HMGT 435 WEEK 8 DISC 8 - Assignment Essays

The Basics of Health Economics

Provide a response to
TWO of the questions below by Saturday, then provide a response to at least TWO of your peers by Tuesday:

· Include the two questions that you selected to discuss at the top of your initial posting.

· Identify one area in which ACA addresses market failures in the private insurance market, discuss how it works.

· How does the ACA impact individual consumers with purchasing insurance?

· How does ACA help low income individuals purchase insurance?

· What economic issues do the private health insurance exchanges address?

· Identify at least two key changes to the ACA since it’s enactment in 2010. Describe those changes and the impact that each change had in the marketplace.

APA Requirements -Include Scholarly Evidence: Include at least TWO APA formatted references with correlating in-text citations.

CHAPTER

24MEDICAID, CROWD-OUT,
AND LONG-TERM CARE INSURANCE

Medicaid is a joint federal–state program enacted along with Medicare
in 1965. Unlike Medicare, however, Medicaid is a needs-based pro-
gram designed to provide health insurance coverage to low-income

individuals and, in particular, pregnant women, children, the elderly, and
people with disabilities. Substantial expansions of Medicaid in the mid- to late
1980s and again in 1996 extended coverage to children in households with
higher incomes through the Children’s Health Insurance Program (CHIP).
The Affordable Care Act (ACA) expanded Medicaid in 2014 for those aged
19–64 living in states that chose to expand eligibility. Nationally, Medicaid
covered some 72.8 million people in 2018 (Centers for Medicare &
Medicaid Services [CMS] 2019a). Because it is a joint federal–state program,
Medicaid eligibility and coverage vary considerably from state to state.

This chapter provides a broad description of the Medicaid (and CHIP)
programs, with respect to both eligibility and covered services. It also dis-
cusses the ACA Medicaid expansion, building on our discussion in chapter
2, and identifies the economic incentives facing the states in the expansion
decision. A key element in the Medicaid program is crowd-out—the extent
to which Medicaid expansions have reduced coverage in the private insurance
market. Finally, we discuss the private long-term care insurance market. This
topic may seem surprising to include, but the long-term care insurance mar-
ket has failed to develop largely because Medicaid has crowded out private
coverage for many.

Medicaid Overview

Medicaid is not a single government-sponsored program. Rather, it is essen-
tially an umbrella of programs, some that states must offer and others that
states can opt to offer. There are 28 types of patients that must be covered,
and 21 optional eligibility types. However, the programs essentially provide
coverage for four groups of low-income people: (1) pregnant women and
adults in families with children; (2) children; (3) the elderly; and (4) indi-
viduals with disabilities. The federal government has established categories
of services that must be covered by state Medicaid programs and also has

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AN: 2459482 ; Michael A. Morrisey.; Health Insurance, Third Edition
Account: s4264928.main.eds

Health Insurance4

identified optional services that a state may choose to offer. Within these
strictures, the states have considerable flexibility on the level of mandatory
services they provide as well as whether they provide any of the optional
services. In addition, the states have flexibility on the eligibility criteria they
apply for the program.

Federal–State Funding
The share of Medicaid medical spending that federal sources cover is deter-
mined by the FMAP, the Federal Medical Assistance Percentage. It is com-
puted as the relative per capita income of the state. The matching formula is

Federal share = 1.0 – [(State per capita income2 /
Federal per capita income2) × 0.45].

Per capita incomes are the average of the preceding three years, and
the federal share is constrained by law to be no less than 50 percent and no
more than 83 percent. Thus, the federal share in a poor state, such as Mis-
sissippi, is approximately 75 percent, while an affluent state, such as Con-
necticut, has a federal match closer to 50 percent. The formula is designed
so that the average state will get a 55 percent federal match. In contrast, the
federal match on most administrative costs is limited to 50 percent, although
some elements of Medicaid, such as fraud and abuse efforts, get a somewhat
higher federal match. In 2019, the FMAP was highest in Mississippi, West
Virginia, and New Mexico, with rates of 76.39 percent, 74.34 percent, and
72.71 percent, respectively. Fourteen states had rates of 50 percent.

Although the FMAP gives a larger federal match to poorer states,
some have argued that the 50 percent minimum federal match is nonethe-
less overly generous to wealthy states. Pauly and Grannemann (2009), for
example, have argued that a better matching arrangement would seek to
provide equal benefits and equal tax burden across the states. Their model
would take into account both the number of poor persons and taxpayer
incomes in each state. Thus, the greatest increases in federal matching, rela-
tive to the current system, would come to states with many poor persons and
many lower-income taxpayers; the greatest decreases would go to states with
few poor people and many high-income taxpayers. New York would see an
increase in its Medicaid match under this model, while Connecticut and New
Jersey would see substantial reductions.

Eligibility Under the Categorically Needy Programs
In general, eligibility for Medicaid is established by being a member of a
covered group and having sufficiently low income. That is, individuals are
eligible because they fall into a category that Congress has identified as

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Chapter 24: Medicaid, Crowd-Out, and Long-Term Care Insurance 481

appropriate for coverage. Initially, income eligibility for Medicad was deter-
mined by virtue of eligibility for welfare—that is, the program that at the
time was titled Aid to Families with Dependent Children (AFDC). With the
welfare reforms enacted during the Clinton administration, the direct link
between welfare and Medicaid eligibility was severed, but Congress contin-
ued to apply the rules for AFDC eligibility to Medicaid.

This approach changed with the enactment of the ACA. Under the
law, low-income eligibility for Medicaid is determined by one’s modified
adjusted gross income (MAGI). The ACA definition of MAGI differs from
that used in the Internal Revenue Service tax code, so we will refer to it as
the ACA-MAGI. For most people, ACA-MAGI is the adjusted gross income
from one’s tax return (basically, wages, salaries, interest, dividends, and tax-
able Social Security income). ACA-MAGI adds in nontaxed Social Security
income and tax-exempt interest and some foreign earned income. Eligibility
is then determined by household size and the federal poverty level (FPL).
Exhibit 24.1 shows the applicable 2019 FPL for families with one to four
members, along with calculations of incomes at various levels above the FPL.
A range of percentages is included to facilitate the discussion of eligibility.

The states have considerable flexibility in how generously they set the
eligibility criteria of their Medicaid programs, and they can vary the income
level for eligibility for each of the Medicaid programs they offer. Exhibit 24.2
demonstrates this variability. Under the expansions to Medicaid in the 1980s
referred to as SOBRA, states have the option of providing differing levels of
eligibility for children depending on the child’s age. Florida provides eligibil-
ity up to 206 percent of the FPL for children aged 0–1, but only provides
coverage for children aged 1–5 at family incomes up to 140 percent of the
FPL. Under CHIP, states could add coverage for somewhat higher-income
families. The “Children CHIP” row in exhibit 24.2 reflects the eligibility for
this program if the state had a separate state program. Florida set its eligibility
level at 210 percent of the FPL. NA it means that the state CHIP program

EXHIBIT 24.1
2019 Federal
Poverty Level

Persons in
Household 100% 133% 150% 200% 250% 300% 400%

1 $12,490 $16,612 $18,735 $24,980 $31,225 $37,470 $49,9

2 $16,910 $22,490 $25,365 $33,820 $42,275 $50,730 $67,6

3 $21,330 $28,369 $31,995 $42,660 $53,325 $63,990 $85,3

4 $25,750 $34,248 $38,625 $51,500 $64,375 $77,250 $103,000

Source: Assistant Secretary for Planning and Evaluation (2019).

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Health Insurance482

was part of the Medicaid program, rather than a separate program. Note
that those states with an NA have higher Medicaid eligibility levels for older
children.

Adults in families with dependent children typically have much lower
eligibility thresholds than children. The eligibility level is 28 percent in Flor-
ida and lower in some other states. Traditionally, this was virtually the only
category under which nonpregnant adults could get mandatory coverage. If
a state did not expand its program under the ACA, these levels of eligibility
still apply. The ACA expansion covers people aged 19–64 who have income
below 133 percent of the FPL. The law ignores 5 percent of income, so the
eligibility level is actually 138 percent. Note that a handful of states allow
somewhat higher levels of eligibility.

Conspicuous by its absence in exhibit 24.2 is eligibility for the blind,
disabled, and elderly. They are eligible because they can receive Supplemental
Security Income (SSI) rather than being eligible based on the FPL. Medicaid
benefits for these folks differ by their allowed income level, but eligibility
ranges from approximately 100—200 percent of the FPL.

The categorically needy Medicaid program also provides coverage to
people in nursing homes, hospitals, posthospital extended care, and inter-
mediate care facilities or facilities for the intellectually disabled (if they have
income below 300 percent of the SSI limit). There are asset limitations as
well, but these typically exclude the home if a spouse or dependent is living
there or if there is a reasonable expectation of a return to the home. If assets
are above the allowed threshold, the individual or couple is required to
“spend down” their assets to become eligible for Medicaid.

EXHIBIT 24.2
Medicaid

Program Income
Eligibility Levels

for Selected
States, 2019

(by Percentage
of FPL)

Eligible Group California Florida Minnesota New York Ohio Texas

Children 0–1 261% 206% 283% 218% 206% 198%

Children 1–5 261 140 275 149 206 144

Children 6–18 261 133 275 149 206 133

Children on
CHIP

NA 210 NA 350 NA 201

Pregnant
women

208 191 278 194 200 198

Adult parents 109 28 133 133 90

People
eligible
under ACA
expansion

133 [Did not
participate

in
expansion]

200 200 133 [Did not
participate

in
expansion]

Source: Data from CMS (2019b).

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Chapter 24: Medicaid, Crowd-Out, and Long-Term Care Insurance 483

Eligibility Under the Medically Needy Programs
Currently, 32 states and the District of Columbia have implemented an
optional Medicaid medically needy program. These programs typically do
one or both of the following: First, they often provide coverage for people
aged 19–20 who otherwise would not be Medicaid eligible or who are eli-
gible because the medically needy program has a higher income threshold.
Second, and more generally, the medically needy programs allow individuals
who have too much income but who also have high medical expenses to
spend down to eligibility. These people become eligible because, after adjust-
ing their income for their medical spending, they meet the income threshold.
Given these eligibility criteria, those covered under the medically needy pro-
grams tend to have higher healthcare spending than other Medicaid-covered
groups (Kaiser Commission on Medicaid and the Uninsured 2013).

Eligibility for Certain Medicare-Eligible Groups (Dual Eligible)
In addition to those who may be Medicaid-eligible because they reside in a
nursing home or other medical facility, three groups of Medicare beneficiaries
are eligible for Medicaid. In the world of Medicare and Medicaid, these ben-
eficiaries are called dual eligible. The first, as mentioned earlier, are those who
are eligible because they are also eligible for SSI. Medicaid pays their Part B
and D premiums and the cost sharing associated with the use of covered Medi-
care services. In addition, however, they also receive full Medicaid benefits not
covered by Medicare. Second, Qualified Medicare Beneficiaries (QMBs) have
incomes below 100 percent of the FPL and limited assets. Medicaid pays their
Part B and Part D premiums and Medicare cost sharing. However, they are not
eligible for other Medicaid services. Finally, Specified Low-Income Medicare
Beneficiaries (SLMBs) have incomes between 100 and 120 percent of the FPL.
Medicaid pays their Part B and Part D premiums only. Approximately 20 per-
cent of Medicare beneficiaries are also covered by Medicaid in some fashion.

Medicaid Recipients and Expenditures

Exhibit 24.3 is the single best summary of the very complex Medicaid pro-
gram. It presents the Congressional Budget Office’s (CBO 2019) estimates
of the four principal groups covered by the program and provides a sense of
the distribution of the enrollees and expenditures made on behalf of the 75
million people who were estimated to receive Medicaid services in 2019. More
than 40 percent of those receiving services were children, but they only make
up 20 percent of spending. In contrast, individuals with disabilities and the
elderly constitute only 20 percent of enrollees but 46 percent of expenditures.

Enrollment and expenditures by category have changed dramatically over
the last decade as a result of the ACA. In 2009, the number of covered adults

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Health Insurance484

was less than half the number of children. This statistic largely reflects the enroll-
ment of adults 19–64 in the 34 states that expanded their Medicaid programs.

This relationship is made clearer by examining the average expenditure
per recipient in 2019 (see exhibit 24.4). Expenditures for children (includ-
ing CHIP) and adults averaged $2,450 and $4,360, respectively. However,
average expenditures on behalf of individuals with disabilities and the elderly
were $13,470 and $7,950, respectively.

Medicaid-Covered Services

Medicaid specifies certain mandatory services that state programs must cover
(see Medicaid-Covered Services). There are also several optional benefits, any
number of which a state may choose to include in its program. For example,

EXHIBIT 24.3
CBO

Estimates of
Enrollment and

Expenditures
in the Medicaid
Program,

2019

Enrollment in millions
35

140

Children Adults Blind/disabled Aged Children Adults Blind/disabled Aged

28
31 122 122

120

100

Expenditures in billions of dollars

Source: Data from CBO (2019).

EXHIBIT 24.4
Average Federal

Expenditures
per Person,

2019

6,000

4,000

2,000

10,000

8,000

6,000

4,000

2,000

2,450

4,360

13,470

7,950

AgedBlind/disabledAdults

In dollars

Children

Source: Data from CBO (2019).

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Chapter 24: Medicaid, Crowd-Out, and Long-Term Care Insurance 485

dental services are required for children but optional for adults. Some states
exclude adult dental coverage; others cover it under differing circumstances.
The states, however, maintain considerable discretion about the level of
benefits to provide within each of the mandated or optional services they
offer. Alabama, for example, covers 16 inpatient hospital days, 3 nonemer-
gency hospital outpatient visits, and 14 physician visits per calendar year as
part of its mandatory benefits.

Medicaid-Covered Services

Mandatory Services

• Inpatient hospital services

• Outpatient hospital services

• Rural health clinic and federally qualified health center (FQHC)
services

• Laboratory and X-ray services

• Nurse practitioners’ services

• Nursing facility (NF) services and home health services for individuals
age 21+

• Early and periodic screening, diagnosis, and treatment (EPSDT) for
individuals under 21

• Family planning services and supplies

• Physicians’ services and medical and surgical services of a dentist

• Nurse-midwife services

Optional Services

• Podiatrists’ services

• Optometrists’ services

• Chiropractors’ services

• Psychologists’ services

• Medical social workers’ services

• Nurse anesthetists’ services

• Private duty nursing

• Clinic services

• Dental services

(continued)

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Health Insurance486

• Physical therapy

• Occupational therapy

• Speech, hearing, and language disorders

• Prescribed drugs

• Dentures

• Prosthetic devices

• Eyeglasses

• Diagnostic services

• Screening services

• Preventive services

• Rehabilitative services

• Intermediate care facilities/services for the intellectually disabled
(ICF/MR)

• Inpatient psychiatric services for under age 21

• Christian Science nurses

• Christian Science sanatoriums

• Nursing facility (NF) services for under age 21

• Emergency hospital services

• Personal care services

• Transportation services

• Case management services

• Hospice care services

• Regulatory care services

• TB-related services

• Inpatient and NF services for 65+ in institutions for mental diseases
(IMDs)

Source: Reprinted from CMS (2000).

Children’s Health Insurance Program

The Children’s Health Insurance Program (CHIP) was created as part of
the 1997 Balanced Budget Act and was reauthorized in 2009, and under
the ACA, and in 2018. It is currently authorized through 2028. In essence,
CHIP provides federal matching funds for the provision of health insur-
ance to children whose family income is up to 350 percent of the FPL,
at the state’s discretion. Georgetown University Health Policy Institute
(2013) reported that 17 states have eligibility levels of 300 percent of the

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Chapter 24: Medicaid, Crowd-Out, and Long-Term Care Insurance 487

FPL or higher. The eligibility levels changed with the enactment of the
ACA-MAGI eligibility standards that we discussed earlier in the chapter.
The federal match on CHIP is 15 percentage points higher than for Med-
icaid, within the range of 65–83 percent of total costs up to the dollar cap
established for each state. If they choose to participate, the states have three
ways to provide coverage: (1) they can expand their existing Medicaid pro-
gram, (2) they can create a new separate program, or (3) they can develop
a combined Medicaid–private program. As of 2015, seven states and the
District of Columbia had expanded their Medicaid program, 13 had created
a separate program, and the remainder had taken a combination approach
(CMS 2015).

One of the reasons many states adopted a separate private program was
a concern that Medicaid was stigmatizing. It was believed that parents with
eligible children would be more likely to enroll their children in private pro-
grams. If the states expanded their Medicaid program, the benefits offered
had to be the same as those in their state program. However, if they took
another, private, option, the benefits could be as follows (National Health
Policy Forum 2004):

• Benchmark coverage—analogous to the Blue Cross Blue Shield
coverage or the state employees benefit package available in the state

• Benchmark-equivalent coverage—coverage that was actuarially equal in
value to the benchmark option

• The same as plans offered by Florida, New York, or Pennsylvania that
were in place prior to the legislation

• A plan of their own creation approved by the CMS

The states may impose premium sharing and copays on services, but
the payments may not exceed 5 percent of the family’s income.

In chapter 2, we reviewed the empirical evidence on the effects of
the ACA on Medicaid enrollment. The pre-ACA literature examined the
effects of Medicaid and CHIP expansions on enrollment and use of services
by children. De La Mata (2012) used the 1997, 2002, and 2007 Panel
Study of Income Dynamics and the Child Development Supplement. She
takes advantage of the differing levels of the FPL eligibility adopted (and
periodically changed) by the states to examine take-up and use of services.
She found that the increases in eligibility thresholds raised take-up rates by
10–13 percentage points on average and 24–29 points at lower-income eligi-
bility levels. She also found that preventive healthcare utilization increased by
12–14 percentage points at the lower-income levels, with no effects at higher
levels. However, even among the low-income groups, she found no one- or
five-year improvements in health. There were crowd-out effects, as well, that
we discuss later.

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Health Insurance488

Copayments and Premiums Under Medicaid and the
Children’s Health Insurance Program

In 2005, Congress gave states the authority to charge copayments up to
10 percent of the cost of services for those individuals with family income
between 100 and 150 percent of the FPL. Those with higher incomes may
be charged up to 20 percent. However, total cost sharing could not exceed
5 percent of the family’s income (CBO 2006). As a result of these limita-
tions, few states have implemented cost sharing in the Medicaid population.
Indeed, only three states require copayments for children’s Medicaid services,
but 26 states do so in their CHIP program.

Beyond the RAND Health Insurance Experiment (chapter 8), little is
known of the service-use response to higher copays among families with low-
income children. Sen and colleagues (2012) examined the increase in copays
in the Alabama CHIP over the 1999–2009 period. They found that the
effects of copayment increases varied substantially depending on the service.
Copayment increases from $0 to $3 or from $3 to $5, depending on income
level, decreased brand-name prescription drug use among the continuously
enrolled by 5 percentage points over a full year. A similar increase in physi-
cian office visit copays reduced visits by 2.7 percentage points. However, a
$5 increase in emergency department visit copays and a $1 increase in generic
drug copays had no statistically significant effects.

CHIP programs are allowed to assess a premium on income groups
above 100 percent of the FPL; in 2013, 30 states did so (Georgetown Uni-
versity Health Policy Institute 2013). Evaluations in Alabama (Morrisey et al.
2012), Florida (Shenkman et al. 2002), New Hampshire and Kansas (Kenney
et al. 2006/07), and Arizona (Kenney et al. 2007) suggest that a $50 per
year increase in premiums along with copayment increase of $1–3 per visit
were associated with about a 6 percent reduction in reenrollment. Larger
reductions were found in the Kentucky and Georgia programs (Marton and
Talbert 2010).

Managed care plays a significant role in Medicaid. By 2017, approxi-
mately two-thirds of all Medicaid recipients—around 54 million individu-
als—were in a managed care program (Medicaid and CHIP Payment and
Access Commission 2020). The vast majority of these recipients are chil-
dren and working-age adults; managed care is much less common among
the disabled and elderly Medicaid populations. One reason for this is that
many states require that children and pregnant women be enrolled in a
comprehensive managed care plan such as a health maintenance organiza-
tion (HMO). Some Medicaid enrollees are in limited-benefit plans focusing
on, say, behavioral health, or in primary care case-management programs
in which primary care physicians are responsible for directing the patient’s
care—these are sometimes in addition to the HMOs.

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Chapter 24: Medicaid, Crowd-Out, and Long-Term Care Insurance 489

The Medicaid managed care market has some key differences from the
private market. Draper, Hurley, and Short (2004) identified these features early
on. Some managed care plans have specialized in the Medicaid market; Cen-
tene and Molina are examples. Specialization often involves maintaining nar-
rowerer networks than in the private sector. However, these narrower networks
often have to include FQHCs and traditional Medicaid inpatient providers in
the community. The plans also maintain relatively broad service offerings.

While commercial plans have partially moved away from utilization
management, Medicaid managed care plans have not. Part of this reflects an
inability to use anything other than nominal copays to limit moral hazard.

