Econ Paper due tonight by 11

Previously we discussed the ACA from the point of view of employers and the incentives that are changed because of the law.  This week we examine the ACA from the point of view of the insurers and the insured. 

Activity Instructions In an essay, address the following questions:

· How does the employer mandate help eliminate the problem of adverse selection? Would a single-payer plan, in which everybody is insured through the government, further reduce the problem of adverse selection? 

· What do you think would happen to health care expenditures in the United States under either the ACA or a single-payer plan? Consider the following:

· Market supply and demand

· Economics of scale

· Incentives facing health-care providers

· That preventative medicine would be available to more citizens

· Any moral hazard issues

· Any bargaining issues

· Porter’s Five Forces model

· Any other issues from this course that come to mind

The rapid growth of health spending has placed increasing pressure on everyone’s budgets- consumers, employers, and all levels of government. If current trends continue, national health spending will nearly double over the next decade rising from $2.2 trillion in 2009 to over $4.3 trillion in 2018. Health spending is projected to grow at an average rate of 6.2 percent a year, about 50 percent faster than the growth in the economy. This rapid growth in overall health spending is mirrored in the federal budget. In 2007, federal outlays for Medicare and Medicaid totaled $425 billion, or about 15 percent of the budget. By 2035, it projected that those programs could grow to more than a third of the total federal spending. It is also noted that because spending is rising much more quickly than program profits, the Medicare trust fund is projected to run short of money in 2017. Rising federal health costs threaten to crowd out education, energy, transportation and other policy priorities. “The rate at which health care spending grows relative to the economy is the most important determinant of the country’s long-term fiscal balance.” (Congressional Budget Office 20)

According to the Medical Expenditure Panel Survey, 97 percent of firms with 50 or more workers already offer health benefits. 97 percent is not 100 percent, of course, and not all firms offer coverage to every employee. But the ACA’s employer mandate, perversely, incentivizes employers to avoid hiring low-income workers, precisely the type of workers who tend to be uninsured.

The penalties associated with the employer mandate are only triggered if a worker is not offered what the ACA deems “affordable” coverage, and if the worker then gains subsidized coverage on an ACA-sponsored insurance exchange. As a result, employers have three incentives: (1) to hire fewer full-time workers; (2) to offer so-called “unaffordable coverage,” for which the penalties are lower; (3) to hire illegal immigrants or workers from high-income families, who are not eligible for exchange subsidies.

To guarantee access to health insurance at a premium rate that is affordable, the law must prohibit discrimination based on health status. That means requiring an insurer to enroll all individuals who apply for coverage even if they are sick or have a pre-existing condition—known as “guaranteed issue.” It also means prohibiting an insurer from charging higher premiums for that coverage if an individual is sick or injured and regulating how much premiums can vary based on age—known as “modified community rating.” Otherwise, older, less healthy individuals would be priced out of the market, and the guarantee to enroll in coverage would do them no good. Finally, it means prohibiting an insurer from excluding coverage of pre-existing conditions.

If all of these reforms were implemented by themselves, then many individuals

would wait to get health insurance until they need care—knowing that coverage

will be guaranteed at a premium rate that will not rise because they are sick or

injured. Less healthy, more costly individuals would be more likely to enroll in

coverage and would largely make up the insurance risk pool.

This “adverse selection” would drive up premiums, which in turn would cause even more healthy individuals to drop coverage—possibly leading to a so-called “death spiral.” Higher premiums would also significantly increase the cost to taxpayers of providing premium tax credits to make coverage affordable. This adverse selection in the absence of an individual mandate is not theoretical. There is substantial evidence from the experience of several states. A classic example is New Jersey.

In 1993 the state implemented guaranteed insurance issuance and community rating in its direct-purchase market—where individuals buy health insurance directly from an insurer, not through their employer. Older, more costly individuals enrolled in coverage, and premiums rose by up to 155 percent from 1996 to 2000. Even the premium of the state’s Health Maintenance

Organization plan—which more aggressively manages costs—rose by 48 percent over this period. As a result, overall enrollment declined by 41 percent in the same period—consistent with a death spiral caused by adverse selection.