Abstract
Issue: The individual insurance market functions better with larger numbers of people enrolled. Higher enrollment makes it is easier for insurers to set premiums that reflect their expected health care costs and allows them to spread administrative expenses over a larger base. Further, incentivizing healthy individuals to enroll may lead to lower average premiums.
Goals: To analyze six policy options for expanding enrollment: 1) enhancing tax credits for young adults; 2) increasing tax credit amounts; 3) extending credits to more people; 4) both increasing and extending credits; 5) adding standard reinsurance; and 6) adding generous reinsurance.
Methods: Analysis through RAND’s COMPARE microsimulation model, which combines economic theory, nationally representative data, and experiential data to project consumer and business responses to policy changes.
Key Findings and Conclusions: Options to enhance, increase, or extend tax credits could increase total enrollment in the individual market by 1.0 million to 3.4 million and the insured population by 800,000 to 2.6 million. Adding reinsurance could increase enrollment by 1.2 million to 5.4 million and total coverage by 900,000 to 3.4 million. Costs for these options range from $2.5 billion to $18.8 billion, with those policies producing the biggest coverage gains generally requiring the biggest public investments.
Background
Approximately 22 million Americans receive health insurance through the individual insurance market, which includes federally subsidized health plans sold through the Affordable Care Act (ACA) marketplaces and other, unsubsidized plans subject to ACA regulations.1 Though much smaller than other parts of the health insurance market, the individual market serves a critical function by providing insurance for those with no access to job-based or public coverage.2 In part because of its small size, it has always faced challenges, including susceptibility to adverse selection and year-to-year variation in enrollment.3 It also has been disproportionately affected by the ACA, which changed regulations governing how individual-market insurers can price and sell their products. In recent years, many regions of the country have seen rising premiums and declining insurer participation.
Policymakers are seeking ways to shore up the individual insurance market and ensure coverage is affordable.4 Increasing the size of the individual-market risk pool is key: when more people enroll, it is easier for insurers to accurately set premiums and spread their administrative costs over a larger base. Further, people currently on the fence about enrolling tend to be those whose entry into the risk pool is most likely to lead to reduced premiums for everyone: individuals who are healthier than average and therefore use less health care.
In this report, we analyze several options to expand enrollment in the individual insurance market and thereby bring coverage to more Americans. We focus on options that have already been proposed by policymakers, and that would make the individual market more financially attractive to consumers (for example by reducing premiums or expanding access to tax credits). These options include:
- Providing young adults with enhanced advance premium tax credits (APTCs) — federal tax credits that reduce out-of-pocket premiums for eligible enrollees
- Increasing the generosity of APTCs for all currently eligible enrollees by reducing the required contribution for a benchmark plan
- Extending APTCs to those with incomes above 400 percent of the federal poverty level (FPL)
- Both increasing the generosity of APTCs and extending tax-credit eligibility to those with incomes above 400 percent of FPL
- Implementing some type of reinsurance program for insurers, which would pay some or all the costs of unusually high claims. Because reinsurance would be funded through fees on individual and employer insurance plans (as in the transitional reinsurance program available during the early years of the ACA), these policy options would not entail costs to the federal government.
We estimate how each of these policies would affect four outcomes: total insurance coverage in the United States, enrollment by source of coverage, individual-market premiums, and the federal deficit. We have previously analyzed several of these policy options.5 This analysis updates our prior work, standardizes reported outcomes so that they can be compared, and adds reinsurance, a policy we have not previously analyzed. We estimate all outcomes for calendar year 2020. Exhibit 1 describes each of the policies. We conducted the analysis using RAND’s COMPARE microsimulation model, which uses economic theory and data to estimate the effect of health policy changes on insurance coverage and health care spending. For all analyses, we assumed that the federal government would continue to pay cost-sharing reductions (CSRs) — the subsidies that reduce out-of-pocket copays, coinsurance, and deductibles for low-income marketplace enrollees. We also assumed that the individual mandate would continue to be enforced.6 When developing the baseline for estimating the effect of recent health reform legislation, the Congressional Budget Office also assumed enforcement of the individual mandate and payment of CSRs.7 The model and methods are described in more detail in Appendix A.
