ObamaCare’s Three Step Approach To Expanding Coverage

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ObamaCare has been dominating headlines recently as the potential cause of a government shutdown next week, but polling shows a lot of confusion over what the program actually does – people are opposed to the program by name, but often in favor of specific provisions, and 30 percent of respondents in a recent poll didn’t know enough to have an opinion. Whether health insurance should affordable to everyone is ultimately a value judgment, and people who openly disagree will oppose the program regardless of the specific details. For everyone else, the question is whether ObamaCare can deliver on its promises.


A Three-Pronged Approach

The most controversial part of ObamaCare (officially the Patient Protection and Affordable Care Act) is the individual mandate, which forces people to get health insurance or pay a penalty, set at the $695 or 2.5 percent of income, whichevers higher. Without dropping into hyperbole, conservatives don’t think it’s the government’s place to legislate good decision-making, but the individual mandate is an important part of making health insurance affordable.

Most people in the US get health insurance from their employers, but people who don’t have access to health insurance at work are often can’t afford it non-group plans, especially if they have pre-existing conditions. (Medicaid covers poor people, and Medicare covers the elderly and some people who are unable to work).

ObamaCare expands coverage by expanding Medicaid to cover people with incomes up to 133 percent of poverty, just over $10,000 for a single person and $22,000 for a family of four, and prohibit health insurance companies from charging people different prices for the same insurance package. Some allowance can be made for age and whether or not a person smokes, but even then the spread is fairly tight.

Similar laws have been implemented without an individual mandate at the state level around the country, including Massachusetts, and they have all run into the same problem – premiums spike. When health insurance companies aren’t allowed to discriminate based on existing conditions, many people live without health insurance until they need it and then quickly sign up, gaming the system. Since the population of people with insurance is sicker than the general public, a process called adverse selection, insurance companies have to charge more to keep their margins in place.

One of the principal reforms implemented by former Massachusetts Governor Mitt Romney was to create an individual mandate, similar to the one in ObamaCare, so that both sick and healthy people would sign up.  This forces healthy people to subsidize other’s medical treatment, with the guarantee of receiving the same treatment if they fall ill.

“It seems possible that even without the mandate, people with the highest health care costs would enroll first and healthier people would enroll over time,” says an article by Amitabh Chandra, Jonathan Gruber, and Robin McKnight in the New England Journal of Medicine. “But data on the health status of new enrollees suggest that that was not the case.” Instead there was a sharp increase in enrollment just before the mandate took effect.commonwealth care new enrollees

Fining people for being unable to afford health care seems perverse, which is why ObamaCare creates insurance exchanges that are meant to have plenty of affordable options. One of the big misconceptions about the exchanges is that most people will end up paying the sticker price – it’s not the exchanges themselves that make health insurance affordable, it’s the tax credits that reduce their effective cost.

“These tax credits are designed to cap the share of income that individuals have to spend to get insurance,” writes MIT economics professor Jonathan Gruber for the National Bureau of Economic Research. “Beginning with a cap at 3 percent of income at 133 percent of the poverty level and rising to a cap of 9.5 percent of income at 300 percent of the poverty level (and remaining at 9.5 percent until 400 percent of the poverty level).”

The Department of Health and Human Services recently released data on 36 states, showing the marked difference between health insurance premiums before and after tax credits are applied. For a 27 year old earning $25,000 per year who chooses the least expensive package on the exchanges, the average premium is less than $100, even though the apparent, pre-tax premium is often much higher. A family of four earning $50,000 can find premiums as low $46, and an average of $95 across those 36 states.

obama care premium tax credits

So ObamaCare’s three-pronged approach to expanding health insurance coverage is to prohibit insurance companies from discriminating based on existing medical conditions, create an incentive for healthy people to get insurance to prevent adverse selection, and then offer tax credits to keep premiums below a certain percentage of income (no doubt the exact percentage will change over time).

Looking Back At RomneyCare

Since ObamaCare closely resembles RomneyCare (officially An Act Providing Access to Affordable, Quality, Accountable Healthcare) it’s reasonable to look at how that program has fared to guess how it might work nationwide.

“There has been a dramatic expansion of health insurance coverage in the state,” writes Gruber, with “data from the Current Population Survey (CPS) showing a 60 percent decline in the uninsured since 2006 — over a period of time where the share of the national population without insurance was rising by 6 percent.”

The Congressional Budget Office (CBO) has predicted similar expansion of coverage, with the percentage of non-elderly uninsured people dropping from 20 percent of the population to 11 percent after ten years. It’s not universal coverage by any means, but it extends insurance to 25 million people who wouldn’t have it otherwise.

Employee-sponsored insurance also became more common in Massachusetts after RomneyCare went into effect. The rate of companies offering ESI went from 70 percent in 2005 to 76 percent in 2009, while the percentage stayed flat at 60 percent nationally. The number of people who opted to use ESI ticked up slightly in Massachusetts while it fell 4 percent across the country, and those who didn’t have access to ESI also benefitted. Non-group premiums fell 40 percent in Massachusetts in the first four years of RomneyCare, when they rose 14 percent nationally.

Most importantly, RomneyCare continues to be popular in Massachusetts, with support ranging from 60 to 70 percent depending on the poll. Compared to national health care system, which more than 60 percent describe as in a state of crisis or having major problems, and there’s good reason for consumers to be optimistic.

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