The durability and vulnerability of the Affordable Care Act (ACA) was on full display last year amidst the Administration’s efforts to undermine it, according to LDI Senior Fellow and law professor Allison Hoffman. In the Journal of Law, Medicine, and Ethics, she makes the case that recent experience demonstrates the shortcomings of market-based health policy and draws insights for future health reforms.

Hoffman cites the example of the elimination of cost-sharing reduction (CSR) payments to insurers, which help low-income people reduce their out-of-pocket payments.  Although the move could have been disruptive to the ACA’s health insurance marketplaces and to the insurers that sold policies on them, it instead showcased states’ ability to adapt to uncertainty. It also highlights the ACA’s complexity, Hoffman notes, and the regulatory tinkering needed to ensure the health insurance marketplace it created functions as intended.

Under the ACA, insurers were required to pay CSRs to low-income individuals to help ease the burden of out-of-pocket costs. The federal government would (in theory) reimburse insurers, but the ACA’s language was ambiguous on whether or not it actually appropriates funds for CSR payments. Congress defunded CSRs in their 2014 budget, and a legal controversy ensued. Ultimately, the Trump Administration announced their decision not to make the payments in October 2017.

States’ response, Hoffman explains, is an example of the “technocratic tinkering” necessary to make market-based health policies work. Regulators and insurers worked together to develop contingency plans that relied on another category of ACA subsidies that remained available to help low-income consumers pay their premiums. These subsidies increase as premiums rise for the benchmark silver-level plans, meaning that consumers pay the same amount based on their income while the federal government picks up the larger share. Most states decided to use this structure to their advantage by factoring their CSR losses into the premiums for silver-level plans, a practice called “silver-loading.”

This workaround left insurers better off, as they no longer had to worry about uncertainty over CSR payments, and they made up for their losses from the non-payment of CSRs through increased federal payments of premium subsidies. Most consumers were also left as well or better off (with the exception in some states of those who buy plans without subsidies). Ironically, the federal government was left spending as much or more than if CSR payments had not been cut off.

The CSR experience, Hoffman explains, exemplifies the limitations of market-based health policy solutions:

1. Health care markets require constant tinkering and are vulnerable to sabotage. The CSR payment drama consumed massive regulatory energy and attention, yet only affects 6 million people, or 2 percent of the U.S. population. This distracts from reforms with greater potential impact.
2. Policies that require deep industry cooperation are especially vulnerable to sabotage. If insurers decided to leave the marketplace instead of adapting to a changing environment, the consequences of cutting off CSR payments may have been far worse.
3. The health insurance marketplace is difficult to navigate for the average consumer, and assuming that they can make good choices is naïve. For consumers to be as well or better off in the new silver-loaded landscape would demand knowledge and health insurance fluency that most do not have.

Hoffman concludes, “The CSR scuttle reaffirms why market-based health policies are time consuming to keep afloat, vulnerable to sabotage, and difficult for people to navigate. This past year makes it perfectly clear that we can and should do better going forward.”  One place to start is by asking how health policy can produce what people genuinely want, in light of the failure of market-based solutions to do so. Hoffman explores this question in an article forthcoming in the UCLA Law Review, “Health Law’s Market Bureaucracy.”