American Enterprise Institute: “Best of Both Worlds”

The American Enterprise Institute published a health reform white paper, titled “Best of Both Worlds”. The white paper, referred to in this report as the Proposal, offers alternative policy suggestions to those that were implemented under the Affordable Care Act (ACA). [1] Key aspects of the proposal include a “Basic Plan” available to all individuals at no cost, eliminating the tax exemption for employer sponsored insurance premiums, eliminating most of the Medicaid program, and instituting a safety net for the uninsured, among others. This report details the findings of the Center for Health and Economy’s (H&E) Under-65 Microsimulation Model on the Proposal’s impact on health insurance premium prices, 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:

• Premium Impact: The Proposal is projected to decrease the total premium cost of private health insurance coverage, with the largest impact on Bronze and catastrophic coverage plans.

• Coverage Impact: The Proposal is projected to lead to 19 million more insured persons by 2025 relative to current law. The increase in coverage is the net effect of a growing individual market and shrinking enrollment through employer-sponsored insurance and Medicaid.

• Provider Access: The Proposal is projected to initially result in greater patient access to providers. According to the H&E Provider Access Index, access for the insured population will be 4 percent greater than under current law in 2016. By 2025, average provider access under the Proposal will be roughly equal to current law.

• Medical Productivity: The Proposal is expected to lead to greater productivity than under current law. According to the H&E Medical Productivity Index, productivity is projected to increase by 8 percent by 2025.

• Budget Impact: Compared to current law, the insurance coverage provisions of the Proposal will increase the federal deficit by $940 billion between 2016 and 2025.

 

Details of the Proposal

The core of the Proposal rests on a “Basic Plan” that is available to all Americans at no cost. Unlike the premium support system under current law, which features a tax credit that declines with income, the Basic Plan refers to an insurance product that declines in benefit level with income. The Proposal does not adjudicate on the best design of such benefit levels but does offer an illustrative example for a scheme which the authors consider to be reasonable. H&E uses this illustration—which describes a system of deductible and coinsurance levels that increase with income—to create stratified benefit levels that are comparable to insurance products currently on the market.

The richest Basic Plan benefits are available to households that earn less than 100 percent of the Federal Poverty Level and are equivalent to the benefits currently provided by Medicaid. The benefit levels decline to a high deductible catastrophic plan with a $10,000 deductible for households that earn between 200 and 250 percent of FPL. The Basic Plan deductible increases gradually from $10,000 to $50,000 between 250 and 400 percent of FPL. Individuals with chronic illness or disability can qualify for Medicaid level benefits up to 300 percent of FPL.

A household has the option to apply the value of the Basic Plan for which it is eligible to the purchase of a different health insurance plan. In its practical application, H&E expects this design of scaled benefits to operate in a similar way to means-tested health insurance premium credits. However, unlike a national, income-dependent premium support scheme, the cost of the Basic Plan will plan will vary according to the person-specific price of the plan.

The Proposal specifies that every eligible household will be enrolled in the basic plan by default and have the option to choose a different insurance plan. Because of uncertainty surrounding the implementation of such a large scale auto-enrollment program, H&E models the Basic Plan as a free health insurance product offered through a national exchange, similar to the Health Insurance Marketplace operated under current law.

The Proposal eliminates the Medicaid program—aside from assistance with Medicare premiums and long-term care—replacing its benefits with the Basic Plan. For the most part, H&E expects this proposal to be implemented as a transition for the current Medicaid program to one comprised entirely of private managed care programs. Income eligibility for these managed care programs ends at 100 percent of FPL in every state—unless an individual can qualify through disability or chronic illness—and the premium support for these managed care programs is paid entirely by the federal government. For simplicity of comparison, this report will directly compare coverage and spending estimates under the current Medicaid program to beneficiaries of the Medicaid-like Basic Plan.

The Proposal eliminates the entirety of the tax exemption for employer sponsored health insurance premiums as well as the tax favorability afforded to various vehicles of health savings: health savings accounts, medical savings accounts, flexible spending accounts, etc.

