Federal Health Reform Is Largely Market-Based, Despite Contrary Assertions Randall R. Bovbjerg and Stan Dorn October 2012 Introduction and Summary leaders for market-based health reform.1 A market works only for those who can afford to participate, so Opponents regularly deride the Patient Protection and the ACA creates advance tax credits for modest- Affordable Care Act as a government takeover of income people that will help millions of the otherwise- American health care. But the ACA relies primarily on uninsured purchase private coverage within the the private market to achieve coverage expansion, exchanges and add to the competitive rewards using public regulation to make the market work. available to plans. All legal residents with incomes The ACA is a direct descendant of the “pro- from 100 to 400 percent of FPL are eligible for competitive” reform strategy of the Reagan era, which subsidies, unless they are instead eligible for also proposed to structure competition among private Medicaid/CHIP or another public plan, or are offered health plans to expand coverage and promote better employer-sponsored insurance that the ACA value. After the ACA, as before, the vast majority of classifies as affordable. Americans younger than Medicare age will enroll in Incentives to seek good value in health coverage are privately operated insurance plans and will receive created by the ACA’s subsidy structure for individuals care from private physicians and hospitals. The ACA choosing among exchanges’ tiered offerings of plans. will expand coverage from private insurers as well as These incentives will be strengthened by a cap on the under Medicaid and CHIP (which also rely heavily on federal tax exclusion for employment groups with very private plans). high premiums that begins in 2018, the so-called 2 The ACA establishes new ground rules for insurance “Cadillac tax” —which will also encourage value- competition, similar to traditional practices of large conscious trade-offs in coverage decisions. employment groups, which require insurers to The structure of credits is a key feature for promoting compete on efficiency, rather than on avoidance of value. The new federal subsidy is pegged to the risky or costly enrollees. Starting in 2014, competing second-lowest premium charged for a “silver” health private health plans will cover the previously plan in the enrollee’s area—the so-called “reference uninsured, both under the new insurance-purchasing premium.” Silver is the label for plans with the second exchanges and under states’ Medicaid programs. -highest level of cost sharing (more than for platinum Most already covered Americans will be largely or gold, less than for bronze). Silver plans are to have unaffected, especially in large firms. an “actuarial value” of 70 percent; this means that Reform operates mainly by structuring incentives for payouts from the plan are projected to pay 70 percent private actors and states and by giving them new of the full expense of the covered services used by a information and coverage options rather than by standard population. Additional subsidies for imposing direct controls on behavior. As a result, the consumers with incomes at or below 250 percent of ACA does far more to expand personal choice and FPL raise actuarial value to between 73 and 94 autonomy than to reduce them, most obviously for the percent, depending on income. As with most insurance, much higher cost sharing applies for using tens of millions of Americans who are now either 3 uninsured or offered only a single option for insurance out-of-network caregivers. coverage. Subsidies cover the amount of reference premium that exceeds an enrollee share deemed reasonable in How the ACA Creates a More Effective light of family income. This is no government Insurance Market giveaway: all enrollees pay at least 2 percent of their income for the reference plan, which is the level Incentives, infrastructure, and information are key expected from enrollees with incomes from 100 to ways to achieve an effective marketplace. These 133 percent of FPL. Consumer premium obligations three i’s were memorably set out by early thought rise to 9.5 percent of income at 300–400 percent of © 2012, The Urban Institute Health Policy Center • www.healthpolicycenter.org page 1 FPL. Everyone wishing to upgrade to a more costly (e.g., open enrollment, comprehensive benefits, silver plan or to a gold or platinum plan must pay the choice of plan, and enrollee contributions that do not full difference in premium themselves; and, while vary based on health status, age, or gender), from accepting a bronze plan lowers the enrollee’s pioneering states’ experience (e.g., coverage of premium share, it substantially increases out-of- childless adults, health insurance exchanges), and pocket costs. Premium subsidies are indexed to rise from prior pro-competitive and Republican proposals more slowly than expected health care costs, which (e.g., individual mandate, risk adjustment). means that consumers may see their premium charges rise in