Improving Health and Health Care: An Agenda for Reform

A group of scholars at the American Enterprise Institute (AEI), with support from the Peter G. Peterson Foundation, proposed a plan for health care reform on December 9th titled “Improving Health and Health Care: An Agenda for Reform.” This proposal, referred to in this report as the Plan, proposes a full repeal of the Affordable Care Act (ACA) and replaces it with alternate policy provisions. Key provisions of this proposal include advanceable and refundable tax credits for the purchase of insurance, a default enrollment option, protection from underwriting for those who maintain continuous coverage, fixed per-capita payments for Medicaid, and one-time tax credit for health savings accounts (HSAs) among many 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. Also, because the Plan offers a number of substantial of Medicare reform proposals, H&E employed the use of a preliminary version of its Over-65 Microsimulation Model and estimates from the Congressional Budget Office (CBO) to develop an estimation of the effects that these reforms may have. While our estimates are associated with some degree of uncertainty, the summary of our findings is as follows:

  • Coverage Impact: The Plan is projected to lead to 16 million more insured persons by 2025, relative to H&E’s baseline of current law. Increases in enrollment are due to widely available tax credits and state optional 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 11 percent for the privately insured population by 2025.
  • Medical Productivity: The Plan is projected to result in greater medical productivity. According to the H&E Medical Productivity Index, productivity will increase by 6 percent for the privately insured population by 2025.
  • Budget Impact: Compared to current law, the insurance coverage provisions of this proposal will lead to budget outcome of a $350 billion net budget surplus relative to baseline estimates by the year 2025.
  • Medicare Budget Impact: Compared to current law, the insurance coverage provisions of this proposal will lead to budget outcome of a $1.56 trillion budget surplus relative to baseline estimates by the year 2025.

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]

Because of the freedom that the Plan leaves to the states with regard to the default enrollment provision, for simplicity, we assume that many states will reject default enrollment. Out of the various permutations of states that could be used to project states that might reject default enrollment, 27 states were chosen. This scenario represents the assumption that all states that have a fully federally-facilitated marketplace will choose to forgo the provision. The other key policies and assumptions used by H&E to analyze the Plan are as follows:

  • The Affordable Care Act is fully repealed.
  • The Plan becomes effective on January 1, 2017.
  • Individuals and families who purchase licensed health insurance in the individual market are eligible for an age-adjusted premium tax credit, increased annually by 3 percent. The following table shows the credit values:
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 tax exclusion for employer sponsored health insurance is capped at $8,000 annually for individuals and $20,000 annually for families. This tax begins in 2018 and is indexed to inflation thereafter.
  • Previously covered households cannot be dropped from their current health plan, denied coverage through a new plan, or charged higher premiums on the basis of health status in the individual market. And households with coverage through an employer can transition to the individual market with the same protections.
  • A one-time HSA credit for up to $1,000 for those that are enrolled in an HSA-compatible plan in 2017.
  • All households become eligible to open an HSA account regardless of enrolled health plan. Those that open an HSA can make tax preferred contributions of up to $2,000 for individuals and $4,000 for families. Beneficiaries enrolled in HDHPs would be allowed to make contributions up to the allowable amounts under current law in addition to the $2,000/$4,000 contributions allowed for all.
  • Eligibility levels for Medicaid are slowly adjusted to 119 percent of the federal poverty level (FPL) over the course of the first five years. States currently above the 119 percent level will see federal matching reduced while states below will see federal matching increase.
  • Medicaid spending would be determined using per-capita caps based upon historic spending.

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. H&E estimates that the Plan will lead to 16 million more insured individuals in 2025, relative to baseline estimates. Due to the default enrollment in catastrophic coverage outlined by the Plan, the uninsured rate should drop to 8.4 percent—down from the projected 12 percent under the current law.

Under the ACA, premium subsidies declining with income are made available to households that earn between 100 and 400 percent of the FPL for the aid in purchasing health insurance. 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.

