When Republicans talk about the supposedly dire effects of Obamacare, they often refer to health care premiums that keep on rising — and many journalists have followed their lead in using premiums as a shorthand for health care costs. But that’s a serious mistake. Premium costs are only one component of total consumer costs.
When considering whether proposals to replace the Affordable Care Act are viable or achieve their stated goals, their effects on cost sharing must be taken into account, too. That’s the proportion of health care spending by the consumer, as opposed to the insurance company.
Since Republicans haven’t agreed on a single replacement health care plan, it’s difficult to compare the Affordable Care Act with — well, whatever is to come. But all Republican proposals to replace or repair the ACA share a set of common elements. These elements would dramatically reduce the generosity of insurance, which would, yes, reduce premiums. But they would also increase consumers’ out-of-pocket costs, such as deductibles and copays, as well as their financial risk.
The ACA also subsidizes many consumers’ premiums through tax credits. The Republican plans would reduce those credits substantially for most people. Finally, the proposals would alter premiums by age, increasing premiums for older people and reducing premiums for younger people.
We’re presenting here the first analysis of the net financial impact on Americans of the proposed Republican modifications to health care premiums after tax credits, plus cost sharing. We estimate that the Republican approach would increase the average total cost for an individual covered by the Affordable Care Act by $1,744 per year. The impact would be particularly severe for individuals ages 55 to 64, whose total costs would increase by $6,089 annually.
Although premiums would be lower under the Republican plan, this decrease would be offset by an increase in cost sharing. Once the differences in tax credits are accounted for, the Republican plan would increase total costs for every age group except for those under 25. What’s more, families — as opposed to individuals — would see an even larger spike in total consumer costs. For families of every age (as determined by the age of the head of household), total costs would increase.
In this analysis, we use current plans sold through the Affordable Care Act’s exchanges as a baseline. We then used the mathematical relationship between premiums and cost sharing to estimate how those plans would change if or when Republicans alter regulations. For the tax credit parameters, we applied the tax credits prescribed in the Empowering Patients First Act legislation, which was sponsored by Secretary of Health and Human Services Tom Price when he was a House member. We assume these parameters would be fairly representative of the Republican approach.
These estimates are average cost increases. Scaling back essential health benefits would raise costs for some individuals by even more. We provide a series of scenarios to demonstrate this aspect of the Republican plans as well.
The Republican proposals share several elements that shift more costs onto consumers
The Affordable Care Act includes three elements that affect the generosity of insurance. First, the ACA requires insurers to cover a minimum share of costs. This minimum “actuarial value” — roughly speaking, the proportion that insurers cover, on average — is set at 60 percent. Second, the ACA provides premium tax credits that are linked to the cost of a plan that covers 70 percent of costs, on average.
Third, the act reduces cost-sharing levels for lower-income individuals whose income falls between 100 percent and 250 percent of the federal poverty level. The combined effect of these elements is that for non-group policies under the ACA, the weighted average share of costs covered by insurers is about 75 percent.
All Republican proposals to replace the Affordable Care Act — not just Price’s, but Paul Ryan’s and several others, which vary greatly in their specificity — would remove these elements. The proposals would eliminate the minimum required actuarial value, meaning there would be no guaranteed “floor” on the proportion of costs borne by insurers.
The plans would also eliminate cost-sharing reductions for lower-income individuals and provide flat premium tax credits by age, unrelated to any plan’s cost. The combined effect of these changes is that the Republican approach would dramatically reduce the generosity of insurance and sharply increase deductibles and other out-of-pocket costs.
In addition, all Republican proposals would eliminate the requirement that insurers cover 10 essential health benefits. Before the Affordable Care Act, a sizable share of plans did not cover such vital things as prescription drugs, maternity care, mental health care, and pediatric dental and vision care. Without a legal requirement, many insurers would certainly revert to benefit packages that do not include these benefits.