The Proposal also provides a safety net that covers emergency services for the uninsured. If a household elects not to purchase insurance, it will be subject to a safety net tax that is designed to be a funding mechanism for safety net expenditures. H&E expects that the safety net provision will be able to raise revenue equal to its expenditures, as it is specified by the Proposal.

There are some provisions of the Proposal which H&E is not able to include in its analysis, the most prominent of which are long-term health insurance contracts. The Proposal offers a new regulatory framework for individuals to enter into long-term contracts with insurance companies. Such contracts would protect against medical underwriting later in life and put a greater emphasis on preventative care. H&E expects that these contracts will begin as a small segment of the market, and will not significantly impact the broader market for health insurance within our analysis period. H&E also assumes that the Proposal repeals all coverage provisions of the ACA and will have a negligible effect on Medicare beneficiaries.

 

Premium Impact

H&E health insurance premium estimates are based on five plan design categories offered in the individual market: Platinum, Gold, Silver, Bronze, and catastrophic. Under current law, the cost-sharing designs of the four metallic categories correspond to approximate actuarial values: 90 percent, 80 percent, 70 percent, and 60 percent, respectively.[2] Catastrophic coverage plans refer to health insurance plans that reimburse for medical expenses only after members meet high deductibles—a maximum of $6,350 for an individual under current law. When analyzing the impact of policy proposals on health insurance premiums, the particular plan designs for each category are not held constant. For example, a proposal to repeal the out-of-pocket maximum would allow insurance companies to offer catastrophic coverage plans with much higher deductibles. The plan categories are meant to roughly demarcate the range of plan options available. All premium estimates reflect health insurance prices without any financial assistance.

H&E estimates that the Proposal will lead to lower health insurance premiums in all plan categories for both single and family coverage. The primary policy mechanisms that influence health insurance premiums are the repeal of actuarial rating restrictions, the repeal of Essential Health Benefits (EHB) and deductible restrictions, and the repeal of the individual mandate.

Under current law, health insurance plans are only able to alter prices based on three factors—geographic location, age (a maximum ratio of 3:1), and tobacco use (a maximum ratio of 1.5:1)—and are explicitly prohibited from taking into account any information on expected medical expenses.[3] Since insurance companies still need to cover the cost of insured lives, these actuarial pricing restrictions lead to more people paying close to average premiums. Intuitively, high-risk individuals who would otherwise pay higher than average premiums benefit from such restrictions, leading high-risk individuals to gain coverage in higher numbers. Similarly, some low-cost individuals, for whom a close-to-average premium is a bad value, may drop insurance coverage. These fluctuations in the pool of insured are likely to cause average premiums to rise. The Proposal is projected to lower average premiums by allowing health insurance to use medical history to determine prices.

The ACA also mandates that health insurance plans cover the EHBs and limit financial exposure to members through lower deductibles and maximum out-of-pocket spending in order to be considered qualified health plans. The EHBs include maternity care, mental health services, and other benefits that might not otherwise be included in a health insurance plan. The Proposal repeals the EHB requirements in its current form, and replaces it with a scaled system of guaranteed benefits through the Basic Plan. For low-income households, the benefits offered by the Basic Plan may cover many of the same services. Higher income households will have much lower benefit levels offered through the Basic Plan but may choose to purchase richer benefits. In general, allowing higher deductibles and cost-sharing will lead insurance companies to make less generous and cheaper plans available for those with low expected medical costs. H&E finds that removing the EHB requirements and deductible restrictions will lead to a decrease in average health insurance premiums.

The Proposal also repeals the individual mandate, which requires that all individuals who fail to obtain qualified health insurance coverage pay a penalty, as detailed by the Individual Shared Responsibility provision of the ACA. Besides raising tax revenue through the penalty, the individual mandate encourages healthy individuals who may otherwise forgo health insurance because of low medical service usage to join the pool of insured premiums. With more healthy, low-risk individuals paying insurance premiums, insurance companies can afford to charge lower premiums, on average. Thus, H&E estimates that repealing the individual mandate alone would lead to an increase in average health insurance premiums.

