The Congressional Budget Office (CBO), at the request of Senate Democrats, recently released a report estimating the effects of a reconciliation bill passed in 2015 but vetoed by President Obama (HR 3762). The bill would repeal the Affordable Care Act’s (ACA) individual and employer mandates and, after a two-year delay, repeal the ACA’s Medicaid expansion and subsidies for insurance purchased on the ACA exchanges. The predicted results are dire but no one should pay too much attention. No one is proposing re-passing HR 3762 without other measures and CBO’s predictions are simply not believable.

The CBO starts the report cautioning that its estimates “are uncertain” and concludes that “If the Congress considers legislation similar to H.R. 3762 in the coming weeks, the estimated effects could differ from those described here.” Truer words were never written.

The CBO estimates that in the first year after full repeal, but before Medicaid expansion and insurance subsidies are eliminated, 18 million people would become uninsured — 10 million fewer in the nongroup market, 5 million fewer with Medicaid coverage, and 3 million fewer with employment-based coverage — and premiums in the nongroup market would rise 20-25 percent higher than under current law. These effects “would stem primarily from repealing the penalties associated with the individual mandate.”

Credit: Twenty20

Attributing such massive changes to individual mandate repeal is unbelievable. The chief architect of the ACA, economist Jonathan Gruber, has reported that the individual mandate had no significant effect on increasing coverage — eliminating it should have minimal effect. The mandate is riddled with exceptions that allow people to avoid buying insurance. The mandate also does little to motivate insurance purchase because penalties for failing to obtain coverage are low compared to insurance premiums. The IRS reports that during the 2016 tax season 11 million people claimed exemptions and 5.6 million people paid an average penalty of $442 – far less than the cost of insurance.

The CBO’s projections of where the coverage losses come from are also suspect. CBO estimates 10 million people will become uninsured in the non-group market. Approximately 20 million people gained insurance due to the ACA. More than half of the gain is attributed to increased Medicaid enrollment meaning that fewer than 10 million new people signed up in the non-group market. It is not credible that all these new enrollees plus people who were previously in the non-group market would drop out in the first year after enacting HR 3762, which delays repeal of the subsidies to buy in the non-group market for two years. Moreover, there is no explanation for CBO’s prediction that the 5 million with Medicaid coverage would become uninsured. Most people with incomes low enough to qualify for Medicaid are exempt from the individual mandate. And HR 3762 delays repeal of the Medicaid expansion for two years. Repeal should not lead to any immediate Medicaid losses.

Even if the CBO predictions were credible, no one is proposing doing what they studied – repeal through reconciliation alone by re-enacting HR 3762 and doing nothing else. All Republican plans call for altering the ACA’s insurance market reforms and include new programs. The generous and expensive ACA minimum essential benefits package will likely be eliminated allowing consumers to select insurance that they want, need, and can afford. The ACA’s arbitrary 3-to-1 limitation on age adjustments for insurance premiums between older and younger enrollees will also likely revert to the more realistic 5-1 ratio that prevailed before the ACA, making insurance cheaper for the young, healthy consumers it is critical to attract. Refundable tax credits and expanded access to Health Savings Accounts will replace the ACA subsidies that lock patients into buying on the exchanges, leaving consumers with more options to obtain affordable plans.

Sadly, the CBO – at the request of partisan forces – has engaged in an unnecessary and misleading exercise. President Trump has already announced he wants ACA repeal to coincide with replacement. Most Congressional Republicans now concur with that strategy. Hopefully the CBO can provide an accurate assessment once an actual Republican proposal is advanced.

House Republicans are being criticized from all directions for their health-care bill. On the left and the center-right, the chief criticism concerns how many people would leave the insurance rolls under the legislation.

That criticism is correct, and Republicans should make alterations so that a lot more people get covered. But the criticism is also exaggerated.

Republicans fear, and Democrats hope, that the Congressional Budget Office will eventually determine that the legislation would cause 10 million to 20 million fewer people to have coverage. That may be why Republicans are holding votes before the CBO can finish its work.

But the CBO has gotten its estimates badly wrong before. Before Congress enacted Obamacare, the office projected that by this year, its exchanges would enroll 23 million people. As late as June 2015, the CBO was sticking to this projection. The actual number is about nine million.

The CBO believes strongly in the power of Obamacare’s fines on people without insurance, the so-called “individual mandate.” Two months ago, it estimated that an earlier bill to repeal much of Obamacare would have led to 18 million fewer people having coverage, with five million of that total coming from reduced Medicaid enrollment. Its report then added, “Most of those reductions in coverage would stem from repealing the penalties associated with the individual mandate.”

If this is right, the implication is that many people who would “lose” coverage after the partial repeal of Obamacare would be better described as people who would drop their coverage. They are buying it only to avoid the fines, and do not think their coverage is worth what they are paying for it. If we buy the CBO’s analysis, our concern about a large fraction of the people who would leave the insurance rolls should be mitigated by the fact that they want to.

Maybe we shouldn’t buy it. The CBO’s estimates for Medicaid are especially hard to believe. It’s plausible that the fines have been somewhat helpful in getting people who are eligible for Medicaid to sign up for it. Something about Obamacare seems to have had that effect, at any rate: After it became law, an increased percentage of the people who were eligible for Medicaid even beforehand started to actually apply for it. It may even be the case that some people with incomes low enough to escape the mandate mistakenly thought they had to sign up for Medicaid to avoid paying the penalties.

But would millions of people really leave Medicaid if the fines ended? Would they really, that is, stop taking advantage of a free program? The assumption that they would goes way beyond thinking that inertia or confusion keeps people from signing up. It entails thinking that people are positively averse to getting insurance.

None of this means the Republicans’ approach to health care is right. A lot of them say that health care is what matters, not health insurance. This talking point ignores how insurance protects people from the risk of serious financial setbacks. And the legislation could do more to facilitate coverage.

Many Republican bills, including the one now before Congress, have offered tax credits for people who lack access to Medicaid, Medicare or employer-provided coverage to buy their own policies. Some conservative reformers argue that Republicans should offer more generous tax credits to people with low incomes.

They should probably also require insurers who benefit from the credit to offer at least one policy with a premium equal to the credit. Even if that policy had a high deductible, it would limit their financial exposure at no charge to them. Another worthwhile step would be to let states assign people who did not choose an insurance plan one of those policies, defeating the power of inertia.

The way the CBO evaluates health legislation is one reason Republican legislation does not include these ways of boosting coverage. If you’re a health-policy staffer for a leading congressional Republican, advocating for more generous tax credits for people with low incomes would require taking on conservatives who object to progressivity. And even if you win that fight, the CBO might still say that coverage will decline substantially without the individual mandate.

If the CBO is wrong about the impact of that mandate, then its numbers on the loss of coverage are too large. If it is right, then there is less reason to worry about those numbers. All in all, then, the public debate could stand to focus less on those CBO numbers.

The American Enterprise Institute for Public Policy Research (AEI) is a nonpartisan, nonprofit, 501(c)(3) educational organization and does not take institutional positions on any issues. The views expressed here are those of the author.

“Victory has a hundred fathers, but defeat is an orphan.”

Although that quote often is attributed to the late President John F. Kennedy concerning the 1961 Bay of Pigs fiasco, the better 20th century source probably was Count Gian Galeazzo Ciano, Foreign Minister of Fascist Italy from 1936-1943, who also was the son-in-law of Benito Mussolini. (That, too, didn’t end well, I’m told… so listen up Jared).

Senate Majority Leader Mitch McConnell (L) and Senate Majority Whip John Cornyn (R) speak to reporters at the White House following meeting with U.S. President Donald Trump and Senate Republicans on healthcare in Washington, U.S., June 27, 2017. REUTERS/Kevin Lamarque

It looks like the bandwagon (make that a party bus) for Hill Republicans’ parade to overturn Obamacare developed a few more empty seats yesterday, as a mounting number of senators jumped off and others checked out the exit door location. Senate Majority Leader Mitch McConnell was forced to pull last week’s hastily crafted Better Care Reconciliation Act from immediate consideration. As several of Henry VIII’s wives might have remarked, “That sure didn’t take long!”

Lacking the 50 Republican votes even to approve a motion to proceed, it was time to recheck the airline departure times for the upcoming July 4th recess. Repeal and Replace once again faced Fight or Flight, and soon retreated back to Delay and Depart.

A combination of “get me rewrite!” desperation and nearly $200 billion in extra savings under CBO’s ten-year scoring window (aka walkin’ around money to buy votes) still may not be enough to straddle the deepening divide among Senate, and then House, Republicans. There are less than forty shopping days (weekends included) before the next drop-dead date for the August recess. Political dismay springs eternal. So, class, what have we learned so far today, and this year, about health care politics?

• It’s always far easier to play prevent defense in resisting health policy change. See, e.g. Republican playbooks circa 1993-1994 and 2009-2016. Overturning permanent law that has been implemented and embedded for multiple years, no matter how badly it operates, is a daunting task — even if you know what you are doing.
• Republicans failed to update their scouting reports and game plans since the fall of 2013, when the rollout of healthcare.gov suffered from online frostbite. But far more subtly, they underestimated the lingering fear factors throughout the country after the combined effects of the Great Recession, modest economic growth, sticky wages, and reduced social mobility. Selling hypothetical freedom to millions of “vincibles” grasping primarily for a semblance of security just didn’t click. Too many personal clocks were striking Darkness at Noon rather than Morning in America. Hill Republicans were warned, but they persisted.
• If you don’t aspire to offer people something better and actually attempt it — while instead seeming to be taking away portions of what they may complain about but actually have — loss aversion always will trump vacuous promises to be great again.
• Arguing that existing entitlements are too generous and unsustainable always is hard. It’s even harder in the absence of imminent fiscal crises, stronger efforts to pay for them now rather than later, or more visible crowd out of competing claims.
• Fundamental flaws in basic political strategy involved both failing to divide the opposition and failing to unify potential supporters around a more centralized, positive theme. Although successful political visions usually require either stronger lenses or more powerful hallucinogenics, getting the division and multiplication functions backward produced more subtraction than addition.
• Republicans neither identified nor activated enough political losers under Obamacare (self-perceived or real) in order to prevail.
• Using budgetary reconciliation as a tool for ambitious policy change is frustratingly limited. With thin political voting margins and limited time on the clock, it might be the only route open, but unrealistic expectations collided with inadequate tools. Republicans may have promised to throw long touchdown bombs downfield but they ended up backpedaling and then tossing out short screen passes deep in their own territory.
• Republicans received minimal credit with the broader public for trying to end the individual and employer mandates and (in the House bill) extending individual insurance market subsidies to other groups that were left behind by Obamacare’s highly income-sensitive ones.
• Aside from some enhanced campaign contributions, Republican also got little if any popular payoff from trying to eliminate all of the Affordable Care Act’s taxes. (Did former speaker Boehner even thank them for ending the tanning tax?) Health industry groups that would have seen eliminated their “kickback” tax contributions under the ACA simply pocketed those gains and moved ahead with complaints that coverage subsidies from which they also benefit still might be trimmed.

And those are just some of the basic political miscalculations that have at least some Republican officeholders staring into the abyss this year. To do better, proponents of change that, eventually, might produce a better, more accountable, and sustainable set of health care options and operating rules should rethink much more before they reload. That might require recognizing some mistaken assumptions so that we can at least develop and try out some newer ones. Ahead soon, in part II.

Yesterday, Senate Majority Leader Mitch McConnell did the seemingly impossible and got the votes he needed to proceed to consideration of the House-passed plan for repealing and replacing the Affordable Care Act (ACA). At this point, it’s hard to tell what exactly will happen in the coming days, but there is one thing that is fairly certain: if the current Republican effort succeeds in passing a bill, the legislation will make the individual insurance market less stable than it is under current law.

The problem for Senate Republicans is that their principal policy goal is incompatible with the process they are using — budget reconciliation — to pass their legislation. Most Republicans in Congress are determined to eliminate the ACA’s penalties for going without insurance — the so-called individual mandate. The House-passed bill – the American Health Care Act (AHCA) — would eliminate the tax penalty for going without insurance immediately, as would the ACA replacement plan Sen. McConnell drafted, called the Better Care Reconciliation Act (BCRA).

It is certainly legitimate for the GOP to want to eliminate a federal requirement that all Americans must buy a government-approved insurance plan. But eliminating the mandate only makes sense if other changes are also made to insurance market rules. Under the ACA, the health status of potential consumers cannot be used by insurers when setting premiums or in establishing what is covered by a product. Any consumer is free to come into the individual insurance market during the open enrollment process each fall and buy an insurance plan at the same price charged to every other consumer of the same age.

Senate Majority Leader Mitch McConnell speaks with reporters following the successful vote to open debate on a health care bill on Capitol Hill in Washington, U.S., July 25, 2017. REUTERS/Aaron P. Bernstein

These rules — “community rating” of insurance premiums and “guaranteed issue” of insurance products to all potential customers — make insurance more attractive to people who expect to use a lot of medical care and less attractive to consumers who believe they are generally healthy and won’t need to use many services. Absent other policy changes, these rules would, therefore, tend to destabilize an insurance market because the risk pool of customers would become more heavily populated with high users of medical care. Insurers would be forced to charge higher premiums to cover the high costs of such customers, which would further discourage healthy customers from buying the products.

Several states attempted to impose community-rating and guaranteed issue in their individual insurance markets in the 1990’s, including Washington, Kentucky, and Maine. The predictable end result was an insurance death spiral and withdrawal of most insurers from the marketplace.

