The Affordable Care Act

Medicaid Expansion

One of the central elements in the ACA is to expand Medicaid by federalizing and raising the eligibility threshold. Technically, the increase is to 133% of the federal poverty level (FPL). However, 5% of income is disregarded, which makes the effective threshold 138%.

The expansion of Medicaid changes the program from one based on specified categories of recipients to one based on need. This change greatly increases the number of potentially eligible participants.

Since its founding in 1965, the states have set their own earnings threshold for Medicaid eligibility. They varied widely. For mothers with children the range was from 18% of the FPL in Alabama to 201% in Connecticut and 221% in the District of Columbia. In 21 states it was zero for childless adults. With the exception of Wisconsin, the states that have not expanded Medicaid correlate perfectly with the states that deny all childless adults Medicaid benefits.

As of May 2015, 29 states and the District of Columbia have expanded Medicaid and 21 states have not. ² The federal government will pay for 100% of the cost of Medicaid expansion for 2014 to 2016, and 95% for 2017. It then gradually drops to 90% for 2020 and thereafter. ³

When a state declines to expand Medicaid, it denies many of its citizens access to health care benefits paid for largely by the federal government. For example, Florida is denying coverage to 1.3 million residents and Texas to 1.2 million. In contrast, California gained Medicaid coverage for 2.1 million residents with the federal government picking up the tab. ⁴

Health Benefits

The ACA requires employers, insurers and other providers of health plans to cover “essential health benefits” (EHBs). They are defined as 10 broad categories of services: (1) ambulatory patient services, (2) emergency services, (3) hospitalization, (4) maternity and newborn care, (5) mental health and substance use disorder services, (6) rehabilitation and rehabilitative services and devices, (6) prescription drugs, (7) laboratory services, (8) preventive and wellness services, (9) chronic disease management, and (10) pediatric services including oral and vision care. ⁵

There can be no caps on annual or lifetime use of EHBs, no preexisting-condition exclusions and the customer must be able to renew the health insurance. Adult children must be allowed to remain on their parents’ health plan until age 26.

The customer may choose a health plan based on its relative generosity (minimum actuarial valuation), which is the percent of the medical bill paid for by the plan relative to that paid by the patient. The customer chooses a level of coverage designated as bronze 60%, silver 70%, gold 80% and platinum 90%. The greater the percent covered by the plan, the higher the premium and the lower the patient’s out-of-pocket cost.

The ACA also requires that health insurance plans spend at least 80% of their premium revenue on providing health care benefits. For large companies, it is 85%. If they spend less than that, they must refund the difference to their customers.

Out-of-Pocket Maximums

Sponsors routinely shift some of the cost of providing health benefits to the employees and retirees through deductibles, co-insurance and co-payments. If not controlled, some employers could in effect evade the employer mandate by transferring much of the cost of health insurance to the recipients. The ACA prevents this by out-of-pocket maximums (OOPM).

On June 23, 2015, the Department of Health and Human Services (HHS) released its final 2016 Notice of Benefit and Payment Parameters. It set limits on the out-of-pocket expenses that large and self-insured group plans (but not “grandfathered” and retiree-only plans) could allow for EHB coverage.

For 2015, the OOPM for “self-only” (individual) coverage is $6,600 and for “other than self-only” (family) it is $13,200. For 2016, the thresholds will increase to $6,850 and $13,700, respectively. In addition, the HHS Notice clarified that group health plans must “embed” an individual OOPM within “other than self-only” coverage. Thus, if one family member incurs health care expenses of more than $6,850 (in 2016), the plan must pay all costs above that amount even if the aggregate medical expenses of the entire family is less than the $13,700 threshold. ⁶

Employer Mandate

Until the ACA, an employer-provided health plan was a voluntary benefit. Employers sponsored them for their own reasons: attracting and retaining employees, reducing absenteeism, increasing productivity by improving employee and dependent health, as a tax-efficient way to add to total compensation and, yes, out of concern for the well-being of employees and their families. The ACA requires that employers with more than 50 employees sponsor a health benefit program for their full-time employees. Prior to the ACA, 94% of such employers already provided employee health benefits. ⁷

Employers with 100 or more full-time equivalent employees (FTE) are required to insure 70% of their fulltime employees by 2015 and 95% by 2016. Employers with 50 to 99 FTE must start insuring their full-time employees by 2016. The employer mandate (shared responsibility requirement) does not apply to employers with fewer than 50 employees.

