The Unaffordable Affordable Care Act Turns 6

This week marks the sixth anniversary of the Patient Protection and Affordable Care Act (ACA). But it’s hardly anything to celebrate. The ACA was intended to make health coverage affordable using an age-old strategy referred to as OPM (other peoples’ money). For instance, ACA regulations require insurers to accept all applicants — including unprofitable ones — at rates not adjusted for their health risk. Premiums can vary somewhat based on age, but not health status. A plethora of new taxes (mostly on medical care and health insurance) are supposed to somehow make coverage more affordable. Other funding mechanisms include draconian cuts to Medicare and higher deficits to expand Medicaid.

Most people covered by health insurance actually experience very low claims in any given year. Although annual health care spending per capita approaches $5,000 per year late into middle age, about half the population spends less than $500 annually on medical care. Thus, health plans with modest benefits would be both affordable and meet the typical medical needs of most Americans. But to accomplish the goal of making health coverage affordable to people with health concerns, the ACA had to force Americans to purchase health coverage and limit their choice of health plans. Health insurance that does not cover a plethora of preventive care, plans that cap benefits at predetermined levels and plans that reward Americans for having led healthy lifestyles are no longer allowed. Granted, insurers are allowed to discount premiums slightly for participation in wellness programs. But insurers know this is like closing the barn door after the horse has bolted. Whereas unhealthy lifestyles have little impact on 25-year olds, decades of unhealthy living makes a huge difference in 55-year olds.

In an attempt to transfer income from low-spenders to big-spenders, Obamacare has purposely undermined affordable coverage. In the process it also removed the incentives health plans use to encourage healthier lifestyles.Middle-class, healthy folks have largely shunned Obamacare Marketplace plans.The inevitable result is that the Obamacare exchange has become a high-risk pool for people who are poorer or sicker than average. Obamacare plans are a bad deal for all but the most costly enrollees or those receiving lavish subsidies. Indeed, 83 percent of exchange enrollees are ones who receive subsidies.

A report from the University of Pennsylvania’s Wharton School found all but the most heavily subsidized Obamacare enrollees would be better off financially if they skipped coverage and pay for their own medical care out of pocket. The people whose incomes fall between 1.38 and 1.75 times the poverty level will spend about three times the amount on premiums for a Silver plan as they would have out of pocket had they remained uninsured. For those earning more than 250 percent of poverty, most will be worse off financially compared to having remained uninsured.

Prior to ACA, health plans with limited benefits (or high deductibles) were less expensive than coverage with onerous mandates and costly regulations. Those who could not afford comprehensive coverage could choose to either self-insure for day-to-day medical needs (now illegal), enroll in a limited benefit plan (now banned under Obamacare) or enroll in a high-deductible plan. Of those three options the only option left are high-deductible plans. Prior to the ACA, high-deductible plans were very affordable. Premiums were low enough to have money left over to fund Health Savings Accounts to cover a portion of the costs below the deductible. Since Obamacare high-deductible plans have become costly even though they cover almost none of Americans’ day-to-day medical needs.

Consider this: according to the comparison website, HealthPocket.com, a family who receives no subsidies pays nearly $1,000 per month for a bronze plan with a high deductible. Bronze plans would cost my family $12,000 per year and require deductibles of $6,750 apiece. These plans are a poor value for most enrollees by design. A family deductible of $13,500 means that despite sending $12,000 to a health insurer, all of our health care needs must be paid out of pocket. That is anything but affordable for most families.

Overcharging healthy people causes them to avoid health insurance like the plague — resulting in a condition known as adverse selection. The ACA attempts to lessen adverse selection by forcing young and healthy people to buy expensive health coverage that’s a poor value.When these types of regulations were tried in the 1990s (without a mandate) it was a disaster. Over time health coverage became incredibly expensive. Premiums shot up to reflect the higher costs of the health plan. Coverage became a bad value for everyone except sick people for whom any coverage was better than nothing. Sound familiar? It should because that’s what’s happening to Obamacare plans today.

I’ve talked to people who say they’ve made the conscious decision to forgo health coverage and just pay the penalty and pay cash for medical care. A few even think they can get out of the penalty. One lady I talked to suggested she’d be far better off just taking the money she would have spent on largely worthless insurance coverage and using it… (hold on to your hats, this is controversial!) on actual medical care. She will pay out of pocket for her physician visits. She will use a discount pharmacy card for her prescription drugs. She will pay for laboratory testing out of pocket. She’s even considering having some procedures done that her insurance would never have covered, even if she met her deductible.