Finally, while Medicaid managed care plans have continued to use
capitation more aggressively than have plans that focus on the private market,
whether they have been able to selectively contract with providers is unclear.
Early work by Leibowitz, Buchanan, and Mann (1992) demonstrated that
Medicaid populations voluntarily enrolled in a managed care plan had sub-
stantially lower Medicaid expenditures than did those who were assigned to
a managed care plan or who were voluntarily in a fee-for-service arrange-
ment. They concluded that apparent Medicaid cost savings from Medicaid
managed care was, in fact, the result of favorable selection. If the savings are
the result of favorable selection, then requiring all Medicaid-eligible people
to participate in the managed care program will not save money. As we saw
in chapter 10, the key to cost containment in managed care is selectively
contracting on a price basis. It is not clear that Medicaid managed care plans
have done this. Work by Duggan and Hayford (2011) is instructive. Using
1991 through 2003 data, they find that shifting Medicaid populations into
managed care essentially had no effect on program costs, on average. As the
authors say, “These results are consistent with recent research on managed
care among the privately insured, which finds that HMOs and other forms of
managed care achieve their savings largely through reduced prices rather than
lower quantities” (Duggan and Hayford 2011, 1). They also found, however,
that in states with low Medicaid reimbursement levels, Medicaid managed
care tended to increase spending, while it lowered spending in states with
relatively more generous reimbursement levels.

Medicaid Crowd-Out

Crowd-out exists when a public program such as Medicaid causes people to
drop private coverage and shift to the public program. We alluded to crowd-
out in chapter 16 when we discussed higher out-of-pocket premiums for
employer-sponsored family coverage in states with generous CHIP programs.
The argument was that some families substitute public coverage for private.
Here we examine the phenomenon directly.

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Health Insurance490

Cutler and Gruber (1997) undertook some of the best work on the
issue of Medicaid crowd-out. They used the US Census Bureau’s Current
Population Survey (CPS) to examine the effects of the SOBRA expansions in
coverage for children aged 7–19 between 1987 and 1992. They found that
the decline in private coverage as a result of the expansions was roughly 50
percent. That is, for every two children who gained Medicaid coverage, one
gave up private coverage.

Other ways to measure crowd-out are sometimes employed. However,
as Cutler and Gruber showed, these measures understate the extent of crowd-
out. For example, using the same CPS data, they estimated that 22 percent of
the expansion in Medicaid over the period was offset by reductions in private
coverage. The flaw in this approach is that Medicaid enrollment may have
increased for other reasons besides the SOBRA expansion. Crowd-out also
has been measured as the proportion of those with private coverage who lost
it as a result of the expansion. Cutler and Gruber estimated this to be approxi-
mately 15 percent. However, private coverage may change for any number of
reasons besides the substitution effect.

Children’s Health Insurance Program and Crowd-Out

LoSasso and Buchmueller (2004) examined the effects of the CHIP expan-
sion on coverage and crowd-out. Using much the same methods as Cutler
and Gruber, they found that approximately 9 percent of the children meeting
the income eligibility criteria gained insurance coverage through CHIP. They
also concluded that, if anything, the straight Medicaid expansions were more
effective than the separate programs. Thus, they concluded that the stigma
of Medicaid was not an issue, or at least no different under the separate pro-
grams. They argued that the growth in coverage was more likely the result of
explicit outreach programs that CHIP used.

However, more than 46 percent of those who gained CHIP coverage
gave up private coverage. The extent of crowd-out was about the same as that
found in the earlier Medicaid SOBRA expansion. Not surprisingly, eligible
children in families with higher incomes were more likely to move from pri-
vate coverage to CHIP. They are the ones more likely to have had employer-
sponsored coverage. Thus, one obvious way to reduce crowd-out is to target
the program to only low-income families. Gruber and Simon (2008) revisited
the crowd-out estimates using 1996–2002 data. They found crowd-out rates
of about 60 percent. More recently, De La Mata (2012) and Gresenz and
colleagues (2012) have examined Medicaid and CHIP expansions. They too
find substantial crowd-out of private coverage, each with estimates at least as
large as those of LoSasso and Buchmueller.

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Chapter 24: Medicaid, Crowd-Out, and Long-Term Care Insurance 491

Another way to reduce crowd-out is to impose waiting periods before
coverage takes effect. LoSasso and Buchmueller (2004) found that a five-
month waiting period essentially eliminated crowd-out, but it also reduced
the take-up rate by 3.7 percent. Work by others suggests that premium shar-
ing can also be an effective means of reducing crowd-out (Davidson, Blewett,
and Call 2004). The CHIP out-of-pocket premium reduces the gains from
dropping private coverage.

Medicaid Expansion Under the Affordable Care Act

The ACA required the states to expand their Medicaid programs or incur
the complete loss of federal matching of their existing Medicaid program.
The Supreme Court held in 2012 that this was the equivalent of “hold-
ing a gun to the head” of the states and was unconstitutional. As a result,
the states have the option of expanding their Medicaid programs to cover
US citizens and long-term legal residents aged 19–64 who have household
incomes below 138 percent of the FPL. (The legislation calls for coverage
below 133 percent of the FPL, but there is also a provision for ignoring the
first 5 percent—thus, 138 percent.) As of 2019, 36 states and the District of
Columbia have expanded coverage.

The legislation gave the states considerable incentive to adopt an expan-
sion. In the first three years, 2014 through 2016, the federal government
would pay 100 percent of the claims costs associated with the expansion. The
federal matching share declined to 95 percent in 2017, 94 percent in 2018, 93
percent in 2019, and 90 percent thereafter. States that chose not to expand lost
the early years of full federal funding and would get only the 90 percent match
afterward. (See Expanding the Alabama Medicaid Program for an example of
the estimated economic implications of one state’s Medicaid expansion.)

Expanding the Alabama Medicaid Program

Becker and I (2012) undertook an analysis for Alabama in late 2012. The num-
bers of eligible people over time were derived from the US Census Bureau’s
American Community Survey. We adjusted these data to reflect census esti-
mates of changes in population from 2014 to 2020 as well as improvement
in the economy and the effects of this improvement on private insurance
coverage. This process yielded an estimate of approximately 522,000 eligible
people in 2014, declining to 480,000 by 2020. It is unlikely that everyone

(continued)

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Health Insurance492

eligible will take coverage, however. We used take-up estimates from the
Urban Institute for our intermediate scenario. It assumed 75 percent of the
uninsured would take Medicaid expansion coverage if available, 60 percent
of those eligible but currently with private nongroup coverage, and 25 percent
of those eligible currently with private group coverage. This yields estimates
of approximately 293,000 likely to take up Medicaid coverage each year.

Estimates of Medicaid spending for this age group are not readily
available. As we saw earlier in this chapter, Medicaid spending is concentrated
among children, the elderly, and the disabled. We used estimates of health-
care spending by those aged 19–64 with private coverage in the Southeast,
drawn from the Medical Expenditure Panel Survey (MEPS). The newly covered
under Medicaid will have coverage similar to that in the exchanges and, as
we saw in chapter 8, those with health insurance use more care than those
without coverage. Thus, the insured population is a reasonable proxy. We
rolled these costs forward with CMS’s estimate of the trend in real health
spending. To these numbers we added the estimated administrative costs.
Under our intermediate scenario, these costs range from $1.76 billion in 2014
to $1.85 billion in 2020. (Costs per person increase but enrollment declines
with the improving economy, so the value is fairly constant.)

The expansion brings new federal dollars into the state. This is direct
spending. Hospitals, physicians, pharmacies, and their employees spend
these dollars on gasoline, food, clothing, and so on. Much of this spending
leaves the state. However, some stays and is spent again and again. Regional
economists have developed input–output models that estimate the size of this
indirect spending. For a state such as Alabama without a diverse economy, the
indirect multiplier is relatively small. The model we used implied a multiplier
of just less than 0.7. Each new dollar generated another 70 cents in spending.
This yields new spending of $2.91 billion in 2014, dropping to $2.76 billion in
2015. (It drops because the federal matching share drops over time.)

Finally, the new revenue generates tax revenue. We used an estimate
of state tax burden from the Federation of Tax Administrators. This estimate
yields an estimate of tax revenue accruing to state and local governments
ranging from $250 million in 2014 to $237 million in 2020.

Thus, our intermediate scenario found that over the 2014–2020 period,
approximately 293,000 people would be covered each year. The federal gov-
ernment would pay approximately $11.7 billion, and the state would have to
pay $771 million. The expansion would generate some $19.8 billion in new
income. After paying its share, the state, through its various taxing entities,
would have some $935 million in net tax revenues.

(continued)

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Chapter 24: Medicaid, Crowd-Out, and Long-Term Care Insurance 493

The states do not get a completely free ride, even in the first three
years. Under the legislation, they must absorb their traditional share of the
administrative costs associated with coverage for the newly eligible. Most
administrative costs are shared 50/50 by the federal government and the
state, although certain special programs, such as fraud and abuse control,
get a higher federal match. Overall, the states pay about 45 percent of the
administrative costs.

Any economic consideration of the expansion depends on six key
factors:

1. the number of people likely to be eligible,
2. the take-up rates of the uninsured and people who are eligible but

privately insured,
3. the claims costs associated with the expansion,
4. the federal matching rates over time,
5. the magnitude of direct and indirect new federal spending in the state,

and
6. the effects of this new spending on state tax revenues.

As we noted briefly in chapters 2 and 3, much of the reduction in
the number of uninsured in the United States over the last half decade
has been the result of the ACA Medicaid expansion. Rigorous early work
by Frean, Gruber, and Sommers (2017) used American Community Sur-
vey data over the 2012–2015 period and concluded that 60 percent of
the expansion in coverage was the result of Medicaid expansions, with
the remaining 40 percent stemming from the individual mandate and its
related subsidies.

Obviously, there is a strong economic case for expanding the Medicaid
program. However, there are at least three strong reasons not to undertake
the expansion. First, for all of the potential benefits, the state may not be able
or willing to obtain the $771 million it needs for its share of the program. Even
when there is a large return on investment, one must still find the resources
to make the investment. Second, there is real concern that the federal govern-
ment may not be able to keep its promise to continue to fund the expansion
at 90 percent of the claims cost into the future. States are concerned that
once the expansion occurs, it cannot be undone and they will be saddled with
the future costs of a program. Finally, there is the concern that the Medicaid
expansion itself is unaffordable at the federal level, and the state should not
encourage reckless spending.

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Health Insurance494

Long-Term Care Insurance and Medicaid

Long-term care insurance would seem to be the product that ideally fits the
demand for insurance that we discussed in chapter 4. Nursing home care,
assisted living, and home health services are expensive. A year in a nursing
home can cost $80,000–$100,000. An assisted living facility may charge
$4,000 per month, and a home health aide’s visit can cost $10 to $30 per
hour. The probability of using such services is certainly in the moderate
range. Roughly two-thirds of 65-year-olds in the United States will eventu-
ally spend some time in a nursing home, and 22 percent of men and 12 per-
cent of women will spend more than three years in one. Yet, Li and Jensen
(2011) report that data from the National Institute on Aging’s Health and
Retirement Study suggest that only about 4 percent of those older than 50
have a policy. Finkelstein and McGarry (2006) report that only 10 percent
of those aged 65 and older have a policy.

Long-term care insurance policies are relatively expensive. Recent
online quotes can easily range from $2,000 to $4,000 for a 60-year-old
couple with preferred health. A typical policy may cover $150 per day in
expenses and three years of care. Policies typically have an elimination period
of up to 180 days. These are initial days in a nursing home that are not cov-
ered by the policy; as such, they are analogous to a deductible. There appears
to be no published research on the effects of coverage options on the use of
services. As you see from this summary, long-term care policies are manually
underwritten (see chapter 6). The factors used depend on the company and
state insurance regulations. Typically, the premiums will be based on age,
location, and health status.

A number of arguments have been advanced for why the long-term
care insurance market has not developed more significantly (see, e.g., Brown,
Goda, and McGarry [2012]). These arguments have focused on both the
demand and supply sides of the market.

On the demand side, it is often argued that people misperceive their
likelihood of using long-term care services, that they believe that Medi-
care covers such care, or that their family will take care of them. In fact, if
a person lives long enough, the probability of spending time in a nursing
home increases dramatically. Liang and colleagues (1996) estimated that, on
average, someone alive at 65 will spend 14 percent of her remaining life in
a nursing home. By age 85, this proportion rises to 50 percent, and by age
90, to slightly more than 70 percent. Medicare does provide some long-
term care services: up to 100 days of skilled nursing home care per spell of
illness and substantial amounts of home health and hospice care. However,
most nursing home care is not delivered in skilled facilities but in facilities
that provide much less intense levels of care. Moreover, while spouses or

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Chapter 24: Medicaid, Crowd-Out, and Long-Term Care Insurance 495

family members commonly provide caregiver services, the earlier Liang and
colleagues estimates belie their ability to substitute out of commercial care-
giving services fully.

On the supply side, the arguments are that insurers lack reliable infor-
mation on the extent of moral hazard and adverse selection. The information
on moral hazard in the long-term care services market is indeed weak. As
we saw in chapter 8, very few studies of private nursing home demand have
been undertaken, but those that have been suggest substantial price sensi-
tivity, with elasticity estimates in excess of 1.0 in absolute value. Thus, we
would expect either substantial use of various forms of copayment (such as
the elimination periods noted earlier) or high premiums designed to accom-
modate this increased usage.

Finkelstein and McGarry (2006) examined the extent of adverse
selection in the long-term care insurance market. Using data from the 1995
Asset and Health Dynamics Among the Oldest Old study, they showed that
there is adverse selection. After controlling for the factors used by insurers in
predicting the use of nursing homes, respondents’ self-reported probability
of being in a nursing home within five years was still predictive of both the
use of nursing homes and of the purchase of long-term care insurance. This
finding implies asymmetric information and the presence of adverse selection.
However, Finkelstein and McGarry also found that individual preferences
for bearing risk also mattered—and in the opposite direction. Those who
were more cautious—that is, more risk averse—were more likely to buy the
coverage but less likely to use it. The net effect was that both types of people
tended to buy long-term care coverage, and the aggregate effect was the
appearance of no adverse selection.

However, the primary reason for the lack of a large private market
in long-term care insurance has nothing to do with these factors; it is again
crowd-out. In this case, people do not buy coverage because they already
have it—Medicaid.

As we noted earlier, an older person can become eligible for Medicaid
nursing home services in a variety of ways. In each case, there are income
and asset limitations on eligibility. The binding constraint is usually thought
to be the asset limitation. There are many anecdotes of people impoverishing
themselves either by spending their assets on nursing home care until they
become eligible for Medicaid or by transferring their assets to family mem-
bers or friends in the years prior to their eligibility for Medicaid. There was
concern that this effort also served to impoverish the community-dwelling
spouse of someone entering a nursing home. For this reason, the Medicare
Catastrophic Coverage Act of 1988 (MCCA) liberalized the income and
asset rules when there was a community-dwelling spouse. Most important, it
excluded the homestead from the asset considerations when there was such

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Health Insurance496

a spouse, and it allowed the spouse to keep all income in their name and a
portion of the income that was in the spouse’s name.

Sloan and Shayne (1993) examined the extent of such impoverishment
before and after MCCA, and by extension, the extent to which people had
Medicaid coverage for long-term care. They used the National Long-Term
Care Survey and information on state Medicaid policies in 1987 and in 1991.
They then simulated the extent to which people with disabilities would have
to spend down their assets to be eligible for nursing home care. It is worth
noting that their definition of disabilities is relatively modest: those with one
or more limitations in activities of daily living. The authors argued convinc-
ingly that individuals with disabilities are the relevant population. Those
seniors in better health are likely to be able to legally transfer assets before
their health deteriorates sufficiently to be disabled.

Sloan and Shayne’s findings, shown in exhibit 24.5, clearly show that,
post-MCCA, nearly 78 percent of those at risk of entering a nursing home
were already on Medicaid or were immediately eligible. Another 5 percent
were eligible within six months. The detail of the table is also instructive. The
MCCA had a relatively small but important impact on eligibility. It increased
the percentage of people immediately eligible or eligible within six months
by 8.7 percentage points. Virtually all of this increase came from increased

EXHIBIT 24.5
Percentage
of Disabled

Elderly Eligible
for Medicaid on
Admission to a
Nursing Home

Before Medicare Catastrophic
Coverage Act of 1988 (%)

After Medicare Catastrophic
Coverage Act of 1988 (%)

Single Married All Single Married All

Already on
Medicaid

24.0 10.1 18.7 24.0 10.1 18.7

Immediately
eligible

48.5 43.3 46.4 48.9 75.1 59.0

Eligible in 1–
6 months

7.8 11.3 9.2 7.8 1.3 5.3

Eligible in 6–
30 months

7.2 13.4 9.6 7.5 3.1 5.8

Eligible in
30–120 months

4.7 9.1 6.4 4.6 1.6 3.8

Not eligible in
120 months

7.8 12.8 9.7 7.2 7.7 7.4

100 100 100 100 100 100

Source: Sloan and Shayne (1993), “Long-Term Care, Medicaid, and Impoverishment of the
Elderly,” Milbank Quarterly 71 (4): 575–99, Table 2. Reprinted with permission.

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Chapter 24: Medicaid, Crowd-Out, and Long-Term Care Insurance 497

eligibility among married people. This result is as we would expect because
the key feature of the MCCA was to protect the income and assets of a
community-dwelling spouse.

The upshot of all of this for the purchase of long-term care insurance
is clear. The reason most people do not buy long-term care insurance is that
they already have it. Based on the Sloan and Shayne estimates, more than 80
percent of those likely to use a nursing home will be eligible for Medicaid
immediately or within six months of entry.

More recently, Brown, Coe, and Finkelstein (2007) examined the crowd-
out effects of Medicaid on private long-term care insurance. They concluded
that, in the presence of Medicaid and controlling for other relevant factors,
between 66 and 90 percent of people would not buy long-term care coverage.
The authors showed that there is some sensitivity to the asset threshold that
Medicaid imposes to determine eligibility. A $10,000 decrease in qualifying
assets would increase private long-term care coverage by 1.1 percentage points.

Summary

• Medicaid is a joint federal–state, need-based program to provide
medical services to low-income populations, in particular pregnant
women, children, the elderly, and individuals with disabilities.

• The states exercise considerable flexibility with the criteria for Medicaid
eligibility, the generosity of services, and the inclusion of optional services.

• While children and adults make up nearly 75 percent of the enrolled
Medicaid population, the elderly and those with disabilities have per
person costs some seven times higher.

• Medicaid expansions in the 1980s and 1990s have sought to cover
people with somewhat higher family incomes. There is evidence of
substantial private insurance crowd-out as a result of these expansions,
typically on the order of one person giving up private coverage for
every two gaining public-sector benefits.

• The Medicaid expansion under the ACA is estimated to have
accounted for 60 percent of the reduction in the number of uninsured
over the first two years of the program. From an individual state’s
perspective, the expansion brings substantial new federal dollars into
the state. States, however, are concerned that the federal government
will not continue to pay for the program over time.

• Under current laws, long-term care insurance is unlikely to be a major
market. Estimates suggest that nearly 80 percent of likely nursing home
residents are already on Medicaid or will be immediately eligible on
entering a nursing home.

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Discussion Questions

1. Under what conditions would a Medicaid managed care program likely
be successful in restraining Medicaid costs?

2. What effect would the ACA have on enrollment in CHIP? What effect
would an expanding economy have on CHIP enrollment? Why?

3. In 2006, Congress enacted legislation that prevents persons with a
home valued at more than $500,000 from qualifying for Medicaid;
states can raise this limit to $750,000. (Homesteads of whatever value
are exempt when a community-dwelling spouse or other dependent
is living there.) In addition, Medicaid will look back for five years
instead of three in determining whether assets have been transferred
in anticipation of Medicaid eligibility. What effects do you expect this
action to have on Medicaid eligibility and the demand for long-term
care insurance?

4. Should a state expand its Medicaid program as allowed under the
ACA? Discuss the advantages and disadvantages of such an expansion.

5. Suppose you are a reasonably wealthy individual. Under what
circumstances would you buy long-term care insurance rather than
investing in other assets?

For the Interested Reader

De La Mata, D. 2012. “The Effect of Medicaid Eligibility on Coverage, Utilization,
and Children’s Health.” Health Economics 21 (9): 1061–79.

Finkelstein, A., and K. McGarry. 2006. “Private Information and Its Effect on Mar-
ket Equilibrium: New Evidence from Long-Term Care Insurance.” American
Economic Review 96 (4): 938–58.

Gruber, J., and K. Simon. 2008. “Crowd-Out 10 Years Later: Have Recent Public
Insurance Expansions Crowded Out Private Health Insurance?” Journal of
Health Economics 27 (2): 201–17.

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Becker, D. J., and M. A. Morrisey. 2012. “An Economic Evaluation of Medicaid
Expansion in Alabama Under the Affordable Care Act.” University of Ala-
bama at Birmingham School of Public Health. Published November 5. www.

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Duggan, M., and T. Hayford. 2011. “Has the Shift to Managed Care Reduced
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org/papers/w17236.

