In the beginning, God created a health-care system. But she quickly found it to be a thankless and terribly complex endeavor, so she decided to create the heavens and the Earth. The Earth was covered in darkness, so she said, “Let there be light,” and there was light. “That was easy,” she thought, so she decided to go back to health care.
“Let there be coverage,” she declared. And from the void came the questions: “You mean single-payer coverage? Universal coverage, or separate programs for the poor and the elderly? How high should we set the deductibles? Should we provide tax credits? If so, should they be refundable? What about guaranteed issue? Community rating? You’re gonna want to cover preexisting conditions, right, God?”
So she went back to creating the land and seas.
Okay, I may be making the health-care challenge sound harder than it is, but clearly Republicans have been struggling with it, and I think I know why. First, Obamacare has set a new baseline, and President Trump has promised that their replacement won’t just hit the baseline, it will surpass it. Second, the fundamental logic of affordable coverage for all goes against their basic brand such that they’ve set up an impossible goal: better, cheaper coverage than Obamacare that reduces the government’s footprint in the sector.
The baseline: What’s so great about the Affordable Care Act?
Though the ACA has some clear flaws, its benefits to millions of people are very real, and once people start getting a benefit, it’s very hard to take it away. It has also helped to generate some real cost savings.
With north of 20 million people getting coverage through either the Medicaid expansion or the health-care exchanges, the ACA has led to a sharp decline in the rate of the uninsured, from about 15 to about 9 percent, the largest such decline since Medicare/Medicaid came online in the 1960s.
The ACA’s effect on costs is harder to tease out, but it appears to be accomplishing one of its important goals of “bending the health-care cost curve.” Paul Van de Water highlights a remarkable finding in this regard. He shows that the Congressional Budget Office projection of how much it expects the federal government to spend on health care has come down by about $600 billion since 2010. That is, its 2017 spending projection is lower than the one it made seven years earlier.
But here’s the kicker: Unlike the higher 2010 estimate, that 2017 estimate includes the costs of the ACA, which we know is covering 20 million more people! And it’s still lower.
Some of these cost savings derive from the ACA’s improvements in the way health care is delivered. These include a tighter fit between what medical services actually cost and what public programs such as Medicare pay out; nudging the system away from the often expensive and wasteful fee-for-service approach toward bundled payments (a single payment for the treatment of a disease or clinical “episode”) and “accountable care” (wherein a group of providers coordinate to oversee the broad needs of their patients); incentives to reduce hospital readmissions; and trying to move these efficiency enhancers from the public to the private side of the market.
What about costs to individuals? Various indexes of health-care prices show relatively slow growth in recent years (some of which is because of the recession/slow recovery): The health price deflator rose at an average rate of 1.5 percent since 2010, compared with 3.2 percent in the 2000s. Analysis by the Obama administration’s Council of Economic Advisers shows lower cost growth for Medicare, for Medicaid and in employer coverage in the post-ACA years (2010-2016).
Of course, there’s the infamous, headline-generating 2017 premium increases in the non-group market. After growing 2 and 7 percent in 2015 and 2016, insurers in the state-based exchanges raised the cost of the benchmark plan by an average of 25 percent. To Obamacare critics, this was proof of the program’s unsustainability. But because 85 percent of participants in this market (state exchanges) receive premium tax credits to offset the cost of coverage, they do not face the full shock. With the subsidies, Obama administration officials pointed out, about three-quarters of those in the exchanges could find a plan for $75/month or less. Second, if the ACA survives, time will tell whether this 2017 jump was the one-time correction many analysts believe it to be. Marketplace insurers appear to have initially underpriced premiums, in part because they may have initially overestimated the wellness of those buying coverage in the exchanges (and, thus, underpriced their premiums). In fact, even with the big 2017 increase, premiums are about where nonpartisan analysts thought they would be at this point.
Still, stable markets don’t typically generate price shocks of that magnitude, and while the non-group market — the part of the ACA served by the exchanges — provides less than 10 percent of coverage in the United States, there are many stories of thin networks and premium price shocks. Solutions to this problem include more generous subsidies and a public option in each exchange (to ensure a reasonable offer in markets with too few insurers), but such ideas are, of course, inconsistent with conservatives’ repeal efforts.
