State Experiences Show Why Repealing the ACA’s Premium Subsidies and Individual Mandate Would Cripple Individual Health Insurance Markets
President-elect Donald Trump and congressional Republicans favor repealing major provisions of the Affordable Care Act (ACA) early in the new administration. Republicans may have enough votes from within their own party to do away with the health law’s premium and cost-sharing subsidies, individual mandate, and Medicaid expansion. But a broader repeal of the ACA’s insurance market reforms, and adoption of a replacement health care plan, may be more challenging. These steps need bipartisan support for passage and require Republicans to resolve ongoing internal differences regarding what a replacement law should look like; they may do so, but haven’t yet.
With the substance of an alternative plan up in the air, uncertainty has grown over when the law might be replaced. Republican leaders have suggested Congress should repeal parts of the ACA now and leave the details of replacement until later. But “repeal and delay” has drawn criticism from stakeholders and policy experts who point out the strategy is likely to cause significant harm to insurance markets and consumers long before a replacement plan materializes, and a growing number of lawmakers have expressed discomfort about the proposal.
What happens if Congress and the new president push ahead with partial repeal without securing support for a replacement? The resulting regulatory landscape would look like what several states had in place prior to the ACA. Their experiences were poor.
The ACA’s Structure
The drafters of the ACA sought to improve access to nongroup health insurance and to make that coverage more affordable and protective. To do this, they relied on an interlocking set of policies often analogized to a three-legged stool. The first leg: consumer protections that require insurance companies to sell their plans to everyone and that prohibit them from excluding coverage for preexisting conditions or charging a higher premium to those who are sick. The second: financial assistance, in the form of premium and cost-sharing subsidies for those at the middle and lower ends of the income scale, to make coverage more affordable. The third: a financial penalty—the individual mandate—for those who can afford to get coverage but choose not to.
This construction was no accident. Protections for people with preexisting conditions are popular; incentives to enroll in coverage before you get sick are not (the mandate), and they cost money (the subsidies). But provide only the former and neglect the latter, and markets collapse just as does the proverbial stool with a leg (or two) shorn off. We know this because a number of states tried it before the ACA—and it didn’t work.
Learning from States
On the eve of federal health reform, five states—Maine, Massachusetts, New Jersey, New York, and Vermont—prohibited insurers from denying coverage or charging a higher premium based on health status. With the notable exception of Massachusetts, these states did not provide incentives to encourage healthy people who could afford coverage to buy it. And—except for Massachusetts—their individual health insurance markets were dysfunctional. In general, fewer plans participated, risk pools were smaller, and premiums were much higher than they had been (or would be after the ACA). In New York, for example, rates skyrocketed after the state’s market reforms took effect in the early 1990s and remained high. In 2012, one carrier in New York City was charging $1,299 a month for individual coverage, nearly three times the unsubsidized price of the 2017 benchmark plan offered in the marketplace today. (For the vast majority of marketplace participants who are receiving premium tax credits, the cost differential is even greater.) In New Jersey, years of declining enrollment and premium increases led the state to modify its reforms in 2003 to introduce the “Basic and Essential” plan. Notwithstanding the name, these plans didn’t cover many critical benefits, including chemotherapy, outpatient prescription drugs, and maternity, and allowed insurers to raise premiums based on gender and other factors.
Other states had also attempted nongroup market reforms without a mandate or subsidies, but had abandoned this strategy prior to 2013. Kentucky, New Hampshire, and Washington established guaranteed issue and community rating rules in the 1990s; each subsequently repealed or significantly weakened those requirements in the face of deteriorating markets (as did other states, including Iowa and South Dakota, where only guaranteed issue requirements had been present). In Kentucky, only two insurers remained in the individual market out of more than 23 that were active before the state’s reforms. In Washington, after years of adverse selection and consequent escalations in premiums, every individual insurer—19 in total—stopped writing nongroup policies until reform efforts were rolled back.
And what of Massachusetts? After years of unsuccessful experiments with partial reform, the state enacted broad changes in 2006. It established a coverage mandate, created a health insurance marketplace where consumers could buy comprehensive policies on a guaranteed basis, merged the individual and small-group markets, and enrolled those with lower incomes into a new state program offering subsidized coverage. By 2010, Massachusetts’ individual market had experienced increased enrollment, remained competitive, and had lower premiums than on the date of reform.
A partial repeal of the ACA, striking the law’s premium subsidies, mandate, and Medicaid expansion, would raise the number of uninsured by about 22 million. We know from experience that the regulatory structure that would remain would cause the nongroup markets in most states to collapse, depriving perhaps an additional 6 to 7 million Americans of coverage. As policymakers weigh the difficult trade-offs in reopening the ACA, there are lessons to be learned from the states who have been here before.