Confronting the Trade-offs in Health Reform: What We Learned From the ACA
[Reposted: Clifford Marks, Janet Weiner, and Daniel Polsky. Confronting the Trade-offs in Health Reform: What We Learned From the ACA, Health Affairs Blog, June 7, 2017. http://healthaffairs.org/blog/2017/06/07/confronting-the-trade-offs-in-health-reform-what-we-learned-from-the-aca/: Copyright ©2017 Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.]
Implicitly or explicitly, all health care reform involves trade-offs, in which policy makers balance competing goals and interests to reach a preferred outcome. The US Senate may soon take up the US House’s American Health Care Act (AHCA), a bill that would radically rebalance the trade-offs made in the Affordable Care Act (ACA).
The Congressional Budget Office (CBO) has recently released its estimates of the net effects of the AHCA on coverage and spending. We can, and should, compare and contrast these outcomes with evidence from the ACA. Like most large pieces of legislation, the ACA got some things right and some things wrong. In evaluating how to move forward, we can benefit from seven years of research on its implementation.
A team of researchers assembled by the University of Pennsylvania’s Leonard Davis Institute of Health Economics (LDI) recently assessed the early evidence on the ACA and distilled the conclusions into a series of policy briefs, the LDI ACA Impact Series. The series synthesizes what we know, and what we don’t, about the ACA’s effects on health insurance Marketplaces, access and coverage, labor markets, and cost containment.
The findings highlight real successes—most notably the expansion of coverage to more than 20 million Americans—as well as substantial deficiencies, such as rising premiums and growing insurer departures from the Marketplaces.
More broadly, the series throws into sharp relief a number of trade-offs—between health spending and insurance expansion, between premium levels for the young and healthy and those for the sick and elderly, and between covering additional people and the extent of the insurance provided—that the ACA sought to navigate, ones that the AHCA and any new effort must also address. We discuss these trade-offs and what our research shows below.
Insurance Expansion Versus Health Spending
Through the young adult coverage provision, the Medicaid expansion, and Marketplace subsidies, the ACA helped more than 20 million additional Americans get health insurance. This amounts to a roughly 40 percent drop in the proportion of nonelderly adults without coverage, a decline consistent across all racial and ethnic groups.
Paired with new requirements that plans cover essential health benefits and an increase in Medicaid reimbursements, this health insurance expansion had measurable effects on access to health care for the newly insured. For instance, Medicaid expansion tracked with greater improvement in self-reported access and affordability of care, as well as higher likelihood of having a primary care physician or taking prescribed medicines.
This coverage expansion relied on substantial new health spending in the form of federal Marketplace subsidies and coverage for new Medicaid enrollees. The expansion was funded by a combination of surtaxes on high-income families; taxes on health insurers, pharmaceutical companies, and medical device manufacturers; and reductions in Medicare provider payments.
The AHCA rebalances the ACA’s trade-offs on spending and coverage. It repeals the taxes, although it leaves the Medicare provider reductions intact. It would reduce federal spending on Marketplace subsidies and on Medicaid by an estimated $1.111 billion from 2017–26, leading the Congressional Budget Office to conclude that the AHCA would lead to an increase of 23 million people uninsured by 2026.
Affordability: Younger And Healthier Versus Older And Sicker
To make coverage more affordable and accessible for older adults and those with health conditions, the ACA requires insurers to issue policies and set premiums without regard for health status. Insurers are also limited in their ability to vary premiums based on age. People with preexisting conditions now face premiums that are lower than what they paid before the ACA—if they had been able to find coverage at all.
The flip side is that younger and healthier enrollees in the individual market have to pay a higher premium than pre-ACA because the insurance risk pool has expanded to include those with health conditions. These higher premiums give healthy people a strong incentive to forgo coverage and sign up only when they become ill. As a remedy, the ACA imposed a penalty on people who opted to forgo coverage and limited the annual open-enrollment period to dissuade people from signing up only if they got sick.
The present turmoil in the ACA Marketplaces partly reflects the trouble policy makers had reconciling the demands of competing groups—those that are younger and healthier and those that are older and sicker—for affordable health care. In practice, the mandate penalty was too modest to serve as a strong inducement for the young and healthy to enroll, which meant that the remaining beneficiaries were more expensive to cover.