The ACA includes two features that were not included in the state reform efforts from two decades ago and which reduce the risk of a death spiral in the current context. First, the law provides large subsidies for purchasing insurance to households with incomes between 100 percent and 400 percent of the federal poverty line (the lower bound threshold is 138 percent of the federal poverty line in states that expanded Medicaid). For households eligible for these subsidies, the ACA limits the premium they must pay annually to a fixed percentage of their income. Consequently, even if total premiums rise rapidly, these households continue to pay the same fixed percentage of their total income. The added cost is paid entirely by the federal government. The ACA market thus has a large pool of customers who are largely immune to the annual increase in overall premiums.

The second important feature of the ACA that was not included in earlier state reforms is, of course, the individual mandate. Current federal law requires households to disclose their insurance coverage status as part of their federal income tax filing and to pay a new tax for going without insurance for any of the months covered by the tax year.

Republicans in Congress understand that if they repeal the tax penalties which enforce the individual mandate, and leave the ACA’s insurance rules in place, they increase the risk that healthy consumers will leave the market, and thus exacerbate the adverse selection that is already present in the ACA market. To prevent this from happening, both the AHCA and BCRA include provisions to encourage healthy people to stay insured. In the House bill, consumers with more than a two-month break in insurance enrollment would be required to pay a one-year, 30-percent premium surcharge when they re-entered the market. In the Senate bill, consumers with a break in coverage would face a six-month waiting period for coverage for any of their pre-existing conditions.

There are two problems with these provisions. First, even if they could be enacted by Congress, they are weaker than the ACA’s individual mandate, which is already too weak to keep the markets fully stable. The tax enforcing the ACA’s individual mandate is applied every year a person remains uninsured; the longer a person goes without coverage, the greater the tax penalty they must pay. That’s not true of either the House or Senate alternatives. Under both the House and Senate bills, healthy consumers would have strong incentives stay out of the market as long as possible because they would keep the premiums they didn’t pay for insurance and their penalty for going uninsured would not increase when they eventually bought coverage again.

The second, and more important problem, with the Republican alternatives to the individual mandate, is that they cannot be enacted using budget reconciliation. Under the Senate’s Byrd Rule, reconciliation bills — which can pass in the Senate with a simple majority instead of the usual 60 votes — are supposed to include only provisions which affect either federal spending or revenues. Changes in federal laws that are more regulatory in nature are considered extraneous and can be stricken from the bill if a Senator objects. Waiving the objection takes 60 votes.

It is very hard to make the case that the GOP provisions in the ACA replacement bill, which are intended to encourage enrollment in private insurance, are primarily budget-related items. Their main effect is to set the terms under which consumers can buy a private insurance plan. The Byrd Rule is pretty clearly aimed at preventing these kinds of “regulatory” provisions from being enacted under expedited procedures.

It is not surprising, therefore, that the Senate parliamentarian, who is the official responsible for making these calls, has indicated the six-month waiting period in the BCRA violated the Byrd Rule. Democratic Senators are sure to move to strike it when, and if, they are ever given the chance. The House’s 30-percent premium surcharge seems certain to be viewed similarly by the parliamentarian.

It is also hard to imagine Republicans coming up with an alternative to the individual mandate that would get passed the Byrd Rule. The obvious solution is to tie the penalty to some kind of payment that gets cycled through the federal budget. That might satisfy the Byrd Rule concern but it would also look too much like the existing tax penalties of the ACA for many Republicans to support it.

The Congressional Budget Office (CBO) places great importance on the individual mandate. The agency assumes that eliminating the penalty will very quickly lead many millions of people to drop their coverage, which will then force insurers to raise their premiums more rapidly than they would if the mandate remained in place.

One does not have to fully accept CBO’s assessment of the mandate to see that eliminating it while retaining the ACA’s insurance rules is a big problem. There is no question that, if the mandate were eliminated and the other rules remained in place, healthy consumers would have a stronger incentive to stay out of the market than they do under current law.

Republicans are in a box. They have argued repeatedly that they need to pass legislation to steady the insurance marketplace, but they are proceeding with legislation that will almost certainly have the opposite effect. If a bill is eventually passed and signed into law, it probably would not cause a death spiral because Republicans in both the House and Senate have also embraced subsidies to help people buy insurance in the individual market. Those subsidies will boost insurance enrollment to a degree. But consumers will see much higher premiums in the individual insurance market than they would under current law, which is exactly the opposite of what they have been promised.

The Congressional Budget Office (CBO) has been criticized for providing inaccurate and misleading estimates of Republican proposals to repeal and replace Obamacare. Those complaints are par for the course whenever a CBO score does not live up to the claims of a bill’s sponsors. Republican dissatisfaction has now reached a new level, with proposals to slash the CBO’s budget and eliminate the agency’s ability to produce cost estimates.

Finding consensus among Republicans and reforming the US health care system is difficult work. Attacking the Congressional Budget Office will not make it easier. REUTERS/Kevin Lamarque

In amendments to fiscal year 2018 appropriations, House Freedom Caucus leaders would reduce the CBO’s budget by 50% and eliminate the agency’s division that produces hundreds of cost estimates for legislative proposals. That is shortsighted, opening the door to Democrats picking and choosing among estimates to advance their agenda when they return to power. More importantly, hobbling the CBO will not help Republicans enact health care reform.

There is no question the CBO cost estimates are imperfect. Economic models rely on data that are unavoidably rooted in the past. Modelers — whether they work for the CBO or other government agencies or private organizations — make assumptions about how consumers and businesses are likely to respond to changes in legislation. Plausible assumptions produce plausible results, but there are no guarantees.

CBO estimates that the latest version of the Senate’s Better Care Reconciliation Act (BCRA) would increase the number of uninsured by 22 million in 2026. That number may well be too high. It assumes that the individual mandate is highly effective in forcing people to purchase insurance or enroll in Medicaid. It assumes that most states that had not expanded Medicaid eligibility under the Affordable Care Act would do so.

An estimate that has less faith in mandates and more skepticism about states committing to Medicaid expansion given the uncertain political and fiscal outlook of such an action would produce a smaller, but still significant impact. If 22 million more uninsured is politically unacceptable to Republican senators, what reduction in coverage would be acceptable?

A better estimate will not solve the political problem, and shopping around for a better number sets a precedent that Republicans will not want to tolerate when they are in the minority.

The problem is not the estimate. It’s the policy, and the lack of consensus among Republicans about what sacrifices they are willing to make to achieve their policy goals. Republican leadership, including the White House, needs to get past the slogans that served them well when they were not in power. A slash and burn approach to the CBO is not a substitute for the hard work of reforming health care.

On Twitter, President Donald Trump said he would be “using the power of the pen to give great HealthCare to many people — FAST.” He isn’t bluffing. His White House has been working on a series of executive actions on health insurance.

But his tweet is misleading. The most far-reaching action under consideration would not give anyone health care. Rather, it would dramatically reduce enforcement of Obamacare’s fines on people without insurance.

If he takes this action, Trump will be following in Barack Obama’s footsteps. In December 2013, President Obama had a problem. The regulations imposed by his health-care law were causing some insurance plans to be canceled. But the new Obamacare website was not working well, and people with canceled plans were having trouble buying new ones. Without insurance, they could be fined.

So the Obama administration granted a “hardship exemption” under the law to anyone with a canceled plan. As liberal commentator Ezra Klein put it at the time, it decided that “Obamacare itself is the hardship.” The Trump administration may decide to grant hardship exemptions even more liberally.

I have written against Obamacare’s “individual mandate” fines many, many times. I urged the Supreme Court to strike down the original version of the mandate. When the court instead modified the mandate, I argued that Congress should replace Obamacare with a health system less reliant on coercing people to buy insurance they do not want.

Yet I don’t think the executive branch should just stop enforcing the fines, for three reasons.

First: The fines are in the law. Whether we like it or not, Congress passed a law that includes these fines and the president signed it. Obama abused the law by stretching the provision for hardship exemptions, as law professor Josh Blackman has explained.

The Trump administration has rightly criticized its predecessor for rewriting laws it was supposed to enforce. It should not now imitate the Obama administration’s worst practices. Trump’s tweet even used the same objectionable rhetoric Obama employed: Congress has failed to write the law he wants, so he will act without its authorization.

Second: Refusing to enforce the fines would destabilize insurance markets. The fines are in the law to make its protection for people with pre-existing conditions workable. Obamacare requires insurers to treat the sick and the healthy the same. Without the fines, healthy people might go without insurance until they get sick. But if enough people follow that course, premiums will spike — and other healthy people will then leave the market.

A law to repeal and replace Obamacare could end the fines, while including other provisions to keep insurance markets from unraveling. The protections for people with pre-existing conditions could be modified; other incentives to buy insurance could be provided. But if you just stop enforcing the fines, people in the individual market will face higher premiums. More insurers could exit the exchanges.

Third: Congress has just rejected this specific policy. The Senate considered a “skinny repeal” bill this summer that primarily consisted of abolishing the fines. It could not get 50 votes — and some senators who endorsed it did so while expressing hope that the bill would be modified before becoming law. They wanted it modified because they did not want to see the end of the fines lead to higher premiums.

Where the Affordable Care Act genuinely gives the executive branch leeway, the Trump administration should exercise its discretion to loosen restrictions on markets in a well-considered way. Reading the fines out of the law doesn’t meet any part of that description. The administration should shelve this idea.

The tax bill approved by the Senate Finance Committee last week would repeal the tax (often called the “individual mandate”) that the Affordable Care Act imposes on individuals who do not have health insurance. Some observers are describing the repeal of the mandate as a tax increase. In reality, the repeal is a tax cut, though not a sensible one.

Senate Finance Committee Chairman Orrin Hatch arrives for the the markup the “Tax Cuts and Jobs Act” on Capitol Hill in Washington, US, November 13, 2017. REUTERS/Kevin Lamarque

Why would anyone view the repeal of a tax as a tax increase? Because this repeal would increase tax revenue. (The revenue pickup is also a major reason the Finance Committee added the repeal to the bill.) The Congressional Budget Office estimates that the repeal of the individual mandate would prompt 13 million people to stop buying health insurance by 2027. Some of those people would end up paying additional taxes because they would no longer receive the premium tax credits offered for insurance bought on the exchanges.

The Joint Committee on Taxation scored those additional tax payments as a tax increase, which was one reason JCT concluded that the bill would raise taxes on many middle-class households. (It was not the only reason — under the bill, key middle-class tax cuts would expire at the end of 2025 while a tax-increasing inflation indexation change would remain in effect.) Opponents of the bill have seized on JCT’s analysis.

As Leonard Burman of the Urban-Brookings Tax Policy Center has pointed out, however, the additional tax payments do not constitute a burden on the affected households. If a household continues to buy health insurance after the tax is repealed, then the household’s tax treatment and its well-being are unchanged, so it clearly faces no tax increase. And if the household voluntarily stops buying insurance, then it is better off, at least by its own lights. The repeal of the individual mandate is a tax cut, not a tax increase.

However, the repeal is not good policy. As my colleague James Capretta and others have explained, it would be a serious mistake to scrap the individual mandate without an adequate replacement. Doing so would prompt young healthy individuals to stop buying health insurance, leaving a less favorable risk pool in the market and driving up premiums. To avoid this adverse selection, modification or repeal of the individual mandate should be considered only in the context of comprehensive health care reform.

Few elements of the Affordable Care Act (ACA) inspire as much controversy as the individual mandate—the requirement that all individuals buy health insurance or face a government-imposed penalty. Despite its central role in ongoing policy debates, a stubborn fact has remained true: We don’t really know whether it did much to expand insurance coverage. For better or for worse, we may soon have that long-awaited answer.

Senate Majority Leader Mitch McConnell (R-KY) leaves the Senate floor during debate over the Republican tax reform plan on December 1, 2017. Notably, as part of their tax overhaul, Republicans have included a repeal of the individual mandate. REUTERS/James Lawler Duggan

Sold as a key leg of the proverbial “three-legged stool” of the ACA, the individual mandate was meant to aid the nascent individual market by ensuring all consumers enrolled—not just the sickest. The Obama administration sold this as a powerful complement to subsidies which lowered insurance prices for many. Importantly, the Congressional Budget Office (CBO) agreed. It estimated that removing this single feature would lead to 16 million fewer insured. Recently, the CBO revised this estimate down by nearly 20%, in part indicating some of the uncertainty involved in estimating the mandate’s effect.

This prediction has stood at the center of nearly constant argument over the past year of unified Republican government. Repealing the mandate was part of a campaign promise nearly a decade in the making, yet doing so would be met with a damning forecast by the CBO. So what to do?

For many the answer was easy. Effectively summarizing a view held by many Republican policymakers, Avik Roy criticized the CBO and its “faith in the individual mandate’s magical powers.” In short, the CBO was simply incorrect.

Unfortunately, adjudicating the conflict between the CBO and its detractors has been difficult. The mandate was one of many features enacted at the same time, meaning we couldn’t easily tell what effect it had in isolation. Our only other evidence comes from the relatively special case of “Romneycare” in Massachusetts. While instructive, extrapolating from the experience of a single wealthy state with a very low baseline uninsured rate can only get us so far.

There is good reason to think we will have a much clearer answer if current tax legislation is ultimately passed. Notably, as part of their tax overhaul, Republicans have included a repeal of the individual mandate. However, don’t expect the individual mandate to be gone for good just yet.

States that like the ACA have an immediate option available to them: They can simply establish their own mandate to purchase insurance. In places like California, where the ACA is relatively popular and successful, there is good reason to expect policymakers to consider this route. Indeed, the calls for such a policy response has already begun in some parts of the country (like Maryland).