The individual mandate also has a specific impact for catastrophic coverage. Under the ACA, adults over the age of 30 that purchase catastrophic coverage do not meet the qualified health insurance requirements of the individual mandate and must still pay the penalty. Because of this incentive, average catastrophic coverage premiums under current law are relatively low, which is partly a reflection of a young and generally healthy population of enrollees. Average premiums are projected to experience upward pressure absent the individual mandate due to an influx of older, higher-risk enrollment.

The net effect of these provisions is to decrease the average insurance premiums between 3 and 21 percent, depending on plan design category. The largest effects are in Bronze and catastrophic plans for single coverage.

 

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.[4] H&E estimates that the Proposal will lead to 19 million more insured individuals by 2025. Under the Proposal, the 2025 uninsured rate among the under-65 population will be 7.8 percent—down from the projected uninsured rate of 14 percent under current law.

Eliminating the Medicaid program and the tax exemption for employer sponsored insurance encourages a dramatic shift towards enrollment in the individual market. While the Medicaid program will not exist in its current form under the Proposal, H&E estimates that the Basic Plan offering Medicaid-like benefits will enroll 14 million fewer individuals than Medicaid under current law in 2016 and 15 million fewer in 2025. Since the Basic Plan is a federal program offered to all citizens earning below 100 percent of FPL, this will constitute an expansion of eligibility in some states. The Proposal will transition individuals currently eligible for Medicaid under current law and earning more than 100 percent of FPL into commercial insurance products with premium support.

Under current law, the tax exemption for employer sponsored health insurance premiums motivates the majority of adults under the age of 65 to purchase insurance through an employer. H&E estimates that the Proposal, through the combination of eliminating the tax exemption and other individual market incentives, will lead 17 million fewer adults to obtain insurance in this way. Employer sponsored insurance can offer some advantages beyond tax deductibility, such as group rating and administrative efficiency, that will lead many adults to continue to purchase these benefits through an employer. But H&E expects that, as the labor force churns over time, the popularity of employer sponsored insurance will continue to decline under the Proposal. In 2025, 37 million fewer adults will be insured through employer sponsored insurance than under current law.

The individual market is projected to grow by 39 million citizens, roughly offsetting the declines in Medicaid and employer sponsored insurance in 2016. Since the benefits of the Basic Plan at higher income levels are far less than the health insurance products offered under current law, H&E separately estimates that 7 million of those insured in the individual market will be enrolled in catastrophic insurance plans with deductibles between $20,000 and $50,000 in 2016. Unlike the health insurance subsidies under current law, the Basic Plan premium support increases in step with health care costs, which discourages enrollees from dropping insurance due to rising premiums. As a result, the number of insured under the Proposal is 7 million more than under current law in 2016 and grows to 19 million more by 2025.

 

Productivity and Access

In an 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 Proposal. The shift from beneficiaries in employer sponsored plans with rich benefits 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. Lower enrollment in traditional Medicaid also fosters higher productivity.

Under the Proposal, 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. The shift from Medicaid to private health insurance also leads to increased access for those beneficiaries. These increases are offset by the shift from employer sponsored insurance to insurance purchased through the individual market, which tend to have more narrow networks. On average, the Proposal will increase average provider access by 4 percent in 2016, but those gains are expected to fade away by 2025.

 

Budget Impact

The Proposal does not explicitly repeal the entirety of the ACA, which includes non-coverage related provisions that raise roughly $1.3 trillion in revenue over ten years.[5] In its analysis of a proposal’s impact on the federal budget, H&E assumes that the Proposal repeals and replaces all of the coverage provisions of the ACA, while leaving non-coverage provisions intact. In this analysis, H&E looks only at provisions directly related to health insurance coverage for the under-65 population.