Finkelstein, A., and K. McGarry. 2006. “Private Information and Its Effect on Mar-
ket Equilibrium: New Evidence from Long-Term Care Insurance.” American
Economic Review 96 (4): 938–58.

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Frean, M., J. Gruber, and B. D. Sommers. 2017. “Premium Subsidies, the Mandate,
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Utilization Among CHIP Enrollees? Evidence from Alabama.” Health Ser-
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rollment Patterns in a SCHIP.” Health Care Financing Review 23 (3): 47–63.

Sloan, F. A., and M. W. Shayne. 1993. “Long-Term Care, Medicaid, and Impover-
ishment of the Elderly.” Milbank Quarterly 71 (4): 575–99.

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CHAPTER

2THE AFFORDABLE CARE A

The Affordable Care Act (ACA) was enacted in March 2010, and
most of its features went into effect in fall 2014. It is the most dra-
matic change in US healthcare policy since the enactment of Medicare

and Medicaid in 1965. This chapter will describe the key features of the law,
focusing on the individual and employer mandates, the insurance exchanges,
and the Medicaid expansion. As part of this discussion, we will describe how
the ACA implementation unfolded, how it was intended to be financed, and
the early empirical literature on the effects of the law. This chapter takes an
overview of these effects; in most of the succeeding chapters, there will be
opportunities to examine how the law changed previous practices and what
effects the law has had or is expected to have on the insurance market. We
will also introduce many of the key changes in the administration of the law
that have been introduced by the Obama and Trump administrations and
by Congress.

The Uninsured

The fundamental goal of the ACA was to reduce the number of uninsured
in the United States. In 2010 there were approximately 50 million unin-
sured people under 65 in the country. Exhibit 2.1 reports the Congressio-
nal Budget Office (CBO) estimates of the reduction of uninsured resulting
from the enactment of the law. Just prior to the enactment of the law,
the CBO estimated 29 million without coverage by 2016. The remaining
uninsured were largely those undocumented residents who were not eli-
gible for coverage (approximately 10 to 12 million) and those who were
exempted or declined coverage. However, the United States did not reach
these projections. As we discuss later in the chapter, some 17 states did
not expand their Medicaid program and its limited coverage. Each year,
the CBO updates its estimates for the next 10 years. Exhibit 2.1 shows
the most recent CBO estimate, suggesting that the number of uninsured
would total 30 to 35 million over the next five years. These estimates
incorporate the smaller number of states offering the Medicaid expansion
and, of course, reflect the CBO’s assumptions about the growth of the
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EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 2/6/2023 8:49 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS
AN: 2459482 ; Michael A. Morrisey.; Health Insurance, Third Edition
Account: s4264928.main.eds

Health Insurance

The Individual Mandate

The individual mandate requires most US citizens and legal residents to have
health insurance. The ACA requires qualifying coverage, imposes a penalty for
going without coverage, and provides a subsidy for lower-income people. It
eliminates the use of preexisting conditions in health insurance contracts.

Why require people to have coverage? One obvious reason was to
ensure that everyone who was eligible would have coverage; the goal was
to reduce the number of uninsured. The second reason was adverse selec-
tion. Under the ACA, one could not be denied coverage regardless of one’s
health status. Under this rule, one should only buy insurance when one is
going to use care. We could imagine people signing up for coverage as they
are wheeled into the hospital on a gurney—then disenrolling as they are
taken out to their car in a wheelchair on discharge. More realistically, those
with chronic conditions may enroll while others wait until they need care.
An effective mandate would compel everyone to enroll. We will discuss these
issues in considerable detail in chapter 5.

In general, most people would satisfy the insurance mandate with the
coverage they had through employer-sponsored health insurance. Indeed,
firms with 50 or more full-time employees were required to offer coverage.
Alternatively, they could buy individual coverage or could enroll for coverage
through a government program, usually Medicaid.

Qualifying Coverage

The Congress specified a broad range of clinical services that a qualified
health plan had to cover. In part, a common set of benefits would make

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

50 50 50

31
2

21 21 22
26

32 34 35 35

2010 estimates 2018 estimates

Source: Data from CBO (2018, 2010).

EXHIBIT 2.1
CBO Estimates
of the Number

of Uninsured (in

millions)

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Chapter 2: The Affordable Care Act 31

it easier for consumers to compare plans. The covered services are the ten
essential health benefits:

• Ambulatory patient services
• Emergency services
• Hospitalization
• Maternity and newborn care
• Mental health and substance abuse services
• Prescription drugs
• Rehabilitative services and devices
• Laboratory services
• Preventive and wellness services and chronic disease management
• Pediatric services, including oral and vision care

This list is broad, but it is not very clear with respect to precisely
what services are to be covered. At the time of enactment, many thought
the government would assemble committees to define precise benefits.
This was not done. Instead, the government asked each state to identify
a benchmark plan that would provide the definitions. States could choose
one of the three small group plans in the state that had the largest enroll-
ment, one of the three largest state employee plans, one of the largest
federal employee health benefit plans, or the largest commercial health
maintenance organization (HMO) plan in the state. States that allowed the
federal government to run their exchanges had to use the small-employer
option. Texas, for example, uses the Blue Cross Blue Shield (BCBS) RS26
plan as its benchmark. The benchmark specifies how many days of hospital
care and physician visits one may have, as well as the nature of prescription
drug coverage, for example. The benchmark’s provisions on deductibles,
copays, and coinsurance and network providers are irrelevant, as we will see
later in the chapter.

The essential benefits definition led to problems of implementation.
You may recall that many people lost their individual health insurance
coverage just prior to the first open enrollment period in fall 2013. The
problem was that individual policies typically did not cover maternity and
newborn care, preventive services, or pediatric services; however, one could
often buy them as a rider. As a consequence, these were not qualifying plans
and could not be offered. Similarly, so-called mini–medical plans that cov-
ered ambulatory but not hospital care, and that were offered individually or
through employers, were also no longer available. These events helped foster
the claim that proponents had misled when they said that “if you like your
plan, you can keep it.”

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Health Insurance32

Benefit Tiers

Within the individual insurance market, the ACA specified four levels of
benefits (bronze, silver, gold, platinum) plus a catastrophic option for
people under age 35. Actuaries in an insurance firm would specify the aver-
age claims cost of an enrollee. If you bought a bronze plan and had a claim,
the plan would pay 60 percent of the cost and you would be responsible
for the remaining 40 percent. If you wanted more generous coverage you
could buy a silver, gold, or platinum plan, being responsible for 30, 20,
and 10 percent of the claims costs, respectively. Obviously, more generous
plans cost more. One advantage of this tiering is that one can relatively eas-
ily compare plans offered by different insurers because they have identical
coverage.

Insurers can offer several plans in a benefit tier—each with differing
deductibles, copays, and provider networks. One of the key issues that has
arisen with benefit tiers is that insurers have narrowed their networks of pro-
viders, often eliminating PPO plans and only offering HMOs. We will discuss
these issues in chapters 5 and 10.

Penalties

If one is to mandate insurance coverage, one needs an enforcement device.
The ACA established financial penalties for individuals who did not obtain
health insurance. The penalties were phased in between 2014 and 2016.
Initially, they were set at $95 per year or 1 percent of income, whichever
was higher. By 2016, the penalty was $695 or 2.5 percent of income per
year. Thus, in 2016, for an individual with an income of $50,000, the
penalty for not buying coverage would be $2,500. The penalty is collected
through the federal personal income tax system. However, it can only be
collected as a reduction in the refund one would have received. There-
fore, if one owes a penalty but does not have a refund due, the penalty
is deferred. Moreover, the penalty is not assessed on people who are not
required to file taxes.

The prevailing view at the time of implementation was that these pen-
alties were probably too low to have a large impact on enrollment. Frean,
Gruber, and Sommers (2017) found only small and statistically insignificant
effects of the mandate on enrollment in the exchanges through 2015.

In December 2017, the Congress set the penalty on the individual
mandate at $0 or 0 percent beginning in 2019. Some observers are con-
cerned that this will significantly erode enrollment in the ACA, but if the
empirical work is correct, the effects should be modest.

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Chapter 2: The Affordable Care Act 33

Subsidies

The ACA provides premium subsidies to encourage low-income individuals
to enroll in the health insurance exchanges. The subsidies are refundable,
advanceable premium tax credits for individuals and families with income
between 100 and 400 percent of the federal poverty level (FPL). This stan-
dard means that the subsidy is handled through the tax code. If one is eligible
for a subsidy of say, $1,000, then one gets a credit of $1,000 toward one’s
income tax liability. The credit is refundable, meaning that even if you did not
owe $1,000 in taxes, you would still get the $1,000 credit.

The obvious problem with this is that you need to buy coverage in
the open enrollment period, but would not get the credit until you filed
taxes for that year. That is why the credit is advanceable, meaning that the
insurance exchange will use data provided by you to estimate the credit and
then use that estimate to reduce the premium by the appropriate amount.
When you file income taxes you would report actual income and the precise
amount of the subsidy would be calculated. You may get a bigger credit (i.e.,
a refund) or you may have been given too big a credit, so you would owe
the government money for the excess amount. In any event, the ACA allows
eligible people to receive their subsidy at the point they are buying coverage
in the exchange.

The ACA defines the maximum amount one must pay for health insur-
ance as a percentage of one’s income. The difference between the price of
the second-cheapest silver plan and the maximum one is obligated to pay is
the size of the subsidy. This statement sounds more complicated than it is.

The maximum one must pay for health insurance depends on one’s
income.

• 100–138 percent of the FPL: Maximum payment of 2.0 percent of
income

• 138–150 percent of the FPL: Maximum payment of 3.0–4.0 percent
of income

• 150–300 percent of the FPL: Maximum payment of 4.0–9.5 percent
of income

• 300–400 percent of the FPL: Maximum payment of 9.5 percent of
income

There is no subsidy for people with incomes below 100 percent of
the FPL. This was because the Congress intended that people with incomes
below this level would be covered by the Medicaid expansion. As we will see
later in the chapter, when the Supreme Court made the Medicaid expansion
optional for the states, this created a group of people who were not eligible

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Health Insurance3

for a subsidy and who had no Medicaid coverage if their state chose not to
expand its Medicaid program. Note too that there is no subsidy for people
earning more than 400 percent of the FPL.

The FPL is determined annually and is based on income and the
number of people in the household. Exhibit 2.2 reports the FPL for people
in the contiguous United States in 2013 (the first open enrollment period)
and 2017.

If an individual’s income was below $12,060 in 2017, they were not
eligible for a subsidy. The subsidy declines with income. In principle, a per-
son in a household of four with a combined income of $115,000 would be
eligible for a subsidy as well. These subsidies would be small—sometimes $0.

Exhibit 2.3 shows how the ACA premium subsidies work. It is drawn
from Brazos County, Texas, the home of Texas A&M University. Con-
sider Mary Younger. She was 27 and lived alone in 2013 with an income
of $17,000. The ACA expects her to pay no more than 4 percent of her
income toward health insurance; that is $57 per month. The amount of
the subsidy depends on the premium of the second-cheapest silver plan in
her county. For someone aged 27, that was $197 per month. Her subsidy
was $139 per month ($197–$57). In contrast, Bob Older was 50 years old,
living alone on the same $17,000 income. He too must pay 4 percent of
his income toward insurance; $57 per month. However, because he is older,
the premium for him is $335 per month and thus, the subsidy is $335 less
$57, or $278 per month. As we will discuss later in the chapter, premiums
in the ACA exchanges depend on where one lives, one’s age, and whether
one is a smoker.

EXHIBIT 2.2
Comparison:

Federal
Poverty Level

in Initial Open
Enrollment

Period

Source: Data from the Office of the Assistant Secretary for Planning and Evaluation (2019).

100% 138% 150% 300% 400%

2013 Open Enrollment Period

1 Person $11,490 $15,856 $17,235 $34,470 $45,960

2 People 15,510 21,404 23,265 46,530 62,040

3 People 19,530 26,951 29,295 58,590 78,120

4 People 23,550 32,499 35,325 70,650 94,200

2017 Open Enrollment Period

1 Person $12,060 $16,643 $18,090 $36,090 $48,120

2 People 16,240 22,410 24,360 48,720 64,900

3 People 24,600 33,948 36,900 73,800 98,400

4 People 28,780 39,716 43,050 86,340 115,120

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Chapter 2: The Affordable Care Act 35

Source: Data from Centers for Medicare & Medicaid Services (CMS) (2019).

EXHIBIT 2.3
How ACA Premium Subsidies Work

Age Income

Maximum
Share of
Income

Required to
Be Spent on

Insurance

Maximum
Dollars to
Spend on
Insurance

Second-
Cheapest

Silver Plan
in Brazos

County,

Monthly

Subsidy

Premium
After

Subsidy

2013 Open Enrollment Period

Mary Younger 27 $17,000 4% $57/month $196 $139 $57

Bob Older 50 $17,000 4% $57/month $335 $278 $57

Mary Younger 27 $35,000 9.5% $277/month $196 $0 $277

Bob Older 50 $35,000 9.5% $277/month $335 $58 $277

2017 Open Enrollment Period

Mary Younger 27 $17,000 4% $57/month $340 $283 $57

Bob Older 50 $17,000 4% $57/month $580 $523 $57

Suppose Mary and Bob each had incomes of $35,000. Under the
ACA, they would have to pay no more than 9.5 percent of their income for
coverage ($277 per month). Bob Older’s premium would still be $335, but
after accounting for what he has to pay, the subsidy is only $58 per month.
Mary must also pay $277 per month, but this amount exceeds the cost of the
second lowest-cost silver plan in her county for someone aged 27, so she gets
no subsidy. As a result of this formula, those with higher incomes get reduced
subsidies and sometimes get no subsidy.

As a further complication consider what happens if premiums increase
over time. In exhibit 2.3, the second-least expensive silver plan for Mary
Younger in the 2017 open enrollment period was $340 per month ($580
for Bob Older). These were 73 percent increases over 2013. However, typi-
cally as long as their incomes are unchanged, the amount they must pay for
coverage remains unchanged. In Mary’s case, the subsidy increased to $283
per month and for Bob to $523. These extra costs are paid by taxpayers. It is
important to note that if one is not eligible for a subsidy, the entire increase
in premium is paid by the individual.

The exhibit identifies the amount of the subsidy and how it is deter-
mined. However, the subscriber does not need to use her subsidy to buy
the second-lowest-cost silver plan. She could buy a costlier silver, gold, or

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Health Insurance36

platinum plan and apply her subsidy to that premium to pay the remainder
herself. Alternatively, she could buy a less expensive silver or bronze plan,
spending the subsidy and potentially paying a $0 out-of-pocket premium.
The consulting firm McKinsey & Company (2014) estimated that some six
to seven million subscribers could have purchased a zero-premium bronze
plan during the 2013 open enrollment period. The large increases in premi-
ums that occurred in the 2017 open enrollment period provided a greater
opportunity to shift to zero-premium plans.

Cost-Sharing Subsidies

In addition to premium subsidies, some individuals are also eligible for cost-
sharing subsidies. Recall that if you selected a silver plan, you were respon-
sible for 30 percent of the actuarily determined claims costs. Thus, you faced
deductibles and copayments. However, if you had income no greater than
250 percent of the FPL, you faced smaller cost-sharing requirements when
you used health services.

• 100–150 percent of FPL: 6 percent cost sharing
• 150–200 percent of FPL: 13 percent cost sharing
• 200–250 percent of FPL: 27 percent cost sharing
• >250 percent of FPL: 30 percent cost sharing

Thus, if you had household income between 100 and 150 percent, you only
had to pay 6 percent of actuarily expected claims costs as deductibles or
copays. This subsidy is only available if you purchased a silver plan.

The Republican Congress challenged the Obama administration in
court over whether the Congress had authorized the funding for these cost-
sharing subsidies. While the case was pending in autumn 2017, the Trump
administration indicated that it did not have the legal authority to make these
payments and stopped them. This change had two implications. First, people
in low-income groups continued to be eligible and to receive these subsidies.
Second, insurers would not be receiving federal government payments for
their enrollees who were eligible.

As a result, 2018 premiums were increased to reflect these higher costs.
States had some flexibility to raise premiums on all plan levels of coverage or
to limit the premium increases to silver plans. Most put all of the additional
premium on silver plans. Recall from the earlier discussion of exhibit 2.2 that
these higher premiums had no effect on individuals with premium subsidies
if their incomes had not changed but did raise premiums, particularly silver
premiums, for those without premium subsidies.

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Chapter 2: The Affordable Care Act 37

Allowable Underwriting

Prior to the ACA, health insurers in the individual market used individual
characteristics to set premiums, subject to state insurance laws and regula-
tions. Thus, they typically used age, gender, location, and health status,
among other factors. The ACA prohibited the use of preexisting health
conditions, and it prohibited the use of gender to set rates. It also limited
the extent to which age could be used; the highest premiums by age could
be no more than three times as costly as the least expensive age. However,
the ACA does allow up to 50 percent higher premiums for those who use
tobacco products. It also requires guaranteed issue; this means that an insurer
may not refuse to provide you coverage if you want to buy it.

As we discuss in chapters 5, 6, and 7, insurers have used these char-
acteristics to set premiums that reflected the likely average claims experience
of the group. As it turns out, on average women have higher claims experi-
ence than men until about age 55. So, historically women have faced higher
premiums than men. Similarly, those with a history of heart disease would
typically pay more for coverage, if an insurer was willing to offer it.

These sorts of regulatory limits have impact only if they are at odds
with actual utilization experience. Thus, if older people have actual claims
experience five times that of younger people, a law such as the ACA, which
sets a maximum premium for older people at no more than three times
higher than for younger people, will cause premiums for younger people to
be higher. Similarly, if women have higher claims experience, but may not be
charged more than men, premiums for women will be relatively lower than
prior to the ACA, and premiums will be higher for men. Women have an
incentive to join plans, men have an incentive to forgo coverage.

Premiums in the healthcare marketplaces have increased substantially
over the first few years of the ACA. Exhibit 2.4 shows the five-year trends

EXHIBIT 2.4
Trends in
Average
Monthly
Premiums for
Silver Plans and
Percentages
of Enrollees
Receiving
Subsidies

Source: Data from Office of the Assistant Secretary for Planning and Evaluation (2017).

Average Second-
Cheapest Silver Plan,

27-Year-Old

Percentage of
Enrollees with

Premium Subsidy

Percentage of
Enrollees with Cost-

Sharing Subsidy

2014 $218 84 60

2015 224 87 60

2016 242 85 59

2017 300 84 60

2018 411 85 54

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Health Insurance3

in premiums and participation in both premium and cost-sharing subsidies
for the plans offered through healthcare.gov. Over the first five years of
the ACA, the average silver plan premium has increased by 88 percent for
a 27-year-old. Moreover, the vast majority of those buying coverage in the
exchanges receive a premium subsidy and approximately 60 percent received
cost-sharing subsidies.

Exchanges: The Healthcare Marketplaces

The ACA required each state to have functioning individual and small
business marketplaces or exchanges in place by January 1, 2014. The imple-
mentation of the small group or SHOP (Small Business Health Options
Program) was delayed twice, but was up and functioning in 2016.

The states had the option of creating their own exchange, using
the federally facilitated exchange, or establishing a partnership exchange.
State-based marketplaces run their own exchanges; these give the states
greater flexibility. Initially 17 states established their own marketplaces. Now
11 states operate their own exchanges and another 5 operate their own
exchanges while using the online federal platform to undertake enrollment
(Kaiser Family Foundation [KFF] 2018b). Partnership marketplaces share
functions with the federal government; 6 states take this approach. Initially
26 states used the federally facilitated approach; 28 do so now.

It may seem surprising that the majority of the states use the federally
facilitated model. In my view, this outcome results from the costs of running
an exchange and the initial confusion over how an exchange was supposed to
operate. The marketplaces are not inexpensive to run. Consulting work for a
moderately sized state such as Alabama suggested that some 330,000 people
would enroll in an Alabama exchange and the annual cost to run it would be
approximately $44.5 million (Carey 2011). Next, the states required rather
substantial direction from the federal government on how the exchanges
were to operate and how to be in compliance with the law and administrative
regulation. Unfortunately, the direction was slow in coming. While the fed-
eral government paid for the costs of running a state exchange in the first year
and provided some start-up money for development, each state’s exchange
was to be self-sufficient by the second year of operation. Thus, I believe many
governors and legislatures concluded that the costs and uncertainty, together
with the blame if the exchange was not functional, led them to default to the
federally facilitated model.

An exchange can adopt one of three roles: it can be a market facili-
tator, a selective contractor, or an active purchaser. All federally facilitated
marketplaces must be market facilitators, and all other states have taken
that approach except California. A market facilitator essentially accepts all

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Chapter 2: The Affordable Care Act 39

insurance plans that are qualified (i.e., offer the essential benefits and meet
state insurance regulations). The exchange serves as a neutral source of infor-
mation on the plans offered.

In California, CoverCalifornia is an active purchaser. It may help to
think of this as the exchange acting in the role of a large employer selecting
some plans and negotiating with insurance companies over a range of issues.
Selective contractor models allow the state to add conditions in addition
to plan qualification before the plan can be offered. These conditions may
include, for example, coverage locations, additional services, network com-
position, or other features. Proponents of the exchange model argue that
over time, marketplaces will evolve away from facilitators to more active roles.