With some states ditching the mandate and others likely imposing their own, we may finally have the natural experiment we need. One way or the other, the answer will surely shape health policy efforts in the coming years.

“Yes, the Senate GOP tax plan would cause ‘thousands’ to die.”

So read the headline of a short essay by Lawrence Summers published in the Washington Post on Sunday night. Summers, an eminent economist and former Treasury secretary, argues that the thousands of deaths will be a consequence of the Senate tax bill’s provision eliminating the Affordable Care Act’s requirement that individuals purchase health insurance or face a penalty.

This argument is overblown. It implies that the goal of public policy should be to reduce the number of preventable deaths to something as close to zero as possible. But of course this isn’t the case. More than 30,000 people die every year in car accidents. Each of these deaths is a tragedy, and in the truest sense, every life has inestimable value. But our fallen world has finite resources, and as a society we have decided that some deaths are an acceptable trade-off for the benefits of allowing vehicles to travel faster than 20 miles per hour. A similar argument could be made for policies surrounding homicides, foreign conflicts and a host of other issues.

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Even in health policy, the goal has never been to eliminate preventable deaths. To take the extreme case, no one is arguing for a paramedic in every building and home. We have implicitly decided that some number of preventable deaths is acceptable in order to achieve other social goals.

They may not have succeeded in repealing and replacing Obamacare, but Republicans are close to undoing the law’s least popular feature. The Senate has passed a tax bill to abolish Obamacare’s fines on people who go without health insurance — the so-called individual mandate. House Republicans are very likely to agree on that provision.

In the past, I’ve called for the fines to be abolished — but only as part of a broader legislative change to Obamacare. Just two months ago, I argued that President Donald Trump should keep enforcing the fines. My main objection concerned the separation of powers: The president has to wait for Congress to pass a bill to lift the fines. I also suggested, though, that lifting the fines without a broader adjustment of Obamacare would be irresponsible.

I’ve changed my mind about that point. Repealing the mandate, even as a stand-alone measure, now seems to me to pose fewer dangers than it once did.

Throughout the debate over Obamacare, the Congressional Budget Office has attributed great power to the mandate. But the CBO has been backing away from its view about how crucial the mandate is. In its November report on the subject, it now concludes that the market for individual health insurance “would continue to be stable in almost all areas of the country throughout the coming decade” without the mandate. It does not, in other words, foresee a “death spiral” in which healthy people take the opportunity to flee that market, premiums skyrocket as they leave, and other healthy people then exit the market, too.

Reuters.

The CBO does, however, project that 13 million fewer people will have insurance. They would not be “losing” their coverage, as politicians and journalists often put it: They would be declining to sign up for it. Some of them, it’s true, would be declining to sign up for it because they would be facing higher premiums. The CBO projects that individual-market premiums would rise about 10 percent as healthy people declined that coverage.

But the people driven out by higher premiums would be a small minority of the 13 million. Only five million of the 13 million would be leaving the individual market. (The rest of them would be declining Medicaid or employer coverage.) Even in this subset of the market, most departures would be purely voluntary. Obamacare protects the vast majority of people who buy individual policies through the exchanges from premium increases.

Lawrence Summers, who was a top economics adviser to President Barack Obama, argues that thousands of people will die because they decline insurance coverage. But that estimate is open to dispute, and anyway our usual practice is, as it should be, to allow people to take risks with their own health and lives.

Assuming the CBO is right about the 10 percent premium increase, on the other hand, it’s the best argument against lifting the fines. There are, however, three points that weaken this argument.

The first is that the CBO is in the process of re-evaluating the effects of the individual mandate. At the same time it released its estimate of coverage reductions and premium increases, it said that “the preliminary results of analysis using revised methods indicates that the estimated effects on the budget and health insurance coverage would probably be smaller than the numbers reported in this document.” Even before this re-evaluation, the CBO had been lowering its estimate of the effect of the mandate on premiums: In 2016, it had said that ending it would raise them by 20 percent. It seems likely that its next estimate will go lower than 10 percent.

Second, we should not be prisoners of a status quo bias. If we did not have the mandate, would it be a good idea to start fining 6.5 million people in order to bring down premiums by less than 10 percent? If you don’t think so, as I don’t, is the situation we face really so different?

Third, Congress can take up future legislation to mitigate the premium increase. Ending the fines while keeping the rest of Obamacare in place will mean that healthy people can refrain from getting insurance and then, if they develop an expensive medical condition, buy coverage at the same rates as everyone else. Republicans have offered legislation that would let states try methods other than the mandate to prevent such gaming of the system. States could, for example, allow insurers to charge a bit more for people with long breaks in their coverage, and thus to give healthy people an incentive to maintain that coverage.

Republicans have famously failed to pass health-care legislation this year. But future attempts at reforming Obamacare will have an advantage over previous ones. The most politically powerful argument against Republican health-care legislation has been that it would “take insurance away” from many millions of people. That argument was based on the CBO’s findings, and most of it was based on the end of the individual mandate.

If Republicans end the mandate in the tax bill, any estimates of the effects of future legislation on coverage will be about 13 million lower. The tax bill doesn’t just advance a major conservative objective on health policy. It prepares the ground for replacing other parts of Obamacare as well.

Friends and foes of the Affordable Care Act (ACA) alike tend to target the relative effectiveness of the (soon-to-be-repealed) individual mandate as the key factor behind relatively higher levels of insurance coverage since the law was enacted in 2010.

ACA supporters might wish that the mandate was much stronger, but they still claim that its repeal will trigger rising premiums and leave millions more Americans uninsured in the years ahead.

Many ACA foes often can’t decide whether repealing the mandate remains the key to unraveling Obamacare or if it simply should be eliminated as a matter of principle, regardless of the cost and coverage consequences.

Spoiler alert: They were both wrong about the past. They are likely to remain mistaken about the future.

In reality, overall coverage gains under the ACA hit a modest, but relatively stable, plateau well before last month’s tax-cutting budget reconciliation law decided to eliminate further penalties under the individual mandate as of 2019. Those initial reductions in the number of uninsured Americans were due primarily to expanded eligibility for Medicaid and, secondarily, to generous subsidies for lower-incomeenrollees in state-based health insurance exchanges.

The less-explored question involves why Obamacare’s overall combination of taxpayer subsidies, expanded insurance programs, health benefits requirements, AND coverage mandates had so much less of an effect than the law’s architects envisioned.

It turns out that many of the nominally uninsured still have other alternatives to health care than just through heavily-subsidized Medicaid and exchange-based insurance. You might call such uncompensated care either an option for “implicit insurance” or a hidden tax on acquiring more formal coverage.

Health policy researchers Amy Finkelstein, Neale Mahonem and Matthew Nolowidigdo unravel the puzzle in a recent National Bureau of Economic Research paper. They explain why there is less “demand” than expected for the increased “supply” of subsidized coverage for lower income individuals and more limited take up of subsidized coverage than once predicted.

The bottom line is that the nominally uninsured (before and after Obamacare’s implementation) pay only a small share (one-fifth to one-third) of their medical expenses. Hence, they value formal health insurance at substantially less than its full cost to insurers providing such coverage.

Among the sources of other financing for care provided to the uninsured are federal and state subsidies for uncompensated care, such as Disproportionate Share Hospital (DSH) payments (reduced more gradually and later than originally envisioned under the ACA), as well as part-year insurance coverage, direct care programs, and private donations.

The federal Emergency Medical Treatment and Active Labor Act (EMTALA) also requires hospitals to provide “emergency care” to screen and stabilize uninsured patients on credit. Nonprofit hospitals claim provision of charity care as one of the primary ways to fulfill their community benefit requirements for tax-exempt status. Retroactive look-back coverage under Medicaid also has provided a further modest financial cushion for some providers treating the nominally low-income uninsured.

Keep in mind, too, that the accounting lines between charity care and bad debt are far from clear cut, and they can be adjusted somewhat to match the financial reporting needs of nonprofit versus for-profit providers. Recovery rates for uncompensated care provided to low-income uninsured individuals with few assets are limited (roughly 10-20 percent at best) and further shielded by personal bankruptcy protections.

So, while financial and medical life for lower-income uninsured individuals is far from  comfortable or stable, Finkelstein, Mahonem, and Nolowidigdo find that these various backup “options” do reduce the willingness of low-income individuals to pay for the full –and in many cases even the generously subsidized, out-of-pocket — premium costs of insurance coverage. For example, other research by Finkelstein estimates that adults living below the Federal Poverty Level would be willing to pay only 20 to 50 cents per each dollar of Medicare insurance coverage spent on their “behalf,” and they would rather give up Medicaid than pay the insurance costs of providing it.

Cui bono? Other recent research estimates that about 60 cents of every dollar of adult Medicaid spending in the Oregon Health Insurance Experiment lottery represented a transfer to previous providers of implicit insurance payments for the uninsured. Now you know why the hospital sector is such an aggressive supporter of the ACA’s expansion of subsidies for Medicaid and exchange-based insurance.

Remember all those pro-ACA arguments about how providing care to so many uninsured Americans, particularly in high-cost and overcrowded emergency rooms, just creates a “cost shift” in the form of higher premiums for everyone else who is insured? It turns out that the ability of hospitals to actually pass on uncompensated care costs, instead of taking a short-term hit in their operating margins, remains limited. However, all of that hot air launched by hospital lobbyists and their allies did facilitate some recycling of corporate welfare relief by way of pass-through patients with dependent providers. Yet not even those subsidy injections could keep Obamacare from bumping up against a relatively low coverage ceiling.

At the same time, promised budget savings in reducing uncompensated care for millions of uninsured Americans by moving them into better-reimbursed care through Medicaid and ACA-exchange coverage appear to have hit their own ceilings as well, and they came up short of earlier expectations. Estimates of uncompensated care costs for hospitals eventually were reduced, from just after the ACA was passed in 2010 ($39.3 billion that year) to when it began to be fully implemented in 2014. (After first reaching $46.4 billion in 2013, costs fell to $35.7 billion in 2015). In particular, the more-telling measure of the percentage of hospital costs due to uncompensated care declined from 6.0 percent in 2009 to 4.2 percent in 2015.

However, just about all of the reductions in uncompensated care costs from 2013 to 2014 occurred in states that expanded Medicaid eligibility, while they remained flat in non-expansion states. According to an August 2016 study by Northwestern University researchers David Dranove, Craig Garthwaite, and Christopher Ody, the ACA’s individual mandate and expansion of coverage through the ACA’s health insurance exchanges had “very little effect on the uncompensated care burden faced by hospitals.” When their later work in early 2017 extended the study period an extra year through 2015, they found only small declines in nonexpansion states between 2013 and 2015. Meanwhile, other researchers estimated that although uncompensated care costs in states that expanded Medicaid under the ACA fell by about 25 percent from 2009 to 2015, Medicaid funding shortfalls in reimbursing hospitals below their costsalso increased by more than 15 percent.

And earlier this month, a Modern Healthcare review of financial records for the 20 largest U.S. health systems found that they had dedicated just 1.4 percent of their collective operating revenue to charity care in fiscal year 2016, the same as the previous year.

The ACA also initially promised to offset some of the costs of subsidizing increased coverage by reducing other federal payments to hospitals previously providing greater amounts of uncompensated care to a (larger) uninsured population. The original law proposed to reduce federal Medicaid DSH allotments by $18 billion from 2014 to 2020. But the initial year of those reductions has been delayed several times by subsequent legislation, and the first year of such cuts, starting at $2 billion, was rescheduled to begin in 2018.

Meanwhile, the early evidence on the effects of expanded Medicaid coverage under Obamacare on the level of use of hospitals’ emergency departments (EDs) for health care is not promising. In 2015, the percentage of Medicaid enrollees at ages 18-64 making one or more emergency department visits within the past 12 months still was nearly twice as high as the percentage of the uninsured at ages 18-64: 34. 9 percent vs. 18.0 percent. In 2010, the difference was 40.2 percent (Medicaid) vs. 21.3 percent (uninsured). The privately insured at those ages didn’t visit the ED much less often than the uninsured (14.1 percent in 2015, 17. 4 percent in 2010). Recent research by Zhou, Baicker, Taubman, and Finkelstein in Health Affairs also confirms that insured and uninsured adults use the ED at very similar rates and in very similar circumstances, but the uninsured use ED services substantially less than the Medicaid population.

These findings echo those within the early years of the Oregon Health Insurance Experiment, where Finkelstein, Taubman, Allen, Wright, and Baicker found that people who won the random lottery selection and gained Medicaid coverage increased their ED visits by 40 percent in the first 15 months. They also found that this Medicaid coverage effect on increased ED use appears to persist over at least the first two years of coverage. There was no evidence it was driven by pent-up demand that dissipates over time, and such expanded coverage is unlikely to drive substitution of physician office visits for ED use.

Of course, hospital sector interests will insist that, despite some reductions in uncompensated care costs since full implementation of ACA coverage expansions, their institutions still need continued subsidies from taxpayers and that recent coverage gains are at risk. Nevertheless, skeptical taxpayers might wonder whether they are double paying, in maintaining tax-exempt status for nonprofit hospitals purportedly burdened by caring for uninsured patients AND providing them uncompensated care subsidies via supplemental Medicaid and Medicare payments, yet at the same time subsidizing increased insurance coverage via expanded Medicaid and premium tax credits for ACA exchange enrollees.

It appears that one hand of federal and state governments doesn’t always know what their other hand is doing, but they usually can agree on both reaching deeper into taxpayers’ pockets.

Meanwhile, these various subsidy streams might be working at cross purposes regarding incentives to gain and maintain insurance coverage.

