. At the same time, the continuous-coverage

provision would likely cause some others to stay enrolled, particularly older adults

for whom the 30 percent upcharge represented a larger amount relative to that faced

by younger enrollees. We estimate that the net effect of this change would be 4

million fewer people insured in the individual market.

Revising the Premium Tax Credit A key target in the ACA for those seeking change is the ACA’s progressive formula for

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determining tax credits in the marketplaces. It works like this: enrollees must

contribute a maximum amount toward their premium, based on their income. If the

benchmark plan premium exceeds that amount, enrollees receive the difference in

the form of a tax credit. The logic of this approach is that enrollees are shielded from

sharp increases in premiums. Critics, however, contend that this formula will be

fiscally unsustainable over the long run. Several alternative proposals, including the

AHCA, have advanced a “premium-support” model, which sets tax credits

independently of the premium.

RAND researchers evaluated two types of proposed tax credits

Flat-rate tax credit. We modeled the impact of a flat tax credit of $2,500

for an individual or $5,000 for a family. This kind of provision generally

shifts costs from older to younger individuals compared with the ACA. A

60-year-old with income at 350 percent of the federal poverty level (FPL)

would see his or her annual premium contribution increase from $3,700

under the ACA to $5,300 under the flat tax credit. A 27-year old with the

same income would see his or her annual premium contribution drop

from $3,000 to $500. The number of uninsured would increase by

approximately 6 million, mostly among people in the 50-64 age range. In

addition, this provision in effect shifts the costs of premium increases

from the federal government to consumers, whose contributions are no

longer capped. A flat rate tax credit could also have an upside. It would

reduce firms' incentives to cut their work force and increase most

consumers’ incentives to keep spending down.

1

Age-adjusted tax credit. A variation of the flat tax credit offers fixed

subsidies that increase with enrollees' age. We have modeled this

provision in the context of the Patient CARE Act and the AHCA, but not

as a standalone provision. Evidence suggests that this approach can

2

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improve affordability for older enrollees compared with the basic flat-

tax credit, but it also shifts the cost of premium increases onto

consumers.

Changing Market Regulations The ACA sets standards for minimum benefit generosity

health plans may offer. Plans must include 10 essential health

benefits; must provide benefits with a minimum actuarial

value of at least 60 percent of expected costs for an average

population; and must cap annual out-of-pocket limit for the

consumers.

The ACA also changed rating regulations. Plans cannot charge

different prices based on gender or health status. Prices can

vary only by age and tobacco use status. Older consumers can

be charged a maximum of three times more than younger

ones (this is known as 3:1 rate banding).

ACA's 10 Essential Health Benefits 1. Ambulatory patient services (outpatient care you get without being

admitted to a hospital)

2. Emergency services

3. Hospitalization

4. Pregnancy, maternity, and newborn care

5. Mental health and substance use disorder services

6. Prescription drugs

7. Rehabilitative and habilitative services and devices

8. Laboratory services

9. Preventive and wellness services and chronic disease management

10. Pediatric services, including oral and vision care

Changing Age Rating

Some reform plans, such as the recent GOP House Plan – the American Health Care

Act – have proposed allowing plans to charge older consumers five times more than

younger ones. This change would benefit younger consumers at the expense of older

ones. This change would cut annual premiums for a 24-year-old from $2,800 to $2,100,

while premiums for a 64-year-old would rise from $8,500 to $10,600. Such a move

would likely increase the number of younger people buying insurance, but also

decrease the number of older people who do so. In general, average premiums would

go down for people under age 47 and up for those over age 47.

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Fig 1. Relaxing Age Bands Would Reduce Premiums for Younger People and Increase Premiums for Older People

SOURCE: Eibner C and Saltzman E. “What Happens if the ACA’s tax Credits are Replaced with Premium Support?” Commonwealth Fund, 11-4-2015.

The focus on enrollees’ age can obscure the fact that age does not always correlate

with health status. In fact, the majority of adults at all ages are in good health and

thus are all good insurance risks. Insurers have an interest in keeping these "good

risk" adults enrolled. When costs increase for older enrollees, these healthier adults

are the most likely to drop coverage.

Fig 2. Percent of Enrollees with Expenditures Below the Age-Rated Amount

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NOTE: We assume premiums are actuarially fair (that is, premiums are set so that insurers’ collections are exactly equal to total spending in the risk pool, plus allowed administrative costs). Data come from COMPARE model estimates for 2015. We assume that the individual mandate is in effect, tax credits and subsidies for marketplace coverage are available for qualifying individuals, and Medicaid expansion has occurred in participating states.

Ending Essential Minimum Benefits

From a policy perspective, the ACA benefit design has both an upside and downside.

The Upside

Guarantees that people who need benefits have access to affordable care

The Downside

Can make others pay for benefits they don't necessarily need

Can potentially increase the cost of coverage

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Various repeal and replacement proposals, including the version of the AHCA passed

by the House of Representatives in May 2017, would allow states to waive or redesign

the ACA’s essential minimum benefit requirement. RAND analysis found that in

general eliminating essential benefits would reduce premiums overall but also

sharply increase costs for consumers who need those services. For example,

removing maternity and mental health benefits from coverage would likely lower

premiums in the individual market premiums by about 5 percent overall; but out-of-

pocket spending for women in need of maternity care could rise by $7,894 if

maternity benefits were dropped. For a typical consumer of mental health and

substance abuse services, out-of-pocket spending would increase by $1,088.

