With last Thursday’s ACA Supreme Court ruling confirming that Congress intended to include subsidies for those on the federal exchange in addition to state exchanges, the ACA has now survived an election, two Supreme Court rulings, and numerous Republican Congressional repeal attempts. Outside of Republicans taking back the White House, maintaining a majority in the House, and grabbing a two-thirds supermajority in the Senate, the ACA is likely here to stay for a while. So, I thought it would be a good time to recap what the ACA is, and then dig in to how it has performed thus far, the winners and losers, and how it can approve.
Most personal finance bloggers avoid the Affordable Care Act (aka “Obamacare” or “Romneycare”, if you will) like the plague, in fear that it might polarize their audience. But I think shying away from such a big topic is a disservice. The ACA impacts all of us – our friends, family, communities, and the nation as a whole. Hopefully by the time you are done reading this, you will agree that I have tried to maintain objectivity and stick to the facts (with a boatload of research and over 2,800 words) versus steering towards the political crap.
As long as the ACA works over the long-term, I don’t care which party takes credit for the idea. Both have a rightful claim: Republicans dreamt it up in conservative think tanks in the 90’s and were the first to implement it (Romney in Massachusetts, which had and still has a nation leading percentage of insured citizens, by a wide margin). Democrats then pushed through the legislation as their platform. Whichever party did not push health reform legislation through as part of their platform was going to work their hardest to discredit the changes and repeal it if it actually had a threat of working and making the other party look good – that’s politics.
Please, no political debates or grandstanding here. Lets stick to what the ACA does, how it works, the impact, winners and losers, and how can it get better – those are the things I want to examine and discuss.
The Affordable Care Act, at its Simplest
The Affordable Care Act, in full, is 906 pages – so summarizing it in one section of a blog post is going to do it a disservice, but I’ll give it a fightin’ effort. What the hell does this behemoth actually do? At its simplest, the ACA’s intent is to increase the number of Americans with health insurance. In order to achieve this, there are three main components:
- Guaranteed issue and community rating: in order to boost coverage for everyone, nobody can be denied coverage because of their age, gender, health risk, pre-existing conditions, lifetime costs, etc. as was commonly practice prior to the law’s enactment. And you are no longer individually rated for premiums – you are bucketed into an age and geography rating.
- The individual mandate: in order to encourage participation, the ACA individual mandate declares that you must have health insurance or you will be have to pay a tax penalty. The goal of this is to get healthy individuals (who may elect to skip health insurance) to join the risk pool and help lower costs for others. A second goal in this is to get low-income individuals insured so they are contributing some cost to their health care (versus getting the services, not paying for them, and leaving the tab with all of us in the form of higher costs).
- Subsidies: in order to encourage participation and help pay for insurance, the ACA offers subsidies for monthly premiums on the health care exchanges for households with income up to 400% of the U.S. poverty line.
The combination of these three components has been metaphorically compared to a 3-legged stool. Without all three legs, the plan (the stool) will completely fail to work.
There are a number of additional components as well that are meant to help keep health care costs in check. Here are a few of the big ones:
- Insurers must have a medical loss ratio (percentage or premiums spent on medical care) of 85% of premium dollars for large group plans (over 50 employees) on medical care (non administrative costs and/or profit make up the remainder) must refund the difference to subscribers, through refund checks or discounted future premiums. The limit is 80% for individual or small group plans.
- All plans must cover an annual preventative visit, 17 preventative services for all adults, and additional preventative services for women, for free.
- The creation of state and federal health insurance exchanges with approved subsidy-eligible plans to ensure minimum coverage and help consumers find and compare plans.
- Raised the age of dependent adult children being able to stay on their parents’ plan from 19 to 26.
How has the Affordable Care Act Performed?
With the background on how it works, how has the ACA actually performed against its goals in its relative 1.5 years infancy?
Number of insured: most importantly, how has the ACA fared in getting more Americans insured? Despite fears that many would lose coverage, there has been a net addition of 15 million newly insured Americans. This has varied pretty dramatically by state. In states that chose to use federal funds to expand Medicaid (mostly blue states), the number of uninsured has been cut in half to 7.5%. States that did not elect to expand Medicaid (mostly red states) have seen a similar percentage of uninsured decline, but are left with a higher percentage of uninsured. The number of uninsured Americans has declined significantly each of the last two years and that will hopefully continue.