Many of those enrolled in Obamacare are gaming the system and cheating insurers in the exchanges.  Many enrollees remain uninsured despite the mandate — only signing up for coverage if they become sick or need expensive medical services. In theory the next opportunity to enroll is not until the next open enrollment period at the end of the year. But eager to grow exchange plans as much as possible, the Obama Administration foolishly created multiple special enrollment categories. This allows just about anyone to sign up during the year long after the open enrollment deadline has passed.

This is a problem because claims data shows that individuals signing up using special enrollments aren’t just slackers who lost track of time during open enrollment. Late enrollees use more medical care than those enrolling during open enrollment. They are also more likely to drop coverage soon after receiving expensive medical care. Health insurer Aetna reports one-quarter of its 2015 enrollees signed up through a special enrollment category. Aetna enrollees who sign up during open enrollment tend to maintain coverage for eight to nine months on average, whereas those signing up during a special enrollment drop out in only half that time. Anthem also reports members who took advantage of special enrollment are twice as likely to drop coverage only months after signing up.Other large insurers report similar problems. Anyone can legally drop coverage for two consecutive months, say November and December, and not owe a penalty. Individuals can also merely stop paying premiums and insurers cannot kick them off the rolls for 90 days (although insurers can stop paying medical claims after 60 days of missed payments).

It’s rather sad when you realize the Affordable Care Act made health care unaffordable for millions of middle-class families and left many formerly-insured better off with no coverage. Obamacare is hardly a legacy to celebrate. It’s time to go back to the drawing board and work together to find a solution that creates the appropriate incentives for all stakeholders.

Devon M. Herrick, PhD is a health economist and senior fellow at the National Center for Policy Analysis. He has written on ways consumers can lower their drug spending for more than a decade.

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24 replies »

  1. “but I had no idea that the enrolles actually had to sign up and pay unfair premiums as well.”

    What about the “unfair subsidies” they receive?

    “Some happen to be more responsible than others and barely use the system which rips them off”

    That’s called insurance – you don’t get a refund if you don’t use it. Do you want a refund for not using house and auto insurance?

  2. “ACA regulations require insurers to accept all applicants — including unprofitable ones ”

    Did you know that employer group health policies have to be issued on a guaranteed issue basis? Did you know that employer’s subsidize health care policies for their employees?

    What would you do with people with pre-existing who cannot afford coverage?

    How do you get your health insurance?

  3. I knew Obamacare wasn’t fair for people who paid healthcare premiums through a healthcare provider, but I had no idea that the enrolles actually had to sign up and pay unfair premiums as well. Some happen to be more responsible than others and barely use the system which rips them off, but then there are the people who sign-up when it is convenient for them to receive care, then bail after without payment. If they don’t have to pay for the care they receive, then why do we have to pay for care we don’t receive; this just has to stop. I have noticed less is being covered when I go in, but the steep premiums that we pay really are getting us very little plus all the extra out of pocket fees. I feel like until a solution is solved, it shouldn’t be illegal for people to self insure because from the perspective of the lady, she seems better off for actually getting the care she is paying for. Hopefully something is done soon.

  4. ACA regulations require insurers to accept all applicants — including unprofitable ones — at rates not adjusted for their health risk. Premiums can vary somewhat based on age, but not health status.

    When Liberals like Mr. Herrick and his National Center for Policy Analysis come up with a reasonable way to finance everyone’s lifetime medical risk from behind Rawls’ Veil of Ignorance, (i.e. an actual public policy) I am sure we’d all love to hear it.

    Oh wait. For him, that’s a non-goal. No, he wants to incentivize stakeholders because he thinks having the right rules leads to “optimal” results. Our disagreement is over the definition of “optimal”.

    How about this? There is no such thing as “other people’s money”. Money itself is a commons, upon which all have a claim. There is no such thing as “Economics”. There is “Political Economy” though. The great disagreement is over what sort of Political Economy we shall have – over what constitutes moral public behavior.

  5. Follow the consensus seems to be your mantra and your methodology behind your epistemological thought processes. Innovation doesn’t come from consensus thinking rather from outliers that create a new consensus. The US is quite different from its major European friends with higher incomes for its citizens, more living space and more amenities. We spend a lot more on these amenities as well. Not only that but we have protected those nations for decades.

  6. As I pointed out this week in a THCB piece on the ACA at 6 years old, there are reasons to be concerned about the rise in exchanges premiums (and high deductibles), due in part to the lower-than-hoped-for number of young and healthy people enrolling….but also due to rising medical prices overall and the initial low-ball premiums the insurers offered in 2013. But I concur with others that Mr. Herrick’s analysis is grounded in the conservative orthodoxy that rejects the notion of social insurance. We’ve had that debate in the U.S. for 30 years—-unlike ALL other Western/democratic industrialized countries which resolved it decades ago in clear favor of universal coverage systems that recognize access to healthcare as a human right and social good. And those systems have served those countries well. Less ideologically driven critiques of the ACA would be more constructive and help make the ACA’s insurance structure work better.

