AEI: A Contingency Plan for King v. Burwell

At the end of June, the Supreme Court is expected to issue its ruling on King v. Burwell, a case concerning the legality of health insurance premium subsidies in states that do not operate a state-based exchange under the Affordable Care Act (ACA). If the Supreme Court rules in favor of the plaintiffs, the government will no longer be authorized to distribute subsidies to millions of individuals currently receiving subsidized health insurance through the federal exchange.

In response to this possibility, scholars at the American Enterprise Institute (AEI), with support from the Peter G. Peterson Foundation, propose a plan to mitigate some of the negative effects of such a ruling, titled “A Contingency Plan for King v. Burwell and Related Cases.” This proposal, referred to in this report as the Plan, gives states the opportunity to opt for the Plan or to remain under the structure provided by the Affordable Care Act (ACA). Key features of this proposal include an extension of subsidies through 2015, advanceable and refundable tax credits for the purchase of insurance, protection from underwriting for those who maintain continuous coverage, and a default enrollment option among others. This report details the findings of the Center for Health and Economy’s (H&E) Under-65 Microsimulation Model on the Plan’s impact on insurance coverage, provider access, medical productivity, and the federal budget. While our estimates are associated with some degree of uncertainty, the summary of our findings is as follows:

  • Multiple Scenarios: The Plan allows states to independently determine whether or not they want to adopt the proposed regulation. H&E expects that 20 states would be the minimum number of states to adopt the Plan while 37 states would be the maximum.
  • Coverage Impact: The Plan is projected to lead to 5 – 9 million more insured persons by 2020. Increases in enrollment are due to widely available tax credits and default enrollment in catastrophic plans.
  • Provider Access: The Plan is projected to result in greater patient access to providers. According to the H&E Provider Access Index, access will increase by 2-4 percent for the privately insured population by 2020.
  • Medical Productivity: The Plan is projected to result in greater medical productivity. According to the H&E Medical Productivity Index, productivity will increase by 4-7 percent for the privately insured population by 2020.
  • Budget Impact: Compared to current law, the insurance coverage provisions of this proposal will lead to budget outcomes from anywhere between a $4 billion surplus to a $46 billion deficit relative to baseline estimates by the year 2020.

Microsimulation Analysis

This analysis utilizes a microsimulation model developed for use by H&E. The model employs micro-data available through the Medical Expenditure Panel Survey to analyze the effects of health policies on the health insurance plan choices of the under-65 population and interpret the resulting impact on national coverage, average insurance premiums, the federal budget, and the accessibility and efficiency of health care.[1]

For simplicity, we assume in this report that the Supreme Court will rule in favor of the plaintiffs and declare that the ACA does not authorize the federal government to distribute subsidies in states that do not have a state-based exchange. In light of such a ruling, we examine three scenarios: 37 states lose access to health insurance subsidies, 27 states lose access to health insurance subsidies, and 20 states lose access to health insurance subsidies. These scenarios represent, respectively, a narrow interpretation of “state-based exchange,” a wide interpretation, and an assumption that all states that have expanded Medicaid will create a state-based exchange. In each scenario, H&E estimates the impact of taking no action and of enacting the Plan, and compares these estimates to “baseline estimates.” These baseline estimates are calibrated to current law. However, given the assumption that the Supreme Court will determine the interpretation of current law invalid, this baseline would require legislative action to maintain.

Table 1. 2016 Premium Tax Credits Under the Plan
Age Credit
17 and Under $900
18 to 34 $1,200
35 to 49 $2,100
50 and Over $3,000

The Plan, which will take effect on January 1st, 2016, is a proposal to replace the newly invalidated credits available under the ACA. States that lose access to the health insurance subsidies in their current form are assumed to opt into the new credit and regulatory structure proposed by the Plan. Individuals and families who purchase licensed health insurance in the individual market[2] are eligible for an age-adjusted premium tax credit, increased annually by 3 percent. These credits are means tested, advanceable, and refundable. States are allowed to adopt default enrollment in which a household that does not enroll in a plan may be automatically enrolled in a catastrophic coverage plan that is equal to the subsidy for which that household is eligible. Importantly, H&E expects significant administrative hurdles that mitigate the coverage expansion that results from default enrollment.