Exhibit 2.5 summarizes the functions of an exchange. While the
federal government is responsible for all of these functions in a federally
facilitated exchange, a state could opt to undertake Medicaid and Children’s
Health Insurance Program (CHIP) enrollment or deal with risk adjustment.

EXHIBIT 2.5
Functions
of a Fully
Operational
Health
Insurance
Marketplace

Determination of
Eligibility

• For Medicaid
• For CHIP
• For eligibility for a premium subsidy

Enrollment • Enroll people into Medicaid, CHIP
• Enroll people in their desired exchange plans

– Solve problems with disenrollment
– Manage nonpayment of premiums and changes in

subsidy status
• Enroll SHOP employees into the plans they or their

employers selected

Plan Management • Certify qualified health plans
• Assign quality ranking to plans
• Review marketing, network adequacy, accreditation,

and quality improvement
• Work with Department of Insurance on general

oversight of plans

Consumer
Assistance

• Single application process—online, in person, or by
phone

• Employ/contract with navigators
• Provide information for knowledgeable plan selection

– Plan comparisons
– Premium calculator

Financial
Management

• Perform accounting, auditing, reporting duties
• Carry out bill collection or or collect passing-through

premiums
• Perform risk adjustment

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Health Insurance40

In addition, if a state has chosen a partnership model, it may undertake either
or both of these two functions, as well as plan management and consumer
assistance roles.

Most of the functions are reasonably straightforward—with the excep-
tion of risk adjustment, which is listed under financial management in exhibit
2.5. Individual insurers and insurance plans are not allowed to use health
conditions to set insurance rates. However, claims experience may differ
substantially across plans, allowing some to incur large losses while others
have substantial gains. The ACA requires the exchanges to risk-adjust; they
are to account for the differences in claims costs by assessing a fee on plans
that have enrolled a cohort of disproportionately lower-cost enrollees and pay
these fees to plans that had higher costs. We will deal with the issues of risk
adjustment in chapter 6.

Exchange Enrollment

Exhibit 2.6 shows the enrollment in the health insurance marketplaces over
the first four years. The first-year enrollment was limited to about eight mil-
lion, with many attributing the low enrollment to the difficulties people had
in negotiating the often-problematic websites used for enrollment.

The vast majority of enrollment was in silver (71 percent in 2017) and
bronze (23 percent) plans (CMS 2017). We will discuss the nature of the
enrollment challenges later in the chapter.

8.1

11.7

12.7
12.2 11.812

2015 2016 2017 2018

Source: Data from KFF (2018a).

EXHIBIT 2.6
Enrollment
in the ACA

Exchanges,
2014–2018 (in

millions)

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Chapter 2: The Affordable Care Act 41

Employer Mandate

The ACA required all employers with 50 or more full-time workers to pro-
vide health insurance or pay a penalty beginning in 2014. The penalty is
$2,000 per worker, after the first 30.

Given the difficulties in implementing the SHOP exchanges, the
employer mandate was delayed a bit. The penalty for employers with 100 or
more workers was delayed until 2015; for those with 50 to 99 workers, it
was delayed until 2016. Moreover, employers were only required to cover 70
percent of workers in 2015 and 95 percent in 2016 and beyond.

It was often argued that with the implementation of the employer
mandate, firms would drop expensive health insurance coverage and simply
pay the penalty. Labor economics suggests this would seldom occur. As we
will discuss in chapter 14, workers are essentially paid what they are worth.
The compensation includes any health insurance, pensions, and other ben-
efits, as well as wages and salaries. So, if an employer simply dropped the
health insurance coverage, workers would be made worse off and the best
of them would get jobs elsewhere. There is one instance in which a small
employer may drop coverage in the face of the ACA, but we will save this for
chapter 18, which focuses on small employers.

In addition to the mandate to offer employer coverage, employers
are also subject to provisions on the affordability and adequacy of coverage.
Affordability means that the out-of-pocket premium contribution may not
exceed 9.5 percent of the earning the worker reports on her W-2 tax form.
Adequacy means that the actuarial value of the plan must be at least 60
percent of claims costs. Thus, it must be equivalent to a bronze plan. The
penalties for these infractions are $3,000 per worker who declines coverage
and gets a premium credit in the individual exchange.

Buchmueller, Carey, and Levy (2013) reviewed microsimulations of
the provision of employer-sponsored health insurance from five different
sources, including the CBO, the RAND Corporation, and CMS. The mod-
els conclude that the ACA would have only modest effects on the number
of people with employer-sponsored health insurance. The estimates ranged
from a 1.8 percentage-point decrease to a 2.9 percentage-point increase. To
date, however, there does not appear to be post-ACA research on the effects
of the ACA on employer-sponsored coverage.

Three other issues relate to employers and the ACA. The first is that
the ACA requires coverage for full-time workers with 30 or more hours of
employment. Traditionally, full time has been defined as 35–40 hours per
week. There was concern that firms would reduce part-time employment and
hire fewer full-time workers or reduce individual hours and hire more part-
time workers. Work by Garrett and colleagues (2017) used 2000–2016 data

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Health Insurance42

from the Current Population Survey and found that there was a higher-than-
expected increase in voluntary part-time employment but less-than-expected
increases in involuntary part-time employment. They interpret the findings
to suggest that the ACA did not lead employers to implement widespread
cutbacks in workers’ hours, while workers may have chosen to reduce the
number of hours they worked.

The second issue is the so-called Cadillac coverage tax. The ACA
requires a tax on insurers of 40 percent on the value of health insurance ben-
efits of more than $10,200 for individuals and $27,500 for family coverage.
The tax would, of course, be passed on to employers buying coverage and
would also apply to self-insured plans offered by employers. Initial estimates
suggested that approximately 16 percent of health plans would be affected
when the tax was to be implemented in 2018. However, Herring and Lentz
(2011) estimated that the impact would rise to some 75 percent of plans by
2029. The increase would occur because the thresholds for the taxes increase
with general inflation, while insurance plan costs have typically increased at
twice that rate. However, Congress has delayed the implementation of this
tax on two occasions, first in 2015 and then in 2018. The provision is now
scheduled to take effect in 2022, and many suspect that the feature will be
further delayed (see Turmoil in the Exchanges).

The third issue is the ACA and employers with fewer than 50 full-time
employees. They are not subject to the employer mandate. However, they are
eligible for a small-employer subsidy. To be eligible, a firm must have fewer
than 25 workers and an average wage below $50,000. The firm must buy
coverage on the SHOP exchange and the employer must pay at least 50 per-
cent of a full-time employee’s premium costs. The subsidy can cover up to 50
percent of the employer’s costs, but it is only available for two years. Scholars
have found little evidence that this subsidy has had much of an impact.

Turmoil in the Exchanges

The enactment of the ACA engendered a substantial amount of uncertainty
among health insurers. On the one hand, the mandate and the subsidies
provided considerable incentives for increased demand for coverage. On
the other hand, the prohibition on the use of preexisting conditions to set
premiums and the lack of knowledge about the extent of healthcare usage
by the potentially large number of uninsured who might join plans provided
risks with respect to the medical costs of providing coverage.

During the first open enrollment period, participation by insurers was
relatively modest. The dominant insurer in many states, often BCBS, tended

(continued)

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Chapter 2: The Affordable Care Act 43

to offer coverage throughout the state. Other insurers entered some of the
market areas in their states but set premiums relatively high. Still others did
not enter the market at all. Two things became clear during the first year:
enrollment was low, and low premiums mattered for new subscribers. Insur-
ers, however, had very little information on actual claims costs, particularly
given that they had to file their next premium proposals to the states in mid-
summer. They had only a few months of data on a small number of insureds.

In the second year, many more insurers began to offer coverage at pre-
miums that were often lower than posted in the first year. In Texas, for example,
the number of non-BCBS plans offered in distinct counties increased by 75
percent as insurers expanded the plans they offered and the counties in which
they offered coverage. However, as the year progressed, a few insurers began to
withdraw and report losses. UnitedHealth withdrew from some of its markets.
BCBS of Texas reported a $400 million loss on its individual coverage in the state.

During year 3, insurers still did not have reliable claims data but they
were observing losses. Many responded by more aggressively narrowing their
provider networks. All of the carriers in Texas withdrew their PPO plans from
the exchanges and only offered HMOs. Other insurers lowered their premi-
ums relative to the dominant insurer, hoping to attract healthier subscribers
who would offset the higher-morbidity enrollees they feared they had enrolled.
By the summer of 2016, losses mounted and insurers had more detailed claims
data. Many insurers withdrew from the exchanges entirely; others selectively
withdrew. Aetna announced it would withdraw from 11 of 15 marketplaces.
Humana announced it was pulling out of eight states. Thus, in 2017, there
were many fewer insurers offering coverage. In Houston, for example, the
number of insurers declined from eight in 2015 to three in 2017. Premiums
increased dramatically as well, as insurers set premiums that reflected their
new knowledge of the high utilization experience they observed.

The election in 2016 also increased the level of uncertainty. There
were meaningful efforts to repeal and replace the ACA in 2017. These failed.
The Trump administration stopped payments for the cost-sharing subsidies
(see earlier discussion). This action led to substantial increases in premiums,
particularly silver premiums, in 2018. In addition, in 2018, the administration
promulgated rules for short-term health plans and for association health plans.
Both sets of rules will allow people to buy insurance coverage more inexpen-
sively than on the exchanges and may lead to the withdrawal of enrollment in
the exchange plans. We will discuss these issues in the chapters on adverse
selection and the small group market. Also, Congress set the penalty for not
having health insurance to zero dollars beginning in 2019.

Source: Data from Morrisey (2016).

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Health Insurance44

Medicaid Expansion

The second major feature of the ACA was the provision that the Medicaid
program would be expanded to cover individuals aged 19 through 64 with
incomes below 138 percent of the FPL. A brief bit of context is necessary
to understand the Medicaid expansion. Medicaid is a federal–state joint pro-
gram that provides health insurance to multiple categories of individuals. As a
result, in each state it is a set of programs covering somewhat different groups
of people. The federal government sets broad provisions with respect to
services covered and who is eligible for coverage. However, the states decide
how generous the service provisions actually are and what level of income
makes one eligible, all under review and approval from the federal govern-
ment. The federal government pays 50 percent or more of the cost of the
program. In a wealthy state such as Connecticut, the feds pay a low percent-
age; in a poor state such as Mississippi, the federal government may pay three
dollars or more for every one dollar provided by the state. The categories of
covered individuals include pregnant women, children younger than 19, the
disabled, and low-income individuals in nursing homes. Nondisabled folks
aged 19 to 65 are covered at very low levels of income eligibility, occasionally
as high as 45 percent of the FPL and sometimes as low as 17 percent.

The ACA opened coverage to a wide range of people who were for-
merly ineligible. However, because Medicaid is a joint federal–state program,
the states must agree to accept the expanded coverage. The ACA provided
very strong incentives for states to participate. First, the feds would pay 100
percent of the claims costs for these individuals in 2014, 2015, and 2016,
declining to 90 percent from 2020 forward. This rate is much higher than
the federal match for other parts of Medicaid. In addition, however, the ACA
also said that if a state chose not to expand its program, it would lose the
federal matching funds for all the other elements of its Medicaid program:
children, pregnant women, the disabled, and the elderly.

It was this last feature that resulted in the Supreme Court decision that
part of the Medicaid expansion was unconstitutional. In NFIB v. Sebelius, the
court held that the Congress effectively did not give the states a choice to not
participate, and the decision allowed states to keep the existing Medicaid fed-
eral matching shares for non-ACA Medicaid if they choose not to participate.

As of summer 2018, some 32 states and the District of Columbia have
chosen to implement a Medicaid expansion. Most did so in 2014; others
entered later. Montana and Louisiana expanded in 2016, for example, and
Maine and Virginia had legislative action to expand in 2018. Exhibit 2.7
shows the distribution of states with expansions. States that expanded under
the ACA rules are called “traditional” in the exhibit. Eight states expanded
by seeking a waiver from Medicaid rules. A federal waiver of existing rules

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Chapter 2: The Affordable Care Act 45

typically allowed the state to impose additional conditions on participants,
such as copays or more limited eligibility.

From a purely financial perspective, expanding Medicaid was an easy
call for a state, at least initially. The very high federal match brought new
federal dollars into the state. These dollars would be spent by physicians, hos-
pitals, and others, leading to spending on things such as groceries, gasoline,
and personal services in the state. All of this leads to more state tax dollars.
Even in low-tax states such as Alabama and Mississippi, estimates by Becker
and Morrisey (2012, 2013) suggested that the states would gain more in tax
revenues than the state costs of the program in the first seven years.

However, many states had reasons not to expand. First, though the
state ultimately may see money ahead as a result of the new tax revenue, at the
time of the great recession, many states did not have the existing tax revenue
to pay for their share of the Medicaid costs. Second, there was concern that
the federal government would renege on its promise to fund the expansion
at 90 percent, and the states would be left with an unfunded federal man-
date. Third, many states argued that Medicaid was a fundamentally flawed
program in terms of eligibility, coverage, and payment systems, and therefore
these states did not want to expand it. Finally, some states maintained that
the ACA was a bad idea and not well funded nationally.

Prior to the enactment of the ACA, the CBO (2010) estimated that
approximately 10 million new Medicaid enrollees would join in 2014, the
first year of expansion, with 16 million newly enrolled when the expansion

RI
PA

NV
NE

KYKS

INIL

CO
CA

ARAZ

Expanding — waiver (8 states)Not expanding (17 states) Expanding — traditional (25 states and DC)

Source: Reprinted from Medicaid and CHIP Payment and Access Commission (2019).

EXHIBIT 2.7
State Medicaid
Expansions,
May 2018

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Health Insurance46

was fully operational. KFF (2016) estimated that in 2016, newly eligible
Medicaid enrollment was nearly 12 million. Going forward, the CBO (2018)
estimated that enrollment from this group will continue at about 12 million
per year through 2021. More rigorous research by Frean, Gruber, and
Sommers (2017) found that about 60 percent of the reduction in the num-
ber of uninsured was the result of the Medicaid expansion.

Low-Income People in States That Do Not Expand

The decision to make the Medicaid expansion optional has the effect of leav-
ing low-income people with few options in states that did not expand. People
with incomes at and somewhat above 100 percent of the FPL are eligible for
the largest ACA subsidies. However, those below 100 percent of the FPL
are not eligible for Medicaid and are not eligible for subsidies. They can buy
exchange coverage, but only at the full, nonsubsidized premium.

Affordable Care Act Spending and Revenue Projections

Exhibit 2.8 summarizes the CBO’s (2010) estimates of the ten-year spend-
ing and revenue sources for the ACA. At the time the legislation was
enacted, the CBO projected that the total ten-year cost of the program to
the federal government would be approximately $935 billion. Revenues

EXHIBIT 2.8
Direct Spending

and Revenue
under the ACA,

2010–2019
(in billions)

Note: DSH = disproportionate share hospital.

Source: Data from CBO (2010).

Spending Revenue

Exchanges $464 Medicare

Medicare Advantage $136

Reduce fee updates $196

DSH and other $123

Medicaid $434 Tax-penalty payments $65

Small-employer
credit

$37 Cadillac coverage tax $32

Fees on manufacturing and insurance $107

Part A tax $210

Other revenue $209

Total $935 Total $1,078

Reduction in deficit –$143

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Chapter 2: The Affordable Care Act 47

(including reductions in spending in other programs) were estimated at
$1,078 billion, for a net reduction in the federal deficit of $143 billion. Let
us examine the items in more detail.

Spending
The costs of the subsidies provided to individuals through the exchanges
together with the initial costs of setting up the exchanges were estimated to
be the largest expenses: $464 billion.

The Medicaid expansion to cover most adults between 19 and 64 was
estimated to be nearly as costly, $434 billion. This estimate was obviously
too large, given the Supreme Court decision and the number of states that
did not expand.

The small-employer credit of $37 billion relates to the short-term tax
credits that employers with fewer than 50 workers can receive for providing
coverage. This amount is small, reflecting both the short duration of the
subsidy and the expectation that few small employers will use it.

Medicare Program Reductions
Much of the revenue to support the expansion in coverage was to come
from changes to the Medicare program. There were two major cost-saving
elements. The first was reduction in payments to Medicare Advantage plans.
Medicare Advantage is the managed care option available to Medicare benefi-
ciaries. Approximately 33 percent of beneficiaries are currently in one of these
plans. The plans receive a capitated rate per enrollee adjusted for their health
status. (We discuss this payment mechanism in some depth in chapter 7.)
If the plan’s proposed rate is below the benchmark established by Medicare,
the plan must provide additional services and cost-sharing reductions to its
enrollees. Congress believed that it was overpaying these plans and estab-
lished reductions of $136 billion over ten years. The ACA also imposed a
quality-of-care program for Medicare Advantage that enhanced payments. As
it turned out, funding to Medicare Advantage plans was not reduced.

Second, Medicare had paid physicians under a mechanism called the
Sustainable Growth Rate (SGR) since 1997. The formula took estimated
changes in Medicare physician fees and adjusted them for enrollment in the
program and changes in the gross domestic product per capita. Physician fees
had increased more rapidly than the general economy, with the result that the
SGR implied substantial reductions in physician fees in most years. Beginning
in 2003, Congress delayed the imposition of these fee reductions in every
year (CBO 2006). As a result, if the reductions had been implemented in
2010, for example, they would have implied fee reductions of approximately
20 percent. The ACA required that these fee reductions be implemented as
of 2011. The result would be a savings to Medicare of some $196 billion
over ten years; these savings were then to be applied to the costs of the cov-
erage expansion. However, after enactment of the ACA, Congress continued

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Health Insurance48

to delay the SGR fee reductions and in 2015 eliminated the SGR program,
replacing it with a quality-based physician fee program.

Among the other cuts to Medicare was a reduction in disproportion-
ate share hospital (DSH) payments. DSH payments are additional payments
Medicare and Medicaid make to hospitals that serve a disproportionately
large number of indigent and Medicaid patients. This reduction results in
cuts of $36 billion. The rationale here is that these hospital payments should
be reduced because the ACA reduces the number of uninsured and therefore
reduces the uncompensated care burden borne by hospitals. This reduction
equates to roughly 75 percent in DSH funds. This reduction now has a sig-
nificant impact on hospitals in the states that did not expand Medicaid. They
face the DSH reductions without seeing new Medicaid revenues.

Taxes and Fees
The legislation also imposed a number of taxes and fees. The most well
known is the tax penalty on those who fail to obtain mandated insurance
coverage. These taxes were relatively modest, and as a result, they do not
raise much revenue (only $65 billion) in the CBO ten-year estimates. The
Congress eliminated these penalties effective in 2019. The other well-known
tax is the 40 percent tax on generous employer-sponsored health insurance
plans, the so-called Cadillac tax. The tax was to become effective in 2018 and
only apply to a few firms, so it was only estimated to generate $32 billion in
revenue in the first ten years. The Congress has delayed the implementation
of this tax until 2022.

Several excise taxes were also imposed on pharmaceutical and durable
medical equipment manufacturers and on health insurance companies; these
total $107 billion through 2019. These taxes included the following:

• Pharmaceutical manufacturers: $2.8 billion in 2012, increasing to $4.1
billion in 2018 before stabilizing at $2.8 billion per year in 2019 and
beyond

• Durable medical equipment manufacturers: 2.3 percent tax on sales
beginning in 2013

• Health insurance firms: $8 billion in 2014, increasing to $14.3 billion
in 2018, with each subsequent year’s assessment being that of the prior
year increased by the percentage increase in premiums

Economic theory would argue that these taxes will be passed on to purchasers.

Medicare Part A Taxes
Currently, active workers and their employers each pay a payroll tax of 1.45
percent on all earned income. These revenues are used to pay for Medicare

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Chapter 2: The Affordable Care Act 49

Part A services—hospital, skilled nursing home, and home health care.
Beginning in 2013, the Medicare Part A payroll tax was increased by 0.9
percent on income more than $200,000 for individuals and $250,000 for
families. In addition, these same individuals will be subject to a 3.8 percent
tax on their unearned income (e.g., interest and dividends). These thresh-
olds were not indexed for inflation, so more people will be subject to these
taxes over time. The CBO (2010) estimated that these taxes would generate
$210 billion through 2019. If nothing else, the evolution of ACA revenues
and expenditures suggests the difficulty the CBO and others have in reliably
predicting programmatic finances.

Summary

• The Patient Protection and Affordable Care Act (ACA) was enacted in
March 2010. Most of its provisions took effect in 2014.

• The ACA was anticipated to reduce the number of uninsured people in
the United States by approximately three-fifths by expanding Medicaid
to adults between the ages of 19 and 64 and requiring all US citizens
and legal residents to obtain health insurance.

• The Medicaid expansion was found unconstitutional, and states were
given the choice of expanding the programs or not. At this writing, 17
states have not expanded coverage.

• The individual mandate, requiring everyone to have health insurance,
includes provisions for tax penalties for those who fail to obtain
coverage and subsidies for those with low income. The tax penalty was
set at zero dollars effective 2019.