Clarification: FTE is used to determine whether the employer is subject to the mandate. The penalty (Employer Shared Responsibility Payment) is based on the number of full-time workers.

The penalty provision of the mandate was suspended for 2014 due to confusion over what constituted a full-time employee. ⁸ It took effect in 2015. A full-time employee is one who works 30 or more hours per week.

Failure to meet the employer mandate will result in a $2,000 penalty (excise tax) per full-time employee after the first 80 employees for 2015 only. Beginning 2016, it will apply after the first 30 full-time employees. ⁹

Plans that existed prior to the ACA may be “grandfathered” if they meet the EHB coverage requirement and have not been amended in terms of access and cost sharing since 2010.

Many economists are critical of the employer mandate because it greatly increases the marginal cost of the 51st full-time employee. This could restrict employment growth and/or result in more part-time workers limited to 29 or fewer hours per week. Most economists would prefer a “play or pay” arrangement that would tax employers that fail to offer health insurance by a percent of payroll.

Employers with 50 or fewer employees are exempt from the employer mandate. If they do not sponsor a health benefit plans, their employees are subject to the individual mandate.

Individual Mandate

The ACA requires that all individuals not covered by an employer health plan, Medicare, Medicaid or other health benefit system, purchase health insurance through a state or federal facilitated exchange. There are exceptions for certain religious groups recognized by the Internal Revenue Service (IRS), Native Americans and for individuals for whom it would impose a severe hardship. There are federal subsidies available to help pay for the benefits for those who earn from 100% to 400% of the federal poverty level.

Those who do not purchase insurance that covers the EHBs at the bronze (60%) level or higher are subject to a penalty (excise tax). For 2014, the excise tax was $95 or 1% of family income. For 2015, it is $325 or 2.0%. For 2016, it will be $695 or 2.5% of family income to a maximum of $2,085. After 2016, the penalty will be indexed to the cost of living. ¹⁰

The ACA also permits a special catastrophic coverage option for customers up to age 30 or for those exempt from the individual mandate because they cannot afford health insurance. Such plans are much cheaper than even a bronze plan. They must cover up to three primary care visits per year and preventive services (immunization, cancer screening) without a deductible.

Individual Exchanges

The ACA allows two types of exchanges, or “marketplaces.” The more important of the two is the “individual exchange” in which individuals may purchase health insurance from private insurance companies, in most cases with the help of a federal subsidy.

Participating insurance companies are required to offer standard (bronze, silver, gold and platinum) health plans that cover the EHBs at competitive prices. They may not refuse to cover or price-discriminate against any applicant on the basis of preexisting conditions or sex. They may discriminate on the basis of age and/or tobacco use. Regional differences in premiums that reflect differences in the cost of medical care are also allowed.

An applicant who is eligible for Medicaid (138% of the FPL or less) is enrolled in that program. The HHS reports that since October 2013 (the first open enrollment period), 10.8 million low-income adults and children have enrolled in Medicaid or the CHIP due to the ACA. HHS estimates that by May 2015, 11.7 million will have done so. ¹¹

Older customers may be charged premiums of up to 400% of those of younger individuals. Smokers may be charged 150% of the rate for nonsmokers.

Many states have declined to set up their own exchanges. As of 2014, 16 states and the District of Columbia had established their own exchanges. Seven other states operate exchanges in partnership with the federal government. The citizens of the remaining 27 states participate in the federally exchange via www.healthcare.gov. ¹² This has resulted in a serious mess that was resolved by the Supreme Court on June 25, 2015 (discussed below).

Shop Exchanges

The second type of exchange encouraged by the ACA is the “Small Business Health Options Program” (SHOP). They may be established by the states or by the federal government (FF-SHOP). Currently, the ACA allows employers with up to 50 employees to purchase health (and dental) insurance for their employees. The employer may choose the level of coverage (bronze, silver, gold or platinum) or allow its employees to choose. The employer can also choose whether to include dental insurance and whether to cover dependents. ¹³ After 2017, the states may open their SHOP exchanges to employers with up to 100 employees.

