Choice, Competition, And Flexibility, Part I: Post-ACA Consumer Challenges

COMMENTARY Health Care Reform

Choice, Competition, And Flexibility, Part I: Post-ACA Consumer Challenges

Aug 21st, 2020 18 min read

Commentary By

Brian J. Miller, MD, MBA, MPH

Hospitalist and Public Health Physician

Robert E. Moffit, Ph.D.

Senior Fellow

Key Takeaways

The ACA’s legislative history and narrow partisan passage marked it for a lifetime of strife.

Prior to the COVID-19 pandemic, America’s multipayer system had achieved nearly universal coverage.

Single-payer bills in both the House and Senate would eliminate virtually all private and public programs.

This is the first part of a two-part post discussing the current state of health reform and where we should go from here. Part I below examines the effects of the ACA and progressive reform initiatives. Part II will outline a market-driven path forward.

The Affordable Care Act (ACA) redefined the national status quo. It standardized benefit design in the individual insurance market; mandated employer-sponsored insurance (ESI) coverage in multiple markets; and rewrote insurance market and rating rules, all while creating a complex series of subsidies to support its public exchange health insurance products. The ACA’s legislative history and narrow partisan passage marked it for a lifetime of strife. Under attack by both Republicans and Democrats—including litigation brought by states in the federal courts—the ACA faces an uncertain future. The COVID-19 pandemic, driving unemployment to greater than 11 percent and driving surges in ACA exchange enrollment, raises new questions for the future of employer-based health insurance and the US multipayer system.

Previously supportive of the ACA, congressional Democrats have proposed a wide range of solutions, ranging from the deployment of a “public option” to compete against private health plans to Medicare for All, the replacement of all publicly funded and private health insurance with a single national health insurance program. Pushed by the progressive wing of the Democratic Party, the feasibility of a single-payer system was recently debated in congressional hearings in the US House of Representatives.

Here, we review current consumer challenges, the legacy of the ACA, and its effects on insurance markets. Subsequently, we review recent progressive health policy efforts targeted at cost control. In part II, seeking to build on our existing multipayer system, we discuss structures for market-driven alternatives to a public option or a single-payer system. We suggest defined-contribution (premium support) financing, a resetting of insurance regulation, and a revision of the federal tax treatment of ESI.

Current Consumer Challenges

Prior to the COVID-19 pandemic, America’s multipayer system had achieved nearly universal coverage. Roughly nine out of 10 Americans had some form of public or private health coverage. This is comparable to other multipayer, public-private mixed markets such as Germany and Switzerland, which according to the Commonwealth Fund International Health Care System Profiles have achieved near-universal coverage. Of the nonelderly, non-minor uninsured, as of December 2019, the supermajority, 70 percent, worked for an employer that did not offer health benefits, with cost serving as the main barrier to insurance access. Many of these individuals have potential access to exchange plans, albeit they may lack knowledge of enrollment processes, fail to understand the benefits of health insurance (consumer health insurance literacy is a well-recognized problem), or face challenges with cost secondary to a lack of flexibility in ACA plan benefit design.

The COVID-19 pandemic has upended this dynamic, revealing weaknesses and inflexibility in current market structures. While experts have challenged the Bureau of Labor Statistics unemployment estimates, one thing remains clear: Massive unemployment challenged our multipayer system. Many of the newly unemployed may eventually find jobs, but many currently have alternative insurance options, qualifying jointly or separately for COBRA coverage, federally subsidized private health insurance, or Medicaid (the last group are enrolled by hospitals when they eventually seek care). Recognizing the urgent, great economic distress and that markets are not frictionless, Congress passed and the president signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The act provides a total stimulus equivalent to 10 percent of the US gross domestic product; its Provider Relief Fund included $175 billion for health systems. With the aim of preserving access to care, some of these funds have been earmarked for safety-net hospitals and Medicaid providers.

