Why Obamacare Has Fallen Short—And How to Transcend It

For those who are striving to afford health coverage and care, replacing the Affordable Care Act is an urgent priority.
September 13, 2016
Print This Article

(The below is adapted from the Preface to FREOPP’s new monograph, Transcending Obamacare: A Patient-Centered Plan for Near-Universal Coverage and Permanent Fiscal Solvency, Second EditionThe full report can be found here. For more on the plan, read 

Avik Roy’s interview with 

Dwyer Gunn in the 

Pacific Standard.)

The Affordable Care Act was signed into law by President Obama on March 23, 2010. But the vast majority of the law’s changes to the U.S. health care system did not go into effect until January 1, 2014. For those who are struggling to afford health coverage and care, recent news has been worse than expected.

Rate shock suppresses enrollment

The individual or non-group health insurance market is of particular importance to those with below-median incomes, because it is the market that serves those who do not receive employer-sponsored health insurance and who do not qualify for other federal programs like Medicare, Medicaid, and the Veterans Health Administration.

While there was considerable evidence prior to 2014 that the ACA’s regulatory scheme would substantially increase premiums in the individual market, the concept of “rate shock” was highly controversial. Today, rate shock is an incontrovertible fact, and it has made affordable coverage elusive for tens of millions of Americans. Premiums have continued to rise on the ACA exchanges; cumulatively, median premiums have more than doubled in the ACA’s first four plan years (49 percent in 20147 percent in 2015, 11 percent in 2016, and 22 percent in 2017, for a cumulative increase of 116 percent).

Enrollees with incomes near the Federal Poverty Level have been insulated from these changes, because the ACA nearly fully subsidizes their premiums, co-pays, and deductibles.

As Figure i notes, 81 percent of those with incomes between 100 and 150 percent of FPL eligible for subsidized coverage on the exchanges have enrolled; however, only 17 percent of those with incomes between 301 and 400 percent of FPL have.

This is because, as one goes up the income scale, the ACA’s premium subsidies do not compensate for the much higher gross premiums that insurers have been forced to charge.

As a result, enrollment in the ACA exchanges has fallen well below originally projected levels. As shown in Figure ii, the Congressional Budget Office had originally projected that 21 million individuals would be enrolled in the exchanges in 2016; the actual figure was 10.3 million.

Based on a median household size of 2.54 and median income of $52,250 in 2015, the median FPL is approximately 286 percent; hence, a majority of those with incomes below the U.S. median, and eligible for exchange-based coverage, have not enrolled.

The largest insurers are ending their exchange participation

In 2016, UnitedHealth, Aetna, and Humana all announced that they are planning to cease participation in the ACA exchanges, due to losses they have absorbed. United has reported that it lost more than $720 million in 2015 on exchange-based plans; Aetna lost $200 million and Humana $176 million.

Non-profit Blue Cross plans have lost more than $2 billion over that time frame, including $1.5 billion alone from the Health Care Services Corporation, the Blue insurer covering Illinois, Texas, Montana, New Mexico, and Oklahoma.

The withdrawing insurers cited a constantly-changing set of implementation rules regarding enrollment in the exchanges as a major driver of higher than expected costs. Furthermore, while insurers expected ACA enrollees to be sicker and older than average, enrollees were even more so than they expected, leading to higher claims costs.

An additional problem is that two of the ACA’s risk mitigation strategies — risk corridors and reinsurance — will expire at the end of 2016. Both programs were designed to provide a financial cushion to insurers if their claims (i.e., health care costs for enrollees) exceeded premiums (revenues from enrollees). As those programs expire, insurers will have to raise premiums even higher, knowing that they will be fully exposed to any excess costs.

There is considerable evidence that lower premiums in a given ACA market are correlated with greater competition; hence, the withdrawal of these large insurers is likely to lead to further premium increases in the future.

For example, a 2015 study by Milliman found that the entrance of one additional insurer to a given ACA market was correlated to a reduction of $6.50 per member per month for 21-year-olds purchasing the second least expensive “silver” plan. Another 2015 study by Leemore Dafny and colleagues associated UnitedHealth’s presence in an ACA market with a 5.4 percent decrease in premiums.

The Veterans Health Administration scandal

The U.S. health care system for veterans is fully socialized, with the federal government providing the insurance, owning the providers, and employing the physicians who provide care. While problems with VA care are longstanding, efforts to reform the VA run into resistance from those who are comfortable with, or benefit from, the incumbent system.

