The ACA – It’s Not About The Subsidies

“Life is complicated with its ifs and ands and buts. It's alright to be crazy, just don't let it drive you nuts.”

- Jimmy Buffet, Simply Complicated

Noise vs opportunity

There has been a bit of noise lately regarding the risk a new Federal administration will reduce or eliminate the current Affordable Care Act (ACA) subsidies that reduce consumer premiums. If the new administration is serious about improving what they see as the flaws of the ACA, they should shift their focus from subsidies to implementing an ACA 2.0.

Eligibility for an ACA premium subsidy was increased by the Biden Administration as part of the American Rescue Plan in 2021 (ARPA.) This temporary increase made consumers with income 4x the Federal Poverty Level eligible for premium reductions - $103,280 in 2024 for a family of four. ARPA increased the number of consumers who received some premium subsidy from 9.6M in 2020 to 19.7M in 2024. This temporary change to the income threshold is set to expire in 2025. If it is allowed to expire as many as 10M consumers could be priced out of health insurance.

Reducing or eliminating the ACA premium subsidies would land with a rather loud boom on a whole lot of citizens. But railing against these subsides is a great talking point on podcasts and talk shows. However, there are so many ways the ACA could be improved to deliver better outcomes at lower cost. But crafting and enacting an ACA 2.0 would be a huge lift requiring extensive expertise and a lot of hard work. It is likely easier just to argue over how large or small the subsidies should be vs. taking on the big lift of actually improving the ACA.

Moving the needle

The ACA was never going to be a perfect solution to expanding access to healthcare. It  did materially changed the healthcare industry in many fundamental ways. Senator Nancy Pelosiaccomplished a nearly impossible task by enacting a major healthcare reform, a task that many before her – Hillary Clinton in particular – failed to get done. As with many large, Federal initiatives, with the passage of time and experience, opportunities for improvement have become apparent.

If the new Federal administration is interested in “fixing” the ACA, they might want to consider a few of the ideas below and stop focusing on subsidies.

The 12-month annual renewal cycle

The ACA prohibits health insurance carriers from offering consumers multi-year contracts. The result is a large volume of “churn” each January, as enrolled consumers shift to a different carrier. Without the ability to offer multi-year plans or multi-year discounts, carriers are financially disincentivized to invest in any health improvements are likely to benefit another insurance carrier. Carriers make large financial investments in marketing and promotion every fall to acquire new enrollees and retain those they currently have. This investment adds no value to health outcomes and drives up total overhead costs, which are indirectly embedded in the premiums charged consumers.

An ACA 2.0 could remove the 12-month renewal requirement, allowing carriers to offer multi-year contracts, thereby incentivizing investment in preventative care, wellness programs, and care management. This would also reduce carrier overhead spent on marketing and retention.

 Premium setting restrictions

When setting ACA premiums, carriers are only allowed to consider the age of the consumer, their gender, county of residence, and if they smoke tobacco. The cost of an ACA plan scales up as the consumer gets older. Carriers are not allowed to offer premium discounts for completing healthy activities, completing recommended preventative care and vaccinations, or other basic health indicators. For example, a 28-year old woman in my home state would pay an ACA premium of about $250/ month without a subsidy, even if she is a Type I diabetic. Her mother who is 50-years old and just ran a sub 3-hour Boston marathon would pay an ACA premium of about $550/ month.

While consumers with chronic conditions shouldn’t be penalized financially, an updated ACA could allow carriers to offer consumers who demonstrate above average health some form of premium discount.

 Subsidies based solely on income

The focus of the ACA was to expand coverage to as many consumers as possible at an affordable price. It has been wildly successful in that regard. One of the key drivers of enrollment has been premium subsidies based on income. But in the 14-years since it’s original enactment a great deal has been learned. Consumer health status remains a huge challenge, with 35% of consumers obese and suffering the concurrent health challenges that come along with obesity. Median consumer health status is one of the key drivers of ever increasing healthcare costs, which directly drive up ACA premiums.

A new and improved ACA could add preventative care metrics from the prior plan year to the premium calculator on Healthcare.gov. Consumers who completed their recommended preventative care screenings in the prior year could be granted a premium subsidy regardless of income level. The result would be an increase in preventive care screenings and reduction in total cost of care, thereby reducing ACA premiums charged consumers.

 Learn from Medicare Advantage

ACA premiums are a direct reflection of total healthcare utilization by the pool of covered lives multiplied by the underlying unit costs to deliver care. Those unit costs reflect the financial reimbursement demanded by providers, hospitals and facilities. These unit costs increase materially year-over-year by as much as 5-8%, regardless of the regional inflation rate in other industries. While some carriers are rolling out capitated provider contracts and value based care agreements, there remains a lot of work to be done to bend the underlying ACA unit cost curve.

Within the Medicare market, the Center for Medicare and Medicaid Services (CMS) has launched and tracked multiple initiatives to reduce total cost of care and improve outcomes. These include ACO Reach and the Medicare Shared Savings Program (MSSP). An ACA 2.0 could roll out similar programs within the ACA marketplace, learning from what has worked and applying those lessons to the ACA.

 Why this matters

Healthcare is complicated and improving it can drive anyone nuts. But reducing the challenges to a sound bite won’t really change anything. There is a real opportunity to update the ACA with a 2.0 version that reduces costs by creating improved incentives for carriers and financially engages consumers to better manage their health.

This would be hard work but there are real opportunities to improve and innovate. If the new Federal leadership doesn’t like the current version of the ACA with 49.4M consumers enrolled, they should take on the challenge of making it better and not retreat to easy talking points.

It might make them nuts, even if they are already a bit crazy.

This article was written by a human being; no chatbots or AI were used. No permissions are granted for any use of this content to train AI algorithms.

Copyright 2itive 2024

2itive is a Portland based consultancy founded by Erik Goodfriend, offering a unique combination of market intelligence, knowledge of healthcare payment systems and creative business strategy insights. Feel free to contact us at info@2itive.com