The coverage challenges elicited by the COVID-19 pandemic do not mask another pressing challenge for the millions of insured ordinary Americans: rising costs. Researchers and policy makers recognize that many factors drive health care costs. The growth in chronic disease is a major cost driver, aggravated by behavior, diet, and sedentary lifestyles. For example, the average American works 31 percent more hours than, for example, the average German. Sleep deprivation is the norm in the US, with its well-documented adverse effects on chronic disease: more than 30 percent achieve less than the recommended sleep duration of seven hours per night.

There are also external environmental factors: a lack of sidewalks, unsafe neighborhoods, decades of underinvestment in decaying mass transit systems, and failures of urban planning. This means that the average American commute of 26.6 minutes is frequently spent sitting in a car. Obesity rates of nearly 40 percent, unparalleled in other countries, coupled with the fact that barely one in five Americans meets national physical activity recommendations, further contributes to these rising costs. These issues, although important public health and policy problems, are not effectively addressed by health insurance benefit design, insurance market structure, or insurance regulation.

Regardless, rising health insurance premiums reflect a multimorbid population, rising prices for products and services, and administrative costs. Some administrative costs are relatively fixed across markets (claims processing, fraud, and waste management), while others (utilization management, step therapy, prior authorization) are present in most private and some public markets but are variable. Profits are small albeit real, with the insurance industry averaging a 3.3 percent margin in 2018.

While the appropriate composition of insurance premium spending is a topic of political debate, Democrats and Republicans in Congress agree that Americans face a myriad of challenges in paying for medical care. Around one-quarter of insured patients report difficulty in affording copayments, premiums, or deductibles, and a similar proportion report difficulty in affording prescription medications. Rising domestic health care product and service prices frequently reflect a lack of competition in these markets; this, again, is a policy problem only partially addressed by insurance designs and insurance market regulation.

The Legacy Of The ACA: Coverage Expansion Without Cost Control

Public policy cannot be judged by good intentions, only by measurable results. The ACA is now viewed favorably by 55 percent of Americansits highest rating yet. The ACA had laudable goals: expanding coverage and access to care, creating robust competition in states’ insurance markets, and reducing both health insurance costs and health care costs for typical families. Like many such broad legislative efforts, the perfect became the enemy of the good, with legislators aiming at multiple goals simultaneously. The ACA successfully powered coverage expansions through generous federal insurance subsidies and a major Medicaid enrollment, but the law was sold as a cost-control measure; in the process, it transferred plenary regulatory authority over the individual and small group insurance markets from the states to the federal government. 

Today, an estimated 87 percent of ACA exchange enrollees are subsidized (with incomes below 400 percent of the federal poverty level, or $51,040 unmarried consumer/$104,800 family of four), ensuring that federal taxpayers fund the majority of the ACA’s coverage, to the tune of $53 billion in 2019. Beyond premium subsidies, persons with incomes between 100 percent and 250 percent of poverty are also eligible for cost-sharing subsidies. After the federal government stopped reimbursing insurers for cost-sharing subsidies in 2017, insurers responded by “silver loading,” or raising the premiums of silver plans, further increasing taxpayer-funded premium subsidies. Given the decline and progressive flattening of enrollment in the nation’s individual markets from 2015 onwards, it became clear that fear of the penalties attached to the ACA’s individual mandate to purchase non-group insurance was not a robust driver of coverage, either inside or outside of the ACA exchanges.

By 2016, the annual tax penalty for a single person had increased to $695 or 2.5 percent of income (whichever was greater), yet enrollment in the nation’s individual markets started to decline, suggesting that the individual mandate was not functioning as a primary enrollment driver. Neither the Obama administration nor the Trump administration relished enforcement of the mandate penalties, with each one granting various exceptions and exemptions. The Congressional Budget Office (CBO) estimated that few of the remaining uninsured would be subject to these penalties, even if the law were vigorously enforced. Based on 2015 data, CBO found that the mandate, when enforced, functioned as a regressive tax: The majority of persons (58 percent) paying the penalties had an adjusted gross income of less than $50,000 per year.

