The Affordable Care Act (ACA) reformed the individual insurance market, requiring issuers to offer coverage to all willing buyers (guaranteed issue and renewal) and limiting premium variation across enrollees. The goals of these reforms are to enable all Americans to have access to affordable health insurance and to prevent sicker individuals (such as those with preexisting conditions) from being priced out of the market.
The ACA also instituted several policies to stabilize premiums and to encourage enrollment among healthy individuals of all ages in light of these market reforms. The law's tax credits and cost-sharing subsidies offer a “carrot” that may encourage enrollment among young and healthy individuals who would otherwise remain uninsured. The specific design of the law's premium tax credits makes recipients relatively insensitive to premium increases, reducing the impact of premiums on enrollment. Simultaneously, the individual mandate acts as a “stick” by imposing penalties on individuals who choose not to enroll. These penalties phase in over time and, in 2016, will be the greater of $695 per adult and $347 per child (up to a maximum of $2,085 per family) or 2.5 percent of income, not to exceed the cost of an average bronze plan available on the new online markets for obtaining health insurance known as “Marketplaces.”
In addition, unlike some state health insurance rating reforms that were implemented in the past, the ACA stops short of full community rating, in which all enrollees are charged the same premium regardless of age. Older adults can still be charged up to three times as much as younger adults, and the youngest adults (ages 18 to 20) are grouped with children rather than adults for the purposes of setting premiums. While these rating provisions have the effect of shifting some costs from older to younger enrollees, full community rating would have placed a much greater financial burden on younger adults.
Risk adjustment, reinsurance, and risk corridors provisions included in the law may further stabilize the market by protecting insurers from potential losses that could occur due to uncertainties about the health status of individuals that may enroll. Specifically, the permanent risk adjustment program transfers funds from plans with low-risk enrollees to plans with high-risk enrollees, which helps to ensure that plans are viable even if they attract a relatively sick population, and reduces insurers' incentives to “cherry-pick” low-cost enrollees. Reinsurance is a temporary program (set to end in 2017) that provides payments to plans in the event that they have an enrollee with an unusually high expenditure (e.g., more than $45,000). Risk corridors limit excessive gains or losses that might occur if plans set premiums inaccurately, and the risk corridors program is also set to end in 2017. These provisions may be particularly important in the early years of the ACA's implementation, since it may take some time before insurers have enough data to accurately predict enrollees' utilization and spending patterns.
In this study, we use the COMPARE microsimulation model to estimate how several potential changes to the ACA, including eliminating the individual mandate, eliminating the tax credits, and combined scenarios that change these and other provisions of the act, might affect 2015 individual market premiums and overall insurance coverage. Underlying these estimates is our COMPARE-based analysis of how premiums and insurance coverage outcomes depend on young adults' propensity to enroll in insurance coverage.
We find that eliminating the ACA's tax credits and eliminating the individual mandate both increase premiums and reduce enrollment on the individual market, as do the combined policies we examine. In fact, in scenarios in which the tax credits are eliminated, our model predicts a near “death spiral,” with very sharp premium increases and drastic declines in individual market enrollment. The increases in premiums affect both enrollees in Marketplace plans and enrollees in off-Marketplace plans that comply with the ACA reforms.
In addition, we find that these key features of the ACA help to protect against adverse selection and stabilize the market by encouraging healthy people to enroll and, in the case of the tax credit, shielding subsidized enrollees from premium increases. Notably, alternative subsidy arrangements that shift more risk to enrollees, such as flat vouchers that do not rise and fall with premiums in the market, increase the vulnerability of the market to adverse selection and reduce the market's stability.
Further, we find that under the ACA as currently in effect, individual market premiums are only modestly sensitive to young adults' propensity to enroll in insurance coverage, and ensuring market stability does not require that young adults make up a particular share of enrollees. Eliminating the mandate, eliminating the tax credits, or restructuring the tax credit as a flat voucher makes premiums considerably more sensitive to young adults' enrollment decisions.
- Eliminating the ACA's tax credits would cause substantial increases in premiums, as well as large declines in enrollment. Without the ACA's premium tax credits, we find significant disruptions to the risk pool, with unsubsidized premiums rising 43.3 percent, enrollment falling by 68 percent, and 11.3 million Americans becoming uninsured. By subsidizing coverage, the federal government helps to lower premiums in the ACA-compliant market. Individuals with large medical expenses are likely to sign up for health insurance coverage, regardless of whether they can obtain a tax credit. In contrast, low-risk individuals of any age may need a tax credit to incentivize them to sign up. As a result, premium tax credits encourage the enrollment of low-risk individuals, who improve the risk pool and bring down premiums. An ACA-compliant market without premium tax credits would consist of a relatively small number of high-risk individuals, preventing the majority of potential enrollees from purchasing affordable coverage.
- Eliminating the individual mandate would cause relatively small increases in premiums, but large declines in the number of people insured. We analyzed the role of the individual mandate in incentivizing enrollment. Without the mandate, premiums rise by about 7 percent, the number of people enrolled in the individual market falls by more than 20 percent, and 8.2 million Americans become uninsured. While the effect on premiums is relatively modest, the sharp decline in enrollment if the individual mandate is eliminated suggests that the mandate is important to achieving the ACA's goal of nearly universal coverage.
- Reduced young adult enrollment is associated with slight premium increases. In our baseline 2015 scenario, we estimate that 27.2 percent of ACA-compliant individual market enrollees are young adults between the ages of 18 and 34; this figure includes enrollees in Marketplace plans and off-Marketplace plans that adhere to the act's rating rules. We estimate that reduced enrollment among 18-to-34-year-olds is associated with higher individual market premiums, but the increases are relatively small. In our most realistic scenario, a 1 percentage point reduction in the share of young adult enrollees in the individual market is associated with a 0.44 percent increase in premiums. Part of the limited effect is driven by the ACA's tax credits, which incentivize young people who are tax-credit-eligible to remain enrolled, even if other young adults drop out of the market. We find, moreover, that a majority of enrollees at all ages have spending low enough to benefit the risk pool (That is, for most enrollees, premium payments are more than sufficient to cover claims expenditure.), an effect that is helped by the ACA's age rating.
- Alternative subsidy structures, such as vouchers, could cause premiums to be more sensitive to the age composition of enrollees. Our analysis also considers the importance of the ACA's premium tax credit structure, which caps individuals' spending as a percentage of income, up to the price of the second-lowest-priced silver plan. The design of the tax credit protects enrollees against premium escalation because, once they have met the required income contribution, the cost of additional premium increases in the benchmark plan are fully offset by the tax credit. We find that premiums are more sensitive to changes in the share of young adult enrollees under alternative subsidy arrangements, including a fixed-dollar voucher and a fixed-percentage contribution. For example, with a fixed-dollar voucher, a 1 percentage point reduction in the share of young adults enrolled in the market would be associated with a 0.73 percent increase in premiums, nearly twice the effect under the ACA.
This research was sponsored by the U.S. Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation, and was conducted in RAND Health, a division of the RAND Corporation.