Table 2. States Considered in Each Scenario
State 20 State Scenario 27 State Scenario 37 State Scenario
Alabama X X X
Alaska X X X
Arizona X
Arkansas X
Delaware X
Florida X X X
Georgia X X X
Illinois X
Indiana X X
Iowa X
Kansas X X X
Louisiana X X X
Maine X X X
Michigan X
Mississippi X X X
Missouri X X X
Montana X X
Nebraska X X X
Nevada X
New Hampshire X
New Jersey X X
New Mexico X
North Carolina X X X
North Dakota X X
Ohio X X
Oklahoma X X X
Oregon X
Pennsylvania X X
South Carolina X X X
South Dakota X X
Tennessee X X X
Texas X X X
Utah X X X
Virginia X X X
Wisconsin X X X
West Virginia X
Wyoming X X X

While the bulk of the taxes implemented by the ACA will remain in effect, both the individual mandate and the employer mandate are repealed under the Plan. In states that opt for the Plan, individual market regulations regarding the age-rating of insurance policies, essential health benefits, and guaranteed issue will no longer apply. The Plan does include guaranteed issue protections for individuals that maintain continuous qualified coverage. Other ACA regulations for employer sponsored insurance will continue. A full write-up of the proposal can be found here.

Coverage Impact

H&E insurance coverage estimates reflect health insurance choices for the under-65 population as estimated by the H&E Under-65 Model.[3] H&E estimates that the Plan will lead to 5 – 9 million more insured individuals in 2020, relative to baseline estimates. The 2020 uninsured rate among the under-65 population will be between 10 and 9 percent—down from the projected uninsured rate of 12 percent under current law.

H&E projects that if no action is taken, the individual market will enroll 5-8 million less people in 2016 than the current baseline estimates. The amount of uninsured in the year 2016 would increase by 3-5 million compared to the current baseline. By the year 2020, H&E projects the number of expected enrollees in the individual market to fall to 6-10 million below the current baseline while uninsured numbers increase to 4-6 million above the current baseline. It is expected that as people leave the individual market, some will seek insurance through their employer as the number enrolled in employer sponsored insurance rises to 2-3 million above the current baseline estimates for 2020. A summary of the coverage effects can be seen below (Table 3) while a more detailed coverage impact can be found in the Appendix (Tables 7-9).

Table 3. Summary of Total Uninsured Under Each Scenario (millions)1
ACA Baseline 20 States Lose Health Insurance Subsidies 27 States Lose Health Insurance Subsidies 37 States Lose Health Insurance Subsidies
No Action Proposal No Action Proposal No Action Proposal
2015 36 36 36 36 36 36 36
2016 29 33 24 33 23 34 22
2017 29 34 25 34 24 35 22
2018 31 35 26 36 25 36 23
2019 32 36 27 37 26 38 24
2020 33 37 28 38 26 39 25
1 All insurance coverage estimates refer only to the under-65 population.

Under the ACA, premium subsidies declining with income are available to households that earn between 100 and 400 percent of the Federal Poverty Level (FPL) and purchase substantial health insurance through state-based exchanges. The subsidies are based on a formula that allows a household to purchase a medium PPO plan—a Silver plan—for a certain percent of their income.

This subsidy structure would be replaced in states that opt into the Plan with an age-based credit available to all households who must buy non-group health insurance. The subsidies available are advanceable and refundable; eligible enrollees can choose to have the credit paid in advance to their insurance company to help lower monthly premium payments—much like the current law. Overall, individual market enrollment is expected to be higher than baseline estimates, despite a less generous subsidy design, due to wider subsidy eligibility, the availability of catastrophic plans, and the default enrollment option.

Much of the increase in individual market enrollment relative to current law is a result of the default enrollment option that will be available to states under the Plan. Any household that does not take the tax credit they receive and purchase insurance of their choice will be automatically enrolled in a catastrophic plan equal to the value of the credit for which that household is eligible. While states have the option to decline to implement default enrollment, H&E believes that households will still be strongly incentivized to purchase insurance. However, H&E does not expect that default enrollment will achieve universal coverage in states that choose to implement it; administrative difficulty remains a significant obstacle.

