[Editor's note: This story originally was published by Real Clear Policy.]
By Peter Nelson
Real Clear Policy
Part of the Democrats’ $3.5 trillion spending bill would make permanent the temporary expansion of Affordable Care Act (ACA) subsidies for individual market health insurance included in the American Rescue Plan Act earlier this year.
Premium affordability in the individual market is without question a problem. However, the ACA directly contributes to this affordability problem and simply throwing money at the problem is no way to fix it. Rather, it’s a perfect example of throwing good money after bad. The end result will be an even more dysfunctional individual market with weaker competition, higher premiums for the unsubsidized, and poorer coverage options for people with pre-existing conditions.
When campaigning in 2012, President Obama promised that “premiums will go down” once the ACA is fully implemented. That never happened.
Instead, by 2017 — the fourth year of full implementation under Obama — state individual markets were in crisis. Average premiums nearly doubled from 2013 to 2017 and health insurance issuers were fleeing. Seventy issuers left the market in 2017 — a 30 percent drop. Moreover, skimpier coverage with high cost sharing and narrow provider networks came to dominate.
To address this crisis, beneath a barrage of Obamacare sabotage accusations from Democrats and the media, the Trump administration quickly implemented a market stabilization gameplan with a large emphasis on making insurance markets more competitive. This strategy successfully lowered the percent of counties across America with just one issuer from 52 percent in 2018 to only 9 percent in 2021.
More competition worked. For three consecutive years average premiums for a benchmark plan on the federal HealthCare.gov exchange dropped. CMS analysis shows premiums dropped by a much higher rate — nearly 8 percent from 2018 to 2019 — in counties with an increase in the number of issuers competing.
Despite this positive movement, premiums remain out of reach for far too many Americans who still need a solution to the ACA’s affordability problem.
However, the Democrats’ proposal is the wrong solution. Their proposal would permanently make premiums free for certain low-income people and extend subsidies to much higher-income people by fully subsidizing the portion of benchmark premiums exceeding 8.5 percent of income.
Increasing subsidies to reduce premiums might sound easy and sensible. Yet, it ignores the ACA’s underlying structural problems that drove up premiums and reduced coverage options, and it will only aggravate these problems.
Research shows that, in addition to its costly mandates and over-regulation, the ACA’s existing subsidy structure raises prices by weakening competition. This is because the subsidy amount is linked to the price of premiums and, as a result, rises lockstep with premiums. With premium increases fully funded by government subsidies, issuers have little incentive to control premium growth.
Permanently expanding premium subsidies will virtually eliminate the portion of price-sensitive, unsubsidized consumers who would otherwise demand lower premiums. Ultimately, it’s a recipe for fueling healthcare cost inflation, adding to America’s crippling debt, and delivering windfall profits to issuers and healthcare providers.
It’s also a bad deal for people with preexisting conditions. While the ACA requires issuers to guarantee coverage to everyone and restricts them from charging higher premiums to sicker people, it also drove issuers to create plans with much higher cost sharing and narrower networks. Neither feature works well for someone with a pre-existing condition.
Yet, those plans can be the only option available. Centers for the Medicare & Medicaid Services data show that, in 12 of the 36 states using HealthCare.gov, the lowest available maximum out-of-pocket (MOOP) — the most someone must pay out-of-pocket for in-network services — runs $6,000 or more annually. By comparison, Kaiser Family Foundation employer surveys show MOOPs for employer coverage can be less than $2,000 and average around $4,000.
Many people living with pre-existing conditions who have good employer coverage today will find themselves forced into individual coverage with higher cost sharing if their employer drops coverage.
When most employees qualify for a federal subsidy, there’s a point when employers stop feeling the responsibility and seeing the value in providing health coverage. The Congressional Budget Office estimates 1.6 million Americans will lose employer coverage “primarily driven by a reduction in offers as a response to increased subsidies.”
There are far better ways to improve affordability and quality of coverage without fueling inflation or undermining coverage for people with pre-existing conditions. To start, shift from the ACA’s inflationary premium-linked subsidy to a fixed subsidy. Instead of giving issuers a blank check, this sets a target to drive competition and innovation. Next, create a federal reinsurance program to bring immediate premium relief by directly funding a portion of high-cost claims while keeping issuers motivated to control costs for their portion. Finally, amend ACA requirements to allow issuers to compete to provide higher quality, more tailored coverage for people with pre-existing conditions rather than current incentives for narrow networks and high deductibles.
Importantly, by relying on competition to drive down premiums versus boosting inflationary premium subsidies, these strategies transform the individual market to become part of a long-term solution to help lower the cost of care across America’s entire healthcare system.
Peter Nelson is a Senior Policy Fellow at Center of the American Experiment in Minnesota. He was a Senior Advisor to the Administrator at the Centers for Medicare & Medicaid Services, the federal agency that oversees health insurance markets and exchanges.
[Editor's note: This story originally was published by Real Clear Policy.]
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