In April 2014, CNN reported that 40 U.S. veterans died while awaiting care at Veterans Health Administration facilities in Phoenix. Later, it came to light that VA officials around the country were falsifying patient wait lists in order to claim that veteran patients were being seen in a timely fashion.

Rob Nabors, President Obama’s Deputy Chief of Staff, described the VA’s problems as the result of “significant and chronic system failures” and a “corrosive culture.” Kenneth Kizer, a former leader of the VHA, said that “The culture of the VA has become rather toxic, intolerant of dissenting views and contradictory opinions. They have lost their commitment to transparency.” These developments have provided renewed momentum to VA reformers.

High drug prices become increasingly controversial

The high price of prescription medicines in the United States has been commented upon for many years. But complaints about high drug prices reached a crescendo after Matrin Shkreli, founder of Turing Pharmaceuticals, raised the price of Daraprim from $13.50 per pill to $750: a 5,456 percent increase.

Daraprim was approved by the FDA in 1953, and its patents expired decades ago, but no generic version was available, giving Turing a monopoly on the drug’s production, and its use for life-threatening diseases such as toxoplasmosis.

While Turing’s pricing policies garnered the most media conroversy, they only differ in degree, not kind, from the practices of many established pharmaecutical companies.

Among policymakers, however, the debate about drug prices did not change. Progressives argued for price controls, and conservatives, opposing price controls, argued for the status quo.

But high prescription drug prices are increasingly unsustainable, and defending the status quo is a mistake.

Building the ‘Uber of health care’

The last several years have witnessed an explosion in venture capital funding of digital health companies: companies that aim to deploy the internet and related technologies to improve health care.

In 2015, venture capital supplied $4.5 billion in funding to digital health startups, compared to $1.1 billion in 2011: an annualized growth rate of 32 percent.

Digital health harbors the promise of doing more to improve the quality of health care delivery than any other initiative. However, the ability of digital technologies to improve health care is severely hampered by antiquated regulations and organized rent-seeking.

For example, in April 2015, the Texas Medical Board enacted draconian restrictions on the practice of telemedicine, i.e., the use of telephones, e-mail, and videoconference technologies between doctors and patients.

Many Texan physicians were concerned that telemedicine would expose them to competition from out-of-state physician practices. The ruling of the Texas Medical Board is now the subject of litigation in the federal appeals court system.

Reform the ACA or replace it?

The debate among policymakers as to how best to reform the health care system has evolved since 2014. Democratic presidential nominee Hillary Clinton promised to “defend and expand the Affordable Care Act” by adding a government-run health insurer to the ACA exchanges, and by allowing those over 55 to “buy into Medicare.”

Republican nominee Donald Trump has pledged to “ask Congress to immediately deliver a full repeal of Obamacare” on the first day of his administration. Among other things, he would replace the law with reforms that would allow individuals to buy insurance across state lines, and allow all Americans to fully deduct their health insurance premiums from their income tax liabilities.

Paul Ryan, the Republican House Speaker, has proposed repealing the ACA and replacing it with a system of non-means-tested tax credits that would subsidize, to a lesser degree than the ACA, the purchase of health coverage.

Few of Mrs. Clinton’s proposals are likely to make it into law. Many of her measures, including the “public option,” were debated during the drafting of the ACA in 2009, and could not pass the U.S. Senate when Democrats controlled 60 votes in that body. Similarly, Republican proposals that would lead to fewer Americans possessing health coverage — as Mr. Trump’s plan would — stand little chance of gaining the support of 60 senators, and thereby overcoming a filibuster.

Hence, there remains a critical need to identify opportunities for bipartisan reform that can help the uninsured afford coverage, while also improving the quality and fiscal sustainability of U.S. health care.

New in the second edition of Transcending Obamacare are sections on reforming veterans’ health care, reducing the cost of prescription drugs, and deploying digital technologies to improve health care quality. We have preserved the original plan’s fiscal modeling; hence, these additional proposals are not counted toward the plan’s estimates for deficit reduction of $8 trillion over the first three decades, nor toward its coverage expansion of 12 million over and above that of the Affordable Care Act.

The core theme remains the same. Transcending Obamacare provides a bipartisan path for improving health outcomes for the poor, reducing the cost of coverage, and increasing the number of Americans with health insurance, all with less regulation, spending, and taxation than we have today.

ABOUT THE AUTHOR