While the ACA hasn’t been in place long enough to observe its long-term effects on health outcomes, it is already generating some positive indicators:
— The share of persons reporting that they could not access needed care rose by half in the decade before the ACA became law. Since then, it has fallen by more than a third.
— The above finding appears to be clearly related to the ACA. We know that the ACA played a role in the decline in state’s uninsured rates, and states with greater declines in the uninsured also had greater declines in people reporting they could not access care because of cost.
— Both the Medicaid expansion and allowing young adults to remain on their parents’ plans have generated significant increases in self-reported health status, mental health and financial stability.
— Most of the ACA’s coverage gains have come through the Medicaid expansion, and Medicaid has been shown to have both near- and long-term positive health impacts. Studies find that Medicaid is particularly helpful in stabilizing patients with chronic diseases such as heart disease, diabetes and asthma. Medicaid patients are more likely to use preventive care and far less likely to experience catastrophic out-of-pocket medical expenses. Medicaid eligibility during early childhood was found to reduce mortality rates among African Americans in their later teenage years by 13 to 20 percent. Longitudinal studies that track children into adulthood find that children on Medicaid for more of their childhood earn more as adults and are more likely to attend and complete college. Such benefits pose a challenge to replacers who want to repeal the Medicaid expansion and significantly cut what’s left of the program.
— Though the ACA is too new to measure longer-term health outcomes, research on health-care reform in Massachusetts, where a similar program was implemented years earlier, finds that for every 830 people who gained coverage, one death was avoided. Though I wouldn’t extrapolate that precise estimate to the ACA (which would imply 24,000 lives saved), it is likely that the program is having a similar effect, though we cannot yet know its magnitude.
Other positive outcomes include the fact that hospitals have seen a significant reduction in uncompensated care, but that reduction has occurred almost exclusively in the 32 states that opted for Medicaid expansion (including D.C.), which makes sense as low-income, uninsured people are those most responsible for uncompensated hospital care and are most likely to be covered by the expansion.
So, that’s the baseline that the replacement plan either has to hit, or Republicans have to explain why we should be fine about losing these gains. Good luck with that.
Another reason for the Republicans’ muddled state is that once you take health care at least partially out of the market, as is the case in every advanced economy, you’ve set off on a path that has a fairly predictable set of branches or decision points posing questions like the voices from the void to the deity in my allegory. Dealing with these questions comes much more naturally to Democrats or moderate Republicans than it does to tea partyers and others who just want to get the government out of the health-care business and give the stream of tax revenue that funds the ACA back to the wealthy.
What do I mean by “we’ve taken health care out of the market?” Simply put, you show up to the supermarket hungry, and they don’t have to feed you. You show up to the ER sick, and they have to treat you. Unless we’re willing to punt on that commitment, and all evidence shows we’re not, the government will be a significant player in health care, though how significant is, of course, what we’re arguing about.
The logic of insurance thus dictates that you’ll need to pool risk so that the healthy can subsidize the sick. Since some of the healthy won’t go for that deal, there needs to be a mandate to avoid an unbalanced risk pool leading to adverse selection, or the death spiral that health wonks warn about (with too many sick people in the risk pool, premiums must rise, pushing out the least ill, exacerbating the problem). But if you have a mandate, there will be those whose income is insufficient to comply, and they’ll need subsidies to afford coverage.
And that’s pretty much it. If you want to cover everyone, you need to pool risk. To do that, you need a mandate, and the mandate implies a subsidy.
Where does this leave those who would repeal and replace Obamacare?
That leaves the replacers in a fairly tight box. Weirdly, the Republicans seem to have somehow convinced themselves that people want to pay more out-of-pocket for health care — that’s certainly the philosophy behind their high-deductible plans and getting rid of the Medicaid expansion. I think they’re misreading the public.
Here are the replacement ideas they’ve been coalescing around.
Capping Medicaid: Instead of the current federal-state match that finances Medicaid, Republicans propose to save money by shifting costs to the states in a way that will cut the program relative to its current trajectory. A per capita cap fixes the level of federal Medicaid funding per beneficiary, which it then adjusts by a formula. Any costs above the cap would fall on the state.
