When the Senate releases its plan to repeal and replace the Affordable Care Act (ACA), it may retain the ACA’s community-rating rules, which prevent health insurers from setting premiums based on enrollees’ health status or preexisting conditions. However, the Senate’s plan may enable states to waive the ACA’s essential health benefits (EHB) requirement, a provision that requires most individual and small-group health insurers to cover 10 services including hospitalization, emergency department visits, prescription drugs, and other specific types of care.1 Our analysis, described in more detail below, finds that allowing states to waive the EHB requirement will reduce premiums, but could substantially increase out-of-pocket costs for those in need of eliminated services. This policy change could make it harder for those with preexisting conditions to afford needed services, despite the fact that premiums would not vary based on health status.
Prior to the ACA, several of the essential health benefits, including maternity care, substance abuse and mental health treatment, and prescription drugs, were commonly excluded from individual market coverage. In this post, we use data from the 2014 Medical Expenditure Panel Survey (MEPS) to analyze how much the requirement to cover these benefits adds to overall insurer spending. We also assess the potential impact of eliminating these services from the required essential health benefits package on consumer spending. We inflated reported expenditures in the 2014 MEPS, which is the most current MEPS year available, to 2017 figures using projections estimated by the Centers for Medicare and Medicaid Services National Health Expenditure Accounts. Our analysis focuses on MEPS respondents who reported being enrolled in any private insurance, including both individual market (both on and off the marketplaces) and employer-sponsored plans. (See the technical appendix for details about the study methods.)
Changes in Insurer Spending and Premiums
We analyzed average insurer spending as projected for 2017 for all privately insured enrollees younger than age 65 for maternity care, mental health and substance abuse treatment, prescription drugs, and all other services (Exhibit 1). We found that maternity care accounted for 4 percent of per capita insurer spending in our data, and mental health and substance abuse treatment accounted for 1 percent of per capita insurer spending. Prescription drug spending was more substantial, representing approximately 22 percent of per capita insurer spending. These results are similar to those reported in a recent issue brief by the actuarial firm Milliman.
Because premiums are based on per capita insurer spending plus administrative costs, the spending amounts in Exhibit 1 illustrate how premiums might change if coverage for select essential health benefits were excluded from the benefits package.2 If we assume that administrative costs are proportional to spending on services, eliminating maternity, mental health, and substance abuse treatment would reduce premiums by 5 percent. Because prescription drugs encompass a larger share of total spending, eliminating this benefit would lead to a larger reduction in premiums—decreasing them by 22 percent.
Eliminating the essential health benefits requirement could also have secondary effects on premiums. For example, the lower premiums that result from eliminating certain benefits could encourage healthier people to enroll in individual market coverage and improve the overall risk pool. Such an effect would likely be small if maternity care or substance abuse and mental health treatment were eliminated, given that these services account for a relatively small share of insurer spending. However, the effect might be larger if coverage for prescription drugs were removed, given that these benefits represent a larger share of insurer spending. In contrast, eliminating certain benefits could lead to higher spending on covered services. For example, poorly managed depression may increase medical spending among those with chronic conditions,3 and lack of access to prescription drugs may lead to costly complications for some patients.4 Our analysis does not take these spillover effects into account.
Changes in Consumer Out-of-Pocket Spending
Our analysis also considered how eliminating these benefits might affect consumer out-of-pocket spending relative to current law for all individuals who used the services in 2014 and for “high-need” users (Exhibit 2). The “high-need” users were defined as:
- High-need maternity care users: Women who had a complicated pregnancy or delivery
- High-need mental health and substance abuse users: Those who experienced a hospital inpatient stay related to a mental health or substance abuse condition
- High-need prescription drug users: Those with prescription drug spending and a chronic condition including cancer, diabetes, emphysema, high cholesterol, coronary heart disease, arthritis, attention deficit and hyperactivity disorder, asthma, or a previous heart attack or stroke.5
Current law spending represents average out-of-pocket spending for privately insured individuals in the MEPS who report using these services. To estimate the change in out-of-pocket spending if the service were removed from the requirements, we assumed that plan spending on these services would fall to zero and that consumers would bear the full additional costs.6 As a result, the estimates should be interpreted as the impact on consumers if they lost access to the benefit but continued to use the same level of care. (Sample sizes in the MEPS are small for the subset of people who use maternity, mental health, and substance abuse care, particularly when we restrict the analysis to high-need users.7)
In all cases, eliminating the benefit substantially increases costs for people who use these services. For example, out-of-pocket spending for a woman in need of maternity care could rise from an average of $737 if the benefit were covered to $8,631 if the benefit were eliminated, resulting in an increase in spending of $7,894. For a typical consumer in need of maternity services, this represents more than an 11-fold increase in out-of-pocket expenditures for maternity care. For a typical consumer of mental health and substance abuse services, out-of-pocket spending would increase from $437 to $1,525 if these services were removed from the benefit. For consumers in high need of care, eliminating the essential health benefit has a larger effect. For example, spending among those with a mental health or substance abuse–related inpatient stay could increase by over $14,000, a ninefold increase in out-of-pocket spending on mental health treatment. Eliminating the benefits therefore leads to large out-of-pocket spending increases for those who use services and reduces premiums by a smaller amount for everyone enrolled in the market. This finding reflects that, by incorporating these benefits into the standard premium, costs are redistributed so that each enrollee pays a little bit more to offset treatment costs for those who need care.
These analyses lead to mixed conclusions about the effectiveness of eliminating essential health benefits as an approach for reducing premiums. Our analysis suggests that eliminating maternity coverage and substance abuse and mental health treatment would reduce premiums by about 5 percent, assuming that administrative costs are proportional to insurer spending, and without accounting for spillover effects. Eliminating coverage for prescription drugs could have a larger effect on premiums, potentially reducing them by 22 percent, in part because many patients use prescription drugs. However, eliminating insurance coverage for any of these services would dramatically increase out-of-pocket costs for people who need maternity care, have a mental health condition, or need prescription drugs. For pregnant women and those in high need of mental health services, out-of-pocket spending on these services could increase by a factor of 9 or more if these services were dropped from the EHB. Those who use prescription drugs could experience a fivefold increase in out-of-pocket spending on pharmaceuticals if drug benefits were eliminated. Such changes could lead to financial hardship for those in the greatest need of care, reducing the usefulness of insurance as a mechanism to guard against financial risk.
This post has been updated from the May 2017 version.