Table 3. Health Insurance Coverage Under The Plan (millions)[2]
2016 2017 2018 2019 2020 2021 2025
Individual Market 39 62 60 61 62 63 64
Employer Sponsored Insurance 145 143 145 145 146 146 144
Medicaid 50 39 38 37 37 36 37
Other Public Insurance 10 9 11 11 12 13 16
Total Population[3] 273 274 275 277 280 281 285
Total Insured9 244 254 255 256 257 258 261
Uninsured 29 20 21 22 22 23 24
Table 4. Change in Insurance Coverage Under The Plan (millions)9
2016 2017 2018 2019 2020 2021 2025
Individual Market 0 23 22 24 26 28 31
Employer Sponsored Insurance 0 -2 0 0 0 1 0
Medicaid 0 -11 -12 -14 -14 -15 -16
Other Public Insurance 0 -1 0 -1 0 0 0
Total Insured10 0 9 10 10 11 11 16

This subsidy structure would be replaced by the Plan with an aged-based credit available to all households who purchase insurance offered through the individual market and are not offered employer sponsored insurance. The credit is 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.

A considerable amount of the increase in individual market enrollment relative to the current baseline 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 automatically be 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 sharp increase in individual market enrollment in 2017 relative to current law is a result of a one-time tax credit for enrollees in health savings accounts (HSA) during that year. Any enrollee in a HSA is eligible to receive a single direct contribution of $1,000 into the HSA from the federal government. In 2017, H&E predicts that not only will most HSA enrollees claim this one-time contribution, but many uninsured and enrollees in other plans will be incentivized to enroll in an HSA for the first time. The one-time HSA contribution policy is likely to cause an irregular increase of insured persons during the first year of its implementation before falling to a steady state benefit for new enrollees in HSAs associated with a moderate increase in insured persons.

The Plan does not completely 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 FPL; however, under the provisions of the Plan, Medicaid eligibility is limited to 119 percent FPL for all states. States that have expanded eligibility under the ACA will see eligibility levels reduced while states that have not expanded under the ACA will see eligibility levels expand to 119 percent of FPL. This does not happen immediately as a five-year transition window is allotted under the Plan with all states’ eligibility levels reaching 119 percent FPL by 2021. The decrease in Medicaid eligibility under the Plan is softened by newly available premium credits available to all households. Many of the households that lose Medicaid coverage will gain low-cost insurance through narrow network or catastrophic plans.

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.

Table 5. Medical Productivity Index Under the Plan[4]
2016 2017 2018 2019 2020 2025
Individual Market 2.4 3.1 3.2 3.3 3.3 3.6
Employer Sponsored Insurance 2.3 2.4 2.4 2.5 2.5 2.7
Private Insurance 2.3 2.5 2.6 2.6 2.6 2.8
Medicaid 1.5 1.5 1.5 1.5 1.5 1.5
Total Insured 2.2 2.4 2.4 2.4 2.4 2.6

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 5. Provider Access Index Under the Plan4
2016 2017 2018 2019 2020 2025
Individual Market 3.1 3.2 3.5 3.6 3.6 3.7
Employer Sponsored Insurance 3.8 3.8 3.7 3.7 3.7 3.6
Private Insurance 3.7 3.6 3.7 3.7 3.7 3.7
Medicaid 1.0 1.0 1.0 1.0 1.0 1.0
Total Insured 3.1 3.2 3.2 3.2 3.2 3.1

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 6. Change in Medical Productivity Under the Plan4
2016 2017 2018 2019 2020 2025
Individual Market 0% 32%% 35% 33% 32% 20%
Employer Sponsored Insurance 0% 4% 2% 2% 2% 4%
Private Insurance 0% 10% 9% 10% 10% 11%
Medicaid 0% 0% 0% 0% 0% 0%
Total Insured 0% 10% 10% 10% 11% 12%
Table 7. Change in Provider Access Under the Plan4
2016 2017 2018 2019 2020 2025
Individual Market 0% 29%% 43% 45% 46% 44%
Employer Sponsored Insurance 0% 0% 0% 0% 0% 0%
Private Insurance 0% 1% 4% 5% 6% 6%
Medicaid 0% 0% 0% 0% 0% 0%
Total Insured 0% 0% 10% 8% 8% 9%

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. For proposals that repeal the ACA—such as the Plan—there are a number of tax policy changes that are not directly related to health insurance coverage and are thus not included in our budget impact analysis.

