Blase Policy Strategies | The ACA’s Failure and Moving Health Care Policy in a New Direction
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The ACA’s Failure and Moving Health Care Policy in a New Direction

December 15, 2016

By Brian Blase

As a result of the Affordable Care Act (ACA), many people are newly enrolled in the Medicaid program or in a highly subsidized exchange plan. Both suffer from serious problems, which drive the need to repeal the law. The Medicaid expansion is costing far more than projected, and the exchanges are descending into heavily subsidized high risk pools.

While repeal is necessary, so is a reform plan that addresses many of the problems with government health care policy. In new research for the Mercatus Center, I argue that one of the central aims for the ACA replacement should be to reduce government bias toward comprehensive insurance. Policymakers should instead focus on realigning incentives, removing government mandates and regulations, and directing government financial support to consumers instead of to insurers and providers. Doing so would lead consumers and providers to make decisions that lead to greater value from the massive amounts of money we spend each year on health care.

Individual Market For Insurance Is A Mess

Most plans available in the individual and small-group markets prior to the ACA’s enactment did not meet all of the law’s new rules and mandates. As insurers adjusted to the new rules, the choices available to consumers declined markedly. Plan variation now largely consists of the size of cost-sharing amounts, including deductibles, and the scope of provider networks. As plans became standardized, premiums and cost sharing increased, and provider networks shrank.

While the young and healthy have seen the greatest increase in premiums, this group’s participation was essential for the law’s regulatory structure to work. Thus, the ACA contained a mixture of sweeteners and coercion to induce them to purchase coverage. The sweeteners were subsidies that were most generous for people with income below 200 percent of the federal poverty line—about $24,000 for a single person. The coercion was the individual mandate tax penalty.

Despite the sweeteners and coercion, the plans have proved so unattractive that individual market enrollment is 40 percent below expectations. About 19 million people will be enrolled in the individual market in 2016—12 million fewer than projected by the Congressional Budget Office (CBO) in 2014. Those who did enroll are much poorer, older, and less healthy than expected. The ACA has left people in the middle class without coverage through the workplace with far fewer choices of plans and plans that carry much higher premiums and deductibles. In addition, some insurers appear to have engaged in a “race to the bottom” in a desire to avoid less healthy enrollees.

A central rationale for the ACA was to help people with pre-existing conditions who could not purchase affordable coverage in the individual market. While a genuine problem, the ACA advocates overstated its significance. A federal high risk pool, open to people with difficulty getting insurance because of a pre-existing condition, created and funded by the ACA enrolled only 50,000 people by the end of 2011. The government expected that eight times as many people would enroll by then.

In its misguided attempt to address the pre-existing condition problem, the ACA’s rules created a large incentive for people to wait until they were sick to purchase coverage. The large degree to which people have done this has contributed to instability in the individual market.

Unwise Medicaid Expansion Is Far More Expensive Than Advertised

The ACA’s Medicaid expansion was controversial for many reasons, including relatively poor health outcomes for enrollees, large crowd-outof private coverage, reduced incentives to work, and crowd-out of other state prioritiessuch as education, infrastructure, and adequate funding of public sector pensions. Moreover, the ACA provides states with a much higher federal reimbursement rate for Medicaid expansion enrollees than for traditional Medicaid enrollees—lower-income children, pregnant women, senior citizens, and the disabled. By doing so, the ACA created a major bias in federal policy in favor of the expansion population at the expense of the traditional Medicaid population, who now face greater competition from new enrollees for access to medical care. Despite these concerns, 31 states and the District of Columbia have adopted the ACA’s Medicaid expansion.

The Medicaid expansion has proved much more expensive than expected. Total federal spending on the expansion in 2015 was at least 50 percent above CBO’s 2014 projection of $42 billion. Part of the reason for this unanticipated expense is that states are paying insurers much higher rates than the government projected; in fact, spending per newly eligible enrollee was 49 percent higher in 2015 than was expected by the Obama administration in a 2014 report.

New Medicaid enrollment has also greatly exceeded projections. In many states, enrollment is more than twice the projected number. Moreover, calculations based on a recent study show that about 60 percent of new Medicaid enrollees in 2014 were eligible for the program under previous state eligibility criteria. Although those people may not have had an insurance card before the ACA, they were not really uninsured because they could generally enroll in Medicaid as soon as they needed medical care. CBO’s expectation was that only about one-sixth of new Medicaid enrollees would have been eligible under previous state criteria.

Evidence from Oregon’s unique Medicaid expansion suggests that the ACA’s Medicaid expansion is a poor use of taxpayer dollars. Despite a significant increase in health care use, Oregon expansion enrollees did not showdiscernible improvements in any of the three physical health metrics evaluated: blood pressure, cholesterol, or blood sugar. Perhaps most important, the researchers estimated that expansion enrollees placed between 20 to 40 cents of value on each dollar of Medicaid spending on their behalf—an estimate that suggests a major opportunity for policy improvement.

A Different Direction In Health Care Policy

The ACA was a massive piece of legislation with far reaching effects. Several of the aims of the ACA, such as improved health care quality, were admirable and the effects of lesser known and less well publicized provisions of the law should be carefully studied. However, it is increasingly clear that the ACA’s core provisions—the law’s complex web of mandates, rules, taxes, and spending—are not worth the benefits. Unraveling these is an important first step, but lawmakers must then pursue a health care reform agenda focused on unleashing choice and competition. In so doing, they should be guided by three main principles: (1) reducing the government bias in favor of comprehensive insurance, (2) fundamentally reforming Medicaid by better aligning incentives of states to be concerned about the value of spending, and (3) expanding market-oriented reforms such as health savings accounts.

https://www.mercatus.org/commentary/aca-failure-replace-repeal-new-direction

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