As the 2020 election approaches, the ACA, its funding derived from general revenue, faces financing challenges that will challenge even the most creative of policy makers. Congress zeroed out the individual mandate tax, repealed the ACA’s health insurance tax and the excise tax on “high value” health plans, yet maintained statutorily mandated health insurance and Medicaid subsidies, all in the face of growing federal budget deficits. Worse yet, despite the decrease and flattening of enrollment in the individual markets, including the ACA’s exchanges, taxpayers’ ACA obligations are set to increase. Over the period 2020 to 2029, the CBO projects that ACA insurance subsidies will total $689 billion, and ACA subsidies for Medicaid will amount to $925 billion. Unfortunately, taxpayer subsidies do not control costs, they obscure them.

In conjunction with rising premiums, ACA enrollment in the individual markets increased initially but still failed to meet official projections. Total individual market enrollment, among both subsidized and unsubsidized persons, jumped sharply from 11.8 million in 2013 to 16.5 million in 2014. Enrollment reached 17.6 million in 2015, which proved to be the ACA’s high water mark.

Thereafter, ACA individual market enrollment steadily declined among persons inside and outside the health insurance exchanges. For the 2015–16 benefit period, the Centers for Medicare and Medicaid Services (CMS) reported that 10 states experienced declining enrollment in their individual markets; the largest declines came among unsubsidized persons. In 2017, the decline deepened: 44 states experienced decreasing enrollment, with the largest declines among unsubsidized persons. In six states, there was a 40 percent decline in unsubsidized enrollment in individual markets.

Enrollment in the ACA exchanges, despite heavy subsidies, has proved disappointing. Congressional analysts and policy makers alike anticipated a robust take-up of coverage, particularly in the exchanges. For 2018, for example, the CBO initially projected 24 million Americans would be enrolled in the health insurance exchanges; in fact, only 11.8 million enrolled that year. By March 2019, only 10.6 million persons secured coverage via the exchanges.  

Health Plan Market Dynamics: Impact Of The ACA

The ACA restructured multiple insurance markets by creating health insurance exchanges, enforcing broad new consumer protections, and imposing greater federal regulation of benefit design in the individual and group health insurance markets. Within the health insurance exchanges, plan products were classified into one of four benefit tiers (Bronze, Silver, Gold, and Platinum) with increasing actuarial value and decreasing consumer financial responsibility. The ACA further defined “essential health benefits” in 10 statutory categories for individual plan products.

While standardization of benefit design assists consumers—who face challenges in both health and health insurance literacy—in selecting health plans, standardization at the federal level has limited local and regional flexibility. Health plans responded to new federal benefit standardization and underwriting restrictions in the individual market, with some plans leaving the state insurance exchanges and individual markets to focus on ESI and other health insurance markets. In contrast, Medicaid-focused plans such as Centene leveraged their experience working in environments with highly regulated benefits and tight budgets, entering ACA exchange markets with plan products driven by narrow networks, vigorous provider access controls, and low reimbursement.

Plan product design evolved. Exchange plans were, and still are, increasingly characterized by narrow networks; 72 percent of 2019 ACA plans featured narrow networks. More similar to their Medicaid managed care cousins than to ESI plans, exchange products have exhibited increased management of beneficiaries’ health care use in conjunction with lower payment rates for providers. In contrast, among all firms offering ESI in 2018, only 7 percent offered narrow networks, and only 2 percent reported eliminating a hospital or health system to reduce their costs.

The ACA also ushered in a new era of rate regulation, with rules setting rating band limits for age and tobacco use; the law also includes community rating, which limits variation in premium prices in the individual market. The risk pool of the individual market was further disadvantaged by ACA regulations requiring ESI plans to allow children to remain as dependents on their parents’ health plan until the age of 26. Considering all these factors taken together, actuaries have proposed modifying the rating bands to increase participation and create a broader risk pool, potentially lowering exchange plan premiums for the young while raising them for older Marketplace enrollees.