Finally, all Republican proposals would also eliminate or relax the limit on how much insurers can charge older individuals relative to younger people, a practice known as “age rating.” The ACA prohibits insurers from charging older people premiums that are more than three times greater than premiums for younger people. Under the Republican plans that have been floated, premiums for older people would rise and those for younger people would fall. Younger Americans would subsidize older Americans to a lesser degree.
How we estimated costs under the Affordable Care Act
To estimate costs under current plans offered on the ACA exchanges, we used data on premiums from the Department of Health and Human Services for silver-level plans — those that cover 70 percent of total costs, on average. Then we applied the ACA’s tax credits, using data from the 2015 National Health Interview Survey (NHIS) to estimate enrollment by age and income. (We assumed that everyone in each income range had income in the middle of that range.)
We estimated total costs, and cost sharing, in several steps. First, we estimated what premiums would be without the Affordable Care Act’s age bands. (It’s necessary to “unlock” premiums by age in order to calculate total costs and cost sharing by age in the next step.) Based on HHS guidance, this involves reducing premiums for young adults (ages 18 to 25) by 25 percent on average and increasing premiums for the near elderly (ages 55 to 64) by 25 percent on average.
Second, we used these premiums to estimate total payments to providers and cost sharing. Premiums represent the expected benefit costs that insurers will pay out plus an administrative load (which we assumed to be 20 percent).
Insurer-paid benefit costs are therefore premiums less 20 percent. Because insurer-paid benefit costs represent 70 percent of total costs, using high school math we can solve for total medical costs by dividing insurer-paid benefit costs by 0.70. Using the same NHIS data on enrollment by age and income, we accounted for cost-sharing reductions provided by the ACA.
How we estimated costs under the Republican approach
To model the Republican approach, we looked at common elements of the plans that have been floated (or, in the case of Secretary Price’s plan, actually introduced as legislation). We assume that under the Republican approach, the average actuarial value would fall to 50 percent, reflecting the decrease in required coverage. The Republican approach would encourage enrollment in “catastrophic” plans with high deductibles. Under the Affordable Care Act, catastrophic plans available mainly to individuals under age 30 have an actuarial value that is less than 60 percent. In addition, the insurance industry pegs the actuarial value of catastrophic (“copper”) plans with especially high deductibles at 50 percent.
In reality, our assumption of an average actuarial value of 50 percent is conservative —most likely too high. Using the HHS actuarial value calculator, removing coverage for prescription drugs, mental health care, and maternity care would reduce actuarial value for the Republican plans to 43 percent. If Republican proposals allow insurers to sell policies across state lines — thereby negating even state-by-state coverage requirements — it is likely that many plans would not cover these services.
What’s more, the general range of premium tax credits contemplated may not be enough for most individuals to afford plans with an actuarial value of 50 percent.
Pushing more costs onto consumers would lead to lower use of both necessary and unnecessary medical services. Based on the RAND Health Insurance Experiment, which examined how people responded to different cost-sharing approaches, we reduced total costs by 5 percent to account for this impact. Assuming that insurer-paid costs represent 50 percent of total costs — the plans’ actuarial value — we then estimated insurer-paid costs and consumers’ out-of-pocket costs. We derived premiums after adding the 20 percent administrative load to insurer-paid costs.
Republicans want to repeal the individual mandate and replace it with a “continuous coverage” requirement, which would guarantee coverage at a rate not reflecting preexisting conditions only for people who stayed on insurance, without gaps. The net impact of this change is uncertain. It would encourage people to stay in the system, but there is no evidence that it would be as effective as the individual mandate at doing so. It might well affect the mix of consumers who enroll in coverage, which would also impact premiums.
In the absence of any policy to replace the individual mandate, the Congressional Budget Office estimates that premiums would increase 20 to 25 percent. A continuous coverage requirement that makes it harder for sicker individuals to enroll in and afford coverage may help mitigate this impact — at the cost of care for the less healthy. But because the impact is uncertain, we conservatively assume that this policy would not cause adverse selection or affect premiums.