Finkelstein, Mahonem, and Nolowidigdo conclude their recent work by asking whether subsidies for formal insurance, or for informal insurance through uncompensated care, offer more efficient forms of providing a given amount of coverage. They also question which version provides a more or less costly form of income redistribution – as compared to simple cash transfers to low-income individuals.

Or as Yogi Berra once suggested (in a commercial for supplemental accident insurance): “They [could] give you cash, which is just as good as money.”

Republicans in Congress and the Trump administration failed to fulfill their commitment to repeal and replace the Affordable Care Act (ACA) in 2017, but they did succeed in repealing the tax penalties enforcing the law’s individual mandate, starting in 2019.

The GOP still might try again to fully repeal and replace the ACA in 2018, perhaps with a modified version of the Graham-Cassidy legislation. However, with Republicans now down to a 51-seat majority in the Senate and some House and Senate members facing difficult mid-term elections this November, it will be even more challenging to get a sweeping rollback of the ACA through Congress in 2018 than it was in 2017.

Republicans would have a better chance of getting something passed if they lowered their sights and used the possibility of enacting bipartisan market stabilization legislation to achieve more limited objectives. Senator Susan Collins (R-ME) and others are pressing GOP leaders to pass the compromise plan sponsored by Senators Lamar Alexander (R-TN) and Patty Murray (D-WA) early this year, along with additional reinsurance funding. That legislation could serve as the vehicle for Republicans to pursue additional changes in current law to move the overall system in their preferred direction.

But pursuing a limited, step-by-step approach to reform presumes that Republicans have a clear overall destination in mind that they could try put in place on an incremental basis. Unfortunately, there are still deep divisions among Republicans about what exactly they are trying to achieve in health care. Their first objective should be more clarity and unity on their vision for reform.

In Need Of A Vision: A Step-By-Step Approach To Market-Driven Health Care

Last year was probably the best chance Republicans will ever have to systematically roll back the ACA. Having fallen short, GOP leaders and the Trump administration must now decide if it is worth it to try again even though the most likely result would be another failure.

Senate Health, Education, Labor and Pensions Committee Chairman Lamar Alexander (R-TN) stands in the subway on Capitol Hill. Reuters.

Instead of a repeat of 2017, Republicans would be better off trying to move current law gradually in a more preferred direction. The overall goal should be market-driven health care with secure insurance for all Americans. The GOP should not ignore the effects of their proposals on overall insurance enrollment. Put another way, Republicans should not want to be the party that increased the number of Americans without health insurance by 10 or 20 million people. To the contrary, Republicans should embrace reforms that lead to more enrollment in health insurance than would have occurred under the ACA, even after repeal of the individual mandate.

There are elements of the ACA that can help Republicans achieve their goal of a more market-driven system. For all of their problems, the ACA’s exchanges are supposed to facilitate consumer choice and competition among insurance options. Moreover, the ACA established a system of income-tested credits to facilitate enrollment in private health insurance plans. Republicans can work to improve this framework, to make it less expensive with less burdensome government regulation, and to drive down costs for consumers and the federal government.

Recent developments have made it clear that Republicans are not yet clear on what they are trying to achieve in the aftermath of the failure of full ACA repeal. In the tax legislation signed into law in December, Congress repealed the taxes enforcing the individual mandate, which was an important provision of the ACA. Many supporters of the mandate believe this was a catastrophic mistake which will destroy the ACA exchanges; opponents of the mandate, and some supporters, believe repeal is no big deal because the mandate was too weak to make much of a difference.

The truth is probably somewhere in between these extreme points of view. The ACA exchanges were already suffering from some adverse selection before the mandate was repealed. Repeal of the mandate is likely to make the problem somewhat worse. On the other hand, the ACA’s subsidies are so generous that the heavily subsidized enrollees are unlikely to drop out of coverage just because the mandate has been repealed. The markets are somewhat unstable, but they are not likely to collapse.

The Trump administration is also taking steps to make it easier for some consumers to get coverage outside of the constraints of the ACA. The Department of Labor issued a proposed rule to allow more small businesses to form association health plans that can offer insurance that does not conform to all of the ACA’s rules for the individual and small group markets. Further, the administration plans to release new rules governing so-called “short-term, limited-duration” plans that can be sold outside of the ACA’s rules requiring community rating and guaranteed issue of coverage. These plans would be priced based on the health status of the prospective consumer, which means they would be attractive to the young and healthy who find the premiums in the ACA exchanges to be too expensive for what they get.

The effort to promote association health plans and short-term coverage will pull more healthy people out of the ACA exchanges, which means premiums are likely to go up in the exchanges quite rapidly in 2019, just as they did in 2018. It would be reasonable to conclude that one of the Trump administration’s objectives with these moves is to erode enrollment in the ACA exchanges by giving low-cost consumers additional, lower cost options.

At the same time, press reports indicate that President Donald Trump has said told Senator Collins and others that he would like to see bipartisan stabilization legislation get passed in Congress, legislation that has the express goal of lowering premiums in the exchanges in order to make the offerings more attractive and increase enrollment.

Republicans need to decide which path they want to take. Do they want to reform the ACA’s exchanges to suit their purposes? Or do they want the exchanges to shrink and perhaps collapse while they build an alternative structure outside the ACA’s regulations?

We believe the better course is to reform the ACA’s exchanges, to make them truly market-driven and less costly, because the alternative would risk a return to much higher numbers of people going without coverage, with all of the problems that then ensue. The President’s recent executive ordercalling for the expansion of association health plans and short-term plans that would not be subject to all of the ACA’s insurance regulations could shift some healthy people from the exchanges, potentially raising exchange premiums.  However, as we pointed out in an earlier post, it is premature to speculate on the net impact of such proposals on enrollment and premiums, but we suspect that the impact will not be as significant as others think.

Republicans must know that their repeal of the individual mandate has made the party at least partly responsible for what transpires in the individual insurance market. Democrats are sure to make this point repeatedly throughout the coming year.

Short-Term Market Stabilization

In the short-term, then, the GOP should try to use the prospect of bipartisan stabilization legislation to advance a vision of the exchanges and individual market that would foster consumer choice, better options, and lower premiums. An important component of such a plan must be some kind of replacement for the individual mandate.

The following are the key features of a stabilization plan that Republicans should support:

Funding Of The ACA’s Cost-Sharing Program

The Trump administration terminated funding for the cost-sharing subsidy program, on the legitimate grounds that Congress had never properly appropriated funds for this purpose. A short-term stabilization plan should provide this funding, which the Congressional Budget Office (CBO) estimates would actually lower long-term costs.

Reinsurance

Reinstatement of a federally funded and state-administered reinsurance would lower premiums in the individual insurance market because insurers would have greater certainty about the extent of their potential losses. The premium reductions induced by reinsurance would also lower the cost of the premium tax credits paid to lower-income households, thus partially offsetting the cost of the reinsurance fund.

State-Enforced Premium Penalties For Breaks In Coverage

With federal enforcement of the individual mandate becoming inoperative in 2019, the states must be given the freedom to change their insurance rules to stabilize the market. One approach would be to create a new default rule that would apply in all states unless they came up with a more effective alternative. The default rule would retain the ACA’s community rating and guaranteed issue protections. However, persons who voluntarily opt out of the market in 2019 or later and purchase coverage at a later point would face premium penalties when they return to the market. These penalties would grow with the duration of the break in coverage to encourage the uninsured to get back into the market as quickly as possible. States could devise alternative rules to achieve the same objective.

State Flexibility On Other ACA Insurance Regulations

In addition, states would be given more freedom to loosen insurance rules in order to lower premiums without damaging protection for those with expensive conditions.  The net effect of state adjustments would need to be an overall increase in enrollment in coverage that does not impose excessive costs on those expected to require substantial medical attention. This would be a difficult balance, but it is possible that some states could find combinations of adjustments (including reinsurance) that result in higher overall enrollment in a way that allows additional premium payments to finance greater support for those with pre-existing conditions.

High-Deductible Health Plans With Health Savings Accounts

The ACA exchanges should make high-deductible plans sold in combination with Health Savings Accounts (HSAs) available to all consumers in the individual market. Individuals eligible for premium or cost-sharing assistance should be allowed to use their subsidies to buy such coverage (regardless of their age), and to deposit any subsidies not used for premiums into an HSA.

Automatic Enrollment Into Coverage

States should be encouraged to establish automatic enrollment into health insurance. The Internal Revenue Service (IRS) would share federal data on insurance enrollment and incomes with the states, which would allow identification of persons who are eligible for assistance. The states could then use that data to enroll those persons into no-premium default insurance plans based on the value of their federal premium assistance. (The default plans would have deductibles high enough to keep the premium for enrollment below the value of the person’s federal assistance.) States would notify individuals enrolled into default plans of their insurance coverage, and give them the option to select an alternative plan or dis-enroll altogether. States would use other data systems, from employers and insurers, to continuously cross-check the IRS data to prevent duplication of enrollment.

In combination, these policies might be robust enough to allow the individual insurance market to stabilize and become more competitive and flexible, with lower premiums and more attractive options for consumers. And these improvements would occur without reliance on the ACA’s individual mandate.

If enacted and implemented, these reforms would provide the basis for proceeding on more far-reaching changes that are needed to bring greater market and budget discipline to health care.

Beyond The Short-Term

The overall goal for Republicans should remain building a market-driven system that is less expensive for consumers and the federal government. Moving toward such a system will not happen quickly, but there are some steps the GOP should plan on taking at the earliest opportunity.

Adjustments To The ACA’s Premium Credits

The ACA’s premium credits are generous, to the point where they create high implicit marginal tax rates on lower income households, potentially discouraging work. The ACA is less generous to households with incomes that are slightly above the levels that receive large subsidies. In the repeal and replace plans considered in 2017, Republicans wanted to make adjustments to the current law credits, to ensure more households at the lower end of the middle-class would get some help to support their enrollment in coverage, and to lower the implicit tax on earned income in the phase-out range of the ACA’s credits. It is difficult to strike the right balance, but the goal should be a plan that provides some incentive for all Americans to enroll in a health insurance plan, and enough help to lower-income households to make coverage affordable while still encouraging the pursuit of higher incomes. Striking this balance can aided by the Medicaid changes discussed below that would focus more resources on the lowest-income households in the non-expansion states while it frees up resources by lowering the cost of the overall program over the long-term.

Medicaid Reform And Compromise

The ACA Medicaid expansion remains politically unstable. Federal resources are now distributed very unevenly across the country based on which states have agreed to the expansion, and which have not. A sensible compromise would establish an income level for eligibility for Medicaid that is between the ACA threshold and what existed previously. A new bonus program would reward all states that established eligibility at least at that level. States that failed to do so would see their share of the bonus fund distributed to compliant states. This compromise on the expansion population would be included in a larger reform of Medicaid that ended the current federal matching system and replaced it with federal per-person payments to the states. States would get more flexibility to manage the program for cost-efficiency (but not to cut mandatory enrollment or benefits).

Medicare Reform

Medicare is central to building a more cost-effective health system. The program should be modified to encourage more transparent and clear competition among Medicare Advantage plans, unmanaged fee-for-service, and Accountable Care Organizations (ACOs). The beneficiaries should have strong incentives to enroll in cost-effective coverage. Beneficiaries selecting coverage with below-average premiums should keep the savings. Beneficiaries selecting more expensive coverage should pay the difference themselves.

Replacement Of The “Cadillac Tax”

Both parties want to repeal the ACA’s excise tax on expensive employer coverage, called the “Cadillac tax.” But Congress should not repeal the tax without replacing it with a more sensible option, which would be to place an upper limit on the amount of employer-paid premiums that can be excluded from the taxable wages of workers. This approach would mean higher-income taxpayers would pay more than low-wage workers for any excess premium payments by an employer because higher-income workers face higher tax brackets. A limitation of this kind is absolutely essential to giving employers and workers strong incentives to seek out the most cost-effective options for coverage. Without such a limitation, Republicans cannot claim they are really interested in a market-driven plan.

HSA Reform

Today’s HSA law needs to be modified to expand the effectiveness of the accounts in holding down costs. HSA holders with high-deductible insurance should be allowed to purchase organized care at a fixed monthly rate from their accounts. This would promote greater competition among service providers, in ways that would be easier for consumers to understand. In addition, HSAs need to be fully incorporated into the Medicare and Medicaid programs.

A Limited Window For Improving The 2019 Outlook

If Republicans want to improve the outlook for the individual insurance market, they have a limited window to put in place changes that would improve the situation for the 2019 enrollment year. Insurers must begin deciding soon what rates they will charge next year because many state regulatory agencies require submission of initial premium estimates for an upcoming calendar year by early spring of the current year. For instance, eighteen states required insurers to submit their initial premium estimates for calendar year 2017 by May 10, 2016. New federal legislation would need to be passed by Congress soon to give insurers sufficient time to determine how it would affect what they should charge consumers for their offerings in 2019.

If Congress fails to act quickly on a stabilization plan despite the obvious need for it, it does not mean that the political imperative for a fix will then fade away. The problems now plaguing the individual market will get worse rather than better if nothing is done. So passing a stabilization plan will be important, no matter when it occurs. Failure to act soon will needlessly punish consumers with higher than necessary premiums for another year.

Republicans in Congress and the Trump administration repealed the penalties associated with the Affordable Care Act’s individual mandate in the tax act that passed in December. Now they need to replace the mandate with something that will address rising premiums and command broader support. Automatic enrollment into health insurance plans is a good place to start.