H&E projects that the insurance coverage provisions of the Alternative will decrease the budget deficit by $350 billion over the next decade. 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 household’s 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 9. Budgetary Impact of the Plan (billions)[5] 10-Year Total
2016 2017 2018 2019 2020 2025
Sources of Funds[6]
Tax on Employer Sponsored Health Insurance 0 0 8 9 9 86 304
Individual and Employer Mandate Taxes 0 -11 -12 -14 -16 -31 -173
Subtotal -11 -4 -5 -7 5 55 132
Uses of Funds[7]
Cost Sharing Benefits 0 -20 -19 -17 -15 -5 -112
Premium Tax Credits 0 56 48 53 58 70 550
Medicaid 0 -48 -53 -57 -62 -71 -570
Other Public Health Insurance 0 -18 -9 -7 -4 -12 -86
Subtotal 0 -30 -33 -28 -23 -18 -218
Net Budgetary Impact 0 19 29 23 16 73 350

H&E projects that the Plan will lead to a gross increase in sources of funds of $132 billion. The Plan repeals the employer and individual mandates of the ACA without replacing them with any similar tax penalty, resulting in a cost of $173 billion from 2016 to 2025. The Plan also repeals the excise tax on employer sponsored health plans from the ACA and replaces the tax with a cap on the exclusion for those plans. Under the Plan, the exclusion for employer sponsored health plans is capped at $8,000 annually for individuals and $20,000 annually for families. This cap is indexed to inflation. After the first year, more households are expected to be subject to the cap as employer sponsored insurance premiums rise more quickly than the exclusion cap. This cap is also significantly lower than the current levels of the excise tax to be implemented by the ACA. H&E estimates that it will raise $467 billion in revenue from 2016-2025, a net increase of $304 billion relative to the current baseline. The Plan generates a much higher revenue relative to current law as the caps set on the tax are stronger.

Over the 10-year budget window of 2016 to 2025, the Plan will lead to a gross decrease in uses of funds of $218 billion. The Plan’s main new source of spending is higher enrollment in the individual marketplace, despite lower average subsidies. While the ACA discourages enrollment in catastrophic plans, the Plan encourages states to use a default enrollment option that would automatically enroll many more households into catastrophic plans. H&E expects high take-up of these catastrophic plan options. While more people are enrolled, the spending in the health insurance marketplace is expected to be slightly offset by the relatively inexpensive catastrophic plans. H&E also expects the affordability of these catastrophic plans will influence many households currently enrolled in other public insurance to enroll in a catastrophic plan. In 2017 the cost of premium tax credits jumps to $163 billion as a result of the cost of the HSA take-up and the tax credits. However, as an initial result of those in Medicaid that jump to the individual market, Medicaid expenditures decrease by $42 billion in 2017. As a result of the tax credits, the per-capita caps, and the new eligibility level of 119 percent FPL by the year 2021, over the 10-year budget window, H&E predicts that enactment of the Plan results in a gross reduction of $570 billion in Medicaid spending.

Over-65 Budget Impact

In addition to all the proposals of the under-65 population, the Plan includes many provisions the could greatly effect Medicare spending. A preliminary version of H&E’s Medicare simulation model was used for this analysis.[8] We provide cost savings estimates for the component of reform best able to score from our model or prior estimates. We estimate the cumulative savings from Medicare reforms we are able to tabulate sum to $1.56 trillion from 2016 to 2025. For any time after that 2026, we hesitate to make a projection because of the uncertainty in the medical market and demographic changes. With that caveat we project the net savings of Medicare reforms we can score would total $2.57 trillion from 2026 to 2035.

There are number of proposals to transform the Medicare program in the Plan. While we see many of great merit, we are only able to score those which we have previously examined or have adequate documentation from other rigorous analyses to make projections. The results of the score-able Medicare reforms from 2016 to 2025 most related to the Proposal are below.