Operating under the ACA’s regime of regulation and federally defined benefits, health plans now statutorily lack an ability to provide local flexibility. Previously, health plans could design and price products to account for local variation—both appropriate and inappropriate—in clinical practice style and intensity, the type and quality of services available, and the demographic profile and health of the local population. Plan participation in the individual market declined and competition and consumer choice suffered. In 2013, there were 395 insurers serving enrollees in the nation’s individual markets. By 2018, that had shrunk to just 181. By 2019, 77 percent of US counties had only one or two insurers, and 42 percent of all enrollees in these markets had access to only one or two insurers.

At the same time, the ACA reinforced coverage in the ESI market, imposing an employer mandate requiring companies with more than 50 full-time employees to offer coverage. While the law’s excise tax on “high value” health plans has recently been repealed, the profoundly regressive tax exclusion for ESI—nearly five-sixths of the financial benefits of the exclusion accrue to the upper half of the income strata—has remained untouched.

The existing unlimited tax exclusion for ESI is also a major driver of higher health care costs. The majority of ESI products have broad networks and high actuarial value—an average of 89 percent according to a 2015 Bureau of Labor Statistic survey measuring the value of ESI products—while the employee pays less than the full differential cost (between these products and narrower, lower-actuarial-value products) due to the ESI tax break. These features, when coupled with employees’ demand for broad networks, severely limit the ability of health plans to impose price and quality pressures on providers. ESI plan products further shield care delivery from competitive pressures, insulating an industry with longstanding negative labor and multifactor productivity growth—the hospital industry.

Progressive Responses To Rising Health Care Costs: Public Option To Single Payer

Against this background, progressives have campaigned for further reform, premised on the need for the federal deployment of a new government health plan either to compete directly against private health plans or to replace private health insurance entirely.

The concept is, of course, not new. While the final version of the ACA did not include a “robust” public option, it did include federally sponsored plans, Community Oriented and Operated Plans (CO-OPs). Congress legislated their rules of operation and management, mandating their entry into exchanges as nonprofit health plans and dictating their governance structure. Statutorily structured boards proved cumbersome, starving start-up CO-OPs of much-needed expertise: Representatives of the insurance industry were prohibited from participating, while individuals with subject matter expertise were prohibited from holding a voting majority.

Subsidized to the tune of several billion dollars in taxpayer-subsidized loans, the CO-OP program spectacularly collapsed within five years. Of the original 23 CO-OP plans that entered into exchange competition, there were just four left by 2018. Notable failures included Evergreen Health, which attempted to convert to a for-profit insurer prior to declaring bankruptcy. After collective losses of more than $1 billion in 2015, the CO-OP market’s subsequent collapse left taxpayers with more than $1.3 billion in delinquent loans and 700,000 Americans without that nonprofit coverage.

The collapse of the CO-OPs holds important lessons for policy makers. Mandating exclusion of certain expertise from health plan boards handicaps new ventures in a technically complex industry. Statutorily determining the structure of an enterprise limits the flexibility of managers, public or private. Necessitating participation in markets prevents a productive dialogue in response to changes in market structure, limiting competitive dynamics while simultaneously hampering growth and innovation.

Current progressive legislative proposals to create a “public option” would not enhance competition in the health insurance markets; they would invariably undermine market competition by creating certain statutory or regulatory advantages for the public plan not available to private health plans, including the ACA plans.

As part of a comprehensive health reform proposal, former Vice President Joseph Biden proposed the creation of a new government plan to compete against private health plans, including ACA exchange plans as well as ESI plans. More recently, Biden and Senator Bernie Sanders (VT-I) have jointly proposed a public option to be offered through the ACA exchanges. The proposed public option would provide all primary care without cost sharing and offer at least one zero-deductible option. A public option as proposed would be administered by CMS and reimburse medical professionals on the basis of Medicare rates. Every US resident would be able to enroll in the new government plan, including those with ESI.

Beyond the broad language of campaign proposals, congressional Democrats have detailed a variety of public option proposals embodied in six major bills in the House and Senate. While the congressional “public option” bills differ in design, they subscribe to an overarching framework.