The Plan does not eliminate the federal funds for Medicaid expansion made available by the ACA. Under current law, states can expand Medicaid eligibility to include individuals and families earning up to 138 percent of FPL; however, for states adopting the Plan, the incentives to expand Medicaid are lessened by the ability for households to gain low-cost insurance through subsidies or default enrollment.

Productivity and Access

In attempt to evaluate access and productivity in the health care system, H&E estimates: the Medical Productivity Index (MPI) and the Provider Access Index (PAI). Health insurance plan designs are associated with varying degrees of access to desired physicians and facilities as well as incentives that promote or discourage efficient use of resources. H&E estimates each index by attributing productivity and access scores to the range of plan designs available and exploits changing plan choices to project the evolution of health care quality.

H&E expects medical productivity to increase under the Plan. The marginal shift from beneficiaries in employer sponsored plans and public insurance to the individual market leads to a net increase in efficiency, as individual market plans typically require more cost-sharing, which encourages price-conscious decision making among patients. These gains are bolstered by high deductible enrollment in the individual market.

Table 4. Summary of Effect on Medical Productivity Under Each Scenario1
ACA Baseline 20 States Lose Health Insurance Subsidies 27 States Lose Health Insurance Subsidies 37 States Lose Health Insurance Subsidies
No Action Proposal No Action Proposal No Action Proposal
2015 2.3 0% 0% 0% 0% 0% 0%
2016 2.3 +1% +3% +1% +4% +1% +5%
2017 2.3 +1% +4% +2% +5% +2% +6%
2018 2.3 +1% +4% +1% +5% +2% +6%
2019 2.4 +1% +4% +1% +5% +2% +6%
2020 2.4 +1% +4% +1% +5% +1% +7%
1 Productivity and access estimates refer only to the under-65,  privately insured population

Under the Plan, average provider access is projected to increase relative to current law due to large enrollment in catastrophic coverage plans that commonly offer a wide choice of providers relative to plans with lower cost-sharing but narrow networks. The structure of the Plan’s premium credits encourage catastrophic coverage enrollment, as many households can purchase catastrophic plans for near to or less than the value of the subsidy, and some households will be automatically enrolled into catastrophic plans.

Table 5. Summary of Effect on Provider Access Under Each Scenario1
ACA Baseline 20 States Lose Health Insurance Subsidies 27 States Lose Health Insurance Subsidies 37 States Lose Health Insurance Subsidies
No Action Proposal No Action Proposal No Action Proposal
2015 3.7 0% 0% 0% 0% 0% 0%
2016 3.7 +1% +1% +2% +1% +3% +1%
2017 3.6 +2% +1% +3% +2% +4% +3%
2018 3.6 +2% +1% +3% +2% +4% +3%
2019 3.5 +2% +2% +4% +2% +5% +3%
2020 3.5 +3% +2% +4% +3% +5% +4%
1 Productivity and access estimates refer only to the under-65,  privately insured population

Budget Impact

In its analysis of the Plan’s impact on the federal budget, H&E looks only at provisions directly related to health insurance coverage. H&E projects that if no action is taken, the assumed decision by the Supreme Court would result in savings of $284 – $408 billion; this is a result of the suspension of subsidies that formerly went to states with federally-facilitated exchanges, all while still receiving revenue from the individual mandate, the employer mandate, and the existing tax structure.

H&E projects that the insurance coverage provisions of the Plan will decrease the budget deficit by $4 billion over the next five years the number of states that decide to opt into the Plan is the estimated minimum. If the maximum of 37 states opt into the Plan, H&E projects that the budget deficit will increase by $46 billion. Below is a summary table of the budget impact. Each column represents the different combination of states that H&E expect to represent the different outcomes of the assumed ruling. In the Appendix at the end of this paper, more detailed budget impact tables (Tables 10-12) of each scenario can be found. The budget impact table is divided into two sections: Sources of Funds refers to changes in dollars raised by the federal government and Uses of Funds refers to changes of dollars spent by the federal government. Many of the insurance coverage provisions of both current law and the Plan disseminate financial benefits through tax credits. Technically, these provisions reduce the effective tax rate and would lead to less money raised—except in cases where the tax credit exceeds a households total tax obligation. However, in the interest of simplicity and clarity, these “tax expenditures” are categorized as Uses of Funds in H&E budget estimates.