A replacement for the mandate is needed because the A.C.A.’s insurance rules are still in place. Those rules, which enjoy bipartisan support, protect the sick by requiring insurers to charge the same premiums to all consumers of the same age without consideration of their health status. The mandate was supposed to encourage the healthy to stay continuously insured, through a federal tax assessment for every month without coverage, even though they could drop coverage and later acquire it when needed, without paying higher premiums. With enforcement of the mandate ending in 2019, more healthy people may leave the A.C.A.’s exchanges, driving up premiums even faster for those who remain in the market.

Automatic enrollment counters the natural human inclinations toward myopia and inertia. Many people do not plan adequately for contingencies, either because they don’t want to or because they lack the resources to do so. Further, the natural disinclination toward taking action means some consumers will not jump through the hoops necessary to sign up for benefits even if they find what is being offered attractive.

Employers use automatic enrollment today in their pension plans, and it works. Firms place workers into plans and set default contribution rates for them. Workers retain the right to change their rates or their investment funds, or to stop contributing altogether. More than two-thirds of all firms sponsoring pension plans use automatic enrollment to increase participation among workers who do not opt in to the plans on their own. The percentage of firms with at least an 80 percent participation rate in their defined contribution retirement plans has increased to 64 percent in 2014 from 50 percent in 2010, largely because of automatic enrollment.

Automatic enrollment would work in health insurance, too. The A.C.A. has not achieved universal coverage in part because many people do not take advantage of the subsidies available to them. The Kaiser Family Foundation estimates that more than half of the uninsured, or nearly 15 million people, were eligible for subsidized coverage in 2016 but failed to enroll in a plan. Another 3.7 million people were eligible for an employer plan and yet remained uninsured.

Congress should allow employers to sign workers up for health insurance after giving them time to select a plan themselves. Workers would be notified by their employers of the insurance plan selected for them and should be allowed to opt out of coverage at any time. Employers should be limited to placing workers in plans requiring little or, ideally, no premium contribution from their employees.

Further, Congress should authorize and facilitate the use of automatic enrollment by the states for those outside the employer-sponsored health care system. States would need to use existing sources of data on insurance enrollment to identify individuals who would be candidates for automatic enrollment. The federal government has data through the tax system on enrollment in employer plans, and the A.C.A. exchanges and state-regulated insurers have data on who is signed up in the individual insurance market.

States could also opt to collect new data, through their own tax systems and from other government offices. States would use this data to identify uninsured households that most likely have incomes that would allow them to qualify for premium assistance, Medicaid or the Children’s Health Insurance Program.

Automatic enrollment works best when the financial burden on the beneficiaries is minimal or, preferably, nonexistent. People found eligible for Medicaid generally owe no premiums, so states can automatically enroll Medicaid-eligible individuals without imposing a premium on them. Individuals with slightly higher incomes are eligible for subsidies, too, but they usually must pay an additional premium themselves to get coverage. Congress should modify current law to allow even higher deductible plans for the auto-enrolled population with incomes above Medicaid eligibility. These individuals would then be able to get coverage of their high medical expenses without paying a premium.

Those who are automatically enrolled would be able to opt out at any time, or to change their plans during the annual open enrollment period. In effect, these households would get free high-deductible catastrophic insurance protection. Automatic enrollment of this kind would also work with the different subsidies for coverage proposed by Republicans in their A.C.A.-replacement plans last year.

It will take some time to work out the administrative steps to make automatic enrollment run smoothly. Available federal coverage data collected from employers could be shared with states and used to automatically enroll families into insurance during open enrollment for the coming year. For instance, tax data obtained this year, for the 2017 tax year, could be used by the states to automatically enroll people for coverage starting in 2019. Insurers will need to participate in data crosschecks to prevent duplicate enrollments. As future data is collected, subsidies and enrollment could be adjusted accordingly.

Congress is currently considering legislation, sponsored by Senators Lamar Alexander, Republican of Tennessee, and Patty Murray, Democrat of Washington, to shore up the A.C.A.’s marketplaces. Their plan, while commendable, is unlikely to lower premiums because it does not do enough to get more consumers back into the market. The legislation would be greatly improved if it were amended to include broad authority for employers and states to use automatic enrollment to boost coverage. Insurers would find the prospect of broader enrollment attractive if the administrative questions can be addressed.

Despite the acrimony around health care, there is more consensus on some policies than appears at first glance. Lawmakers from both parties have expressed support for lowering health insurance premiums and providing federal subsidies to increase enrollment into insurance among households without access to job-based coverage. Automatic enrollment can accomplish both of these important goals.

The tax-reform provision repealing the penalty on those who refuse to participate in ObamaCare has freed millions of Americans to escape a system that exploits them. But while Americans can escape ObamaCare, they still can’t buy insurance in the individual market independent of ObamaCare because private insurers are prohibited from selling it. If this prohibition can be removed through the granting of state waivers by the Department of Health and Human Services, or by the passage of a new federal statute, ObamaCare will collapse into a high-risk insurance pool for the seriously ill rather than become a stepping stone to socialized medicine.

The politics of the ObamaCare debate changed dramatically when the Congressional Budget Office determined that repealing the coverage mandate would save an astonishing $338 billion over 10 years. The saving would come from undisbursed subsidies, as lifting the tax penalty would induce an estimated 4.6 million people to flee from the exchanges. The number of Americans enrolled in ObamaCare plans is projected to plummet to 7.4 million by 2021, a mere 2.2% of the population.

The repeal of the tax penalty will progressively worsen ObamaCare’s risk pool as healthy enrollees who currently pay more into the system than the expected value of their coverage exit the exchanges. Premiums will rise at an accelerating rate for those who stay in the exchanges, forcing Democrats to find new funding or watch the program implode.

There are two ways to restore Americans’ freedom to buy health insurance independent of ObamaCare. First, HHS should grant waivers to states that want to let private insurers offer state-approved plans exempt from ObamaCare’s coverage mandates and rigged risk pool, enabling these states to expand health-care freedom inside their own borders. Second, Congress should amend ObamaCare to permit insurers to sell individual policies outside of the exchanges that are totally independent of ObamaCare regulations, which would dramatically increase the options available to every American.

Idaho is the first state to allow plans that stray from ObamaCare’s coverage mandates, and Blue Cross of Idaho has proposed five “Freedom Blue” plans outside the state exchange. The plans provide coverage similar to what is available on the exchange, but many are listed at about one-third the price because premiums are set to match individual health-risk profiles rather than subsidize the riskiest enrollees. The new plans also boost affordability by offering higher deductibles.

Idaho’s best chance at obtaining the feds’ blessing for its state-approved plans is to make the plans renewable every 12 months. This would allow them to qualify for the limited-duration exemption recently expanded by HHS. In a March 8 letter the administrator of the Centers for Medicare and Medicaid Services told Idaho Gov. Butch Otter : “These state based plans could be legally offered under the PHS [Public Health Service] Act exception for short-term, limited-duration plans.”

Democratic leaders in Congress were quick to recognize that Idaho’s plan to grant health-care freedom to its citizens posed a mortal threat to ObamaCare. Sens. Patty Murray and Ron Wyden were joined by Reps. Frank Pallone and Richard Neal in sending an intimidating letter to the director of Idaho’s Department of Insurance, threatening massive fines and demanding emails and phone records. Since Idaho has shown no sign of backing down, this battle is certain to escalate. Democrats clearly understand that if Idaho is able to market its “Freedom” insurance, as many as 30 Republican-led states will quickly follow its lead. Health-care freedom in Idaho could lead to the de facto end of ObamaCare throughout America.

The Trump administration and Congress are also working to expand health-care freedom nationwide. When the current administration reversed President Obama’s policy of making cost-sharing payments to keep insurance companies in the exchanges, insurers responded by raising the price of their federally subsidized benchmark insurance options. This premium increase on the benchmark policies triggered an automatic increase in the subsidies, all funded by federal taxpayers. State insurance regulators conveniently looked the other way in 2017, but ObamaCare specifically granted the federal government rate-review powers to prevent insurance companies from gaming the system. The benchmark ruse is unlikely to pass HHS scrutiny in 2018.

Before the repeal of the tax penalty, Democrats couldn’t bear the political cost of being seen as dismantling ObamaCare, but they will be forced to act as the program contracts. As healthier families flee the exchanges and premiums spiral, Democrats will be desperate to boost the subsidies. Politically, it will be very difficult for Democrats to deny people who have voluntarily left the exchanges the freedom to buy their own health insurance independent of ObamaCare regulations. Their stubborn reluctance to permit more-flexible plans will provide cover for Republicans to oppose increasing subsidies to the exchanges.

State and federal action to restore health-care freedom would allow new health-care initiatives, such as the partnership among Amazon, Berkshire Hathaway and JPMorgan Chase , to increase innovation in the insurance market. If more than 40% of people enrolled in the exchanges are expected to flee even when the only alternative is to become uninsured, we can expect the number exiting the exchanges to grow substantially when private alternatives are made available. This accelerated exit will reduce ObamaCare to a high-risk insurance pool. At that point the country can have a real debate about how high-risk care should be structured and funded, and whether it should be administered by states or the federal government. Such a program would undoubtedly enjoy stronger bipartisan support than America’s current restrictive health-care law.

Mr. Gramm, a former chairman of the Senate Banking Committee, is a visiting scholar at the American Enterprise Institute.

Editor’s Note: This interview between April Xiaoyi Xu and Thomas P. Miller originally appeared in The Claremont Journal of Law and Public Policy on April 13, 2018. The original post can be seen here.

CJLPP: It has been announced that the Trump administration is cutting the Affordable Care Act’s advertising budget by 90 percent, as well as reducing spending on groups that help customers find the appropriate insurance plan. Do you think this will impact the effectiveness of the program? If so, how?

Miller: We have had some experience with that during this last enrollment season. They shortened the dates and did not put the same amount of money into the various groups that were engaged in the enrollment processes. Despite this we got about the same amount of people enrolling. It did not seem to make a difference because the biggest difference is how much you are being subsidized. The minimum is fairly high and it is not going to get much lower as long as the current subsidy structure remains in place. In the same way, reducing the enrollment period in half didn’t make a big difference because most of the people enrolled very early. There was not a great demonstration of the extra volume that came from those investments.

@jsdaniel via Twenty20

There are other parts of the healthcare system where we should be spending more money, with the goal of making it easier or practical for people to use it. This does not mean just enrolling them in an insurance plan. We have a very complex system, which is bizarre, confusing, and demoralizing to patients. Not only while you are in the hospital, but also when you are seeing a physician. Knowing that they are only able to communicate with you in the allotted three minutes that they have scheduled for you in their office. There is a very important and neglected aspect of healthcare, which is to make it practical, understandable, and workable for real people. That may involve public investment, because it will not come privately. Rather than try to add more extensive services that people either don’t know they have or don’t use, we should invest more on decision support and patient engagement. A worthwhile contribution would be to prioritize ways in which the system becomes real to people so that they can have a role, a voice, and a choice. However, we tend to have a lot of self-interested groups who make sure they get their operations funded, but don’t necessarily deliver the actual care that affects people’s real lives, for both health and economic reasons.

CJLPP: Continuing with the Affordable Care Act, the Trump Administration also decided to repeal the individual mandate. For those of us who are not familiar, what is the Obamacare individual mandate? And what does its repeal mean for Americans?

Miller: Well the individual mandate had a mixed progeny. It was put into the Affordable Care Act for multiple reasons but particularly as a way to derive a budget score. It did not work out that way, but that was just one part of it. The creators of the ACA were trying to throw together different items to create the pretense that everything was paid for and was offset with other revenues to pay for the expenses. Now it was never collected, but this scoring approach was another way to do a short-term fix. Also, those who like the Affordable Care Act and those who engineered it tell people not only is this stuff good for you, you don’t have any choice, you are going to have to get it anyway. And they were hoping that they would bring in people who would pay more for care than it was worth to them, mostly younger people or slightly up the income ladder, who didn’t think they needed as much health insurance, because they needed that money to pay for other people. That was the main engineering purpose of the individual mandate.

Now, let’s move over to reality. In practice, the individual mandate was the most disliked part of the Affordable Care Act, even by the people who were not even affected by it and already had coverage. People did not like the idea of being told they have to buy something as a government requirement. There were also legal arguments. I was involved in some of this litigation, which went up to the Supreme Court to determine whether it was unconstitutional or not. We got a split decision due to the oddities of Chief Justice Roberts. Because it is disliked, it was always a very weak individual mandate that acted as a suggestion. Once they ran into trouble, the Obama administration put in all kinds of special exceptions and exemptions from the mandate. In addition, there is an un-affordability part of it.  You are not subject to it if it costs more than a certain amount, if you don’t file taxes, or if your state didn’t pass the Medicaid expansion The actual numbers of people who were subject to the individual mandate would admit that they had not gotten the insurance on their tax forms and then paid the penalty.

So unsurprisingly, all the promises of the individual mandate did not materialize. It took a long time in the world of budgetary scoring for the Congressional Budget Office to recognize this. They began to recognize, “Oh, I guess we were a little on the high side there,” so they started marking it down. People are not going in the streets to say, “We have to get that individual mandate back.” The way it worked was, people enrolled in the exchanges if they were getting a lot of subsidies, and if they were not they didn’t. That was the magic, if you give people money, if you subsidize them, they will come—whether they like it or not. In my opinion the individual mandate was a bad idea and did not keep with our values and history. I would be opposed to it in theory and in principle. But I didn’t need to make those arguments. I wrote a lot about the individual mandate and all the practical impediments to it, and how the opposition had more than enough to kill it off.