First, federal officials would fix payment rates for doctors, hospitals, and other medical professionals below commercial market rates, usually on the basis of Medicare rates. This would forever tie a public option to fee for service payment, thus expanding a payment method recognized as a problem by Democrats and Republicans alike. With the government “tipping the scales of competition” by mandating below-market rates, a public option would have a powerful advantage over private health plans in setting lower insurance premiums.

Second, most of these bills would compel, either directly or indirectly, physicians and other medical professionals to participate in the government plan. For example, the Choose Medicare Act (S. 1261) and the Medicare at 50 Act (S. 470) would enroll existing Medicare or Medicaid physicians and other providers in the new government plan. Similarly, the Choice Act (S. 1033) and Medicare–X Choice Act (H.R. 2000) mandate physician or medical professional enrollment in the new government plan by making it a condition of participation in Medicare.

Finally, a new government plan would promote market consolidation and increase federal control of health insurance markets, foreclosing both local and state flexibility. By expanding the scope of enrollment eligibility and taxpayer subsidies, the Medicare for America Act (H.R. 2452), for example, would include persons enrolled in job-based coverage, including large-employer plans, not unlike former Vice President Biden’s initial proposal. Health spending would likely increase significantly as proven cost-control measures such as deductibles are eliminated. Anticipating this, the Medicare for America Act, for example, provides a detailed list of new taxes to cover the anticipated costs of a new public option.

Still, significant progressive energy and enthusiasm rests with single-payer health care as Democrats in the House and Senate are simultaneously embracing a far more sweeping proposal: the creation of a single-payer national health insurance program that would abolish nearly all private and employer-sponsored insurance

Single-payer bills in both the House (H.R. 1384, the Medicare for All Act of 2019) and Senate (S. 1129, the Medicare for All Act of 2019) would eliminate virtually all private and public programs. Private coverage that duplicates the government-sponsored program would be prohibited, transitioning the approximately 157 million-strong ESI market to a public program. Medicare, Medicaid, CHIP, TRICARE, the Federal Employee Health Benefit Program, as well as the health plans in the ACA markets, would be eliminated over two years. Medicare for All measures would cover undocumented immigrants, departing significantly from the tradition of European national health systems, including the United Kingdom’s National Health Service, which require legal residency for advanced care.

Benefits would be standardized while the Health and Human Services secretary would determine which services are “medically necessary.” The irony is that, despite longstanding physician complaints about insurance companies determining “medical necessity,” the medical necessity decision would be removed from multiple payers with differing opinions and delegated to a single agent, with limited options for appeal.

Cost sharing would be eliminated. Enrollees would face no copays, deductibles, or coinsurance—these proven health plan tools, used by both public and private payers to steer consumer behavior and prevent overuse, would be prohibited. With no consumer financial incentives to limit use and the transfer of all private health expenditures to the federal ledger, it is no surprise that the additional federal 10-year costs would be significantestimated at $32.6 to $38.8 trillion over the period 2022 to 2031, balanced against savings of $5 billion in annual personal expenditures. Despite personal health care expenditures declining from “zeroing out” insurance premiums and out-of-pocket medical spending, researchers also estimate that almost two-thirds of households would still pay more for health care through higher taxes.

Finally, Medicare for All would impose administratively set prices, ensuring the growth and monopolization of Medicare’s system of fee-for-service medicine. With no network design, Medicare For All, like Medicare fee-for-service, would exist as an “any willing provider” network, including all physicians. Physician participation would be determined by physician compliance with the federal government new care delivery mandates.

Both the public option, as proposed, and Medicare for All proposals would reverse the current (and positive) trend away from fee-for-service medicine. While imperfect, risk-adjusted, capitated, managed care alternatives such as Medicare Advantage and state-based Medicaid managed care programs provide benefits in the context of care coordination, along with physician network tiering based upon cost and quality. This has helped to serve and guide our most disadvantaged beneficiaries toward better medical outcomes and financial prudence.

In part II of this post, we will outline market-driven solutions that build on our existing multipayer system, including defined-contribution financing, a resetting of insurance regulation, and a revision of the federal tax treatment of ESI.

This piece originally appeared in Health Affairs

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