Table 6. Summary of Budget Impact Under Each Scenario (billions)1
20 States Lose Health Insurance Subsidies 27 States Lose Health Insurance Subsidies 37 States Lose Health Insurance Subsidies  
No Action Proposal No Action Proposal No Action Proposal  
2015 0 0 0 0 0 0
2016 47 -6 60 -14 68 -19
2017 60 6 76 1 87 -2
2018 60 4 76 -1 86 -5
2019 59 1 75 -3 84 -8
2020 58 -2 74 -6 83 -12
2016 – 2020 284 4 362 -24 408 -46
1 Cost estimates refer only for the under-65 population. Positive values denote surplus; negative values denote deficit.

H&E estimates that the Plan will lead to a net revenue decrease of $24 billion to $40 billion. The Plan repeals the individual and employer mandates, but it does not replace any other current tax structures in place for employer sponsored insurance. Therefore, these revenue decreases are solely the product of repeal of the individual and employer mandates in those states that opt for the Plan.

H&E estimates that the Plan will lead to changes in uses of funds of between a net decrease of $30 billion and a net increase of $2 billion. The Plan’s main new source of spending is higher enrollment, despite lower average subsidies. While the ACA discourages any enrollment into catastrophic plans, the Plan encourages states to adopt a default enrollment option that would enroll many more households into a catastrophic plan. H&E expects high take up of these catastrophic plans. While more people are enrolled, the spending in the health insurance marketplace is expected to be offset by the relatively inexpensive catastrophic plans. H&E also expects the affordability of catastrophic plans will incentivize households to drop other public insurance to enroll in a catastrophic plan. H&E projects that this shift would lead to a decrease in spending for Medicaid and other public insurance of $32 billion to $55 billion over the next 5 years. However, the expected change in Medicaid enrollment is small, as the benefits of Medicaid plans far outweigh those of a catastrophic plan. Over the next 5 years, H&E projects that spending in the health insurance marketplace will increase $2 billion to $57 billion.

Uncertainty in H&E Projections

As with all economic forecasting, H&E estimates are associated with substantial uncertainty. While our estimates provide good indication on the nation’s health care outlook, it is not likely that the policy environment will remain unchanged throughout our ten-year analysis period. And even if no major legislative action occurs, there still exists a wide range of possible future scenarios. H&E attempts to depict an unbiased, middle -ground representation of the future should the policy and economic environment remain constant. While the goal is to quantitatively describe the most likely scenario, actual events may differ significantly from published predictions.

Appendix: Detailed Tables

Table 7. Coverage Impact of Losing Subsidies in 20 States (millions)1
ACA Baseline 2015 2016 2017 2018 2019 2020
Individual Market 31 39 39 38 37 36
Catastrophic Coverage 5 5 0.5 1 1 1
Employer Sponsored Insurance 146 145 145 145 145 145
Other Public Insurance2 58 60 60 61 62 63
Uninsured 36 29 29 31 32 33
Effect of No Action 2015 2016 2017 2018 2019 2020
Individual Market 0 -5 -6 -6 -6 -6
Catastrophic Coverage 0 3 5 5 5 5
Employer Sponsored Insurance 0 1 1 2 2 2
Other Public Insurance2 0 0 1 1 0 0
Uninsured 0 3 4 4 4 4
Effect of Proposal 2015 2016 2017 2018 2019 2020
Individual Market 0 6 6 6 7 7
Catastrophic Coverage 0 7 9 9 10 10
Employer Sponsored Insurance 0 -1 -1 -1 -1 -1
Other Public Insurance2 0 -1 -1 -1 -1 -1
Uninsured 0 -5 -4 -5 -5 -5
1 All insurance coverage estimates refer only to the under-65 population.    
2 Other Public Insurance is primarily comprised of Medicaid and under-65 Medicare enrollment.

