In his joint address to Congress, President Trump said that we are in the midst of an “imploding ObamaCare disaster.” While individual market premiums did increase significantly in 2017, experts concluded that increase was a one-time adjustment for initial underpricing, with the Health Insurance Marketplace poised for greater price stability and success going forward—although recent executive actions have already changed this trajectory. But what could actually cause a death spiral is the new House Republican proposal, the American Health Plan Act. Our analysis concludes that bill could be harmful, if not fatal, to the individual market in many, if not most, places over time.
The new House legislation, released yesterday, has the same basic flaws as the “repeal and delay” bill that President Obama vetoed last year: it repeals the Affordable Care Act’s (ACA’s) individual responsibility provision with no adequate substitute, and it dramatically reduces financial assistance. Kaiser Family Foundation estimated that it would cut tax credits by an average of $1,600 per year in 2020 for current enrollees. The Congressional Budget Office (CBO) estimated that “repeal and delay” bill would cause individual market premiums to double and cause the individual market to collapse in most of the country.
Here are five reasons why the new House legislation to repeal the ACA could result in a “death spiral”: a cycle of unraveling in which fewer healthy individuals enroll in insurance, causing higher premiums—which leads to even fewer healthy enrollees and escalating premiums—ultimately resulting in insurance companies dropping out of the market altogether.
1. Fewer healthy enrollees motivated by the coverage requirement
The House bill repeals the individual shared responsibility provision. In an attempt to replace the enrollment lost and mitigate the premium increases caused by this repeal, the House bill imposes a 30 percent increase in premiums for people who had a break in their health coverage over the past year. Yet, common sense indicates why such a provision is a poor substitute. What young adult with a coverage gap would pay 30 percent more to get coverage when they did not want coverage previously? The answer is probably sick ones, while those who are healthy remain uninsured until their health care costs approach the penalty amount. This potentially results in a worse risk pool than if there was no penalty at all.
By repealing the individual shared responsibility provision, Americans who signed up for coverage under the ACA because it is the law or to avoid paying a penalty will likely no longer do so. This policy change would most likely alter decisions for young or healthy enrollees. CBO estimated that repeal of the individual responsibility provision alone could cause premiums to jump by 20 to 25 percent in the first year after enactment, with a decrease in market participation by both consumers and health insurance companies.
2. Fewer healthy rural enrollees
Rural Americans have historically faced higher individual market premiums than urban Americans because their insurance pools tend to be smaller, more volatile, and experience a higher cost of services. In 2016, the average premium in the Health Insurance Marketplace in rural areas was 6.6 percent higher than the national average. As a result, tax credits were higher in rural areas because the ACA ties premium tax credits to the cost of local market premiums.
Instead, Republicans propose a defined contribution approach to credits, under which federal budgetary spending is more predictable, but the downside to individuals is clear. Since the House Republican tax credits are not tied to the local premium and include no geographic adjustments to its premium tax credits, rural residents would bear the full cost of this higher premium—which would average about $340 more per year for a 40-year-old in 2020. In a state like Alaska, where costs are much higher than the national average, a 27-year-old with income of $25,000 would pay $7,120 this year in out-of-pocket premiums under the American Health Care Act compared to paying only $1,236 in out-of-pocket premiums with the ACA’s tax credit.
Such large premium increases would likely cause a disproportionate number of rural Americans—especially those that are relatively healthy—to drop their coverage, likely jump-starting the potential unraveling of the insurance market in sparsely populated areas.
3. Fewer healthy low- and moderate-income enrollees
Historically, the greatest barrier to health insurance coverage was cost: lower-income people were much less likely to be covered. This is why the ACA included income-related tax credits linked to the cost of local market premiums. Under the House bill, premium tax credits would not vary with income. This is a change estimated by a former Republican presidential candidate advisor to “price many poor and vulnerable people out of the health insurance market.” By no longer adjusting premium tax credits for income, the House bill would cause the average Marketplace enrollee with income below 200 percent of poverty (and higher in many cases) to pay several hundred to several thousand more for the same health coverage (Figure 1). Last year, 65 percent of enrollees through HealthCare.gov had income below 200 percent of poverty—suggesting a large fraction of current enrollees may no longer be able to afford coverage unless their health costs are so high they are willing to pay large shares of their income for insurance. Moreover, they would pay more for less: the bill would repeal financial assistance for cost sharing, potentially putting deductibles as well as premiums out of reach for this population.
4. Fewer healthy older enrollees
Under the ACA, premiums and tax credits for the oldest enrollee were three times higher than that of a 21-year-old at a given income. Because the average health care costs for a 21-year-old are more than three time the average for a 64-year-old, critics of the ACA cite this 3:1 limit in age rating as increasing average premiums for younger adults. The American Health Care Act substitutes the limit in the ACA and allows older enrollees to be charged five times more than their younger counterparts. But the bill’s premium tax credit for older enrollees is only twice as high as that of a young adult starting in 2020. As such, it is likely that the out-of-pocket premium that every Health Insurance Marketplace enrollee age 60 or older would pay would increase significantly under this proposal for the purchase of the same health plan (Figure 2).
5. Fewer healthy younger enrollees overtime
The House bill’s tax credits are fixed dollar amounts that increase annually by general inflation (the consumer price index) plus one percentage point. Supporters of the plan argue in favor of this approach because it limits risk to the federal budget.
By contrast, the ACA’s tax credits are designed to track premium growth—both when premiums go up and when they go down—keeping enrollment steady. Since health cost growth tends to increase faster than general inflation, the formula behind the House bill will result in premium growth outpacing the growth of tax credits, leaving consumers on the hook to pay a growing share of the premiums. This means that by 2030, even many young adults who may have gained in the early years of the flat tax credit would end up paying more out of pocket for premiums (Figure 3). Young adults, especially those that are healthy, would likely drop coverage rather than pay higher premiums.
President Trump and Republican leadership in Congress promised to replace the ACA with something “much better.” The House Republican leadership claims to protect people with pre-existing conditions. Yet, its bill would remove policies that have proven essential for a stable individual market: the individual responsibility requirement and well-targeted financial assistance. The House bill’s Stability Fund would likely be insufficient to compensate for the premium increases and coverage losses due to the individual responsibility requirement repeal. And insurers could not raise their deductibles high enough to lower premiums to the size of the credit given existing requirements (e.g., essential health benefits and an annual maximum out-of-pocket limit on cost sharing). As such, the American Health Care Act would not provide meaningful coverage for people with pre-existing conditions—and could result in millions of Americans with and without pre-existing conditions left with no affordable health plan options, even potentially at any cost due to insurance market instability, or even an insurance market death spiral.