The Future of U.S. Health Care

The Affordable Care Act is a monumental accomplishment. Thanks to its expansion of health care coverage and new regulations, tens of millions of Americans will feel more secure, knowing that they can seek medical attention when they need it and that they will be protected from the insurance industry’s most egregious practices.

But the reform was very much limited by the American terms of the debate, particularly the enduring belief that markets are always more efficient than government (even though our current private insurance system demonstrates otherwise) and the conviction that any changes to the arrangements of the insured cannot fly. The result is a sprawling, confusing, Gorgon-headed workaround, whose beneficial features are difficult for the typical consumer to discern.

Now that the Act has run the Supreme Court gauntlet, how will it affect the structure and politics of health care going forward? Assuming the ACA survives Republican repeal attempts, does it represent a large step toward a single-payer system? What will happen to the employer-provided sector of health insurance? Will health insurance in the United States settle into a pattern of competing private plans? And will some states really opt out of the ACA’s Medicaid expansion and forgo billions of federal dollars?

Prognostication is always a dangerous business—witness the many observers who thought the Supreme Court would uphold the Medicaid expansion but strike down the individual mandate, the opposite of the Court’s ruling. Policy changes of this magnitude are especially difficult to assess, since they take years to unfold, with all the legislative tweaks and developments that are sure to follow. As political scientist Eric Patashnik has pointed out, Social Security was reshaped by decades of amendments and changes before it took the form we know today. A recent Congressional Budget Office report on the ACA admits that the legislation contains so many moving parts, and the changes are so consequential, that prediction is difficult. With this caveat, I offer the following thoughts with modesty.

A review of past trends and policy experiences provides some guidance. It suggests that the prospects for a single-payer system are no brighter than they were before the Act was passed. The employer-provided system will likely survive for the foreseeable future, although the forces that have fed its deterioration over time remain in place. What appears most likely is a competing system of private insurers, attractive in that the health exchanges in which they will operate steer subsidies toward lower- and middle-income consumers, less attractive in that private insurers retain many of the administrative inefficiencies of the present system. And we can expect that conservative governors will not be able to refuse the Medicaid expansion indefinitely, as there will be considerable pressure from providers and voters (who will otherwise see their tax dollars flowing out of state) to join.

The Unraveling of Employer-Provided Insurance

Just over half of all Americans get health insurance through an employer (another 30 percent are covered through public insurance programs such as Medicare and Medicaid, and 16 percent have no health insurance). The employer-based system has been deteriorating for a long time, as rising costs have led to fewer and fewer employers offering health insurance, and more and more employees joining the uninsured population. This trend was a key motivation behind health reform in the first place. The ACA, and the similar 2006 Massachusetts reform that preceded it, both contain a mandate requiring employers of a certain size to offer health insurance to employees or pay a fine ($295 per employee in Massachusetts, $2,000 per employee nationally under the ACA).

At first glance, we might expect employers to drop health insurance: the cost of the fine is well below the cost of offering insurance, and employees will still be able to get insurance, with subsidies in many cases, on the exchanges established by the ACA. However, the Massachusetts experience, along with projections for the ACA, suggests this outcome is unlikely. In Massachusetts, employer-based coverage increased slightly after health care reform was implemented. Projected declines under the ACA are modest. A March 2012 Congressional Budget Office study of the ACA estimates that in 2019 to 2022, three to five million fewer non-elderly persons will have employer-provided insurance compared to a pre-ACA baseline. Similarly, the Urban Institute estimated that employer-provided insurance coverage would have declined by 500,000 if the ACA had been fully implemented in 2010 while the Lewin Group predicted a decline of 3 million if the law had been in place in 2011. A Rand analysis predicted that employer-based coverage would actually increase by 4 million in 2016 thanks to the ACA.

Why would employer-based coverage endure, when the employer fine is so low? As the CBO points out, the ACA and the market for employees present a complex web of incentives; there is more for employers to think about than the fine. Chiefly, businesses have to compete for employees, and health insurance has proven one of the most desirable benefits over the decades. Businesses that do not offer health insurance have to increase their compensation to compete, and the compensation has to be greater than a comparable amount of health insurance, since wages and salaries are taxed, while health insurance benefits are not.