 

Table 8. Coverage Impact of Losing Subsidies in 27 States (millions)1
ACA Baseline 2015 2016 2017 2018 2019 2020
Individual Market 31 39 39 38 37 36
Catastrophic Coverage 5 5 0.5 1 1 1
Employer Sponsored Insurance 146 145 145 145 145 145
Other Public Insurance2 58 60 60 61 62 63
Uninsured 36 29 29 31 32 33
Effect of No Action 2015 2016 2017 2018 2019 2020
Individual Market 0 -7 -8 -8 -8 -8
Catastrophic Coverage 0 5 7 7 7 7
Employer Sponsored Insurance 0 2 2 2 3 3
Other Public Insurance2 0 1 1 1 0 0
Uninsured 0 4 5 5 5 5
Effect of Proposal 2015 2016 2017 2018 2019 2020
Individual Market 0 8 8 8 9 9
Catastrophic Coverage 0 9 12 12 13 13
Employer Sponsored Insurance 0 -1 -1 -1 -1 -1
Other Public Insurance2 0 -1 -1 -1 -2 -2
Uninsured 0 -6 -5 -6 -6 -7
1 All insurance coverage estimates refer only to the under-65 population.    
2 Other Public Insurance is primarily comprised of Medicaid and under-65 Medicare enrollment.

 

 

Table 9. Coverage Impact of Losing Subsidies in 37 States (millions)1
ACA Baseline 2015 2016 2017 2018 2019 2020
Individual Market 31 39 39 38 37 36
Catastrophic Coverage 5 5 0.5 1 1 1
Employer Sponsored Insurance 146 145 145 145 145 145
Other Public Insurance2 58 60 60 61 62 63
Uninsured 36 29 29 31 32 33
Effect of No Action 2015 2016 2017 2018 2019 2020
Individual Market 0 -8 -9 -10 -10 -10
Catastrophic Coverage 0 6 8 8 8 8
Employer Sponsored Insurance 0 3 3 3 3 3
Other Public Insurance2 0 1 1 1 1 0
Uninsured 0 5 6 6 6 6
Effect of Proposal 2015 2016 2017 2018 2019 2020
Individual Market 0 11 10 11 11 12
Catastrophic Coverage 0 12 15 15 16 16
Employer Sponsored Insurance 0 -1 -1 -1 -1 -1
Other Public Insurance2 0 -2 -2 -2 -2 -2
Uninsured 0 -7 -7 -7 -8 -9
1 All insurance coverage estimates refer only to the under-65 population.    
2 Other Public Insurance is primarily comprised of Medicaid and under-65 Medicare enrollment.

 

 

Table 10. Budget Impact of Losing Subsidies in 20 States (billions)1
Effect of No Action 2015 2016 2017 2018 2019 2020 2016 – 2020
Tax on Employer Sponsored Health Insurance 0 0 0 0 0 0 0
Individual and Employer Mandates 0 -4 -4 -5 -5 -6 -24
Total Impact on Sources of Funds2 0 -4 -4 -5 -5 -6 -24
Health Insurance Marketplace 0 -54 -68 -67 -67 -66 -321
Medicaid and Other Public Insurance 0 3 4 3 2 2 14
Total Impact on Uses of Funds3 0 -51 -64 -64 -64 -64 -308
Net Budget Impact4 0 47 60 60 59 58 284
Effect of Proposal 2015 2016 2017 2018 2019 2020 2016 – 2020
Tax on Employer Sponsored Health Insurance 0 0 0 0 0 0 0
Individual and Employer Mandates 0 -4 -5 -5 -6 -7 -26
Total Impact on Sources of Funds2 0 -4 -5 -5 -6 -7 -26
Health Insurance Marketplace 0 10 -4 -3 -1 0 2
Medicaid and Other Public Insurance 0 -8 -7 -6 -6 -5 -32
Total Impact on Uses of Funds3 0 2 -10 -9 -7 -5 -30
Net Budget Impact4 0 -6 6 4 1 -2 4
 
1 Cost estimates refer only for the under-65 population.
2 Positive values denote increases in revenue; negative values denote decreases in revenue.
3 Positive values denote increases in spending; negative values denote decreases in spending.
4 Positive values denote surplus; negative values denote deficit.

