Why Premiums Should Grow Faster than Health Costs under ACA; and, Why a Staged Rollout of Health Insurance Exchanges is a Feasible Budget Compromise


The Affordable Care Act (ACA) subsidizes eligible households’ purchase of health insurance; in the first year of operation subsidies are geared to keep households’ premium costs below certain percentages of income

Subsidies are subject to two layers of indexing: ‘regular’ and ‘additional’. ‘Regular’ indexing applies in any year that health costs grow faster than wages – a condition that should be met in all or very nearly all of the next ten years. The consequence of regular indexing is that households’ premium costs grow at almost exactly the same rate as growth in health costs, thus under regular indexing we expect households purchasing health insurance on the exchanges to see premium cost growth of +/- 6 percent, v. wage growth of +/- 3 percent

‘Additional’ indexing applies in 2019 and beyond if health costs grow faster than CPI; however if federal subsidies exceed 0.504 percent of GDP additional indexing applies before 2019. Because peak Medicaid eligibility probably will be closer to 100 percent of the federal poverty level (FPL) than the 138 FPL originally envisioned, many households between 100 and 138 FPL are likely to purchase heavily subsidized insurance on the exchanges right away, pushing federal subsidies above the 0.504 limit in the first year of exchange operations – if all states begin operating exchanges in the same year

Additional indexing constrains growth in subsidies such that households’ premium costs grow substantially faster than both wages and health costs. Expecting additional indexing to factor in immediately, we expect households’ premiums to grow at +/- 10 percent in the first decade of exchange operations, as compared to health cost growth of +/- 6 percent and wage growth of +/- 3 percent

The economic result is that over time fewer households purchase coverage, and households that do purchase coverage choose less and less generous plans; the political result is that the ACA becomes less and less popular

This strengthens our conviction that the ACA ultimately produces less gains in overall healthcare demand than generally expected – in fact we expect ACA to actually slightly reduce total healthcare demand

This also raises the possibility of a staged ACA roll-out – the 0.504 fail-safe can be avoided for several years – and deficit projections can be considerably reduced – by a staged roll-out of health insurance exchanges, rather than the current plan for all exchanges to start in the same year (with 2014 still standing as the technical deadline, though the odds of an all-state 2014 start are increasingly remote). We view a staged roll-out of the exchanges as a politically feasible means of: 1) reducing 10-year deficit projections (we estimate federal spending on subsidies of more than 1.3 trillion (in 2012 dollars) in the first decade of exchange operation); 2) avoiding the inconvenient truth that few states are prepared to meet the 2014 deadline; and, 3) avoiding (or delaying) a scenario in which households’ premiums grow substantially faster than health costs. Under a staged roll-out, not only would we expect ACA effects on demand to ultimately be very small (in fact slightly negative); we would also flatten / spread out any immediate unit demand ‘boost’ that would have been associated with a simultaneous 50-state roll-out of exchanges

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