• The law established health insurance marketplaces, which determine
eligibility for Medicaid and for the subsidies for the purchase of
private coverage. These exchanges provide an online place where
individuals and small employers may compare and purchase qualified
health plans.

• Each plan offered by the exchanges must cover essential health services
at one of four levels of generosity. These levels cover 60 to 90 percent
of the actuarially determined expected medical costs.

• Although employers with fewer than 50 full-time employees are
not required to provide coverage, larger firms must do so or pay a
penalty.

• The ACA calls for the expanded coverage to be financed largely by
reductions in Medicare and the creation of several taxes and fees on
pharmaceutical and durable medical equipment manufacturers, the
health insurance industry, and higher-income individuals.

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Health Insurance50

Discussion Questions

1. The ACA imposed a tax penalty on those who did not buy health
insurance. Is it really necessary to impose such a penalty? Is a tax
penalty of $695 per year, or 2.5 percent of one’s income, adequate to
encourage people to buy coverage? Who would be least likely to buy?
Most likely? How large an effect would the elimination of the penalty
have on the number of covered people?

2. As a result of the Supreme Court decision, states may voluntarily
expand Medicaid coverage. What incentives do they have to expand?
What are the costs of doing so? What interest groups are likely to line
up on each side of the issue?

3. Is a large employer likely to stop offering health insurance to its
employees and simply pay the fine for not doing so? Why?

For the Interested Reader

Frean, M., J. Gruber, and B. D. Sommers. 2017. “Premium Subsidies, the Mandate,
and Medicaid Expansion: Coverage Effects of the Affordable Care Act.”
Journal of Health Economics 53: 72–86.

Morrisey, M. A., A. M. Rivlin, R. P. Nathan, and M. A. Hall. 2017. Five-State Study of
ACA Marketplace Competition. Brookings Institution and Rockefeller Insti-
tute of Government. Published February. www.brookings.edu/wp-content/
uploads/2017/02/summary-report-final .

References

Becker, D. J., and M. A. Morrisey. 2013. “An Economic Analysis of the State and
Local Impact of Medicaid Expansion in Mississippi.” Unpublished report to
the Mississippi Health Advocacy Program, Jackson, MS.

———. 2012. “An Economic Evaluation of Medicaid Expansion in Alabama Under
the Affordable Care Act.” University of Alabama at Birmingham School of
Public Health. Published November 5. www.soph.uab.edu/files/faculty/
mmorrisey/Becker-Morrisey%20Study%20of%20Alabama%20Medicaid%20
Expansion%202012 .

Buchmueller, T., C. Carey, and H. G. Levy. 2013. “Will Employers Drop Health
Insurance Coverage Because of the Affordable Care Act?” Health Affairs 32
(9): 1522–1530.

Carey, R. L. 2011. “Financial Sustainability of the Alabama Exchange.” Alabama Depart-
ment of Insurance. Published November. www.aldoi.gov/PDF/ Consumers/
Exchange%20Financial%20Sustainability%20BMA10T9 .

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Chapter 2: The Affordable Care Act 51

Centers for Medicare & Medicaid Services (CMS). 2019. “FFM QHP Landscape
Files: Health and Dental Datasets for Researchers and Issuers.” Accessed
September 16. www.healthcare.gov/health-and-dental-plan-datasets-for-
researchers-and-issuers.

———. 2017. “Health Insurance Marketplaces 2017 Open Enrollment Period Final
Enrollment Report: November 1, 2006–January 31, 2017.” Published March
15. www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2017-
Fact-Sheet-items/2017-03-15.html.

Congressional Budget Office (CBO). 2018. Federal Subsidies for Health Insurance
Coverage for People Under Age 65: 2018 to 2028. Published May 23. www.cbo.
gov/publication/53826. files/cbofiles/ftpdocs/114xx/doc11439/whcc_
presentation-4-12-10 .

———. 2010. “Letter to the Honorable Nancy Pelosi.” Published March 20. www.
cbo.gov/sites/default/files/cbofiles/ftpdocs/113xx/doc11379/amendre
conprop .

———. 2006. “The Sustainable Growth Rate Formula for Setting Medicare’s Physi-
cian Payment Rates.” Economic and Budget Issue Brief. Published September
6. www.cbo.gov/sites/default/files/cbofiles/ftpdocs/75xx/doc7542/09-
07-sgr-brief .

Frean, M., J. Gruber, and B. D. Sommers. 2017. “Premium Subsidies, the Mandate,
and Medicaid Expansion: Coverage Effects of the Affordable Care Act.” Jour-
nal of Health Economics 53: 72–86.

Garrett, A., G. A. Bowen, R. Kaestner, and A. Gangopadhyaya. 2017. “Recent
Evidence on the ACA and Employment: Has the ACA Been a Job Killer?
2016 Update.” Urban Institute. Published February 15. https://ssrn.com/
abstract=2922288.

Herring, B., and L. K. Lentz. 2011. “What Can We Expect from the ‘Cadillac Tax’
in 2018 and Beyond?” Inquiry 48 (4): 322–37.

Kaiser Family Foundation (KFF). 2018a. “Marketplace Enrollment, 2014–2019.”
Accessed October 16, 2019. www.kff.org/health-reform/state-indicator/
marketplace-enrollment.

———. 2018b. “State Health Insurance Marketplace Types, 2018.” Accessed Octo-
ber 16, 2019. www.kff.org/health-reform/slide/state-decisions-for-creating-
health-insurance-exchanges/.

———. 2016. “Medicaid Expansion Enrollment.” Accessed Ocotber 16, 2019.
www.kff.org/health-reform/state-indicator/medicaid-expansion-enrollment.

McKinsey & Company. 2014. Individual Market Enrollment: An Updated View.
Published March 6. https://healthcare.mckinsey.com/sites/default/files/
Individual-Market-Enrollment .

Medicaid and CHIP Payment and Access Commission. 2019. “Medicaid Expan-
sion to the New Adult Group.” Accessed September 16. www.macpac.gov/
subtopic/medicaid-expansion/.

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Health Insurance52

Morrisey, M. A. 2016. “Turmoil in the Health Insurance Marketplaces.”
Leonard Davis Institute of Health Economics at University of Penn-
sylvania. Published October 27. https://ldi.upenn.edu/brief/turmoil-
health-insurance-marketplaces.

Office of the Assistant Secretary for Planning and Evaluation. 2019. “Prior HHS
Poverty Guidelines and Federal Register References.” US Department of
Health & Human Services. Accessed October 16. https://aspe.hhs.gov/
prior-hhs-poverty-guidelines-and-federal-register-references.

———. 2017. “Health Insurance Coverage for Americans with Pre-existing Condi-
tions: The Impact of the Affordable Care Act.” US Department of Health &
Human Services. Published January. https://aspe.hhs.gov/system/files/
pdf/255396/Pre-ExistingConditions .

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CHAPTER

623

THE AFFORDABLE CARE ACT: DID IT ACHIEVE
ITS GOALS?

When President Obama was elected in 2008, the Democrats achieved
majority control of the House of Representatives and a filibuster-proof
majority in the US Senate. The Affordable Care Act (ACA) was

enacted in 2010 without the support of a single Republican in either the House
or Senate. Given the partisan nature of the vote, Republicans have continually
opposed the ACA, while Democrats have felt obliged to support it.

Leading up to the debate over the ACA, the middle class became anxious
about changes to their healthcare. To alleviate their concerns, President Obama
made a series of promises to the American public. In doing so he raised expec-
tations as to what the ACA would accomplish. Among his promises, “If you
like your healthcare plan, you’ll be able to keep your healthcare plan, period.
No one will take it away, no matter what.”1 “That means that no matter how
we reform healthcare, we will keep this promise to the American people: If
you like your doctor, you will be able to keep your doctor, period.”2 And, “In
an Obama administration, we’ll lower premiums by up to $2,500 for a typical
family per year.”3

Given the partisan nature of the ACA, it became a major issue in the
2012 congressional elections. The controversial legislation cost the Democrats
control of their House majority, but they maintained their majority in the
Senate, although several incumbent Democrats lost their seats. The divided
Congress meant that Democrats could not fix problems that had arisen with
the ACA because Republicans only favored repealing it.

Republicans brought several lawsuits questioning the ACA’s constitu-
tionality. The US Supreme Court upheld the ACA’s individual mandate but
ruled that states could not be penalized if they didn’t participate in the Medicaid
eligibility expansion. When the Congress failed to appropriate additional funds
after 2014 for cost-sharing subsidies on the health insurance exchanges, the
Obama administration continued to pay the subsidies to health insurers. The
Republican-controlled House of Representatives sued, claiming only Congress
has the authority to appropriate federal funds. In 2016, a federal judge ruled
that these subsidies were illegal.

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Health Pol icy Issues: An Economic Perspect ive624

The ACA is the most significant health legislation enacted since Medi-
care and Medicaid in 1965. While members of both political parties supported
Medicare and Medicaid, the fact that the ACA did not receive similar bipartisan
support meant that the ACA would be less durable.

In 2017, the Trump administration continued the cost-sharing subsidies,
expecting that a Republican-controlled House and Senate would repeal the
ACA. When that did not occur, President Trump stopped the illegal cost-sharing
exchange subsidies. With only Republican votes, the Tax Reform Act, enacted
in December 2017, repealed the individual mandate penalty. President Trump
then permitted “short-term” health plans, which have limited benefits and
lower premiums, to be extended for a year and then renewed, thereby provid-
ing individuals with a low-cost alternative to ACA health plans. This policy,
expected to take effect in 2019, will significantly affect the exchange risk pools.

The ACA is being changed in important ways. Contrary to early claims,
the ACA will not have finally resolved the debate over health reform. The ACA
affected many aspects of the financing and delivery of medical services. The
complexity of the program also included imposing new types of taxes and severe
reductions in healthcare provider payments to finance government subsidies
for expanding insurance coverage.

Determining the equity and efficiency aspects of the ACA’s taxes would
require a discussion of who actually bears the burden of the tax (compared with
who is required to pay the tax) and the effects on work effort of the different
taxes (e.g., employees might be less likely to work longer hours if their higher
income decreases their ACA exchange subsidy or makes them ineligible for
Medicaid). Similarly, analyzing the consequences of the reductions in Medicare
provider payments, assuming the payment reductions are fully implemented,
would necessitate an analysis of the effects on patient access to care. (Given
the Medicare actuary’s concern over the drastic effect the payment reductions
would have on hospitals, it is unlikely that they will ever be fully implemented.)

Instead of analyzing all aspects of the ACA, this relatively brief chapter
analyzes President Obama’s promise to “sign a universal healthcare bill into
law by the end of my first term as president that will cover every American.”

How well did the ACA achieve the goal of reducing the number of
uninsured? Which ACA approaches have been more successful in this regard?
It is important to keep in mind that increased insurance is not synonymous
with increased access to care or to high-quality care.

Reducing the Number of Uninsured

Most of the ACA’s provisions became effective in 2014. In 2017, several changes
occurred that likely affected the number of uninsured in 2018 unrelated to
the ACA. The economy began growing faster in 2017; the rate of growth in

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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 625

GDP increased to 2.5 percent compared with only 2.1 percent in previous
years, and as economic activity increased, the unemployment rate decreased
to 4.1 percent. Thus, any decrease in the number of uninsured late in 2017
could not be attributed solely to the ACA. Further, the new administration
reduced marketing expenses and shortened the enrollment period for exchange
enrollees, which might have affected enrollment.

Two types of data are available on health insurance coverage: survey and
administrative data. Administrative data do not cover all the insurance categories
included in survey data. The advantages of administrative data, however, are
that survey data undercount Medicaid and exchange enrollment and, second,
the most recent survey data from the US Census Bureau are from June 2016,
while Centers for Medicare & Medicaid Services administrative data are for late
2017. Thus, the analyses of the ACA’s approaches for reducing the number
of uninsured compare the period 2013 to 2016 based on survey data, as well
as to 2017 based on administrative data.4

Exhibit 38.1 presents the number and percentage of insured and uninsured
in 2013 and 2016 based on the latest US Census Bureau survey data, according
to the major sources of insurance coverage for those younger than 65 years.

Overall, the ACA succeeded in reducing the number of uninsured from
41.1 million in 2013 to 27.5 million in 2016; 13.6 million gained insur-
ance. The number of uninsured as a percentage of the nonelderly population
decreased from 15.3 percent to 10.1 percent during this period. Based on
administrative data, Medicaid enrollment increased by 13 million as of 2017,
to 74 million, and the exchanges expanded to 9.1 million (2016) and 9.9
million by 2017.

The ACA used six approaches to cover the uninsured:

1. Expand Medicaid eligibility from 100 to 138 percent of the federal
poverty level (FPL).

2. Impose an employer mandate requiring employers to offer their
employees health insurance or pay a penalty.

3. Provide tax credits to small employers to incentivize them to buy
insurance for their employees.

4. Impose an individual mandate to buy insurance or pay a penalty.
5. Permit dependent children up to age 26 to be included on their

parent’s insurance.
6. Provide income-related tax credits for use on newly established ACA

insurance exchanges to those with incomes between 138 and 400
percent of the FPL.

Each of these approaches and how well they achieved their objective
is discussed.

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Health Pol icy Issues: An Economic Perspect ive626

Medicaid Eligibility Expansion

About 74 million people are enrolled in Medicaid (68 million in Medicaid
and 6 million in CHIP), or one in five Americans. The program is funded by
state and federal matching funds (Centers for Medicare & Medicaid Services
2018). The federal government and each state have different federal matching
formulas, which vary between 50 and 74 percent of the state’s cost.

The ACA expanded Medicaid eligibility from 100 percent of the FPL
up to 138 percent of the FPL (which translates to $16,643 for an individual
and $33,948 for a family of four, as of 2017). For the first time, these eligibility
standards include childless adults.

The ACA committed the federal government to pay the entire Medicaid
cost (100 percent) for each state’s expansion population (i.e., from 100 to 138
percent of the FPL) for the first three years; the percentage was decreased to
95 percent in 2017 and then to 90 percent in subsequent years. Given that
almost all of the expense is paid by the federal government, an expansion state
has little incentive to monitor how well federal dollars are spent.5

When the US Supreme Court overturned the ACA requirement that all
states expand Medicaid eligibility, only 30 states and the District of Columbia
chose to expand Medicaid eligibility. By 2017, about 13 million new adults
had enrolled in Medicaid (Kaiser Family Foundation 2017d). A recent study,
however, estimates that only about one-third of the new enrollees became
eligible as a result of Medicaid expansion. Those who had been previously

Market Segment

2013 2016

Population
(Millions

)

Percentage
of Total

Population
(Millions)

Percentage
of Total

Employment-based 161.1 59.9% 164.9 60.8%

Individual (direct
purchase)

23.7 8.8% 37.9 14.0%

Medicaid 52.0 19.3% 58.9 21.7%

Medicarea 7.5 2.8% 7.5 2.8%

Military-related
healthcare

10.8 4.0% 10.9 4.0%

Uninsured 41.1 15.3% 27.5 10.1%

Note: Numbers may not add up exactly to totals because individuals may receive coverage from
more than one source.
aThose younger than 65 may be eligible for Medicare if they have end-stage kidney disease and/or
are permanently disabled.

Source: Data from US Census Bureau (2017, table HI01).

EXHIBIT 38.1
Sources

of Health
Insurance

Coverage of
US Nonelderly
(Younger Than

65 Years), 2013
and 2016

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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 627

eligible accounted for a much larger percentage—as high as two-thirds—of
Medicaid enrollment increases in expansion states (Frean, Gruber, and Sommers
2016). Had all states chosen to expand eligibility, the decrease in the number
of uninsured would have been greater. Medicaid expansion states experienced
a much greater increase in enrollment than expected.

The ACA’s Impact on Medicaid
Increased Medicaid eligibility increased demand for medical services. However,
the supply of physicians did not similarly increase. Concerned that Medicaid’s
low physician payment rates would limit access to primary care physicians, the
ACA required the federal government to pay the additional cost of making
Medicaid fees equal to Medicare fees for primary care physicians for just two
years (covering the 2014 Congressional midterm elections). After the two years,
Medicaid fees were again determined by the states, and they have returned to
their previous lower levels, with a consequent decrease in access to physicians.

Several studies have been conducted to determine the effect of Medicaid
expansion on the patient’s health status, access to care, use of services, and
financial effects (Antonisse et al. 2018; Courtemanche et al. 2018; McMorrow
et al. 2017; Miller and Wherry 2017). A consistent finding in these studies
is that those who became newly eligible in the Medicaid expansion states felt
less stressed regarding their ability to pay for medical care, and were financially
better able to pay for additional follow-up care than those in nonexpansion
states. The researchers noted that in expansion states, increased waiting times
were reported for appointments, which delayed receipt of medical care. These
studies generally concluded that health effects have been minimal, although the
study periods have only been a few years. More time is needed to determine
whether significant changes in health status occurred compared with compa-
rable groups of uninsured people.

When the ACA expanded Medicaid eligibility, proponents expected that
those previously uninsured would have increased access to care, would receive
coordinated care, and would not have to wait many hours in an expensive
emergency department (ED) for routine medical issues. Further, having a usual
source of care would result in cost savings because Medicaid enrollees would
have fewer visits to the ED.

Contrary to these expectations, ED use increased by 40 percent in the
first 15 months after individuals enrolled in Medicaid. In a study of Oregon’s
Medicaid expansion, which relied on a lottery to randomly select a limited
number of new Medicaid enrollees, researchers found that the large increase
in ED use by these new enrollees resulted in a greater-than-projected cost
increase in the state. In a follow-up study, the authors “found no evidence
that the increase in ED use due to Medicaid coverage was driven by pent-up
demand that dissipated over time; the effect on ED use appears to persist over
the first 2 years of coverage” (Finkelstein et al. 2016, 1506).

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Health Pol icy Issues: An Economic Perspect ive628

Interestingly, the authors found that visits to a physician’s office were
not a substitute for going to the ED. For these patients, ED use increased
along with physician office visits. Perhaps the physician sent the patient to the
ED where more could be done for the patient.

The Oregon Medicaid expansion study is also significant for estimating
the health effects in those who enrolled in Medicaid and in those in the lottery
who remained uninsured. Those newly enrolled in Medicaid increased their
use of medical services; in addition to increased visits to the ED, the number
of outpatient visits increased, as did hospitalizations and use of prescription
drugs. However, the researchers did not find improvements in three measures
of physical health—blood pressure, cholesterol levels, or blood sugar (for
diabetes control)—relative to the control group. New enrollees, however, did
report a higher level of self-reported health. Similarly, newly enrolled individu-
als in Medicaid reported having less medical debt, feelings of greater financial
security, and lower rates of depression (Baicker et al. 2013).

The findings of the Oregon Medicaid study were disappointing to propo-
nents of Medicaid expansion. Medicaid coverage often results in uncoordinated
care that is inefficient; it is less valuable than private insurance. When the ACA’s
higher Medicaid fees for two years were reduced, new Medicaid patients once
again experienced higher wait times for an appointment (Candon et al. 2018).
Many physicians refuse to accept Medicaid’s low fees, access to primary care and
specialty physicians is limited, and Medicaid managed care firms rely on more
restrictive provider networks than those available to privately insured people.

ACA-Mandated Benefits and Regulations

The ACA imposed strict rules regarding the purchase and sale of health insur-
ance. These requirements on purchasers and insurers affected the insured, the
uninsured, health insurers, and the performance of the health insurance markets,
which are large employers, small employers, and the individual health insurance
market. The following is a brief description of these ACA rules.

Ten Essential Health Benefits
ACA requires insurers to cover a broad range of mandated “essential” benefits,
the scope of which is greater and more comprehensive than typical health
insurance policies previously sold, particularly in the individual market. Some
of the comprehensive benefits are pregnancy, maternity and newborn care,
women’s contraceptives (a required benefit even for single men and women
past child-bearing age), preventive and wellness services with no copayment,
chronic disease management, and pediatric dental and vision services.

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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 629

One problem with requiring the same comprehensive benefits for every-
one is that premiums are higher for those who prefer less comprehensive
coverage.

Four Types of Health Plans
Enrollees must choose from among only four types of ACA health plans.
All four types cover the same comprehensive (“essential”) benefits, but they
differ according to their premiums, deductibles, cost sharing, and maximum
out-of-pocket costs. For each type of plan, the insurer is expected to pay, on
average, a maximum percentage of the insured’s medical costs, referred to as
the “actuarial value” of the plan. A Bronze plan covers, on average, 60 percent
of the insured’s medical costs, a Silver plan pays 70 percent, a Gold plan pays
80 percent, and a Platinum plan pays 90 percent.

Removal of the Preexisting Condition Requirement
Preexisting condition exclusions have long been a concern of those with a
health condition, such as heart disease or cancer. Many states developed high-
risk pools that sold subsidized insurance to those who were rejected by health
insurers for having a preexisting condition. These risk pools typically charged
premiums that were about 150 percent of health insurers’ premiums for those
without a preexisting condition. When the ACA prohibited insurers from
denying coverage because of a person’s preexisting condition, states that had
high-risk pools closed them.