 

Table 11. Budget Impact of Losing Subsidies in 27 States (billions)1
Effect of No Action 2015 2016 2017 2018 2019 2020 2016 – 2020
Tax on Employer Sponsored Health Insurance 0 0 0 0 0 0 0
Individual and Employer Mandates 0 -5 -6 -6 -7 -8 -32
Total Impact on Sources of Funds2 0 -5 -6 -6 -7 -8 -32
Health Insurance Marketplace 0 -67 -84 -84 -83 -82 -401
Medicaid and Other Public Insurance 0 3 4 3 3 2 15
Total Impact on Uses of Funds3 0 -64 -80 -81 -81 -80 -386
Net Budget Impact4 0 60 76 76 75 74 362
Effect of Proposal 2015 2016 2017 2018 2019 2020 2016 – 2020
Tax on Employer Sponsored Health Insurance 0 0 0 0 0 0 0
Individual and Employer Mandates 0 -5 -6 -7 -8 -9 -34
Total Impact on Sources of Funds2 0 -5 -6 -7 -8 -9 -34
Health Insurance Marketplace 0 15 -1 1 3 5 23
Medicaid and Other Public Insurance 0 -7 -6 -6 -7 -7 -34
Total Impact on Uses of Funds3 0 8 -7 -6 -4 -2 -11
Net Budget Impact4 0 -14 1 -1 -3 -6 -24
 
1 Cost estimates refer only for the under-65 population.
2 Positive values denote increases in revenue; negative values denote decreases in revenue.
3 Positive values denote increases in spending; negative values denote decreases in spending.
4 Positive values denote surplus; negative values denote deficit.

 

 

Table12. Budget Impact of Losing Subsidies in 37 States (billions)1
Effect of No Action 2015 2016 2017 2018 2019 2020 2016 – 2020
Tax on Employer Sponsored Health Insurance 0 0 0 0 0 0 0
Individual and Employer Mandates 0 -6 -7 -8 -9 -10 -40
Total Impact on Sources of Funds2 0 -6 -7 -8 -9 -10 -40
Health Insurance Marketplace 0 -78 -97 -97 -96 -96 -465
Medicaid and Other Public Insurance 0 4 4 4 3 3 17
Total Impact on Uses of Funds3 0 -75 -94 -94 -93 -93 -448
Net Budget Impact4 0 68 87 86 84 83 408
Effect of Proposal 2015 2016 2017 2018 2019 2020 2016 – 2020
Tax on Employer Sponsored Health Insurance 0 0 0 0 0 0 0
Individual and Employer Mandates 0 -7 -8 -9 -10 -11 -44
Total Impact on Sources of Funds2 0 -7 -8 -9 -10 -11 -44
Health Insurance Marketplace 0 23 5 7 10 13 57
Medicaid and Other Public Insurance 0 -11 -11 -11 -11 -11 -55
Total Impact on Uses of Funds3 0 12 -5 -4 -2 1 2
Net Budget Impact4 0 -19 -2 -5 -8 -12 -46
 
1 Cost estimates refer only for the under-65 population.
2 Positive values denote increases in revenue; negative values denote decreases in revenue.
3 Positive values denote increases in spending; negative values denote decreases in spending.
4 Positive values denote surplus; negative values denote deficit.

 

[1] More information on the H&E Under-65 Microsimulation Model can be found at http://dev-health-economy.pantheonsite.io/models/under-65-microsimulation/

[2] In this report, the individual market refers to the commercial, non-group market for health insurance.

[3] Parente, S.T., Feldman, R. “Micro-simulation of Private Health Insurance and Medicaid Take-up Following the U.S. Supreme Court Decision Upholding the Affordable Care Act.” Health Services Research. 2013 Apr; 48(2 Pt 2):826-49.

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