future years. In particular, two underappreciated aspects of traditional large-group financing parallel what the ACA Two key features of the subsidy design are so seeks to accomplish. First, such employers finance important that they deserve reemphasis: the “employer share” of premiums by setting aside funds that would otherwise be paid as wages.8 In 1. The full marginal cost of any upgrades is borne by effect, because wage offsets are not individualized, all enrollees. The structure creates a very powerful incentive for enrollees to carefully weigh added value employees are “taxed” to create a shared pool of against added cost, to seek out efficiencies much funding that supports all employees’ benefits. Employees who seek to postpone enrollment until more widely than is asked of enrollees in typical large they really need care can save only the relatively employment groups. A similar approach is used by small “employee share.” Given the extent of benefits the federal employees health benefits program, long lost by opting out, this arrangement gives employees lauded by conservatives as a good market model for 9 health insurance.4 Having consumers pay for the full strong incentives to enroll promptly and not free ride. price differentials, as noted by conservative thought Second, employers also typically charge the same share of premium to all employees, a form of full leaders, also “triggers much stronger price/quality “community rating.” competition among plans seeking the business of enrollees. Plans [must] compete to satisfy customers The ACA’s allegedly heavy-handed provisions are who are motivated to pick a plan according to the full much weaker than these widely applicable private- package of premium, services, quality, and sector practices. The ACA’s payments from anticipated out-of-pocket costs.”5 individuals who remain uninsured are much smaller 10 2. Government contributes toward a modest plan and much less reliably enforced than is the only, not the best plan or what families or their employer share of premium held aside from wages for caregivers consider “needed.” This approach is a all workers, whether or not they accept employer deeply conservative one, classically espoused by coverage offers. And the ACA calls only for “modified” President Reagan’s Commission on Ethics in rather than full community rating; premiums can vary Medicine and vigorously promoted by Professor Alain substantially by age and tobacco use and somewhat Enthoven, that era’s leading proponent of pro- by geographic location, with significant latitude for competitive reform.6 The level of premium subsidy state variation, as well as variation across plans depends on income, asking more of people who can within states. afford more, and cost sharing is subsidized for people The ACA likewise creates modest incentives for up to 250 percent of FPL. But every enrollee must medium and large employers to contribute to the cost pay some premiums and some out-of-pocket cost of their workers’ health coverage, rather than allow sharing, up to limits that also vary by income and tier 11 7 such costs to be paid entirely by taxpayers. While of coverage chosen. these payments are significantly below the cost of The requisite purchasing infrastructure comes from group coverage to most employers, they establish the new nongroup and small-group exchanges, along modest disincentives against firms dropping coverage with new ground rules for insurance that create the entirely or structuring health coverage offers to shift lifetime protections of open enrollment—protections costs to the public sector. not available at any price within unstructured insurance markets. Such rules are essential to avoid Modestly standardized benefit structures are another the segregation by risk that inevitably excludes many infrastructural component that promotes more people from coverage. Rules are also essential to effective competition. The ACA requires that plans create insurance market competition that focuses include 10 “essential health benefits.” Echoing that most on the value of health coverage rather than same federal employees plan previously so admired mainly on how insurers and customers can sort by conservatives, the ACA sets out only broad categories like ambulatory care, emergency services, themselves out according to medical risk and 12 expected expenditure. and hospitalization. It has been implemented not to impose a single, uniform national package for all but The ACA’s basic concepts and ground rules come to allow state discretion to adapt benefits from a wide from traditional practices of large employment groups range of private-sector models. Each state defines its © 2012, The Urban Institute Health Policy Center • www.healthpolicycenter.org page 2 own comprehensive benefits package, and out-of- The Medicaid expansion also relies heavily upon pocket cost sharing can vary dramatically, even within private health plans. Medicaid and CHIP expansion “color” tiers, as long as overall actuarial value targets are an important part of the ACA.