The AHCA broadens the permissible age rating band from 3:1 to 5:1, meaning that older people would face higher premiums and younger people would pay less. This would make plans more affordable for healthier people and less affordable, perhaps even unaffordable, for sicker people. Healthier people could stabilize the Marketplace, but the trade-off is that sicker individuals would face higher premiums, and in many cases, lower subsidies. Another provision of the AHCA allows states to request waivers that would permit insurers to price plans based on preexisting conditions. In those states, sicker people could be relegated to high-risk pools with uncertain coverage and affordability.
Number Of People Covered Versus Scope Of Coverage
As policy makers debate how or whether to cover those currently getting health insurance through the ACA, they will have to grapple with defining what constitutes adequate coverage. The CBO already laid down a marker in this debate by writing in December that it would only count health insurance plans that provide “financial protection against high medical costs.” This may limit the ability of any new proposal to offer low-value health insurance and claim it is not raising the number of uninsured.
The AHCA allows states to request a waiver eliminating the essential health benefits requirement. That, combined with reduced subsidies for the Marketplaces and uncertain funding for high-risk pools, means that states may choose to trade off covering more people with policies that provide “skinnier” coverage. Plans might provide more limited benefits, come with higher deductibles, or include extremely narrow networks of providers.
The ACA’s drafters faced a similar trade-off when determining the eligibility threshold for Medicaid expansion. Medicaid reimbursements are substantially lower than those of private plans, so expanding coverage through that program cost the federal government less than doing so through the exchanges. Setting the threshold at 138 percent of the federal poverty level, instead of at a lower number, reflected in part a desire to cover more people at a lower cost.
Employment: The Trade-Off That Wasn’t
Opponents of the ACA often pointed to the possibility that employers, in response to employer shared responsibility requirements and new regulations, might cut jobs or hours to avoid paying penalties or health benefits. Others suggested that people would exit the labor force if they could get affordable health care through the young adult and income-based coverage expansions.
Although theoretically plausible, neither concern has been borne out thus far. Early studies suggest that on a microeconomic level, the ACA has had little impact on employment, hours worked, or compensation.
On a macroeconomic level, however, there is little doubt that the ACA fueled a large increase in health care jobs, one of the key drivers in our economic recovery. To the extent that the AHCA or other reform proposals reduce the insured population, it will have a significant impact on the number of health care jobs. Whether this is a good or bad thing depends on opportunity costs—that is, what other jobs might the health care labor force find, and would they be more socially useful than health care?
The Challenge That Remains
Regardless of the form of financing or benefits, health care coverage is expensive because health care is expensive. Ultimately, the key to affordable coverage for all remains cost containment.
The ACA included some cost containment measures, although it was not the focus of the legislation. It reduced Medicare provider payment updates and Medicare Advantage payments, producing immediate and direct cost savings for the federal government. It also mandated reductions in annual “market basket” updates to hospitals and other facilities, with goal of making cost increases more in line with other industries.
Other cost containment provisions in the ACA included a “Cadillac tax” on high-value insurance plans, the creation of the Independent Payment Advisory Board (IPAB) tasked with curbing Medicare cost growth, and delivery system innovations.
The Cadillac tax and the IPAB have proven so politically fraught that they were considered dead even before Donald Trump’s election. The AHCA extends the delay on the Cadillac tax from 2020 to 2025. The latest spending bill defunds the IPAB, a board that has never had any members.
Health delivery innovations present more of a mixed picture. Accountable care organizations, for instance, have shown modest reductions in Medicare spending without lowering quality. Such reforms may yet allow policy makers to bend the cost curve, but thus far, their effect on overall costs has been relatively minor.
The AHCA has no provisions that address the high cost of health care; instead; it converts Medicaid into a block grant to limit federal obligations, leaving the states holding the cost containment bag for Medicaid. Similarly, the AHCA allows states to request waivers from many of the ACA’s benefit provisions but does not help states containing costs other than by reducing coverage. The challenge of “bending the cost curve” remains.
Learning From The ACA
Much of the news coverage about Republican plans for “repeal and replace” have focused on the considerable political difficulty reforming the health system. This is with good reason—US history is littered with failed health care reform efforts.
But policy makers, the press, and the public should also pay attention to how new proposals navigate the trade-offs above, and we should be wary of plans that gloss over the need to make the difficult choices these trade-offs imply.
The Nobel Prize-winning physicist Richard Feynman once warned that “for a successful technology, reality must take precedence over public relations, for nature cannot be fooled.” The principles of insurance markets and health economics are not so inviolable as those of physics. Even so, policy makers ignore them at their peril—and at ours.