Republicans May Be Less Likely to Make Use of Federal Subsidies When Buying Individual Health Insurance Policies
Sep 8, 2021
The 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.
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:
RAND research has also examined the impact of retaining the ACA while modifying key provisions, including:
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.
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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 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.
If the ACA were repealed, with no replacement, the number of insured Americans would drop by 19.7 million.
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.
RAND research has also examined the impact of replacing the ACA with single-payer plans. The analysis looked at two scenarios:
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 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:
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.
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:
The key amendment to the bill as passed in May 2017, would allow states to apply for waivers in order to:
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.
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.
Photo by Aaron P. Bernstein/Reuters
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.
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.
A key target in the ACA for those seeking change is the ACA’s progressive formula for 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.
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).
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.
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.
From a policy perspective, the ACA benefit design has both an upside and downside.
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.
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.
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.
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 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:
The net effect of these provisions will most likely translate into some combination of lower Medicaid enrollment and less generous coverage.
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 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.
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.