On subsidies and mandates: a regulatory critique of ACA.

• Date: 22 June 2011
• Author: Monahan, Amy B.

1. INTRODUCTION II. BACKGROUND ON ACA & HEALTH INSURANCE COVERAGE III. ENCOURAGING HEALTH INSURANCE PURCHASE: ACA'S CARROT AND STICK A. The Carrot: Tax Credits for Health Insurance Purchase B. The Stick: The Individual Mandate 1. Policy Rationales 2. The Structure of the Individual Mandate and Its Effects 3. Analysis of the Financial Penalty as a Tax 4. The Impact of the Mandate on Purchasing Decisions 5. Putting the Pieces Together IV. AN ALTERNATIVE: MASSACHUSETTS' EXPERIENCE A. Subsidies in Massachusetts B. The Individual Mandate in Massachusetts 1. The Mandate as a Tax 2. Mandate as Nudge 3. Putting the Pieces Together V. KEY DIFFERENCES AND CONSIDERATIONS VI. CONCLUSION I. INTRODUCTION

   This Article examines one of the most controversial elements of the Patient Protection and Affordable Care Act (ACA), (1) the so-called individual mandate, as well as its lesser-discussed but intimately related system of tax credits given to lower-income individuals to subsidize health insurance purchase. (2) A few caveats are important at the outset. First, this Article provides an examination of the structure and likely effects of the individual mandate. It puts aside entirely the constitutional and liberty issues raised by the mandate. Second, while the Article offers a critique of the current regulatory structure of both the mandate and the subsidies, I am cognizant of the political realities that affected ACA's passage and that are likely to affect any subsequent reform efforts. As a result, while this Article suggests regulatory improvements, my main goal is to alert readers to potential shortcomings in ACA's reform efforts that warrant further monitoring and study following implementation.

   The Article begins with a very brief background on ACA, before analyzing ACA's subsidies and individual mandate in detail. It then offers a comparison to the subsidies and individual mandate provided under the Massachusetts health reform law that passed in 2006, arguing that in many ways Massachusetts' approach appears to be preferable. Massachusetts' system of subsidies provides better financial security to low-income individuals and has an individual mandate that provides a clear, equitable incentive to all but the lowest-income individuals to purchase health insurance coverage.

2. BACKGROUND ON ACA & HEALTH INSURANCE COVERAGE

   ACA is an immense piece of legislation that has been likened to a "finely crafted watch" given its complicated and interrelated provisions. (3) It has many and varied goals, but primary among these is a desire to greatly increase the number of Americans with health insurance coverage, to provide better access to health insurance for those with poor health history or risks, and to make health insurance coverage more affordable. (4)

   In 2009, there were 50 million uninsured individuals under age 65 in the United States. (5) This figure includes all individuals present in the United States, regardless of citizenship or immigration status. (6) Most of the uninsured are part of a family with at least one full-time worker. (7) Not surprisingly, those with lower incomes make up a large percentage of the uninsured. (8) Among the uninsured, 40% have incomes below the federal poverty limit (FPL); (9) 38% have incomes between 100% and 250% FPL, 13% have incomes between 251% and 399% FPL, while only 10% of the uninsured have incomes at or above 400% FPL. (10)

   Following full implementation of ACA's major insurance reforms in 2014, health insurance market dynamics are likely to change dramatically from their current state. ACA will require health insurers to offer coverage to every applicant at premiums that vary based only on age, geographic location, family size, and tobacco use, and even then only within certain ranges. (11) These policies must have guaranteed renewability, and can be rescinded only under limited circumstances. (12) In the individual and small group markets, ACA will require all new policies to offer "essential health benefits" and all markets will be subject to restrictions on deductibles, out-of-pocket maximums, and other annual and lifetime limits on benefits. (13) In order to make coverage more affordable, individuals with household income below 400% FPL are eligible for refundable tax credits that subsidize insurance purchase. (14) To help organize the market for individuals and small groups, each state will have an insurance exchange to simplify, facilitate, and oversee insurance purchase. (15) And of course, ACA also requires most individuals to purchase health insurance or face a significant monetary penalty. (16)