Finally, we applied tax credits to premiums under the Republican approach. We used the levels in the Empowering Patients First Act, which do not take income into account: $900 for an individual under age 18; $1,200 for an individual age 18 to 35; $2,100 for an individual age 35 to 50; and $3,000 for an individual over age 50.
We found a significant cost increase for consumers under the Republican plans
Table 1 displays the results of our analysis. Compared with the Affordable Care Act, the Republican approach would increase total costs — premium costs plus cost sharing — for the average exchange enrollee by $1,744 per year.
This change is the net effect of several factors. The Republican approach would increase cost sharing for the average individual buying insurance in the non-group market by $2,050 per year. The trade-off between premiums and median cost sharing would be roughly equivalent on average — but only if the ACA’s higher tax credits and cost-sharing subsidies for low-income individuals are disregarded. When they are brought into the picture, total costs for consumers spike under the Republican plans. So does risk, given that shifting consumers’ spending from premiums to out-of-pocket costs raises the likelihood of a stratospheric health care bill.
The impact of the Republican approach would vary significantly by age. The net change in total costs would be negligible for children and young adults 18 to 25. However, the loosening of age rating would substantially increase premiums for the near elderly. For that group, the tax credits would not come close to compensating for this increase. As a result, for individuals ages 55 to 64, total weighted average costs would more than double, rising from $4,078 to $10,167 per year.
To determine the impact of the Republican approach on families, we used National Health Interview Survey data on family composition of exchange enrollees to group individuals into families. For each family type, we added up average costs based on the distribution of the age of each member. To display the results, we grouped families by age of the family head.
Table 2 shows family costs under the Affordable Care Act and the Republican approach. Under the Republican approach, the total weighted average cost for a family would increase by $4,098 per year. The increase in total costs ranges from $881 per year for a family headed by someone between 35 and 44 years old to $9,633 per year for a family headed by someone 55 to 64.
Once again, our assumptions were very conservative. We assumed zero premium increase from eliminating the individual mandate. We also assumed that most people would enroll in plans with an average actuarial value of 50 percent — although premium tax credits would likely be too small to make these plans affordable. Therefore, the results we present here are likely a lower bound of what the actual cost increases would be under the Republican approach.
Additional cost increases for particular services
Since, under the Republican proposals, many insurance plans would not cover prescription drugs, mental health care, or maternity care, costs for these services would be borne entirely out of pocket by consumers. That would add other cost increases on top of those reported above.
To estimate these additional cost increases, we used data on claims costs for employer-sponsored insurance. Because research suggests that costs for non-group insurance are 10 percent lower than costs for employer-sponsored insurance, we adjusted this data downward by 10 percent. (Exchange plans have narrower networks of care providers, allowing insurers to strike better bargains.) We assumed that consumer-paid costs would increase from 30 percent — with insurance paying the balance — to 100 percent of these adjusted costs.
Table 3 displays additional cost increases for individuals who are enrolled in plans that do not cover selected services, who pay out of pocket for such services. The additional cost increases for these services would range from more than $1,000 up to $8,500 per year. Because our data sources are all at least a few years old, these additional cost increases would likely be even greater.
Clearly, using premiums as a proxy for consumer health care costs is a mistake. In judging whether Republican health care plans will be an effective, or even acceptable, replacement, their effects on cost sharing must be taken into account.
Doing so dramatically changes the picture. The Republican plans do reduce premiums — predictably, given how much less coverage consumers would receive. But our analysis shows that the current Republican proposals would substantially increase total costs on average — not to mention the risks of a financially devastating health care expense.
In short, any discussion that focuses on premiums in isolation hides the true impact of Republican plans to repeal and replace the Affordable Care Act. Consumers’ wallets would take a big hit.
David Cutler is the Otto Eckstein professor of applied economics at Harvard University. John Bertko is the chief actuary for Covered California, the state’s health insurance exchange. Topher Spiro is the vice president for health policy at the Center for American Progress.
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