The Affordable Care Act made fundamental and important changes to the way the United States finances health care. The law did not represent a radical departure from prior law or policy, however. The ACA instead worked within, rather than disrupting, existing market-based, legal and regulatory structures. It reformed, but it did not displace, the private health insurance markets; relied on, but did not displace, employer-sponsored group health coverage; and expanded, but did not displace, Medicare, Medicaid and other existing government programs. There is a simple reason for this. No wholesale departure from these existing structures is politically viable. There is not the collective political will to move to a single payer system (whether British- or Canadian-style); nor is there the collective political will to scrap all government programs in favor of a purely free-market approach (Medicare is too popular, and Medicaid, too necessary).
Most agree that, if the United States set out to design its health care financing system on a blank slate, the country would not adopt the current patchwork system. The country doesn’t have that luxury, however. The ACA’s replacement will, as a consequence, have to accommodate this political reality.
The High-Level Context
As they endeavor to regulate the U.S. health care financing system, lawmakers confront three high-level policy questions:
- Is health care a right or a commodity?
Implicitly, if not overtly, Obamacare assumes that health care is a right; implicitly, if not overtly, the proposals advanced by Republicans (e.g., House Speaker Paul Ryan’s A Better Way) assume that health care is a commodity.
- Is there a role for Government in financing and regulating health care?
The answer to this question is, almost irrespective of one’s place on the political spectrum, “yes.” As I noted above, Medicare is too popular, and Medicaid is too necessary.
- What are the proper roles of the Federal government vs. the States?
Obamacare erected an elaborate Federal regulatory superstructure around the regulation of insurance that was previously the prerogative of the States. Medicare has always been a Federal Program. Medicaid, though administered by the States, is largely the subject of Federal regulation. It appears that this balance is about to change as it applies to insurance regulation and Medicaid.
Though important and even foundational, these questions are not likely to surface in the public discourse or political debate surrounding efforts to replace the ACA. The answers will, however, inform the resulting legislation.
The Structural Limits of Health Care Reform
Both the ACA and the Massachusetts health care reform law that preceded it had six major features: an individual mandate; moderate- and low-income premium subsidies; a mechanism to facilitate access to coverage (exchanges/marketplaces); an employer mandate; insurance reforms (guaranteed issue and renewability and other underwriting rules, that apply to commercial carriers in the individual and group markets); and reforms to government programs for low-income individuals, children, and the aged (Medicare). These features are structural; that is, they are a product of the contours of our current political ecosystem.
The individual mandate
The ACA’s individual mandate, i.e., the requirement that individuals have minimum essential coverage or pay a penalty, was never popular, and it proved valuable as campaign issue for Mr. Trump. It appears that this mandate will be replaced by some combination of a continuous coverage requirement and the reinstatement of State high-risk pools. The former, a continuous coverage requirement, was imposed on group health plans in 1996 under the Health Insurance Portability and Accountability Act, and it has worked. The latter, State high-risk pools, which were done away with under the ACA, were less successful.
Moderate- and low-income premiums subsidies
ACA premiums subsidies will likely be replaced by tax-subsides, the mechanics of which may not change much from current law. What will change is the range of options and choices of health care coverage that can be purchased with the new subsidies. Under the ACA, subsidies must be used to purchase products that provide an “essential health benefit” package, which includes 10 specified benefit categories and which, among other things, have prescribed limits on cost sharing. This will no longer be the case. Individuals will instead be able to select coverage from an array of competing insurance products across state lines, the design of which is driven in large part by market forces.
A mechanism to facilitate access to coverage (exchanges/marketplaces)
While the ACA exchanges were the subject of a great deal of public and judicial attention, their purpose was and is to simply facilitate access to coverage. Exchanges, which are limited to selling coverage in the individual and small group markets, are mere conduits. The model seemed to work well both in Massachusetts and at the Federal level. Whatever serves as a replacement will have to ensure that individuals can get the necessary product information and arrange for coverage. It may be that this is left in the hands of the carriers.
The employer mandate
Other than having to comply with fairly onerous reporting rules, large employers in the U.S. were generally indifferent to the employer mandate. They already offered robust, affordable coverage to their full-time workforces. This is not the case for smaller employers, who generally chafed under the requirement. The employer mandate is a revenue raising measure. With the mandate’s repeal, the missing revenue will have to come from somewhere. One option is to cap the employer deduction. This is a big step, and it is one that would pit the large employers against smaller employers. According to the Kaiser Foundation,
Employer-sponsored coverage became the central component of the American health insurance system for a variety of reasons, including the tax preference of employer’s spending on health benefits over wages, as well as the advantages of purchasing coverage as a group rather than as individuals. Many employers and employees continue to believe that offering health benefits is an important way for firms to recruit, retain and value talent. With employers facing rising costs, many commentators are speculating about the long-term stability of the employer-sponsored insurance system.
Contrary to many predictions, the ACA employer mandate did not cause employers to abandon their group health plan coverage. Nor should the mandate’s repeal have any effect. Health benefits are being deployed “to recruit, retain and value talent.” But what happens if the tax preferences are impaired? Presumably, there is a point at which the increased cost outweighs the other intangible benefits.
The ACA included some 17 separate insurance reforms that we will explore in a future post. The Trump campaign focused on two in particular: the ban on pre-existing conditions and the coverage of dependent children to age 26.
Any debate over the reform of commercial insurance markets must take into account the laws of actuarial science. Any legislative solution that fails to do so will falter. A ban on pre-existing conditions means that carriers will be unable to apply medical underwriting (this is generally considered a good thing). This approach works only with a sufficiently large pool, hence the need for an individual mandate or some proxy for the individual mandate (see above).
Once a pool of covered individuals is sufficiently large, a “community” rate can be applied. Healthier individuals balance out sicker individuals. Community rating results in younger individuals subsidizing the health care costs of older individuals. Before the ACA, most states provided for “modified” community ratings based on age bands, e.g., 5:1 (a carrier cannot charge premiums to older individuals that are more than five times those charged to younger individuals). The ACA mandated age bands of no more than 3:1. Opponents claimed that that provision drove younger individuals out of the market. The ACA replacement will in all likelihood return the power to set age bands to the States.
Historically, Medicaid was a health insurance program for low-income individuals, children, their parents, the elderly and people with disabilities. The ACA originally expanded Medicaid to all Americans under age 65 whose family income is effectively at or below 138% percent of federal poverty guidelines ($16,394 for an individual in 2016). But the Supreme Court subsequently ruled that states were not compelled to accept the expansion. Thus, the ACA’s Medicaid expansion depends on voluntary action by the States.
Medicaid is a federal/state partnership with shared authority and financing. It has also become controversial as it consumes ever larger portions of state budgets. The Trump-Pence proposal Health Care Reform to Make American Great Again proposes to permit block grants to states. Other proposals have included “per capita” caps. While both approaches would reduce federal spending on Medicaid, they would almost certainly reduce the number of Americans eligible for Medicaid and narrow coverage for remaining enrollees.
Notes on the Way Forward
The six items listed above are the levers that the Congress can pull and the buttons that they can push as the go about unwinding and replacing the ACA. Together they represent the box in which health care reform lives. Each element is fraught with some peril. Will the changes to the individual mandate, for example, result in a net reduction in coverage; and if so what is the impact on the risk pool? As this example indicates, these items are interrelated. A change in one component will ripple into the others.