Costs: those who were young and healthy, with self-insured (non-employer) plans, saw the disappearance of super high deductible, low premium plans, as they were made illegal by the ACA. If you fall into that group, you’re likely paying higher premiums than you once were.
Everyone else? It is hard to get apples-to-apples comparisons here because premiums can be significantly different from one state or even city to another and hence from one individual to another. For example, Seattle saw ~10% premium rate declines each of the last two years, while Portland will see 6.1% and 16.2% increases. Overall, the ACA marketplace plans saw premiums increase just 2% on average from 2014 to 2015. Employer plans saw a slightly higher change. 2015 to 2016 changes are TBD, but expected to have a slightly higher increase in the 4-5% range (or about ~1% increase after subsidy adjustments). How does this stack up compared to recent averages? Pretty favorably.
As with all insurance, the lowest cost provider frequently changes. It pays to shop around every year.
The economy: so far, the ACA has not turned out to be the job killer that it was predicted to be. The U.S. economy has added over 240,000 jobs per month on average since it went into effect – the largest monthly job gains since the 1990’s, and the unemployment rate has dropped to 5.5%. Certainly, there are other macroeconomic factors at play, but at the very least, the “sky will fall” fears have not played out.
Federal budget impact: this one shocked me a bit, but the non-partisan Congressional Budget Office released a report that determined that the impact of REPEALING the Affordable Care Act would ADD $137 billion to the deficit over the next ten years. It also determined that the number of people with health insurance would drop from 90% of the population to 82% (24 million more uninsured if repealed).
ACA Winners and Losers
In any significant new reform legislation, there are going to be winners and losers. This holds true with the Affordable Care Act. I think it’s important to look at the scale and relative impact of each when considering if legislation has a net plus or minus impact on society.
The ACA winners are as follows:
- More American families: 9.4 million fewer American families are having problems paying medical bills.
- More Americans: of those with a new marketplace plan, 86% were “somewhat” or “very satisfied” with their plan. 11% reported being “worse off” with their new plan, while 5X as many (52%) reported being “better off”. The marketplace plans are superior to the bare-bones plans previously offered in the self-insured marketplace and the increase in costs is more than offset by subsidies. Additionally, most Americans now have significantly more preventative health services and screenings available to them for free. And in total, 15 million more Americans are insured than prior to the law’s enactment.
- Dependents: with carriers now being required to allow dependents to stay on their plan until age 26 (up from 19) there is more leeway for young adults to transition to a working career that offers health insurance coverage.
- Females: due to higher cost of care, otherwise healthy females were charged sometimes more than 50% more on average than males of the same age for the same health insurance. The ACA prohibits gender rating, so this no longer exists. Additionally, a number of female-specific preventative services and birth control are now free for women.
- Anyone with pre-existing conditions: if you were unlucky enough to have pre-existing conditions, you were typically formerly completely denied insurance coverage altogether or charged impossibly high rates. This is no longer allowed. Many of these folks were at risk for medical bankruptcy. They no longer are.
- Anyone who had previously high health care costs: many insurers had lifetime cost caps that if were crossed, you were simply cut off from further expense coverage. Lifetime caps were eliminated with the ACA. Disaster averted for these individuals.
- Some insurance companies: insurance companies that are participating in the new exchanges now have a much bigger pool of insured to draw from which increases their user base and potentially revenue. The ACA opened up completely new markets for some of them.
- Self-employed: those who choose to be self-employed now have a much more likely shot of finding affordable health insurance versus having to take unwanted jobs to rely on employers for insurance.
- Early retirees: similar to self-employed, early retirees will now much more easily be able to find and afford health insurance without needing an employer plan.
- Anyone who has ever had to pay for COBRA: screw COBRA and its ridiculous rates! ACA plans are much more affordable.
- Older individuals: previously, insurers could charge a rate premium to older individuals of 5:1 or greater in 42 states. Now, the premium increase for age has been limited to a maximum of 3:1 of an individual that is 21 years old.
- Low to upper-middle income families: the ACA offers subsidies for monthly premiums on the health care exchanges for households with income up to 400% of the US poverty line, reducing the amount they pay for coverage.
- States that elected to expand Medicaid: have seen significantly fewer uninsured individuals, which has eased health care cost burdens on those states.
And the losers:
- Those with no pre-existing conditions and self-insured plans: in general, if you have been lucky enough to not have any history of pre-existing conditions and you were buying insurance on your own, your rates could be higher than they previously were.