In practice, block-granted programs (of which the per capita cap is a variant) rarely get adequate plus-ups when need increases because of, for example, the aging of their populations or unexpected spikes from epidemics or costly technical advances. Since 2000, funding for block-granted programs that serve low-income people fell by almost 40 percent once accounting for inflation and population growth.
Thus, eventually, the money supporting Medicaid would diminish and coverage losses would follow as millions of low-income families, people with disabilities and seniors would lose access to the program. Edwin Park estimates that over the next decade, the health plan being considered by the Republicans would shift $370 billion in Medicaid costs to states.* Park’s estimate implies ending the ACA’s Medicaid expansion, a stated goal of the repealers, leaving 11 million people without coverage, while also risking the coverage of the kids, seniors and disabled people who have long depended on Medicaid.
Creating state high-risk pools: This idea challenges what I think of as a fundamental truth of health policy design: the essential role of balanced risk pools. A pool comprising mostly sicker people will, of course, face relatively expensive coverage, and vice versa: If they had their druthers, healthy people would prefer their own, cheaper risk pool. Mandates forbid such segmentation, and those who oppose them argue this is unfair, as it raises the relative costs of coverage to healthier people. High-risk pools — insurance markets for those with expensive preexisting conditions — are offered as a solution, wherein healthy people get reduced costs and sicker people still get coverage.
Unfortunately, the logic of risk pooling still prevails. Experience with state risk pools shows that even expensive premiums fail to cover costs, and medical loss ratios (paid claims/premium revenue) always exceed 100 percent, with the difference made up by state revenue, fees on insurers, or employers.
States often found these pools unsustainable and, thus, restricted enrollment, raised premiums, cut back on coverage and benefits, raised deductibles and cost sharing, imposed waiting periods for coverage of preexisting conditions, and established lifetime limits on benefits.
In other words, in the interest of providing low premiums to healthy persons, high-risk pools avoid the cross-subsidization that is basic to insurance. The only way that can work, however, is either if some other entity makes up the difference between spending and premium revenue, or those with preexisting conditions get a lot less care.
Health Savings Accounts: Actually, these accounts are not just part of current law, they are also widely used. One recent study found there were 20 million such accounts with assets of $37 billion. HSAs allow people in a high-deductible plans to shelter savings (including the growth of those savings) from taxes. Unlike a traditional IRA, even the withdrawal of the savings goes untaxed as long as the money’s used for health-related spending.
There are at least four problems with HSAs. First, if you can’t afford to save, HSAs can’t help you. Some proposals offer subsidized savings through tax deductions or credits, which can help, but depending on how it’s set up, that, too, can be problematic, as I’ll discuss below. Second, this whole high-deductible, HSAs play is based on the skin-in-the-game theory of cost control, i.e., the view that the more costs are directly shared with patients, the less unnecessary care patients will seek. But the problem here is that since few of us are doctors, we don’t always know what’s important and what’s wasteful. And so, numerous studies have shown that skin-in-the-game policies end up dis-incentivizing necessary care. Rather than dip into the HSA to meet their high deductible, patients will go without needed care.
Third, we’re talking a major tax shelter here, as HSAs shelter savings, accruals and even withdrawals (when spent on medical costs). That’s why 70 percent of the total value of HSA contributions comes from households with incomes above $100,000.
Finally, some proposed plans allow tax-deductible contributions to HSAs that can be used to offset premium costs and meet the costs of high deductibles. But that won’t provide much help to low- and moderate-income people. The vast majority of those uninsured before the ACA were in the 0, 10 or 15 percent tax bracket, meaning that at best, they’d get a tax benefit from HSA contributions that amounted to 15 cents on the dollar. Their lack of tax liability would translate into a loss of coverage.
Letting insurers sell across state lines: Conservatives argue that different insurance rules in different states limit competition, and because consumers should have more options and competition lowers price, insurers should be able to sell across state lines.
The problem here is again the segmentation problem, as states with cheap, weak coverage will attract healthier customers from across the country, leading to a sicker pool in states with better insurance. Thus, if what I would consider an enlightened state decided to keep all the coverage benefits of Obamacare — covering preexisting conditions; no price discrimination based on age, gender or health status; benefit requirements — that state’s healthier residents could get inferior, cheaper coverage elsewhere, making coverage more expensive for everyone else in the state. That is, because insurers would have to meet the requirements only of the state in which they were licensed, “high-road” states would be undermined and their sicker residents would face higher premium costs.