There is a temporary 2-year subsidy available to help employers with 25 or fewer employees and average wages of less than $50,000 to get started with SHOP plans.

The SHOP exchanges will not be popular. The subsidies are limited to 2 years, are too small and require too much paperwork to be worthwhile. Employees of small businesses would be better off with the larger subsidies on the state and federal exchanges. There is a question as to whether the SHOP exchanges are necessary or desirable. ¹⁴

Subsidies

The ACA provides for a complex arrangement of subsidies (technically “premium tax credits”) that helps low-income individuals and families buy health insurance through the exchanges. Eligibility and the amount of the subsidy are based on the relationship of one’s household income to the FPL. The 2014 FPL guidelines are used to calculate the subsidy amounts for 2015. For 2014, the FPL for the 48 contiguous states and the District of Columbia was $11,670 for an individual and $23,850 for a family of four. For each additional (or fewer) family members add (or subtract) $4,060. Amounts for Alaska and Hawaii are higher: $14,580 and $13,420 for an individual and $29,820 and $27,430 for a family, respectively. ¹⁵

Subsidies are available on a sliding scale to households with incomes between 100% and 400% of the FPL. About 87% of federal exchange customers receive a subsidy. ¹⁶ The subsidies are paid as a “premium tax credit” by the IRS. An “advanced premium tax credit” is available to help pay for the insurance during the year.

Physician Fees and Medicaid

With the expansion of Medicaid, the difficulty of Medicaid patients securing medical services will increase. The ACA attempted to rectify the problem by making Medicaid payments the same as those under Medicare for specified procedures performed by primary care physicians (family medicine, internal medicine and pediatrics). For 2013 and 2014, the full cost of the adjustment would be borne by federal government. It was hoped that the states would then absorb the additional cost. The results were disappointing.

Fifteen states planned to continue the increase (fully or partially), 24 states do not and 12 states have not yet decided. ¹⁷ Not surprisingly, the states that planned to continue the increase already paid near or above the Medicare rate. For those states that paid substantially less, the cost of continuing the increase would be too great. It will be interesting to see what the federal government does about this problem.

Funding

The ACA was skillfully designed so as not to add to the federal deficit or to the consequent national debt. Half of the cost of the ACA was to come from savings in the existing health programs (mainly Medicare and, to a lesser extent, Medicaid) and half from new revenue including (1) adjust the taxation of health plans, health savings accounts and other programs and on excessively generous health plans (the “Cadillac tax” discussed below), (2) adjustments to the Medicare payroll tax, (3) assessing excise taxes and penalties for not complying with the employer and individual mandates, (4) assessing fees on health insurers, pharmaceuticals and manufacturers of medical devices and (5) various new and increased taxes (on tanning salons and on high earners). ¹⁸ Paying for the health benefit improvements was important.

The nonpartisan Congressional Budget Office (CBO) was created in 1974 to help monitor and control federal spending. It calculates baseline projections for the federal budget over the next 10 years and “scores” proposed legislation by estimating the impact on the annual federal deficit. A positive score indicates an increase in the deficit and a negative score a decrease. If a bill’s score is negative or neutral, its chances of passage are greatly improved.

The ACA scored well. The Senate bill passed in December 2009 received a score of −$118 billion. ¹⁹ How accurate that estimate will prove to be is another matter. A more recent CBO estimate for 2015 through 2025 shows the “increases in mandatory spending” of the ACA growing from $90 billion in 2015 to $213 billion in 2025 while “increases in revenue” grow only from $17 billion to $78 billion. The cumulative 10-year totals (2016-2025) are an increase in spending of $1,747 billion and an increase in revenues of $540 billion. ²⁰ However, a subsequent report (discussed below) implies that the ACA will increase the federal deficit by $108 billion between 2016 and 2020. It will then decline (improve) by $246 billion from 2021 through 2025. From 2016 to 2025 the deficit will decline by $137 billion. ²¹

There is a great deal of uncertainty in any of these estimates. Forecasting the expenditures and revenues of a statute as complex as the ACA is difficult. One of the challenges is predicting how the affected parties will respond to its various provisions and how they will respond to each other’s responses.

