The actuarial artisans of the Affordable Care Act conceived a magnificent three-legged stool of reform mandates: 1) regulations to guarantee issue with no pre-existing condition exclusions, 2) subsidies to help those buy insurance priced out of reach and 3) a requirement that everyone must buy insurance or pay a tax penalty. In this vision, if you pull one leg of the stool, the ACA collapses. Then again, maybe a significant portion of it can walk on two legs.
Right now, the individual insurance market in the country has seen premium spikes for the 2017 plan year at scale beyond what I predicted in three separate Wall Street Journal editorials, with many communities experiencing more than 30 percent higher prices. Even worse, major insurers left the market with no plans to return, leaving 1,022 counties and five states with only one health carrier. Defenders of the ACA tend to look in the rear-view mirror, but following the recent trend like gives one real concern for individual market erosion – without any changes to the ACA. Concerns of a death spiral already having started abound. For a death spiral to occur premiums start to get higher so that only the sickest who need insurance buy it and eventually the prices are too high for anyone to afford insurance.
The three-legged stool was supposed to be sturdier. But the legs were never quite all in place and coordinated. It is as if the stool legs are there for you to assemble as you are sitting down, but you only have two hands and can’t make the engineering work before crashing to the floor. The regulatory leg was misshapen and warped by the Obama administration countermanding and delaying full Qualified Health Plan implementation from 2014 until 2017. The subsidies took two different forms: tax credits and cost sharing reductions, and the latter are endangered by litigation. And the individual mandate’s full effect was slowly implemented over four years and — as a penalty due on tax day — is not felt for up to 18 months after insurance purchase.
Of all the changes to the ACA the Republican-led Congress could try through budget reconciliation, eliminating the individual mandate is the most straightforward since it is simply a tax that could be removed from collection. Changing insurance regulations in the ACA through budget reconciliation is not trivial. And removing tax credits to buy insurance, while a budget decision, would harm individuals getting coverage without, as U.S. Sen. Lamar Alexander described in HHS-Nominee Tom Price’s hearing, have “a replacement bridge” in place.
Using a microeconomic simulation model originally funded by HHS, I estimate that removing the individual mandate requirement will increase the number of uninsured by 6.3 to 8.0 million in 2018 alone. This assumes insurers will price plans higher to account for the removal of one the legs. Most of the damage will occur in the unsubsidized individual insurance market. Furthermore, the unsubsidized market would experience a full out death spiral with 8.0 to 9.6 million uninsured by 2020.
In contrast, the ACA market places are fairly resistant to higher premiums because the consumer is shielded from the impact of higher prices. Subsidized families pay no more than small fixed percent of their income on insurance premiums. For example, if a family has a household income of $50,000 and faces a premium of $25,000 for the year, they will only pay $5,000. In the next year if family income is stagnant, but premiums go up 30 percent to $32,500, the household will stay pay $5,000. But the American taxpayer will pay the $27,500 difference.
Of course, if ACA premium subsidies were to be removed immediately, the entire individual market — subsidized or not — will be severely destabilized. No one is pushing for that. But if the goal is near-simultaneous repeal and rebuilding, a suitable replace option must be available closing the special enrollment period exceptions in ACA that currently drive premiums higher. Both Rep. Tom Price’s (R-Ga.) and House Speaker Paul Ryan’s (R-Wis.) health plans have age-based premium tax credits, high-risk pools, and a guaranteed renewability provision. Guaranteed renewability gives consumers a strong incentive to stay in a risk pool since if they do not keep coverage within a reasonable grace period, they risk being re-rated for a higher premium. Republican replace plans represent a new three-legged stool with simultaneous implementation. Initial estimates from the Center for Health and Economy show the Republican leadership plans could achieve similar coverage to ACA with lower costs and no individual mandate. This meets Senate Minority Leader Chuck Schumer’s criteria for supporting replacement legislation, so it will be interesting to see if he finds new criteria.
For now, giving consumer’s relief from the individual mandate (of which only half of those required to pay are refusing and breaking the law) will not collapse the market, especially if the repeal legislation carries funding to provide subsidies during any transition. But like a fading ice sculpture in winter, the three-legged stool needs a new mold and some fresh material to achieve its aim of making insurance available for everyone.
Stephen T. Parente, PhD, is a professor of finance and associate dean at the Carlson School of Management, University of Minnesota.
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