Table 10. Medicare Budget Impact of the Plan (billions) 10-Year Total
2016 2017 2018 2019 2020 2025
Uses of Funds[9]
Prevention Fraud Recovery 0 -20 -20 -21 -22 -26 -203
Medical Malpractice Reform 0 -5 -6 -6 -6 -8 -61
Implement Coburn/Lieberman: Age 67 0 -28 -29 -30 -31 -28 -295
Implement Coburn/Lieberman: Unify A&B, Restrict Medigap 0 -10 -10 -11 -11 -10 -103
Mean-Testing Part D[10] 0 -4 -4 -4 -4 -4 -42
Block Granting Medicaid Long-Term Care9 0 -82 -85 -88 -92 -82 -864
Dual Medicare Beneficiaries Use Exchange 0 19 20 20 21 24 195
Premium Support[11] 0 -14 -14 -15 -17 -24 -186
Net Budgetary Impact 0 -144 -148 -155 -162 -158 -1,559

The benefit of major Medicare reform will echo far after a ten-year window. However, many variables could effect a greater than 10-year project. With that caveat we provide additional ten-year score for provision we feel can be projected from marginal certainty. At the very least the results show the budget impact of major reform can be quite substantial.

 

Table 11. Medicare Budget Impact of the Plan (billions) 10-Year Total
2026 2027 2028 2029 2030 2035
Uses of Funds[12]
Prevention Fraud Recovery -26 -27 -28 -29 -30 -36 -309
Medical Malpractice Reform -8 -5 -6 -6 -6 -8 -69
Implement Coburn/Lieberman: Age 67 -4 -4 -4 -4 -4 -5 -41
Implement Coburn/Lieberman: Unify A&B, Restrict Medigap -35 -37 -38 -39 -40 -48 -414
Mean-Testing Part D9 -6 -6 -6 -6 -6 -8 -67
Block Granting Medicaid Long-Term Care9 -115 -120 -124 -129 -135 -164 -1,382
Dual Medicare Beneficiaries Use Exchange -25 -26 -27 -27 -28 -33 -287
Net Budgetary Impact -219 -224 -233 -241 -250 -301 -2,568

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.

Under-65 Microsimulation Model

One piece of this analysis that is particularly sensitive to uncertainty is our assumption on the number of stats that implement the default enrollment option available through the Plan. While many different permutations of states could opt out of default enrollment for various reasons, for simplicity, H&E assumes that 27 states will opt out of the default enrollment option of the Plan. These 27 states represent those states that currently have federally facilitated exchanges.

Over-65 Microsimulation Model

H&E’s Medicare microsimulation is currently under development. One of the challenges is fully recognizing all of the plan choices and their associated premiums in a microsimulation model of health plan choice. Further compounding the complexity is that many in Medicare have choices that are jointly made by federal and state agencies such as dual eligible programs and the disabled population. To the extent possible we utilized our model for projections. When the model was too uncertain we relied on federal estimates from other sources such as CBO.

 

 

[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] All insurance coverage estimates refer only to the under-65 population.

[3] Total enrollment estimates may not equal the sum of all other enrollment due to rounding.

[4] Productivity and access estimates refer only to the under-65 population

[5] Cost estimates refer only to coverage provisions for the under-65 population.

[6] Positive values denote increases in revenue; negative values denote decreases in revenue. Due to rounding, totals may not add to the sum of each year.

[7] Positive values denote increases in spending; negative values denote decreases in spending. Due to rounding, totals may not add to the sum of each year.

[8] More information on the H&E Medicare Model is available at

Medicare Model

[9] Positive values denote increases in spending; negative values denote decreases in spending. Due to rounding, totals may not add to the sum of each year.

[10] http://www.cbo.gov/ftpdocs/99xx/doc9925/12-18-HealthOptions.pdf

[11] https://www.cbo.gov/sites/default/files/113th-congress-2013-2014/reports/09-18-PremiumSupport.pdf

[12] Positive values denote increases in spending; negative values denote decreases in spending. Due to rounding, totals may not add to the sum of each year.