The Cadillac Tax

A provision of the ACA is an excise tax on high-cost health benefit plans effective 2018. The so-called Cadillac tax will impose a 40% penalty on employer and employee contributions that exceed specified limits to group health plans, including contributions to health savings accounts (HSA), health reimbursement arrangements (HRA), health flexible spending accounts (FSA) and Archer Medical Savings Accounts (MSA). The tax is to be paid by insurance companies and third party administrators, who will, of course, pass it on to sponsors.

In February 2015, the IRS issued Notice 2015-16 containing its thoughts on the definition of “applicable coverage” and how employers are to calculate the dollar limits of the excise tax. Comments were due by May 15, 2015, and 245 were received. Another Notice will follow on the remaining aspects of the excise tax. After comments to that Notice are submitted, the IRS will publish proposed regulations and invite additional comments. Final regulations will follow.

For planning purposes, the thresholds were set at $10,200 for an individual and $27,500 for a family. Those thresholds will be adjusted by a “health cost factor” before they go into effect. After 2018, they will be indexed to general inflation rate (CPI-U), not to medical cost inflation.

The average increase in the CPI-U from 2001 through 2014 was about 2.2%, significantly less than the 3.7% rate of medical cost inflation. ²² If that relationship continues, more and more plans will be subject to the excise tax and the amount of revenue generated will grow. ²³

Towers Watson’s estimates that 48% of all health plans will be subject to the Cadillac tax in 2018 and 82% by 2023. ²⁴ At some point, any plan that meets the law’s EHB requirement will be subject to the tax! Of course, this assumes that the future will look like the past. It may not.

The Cadillac tax will initially hit health plans at the upper levels of the income distribution (executives and managers), collectively bargained multiemployer plans and state and local government plans.

Why would the government want to discourage generous health plans? One reason was to help drive down health care expenditures. Another was revenues. The Cadillac tax is a revenue generator that helped the ACA score well when assessed by the CBO. It was estimated that the excise tax would produce $111 billion from 2013 (really 2018) through 2022.

Even if plan sponsors avoided the Cadillac tax by reducing contributions, the government will still gain from the additional revenue subject to corporate and individual income and payroll taxes. Of course, the Cadillac tax could be repealed or modified before 2018.

King v. Burwel

The most important challenge to the ACA since its constitutionality was confirmed in 2012 arose in 2014 in King v. Burwell. In 2014, Silvia Burwell replaced Kathleen Sibelius as Secretary of Health and Human Services. The issue before the Supreme Court was the validity of the regulations implementing the “premium tax credit provisions” (subsidies).

The ACA permits two types of individual exchanges: those created by the states and those established by the Secretary of HHS. If interpreted literally, the ACA would have limited the subsidies to individuals who obtain coverage under a state exchange and prohibited them for those enrolled in a federal exchange. ²⁵

On June 25, 2015, the Supreme Court issued its decision. ²⁶ It held that the subsidies were to be available to the federal exchanges as well as to the state exchanges. The ACA was saved.

Most federal-exchange enrollees reside in “red” (Republican) states in the south and mid-west. Their political leaders chose not to set up state exchanges as a protest against the ACA. This was not anticipated by the drafters of the ACA.

Thirty-six states refused to establish their own exchanges and their citizens had to enroll through the federal exchange. If the challenge to IRS regulations permitting subsidies for federal enrollees had been successful, most of them would have lost their subsidies. That would have made most of them eligible for a “hardship exemption” from the individual mandate. Such an exemption is allowed if the premium of the lowest cost bronze plan available in their region exceeds 9.5% of their family income. That would have gutted the ACA.

Had the plaintiff (King) prevailed, it would have affected 6.4 to 8.2 million individuals (various estimates) and would have increased their premiums by an average of 255%. The amount varies by state and ranges from 122% to 774% (with Alaska and Mississippi being the most affected). Indeed, it would have been worse.

The ACA allows price discrimination on the basis of age. Older customers may be charge a premium up to 400% more than younger ones. A 50 year old who earns less than $46,000 per year would be entitled to a hardship exemption. A 27 year old earning just $27,000 would be entitled to the exemption. ²⁷ The deletion of large numbers of young enrollees from the risk pool would have jeopardized the viability of the ACA.