Changes to Medicaid Financing Medicaid expansion has accounted for most of the newly insured under the ACA –

approximately 14 million, according to the Kaiser Family Foundation. Medicaid and

the Children’s Health Insurance Program (CHIP) is jointly funded by states and the

federal government. The federal government currently contributes 50 percent to 75

percent of total costs for Medicaid enrollees who were eligible prior to the ACA,

higher amounts for CHIP enrollees, and higher amounts for those made eligible for

Medicaid because of the ACA. Concerns about the potential long-term costs of this

arrangement have fueled proposals to modify financing for Medicaid.

Change Medicaid to a Block Grant Program

Some proposals would convert Medicaid financing to a block grant to states. Under

this plan, states would receive a lump sum federal payment for Medicaid, indexed to

inflation. The payment is fixed regardless of enrollment. We estimated the block

grants as a component of the Trump campaign platform.

Change Medicaid Expansion to a Per Capita Grant Program

Under this arrangement, the federal government sets a limit on how much to

reimburse states per enrollee. Cost growth per enrollee is indexed to inflation. We

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estimate that under one such proposal (the AHCA) Medicaid enrollment would fall

by nearly 10 million people by 2020. The impact becomes more pronounced over

time, with Medicaid enrollment falling by nearly 14 million.

We also estimate that this change will shift costs to the states over time, as recent

growth in per capita Medicaid costs exceeds the Medical Consumer Price Index, and

this trend may continue. Under the AHCA, states that expanded Medicaid will face

lower contributions for adults made eligible by the ACA. This is not an inherent

effect of per capita caps, but as implemented under the AHCA, the caps would

reduce funding for the Medicaid expansion population. States could respond in

several ways:

Pay the difference out of state funds

Reduce eligibility

Reduce provider reimbursement

Institute cost sharing requirements and/or premiums for some enrollees

Add work requirements

The net effect of these provisions will most likely translate into some combination

of lower Medicaid enrollment and less generous coverage.

The Cadillac Tax Versus Limiting Tax Breaks for Employer- Sponsored Insurance Of the various mechanisms for raising revenues in the ACA, one of the most debated

has been the "Cadillac tax," scheduled to take effect in 2018. The Cadillac tax consists

of a 40 percent tax on premiums for employer-sponsored plans in excess of a dollar

limit ($10,200 for a single plan, and $27,500 for a family plan in 2018). The tax would be

jointly paid by employers and workers on their respective contributions.

The Cadillac tax seeks to address problems with the tax advantage for employer-

sponsored insurance (ESI), which allows premiums to be paid with an unlimited

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amount of pre-tax dollars. The current tax break has been criticized for encouraging

overly comprehensive benefits and promoting overconsumption of care. The tax

break also costs the federal government roughly $323 billion each year. However, the

Cadillac tax has also been criticized for making high-cost plans too expensive,

particularly for firms with older and sicker workers, and because the flat 40 percent

excise tax is not progressive, like federal income tax.

A third option that could address both sets of concerns is a cap on the tax advantage

for ESI (known as an "exclusion cap"). Under this cap, individuals in employer plans

could exclude premiums from their taxable income up to a dollar limit. Premiums in

excess of the cap would be treated as taxable income and, therefore, subject to

federal and state income taxes. The same limits would apply to employers. Like the

Cadillac tax, an exclusion cap addresses the problem of ESI's open-ended tax

advantage, but would be more equitable because the impact is smaller for people

with lower incomes.

We compared the effect of the Cadillac tax and an exclusion cap that treats

individual contributions to health premiums above $10,451 and family contributions

above $28,178 as income. For families in all income categories, spending for health

benefits declines, but the declines are larger for the Cadillac tax than for the tax cap.

But when changes in health benefits are combined with changes in take-home pay,

the differences in progressivity between the Cadillac tax and the tax cap were small.

The research also suggested that employers might respond to either the Cadillac tax

or the exclusion cap by reducing their health benefits for employees. To avoid paying

the 40 percent excise tax or the amount above the exclusion cap, employers may

reduce the generosity of the health insurance plans that they offer. In turn, they

might increase wages, leaving employees’ compensation largely unchanged. Because

wages are subject to income and payroll tax, these changes would increase federal

revenue.

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Conclusion

As policymakers weigh the choices ahead, it is clear that tensions exist between

many health policy goals—for example, expanding coverage versus reducing costs;

targeting tax credits effectively versus incentivizing work; protecting the sickest and

most expensive patients versus preserving choice among the majority of patients

who may not need comprehensive coverage; and limiting the federal government's

cost liability versus minimizing cost-shifting to consumers and states. Deciding

among these goals or striking a balance across them will involve political and value

calculations about what the U.S. health care system should look like.

Researcher Spotlight Christine Eibner Paul O'Neill Alcoa Chair in Policy Analysis

Christine Eibner is the

Paul O'Neill Alcoa Chair in

Policy Analysis; director,

Payment, Cost, and

Coverage Program; and a

senior economist at the

RAND Corporation. She is director of RAND

COMPARE, a project that uses economic

modeling to predict how individuals and

employers will respond to…

LEARN MORE

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