  7. …And your message Roger is wait in line and die.

    Being on the hook for a high bill or even going bankrupt is a lot better than dying.

    I advocate high deductible and low premium insurance that would cover the patient in need rather than high premiums that bankrupt the patient before the patient ever has a chance to meet his deductible.

  8. Allan’s message to cancer victims: What do you mean, you can’t afford the increased premium. Too bad, buddy!

  9. ““Bronze plans would cost my family $12,000 per year and require deductibles of $6,750 apiece. These plans are a poor value for most enrollees by design. A family deductible of $13,500 means that despite sending $12,000 to a health insurer, all of our health care needs must be paid out of pocket. That is anything but affordable for most families.””

    What do you think insurance cost before the ACA? The same as that example. The difference is subsidies for lower income families.

    Buying health insurance is like any other insurance, You pay and pay and don’t get any money back unless you need it. That’s how it insurance works. But in the U.S. we’ve allowed the system to spiral costs out of control so everyone needs a subsidy either from government or through employer.

    “Its been 6 years.. and if you can’t tell, I’m fed up.”

    Blame Republicans for only wanting to kill it, not improve it. They have nothing to replace it with.

  10. ACA penalty 2016 to 2017, goes from 2% to 2.5% of taxable income, max of $2085.

    “Bronze plans would cost my family $12,000 per year and require deductibles of $6,750 apiece. These plans are a poor value for most enrollees by design. A family deductible of $13,500 means that despite sending $12,000 to a health insurer, all of our health care needs must be paid out of pocket. That is anything but affordable for most families.”

    At the moment the price differential to the uninsured ‘healthy’ demographic between ACA penalty and joining the ACA is pretty large.I guess its possible that as time goes on the penalty rises to a point where it doesn’t make economic sense to not join. I think the public opposition to a very hefty mandate will be insurmountable though.

    Why not do something simpler – let folks have the option of minimal catastrophic coverage plans? These plans would have very low premiums and would by design have high deductibles which would serve as the damper on health care costs that everyone wants. ( I think this is what the author means by saying that prior to the ACA, you could get a low cost plan that doesn’t meet the obama minimum requirement. You still can now, you just have to pay the penalty)

    I don’t think most folks mind high deductible plans if its paired with low premiums — at the present time for a multitude of reasons outlined above you have high premium, high deductible plans. This is what fuels the anger of the trump/bernie crowd – its a raw deal. I find the response of the administration anemic…follow HHS on twitter – where is the admission of the flaws inherent in it and why is there no frank discussion about how to fix it? Check out the whitehouse.gov aca site – nary a word about any problems. According to the website, the ACA has apparently reduced redtape for physicians. I kid you not. I guess the whitehouse thinks meaningful use has improved the patient-physician relationship?

    I used to defend the ACA as a good first draft.. the smartest guys in the room would figure it out – other, better iterations/modifications/improvements would follow. Its been 6 years.. and if you can’t tell, I’m fed up. 🙂

  11. The Dems pushed it through without even reading it. Don’t blame the Republicans for a bad idea that gets worse everytime we look at it.

    We had some problems before the passage of the ACA that both sides agreed upon so instead of working where there was agreement the Dems passed a bill that even many on the left dislike. It’s a hybrid that just doesn’t work and its passage has made it that much more difficult to fix the inherent problems.

  12. There aren’t many ways to bring down prices: 1. competition in a market. 2. Use large purchasing (monopsony or oligopsony) often via price controls and fee schedules. 3. Naked price controls ordered by law for all buyers and sellers.

    Plastic surgery and some dentistry are in a relatively free market, albeit heavily regulated. Almost all other providers are facing large oligopsonic purchasing which means a large insurer or government body is saying “this is what we will pay you for this.”

    Naked price controls never work. Recall Nixon’s adventure here.

    Monopsony is the favored tool used by the government seeking lower prices from the docs. They were afraid to use this on big pharma and pharma supported the ACA in return. Surprise!

    We docs are not going to compete and lower our procedure prices maximally (prices near marginal costs) if there is an insurance company paying. “They can afford it.” …is what we will all say. No one can be this altruistic if there is a big third-party payer.