Findings
Changes in Insurance Coverage
Exhibit 2 shows the estimated change in insurance enrollment among nonelderly adults, overall and by source of coverage, under each of the policies considered. All the options would increase total insurance coverage and enrollment in the individual market, relative to current law. The change in total insurance relative to the ACA ranges from an increase of 800,000 individuals with enhanced APTCs for young adults to an increase of 3.4 million individuals under the generous reinsurance scenario. Increases in individual-market enrollment would exceed the increases in overall insurance coverage because some people would move from employer-sponsored insurance (ESI) to the individual market as a result of the policy changes. This shift would be most pronounced in the generous reinsurance scenario, leading to a 2.3 million reduction in ESI enrollment. As modeled, reinsurance in the individual market is funded through a fee on all health plans, including employer plans. The tax increases the cost of employer-sponsored insurance, causing some individuals to change their enrollment decisions.
Effects on Individual-Market Premiums
Incentivizing people to enroll in the individual market could lead healthier people to purchase insurance, causing premiums to fall. Reinsurance would further reduce premiums because it would partially offset the costs of the sickest individuals (see Appendix A for discussion). Exhibit 3 reports the estimated change in individual-market premiums under each policy scenario, relative to current law. We report the change in silver premiums for a 40-year-old. Because of the ACA’s age-rating provision, which allows insurers to charge older adults no more than three times as much as younger adults, the proportional change in premiums would be similar for all age categories. Premium estimates for a broader range of ages can be found in Appendix B. These estimates focus on total insurance premiums, before accounting for tax credits.
Under all the proposed policies, the cost of individual-market premiums would fall. In the first four scenarios, premium changes relative to the ACA would be driven entirely by improvements in the risk pool. These improvements occur when healthy, low-cost people enroll, reducing average expenditure in the group. Adding enhanced tax credits for young adults would have the smallest effect on age-specific premiums among the policies considered. This is partly because the enhanced tax credit would lead to a relatively small change in enrollment. Additionally, because young adults are charged less than older enrollees, insurers have relatively little to gain if a healthy young adult enrolls. In contrast, because older adults can be charged up to three times as much as younger adults, attracting a healthy older person into the risk pool could have a bigger impact on premiums.
As expected, the declines in premiums would be particularly large in the reinsurance scenarios, because these options directly reduce the cost of insuring those with costly conditions. We estimate that the standard reinsurance scenario would decrease age-specific premiums by approximately 4 percent, while the generous reinsurance scenario would reduce age-specific premiums by 19 percent.
Effects on Federal Deficit
Exhibit 4 shows how the proposed policies would affect the federal deficit. The first four options — enhanced APTCs for young adults, extending APTCs to those with higher incomes, increasing APTCs for the currently eligible population, and both extending and increasing APTCs — would increase the federal deficit relative to current law. These deficit increases would be positively correlated with the size of the newly insured population. For example, enhanced tax credits for young adults, a policy that would increase the number of insured by 800,000 in 2020 (the most modest increase of all the policies), also would have a relatively small impact on the deficit, increasing government costs by a net $2.5 billion. Both extending APTCs and increasing their value, a policy that would increase insurance rolls by 2.6 million, would increase the deficit by $11.8 billion.
The two reinsurance scenarios stand out because they would reduce the federal deficit relative to the ACA, despite insuring more people. We assume that reinsurance would be funded by a tax on all individual and employer health plans (including self-funded plans), so the program is nearly costless from the federal government’s perspective.8 Yet, because reinsurance would reduce premiums on the individual market, it would lead to reductions on APTC spending. As a result, we estimate that the standard reinsurance program would reduce the federal deficit by roughly $2.9 billion in 2020, and the generous reinsurance program would reduce the federal deficit by roughly $13.1 billion in the same year.
Exhibit 4 presents results from the federal government’s perspective, and hence may obscure the cost of the policies to taxpayers. We estimate that the per-enrollee health insurance fee needed to fund reinsurance would increase single ESI premiums by $35 per year in the standard scenario, and by $189 per year in the generous scenario. Below, we discuss the cost of the policies from the taxpayers’ perspective.
Change in Taxpayer Costs
The first four policy options would create an implicit cost to taxpayers because they would increase the federal deficit relative to the status quo. While the two reinsurance approaches would reduce the deficit, they would add a new fee on all health insurance plans, including employer-sponsored plans. Although the fee is levied on health plans rather than individuals, economic theory and past evidence suggest that these fees would be passed on to enrollees in the form of higher premiums.9 In Exhibit 5, we show the estimated ultimate increase in cost to taxpayers, defined as the deficit impact plus the cost of any new insurance fees, for each policy considered. From the taxpayers’ perspective, generous reinsurance would be the costliest policy, followed by the policy that would extend APTCs to higher-income individuals and increase their value. These two policies also would yield the largest increase in the number of people with insurance.