   The Centers for Medicare & Medicaid Services, a division of Health & Human Services, estimates that by 2019, ACA will expand coverage to nearly 34 million individuals, reducing the number of uninsured individuals by more than half. (17) Of those gaining coverage, they estimate that 20.4 million will receive publicly-financed coverage such as Medicare and Children's Health Insurance Program (CHIP). (18) Another 16 million are expected to obtain insurance through exchange-based private markets. (19) The remaining uninsured will include illegal immigrants (who are not eligible for public coverage or federal subsidies), those exempt from the mandate because affordable coverage is unavailable to them, and those subject to the mandate, but who choose to pay the penalty in lieu of coverage. (20)

3. ENCOURAGING HEALTH INSURANCE PURCHASE: ACA'S CARROT AND STICK

   1. The Carrot: Tax Credits for Health Insurance Purchase

      Recognizing that the out-of-pocket premium cost of health insurance coverage has a significant impact on an individual's decision to purchase insurance, (21) and that the impact is particularly strong for low-income individuals, (22) ACA provides advanceable, (23) refundable (24) premium tax credits to help subsidize the purchase of insurance for individuals at or below 400% FPL. (25) In part, these credits allow the individual mandate, discussed below, to have a broader reach than it otherwise might. (26)

      The credits, which are not fixed in amount, are calculated based on the difference between the maximum percentage of income an individual is required to spend on health insurance coverage and the premium for the second-lowest cost silver plan that the individual is eligible to purchase. (27) The following chart provides the maximum percentage of income that individuals at various income levels are required to contribute to coverage for purposes of calculating the credit.

      To illustrate, assume that a single individual has household income of $21,780, exactly equal to 200% FPL, and that individual seeks health insurance coverage through her state exchange. Further assume that the premium for the second-lowest-cost silver plan available to the individual is $4780. The individual would then be entitled to a tax credit equal to the difference between $4780 (the silver plan premium) and $1372 (6.3% of household income), which is $3408. It is important to note that while the credit amount is calculated on the basis of the second-lowest-cost silver plan, the individual is not in any way required to purchase that plan; the second-lowest-cost silver plan is used solely to determine the amount of the tax credit. (29) The individual is free to choose any plan offered within the exchange. (30) If the individual chose a bronze level plan with an annual premium of only $4100, she would still receive the $3408 tax credit and would only be required to pay $692 out-of-pocket for such coverage. And if she chose platinum level coverage with a $6150 annual premium she would again receive the $3408 tax credit and be required to pay $2742 out-of-pocket for premiums.

      Structuring the premium tax credits in this manner creates an interesting incentive for individuals without known medical needs to purchase the lowest cost plan that is available to them, in order to reduce their out-of-pocket premium payment. This type of regulatory incentive is consistent with economic theory that suggests that a significant cost driver of medical care and health insurance in the United States is "overinsurance." (31) overinsurance, which typically takes the form of a generous plan with very low deductibles, copayments, and cost-sharing requirements, is thought to lead to moral hazard, whereby insurance coverage makes an individual more likely to incur a covered loss. (32) For example, in the case of health insurance, moral hazard might cause an individual to consent to an expensive diagnostic procedure to which the individual would not consent if she faced the full price of the service. Cost sharing is thought to significantly reduce moral hazard, (33) and low cost plans available on the exchange are likely to have significant cost sharing. (34)

      Of course, encouraging low and moderate income individuals to purchase plans with high cost sharing requirements may significantly undercut the financial security offered by health insurance and ACA, at least partly, recognizes this fact. Section 1402 of ACA provides that tax credit-eligible individuals who enroll in silver level coverage are eligible for cost-sharing reductions. (35) First, out-of-pocket maximums are reduced by two-thirds for those with income between 100% and 200% FPL, by one-half for individuals with income between 200.1% and 300% FPL, and by one-third for individuals with income between 300.1% and 400% FPL. (36) Further, the percent of covered expenses that a plan must pay is increased to between 94% and 73%, depending on the individual's income. (37) Notably, however, the statute does not appear to limit the deductible that can be applied to such individuals, except indirectly. (38)

      Pity the tax credit-eligible individual that has to sort through all of these competing incentives. The tax credit encourages individuals to purchase a low-cost plan, in order to minimize their out-of-pocket premium payments. But the reduced cost-sharing...