Medical Loss Ratios
The medical loss ratio (MLR) is calculated by dividing the medical claims
expense by the total premium. The ACA required health plans to have an MLR
of no less than 80 percent (spending 80 percent of the premium on medical
expenses) in the individual and small group markets and a minimum MLR of
85 percent in the large group market. Inability to meet the MLR required the
insurer to refund the difference to enrollees. For example, if an insurer has an
MLR of 70 percent in the individual market, it is required to refund the differ-
ence between 70 and 80 percent to enrollees (Kaiser Family Foundation 2012).

The remaining portion of the premium is considered administrative costs,
which includes the insurance company’s marketing costs, costs of establishing
a provider network, administrative costs of handling insurance claims, costs of
monitoring provider fraud and abuse, and profit (see exhibit 7.2). Differences
in premiums and annual premium increases are primarily due to changes in the
insured group’s claims experience.

The following ACA requirements were particularly important in their
effect on enrollment and premium increases in the individual insurance market.

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Health Pol icy Issues: An Economic Perspect ive630

Modified Community Rating
The ACA established rules governing how health insurers are permitted to
price their health plans. For each type of health plan, insurers are permitted
to vary their premiums by family status, county within a state, smoking status,
and age. On average, the medical costs of older people, not yet eligible for
Medicare, are higher than those for people in their 20s by a ratio of 5 or 6 to
1. The ACA, however, requires that differences in premiums according to age
be no greater than 3:1, much less than the actuarial cost differences. (This
age-rating rule was supported by AARP because it would lower premiums for
older enrollees.)

Regulation of premiums by age, rather than by actuarial cost differences
(as would occur in an experience-rated market), fails to consider the enrollment
consequences of such a “tax” on the young.

Gender Rating
The ACA prohibits using gender rating for individuals (and employers with
fewer than 100 employees). Women, on average, use more healthcare services
than men of the same age. They visit the physician more often and take more
prescription drugs. Because of their higher healthcare costs, a young woman’s
premium in the individual health insurance market would be 50 percent greater
than that for a young man if gender rating were used.

Similar to age rating, gender rating replaces experience-rated premiums
(based on cost differences) and relies on value judgments to determine pre-
miums; therefore, enrollment decisions will differ for the two approaches for
determining premiums.

Health Insurance Tax
The ACA imposed a health insurance provider fee on insurers. Any tax imposed
on insurers is shifted to those buying insurance and will also affect their enroll-
ment decisions. Imposing the tax on insurers is merely a way to make it less
visible to enrollees. (See chapter 23, “Who Bears the Cost of Employee Health
Benefits?”) Large employers and their employees are unaffected by the tax
because large firms self-insure and, therefore, are not subject to the tax. The
new tax is not a specified fee, but is determined annually by the Treasury
department to raise a certain amount of revenue. Those most affected by the
tax are small employers and individuals buying insurance.

ACA’s Employer Mandate

The ACA employer mandate required that employers with 50 or more employ-
ees who worked full-time (defined as at least 30 hours a week) must offer to

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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 631

buy their employees single coverage for an affordable and ACA-qualified health
plan. An affordable plan was defined as one in which the employee did not have
to spend more than 2.5 to 9.66 percent of her wages (depending on income)
on the premium. Qualified ACA health plans consisted of four metal plans
(Bronze, Silver, Gold, and Platinum). An employer failing to offer employees
an affordable and qualified plan had to pay a $2,000 tax per employee.

The uninsured employee did not have to accept the employer’s offer. If
the employee rejected the employer’s offer, the employer was no longer subject
to the employer mandate tax.

Many uninsured employees believed the value of the minimum-qualified
Bronze plan, with its large out-of-pocket payments, was not worth even the
reduced amount they would have had to pay for it. The Bronze plan included
a $6,000 deductible and cost-sharing expenses, and it paid about 60 percent
of medical costs. In 2017, the average annual premium for a Bronze plan was
$3,200, for which the employee was liable for only 2.5 to 9.66 percent of his
income. If the employee wanted to buy a separate health plan for his family,
in addition to having to pay the full $3,200 annual premium (plus child cost),
the plan also included a $6,000 deductible. Many uninsured, low-income
employees declined their employer’s offer because they would have had to pay
the additional premium of $3,200 plus two deductibles ($12,000) before they
could receive any insurance benefits.

Another significant problem with the ACA employer mandate was that
by declining the employer’s offer of single coverage, the low-wage employee
and family members became ineligible for premium tax credit and cost-sharing
subsidies offered on the health insurance exchanges. Further, once the employee
rejected the employer’s offer, he became subject to the ACA’s individual man-
date penalty for not having health insurance.

Several studies concluded that the ACA’s employer mandate was inef-
fective in decreasing the number of uninsured employees (Duggan, Goda, and
Jackson 2017; Frean, Gruber, and Sommers 2016). In addition, it has been
estimated that 3.7 million employees have been adversely affected by these
ACA rules (Garfield et al. 2017, figure 1).

Small-Business Premium Tax Credit

The ACA exempted employers with fewer than 50 employees from the employer
mandate.6 To encourage these employers to buy insurance for their employees, the
ACA offered firms with 25 or fewer employees (with an average income of $50,000
or less) a tax credit good for two years, equal to 50 percent of the premium. The
employer would have had to pay the other half of the employees’ health insur-
ance premiums and buy the insurance through an ACA small business exchange.

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Health Pol icy Issues: An Economic Perspect ive632

The premium tax credit was apparently an insufficient incentive for
small employers to buy insurance for their employees. The administrative and
financial burden imposed on them was too great. The ACA small business
premium tax credit failed to decrease the number of uninsured employees by
any appreciable amount.

ACA’s Individual Mandate

The individual mandate was intended to achieve two goals: first, to eliminate
the “free rider” problem. Many uninsured are financially able to purchase a
high-deductible health insurance plan but choose not to do so. If someone
can afford insurance, but is uninsured and suffers a large medical expense,
that person will still be cared for. The community will subsidize the medical
treatment. That person is shifting the risk—hence, the cost of catastrophic
coverage—to the rest of the community.

Second, an individual mandate was to ensure that the individual market
risk pool would be larger and would include a greater number of healthy adults
to offset the higher medical costs of those who are older and sicker.

To achieve universal coverage, the government must ensure that the
two groups without health insurance—those who can afford insurance but
refuse to purchase it and those who cannot afford insurance—gain coverage.
The intent of the individual mandate was to require everyone above a mini-
mum level of income to have health insurance, while the remainder (except
for undocumented individuals) became eligible for Medicaid.

Frean, Gruber, and Sommers (2016) concluded that the individual man-
date did not appear to increase insurance coverage. The authors, however, quali-
fied their conclusion by stating that the tax penalty might have encouraged some
uninsured individuals to sign up for Medicaid, even if they were previously eligible
but had not done so. (The Congressional Budget Office confirms that if the
individual mandate were repealed, many individuals who enrolled in Medicaid to
avoid paying the tax penalty would disenroll) (Kaiser Family Foundation 2017a).

Young Adult Coverage Expansion
Starting in 2010, the ACA permitted dependent children, up to age 26, to be
included on their parents’ employer-based health insurance. About 2 million
young adults, whose parents generally had higher incomes, took advantage of
this provision (McMorrow and Polsky 2016). It is unknown whether these
young adults previously had insurance.

Goda, Farid, and Bhattacharya (2016) estimated that all employees,
regardless of whether they had children up to age 26, subsidized those with
dependent children in the form of about $1,200 in reduced wages.

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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 633

Health Insurance Exchanges

A New Insurance Marketplace for Individuals
The health insurance exchanges were designed to become marketplaces for
individuals buying health insurance. In 2016, the individual market consisted of
about 38 million people and represented about 14 percent of the total number
of insured individuals younger than 65 years. Those purchasing insurance in the
individual market tend to be self-employed, students, retirees not yet eligible
for Medicare, unemployed, individuals between jobs, and individuals who are
employed but have not been offered insurance through their employers. The
individual market, although small compared with the numbers enrolled in
employer-based insurance, Medicare, and Medicaid, is a major policy concern.

Before the ACA, individuals purchased health insurance through a broker,
directly from a health plan, or on the internet. They were able to choose from
among a variety of health plans at different premiums. Insurers used an individual’s
“risk-rating” to price his premiums, using the person’s age group, gender, and medi-
cal benefits desired. Those with a preexisting health condition were often unable
to buy insurance; they had to use state high-risk pools when they were available.

Further, premiums in the individual insurance market were higher rela-
tive to medical claims (a lower MLR) because enrolling individuals involves
higher marketing and enrollment costs than those for large employer groups.
MLRs in the individual market were generally between 60 and 70 percent.

The ACA’s approach for decreasing the number of uninsured individuals
whose incomes were too high to be eligible for Medicaid was to replace the
private individual health insurance markets with federal and state health insur-
ance exchanges based on ACA rules. Individuals, regardless of their medical
conditions, can buy subsidized insurance on the exchanges. The exchanges offer
a choice of ACA plans from competing insurers for citizens and legal residents
whose incomes exceed the expanded Medicaid eligibility levels (138 to 400
percent of the FPL). Also eligible for federal subsidies are those who are not
offered ACA-compliant insurance through their employers.7

Subsidies Available on the Health Insurance Exchanges
Two types of income-related subsidies are available on the exchanges. The size
of each subsidy declines at higher income levels.

A premium tax credit lowers the monthly premium for those with
incomes between 138 and 400 percent of the FPL; according to the ACA
provisions, enrollees do not have to pay more than 2.04 percent to 9.69 per-
cent of their income. A cost-sharing subsidy reduces the out-of-pocket liability
(deductibles and copays) for those with incomes between 138 and 250 percent
of the FPL. Without these cost-sharing subsidies, many low-income exchange
enrollees would have difficulty paying their out-of-pocket medical expenses.

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Health Pol icy Issues: An Economic Perspect ive634

Both types of subsidies are based on the premium for the second-lowest-cost
Silver (“benchmark”) plan offered in the exchange.

Exhibit 38.2 shows the premium tax credits and cost-sharing subsidies
available for a single person, aged 40 years, according to different income levels.
Exhibit 38.3 presents the same information for a family of four. These exhibits
illustrate the approximate financial burden of the premium and deductible on
individuals and families at different income levels in 2017. In addition to paying
the premium and deductible, enrollees are responsible for copays to provid-
ers. A Silver plan covers 70 percent of a person’s expected medical expenses
(deductible and copays). Thus, in 2017, the maximum liability for an enrollee
with a Silver plan was $7,150 (excluding the premium); for a family of four,
the maximum liability was $14,300.

After receiving a premium tax credit and a deductible cost-sharing sub-
sidy, a single individual with an income of $30,150 (250 percent of the FPL)
would still have to pay $5,342 or 17.7 percent of her income before receiving
any insurance benefits. The financial burden increases as the enrollee’s income
rises. An individual with an income of $42,210 (350 percent of the FPL), who
is ineligible for the cost-sharing subsidy, would have had to pay $7,638, or
18.1 percent of their income, before receiving any insurance benefits in 2017.

After receiving a premium tax credit and a deductible cost-sharing sub-
sidy, a family of four with an income of $61,500 (250 percent of the FPL)
would have to spend $10,808—or 17.6 percent of their income—out of pocket
before receiving any insurance benefits. Further, a family of four, with an income
of $86,100 (350 percent of the FPL) (ineligible for a cost-sharing subsidy),
would have to pay $15,480 (18 percent of their income) out of pocket before
receiving any insurance benefits.

Those with incomes below 250 percent of the FPL receive the largest
subsidies and spend the smallest portion of their limited income on health insur-
ance. Enrollees with incomes above 250 percent of the FPL must spend almost
20 percent of their income before their insurance covers any medical expenses.
These out-of-pocket payments for premiums and deductibles represent a signifi-
cant portion of a person’s or a family’s income. Someone faced with such a large
expenditure for unknown medical risks must weigh the value of being insured
against other necessary household expenses. It is not surprising then that many
people with incomes greater than 250 percent of the FPL, who must spend nearly
20 percent of their income on insurance, have decided to remain uninsured.

Adverse Selection in the Health Insurance Exchanges

In 2010, when the ACA was enacted, the Congressional Budget Office pro-
jected that the health insurance exchanges, which became effective in 2014,
would enroll about 23 million people by 2017 (Congressional Budget Office

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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 635

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Health Pol icy Issues: An Economic Perspect ive636

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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 637

2010, table 4). Many health insurers viewed the exchanges as a new business
opportunity and eagerly entered the exchange markets.

The Failure of the Individual Mandate to Expand the Risk Pool
The elimination of the preexisting medical condition requirement was expected
to increase the number of high-cost enrollees. The individual mandate, however,
was expected to expand the risk pool to include young and healthy individu-
als whose lower medical costs would offset the higher medical costs of other
enrollees. The ACA anticipated that the higher costs of those with a preexisting
condition would be small when spread over a large number of healthy enrollees.

The individual mandate, however, failed to expand the risk pool for
three important reasons. First, the penalty for not buying insurance was too
low. In 2014, the penalty was the greater of $95 a year for an individual or 1
percent of income. By 2016 (and into the future), the tax penalty increased
modestly to $695 (or 2.5 percent of taxable income), which is only $1,250 for
a person with an annual income of $50,000. Someone buying the lowest-cost
ACA-qualified Bronze plan in 2017 would have had to spend $3,200 for the
premium plus $6,000 for the deductible before she would receive any insurance
benefits. Many healthy individuals concluded that the value of being insured
did not exceed the penalty for being insured.

Second, the Internal Revenue Service failed to enforce the already low
penalty for being uninsured. In 2015, 23 million people lacked health insurance;
6.5 million tax filers paid the individual mandate tax, 12.7 million uninsured
claimed an exemption from the mandate on their federal income tax forms
(Norris 2018), and 4.3 million did not check the box indicating whether they
had insurance or paid the penalty tax. The federal government processed these
tax forms as usual, and the IRS did not follow up with those who had not
checked the box (Internal Revenue Service 2017).

Third, the size of the exchange risk pool decreased as a result of an admin-
istrative ruling to reduce opposition to the ACA. When the ACA exchanges
started, millions of individuals who previously purchased individual health insur-
ance received cancellation notices from their insurers because their coverage
did not meet the ACA’s mandated benefits. To continue being insured, they
would have had to buy more expensive insurance on the new exchanges. Many
people did not want to change their health plans, and their anger at no longer
being able to keep their health plan and their physician, as President Obama
promised, created a great deal of adverse publicity for the ACA. In response,
President Obama “grandfathered” these health plans, with the stipulation
that insurers could not reduce the plans’ benefits. About 2 million individual
enrollees preferred to remain in their grandfathered plans than switch to the
new ACA plans (American Academy of Actuaries 2017, 8).

The inability of the exchanges to enroll a greater number of young
and healthy adults resulted in an older and sicker risk pool than insurers had

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Health Pol icy Issues: An Economic Perspect ive638

estimated. Adverse selection occurred; the risk pool was more heavily weighted
toward higher-cost enrollees. Insurers suffered large losses, many exited the
exchanges, and those remaining sharply increased their premiums.8 The ACA
exchanges failed to achieve the projected decrease in the number of uninsured.
In 2017, 9.9 million people enrolled in the exchanges, fewer than the projected
23 million (Centers for Medicare & Medicaid Services 2017).

The Use of Cross Subsidies in the Health Insurance Exchanges
The ACA rules provided a disincentive for the young and healthy to enroll in
the exchanges. The ACA relied on cross subsidies among the insured, increasing
premiums on young enrollees, instead of using federal subsidies to lower the
premiums of higher-cost exchange enrollees. The purpose of using redistribu-
tion among enrollees was to lower the federal cost of the ACA.

The ACA exchanges require that a form of community rating be used to
narrow the differences in premiums between young and older adults. Age-rated
premiums could not be greater than 3:1 for different age groups, even though the
medical costs incurred by older adults are five to six times greater than those incurred
by adults in their 20s and 30s.The increasing divergence between the premiums and
actuarial cost for young adults was an important reason for many to remain uninsured.

Similarly, gender rating was prohibited in determining an enrollee’s
premium. Because women have higher medical costs on average than men, the
rule resulted in increased premiums for men to subsidize women.

Insurers are required to include more comprehensive benefits in all
insurance plans. These “essential benefits” exceeded what many were willing
to purchase. For example, older men and women and young single men are
required to buy coverage for maternity care.

Finally, the ACA imposed a new health insurance tax (HIT) on insurers,
which, when shifted to enrollees, serves as a further disincentive for those not
receiving premium tax credits to remain uninsured (Burton 2013).

The overall effect of these rules, which increase premiums on all or some
segments of the individual market, is higher premiums and a lower demand for
insurance. Many individuals, even those eligible for exchange subsidies (7.9
million), preferred to be subject to the penalty for being uninsured rather than
buy insurance whose cost exceeded its perceived value (Kaiser Family Founda-
tion and Health Research & Educational Trust 2016).

Consequences of the ACA Legislation on the Health
Insurance Exchanges

Health Insurers
The individual mandate’s low penalty, IRS’s lack of enforcement of the penalty,
retention of grandfathered plans for 2 million people, ACA rules that increased

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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 639

premiums, and imposition of cross subsidies on younger adults reduced much
of the demand for insurance and decreased the size of the risk pool. Further,
about 7 million people preferred to purchase ACA-compliant individual insur-
ance outside the exchanges. Consequently, the exchange risk pools became
more heavily weighted with costlier enrollees. Premiums, based on insurers’
expectations of a larger risk pool with a lower average risk level, failed to cover
the medical costs of enrollees.

Insurers incurred large financial losses, and many exited the exchanges.
Competition among insurers decreased as many geographic areas had few
remaining insurers. Many exchanges were left with only one insurer. Sharply
increased premiums after 2014 reflected insurers’ realization that the risk pools
would be more costly (Cox et al. 2016).

As fewer healthy people enrolled and the risk pool consisted of a greater
proportion of higher-risk enrollees, insurers complained that some enrollees
bought health insurance and then stopped paying premiums once they received
treatment. This behavior exacerbated adverse selection on the exchanges and
contributed to higher medical costs and premiums.

Exchange Enrollees
The consequences of sharply higher premiums differ for the three income
groups enrolled on the exchanges. Those with incomes at or below 250 percent
of the FPL and those with incomes up to 400 percent of the FPL (groups 1
and 2) are not affected by rising premiums because the premium tax credit is
based on income; enrollees in these groups contribute no more than 2.04 to
9.5 percent of their income for a benchmark plan (Kaiser Family Foundation
2017b).

However, the insurer offering the benchmark (second-lowest cost) Sil-
ver plan often changed each year. Thus, to be unaffected by rising premiums,
the individual had to keep switching insurers (and their provider network and
physician) to enroll in the benchmark plan. Doing so is troubling for many
people, who may be in a higher-risk group and receive care for chronic condi-
tions. If they stayed with their previous year’s plan, they would have had to
pay a higher premium.

Although average actual premiums increased by 21 percent in 2017,
those with incomes of less than 400 percent of the FPL were able to pay the
same after-tax credit premium that they paid in 2016, as long as they enrolled
in the benchmark plan.

The financial burden of sharply increasing premiums has been especially
difficult for those with incomes above 400 percent of the FPL. In some com-
munities, premium increases have exceeded 100 percent. For many middle-class
individuals and families who rely on the individual insurance market, the high
premiums, together with large deductibles and copayments, have become a
financial hardship that has made health insurance unaffordable. This middle-class

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Health Pol icy Issues: An Economic Perspect ive640

group faces the choice of paying sharply higher premiums and deductibles
(which consume about 20 percent of their income) or being uninsured (Pear
2016). The high cost of insurance was the reason given by 45 percent of unin-
sured adults for being uninsured (Kaiser Family Foundation 2017c).

In 2017, the ACA exchanges enrolled about 9.9 million; 70 percent
were in group 1, with incomes up to 250 percent of the FPL. These enrollees
received both premium tax credits and cost-sharing subsidies. They benefit the
most from the ACA exchanges.

Proposed Changes to the ACA to Further Reduce the
Uninsured

Decreases in the number of uninsured resulted from ACA subsidies in the
health insurance exchanges to those with low incomes and from Medicaid
expansions. It is unlikely, however, that the health insurance exchanges will be
able to further reduce the 28 million uninsured. Several approaches are avail-
able that can expand coverage by lowering premiums and reducing adverse
selection in the exchanges. Implementing any of these approaches requires
legislative changes to the ACA.

Increasing the individual mandate penalty would incentivize more unin-
sured to buy insurance. However, public opinion polls show that the penalty
was very unpopular, and it was repealed by the Republican-controlled Congress
as part of a tax bill in 2017.

To reduce the cost of insurance for young adults and increase their enroll-
ment, Congress should replace the exchange cross subsidies (requiring young
adults to subsidize older adults [age rating]) with refundable tax credits, which
would be based on age and income. Older adults would still receive a subsidy, but
it would come from the federal government (taxpayers), not from young adults.
(The same approach should be used to eliminate the gender rating.) Insurers would
then base their premiums on the expected medical costs of different age groups.