    The government is striving to get competition between insurance companies, believing this will bring down prices of hospitals, doctors and all deeper providers. This is a defect in economic thinking. Just because one succeeds in achieving a competitive market between insurers does not mean that any effective price lowering vectors will arise lower down. In fact, just the reverse will happen whenever the patient and the doctor and hospital are all saying “someone else is covering this.”

    The third party payer is the canonical cause of all of our problems. Not feeling costs–all down the line–is our defect.

  13. Prior to the ACA, most people who didn’t have health insurance either (1) couldn’t pass medical underwriting, (2) couldn’t afford insurance even if they could pass underwriting, or (3) were young and healthy and thought they didn’t need insurance and didn’t want to pay for it.

    If we had reasonably well funded high risk pools that worked well for the unhealthy and already sick by providing them with decent coverage at a premium they could afford, that would have removed one important reason for the ACA. If we had a mechanism to provide adequate subsidies for people who wanted health insurance but couldn’t afford it, that would have removed a second important reason for the ACA. As for the young and healthy who didn’t think they needed to buy insurance, they should reflect on the consequences of being wrong. What happens if they are in a serious accident, get a cancer diagnosis, or develop some other problem that requires expensive medical care that they couldn’t pay for? Maybe if they perceived that they wouldn’t be able to get the healthcare they needed and might die as a result, they wouldn’t be so cavalier about deciding not to buy health insurance.

    The bottom line is that the ACA was a response to market failures – items #1 and #2 above. Those who want to repeal the ACA and replace it with something else don’t come close to adequately providing for the unhealthy and already sick. The most frequently suggested alternative to subsidies, age-based tax credits, will work OK for some people but not for many others because the cost of identical health insurance coverage can easily vary by 100% or more across the country and sometimes even within a single state. At least the ACA caps premiums at 9.5% of pretax income for those with income below 400% of the FPL. I think it should offer a 10% cap regardless of income.

    ACA premiums are as high as they are because of adverse selection. Maybe the penalty for not buying coverage should be closer to the cost of the lowest priced plan in the marketplace to induce more healthy people to buy coverage. Maybe parts of the essential benefits package should be made optional including maternity benefits, chiropractic care, mental illness and alcohol and drug abuse treatment. Maybe even the maximum age rating band should be raised from the current 3 to 1 up to 6 to 1 so young people don’t pay any more than is appropriate for the actuarial risk associated with their age group. There is lots of room to improve the ACA but I’ve been singularly unimpressed by replacement plans that I’ve seen put forth by republicans so far.

  14. “While a bunch of healthy folk balk at getting insurance and find it a better deal to pay the penalty.”

    Not sure how many after the 2nd and 3rd years will find this so. I agree the plan is flawed, but that’s what you get when you try to get legislation with insurers wielding so much influence. But what will we get with a Republican win in the President and the congress – no ACA, no coverage for sick people? We’re not going to get the plan that is needed.

  15. The basis for traditional insurance is that each member of the pool pays a premium commensurate with risk. The alternative that some prefer is that all pay equally, but that leads death spirals and higher costs unless force is applied. It is true that the ACA reduced the premiums of those that were the sickest while raising prices almost everywhere else, but some of those that are among the sickest are better able to pay their extra high premiums than many of the people that now are paying the higher premiums for them. Under this scenario healthy patients will try and avoid the high costs. Some of those healthy persons will then become sick and not have insurance or enough money.

    Though I think that most people (studying the healthcare debate) that dislike the ACA understand the reasons behind removing risk from premiums consideration I think a lot of those in support of the ACA don’t understand the problems that stem from insurance that is not risk adjusted.

    Great post, Devon.

  16. Come on folks, he has a very real point (disclaimer : I was for the ACA before I was against it).
    1. I believe the economist may understand the meaning of insurance is that the ‘healthy’ pay for the sick. The point he’s making is that the pool of the healthy is too small in this case. Without a strong enough mandate mostly sick and poor folks have joined… While a bunch of healthy folk balk at getting insurance and find it a better deal to pay the penalty.

    2. Partly because of 1, The current health plan options invariably soak you, and he gave a very real example. Most young healthy folks are never going to get past their deductible..so why pay the premium in addition to this??

    3. The ACA has singlehandedly bent the cost curve up, because it’s expensive to subsidize folks to get insurance, and the subsidized folks also start using more health care (not bad, just expensive). 2009-2013: health care costs were flat, (equiv to gdp rise). 2014 saw costs start to rise again.. Because of the ACA (this is not opinion – from cms). On top of that taxes supposed to fund the ACA were nixed..https://thehealthcareblog.com/blog/2015/12/17/the-magical-world-of-aca-funding/

    To rub salt in the wounds the Obama administration talks of the ACA like it’s fantastic! Watch this state of the Union!! I hear nothing about any real transformative change for the ACA from the powers that be.