CJLPP: Do you think the Affordable Care Act has shifted Americans expectations of government involvement in healthcare?

Miller: Yes, particularly in the beginning. Every time you establish a new program where it looks like someone is getting something for less than it costs and someone else is paying for it, it becomes difficult to take it away. Once the act is put into practice and implemented with a constituency, people are going to notice, “Wait a minute, I got this before and now you are going to take it away?” That is the politics of modern entitlements, which makes them hard to cut back. You can nibble at the edges but it is hard to usually go at it head on, short of major political or economic swings in a strong direction. Sometimes things get built into the scenery and become taken for granted. Then to change it is considered revolutionary and disruptive, or changing something that is already settled. This happens not just among patients and consumers, it is everyone who is feeding off of it. The healthcare community, which is getting more revenue as a result of the Affordable Care Act is saying, “This is what my business plan is and here is what my revenue prospects were, repealing this would upset everything so I am going to hold on for dear life to retain this.” So, it is easier to stop new additions than to take away ones that have been in place for a number of years. This is what the Republicans in office are finding out along the way.

CJLPP: Considering the publicly funded healthcare systems in much of Europe, do you think a similar system would ever be able to work for the United States? Why or why not?

Miller: We would have to camouflage this type of system even more than we currently do. We have a lot of government sponsored healthcare, directly and indirectly, and not everyone acknowledges it. If you add up Medicare and Medicaid and other lesser programs, you realize that about 45 percent of the healthcare dollar is already accounted for. If you add onto that the other ways in which the public sector is either indirectly subsidizing bills or controlling what is being bought and sold, you get well past 50 percent. So, that is where we already are. The question is how it will adjust in the future. We always try to mix and match. For instance in Medicare, we have a growing portion of Medicare called Medicare Advantage, which is a private-sector-like plan under a lot of public rules. It is not Medicare in the traditional sense, but rather looks more private compared to what it was a couple decades ago. It is growing, partly because it does a better job, and partly because more was invested in it compared to the old Medicare system. Medicaid has grown substantially under the Affordable Care Act, and that although the care is mostly brokered and managed by private insurance companies under state rules and state contracts, it is still more public than it is private. European or other public-sector countries have more faith and adherence to government regulation and are more bureaucratized and transparent.

The US likes some subsidies, we like regulatory advantages, and we often don’t look at the total balance sheet and realize how much of it is being run through our political processes. We are not Europeans, we don’t like to get on trains, we would rather get in cars. We are not as solidarity-oriented and collectivist as most of the European nations are. Now most European nations are not invested completely in state socialism either, if you do your research, you will find out that the private sector still plays some role, but they are further in that direction than we are. Also, we are less tolerant of explicit price controls. We like our price controls disguised a little bit.

CJLPP: Americans have shown considerable discontent with our country’s healthcare policy in recent years, whether that be insurance inequity, high costs or quality issues. In your view, what would be the ideal construction of healthcare policy in America?

Miller: I never worry about what an ideal construction in healthcare policy would look like. Our policy is so backward that any improvement will be a step in the right direction. Before we reach for the ideal, we need to start adopting better practices. Having said that, while we may not be good at producing a good healthcare system, we are excellent at producing healthcare system criticism. People will often draw a distinction between not liking their doctor or their health plan, and not liking the rest of the system. But at the same time, people do not want what they have to be disrupted. Generally, there are a lot of people who don’t like their healthcare whatsoever right now and have had bad experiences. Considering the history of healthcare, we have been on a slow slide downward, step-by-step, incrementally getting worse. If we want to improve it, we are going to have to climb that steep hill step-by-step, rather than thinking there is going to be one sudden breakthrough moment where everything changes and it all transforms magically.

CJLPP: Finally, do you have any advice for students looking to make a difference in US healthcare policy and law?

Miller: Do something different. We have tried almost all of the bad policies we could possibly imagine. So, don’t be afraid to suggest something different, it might not be new, but it might have been discarded or dismissed. Because most of what has been established as conventional wisdom has been wrong. And it has affected the lives of a lot of people. We have redirected resources that could have improved people’s health, improved their lives, and better matched what their values and preferences are. But, because policy is driven by people who are already doing quite well for themselves, important priorities often go overlooked.

CJLPP: Thank you very much for your time.

Many Republican policymakers in Congress and some officials in the Trump administration continue to confuse insurance deregulation in the individual market with unleashing market forces in health care. They are not the same thing. Thinking otherwise leads to misplaced emphasis on ideas that might help some insurance enrollees in the short-term but will have very little effect on their lifetime costs.

@jamiesue via Twenty20

The primary problem with the provision of medical care in the U.S. is the absence of an overall system of cost discipline. Unlike other sectors of the economy, medical services are not bought and sold in a well-functioning marketplace that rewards value, innovation, and efficiency. There are many reasons for this, including the large imbalance in information between suppliers of services and patients, which leads to market failure. Further, despite the existence of many government rules for health insurance and the provision of medical care, the U.S. also does not have effective regulatory control over total costs. Instead, what we have is a mishmash of large public subsidies for insurance enrollment, government regulations, and some private activity and incentives too.

Unfortunately, the sum of these parts does not add up to a coherent whole. Instead, U.S. health care suffers from rampant waste, inefficiency, high administrative costs, and uneven quality.

Instead of trying to bring more market discipline to this dysfunctional status quo, many Republicans remain focused exclusively on changing regulations for insurance premiums in the individual and small group markets, which are now governed by rules imposed by the Affordable Care Act (ACA). In particular, these Republicans would like to see more products available in these markets that are exempt from the ACA’s requirements on covered benefits and community rating. This would allow younger and healthier consumers to purchase plans with premiums that are far lower than what is available today.

This is an understandable objective. The individual insurance market has always been small and somewhat unstable, and it appears to be deteriorating under the ACA. Insurance premiums in this market rose by an average of 32 percent in 2018, and there is an expectation that premiums will rise rapidly again in 2019. The ACA protected households with incomes below 400 percent of the poverty line from premium increases, but the unsubsidized middle class has been fully exposed to the rising premiums and deductibles in this market, which is why many of them are unhappy with the law.

The Trump administration has offered two new rules to give these consumers more options. The first would allow them to buy less-regulated “short-term” plansthat would be sold outside of the ACA’s requirements. If allowed by the states, these plans could offer less generous benefits than is permissible under current rules, and they could adjust their premiums based on the health status of potential consumers. A second regulation would make it easier for small businesses to join Association Health Plans that are also exempt from the ACA’s benefit requirements and premium regulations.

When these proposed rules are made final, which is likely to occur in the coming months, many middle-class consumers will be able to exit the ACA-regulated markets for less expensive options. But overall costs will not decline. Insurers will simply shift higher premiums onto those who remain in the current market, which in turn will mean the federal government will pay higher subsidies for those eligible for premium assistance. Consumers who exit the ACA-regulated market next year for lower premiums would have the option to return to the more regulated market at some later point if they ever got very sick.

Shifts back and forth between a more and less regulated individual insurance market, which covers less than one-tenth of the overall population, will affect the distribution of premium payments across some insurance enrollees and taxpayers. The problem is that it won’t make much of a difference one way or another on overall costs.

Lowering premiums for all Americans of every age and condition will require something far more difficult and significant than deregulating insurance premiums for a small slice of plan enrollees.

The nation’s vast network of hospitals, physician groups, clinics, labs, and others would have to be forced to compete vigorously with each other on price and quality in a functioning marketplace for medical services. This would require making sure consumers have strong financial incentives to seek out high-value, low-cost care, which in turn requires significant changes in employer-sponsored coverage, Medicare, and health savings accounts (HSAs). Among other things, the current open-ended tax benefit for employer plans should be capped, Medicare enrollees should choose each year from among competing coverage alternatives, and pay more if they choose less efficient options, and the government should help HSA enrollees shop in a market with transparent prices for standardized packages of clinical services.

All of these changes would force suppliers of medical services to compete with each other in ways that do not occur today, and thus would have more of an effect on how medical care is supplied and consumed than would insurance deregulation in the individual market.

The ACA-regulated market is not working well; it needs to change. There are a number of adjustments that should be considered, including giving non-subsidized consumers better options than they have today. But none of these relatively small changes will have much of an effect on the overall cost of care in the U.S. If lawmakers want to tackle rising costs, they will have to propose something much more ambitious.

In December 2017, the Republican Congress, working with the Trump administration, repealed the tax penalties enforcing the Affordable Care Act’s (ACA) individual mandate, effective in 2019. Although the degree of the mandate’s efficacy is uncertain, its repeal is sure to lead to additional Americans going without coverage, exacerbating the instability that now affects the individual insurance markets of many states.

In this context, it is incumbent on federal and state policymakers to enact replacement policies for the ACA’s individual mandate. More fundamentally, the individual market’s core dysfunction remains in place: Many young and healthy consumers remain outside the market, increasing average risk levels and premiums, and leaving millions of people needlessly uninsured. Those enrollment choices involve the perception and the reality of unaffordable coverage, but they also reflect burdens of enrollment and plan selection that have an outsize impact on program participation.

@musiena via Twenty20

Similar dynamics extend beyond the individual market, leaving many people uninsured despite qualifying for Medicaid or employer-sponsored insurance. Most people who remain uninsured today qualify for insurance, often at very low cost to themselves.

One promising strategy to address these challenges involves the use of automatic, default enrollment into insurance. An automatic enrollment program can improve participation by creating options that require little or no premium payment and that require very little effort from the consumer—apart from providing consent, perhaps through failing to opt out.

We propose an approach aimed at making enrollment into insurance as automatic as possible. This will be a complex undertaking. Nonetheless, once it is up and running, we believe this approach can dramatically improve enrollment into insurance, and thus help to stabilize the market and make it more attractive for all consumers.

Past Use Of Automatic Enrollment

401(k) Enrollment

Making participation rather than non-participation the default option has greatly increased take-up in contexts outside health coverage, illustrating the surprisingly significant impact of lifting small procedural barriers to enrollment. One classic example involves 401(k) retirement savings accounts. In companies where new employees must complete a form to establish such accounts, roughly one-third enroll within six months. By contrast, in firms where new employees are automatically enrolled unless they complete opt-out forms, 90 percent join.

Medicare Part B

Health programs have also used automatic enrollment to achieve high take-up levels. Perhaps the best known example involves Medicare Part B, which historically achieved 96 percent participation levels. People turning 65 are automatically enrolled by default, unless they object. Part B premium payments are withheld from Social Security checks.

Medicare Part D

Within six months of the Medicare Part D prescription drug benefit becoming available for enrollment in January 2006, the Centers for Medicare and Medicaid Services (CMS) achieved remarkable success, enrolling 74 percent of eligible seniors in the low-income subsidy (LIS) component of the program. Only 14 percent of eligible seniors completed applications for enrollment, however. The others were auto-enrolled based on data matches with state Medicaid programs and the federal Supplemental Security Income (SSI) program. Medicare beneficiaries continue to qualify automatically for LIS assistance based on their receipt of Medicaid or SSI during the previous year.

Louisiana Express Lane Eligibility

In 2010, Louisiana implemented Express Lane Eligibility (ELE), an option that lets states base Medicaid on the eligibility determinations of other need-based programs. Unlike other states that reached many fewer children because they required parents to complete forms requesting coverage, Louisiana used largely default-enrollment methods to provide children with Medicaid when their families participated in the Supplemental Nutrition Assistance Program (SNAP).

Only 1 percent of families whose children received SNAP but not Medicaid opted out of ELE. The remainder were sent Medicaid cards, which were automatically activated upon first use. Nearly 30,000 children received health coverage, substantially cutting the state’s already low percentage of uninsured children. After initial enrollment, 83 percent of ELE children used Medicaid to access care within a year—only slightly below the 88 percent of children who enrolled in Medicaid through other channels.

When information technology problems forced Louisiana to change its enrollment method to require parents to check an opt-in box on the SNAP application form, ELE enrollment fell by 62 percent.

Lessons Learned

Based on this prior experience, several features appear essential to the effective use of default or automatic enrollment:

• Eligibility criteria are structured to fit available data, so additional information or other action from the individual is not required before coverage begins.
• Either default enrollees are not required to make payments or the administrative entity doing the enrollment can make payments on the consumer’s behalf (e.g., employers’ paycheck withholding of workers’ 401(k) contributions and the Social Security Administration’s withholding of Medicare Part B premium payments from social security checks).
• Default choices are believed to match the preferences of most affected consumers, with consumer gains significantly exceeding costs.

Maryland Tests The Possibilities Of Default Enrollment In The Individual Market

Meeting these criteria in the context of individual-market coverage is not easy, but policymakers in Maryland have been pushing the boundaries of what is possible under current federal law. Legislation introduced in Maryland, the “Protect Maryland Health Care Act of 2018,” would use the state’s income tax system to replace federal enforcement of the ACA’s individual mandate. Rather than simply impose a penalty, the legislation would encourage the uninsured to convert their penalties into “down payments” to buy health insurance, whenever possible.