The HIT is another example of redistribution. All exchange enrollees
pay the tax, and the government uses the proceeds to subsidize those with
low incomes. Similar to age and gender ratings, removing the tax would lower
premiums; the subsidies could then be funded on a more equitable basis.

ACA-qualified health plans include the same “essential” benefits, but
vary according to premiums and the percentage of out-of-pocket expenses.
Exchange enrollees differ in many ways, among them being the amount they
are willing to pay for a plan and the degree of financial risk they are willing to
bear. Decreasing the number of “essential” benefits would lower premiums
and provide more choices. The type of health insurance demanded would then
reflect enrollees’ preferences.9

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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 641

The ACA regulates health insurers’ MLR. If the intent of the ACA
was to force insurers to reduce their administrative costs, then establishing
the MLR as a percentage of premiums is unnecessary. Insurers are unlikely to
waste administrative dollars if their goal is to maximize profits. They would
only increase administrative costs, such as fraud detection or marketing, up
to the point at which the additional revenue gained equals the additional cost
incurred (i.e., marginal revenue equals marginal cost).

If the purpose of the MLR was to limit an insurer’s profit, the best way
to achieve this is to ensure that insurers compete. The unintended consequence
of using the MLR to limit an insurer’s profit is that it provides insurers with
an incentive to raise their premiums. An insurer can only increase the absolute
size of its profit by applying the MLR to a higher premium. If insurers are
less forceful in curbing providers’ prices, enrollees’ medical costs increase and,
consequently, premiums, along with insurers’ profit. Most exchange enrollees
are unaffected by higher premiums because their premium payments cannot
exceed a certain percentage of their income.

Providing care for those with a preexisting condition is a necessary
requirement for health insurance reform. The issue is how that coverage should
be provided. Allowing those with a preexisting condition to buy insurance,
combined with a weak individual mandate, causes adverse selection. The risk
pools are more heavily weighted with older and sicker individuals than expected,
and the higher premiums discourage healthy adults.

Prohibiting exclusion of preexisting conditions has not been a panacea
for those with serious medical conditions. A recent study found that the ACA’s
ban on discriminating against those with preexisting conditions has led insur-
ers to design their provider networks and drug formularies so that individuals
with serious medical problems do not receive high-quality care. Specifically,
exchange insurers have narrowed their provider networks, excluding costly can-
cer centers and teaching hospitals, and limiting access to costly drugs (Geruso,
Layton, and Prinz 2016).

Alternative approaches would be more favorable to those with a preex-
isting condition and would also benefit individuals currently required to cross
subsidize them. Allowing the exchange risk pools to reflect the actuarial costs
of different age groups would have two positive effects. More young adults
would become insured because their premiums would be lower. Second, for
older adults, subsidies should be paid by the government. Moving toward
experience rating with subsidies based on income and age, insurers would be
less concerned with adverse selection. Subsidies and premiums for older and
higher-risk groups (including those with preexisting conditions) would reflect
their higher medical costs.

Alternatively, a separate, federally funded, high-risk pool could be
established to subsidize those with a preexisting condition. The ACA initially

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Health Pol icy Issues: An Economic Perspect ive642

established such a risk pool; it was closed when the exchanges opened. The
advantages of a separately funded high-risk pool are twofold. First, premiums
in the individual market would be reduced, thereby encouraging more healthy
individuals to buy insurance. Second, those in the federally funded risk pool,
who require more specialized medical services, would have improved access
to cancer centers and teaching hospitals; they also would have a greater choice
of physicians (and specialists in particular).

The federal government also could establish a reinsurance program to
protect health insurers from the very high cost of covering some patients. A
federal reinsurance program was established for Medicare Part D insurers to
protect them from the very high drug expenses of some patients (Frank and
Zeckhauser 2018). Like the other proposals discussed, a reinsurance program
for the exchanges would reduce premiums and ensure high-quality care for
costly patients, because those costs would be shifted from insurers to the
government.10

Summary

Prior to implementation of the ACA, about 41.1 million nonelderly individu-
als (or 15 percent of the nonelderly population) were uninsured. The major
accomplishment of the ACA has been the 13.6 million decrease in the number
of uninsured, to 27.5 million (10 percent of the population) in 2016 (exhibit
38.1). This happened because of Medicaid eligibility expansion (13 million) and
income-related subsidies to those in the nongroup health insurance exchanges
(9.9 million) (Kaiser Family Foundation 2017d). The other ACA approaches
to reduce the number of uninsured, namely the employer mandate, the small
business tax credit, and the individual mandate, were ineffective in expanding
coverage.

The employer mandate, backed by a significant penalty, failed to increase
employees’ coverage. Many employees chose not to accept their employer’s
coverage offer because their premium contribution and the deductible in the
ACA-qualified plan exceeded their perceived benefits. Employees would also
have had to buy separate insurance for their families and pay the full premium,
plus bear an additional deductible. Once the employee rejected the employer’s
insurance offer, he could not purchase subsidized health insurance on the
exchanges.

The temporary small-business tax credits were an insufficient incentive
for many small businesses to offer health insurance to their employees. Low-
income employees, whether in large or small firms, still need affordable coverage.

The ACA’s removal of the prohibition against insuring people with a
preexisting condition was beneficial to those with health problems. They could

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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 643

no longer be denied coverage in the individual insurance market. To prevent
adverse selection by having a risk pool consisting of many high-risk individuals,
the ACA included an individual mandate to require large numbers of healthy
young adults to buy insurance. However, the penalty was too weak to be effec-
tive, exemptions from the penalty were readily available, and the IRS failed to
enforce the penalty. The greater proportion of high-cost patients in the risk
pool led to sharply increased exchange premiums.

After suffering large financial losses, insurers have exited the exchanges,
thereby limiting competition and patient choice. Insurers that remained sharply
increased their premiums to reflect the higher costs of their enrollees. Many
exchange-eligible individuals (particularly young, healthy adults) decided that
they preferred being uninsured to paying high premiums (greater than their
actuarial value) and large deductibles, as well as being required to use narrow
networks, for comprehensive insurance they didn’t believe they needed.

Exchange enrollees, particularly those with incomes at or below 250
percent of the FPL, have benefited most from the premium tax credits and
cost-sharing subsidies. They have not been affected by double-digit premium
increases, as long as they switch to the new benchmark Silver plan each year.
The exchanges will continue to provide them with affordable health insurance.
However, many with serious medical conditions are limited in their choice
of providers; having to switch to the lower-cost benchmark plan and change
providers causes great anxiety.

Shortcomings of the ACA make it unlikely that further decreases in the
28 million uninsured will occur without significant legislative changes. Many
middle-class families buying individual coverage face a financial hardship from
sharply rising premiums and high deductibles.

Few of the ACA’s cost-control measures have been effective in reducing
costs. They have either failed to produce significant savings (accountable care
organizations) or have not been implemented (a 40 percent tax on “Cadillac”
plans exceeding $27,500 for family coverage and the Independent Payment
Advisory Board).

The ACA is likely to be seen as an extension of Medicaid, serving those
with incomes below 250 percent of the FPL and those who have preexist-
ing medical conditions. The exchange insurers are also becoming similar to
Medicaid HMOs, limiting patient access by using narrow provider networks.

Millions of middle-class individuals and families, however, whose incomes
are too high for premium tax credits, those buying insurance in the off-market,
and the uninsured (45 percent of whom state that cost is a reason for being
uninsured) find the high premiums unaffordable (Goddeeris, McMorrow, and
Kenney 2017). Premiums for 2017 increased, on average, by 21 percent; some
exchanges, such as in Phoenix, reported increases as high as 145 percent (Cox
et al. 2016).11 These individuals are experiencing great anxiety and financial

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Health Pol icy Issues: An Economic Perspect ive644

hardship, and many consider reducing their working hours and income to qualify
for subsidies. Revisions to the ACA must address the economic insecurity of these
middle-class individuals and families, which will require a bipartisan consensus.

Discussion Questions

1. What were the ACA’s approaches for reducing the number of
uninsured?

2. What change did the ACA institute that was of major importance in the
individual market that any replacement plan would likely maintain in
one form or other?

3. How effective was the individual mandate in expanding the exchange
risk pools?

4. Why did adverse selection occur in the health insurance exchanges?
5. How did health insurers respond to adverse selection?
6. What are alternative approaches for subsidizing health insurance for

those with a preexisting condition?

Notes

1. The ACA required that all health plans be ACA compliant, which
made previous health plans, particularly in the individual market,
noncompliant with the law. A public outburst occurred as many millions
of individuals were shocked to find that they could not keep their health
plan as promised. They were forced to buy new, more costly health
plans on the ACA exchanges. PolitiFact, a nonpartisan organization,
has called President Obama’s “If you like your healthcare plan, you can
keep it,” the Lie of the Year for 2013 (National Public Radio 2013).

2. Those buying insurance on the exchanges were shocked and angered
when they realized that not only could they not keep their health plan
but they also could not keep their physician. To control higher-than-
expected medical costs, insurers narrowed their provider networks,
requiring enrollees to use network physicians and hospitals. Further,
the benchmark Silver plan kept changing as insurers entered and exited
the market. To avoid higher premiums, enrollees had to keep switching
insurers, which also included changing their provider networks,
including their physicians.

3. The Obama administration claimed that it would “bend the cost
curve.” Instead, the ACA increased the rate of growth of medical
expenditures. In the years before the ACA, there was a slowdown in

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Chapter 38: The Affordable Care Act: Did I t Achieve I ts Goals? 645

the annual percentage increase in health expenditures. The slowdown
was generally attributed to the recession and the growth of high-
deductible health plans. The ACA’s expanded coverage resulted in an
increase in use of services and higher prices, both of which increased per
capita and total healthcare spending (Weiner, Marks, and Pauly 2017).
Health expenditures increased from 17.2 percent of the gross domestic
product in 2013 to 17.9 percent in 2016. On a per capita basis, health
expenditures, adjusted for inflation, increased from 1.7 percent annually
in the six-year period before the ACA was enacted to 3.2 percent
annually for the three-year period from 2014 to 2016. Premiums in the
highly volatile nongroup market increased, on average, 8 percent in 2016
and 21 percent in 2017. Some cities experienced very high premium
increases; in Phoenix, they rose 145 percent (Cox et al. 2016).

4. Enrollment data for the health insurance exchanges and for Medicaid
expansion differ based on their data collection methods and time
periods used. Some sources use a broad definition of the individual
marketplace, such as “nongroup,” while others use a narrower
definition, such as “exchange enrollment.” Enrollment estimates may
be based on administrative data or surveys, which vary according to the
methods used, such as personal or telephone interviews, sample sizes,
and geographic area (e.g., state, county). Data for exhibit 38.1 are based
on the US Census Bureau’s Current Population Survey Annual Social
and Economic Supplement because this survey is the primary source of
annual health insurance information in the United States. Administrative
enrollment data vary according to time of year; for example, 10.8
million enrolled in an exchange plan in 2016, but by December 2016,
enrollment was only 9.1 million. Similarly, 12.2 million selected an
exchange plan in January or February 2017, but as of June 2017, only
9.9 million had actually paid their first premium (Centers for Medicare
& Medicaid Services 2017). The more accurate definition of exchange
enrollment is the number paying their premiums.

5. Archambault (2017) stated, “When California first expanded ObamaCare,
the state predicted enrollment would max out at 910,000 able-bodied
adults. As of July 2017, expansion enrollment sat at 3.8 million. . . .
California initially predicted that its ObamaCare expansion would cost
roughly $11.6 billion in the first three fiscal years of the program. The
actual cost during that time? An astounding $43.7 billion.”

6. Mulligan (2017) estimated that designating a large firm by the number
of full-time employees affects hiring decisions. To be exempt from
the employer mandate tax, many small firms reduced the number
of employees to below 50. This change resulted in the loss of
approximately 250,000 employees.

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Health Pol icy Issues: An Economic Perspect ive646

7. In states that have not expanded Medicaid eligibility, the premium
tax credits are for those with incomes between 100 and 400 percent
of the FPL. About 2.5 million people in states that did not expand
Medicaid eligibility would otherwise have fallen into a “coverage gap,”
having incomes between 100 and 138 percent of the FPL (Garfield and
Damico 2017).

8. The ACA had already caused adverse selection in “child-only” health
insurance policies. An ACA rule, which took effect in 2010, prohibited
insurers from excluding children younger than 19 years who were
diagnosed with a preexisting condition. Many parents purchased child-
only plans because their small employers’ health insurance policies did
not cover children. Concerned that they would experience adverse
selection (and the associated high costs) by enrolling large numbers of
children with preexisting conditions, many insurers exited the market,
and others stopped selling child-only policies. Parents who previously
had enrolled their children faced much higher premiums and many
disenrolled, while other parents were unable to buy child-only plans
(Keith, Lucia, and Corlette 2012).

9. Allowing greater choice of health plans that differ in their benefits is
similar to the introduction of Medicare Advantage (MA) plans. Initially,
Medicare permitted MA enrollees to switch to traditional Medicare with
30 days’ notice. Adverse selection occurred in traditional Medicare. When
a person required a great deal of medical treatment, he would leave the
MA plan and enroll in traditional Medicare, which permitted a greater
choice of specialists and hospitals. Adverse selection was reduced when
the 30-day period was lengthened to an annual open-enrollment period.

10. Medicare appears to have solved the problem of adverse selection
in Medicare Part B (physician and outpatient services) and Part D
(outpatient prescription drugs), which are both voluntary. Concerned
that the aged would wait until they were sick to enroll in these
programs, Medicare charges a higher premium the longer a person
delays enrollment.

11. If it had not been for deductibles rising much faster than premiums in
2016, it has been suggested that premiums would have risen even more
(Kaiser Family Foundation and Health Research & Educational Trust
2016).

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CHAPTER

6REALIZING THE TRIPLE AIM

Learning Objectives

After reading this chapter, students will be able to

• explain what the Triple Aim is,
• discuss several strategies for realizing the Triple Aim,
• describe several strategies for improving the experience of care for

patients,
• propose several strategies for improving population health, and
• identify several ways to reduce cost per service.

Key Concepts

• The Triple Aim seeks to improve the experience of care for patients,
improve population health, and reduce per capita costs.

• Multiple public and private trials of payment innovations are underway.
• Healthcare spending depends on price and volume.
• Private prices are high in the United States.
• The full effects of provider and insurer innovations will not be known

for years.

6.1 What Is the Triple Aim?

In 2008 a team from the Institute for Healthcare Improvement argued that
the United States should try to reach three aims simultaneously (Whittington
et al. 2015):

1. Improve the experience of care for patients.
2. Improve population health.
3. Reduce per capita costs.

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Economics for Healthcare Managers90

This framework became a part of national strategy with the implementation
of the Affordable Care Act (ACA) in 2010. In addition to major changes in
Medicare payments, this framework has led most major commercial insurance
firms to significantly modify how they pay providers. For example, Anthem
Blue Cross Blue Shield has redesigned payment models to align financial
incentives and move away from visit-based payments (Anthem Blue Cross
Blue Shield 2018). Likewise, many Medicaid agencies have made realizing
the Triple Aim a goal.

Public and private insurers have proposed four new payment models
that are designed help realize the Triple Aim:

1. accountable care organizations (ACOs),
2. bundled payments,
3. patient-centered medical homes (PCMHs), and
4. value-based insurance designs.

Some observers call these models “value-based payment systems.”

6.1.1 Accountable Care Organizations
ACOs can take many forms, although most continue to pay providers on
the basis of volume (e.g., per visit or per procedure) but add incentives to
improve quality or reduce costs. Early evidence for Medicare ACOs—more a
prescription for health system redesign than an organizational model—sug-
gests that some savings have been realized, while measures of quality have
remained stable (Nyweide et al. 2015). For example, the Meridian Alliance
ACO, which is based in Hackensack, New Jersey, is a Track 1 participant in
the Medicare Shared Savings Program (meaning that it is not exposed to
losses if it does not generate savings). It generated more than $50 million in
shared savings in 2016 and had a quality score greater than 92 percent, so
it distributed $22,835,022 to its participants (Hackensack Meridian Health
2018). Most ACOs do not yield this sort of payment. Less than a third actu-
ally had savings to share, as savings vary considerably across ACOs, payers,
and populations (Kaufman et al. 2017).

Originally a Medicare payment model, ACO contracts have become
more common in private insurance than in Medicare or Medicaid (Muhles-
tein, Saunders, and McClellan 2017). This is not surprising. Private ACOs
can reduce costs and improve quality by creating networks of higher-quality,
lower-cost providers. (Medicare has fee schedules, not negotiated prices,
and cannot exclude any eligible provider.) For example, the Alternative
Quality Contract in Massachusetts resulted in higher quality and lower
costs, although not enough to offset the costs of running the ACO (Song
et al. 2014).

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Chapter 6: Real iz ing the Tr iple Aim 91

6.1.2 Bundled Payments
Bundled payments pay a fixed amount for an episode of care, such as a knee
replacement. As with ACOs, bundled payments are commonly seen as Medi-
care innovations that were authorized by the ACA. In fact, bundled pay-
ments are not new. Medicare’s DRGs (diagnosis-related groups) are a form
of bundled payment, and Medicare tested bundled payments for coronary
artery bypass grafting in 1991 (Slotkin et al. 2017). Like ACOs, bundled
payments usually base payments at least partly on quality. Early results of
bundled payments are promising, showing lower costs with no reduction in
quality (Sullivan et al. 2017). Because Medicare patients tend to require sig-
nificant amounts of postsurgical rehabilitation, bundled payments may save
more for Medicare than for commercial insurance.

For example, NYU Langone Medical Center chose to participate in a
Medicare bundled payment program that included costs for the three days
before the procedure plus hospital, physician, and rehabilitation costs and any
additional costs for 90 days after discharge. NYU reduced readmissions by
38 percent and cost per episode by 20 percent (Dundon et al. 2016). NYU
developed protocols that reduced length of stay and operating room time;
lowered implant, supply, and drug costs; and improved discharge planning.
Virtually all the savings were due to reductions in use of inpatient rehabilita-
tion facilities and reductions in readmissions.

Although commercial bundled payments are similar to Medicare’s,
important differences exist. Commercial bundles have fewer opportunities
for savings because rehabilitation and readmission costs are much smaller
(Elbuluk and Bosco 2016). Commercial prices are higher than Medicare’s,
however, so discounting may create opportunities for saving. In addition,
many employers and insurers plan to expand the use of bundled payments,
often in centers of excellence (which will be discussed in section 6.1.4).

6.1.3 Patient-Centered Medical Homes
Like ACOs and bundled payments, PCMHs are hard to define. For example,
the Patient-Centered Primary Care Collaborative (2017) defines them “as a
model or philosophy of primary care that is patient-centered, comprehensive,
team-based, coordinated, accessible, and focused on quality and safety.” A
difficulty with this definition is that some PCMHs have implemented the
model more completely or more effectively than others, and some practices
that are not considered medical homes may have implemented many of the
features of a PCMH without seeking certification. In addition, good evi-
dence about what elements of the PCMH model are most important is not
available. Some evidence suggests that enhanced care coordination, continu-
ity of care, access to care, and communication improve clinical quality the
most, but this needs to be confirmed (Nelson et al. 2017).

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Economics for Healthcare Managers92

Can Patient-Centered Medical Homes
Help Realize the Triple Aim?

A PCMH emphasizes a team approach to care, typically including
physicians, advanced practice nurses, physician assistants, nurses,
pharmacists, nutritionists, social workers, educators, and care coor-
dinators. This team cooperates to improve access (e.g., after-hours
care and same-day visits), patient engagement (e.g., teaching patients
how to manage their care and contribute to decision making), care
coordination (e.g., tracking care plans among providers and improving
transitions from hospitals to home), quality (e.g., improving patient
satisfaction and tracking compliance with practice protocols), and
safety (e.g., decision support for prescribing and tracking abnormal
test results). Despite broad similarities, PCMHs vary in their emphases
and implementation strategies. Not surprisingly, reviews find weak,
variable evidence that PCMHs save money, although the evidence is
stronger and less variable for high-risk patients (Sinaiko et al. 2017).
Similarly, some studies find improvements in patients’ experiences
in PCMH practices, whereas others do not (Sarinopoulos et al. 2017).
How much PCMHs improve quality and safety also remains unclear
(Green et al. 2018).

An analysis of Geisinger Health System’s implementation of
PCMHs offers some strong evidence that they can reduce costs (Maeng
et al. 2015). An integrated health system that offers PPOs and HMOs
for Medicare, Medicaid, and the ACA marketplace, Geisinger’s PCMH
approach differs from most others in a number of ways:

• Geisinger used a standardized model.

• Geisinger had clear incentives to reduce cost and improve quality
because it offered an HMO.

• Geisinger had a long history of experimenting with PCMH models.

• Geisinger focused on high-risk patients.

• Geisinger used a mix of volume-based and quality-based payments.