    I want the ACA to work, and I’m not some tea party denier who’s hated the ACA since its inception. I just don’t see a path forward With the current folks
    In charge..

  17. So much wrong with Mr. Herrick’s biased opinion that it’s hard to respond in brevity.

    1. “For instance, ACA regulations require insurers to accept all applicants — including unprofitable ones ”

    Arne’t employer plans required to do so? What do we do with pre-exist “unprofitable ones”?

    2. “But to accomplish the goal of making health coverage affordable to people with health concerns, the ACA had to force Americans to purchase health coverage and limit their choice of health plans.”

    So called “forcing” involves including all at risk people not currently covered who would not be able to pay if they didn’t have insurance. It’s called a larger pool.

    3. “healthy folks have largely shunned Obamacare Marketplace plans.”

    All insurance (risk sharing) requires healthy to pay for non-healthy.

    4. “Prior to the ACA, high-deductible plans were very affordable.”

    Affordable to whom? People who don’t use health care or those that need to use it? Of course assuming risk makes the premiums more affordable – but not when you need it.

    I can’t go on, it gets worse. Mr. Herrick, who subsidizes your health care?

  18. The ACA is a misnomer. It should be called the ‘Let’s get more people covered’ act, and to that end, it has been successful. It has also removed the unhealthy dependence that people with pre-existing conditions had on their employers.

    However, Dr. Herrick is pointing to the ACA as the root of a much bigger problem, and that is that little seems to be working to reduce the overall cost of healthcare. The ACA has increased the number of people who are insured, so that the healthcare providers are writing off less for uncollectible services that they are compelled to provide. That is also a benefit to those who are writing off less, but it unlikely that they are reducing their prices to reflect fewer write-offs.

    Sadly, any meaningful improvement in costs will be taking on powerful interests. A staggering percentage of our overall healthcare costs are figuring out who is covered, who is going to pay, and how much. If all we spent was on the actual cost of the health care, we would save a ton of money (http://www.npr.org/2013/07/30/206654000/montanas-state-run-free-clinic-sees-early-success)

  19. “The ACA was intended to make health coverage affordable using an age-old strategy referred to as OPM (other peoples’ money).”

    This is how “Insurance” works. And it is the luck person who looses money on their health insurance every year.

    Just in case that is not clear, I have homeowner’s insurance. I am thrilled that I have lost money on my homeowner’s insurance every year (or maybe I should wish that my house burns down so I receive more money from the insurance company than I paid into the system.)

  20. Good observations.

    As to #4– no, he apparently does not, preferring to insinuate generational age cohort warfare. Actuarially, in E-Z round numbers, health insurance is a ~60 year proposition (speaking just of adults), tightly correlated with aging. This is not rocket science, we all know this (or should). Consequently, given that we insist on continuing to sell it on one-year chunks — well, you get what you get. Everyone thinks someone else is getting a better deal, and everyone wants to “free ride” until they need serious medical care. Moreover, a good bit of it is not even “insurance” but rather expensive no-value-adding bureaucratic 3rd party intermediated “pre-payment.”

    Again, the “Repeal and Replace” people continue to ignore the “replace” component. Replace with what?

    We already spent years at “the drawing board,” and it got us “AHIPcare.” I studied every draft of the House bill every step along the way (so much for “we have to pass it so you’ll know what’s in it”). Maybe next time at the drawing board will be more effective. I rather doubt it, given that published health policy wonks continue to fail to proffer any details and AHIP remains in business.

  21. Yes, there’s lots wrong with the ACA, and there was lots wrong with our healthcare system before the ACA.
    So, a few questions for Mr Herrick:
    1. Given that, outside of Medicare and Medicaid, most Americans continue to get insurance via their employer, what research can you cite that shows that rising premiums are primarily due to the ACA?
    2. What “draconian cuts to Medicare” are due to the ACA?
    3. Given that most of us incur much less in medical costs than we (or our employers) pay in insurance, how would avoiding the insurance mandate help when we discover we have cancer?
    4. Do you realize that the basis for insurance is that the entire pool of covered lives pays for the costs incurred by the sick and injured?
    5. How do you differentiate for premium purposes between the heart problems of the smoker who eats all meals at McDonalds and the cancer of the vegan yoga instructor?
    6. If body weight is to be used in premium setting, how do you differentiate between an individual with Samoan ancestry and one with Vietnamese parents without violating the US constitution?

  22. The usual litany of smackdowns, some of them true, some of them hype. Zero proposals as to what might constitute a rational, comprehensive, and effective system.