Roughly 100,000 Maryland adults who were uninsured in 2016 could obtain Exchange coverage at zero additional premium beyond the applicable premium tax credit (PTC) plus the payment owed because of coverage gaps the previous year, according to a Families USA analysis of 2016 data from the American Community Survey and premium information from Maryland’s Exchange. More than two-thirds of these 100,000 consumers could purchase gold plans with deductibles of $1,500 or less. Roughly two-thirds are adults under age 45, and 39 percent are under age 35, suggesting that their addition to the individual market could lower overall risk levels and unsubsidized premiums. However, several legal and policy obstacles prevented legislators from proposing full automatic enrollment:

• State mandate enforcement means that consumers who were uninsured the previous year identify themselves on state income tax returns. However, many who were uninsured the previous year have coverage by the time they file tax returns. The Maryland legislation therefore requires formerly uninsured tax filers to indicate whether they remain uninsured before tax-based enrollment begins.
• Tax return information provides most of the information needed to determine an uninsured taxpayer’s eligibility for PTCs. But the state revenue agency cannot disclose return information to the Exchange without legal authorization. The Maryland legislation thus requires uninsured taxpayers to authorize disclosure of relevant return information before the Exchange moves forward.
• State tax returns do not provide all of the information needed to determine PTC eligibility. The Exchange can obtain some of the missing data elements based on matches from third-party data sources, authorization for which is provided by uninsured consumers on their tax returns. But other items may need to be furnished by the consumer, either on the tax return or through later provision of information to the Exchange.
• Advance PTCs are needed for taxpayers to enroll in coverage at zero additional premium cost. However, PTC claimants must file later federal tax returns that reconcile advance payments with annual circumstances shown on the return. Excess advance PTC claims can thus lead to federal tax debts. The Maryland proposal accordingly requires consumers, before enrollment, to be informed of and acknowledge the need for tax reconciliation, the risk of year-end federal tax debts, and the obligation to notify the Exchange of changes in mid-year household circumstances.

The Legislature was unable to complete action on this complex, groundbreaking proposal during the brief 2018 legislative session, but it is a leading item on the agenda of a bipartisan legislative working group preparing legislation for action in early 2019. More broadly, Maryland’s initial efforts illustrate what states can do under current federal law, as well as operational barriers that could be lowered through federal policy intervention.

A Federal Framework With Multiple Options For States And Employers

In addition to other steps to stabilize markets and increase coverage, the federal government could establish an overall framework for states to experiment with more frictionless enrollment into insurance. Flexibility is key, given the many challenges ahead and the need to garner lessons learned that can inform future policy. Such a federal framework could address the individual market, employer coverage, and Medicaid/CHIP.

The Individual Market: Increased State Flexibility

Several possible changes to federal law would increase state capacity to use default enrollment to provide individual market coverage to uninsured residents, including young and healthy adults whose participation would improve risk pools and lower unsubsidized premiums. First, states could be given the option to base eligibility for federal financial assistance on prior-year tax returns, eliminating the risks that auto-enrollment would otherwise create with later reconciliation. Other programs use similar eligibility methods to simplify enrollment, including federal grants and loans for post-secondary-education, tax rebates in the 2008 stimulus bill, and means-tested variations in Medicare Part B and Part D premiums. In these programs, consumers can obtain additional assistance by demonstrating a recent drop in income, but increases to current-year income affect future assistance levels without requiring subsidy repayment.

Second, federal law could increase state flexibility to base eligibility determinations on reliable sources of objective data. For example, lawmakers could more clearly authorize states to determine eligibility for PTCs (premium tax credits) (and Medicaid) based entirely on third-party data sources, without obtaining affirmative attestations from consumers. Congress could authorize the IRS to share federal income tax data with states to help administer auto-enrollment programs, provided that affected tax filers give consent. With other sources of reliable and relevant data, federal legislation could permit their use to determine eligibility for subsidized coverage, so long as affected consumers receive clear notice and a chance to opt out of data sharing. The Medicaid statute already permits such an opt-out approach to obtaining information needed to verify eligibility, with guardrails to protect privacy and data security.

Third, Congress could give states more access to data about health coverage. This would help states target the uninsured for auto-enrollment and prevent public funds from being wasted to cover consumers who already have insurance. For example:

• Federal law could give states access to existing data sources that identify people with coverage. Such sources include Medicare coordination-of-benefits records, information returns that carriers and sponsors provide under Internal Revenue Code Section 6055, coverage data provided by private contractors to HHS for purposes of verifying eligibility for special enrollment periods, and third-party-liability data sources for Medicaid. Currently, such data are available for specified purposes that do not include helping states focus enrollment efforts on people who are uninsured.
• The federal government could create an exemption from ERISA allowing states to compel self-insured plans to provide coverage information to the state.
• The federal government could incorporate information about recipients of employer-based coverage into the National Database of New Hires (NDNH) and make NDNH accessible both for determining eligibility for subsidies and helping state auto-enrollment programs.
• Federal agencies could give states access to information about who receives coverage through federal employment, Medicare, other states’ Medicaid and CHIP programs, or the federally operated healthcare.gov website.

Fourth, the federally facilitated marketplace that serves most of the country could create options for data exchange and plan choice for states interested in collaborating around default-enrollment strategies.

Finally, states could receive the option to let consumers of all ages use PTCs to auto-enroll into catastrophic plans, letting more people receive coverage that costs no more than PTC amounts. Currently, PTCs may not be used with such plans, and they are generally limited to people under age 30. Other plans could potentially be offered at even lower net cost to the consumer, bringing entirely PTC-funded coverage within reach of additional uninsured.

Enrollment in high-deductible plans improves the individual market’s overall risk pool and shields enrollees from catastrophic costs, but such plans provide much more limited access to care than is typically furnished by group coverage, and many enrollees may not perceive their high-deductible plans as valuable. Reasonable people can disagree about the desirability of high-deductible plans—including bronze coverage—but several steps could mitigate concerns about their use for default enrollment.

As a starting point, states can improve such plans’ short-term usefulness by encouraging or requiring high-deductible plans used for default enrollment to offer significant coverage of pre-deductible services, including generic medications and visits with primary care providers. In addition, federal law could permit carriers to let default enrollees quickly move up to silver coverage by combining PTCs with additional household premium payments. This might require revising current federal limits on changing plans outside open and special enrollment periods. Moreover, default enrollment into high-deductible plans, based on zero additional premium cost beyond PTC amounts (plus payments, if any, required by the state because of coverage gaps the previous year), could be limited to consumers who: (1) were offered more generous plans and chose not to enroll; (2) are not offered more generous plans at zero additional premium cost; and (3) can opt out of the default high-deductible option, either before or within a defined period following auto-enrollment.

The Individual Market: A Supportive Federal Structure

Beyond increasing state flexibility, federal lawmakers could create a basic structure to support state auto-enrollment efforts. Short-term federal grants, perhaps with modest state matching requirements, could fund state policy planning and initial development of information technology infrastructure. The federal government could also fund independent studies that inform future policy choices about whether and, if so, how to pursue auto-enrollment.

To qualify for these federal resources, states could be asked to submit an outline describing key elements of the proposed auto-enrollment strategies, such as:

• Venue For Auto-Enrollment. Will the state use its income-tax system as the place to identify the uninsured and provide them with coverage? Will health care providers begin auto-enrollment for uninsured patients (perhaps leveraging systems hospitals already use to retroactively enroll uninsured patients into Medicaid)? Will auto-enrollment efforts begin when drivers’ licenses are renewed or when workers are laid-off from jobs that provide employer-based coverage? Will the state proactively identify the uninsured through analysis of coverage data and initiate auto-enrollment based on such identification?
• What data will the state access to determine eligibility for assistance? How will the state prevent default enrollment from reaching consumers who already have insurance? Will the state create new databases to supplement existing data sources? How will data privacy and security be protected? What notice will the state provide consumers? What opt-ins, opt-outs, and defaults will apply? How will consumers be able to review and correct their data, securely and easily?
• Financial Assistance. What financial assistance will pay for coverage? How will consumers be warned about or shielded from risks associated with claiming assistance, such as the risk of federal tax liability for advance PTC claims that turn out to be excessive? Will states impose a tax payment on consumers who fail to maintain coverage, and thus provide added incentive for insurance enrollment, or will they rely on automatic enrollment to boost coverage? If states impose a penalty for going without coverage, will they allow payments of those penalties to be applied toward enrollment in insurance?
• Health Plan Selection. What health plans will be used for auto-enrollment? If more than one plan is available, how will the default plan be chosen? How will the state promote consumers’ receipt of coverage they value? Will consumers have options to make plan choices before auto-enrollment or to change or drop coverage after auto-enrollment?

As federal and state policymakers decide on their approach to auto-enrollment, several trade-offs are important to evaluate:

• Enrollment Versus Privacy. Requiring consumers to affirmatively waive privacy protections before a state accesses data establishing eligibility for assistance, for example, may protect privacy at the expense of coverage. Further analysis may be needed to assess the actual preferences of affected consumers and determine which default settings make consumers better off “as judged by themselves.”
• High-Deductible Coverage. Default enrollment in the individual market reaches more people, all else equal, if such enrollment can put people into high-deductible plans. Some observers are concerned about the limited access to care such coverage provides, but few would argue that going completely uninsured is better.

Employer Coverage

While most working Americans and their families readily sign up for employer-sponsored insurance, some do not. According to a study published by the Kaiser Family Foundation, 3.7 million people were uninsured in 2016 despite offers of employer-sponsored coverage that disqualified them from subsidized health insurance in the ACA exchanges. In a separate study, based on survey data from employer plans, Kaiser found that 78 percent of workers whose employers offered coverage accepted those offers.

Federal law could make clear that employers, under certain conditions, have the flexibility to automatically enroll their employees into coverage. Employers electing this option would need to ask workers in advance if they have other coverage. Those who state that they are uninsured could be enrolled into the employer plan unless they opt out, with worker premium shares withheld from paychecks.

Employers could limit these default options to plans with minimal worker premium costs. Workers would need the right to decline coverage after their employers notify them of enrollment. This option would mirror some employers’ current practice of automatically enrolling their employees into pension or retirement savings arrangements unless workers opt out.

Medicaid And CHIP

Federal policymakers could take several steps to let states automate and otherwise streamline enrollment into Medicaid and CHIP when reliable sources of data show that consumers qualify. States could receive the flexibility to enroll such consumers by default, without requiring an affirmative request for coverage. If a state picks this option, consumers would need to receive notice and a chance to opt out before coverage begins. As with Medicaid’s current procedures for ex parte/administrative renewal, the notice could inform beneficiaries of their obligation to notify the state if household circumstances change in ways that may affect eligibility.

Congress could also give states the flexibility to use Express Lane Eligibility with adults as well as children. This would let states qualify families for health coverage when SNAP or other benefit programs have already found them to meet income and other eligibility requirements, notwithstanding small technical details about how different programs define households and measure income. When children and adults qualify based on ELE, states could be given the flexibility to enroll them by default, so long as they do not opt out. The expedient originally used by Louisiana—where eligible families showed affirmative consent by using a Medicaid card to seek care—would no longer be required if a state used opt-out rather than opt-in enrollment procedures for people who qualify through ELE.

What A State’s Automatic Enrollment Program Might Look Like In Practice

With the above changes to federal law, here are examples of how a state might facilitate automatic enrollment.

Tax-Based Enrollment

The tax-based component of a state auto-enrollment plan might unfold as follows:

• Tax Season. The state could require residents to disclose health insurance status during the prior calendar year as part of filing state income tax returns. By checking a single box, tax filers could authorize a state health agency to obtain all necessary information to determine eligibility for free or low-cost insurance and to enroll uninsured household members into coverage through Medicaid, CHIP, or private marketplace coverage. The state has the option to impose taxes on those who were uninsured the prior year.
• Immediate Data Cross-Check And Eligibility Determination. For tax filers who check the authorization box, the state would access coverage data and use information from the tax return as well as other third-party sources to identify uninsured tax filers and determine their eligibility for Medicaid, CHIP, and PTCs. Until the state has built a system for compiling and vetting coverage data, tax filers could be asked to indicate on their return whether they are uninsured at the time the return is filed.
• Rapid Enrollment. Those found eligible for Medicaid and CHIP would be enrolled. Those who filed tax returns by April 15 and qualify for PTCs might have a brief special enrollment period in which they could choose from any available QHPs (qualified health plans). Those who fail to enroll during that period and who are offered QHPs costing no more than PTCs (plus tax payments for prior-year coverage gaps, in a state imposing such payments) would be auto-enrolled.
  To increase the number of residents with auto-enrollment options, the state might make catastrophic-level plans available for PTC use by auto-enrollees of all ages. To lessen consumer risks and reduce the need for affirmative consent, the state could base PTC eligibility on prior-year tax returns, without any need for later reconciliation on federal income tax returns. Coverage would begin at the earliest practical date, given standard rules about coverage-effective dates.
• November-December Open Enrollment After Tax Time. Individuals who were auto-enrolled into a QHP could change plans during open enrollment. If they did not make a selection, they would remain enrolled in the same QHP, following normal default renewal rules.

This cycle would repeat itself each year, with refinements over time making the process more seamless, less costly, and with fewer mistakes and errors.

What If The State Does Not Use Or Wants To Supplement Tax-Based Enrollment?

If the state has no income tax or hesitates to use tax filing for this purpose, it could develop automatic enrollment systems that find uninsured residents through other means. For example, a state could:

• Proactively reach out to residents who are reliably identified as uninsured based on a state-developed comprehensive, regularly updated coverage database;
• Leverage existing state functions that “touch” numerous residents, such as automobile registration or drivers’ license renewal, by asking about health insurance and requiring all uninsured consumers to say whether they want their contact information forwarded to the state health agency to see if they qualify for free or low-cost health insurance; and
• Creating systems through which health care providers can easily and quickly enroll their uninsured patients into coverage, perhaps building on successful state initiatives to let hospitals and clinics act as their patients’ authorized representatives in signing up for health coverage. Newborn children could be a particular focus of hospital-based enrollment, given the surprisingly large percentage who lack coverage—5 percent of all children under age 1, a much higher proportion than for any other age group.