The Geisinger study found that implementation of a PCMH significantly
reduced costs (primarily by reducing hospitalization), and the size
of the reduction grew with experience as a PCMH practice. An earlier
Geisinger study found that patients perceived that some aspects of

Case 6.1

(continued)

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Chapter 6: Real iz ing the Tr iple Aim 93

6.1.4 Value-Based Insurance Designs
In response to rising spending, employers and insurers have sought to
identify benefit designs that would simultaneously reduce spending and
improve the health of beneficiaries. These goals can conflict. For example,
increasing deductibles appears to reduce use of services and therefore costs.
Unfortunately, patients appear to reduce use of effective and ineffective
services, often including preventive care that is covered in full (Agarwal,

care had improved and some had not (Maeng et
al. 2013). Only modest evidence about quality and
safety has been analyzed. For this highly inte-

grated system, PCMHs appear to contribute to realizing the Triple Aim.
Can becoming a PCMH help other practices realize the Triple Aim?

Green and colleagues (2018) suggest that the evidence is clearer than
it seems. Their analysis focused on conditions that were targeted by
Blue Cross Blue Shield of Michigan and measured how many PCMH
components each practice had implemented (which had seldom been
done before). Their analysis found that emergency department costs
and hospitalization costs fell for all conditions but fell by much more
for targeted conditions and for practices with more complete PCMH
implementation. An earlier study that analyzed data for only two
years of PCMH implementation (Paustian et al. 2014) found that full
implementation was associated with higher quality and significant
cost reductions for adults. Partial PCMH implementation was associ-
ated with higher quality but not with cost reductions. A separate study
found that the patient experience was rated more highly in PCMH prac-
tices (Sarinopoulos et al. 2017).

Discussion Questions
• Why does offering HMO plans affect incentives?

• How could improving access reduce costs?

• How could improving care coordination reduce costs?

• Why is the evidence about effects on cost so varied?

• Why is the evidence about effects on quality so varied?

• Why is the evidence about effects on the patient experience so
varied?

• How would a successful PCMH program affect patients? Hospitals?
Participating practices?

Case 6.1
(continued)

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Economics for Healthcare Managers94

Mazurenko, and Menachemi 2017). Reducing use of effective services can
harm population health.

Reference pricing represents one strategy to reduce costs without
harming population health. An insurer sets a reference price for a product,
and the patient is responsible for the entire amount in excess of the reference
price. Originally used in Europe to steer patients toward less expensive drugs,
reference pricing also appears to lead firms to cut prices (Herr and Suppliet
2017). Commonly used in the United States to reduce spending on high-
cost products, reference prices typically shift market share to less expensive
providers and induce expensive providers to lower prices.

Centers of excellence represent an alternative strategy for reducing
costs and improving population health. From a patient perspective, a center of
excellence offers access to a high-quality, high-volume provider with minimal
out-of-pocket expense. From an insurer perspective, a center of excellence
offers high quality with savings primarily due to reductions in intensity of care.
Most centers of excellence adhere to evidence-based guidelines and reduce
volume-based compensation for practitioners, seeking to avoid invasive pro-
cedures if possible unless they are what is most appropriate for the patient.
Zhang, Cowling, and Facer (2017) found that reference pricing and centers of
excellence both steered patients to high-quality providers and reduced spend-
ing. However, the mechanisms differed: Reference pricing design reduced
average prices sharply but did not reduce utilization. In contrast, the centers
of excellence reduced utilization sharply but did not reduce prices.

One function of insurance coverage is to signal that a covered prod-
uct is valuable. Reducing out-of-pocket costs for effective products also
increases their use and improves patient outcomes (Kesselheim et al. 2015).
Value-based insurance reduces or eliminates out-of-pocket costs for cost-
effective products, but designing such a plan is demanding. It requires
accurate measurement of health outcomes, accurate measurement of total
costs (not just the cost of the product), and payment changes to create the
proper incentives for patients and providers. (How to change the payment is
not always obvious.) Good data on outcomes are often available for drugs,
so changes to drug benefits are more common than other changes. Many
insurance plans now incorporate free preventive services (e.g., vaccinations
and mammography), but patients and providers are not always aware of
these changes.

Another approach to value-based insurance is pay-for-performance,
which gives bonuses for high-quality care and imposes penalties for low-
quality care. Although pay-for-performance sounds plausible, there is little
evidence that it works (Mendelson et al. 2017).

Yet another approach involves public reporting of cost and quality
measures. This approach is much less obtrusive than pay-for-performance

reference pricing
A maximum that
an insurer will
pay for a product.
Patients typically
must pay the full
difference between
the product’s price
and the reference
price.

center of
excellence
An integrated
program to treat
a condition (e.g.,
breast cancer).
Certification is
possible, but
structures and
approaches vary.
From an employer
or insurer
perspective,
a center of
excellence is
defined by the
contract with the
provider and by
demonstrated
high quality and
efficiency.

value-based
insurance
Health insurance
that is designed
to encourage use
of highly effective
services (usually
by reducing cost
sharing for these
services).

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Chapter 6: Real iz ing the Tr iple Aim 95

and involves potentially powerful incentives. Patients are apt to prefer pro-
viders with high ratings (Werner, Konetzka, and Polsky 2016), meaning that
poor performance can have significant financial consequences. However,
because quality is a complex, multifaceted concept and the evidence is often
confusing, reporting it in a way that the public and referring physicians can
understand is a challenge.

Centers of Excellence

It is easy to understand why JetBlue Airlines
helped to establish the Employers Centers of

Excellence Network. JetBlue and its partners shifted from paying highly
variable prices for care of variable quality to paying a set price to a
small group of organizations with a history of offering excellent quality.
Prices are typically 10 to 15 percent lower, but the real savings occur
because patients are often steered toward less invasive, less costly
care. For example, local providers had recommended surgery for nearly
all 450 spine patients who went to centers of excellence, but the cen-
ters recommended surgery for only 62 percent of them (Slotkin et al.
2017). The centers instead proposed physical therapy, pain treatments,
weight loss, and other alternatives.

It is also easy to understand why an employee would be willing
to seek care from a center of excellence. Travel, lodging, and care are
covered by the program, so out-of-pocket costs are typically much
lower. Some of the patients avoid unnecessary surgery, and the quality
of care appears to be higher at centers of excellence. Claims data from
Lowe’s (another partner in the Employers Centers of Excellence Net-
work) show sharply lower readmission rates, much less use of skilled
nursing facilities, and high rates of employee satisfaction (Slotkin et al.
2017).

Why are centers of excellence limited to US providers? The answer
is unclear. Excellent providers are available in other countries for
much lower prices. For example, US private insurers paid an average
of $29,067 for hospital and physician services for hip replacement.
Swiss insurers paid an average of $17,112, and Spanish insurers paid
an average of $6,757 (International Federation of Health Plans 2016).
A hospital in Cancún, Mexico, advertises a price of “from $22,004”
(Qunomedical 2018).

Case 6.2

(continued)

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Economics for Healthcare Managers96

6.2 Improving the Experience of Care

PCMHs and ACOs might improve patients’ experiences of care, but the evi-
dence is mixed. As noted in case 6.1, a Michigan study found that a mature,
multipayer PCMH offered patients better access, better communication,

One alternative to a center of excellence is
a high-performance network, which identifies
high-quality, cost-effective providers. No explicit

contract may be required. In 2017 only 11 percent of employers offered
high-performance networks. This percentage is expected to more than
quadruple in 2018. Currently, centers of excellence are much more
common, and they are expected to be available to a majority of work-
ers in 2018 (National Business Group on Health 2017).

Discussion Questions
• Why do prices vary so much?

• Why does clinical quality vary so much?

• Why do patient experiences vary so much?

• What employers are participating in centers of excellence?

• What services do centers of excellence typically offer?

• Why might low-quality care be more expensive than high-quality
care?

• Have you or someone you know used a center of excellence? What
was their experience?

• Why would risks for providers be higher for a center of excellence?

• If you ran an ACO, would you choose a center of excellence or
reference pricing?

• Have centers of excellence grown as expected? Have high-
performance networks?

• Would you be willing to go to a center of excellence if you needed
spine surgery?

• Would you be willing to go to Cancún, Mexico, if you needed a hip
replacement? What about Zurich, Switzerland?

• What are the alternatives to a center of excellence program?

Case 6.2
(continued)

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Chapter 6: Real iz ing the Tr iple Aim 97

better coordination, and more comprehensive care (Sarinopoulos et al.
2017). Some other studies, but not all, have linked improvements in the
patient experience to PCMH conversion. Only a limited number of analyses
have emphasized the patient experience.

Likewise, patients seem to be somewhat more satisfied with the care
provided by ACOs, but responses do not differ greatly. In addition, most
analyses have focused on costs, suggesting that costs are more important.

6.3 Improving Population Health

6.3.1 What Is Population Health?
Population health is “the health outcomes of a group of individuals, includ-
ing the distribution of such outcomes within the group” according to
David Kindig and Greg Stoddart, who first coined the term (Kindig 2015).
Originally meant to describe populations in geographic areas, population
health now sometimes means clinical populations (e.g., the patient panel of
a practice or patients on a heart failure registry). The Triple Aim emphasizes
improving care for clinical populations, but it has also heightened interest in
traditional public health approaches to improving population health.

Population health’s focus on the distribution of outcomes emphasizes
disparities in health outcomes. For example, because the infant mortality
rate for non-Hispanic blacks is more than double the rate for non-Hispanic
whites and Hispanics, reducing the infant mortality rate for non-Hispanic
blacks would improve population health and reduce disparities (Kaiser Fam-
ily Foundation 2018). (Overall improvement would be desirable. Among
the well-to-do countries of the world, only Chile, Mexico, and Turkey have
higher infant mortality rates, according to the Organisation for Economic
Co-operation and Development [OECD 2017].)

Not all disparities reflect advantages to whites. At age 65 Hispanics
have a life expectancy that is 3.3 years longer than that of non-Hispanic
whites and 6.9 years longer than that of non-Hispanic blacks (National Cen-
ter for Health Statistics 2017).

Some disparities can be reduced by changes in the healthcare system,
so disparities are relevant for managers. For example, before the implementa-
tion of the ACA, Latinos and African Americans were less likely to be insured
than whites and less likely to have had a physician visit in the survey year
(Chen et al. 2016). Between 2011 and 2014 these differences narrowed,
primarily as a result of the ACA. Other health disparities can be reduced by
modifying social determinants of health.

social
determinants of
health
Factors that
affect health
independently of
healthcare (e.g.,
education and
housing).

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Economics for Healthcare Managers98

6.3.2 What Are Modifiable Social Determinants of Health?
Many social determinants of health are modifiable. Some involve health
systems. For example, follow-up after a missed primary care visit might
identify lack of transportation as the cause. The health system could con-
nect the patient with an insurance-provided transportation service or a
social service agency that provides medical transportation. Some changes
require more effort from patients. For instance, improved diets, increased
physical activity, smoking cessation, and other patient-managed activities
can significantly improve the health of individuals with diabetes (American
Diabetes Association 2017). Especially for patients with language, financial,
or cultural barriers that complicate patients’ efforts to manage their health,
a health system that simply recommends changes and fails to follow up will
have poor outcomes.

Not all changes to social determinants of health need to be financed
by the health system. The local government or a local charity may offer a
subsidy program for medical transportation. Alternatively, a health system,
a local government, a local school, or a local charity might develop user-
friendly tools that simplify the process of booking a ride for patients or
providers. Likewise, other community organizations may support programs
to improve health self-management (or be encouraged to do so by the
health system).

Other modifiable social determinants may not involve health systems
at all. For example, low-income children are 49 percent more likely to have
asthma than higher-income children (Forum on Child and Family Statistics
2017), and non-Hispanic blacks are 86 percent more likely to have asthma
than non-Hispanic whites and are 185 percent more likely to die as a result
of asthma (Centers for Disease Control and Prevention 2018). One strategy
for reducing the severity of asthma is to change a child’s home environment
(e.g., reducing mold or exposure to tobacco smoke). Such changes can be
supervised by housing code officers, community health workers, or public
health workers. Alternatively, some well-designed educational programs can
improve health and economic outcomes enough to yield a substantial return
on investment (Thornton et al. 2016). Typically, health systems would play
little or no role in such programs.

6.4 Reducing Cost per Capita

Cost per person depends on services per person and the price of each of those
services, so costs can be reduced in two ways. One way is to reduce service

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Chapter 6: Real iz ing the Tr iple Aim 99

use. The other way is to reduce the price per service. Both of these ways
require changes in behavior, and these changes in behavior require changes
in incentives.

Prices are high in the United States and appear to be the main driver
of the nation’s higher costs. For example, the average amount paid for a
magnetic resonance imaging scan was $1,119 in the United States, $503 in
Switzerland, and $215 in Australia (International Federation of Health Plans
2016). Likewise, the average amount paid for a hospital day was $5,220 in
the United States, $4,781 in Switzerland, and $765 in Australia (Interna-
tional Federation of Health Plans 2016).

These price differences are large enough to explain why spending
per person is higher in the United States. Average spending per person was
$9,036 in the United States in 2014, $7,536 in Switzerland, and $4,289 in
Australia (OECD 2017). Although the intensity of treatment may be higher
in the United States, physician visits and hospital discharges per thousand are
lower (OECD 2017; National Center for Health Statistics 2017).

Why are prices so high in the United States? First, insurers and provid-
ers view the prices that they have negotiated as trade secrets. Providers do not
want insurers to know that they are paying more (or less) than a rival insurer.
Insurers do not want providers to know that they are being paid more (or
less) than a rival provider. Second, many insurers have weak bargaining posi-
tions and modest incentives to strike hard bargains. Insurers have difficulty
selling plans that exclude major health systems, and employers have not
traditionally focused on premium costs. Third, although governments have
created fee schedules for Medicare and Medicaid, most have not tried to
influence private prices (Rocco et al. 2017). (Those that have tried have gen-
erally had too little public support to be effective, and most of these efforts
have been abandoned.) Fourth, healthcare financing in the United States is
so opaque and complex that employers, policymakers, and the public have
not seen a way to change it.

The other mechanism for reducing cost per capita is to reduce ser-
vices per capita, especially if those services are not effective. Medicare ACOs
have been linked consistently with lower inpatient use, lower emergency
department use, reductions in low-value services, and improvements in
preventive care (Kaufman et al. 2017). Medicaid ACOs have been linked to
lower emergency department use and improvements in preventive care. The
evidence about private ACOs is limited, but centers of excellence appear to
reduce the intensity of treatment for private patients (Zhang, Cowling, and
Facer 2017).

low-value service
A service that has
little evidence of
benefit or is likely
to do more harm
than good.

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Economics for Healthcare Managers100

Would Medicare for All Reduce
Costs?

This question actually has two parts, because cost has several mean-
ings. Moving to Medicare for all would reduce administrative costs for
insurers and providers. Overall, private insurers’ administrative costs
average 13 percent of premiums, and Medicare’s administrative costs
are less than 2 percent of total spending (Congressional Budget Office
2016). This change could save as much as $125 billion per year. How
much dealing with just one insurer would reduce providers’ costs is not
clear. It could be as little as $125 billion per year or as much as $500
billion per year if capitation were the norm.

From the perspective of patients, moving to Medicare for all would
reduce some prices and increase others. If Medicare gradually replaced
private insurance and kept Medicare prices, provider revenues would
fall, because Medicare prices are lower than private prices. (This
decrease would be partially offset by higher revenues if Medicare
replaced Medicaid.) Overall, Medicaid fees average 72 percent of Medi-
care fees, but state averages range from 38 percent in Rhode Island to
126 percent in Alaska (Kaiser Family Foundation 2017). Private physi-
cian fees average 125 percent of Medicare rates, and private hospital
prices average 189 percent of Medicare rates (Maeda and Nelson
2017). When Maryland moved to a global budget model for hospitals,
it used prices between Medicare rates and private rates (Haber et al.
2017), so it is not completely clear how large a reduction would occur.

In 2016 private insurance spent $1,123 billion ($5,721 per person
for 196 million beneficiaries), Medicare spent $672 billion ($12,046 per
person for 56 million beneficiaries), and Medicaid spent $566 billion
($7,941 per person for 71 million people) (Hartman et al. 2018). Out-of-
pocket spending was $353 billion, and 29 million people lacked health
insurance. Savings could be up to $455 billion if private prices were
cut to equal Medicare prices. Spending could increase by up to $160
billion if Medicaid prices were increased to Medicare levels. Spending
could increase by $100 billion to $165 billion if all the uninsured were
covered.

There is one more possible source of savings (apart from cost
reductions resulting from the shift from volume to value): lower phar-
maceutical prices. Per capita spending for pharmaceuticals is $1,112

Case 6.3

(continued)

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Chapter 6: Real iz ing the Tr iple Aim 101

6.5 Conclusion

The payment system in the United States is changing. The evidence does not
clearly tell us what works or for whom. Nor does it tell us how the various
approaches will change over time.

The best evidence suggests that costs are high in the United States
because prices, especially private prices, are high. Of the initiatives that this
chapter discusses, only reference pricing and (to a lesser extent) centers of
excellence directly address prices. Private ACOs tend to shift care to less
costly sites and may have indirect effects on price.

Medicare and Medicaid prices are lower than private prices. Their
efforts to reduce spending emphasize delivering care more efficiently and
more effectively (by decreasing low-value care and increasing high-value

in the United States versus $740 in Germany and
$656 in France (Sarnak et al. 2017). If Medicare
negotiated pharmaceutical prices, savings of $120

billion to $140 billion might be possible.

Discussion Questions
• How much would moving to a single payer plan reduce

administrative costs?

• How much would provider revenues fall if Medicare replaced private
insurance?

• How much would provider revenues rise if Medicare replaced
Medicaid?

• How much would spending change if Medicare replaced private
insurance and Medicaid?

• How much would provider revenues rise if all the uninsured were
eligible for Medicare?

• How fast has spending per person been increasing for private
insurance?

• How fast has spending per person been increasing for Medicare?

• Has Maryland’s global budget plan helped realize the Triple Aim?

• Has Vermont’s Medicare and Medicaid ACO helped realize the Triple
Aim?

• Do you favor Medicare for all? The status quo? Some other
alternative?

Case 6.3
(continued)

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Economics for Healthcare Managers102

care), thus improving the health of beneficiaries. The early evidence from
Medicare and Medicaid ACOs, bundled payments, and PCMHs is fairly posi-
tive. Spending seems to have dropped, quality seems to have increased, and
the patient experience may have improved.

One factor in the poor health of Americans may be our weak primary
care system. Support for PCMHs seems likely to enhance the capacity of
primary care (if only because it creates a model that allows nurses, nurse prac-
titioners, and physician assistants to play a larger role). A number of insurers
have initiated programs to pay primary care practices to coordinate care for
patients with complex problems. These programs can increase primary care
revenues and capabilities.

Medical care is but one input into population health. For some people,
access barriers make effective use of medical care impossible. For others, the
factors that limit health are public health problems (e.g., unsafe water, local
environments). For still others, the factors that limit health are social prob-
lems (e.g., poor housing, poor diets, unsafe neighborhoods). Efforts to make
healthcare safer, of higher quality, and more affordable are apt to be only part
of efforts to improve health.

Exercises

6.1 An insurance market consists of high-risk patients, who average
$40,000 in spending per year, and low-risk patients, who average
$1,000 per year. Overall, low-risk patients represent 90 percent of
the population. What would average spending be for a population
like this?

6.2 Refer to exercise 6.1. What would average spending be if low-risk
patients were 92 percent of the population?

6.3 Refer to exercise 6.1. If an insurer sold 100,000 policies at $6,000,
what would revenue be? What would medical costs be if the insurer
paid for everything and low-risk patients were 90 percent of the
population? How would that change if low-risk patients were 92
percent of the population?

6.4 Why did hospitals have limited incentives to reduce readmissions
before the ACA?

6.5 What are some examples of modifiable social determinants of health
that would be feasible for an ACO to influence? For a health system
not in an ACO? For an insurer?

6.6 Where are reference prices being used? What have their effects
been?

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Chapter 6: Real iz ing the Tr iple Aim 103

6.7 Go to the Centers for Medicare & Medicaid Services Innovation
Center website (https:// innovation.cms.gov) and see what ideas
are being tested in a state of your choice.

6.8 Why would a system launch a medical home that is intended to
reduce its revenues?

6.9 How are a narrow network and an ACO different?
6.10 What recent evidence about the performance of ACOs can you find?

Are they growing? Are they saving money? Do enrollees seem to like
the care they get? Is the quality of care good?

6.11 What recent evidence about medical homes can you find? Are they
growing? Are they saving money? Do enrollees seem to like the care
they get? Is the quality of care good?

6.12 What recent evidence about bundled payment programs can you
find? Are they growing? Are they saving money? Do enrollees seem
to like the care they get? Is the quality of care good?

6.13 What recent evidence about Medicare Advantage HMOs can you
find? Are they growing? Are they saving money? Do enrollees seem
to like the care they get? Is the quality of care good?

6.14 How much did cost per Medicare beneficiary go up last year? The
Kaiser Family Foundation publishes these data (www.kff.org/
state-category/medicare/).

6.15 Why would a health system want to participate in a trial of bundled
payments?

6.16 What risk does a health system bear when it agrees to a bundled
payment?

6.17 What risk does a health system bear when it agrees to accept
capitation?

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