Select Empirical Realities of the Individual Health Insurance Market as Structured by the Affordable Care Act

23rd Mar 2017

With the recent filing of the American Health Care Act (AHCA) to ‘repeal and replace’ Obamacare (that I’ve discussed previously on this blog), it is useful to ensure that everyone has a clear understanding of the scale of the potential impact. While the AHCA (and the ACA, even more so) did lots of different things, the primary focus of both has tended to be on the reforms to the individual health insurance marketplace, and, to a slightly lesser degree, the increased federal financial participation for Medicaid expansion. The latter is significant in its own right; however, it does not represent a fundamental policy change, but rather a variation in the federal matching rate for a part of a federal program that already existed. The reforms to the individual market, on the other hand, represent a significant restructuring of a small but very important slice of the health insurance market. Therefore, in this article, I will try to describe as accurately as possible a few key characteristics of the individual health insurance market as it is structured by the Affordable Care Act.

Size

The individual health insurance market reforms (e.g., the individual mandate, income-based subsidies, etc) have gotten a lot of attention, and one might come away from some of the political commentary with the impression that they directly affected everyone in the country. In fact, the individual health insurance market represents a relatively small portion of the overall health insurance landscape. In 2013, just prior to the implementation of the individual health insurance market reforms and subsidies, only about 4% of the U.S. population was in the individual health insurance market. By 2015, the second full year of implementation, that percentage had grown to 7%. So, while it experienced a significant proportional increase in size, the absolute size of the individual health insurance market after the implementation of the individual health insurance market reforms was still moderately less than 1/10 of the population.

As shown in the accompanying graph, the relative size of the individual health insurance market is dwarfed by the other major components of the overall health insurance market.

Of particular relevance is the relative size of the individual health insurance market, with its controversial public subsidies, compared to the sizes of Medicare and Medicaid, which are almost entirely publicly funded, in terms of population coverage. Medicaid and Medicare combined to cover just over 30% of the population in 2013, prior to implementation of the individual health insurance market reforms and Medicaid expansion, growing to just under 35% of the population in 2015, after the market reforms and Medicaid expansion had been in place for a couple of years.

So, looking at the big picture, the proportion of the population directly affected by the individual health insurance market reforms of the Affordable Care Act (e.g., individual mandate, premium subsidies, etc) is relatively small. Even if we also take into account the proportion of the population that is uninsured, which falls from 13% of the population in 2013 to 9% of the population in 2015, and is also subject to the individual mandate and potentially eligible for the premium subsidies, the total scale of the population affected is similar to the population covered by Medicaid or Medicare individually, but less than half of the population of both considered together and less than a third of the population covered by employer sponsored health insurance.

 

Cost

The cost of the individual health insurance market subsidies has been another point of recent political attention. The cost of the tax credits and subsidies associated with the individual health insurance market under the ACA is substantially less than cost of other public health care programs. In 2015, the estimated federal expenditure for the tax credits and subsidies associated with the individual health insurance marketplaces was just over $29 billion. (CMS, National Health Expenditures, Table 5-6) While no small amount in the realm of mere mortals, this pales in comparison to the public expense for Medicare (almost $650 billion) and Medicaid (almost $550 billion, state and federal) in that year. (CMS, National Health Expenditures, Table 3)

Also notable, although frequently missing from this conversation, is the cost of the tax exclusion for employer-sponsored insurance. The employer contribution to employer-sponsored health insurance is exempt from both income tax and payroll tax, for a total cost to the treasury of over $300 billion annually. To round out the federally-funded health care programs for the sake of comparison, the VA has a proposed medical budget of $65 billion for 2017 and the Indian Health Service has a proposed budget for 2017 of $6.6 billion.

So, taking the big picture again, the cost of the tax credits and subsidies associated with the individual health insurance market as structured by the ACA is more than an order of magnitude less than the cost of either Medicaid or Medicare to the public, and is between the costs of the medical budgets of the VA and IHS. None of this is to suggest that the amount associated with publicly subsidizing the individual market is trivial, but, in the big picture, it is hard to argue that these public expenditures are the ones that will bankrupt the country.

Impact

Finally, it is useful to examine the impact that the now subsidized and newly enlarged individual health insurance market may have had on the rate of health care cost growth, in the aggregate, or by service. The following figure shows the growth in national health expenditures since 2000. At this level of granularity, it is difficult to see any significant change in the aggregate level of health care spending that might have coincided with the passage of the ACA. For the two years after the ACA implementation for which data are available, the overall trend seems very much to be keeping with the trend prior to the ACA implementation.

Examining a breakdown of the types of health care services provided, little change can be identified between the period prior to the implementation of the individual market reforms and Medicaid expansion, and after it.

So, while one might have predicted a shift away from hospital-based services toward physician-based services, such a shift is not directly apparent in the data at this level of detail. Even so, this consistency raises the interesting possibility that, prior to the implementation of the individual market reforms and Medicaid expansion, uninsured individuals with high-cost medical situations were bearing the full costs of unexpected medical situations themselves, whereas with expanded coverage those costs get distributed throughout the system.

Conclusion

Considering the individual health insurance market, as reformed and structured by the ACA, in the context of the overall health insurance ecosystem in the U.S. today, it is clear that it is relatively small and low cost, and has not had a noticeable impact on the trend in, or pattern of U.S. health care spending.

 

This article originally appeared on www.waterlooresearch.com.  Stephen Palmer, PhD is the Founder and Principal of Waterloo Research and Consulting, an Austin-based consulting firm that helps organizations navigate the intersections of health care, technology, and government.  Dr. Palmer can be reached at stephen.palmer@waterlooresearch.com.