Even a state that uses its income tax system as a pathway to enrollment could supplement that effort with one or more of these other channels.

Employment-Based Enrollment

Auto-enrollment into employer-sponsored insurance could accompany any of the above methods for identifying uninsured state residents and signing them up for coverage. With hiring that can take place at any time, employers could offer automatic enrollment of new employees throughout the calendar year.

Looking Forward

We are convinced that auto-enrollment could greatly reduce the number of uninsured while lowering individual-market premiums substantially by increasing the participation among the young and healthy uninsured. Among other gains, such measures could more than offset the effects of ending the ACA’s individual mandate enforcement and help remedy some of the core dysfunctions plaguing the individual market. We hope that future analysis and state-level implementation will test these hypotheses and assess the magnitude of the effects we foresee.

The operational challenges of implementing auto-enrollment strategies would be significant. Numerous details, such as those involving immigration status and citizenship, would be critically important to design with great care. Nevertheless, state health officials have a track record of remarkable creativity, persistence, and effectiveness, given the right tools. We encourage federal policymakers to give such tools to their state colleagues so that the whole country can learn from state innovation in this promising and important arena.

A lawsuit against Obamacare may well turn out to be a bigger story in the news than in the courts. When the Donald Trump administration declined to defend the law, and partly endorsed the lawsuit, critics denounced it for flouting its alleged duty to defend duly enacted federal laws in court. They said the lawsuit threatens everyone with pre-existing conditions, who would lose the protections that Obamacare provides.

Credit: Flickr

But the lawsuit is highly unlikely to succeed. It makes two basic arguments, one of which is trivial and the other absurd. It is on far weaker ground than the two major anti-Obamacare lawsuits that preceded it.

In 2012, opponents of the law argued before the Supreme Court that the law’s requirement that most Americans buy health insurance was unconstitutional. In 2015, conservatives brought a different lawsuit arguing that the federal government had provided subsidies for health insurance in many states where the text of the Affordable Care Act did not authorize them.

One way of gauging the weakness of the current lawsuit: Some legal scholars who supported the previous two, such as Case Western Reserve University School of Law professor Jonathan Adler, have criticized this one. (I don’t know of anyone who opposed those lawsuits and supports this one.) And even those more meritorious lawsuits were, in the main, unsuccessful: The Supreme Court upheld Obamacare in 2012, and upheld the nationwide provision of subsidies in 2015.

The current lawsuit centers, again, on the individual mandate. In 2012, the Court ruled that the mandate was constitutional if the fine for going without insurance was construed as a tax. In the tax bill that Trump signed in December, Congress set that penalty at zero. So, the argument goes, there’s no tax any more and the mandate isn’t constitutional.

The flaw in this argument is that the mandate doesn’t really exist either. The Supreme Court already said, in its 2012 decision, that Congress could not make it illegal to refuse to buy insurance. The fine for not buying insurance was the only part of the individual mandate that survived that decision — and Congress just buried the fine. What the lawsuit seeks to do to the mandate has already been done.

That’s the trivial portion of the lawsuit. The absurd part is a contention that because the mandate is unconstitutional, the rest of Obamacare has to fall too. The Trump administration takes a slightly different position, arguing that key insurance-market regulations in Obamacare, including the protections for people with pre-existing conditions, have to go. The administration and the plaintiffs, 20 states led by Texas, agree that the mandate can’t be separated from those regulations.

Sometimes one provision of a complex law is so central to its operation that the Court can’t just invalidate it and leave the rest intact. If the Court invalidated that provision alone, it would leave a law very different from the one Congress enacted. In effect it would not just be bringing the law in conformity with the Constitution but writing a new law.

But that reasoning cannot possibly apply to this case. Congress deliberately got rid of what was left of the mandate without getting rid of any other part of Obamacare. Since Congress separated the mandate from the rest of the law, the court can and should treat them as separate.

My guess is that politics motivated the Trump administration’s partial endorsement of the lawsuit. It did not want to defend a law most Republicans hate, but had to explain its position on the case to justify its refusal; perhaps it thought a partial endorsement would maintain its anti-Obamacare credentials while insulating it from criticism.

Whatever the administration’s thought process, its decision has a clear political downside. It has made it possible for Democrats to claim that people with pre-existing conditions are in real danger. They aren’t. Chief Justice John Roberts, who was in the majority of both previous Obamacare decisions, has shown no interest in striking down the bulk of the law. This case offers no reason for him to change his mind.

The Affordable Care Act (ACA), through the individual health insurance markets, provided coverage for millions of Americans who could not get health insurance coverage through their employer or public programs. However, recent actions taken by the federal government, including Congress’s repeal of the individual mandate penalty, have led to uncertainty about market conditions for 2019. Market stabilization is currently the most critical regulatory issue that public policy officials are facing under the private insurance component of the ACA.

On Friday, July 13, the USC-Brookings Schaeffer Initiative for Health Policy hosted a conference on strategies for stabilizing the individual market. Keynote speaker Mark Hall presented his research findings on a new study, which examines the recent experience of ten states with respect to individual market stability, including Alaska, Arizona, Colorado, Florida, Iowa, Maine, Minnesota, Nevada, Ohio, and Texas. Two expert panels convened to discuss outlook for the individual market at both the individual state and national level. 

Last week, the Trump administration’s Department of Health and Human Services (HHS) published its final rule to revise regulations for Short-Term Limited-Duration (STLD) Plans in the non-group, private insurance market. It was one small step for some individuals, but far from one giant leap ahead across the entire marketplace.

Image via Twenty20

The slam dunk part of the regulatory change involved restoring the longstanding rule that such plans would be defined as involving insurance policies whose initial period of coverage (including renewals and extensions not at the option of the issuer) lasts fewer than 12 full months (i.e., even as long as 364 days, or perhaps 365 days during Leap Years!). At least since the 1996 Health Insurance Portability and Accountability Act (HIPAA), such insurance had been defined under federal law and in state regulatory practice as distinct from “individual insurance,” which is subject to a more restrictive set of federal rules and regulations, including those imposed by the Affordable Care Act (ACA). But in October 2016, the Obama administration tried to lock the regulatory doors on potential individual exchange market customers who might want to stray and find more affordable coverage elsewhere without Obamacare’s mandated benefits and regulatory burdens. It changed the rules and limited STLD coverage to a maximum period of three months, with no further opportunity to renew and extend it. The hope of Obama administration regulators was that curbing the length of STLD options would reduce the competitive threat they posed to the ACA’s regulatory scheme for exchange-based individual insurance market coverage.

Like many other desperate measures, the October 2016 rule change did not work out according to plan. In 2017, premiums rose, insurers exited, and coverage dropped — particularly for individuals potentially searching for non-group insurance but lacking the benefit of income-related, premium tax credit subsidies in the ACA exchange market. Average monthly enrollment for the latter declined 20 percent between 2016 and 2017. Average monthly enrollment in all individual market plans decreased 10 percent during the same period, while premiums increased 21 percent. Of course, other economic and policy factors were involved, but the 2016 STLD rule change hurt overall individual market coverage far more than it helped ACA exchange markets hold on to “captive” insureds.

The basic operating rationale for restoring previous STLD options in 2018 is to provide more affordable consumer choices to individuals who would otherwise lack them. These types of short-term plans are not subject to the ACA’s mandates (essential health benefits, guaranteed renewability, and guaranteed availability) and prohibitions (exclusions for pre-existing conditions, annual and lifetime dollar limits on coverage). As noted before, the “bargain” here is that customers who are willing and able to accept less (in terms of covered benefits, long-term insurance security, or protection against future changes in health status) can also pay less. For them, something may be better than “nothing” — coverage that they cannot afford or do not need.

The more interesting regulatory policy questions involve how to handle renewals of such coverage beyond its initial “short term” of less than one year. The new final rule sets a maximum duration for STLD plans of 36 months.

First, the Trump HHS officials are hamstrung in what the new rule can allow, but not mandate. Permitting the possibility of mutually agreeable renewals of such insurance contracts could open up a more attractive alternative market for some insurance customers and issuers, particularly those wishing to minimize or eliminate the burdens of ACA rules for not only its exchange plans, but also other “individual insurance” plans in the rest of the market. However, those officials lack both the legal authority and the political motivation to require that STLD plans be guaranteed renewable regardless of health status. Doing so also would undercut the argument that such matters should be left to willing buyers and sellers, or at least state insurance officials instead of federal ones. Hence, the new rules largely delegate determinations of not only the initial contents of STLD coverage, but also the terms under which it may be renewed, to insurers and state officials. Such policies could be medically underwritten, both initially and upon renewal, or not. Those issues initially are left up to marketplace choices, but, secondarily, to the political judgments of state officials.

Second, HHS officials appeared to be concerned that allowing even voluntary renewability of the same initial insurance contract for more open-ended periods (potentially, to “infinity and beyond?”) would contradict their self-described “limited duration” status. The final rule published last week resorted to the perhaps-necessary fiction that federal rules for the maximum duration of COBRA continuation coverage — 36 months — set an outer limit for limited duration insurance. However, this purportedly maximum COBRA period applies only in certain circumstances (death, divorce, or separation involving the primary worker previously covered by an employer group plan) and for certain parties (spouses and other dependents). A different maximum COBRA period of up to 29 months applies when the previously covered worker is disabled. The typical COBRA beneficiary who qualifies for regular extended coverage gains a maximum period of only 18 months. (Theoretically, employers even could agree to extend such coverage beyond those periods, but they are not required to do such under the COBRA law and regulations.)

However, the legal authority for such COBRA coverage options is provided by a 1986 federal statute (the Consolidated Omnibus Budget Reconciliation Act of 1985), and they only relate to employer group coverage. Adapting such time limits for new STLD plan renewability rules in the non-group market is more than a bit of a legal stretch. And suddenly discovering a legal necessity to distinguish between the initial term and the maximum duration of a STLD plan contract seems odd, given that the issue never came up previously during the two decades since the 1996 HIPAA statute formally excluded such coverage from the definition and rules for “individual insurance” under federal law.

On the one hand, Trump HHS officials still have the regulatory authority, and opportunity, to differentiate ACA-regulated individual insurance from STLD coverage by defining the latter by its separate contract terms, the maximum duration of its initial policy contract, and contractual notice requirements for potential purchasers. On the other hand, they can only set maximum permissible periods of STLD coverage that remains exempt from ACA requirements. They still cannot require issuers to offer and extend such coverage without their consent. State officials also can choose to define STLD coverage with shorter maximum initial terms or shorter maximum durations.

The new rule also attempts to create an attenuated distinction between an initial STLD insurance contract (which can be extended or renewed for up to 36 months) and two separate contracts for such coverage that “run consecutively.” Its limited treatment of this issue remains unconvincing.

Of somewhat more hypothetical interest, the rule clarifies that other sorts of options contracts providing guaranteed availability of STLD coverage (or even individual insurance) at some future date, regardless of health status, for a pre-negotiated price are not prohibited by federal law. Some proponents of so-called “health status insurance” contracts have viewed this step as potentially transformational, but substantial practical barriers to this development remain. A closer and more skeptical look suggests that the near-term market for such products remains limited at best to healthier and wealthier customers lacking access to the relative advantages of premium tax subsidies and guaranteed issue rules in ACA exchange markets for individual coverage, or the tax exclusion and group insurance risk rating rules in the employer market. The very limited example of UnitedHealth Continuity, a product briefly offered for sale about a decade ago (pre-ACA), suggests the low ceiling for such ventures.

In late 2008, UnitedHealth began to offer for sale in at least 25 states a product offering the right to buy an individual health policy at some point in the future even if you become sick. The new product faded away once the 2010 ACA guaranteed the legal right to purchase individual insurance (at least during annual open season enrollment periods) regardless of health status. In any case, potential purchasers of a UnitedHealth Continuity contract first had to pass a medical review and then pay 20 percent each month of the current premium of an individual policy offered by UnitedHealth — in order to reserve the right to gain insurance under that plan at some point in the future, if they ever needed it. Moreover, future premiums, and the option’s ongoing monthly fees, would increase over time. Any particular insurance plan involved also would be repriced in the future based on its underlying claims experience.

The limited market for such insurance options contracts is obvious. Only individuals passing medical underwriting screens are likely to proceed further. The alternative “put” option of guaranteed issue coverage in ACA exchanges, as well as income-related premium subsidies, will remain more attractive to most other riskier potential customers. The size of the likely cohort of pre-Medicare-eligible workers desperate to exit employer-sponsored insurance also tends to be exaggerated by individual insurance market enthusiasts.

Market coordination hurdles also remain in the way of broader portability features for would-be health status insurance contracts. Meanwhile, many consumers remain reluctant to sign up with the same insurer for life, preferring the option value of someday being with the one they love than having to love the one they’re with.

On balance, the new STLD rule offers modest progress toward alleviating the coverage availability and affordability woes of a particular subset of individual insurance market customers whose plight was worsened by the ACA. Despite the mutually reinforcing, exaggerated claims of diehard ACA defenders and critics, respectively, the uncertain business prospects for newly-expanded STLD plans remain bounded by the offsetting attractions of tax subsidies and regulatory protections in other portions of the insurance market, as well as the regulatory discretion of state officials. The public policy component of the playing field remains tilted, and the hypothetical protections to consumers that might be offered in expanded STLDs to make the latter more attractive will increase their costs. Of course, opening the legal door to new competitive market pressures on willing buyers and sellers, on the margin, could always surprise. But in the meantime, for those no longer able to tread water as their remaining insurance alternatives sank away, any lifeboat will do!