Politics and Repeal

The ACA was enacted in 2010 when the Democrats held a majority in both houses of Congress and signed into law by Democratic President Obama. In the election of 2012, the Republicans gained control of Congress and have been vociferously anti-ACA ever since. While the Republicans in Congress say they would like to repeal the ACA, the certainty of a presidential veto will preclude that at least through 2016. The Republicans do not have the votes to override a presidential veto. The stand-off also precludes improving the ACA by amendment.

There will be a presidential election in November 2016. Barring surprises, the Republicans will retain control of Congress. That leaves the presidency. If a Democrat wins, the stand-off may continue. The Republicans have been calling for the repeal of the ACA for so long; it will have to part of their 2016 platform. Should they win the White House or gain enough votes in the Congress to override a presidential veto, the Republican Party will have a big problem.

By 2017, 24 million Americans will have health insurance thanks to the ACA. Moreover, many of its other provisions will have become accepted and embedded. They include the 5.7 million young adults remaining on their parents’ plan until age 26, guaranteed coverage regardless of preexisting conditions, guaranteed renewal regardless of medical experience and no annual or lifetime limits on medical expenses.

The June 2015 report by the CBO and Joint Committee on Taxation (JCT) found that repealing the ACA would reduce the federal deficit by $108 billion from 2016 to 2020. However, from 2021 to 2025, it would increase the deficit by $246 billion. For the entire 2016 to 2025 period, repeal would add an estimated $137 billion to the deficit. The CBO/JCT researchers expect this trend to continue after 2025. ²⁸ Since much of the congressional opposition to the ACA is based on its cost, this is important.

The CBO/JCT report also found that repealing the ACA would result an increase of the uninsured nonelderly population of 19 million in 2016 (if the repeal was effective January 1, 2016) and by 24 million by 2020 to 2025. ²⁹ To have that many “dis-insured” voters blaming their plight on the Republican Party could be a “game changer.” In my opinion, it is likely that the Republican opposition to the ACA will weaken by 2017.

Appraisal

The Affordable Care Act fundamentally changes the health benefit landscape of the United States. The system of voluntary employer-sponsored health plans has become a mandated system for employers with more than 50 employees. The sponsors’ discretion to choose the health benefit package has been replaced by a specified list of EHBs. Medicaid has been transformed from a system of eligibility categories with wide variations among the states to one in which individuals and families with incomes below 138% of the FPL are entitled to benefits. The federal government will levy substantial new taxes and penalties on various parties to bankroll the expanded Medicaid and subsidy payments to those with incomes from 100% to 400% of the FPL. Whether the additional revenues will cover the additional costs hinge, in part, on the fate of the Cadillac tax.

Clearly the ACA will result in millions of the formerly uninsured population gaining coverage due to the exchanges, subsidies and Medicaid. That is an obvious improvement. However, millions of undocumented immigrants and individuals and families for whom buying health insurance at the bronze 60% level would cost too much remain uninsured. There are over 30 exemption categories to the individual mandate.

Numerous other requirements improve the health benefits system. They include allowing young adults to remain on their parent’s policy until age 26, prohibiting preexisting condition exclusions, guaranteed insurance renewability and no annual or lifetime expenditure limits.

Much of the early optimism about the ACA is premised on the expectation that it will reduce the rate of health care inflation. It may not. Following some early improvement in 2013 and early 2014, health care costs began to rise. For the first quarter of 2015, health care spending was 7.3% higher than it was in 2014 Quarter 1 and hospital spending was 9.1% higher. ³⁰

Conclusion

Notwithstanding serious rollout problems with the federal and some of the state exchanges (that have been largely corrected), the Affordable Care Act represents a monumental change in the health policy of the United States. While it falls short of the comprehensive single-payer model favored by some, it was the best that could have been done given the development of the employment-based and government program augmented American health care system. While not without problems, the ACA can be improved in the future. In my opinion, it is unlikely that it will be repealed even if the Republicans retain control of the Congress and win the White House in 2016. Too many people will have gained access to health insurance, and too many other improvements will have become accepted and expected. Moreover, the health insurers and the health care providers will have gained another 25 million paying customers. In the event that the ACA was repealed after 2016, it would have to be replaced with something very similar.