By dividing the taxpayer costs estimated in Exhibit 5 by the number of newly insured enrollees, we calculate the taxpayer cost per newly insured individual (Exhibit 6). Based on this metric, enhancing APTCs for young adults would be the most efficient approach, yielding a cost per new enrollee of $3,112. While generous reinsurance would yield more new enrollees than any other option, it is a less efficient policy, with a taxpayer cost per new enrollee of $5,571.
Alternative Reinsurance Scenarios
Because of the federal savings incurred from the reinsurance policies, it would be possible for the federal government to reduce the fees on health plans while achieving gains in insurance. Prior Republican health reform proposals, such as the American Health Care Act and the Better Care Reconciliation Act, included billions of dollars in federal funding for state stability funds that could be used for reinsurance. The finding that reinsurance could reduce APTC outlays creates an additional argument for federal investment in the program; officials from the Centers for Medicare and Medicaid Services used similar logic to justify federal investment in Alaska’s state-run reinsurance program.10
Alternatively, the federal government could use savings from fee-funded reinsurance programs to invest in other priorities. For example, policymakers could counterbalance the new tax on health plan enrollees with other policies aimed at reducing regulations on businesses, such as by reducing the number of firms subject to the ACA’s employer mandate.
Exhibit 7 compares our baseline reinsurance scenarios with two alternative approaches: 1) the federal government investing up to $10 billion in the reinsurance program in 2020, and 2) levying the employer mandate to offer coverage only on firms with 500 or more workers (instead of firms with 50 or more workers, as the ACA now requires). The 500-worker threshold has been proposed by the bipartisan “Problem Solvers” caucus.11 The bottom line from these scenarios is that the reductions in the deficit could be used to reduce reinsurance fees or other taxes. However, the net impact on taxpayers would be somewhat similar, regardless of whether reinsurance is financed through fees on health plans or direct government spending. This is because we assume taxpayers benefit equally from deficit reductions and tax reductions. As a result, a policy that reduces the deficit but requires a new tax (or, in this case, a fee on health plans) is equivalent to a policy that has no deficit impact.
Conclusion
Policymakers have many options available to expand coverage in the individual market. In this report, we considered federal investments that would enhance, extend, or increase the tax credits available to enrollees, as well as reinsurance approaches that would lower premiums. On a cost-per-enrollee basis, we find that enhancing tax credits by $50 per month for young adults is the cheapest way to expand coverage. However, this approach would yield only about 800,000 newly covered individuals. By contrast, a generous reinsurance program would extend coverage to 3.4 million people.
The benefits of reinsurance come at a cost to taxpayers. As modeled, the reinsurance options would involve an annual fee on health plans of $35 to $189 for every enrollee, including those with employer insurance. Because reinsurance would lower federal spending on APTCs, adding a reinsurance program would reduce the federal deficit. After accounting for the deficit reduction, the reinsurance approaches modeled in this report would cost taxpayers between $3 billion and $18.8 billion in 2020. Relative to the other policy options, the standard reinsurance program is efficient — leading to a taxpayer cost (reinsurance fees plus deficit impact) of $3,537 per newly insured individual. The generous reinsurance would cost $5,571 per newly insured individual, higher than most other options.
All the policy options discussed in this analysis would lead to improvements in the risk pool by enticing lower-cost people to buy coverage. As a result, they could increase the long-term stability of the individual market. Additionally, all of the policies have design features that could be altered, potentially producing different results. For example, the effect of reinsurance depends on which enrollees are eligible for reinsurance payments and whether insurers must contribute coinsurance. Our standard reinsurance scenario, which covered 50 percent of enrollees’ claims between $90,000 and $250,000, would insure less than one-third as many additional people as would our more generous reinsurance scenario. While we did not model alternative permutations of the other reforms examined in this report, these too have design features that could be altered to produce different results. For example, the size of the enhanced tax credit for young adults could be scaled up or down, and options to extend tax credits to those with modest incomes could include limits (e.g., 700 percent of FPL, or annual income of no more than $84,420 for an individual) or could require larger applicable percentage contributions for those with higher incomes.
Our analysis focused on a subset of options to expand enrollment that would make health insurance more attractive from the consumer’s financial perspective. There are many other options that we did not consider. For example, reinsurance could be combined with changes to tax credits, or changes could be made to health plan design (e.g., to the cost-sharing requirements or scope of covered services). Another set of approaches might encourage enrollment by making consumers more aware of their health insurance options, helping people navigate marketplace websites, providing information about tax credits, and explaining key terms such as deductibles and coinsurance. We believe these additional approaches would complement the approaches we’ve analyzed here.