- Young, healthy males with self-insured plans: if you are a young, healthy male with self-insured coverage (non-employer) and are not a part of one of the “winner” groups, you are probably paying more for insurance these days than you were before. The barest of low-cost bare-bones plans were eliminated from the market.
- Healthy high income families: individuals with an income over $200,000 and married filers with income over $250,000 now pay an additional 0.9% medicare tax. Net investment income for those at the same income thresholds is taxed at 3.8%. These new taxes were put in place to pay for the subsidies and Medicaid expansion.
- Some insurance companies: also a winner, many insurance providers are a loser in that their margins could be squeezed by the new medical loss ratio requirement of 80 – 85% of premium revenue being spent on medical care. Also, those insurance companies that offered low value insurance plans have been pushed out of the exchanges completely.
- Employees with “Cadillac” plans: the excise tax to discourage cushy “Cadillac” plans does not officially kick in until 2018, but employees with these high cost plans may see their benefits being scaled back by employers looking to avoid the tax. It has been estimated that the excise tax would impact roughly 16% of plans. Super cushy plans might become only cushy in the future.
- States that elected to not expand Medicaid: states that voluntarily decided to decline federal funds for Medicaid expansion were left with comparatively higher health care cost burden than those that accepted funds.
I know it’s still early, but it appears that so far, there are significantly more winners than losers, and it’s not even close. And even if you fall in to a “loser” category (as I do) at this moment, there is a good chance you will end up in a “winner” category at some point (i.e. when disease strikes, you become self or unemployed, your income drops, or you get to age 50+).
The Early Verdict and How the ACA Can Improve
It is still early, but when you take all of the factual data into account and the number of winners versus losers, it is really hard to argue that the ACA has not been a success. Are there some downsides? Yes. The website sucked in the beginning. Young, healthy males (a niche group that I fall into) are paying more self-insurance. And some very wealthy individuals and families are paying a bit more in taxes. But the data and facts show that there has been a large net plus effect – a large number of Americans have benefited and will continue to benefit from the legislation and millions of lives will be saved both medically and financially. That is a step in the right direction.
Could the ACA be better? While the cost of insurance has tapered and been better than expected, it’s still too damn high compared to other developed nations. The ACA still allows for too much insurance company involvement as middle-men with no true value added. As a result, in the U.S., we spend almost 20% of GDP on health care, compared with about half that in most developed countries. We’re still paying ridiculously high markups for prescription drugs and actual health care expenses because there has never been and still isn’t a true free market in health care – when you need drugs and operations, you need it now – there’s no time to shop around across the country. And the 80-85% medical loss ratio requirements were a good step, but still leave way too much room for abuse by insurers and don’t do enough to control costs.
How do we address all that?
Here’s an idea that nobody raises – why not introduce Medicare/Medicaid as competitive options in the newly formed marketplaces and open them up to everyone, at cost? Steven Brill, did a massive health cost expose that discovered that Medicare has an overall administrative and management cost of about two-thirds of 1% of the amount of the claims it processes, or less than $3.80 per claim. According to a recent SEC filing, Aetna spent $6.9 billion on operating expenses (including claims processing, accounting, sales and executive management) in 2012. That’s about $30 for each of the 229 million claims Aetna processed, and it amounts to about 29% of the $23.7 billion Aetna pays out in claims. Medicare can negotiate prices that are a fraction of what insurers can and their administrative costs are 10% of insurers. On top of that, there is no 20% profit payout to Medicare, and no lavish CEO salaries as there is in the 80% medical loss ratios for insurers. The government is already in the health insurance business, and it turns out they are pretty damn good at it relative to private insurers.
Negotiating power, more than anything else, is what sets medical cost prices. The more negotiating power a provider has, the lower prices will be. Medicare/Medicaid are really good at that – significantly better than private insurers, and would only get better with more participants. If there are insurers that can grow in size/scale/efficiency to compete with the government and/or if users want to stick with a non-government insurance option, then let them. I’m not arguing for a complete government takeover of health insurance, rather, I’d like to see Medicare/Medicaid compete with private insurers, give everyone the choice of coverage, and let the rest work itself out as it may. If the result is government wins and we all go to single payer or insurers win, then so be it. The only thing that SHOULD matter is lower health care costs for every American for now and into the future.
Is this a perfect solution? Nope. Single payer would control costs better, but in this political climate, I just don’t see that as even a remote possibility for a next step. Opening public options on the exchanges is the next step to not just keep costs under control, but actually start significantly trimming them. And shouldn’t that be the ultimate goal?