Implementing “continuous coverage provisions” for people with preexisting conditions: Conservatives who want to provide coverage to people but are hostile to mandates face the problem discussed above about the fundamental structure of health reform. Without a mandate, healthy people will leave the risk pool and come back in only when they need care, creating the classic adverse-selection problem that leads to unsustainable, spiraling costs. So, in a search for some incentive to prevent this problem, they require guaranteed access to a marketplace plan only for those with a history of uninterrupted coverage.
One problem is that people with preexisting conditions have a track record of coverage gaps. One report found that “about 23 percent of Americans with a preexisting condition (31 million people) experienced at least a one-month gap in coverage in 2014, and nearly one third (44 million) had at least a one-month gap of coverage during the two-year 2013 to 2014 period.” Such spells are more acute among those who’ve been uninsured at some point in the past: More than 90 percent of such people have experienced gaps in coverage lasting at least two months.
These plans rarely say what will happen when someone without continuous coverage shows up at the ER. Of course, they will get treated and, under the fair assumption that we’re not talking about a wealthy person (those with interrupted coverage tend to have lower incomes), the costs of that treatment will be borne by the rest of us. Even those with higher incomes who fall on hard times, say through a job loss, could easily have a break in coverage, making them ineligible for a subsidized plan and, thus, facing much higher premiums on the open market or denial of coverage. In essence, I think of this continuous-coverage provision as the “kick-’em-while-they’re down” approach.
New tax credits or a standard tax deduction: Right now, for those in the individual market who purchase insurance on the exchanges, the Affordable Care Act provides premium tax credits that vary based on individuals’ income, their age and the cost of premiums in a given area. Low-income people get bigger credits, as do those who live where insurance costs are greater. At incomes above 400 percent of poverty (just short of $100,000 for a family of four), the ACA credits go to zero. In place of these credits, some replacement plans establish either new, uniform credits that do not vary by income or a standard tax deduction for health care. What’s the point of such a switch? This part sounds a little like replacing Obamacare with the Affordable Care Act.
In fact, salient differences abound. The ACA credits are scaled to help those with low and moderate incomes pay for coverage in the non-group market where they live. That means the credits will adjust to incomes and geography, both of which are key determinants of affordability. The proposed changes, however, at least as we understand them thus far, are based neither on income nor geography (they make some adjustments for age), nor, most importantly, the actual cost of coverage.
This means that those currently receiving credits in the ACA exchanges would get smaller credits under the proposed changes, while families with incomes above 400 percent of poverty, who get no credits under the ACA, would get a credit under the proposals. Low-income families in high-price places would be hit especially hard. One recent study predicts that in five years, credits under the replacement plans will probably be about 40 percent to 55 percent less than those under the ACA. Plans that give greater subsidies to the wealthy and less to those with moderate incomes will lead to less coverage than under the ACA.
Those are the problems engendered by tax credits. The problem with the standard-deduction approach is the same as was discussed under HSAs: The vast majority of those who got ACA coverage have low or no tax liability, so deductions don’t help them. Conversely, deductions return the largest benefits to those at the top of the income scale, so again, this change tilts against coverage for low-income families.
To put it in its simplest terms, Republicans are finding health-care reform a challenge for two main reasons: 1) the ACA established a new coverage baseline that they realize they have to hit or they have to be ready for serious political blowback, and 2) the logic of high-coverage-oriented health care implies risk pools, mandates and subsidies, all of which are discomforting to Republicans who correctly view them as “stuff Obama did” (and, thus, verboten) or just more big government.
They appear to be coming up with a set of ideas for reform that, at least as I understand them, will fail to deliver what their constituents want in terms of their health coverage. Their ideas call for most cost-sharing, more out-of-pocket spending and, ultimately, significantly less coverage. My impression is that Americans want health care that is less complex and calls for less skin in the game, and yet Republicans appear to be teeing up the opposite.
Thus, to the extent that they really do try to repeal and replace Obamacare with something like the set of ideas they’re currently considering, I think they’re going to find out the hard way that not only is health reform a challenge, but it is one they haven’t met.
*An earlier version of this post put this value at $500. The updated number reflects the latest Republican plan (American Health Care Act).