H&E projects that the insurance coverage provisions of the Proposal will increase the budget deficit by $940 billion between 2016 and 2025. 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 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 provisions are categorized as Uses of Funds in H&E budget estimates. 

H&E estimates that the Proposal will lead to a gross revenue increase of $3.822 trillion over ten years. The Proposal eliminates the tax-exempt status of premiums spent on employer sponsored insurance, which H&E estimates will raise over $4 trillion over the budgetary analysis period. This revenue is partially offset by repealing the excise tax on high-cost employer sponsored insurance under current law and will net $3.923 billion in revenue when compared to current law. The Proposal repeals the individual and employer mandates, which is projected to cost $187 billion between 2016 and 2025. However, the Proposal replaces these mandates with a tax designed to fund an emergency safety net for the uninsured. H&E estimates that the safety net tax will raise $87 billion over ten years.

Table 10. Budgetary Impact of the Proposal (billions)1									2016 – 2025
			2015	2016	2017	2018	2019	2025
Sources of Funds2
	Tax on Employer Sponsored Health Insurance		0	372	382	365	374	426	3,923
	Individual and Employer Mandate Taxes		0	-10	-11	-13	-14	-31	-187
	Safety Net Tax		0	7	8	8	8	10	87
	Subtotal		0	369	379	361	368	405	3,822
Uses of Funds3
	Subsidized Private Insurance
		Cost Sharing Benefits	0	-19	-19	-18	-17	-6	-143
		Basic Plan Benefits	0	254	286	321	363	665	4,478
	Medicaid/ Low-Income Basic Plan		0	26	30	32	34	35	341
	Medicare		0	0	0	0	0	0	0
	Safety Net		0	7	8	8	8	10	87
	Subtotal		0	269	305	343	388	704	4,762
Net Budgetary Impact4			0	100	74	18	-20	-299	-940
1Cost estimates refer only for the under-65 population.
2Positive values denote increases in revenue; negative values denote decreases in revenue.
3Positive values denote increases in spending; negative values denote decreases in spending.
4Positive values denote surplus; negative values denote deficit.

H&E estimates that the Proposal will lead to a gross spending increase of $4.762 trillion. The Proposal adds one source of new spending—a safety net for the uninsured. H&E expects that spending under the safety net provision will be equal to revenue at $87 billion over ten years. The Proposal also eliminates spending on cost-sharing benefits for low-income households under current law, which is projected to save $143 billion between 2016 and 2025.

The most significant spending provision of the Proposal is the premium support associated with the Basic Plan. At the lowest income levels, the Basic Plan is a replacement for Medicaid funded entirely by the federal government. While enrollment in this plan is substantially lower than under Medicaid, H&E estimates that the Proposal will lead to $341 billion in additional federal spending, but significant savings to state budgets. Under current law, H&E estimates total state spending on Medicaid coverage for the under 65 population will be $1.2 billion between 2016 and 2025.

The Basic Plan also replaces the most significant spending provision of the ACA, premium tax credits for health insurance. Through higher coverage numbers and funding that keeps pace with rising health care costs, the Proposal leads to substantially higher spending on subsidized health insurance. In 2016, H&E estimates that the federal government will spend $254 billion more on Basic Plan benefits than on subsidized plans through the current Health Insurance Marketplace. The higher spending on subsidized health insurance under the Proposal will grow to $665 billion in 2025, as the Proposal does not restrict the growth of subsidy generosity relative to the cost of health insurance and the employer sponsored insurance market continues to decline in popularity. In total, H&E estimates that spending on subsidized health insurance will increase by $4.478 between 2016 and 2025 under the Proposal.

 

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.

The Proposal under analysis in this report is a particularly extensive reform of the health care system that involves large increases in both federal revenues and spending. Just as with the ACA, significant reform efforts can require several years of gradual implementation with various provisions phasing in over a long period. In contrast, H&E assumes full implementation at the beginning of the analysis window—the 2016 plan year. While this assumption may be improbable, it allows for simple comparisons of various health reform proposals that are driven by the policy mechanics rather than implementation assumptions.

 

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