That said, employers’ incentives to drop health insurance might grow over time, particularly because of the so-called “Cadillac tax” on high-value health plans. The tax break for employer-provided health insurance, in which neither employers nor employees pay taxes on health insurance premiums, currently has no cap. This encourages the adoption of elaborate insurance plans, which, in turn, create incentives for overindulging health care. Beginning in 2018, a 40 percent excise tax will be imposed on the value of employer-provided plans above a threshold of $10,200 for individual coverage and $27,500 for family coverage. This provision was included in the ACA to cut costs and to discourage both employers and employees from choosing such plans. Many current plans will reach the thresholds between now and 2018, and after that date, more and more plans will be subject to the tax since the thresholds will be adjusted to the Consumer Price Index, which rises at a lower pace than medical inflation. In essence, the Cadillac tax is a gradual repeal of government’s enormous subsidization of employer-provided health care.

Many observers see the expected decline of the employer-provided health insurance system as a disaster, since it currently covers the majority of Americans. But the eventual transfer of such individuals and families onto the health exchanges may be more equitable, for two reasons. First, the government subsidy of health insurance provided through the tax code depends on employment status and encourages people to remain in jobs they would otherwise leave. In contrast, health insurance exchanges will be open to all citizens who do not have employer-provided insurance, and those with incomes between 133 and 400 percent of the federal poverty level will qualify for a subsidy. This change will bring special relief to entrepreneurs, freelancers, and the self-employed for whom access to health insurance has been commonly denied. Second, the government subsidy in the tax code supporting the employer-based system is tilted toward the affluent: because the tax preference is provided as a deduction from taxable income rather than as a credit with the same value for all taxpayers, the value of the deduction increases with income. For example, a household paying $5,000 in health insurance premiums receives a $1,750 tax break if it is in the 35 percent tax bracket but only a $500 break if in the 10 percent bracket. In contrast, the health-exchange subsidies are tilted toward lower income households, with the amount of help decreasing, rather than increasing, with income.

Single-Payer Redux?

Can we expect this shift away from employer-provided health insurance and toward exchanges to lead to a single-payer system? Don’t count on it. If the health exchanges had included a public option, there would have been a structural path to single payer. Many would likely have flocked to the public option because it would have been cheaper—government-run insurance, such as Medicare and Medicaid and the public systems of every other industrialized nation with similar health outcomes, has lower administrative costs than private insurance—and because it would represent a default option for consumers flummoxed by choice. For these reasons, insurers vigorously resisted the public option, just as they and pharmaceutical firms fought a public option in the 2003 Medicare prescription drug benefit.

It’s not just special interests that oppose a public option. Respondents to a November 2011 Gallup poll preferred a “system based on private insurance” to a “government-run health care system” 56 to 39 percent. Despite the popularity of Medicare (a single-payer system) for the elderly, Americans’ deep suspicion of government, combined with the satisfaction of most insured Americans with their policies, make the prospects of a single-payer system very poor.

In fact, the ACA’s structure undermines the solidarity needed to grow popular support for single-payer in the future. ACA passed, while previous reforms failed, in large part because it left intact the arrangements of the insured, reducing the political opposition of that group. But this strategy, in turn, reinforced the divisiveness of the current system. Remaking everyone’s insurance arrangements, though politically impossible, would have put everyone in the same boat. Leaving intact the arrangements of the insured and extending coverage to the uninsured, on the other hand, encourages the insured to see themselves as taxpayers who will now have to pay for the expanded coverage of others (even though the ACA’s funding comes from many other sources as well) and who suspect that their own coverage may deteriorate in some way. This is why we see commentary of the form, “How are we going to afford the Medicaid expansion and the subsidies on the health exchanges?” “Afford” is a taxpayers’ word. This is also why numerous polls report that more Americans say that other groups, such as the uninsured, will benefit from the health reform than say that they themselves will benefit. In a February 2012 Gallup poll, just 24 percent said the health care law would make their family’s health care situation better in the long run. Thirty-eight percent said the reform would make it worse, and 34 percent said it would make no difference. The insured will benefit from the ACA’s extensive insurance-industry regulations, but such protections are difficult to appreciate and certainly less tangible than the coverage extension that their tax dollars will be paying for in part.

Governors to Medicaid Billions: Thanks but No Thanks

The final moving part in the complicated future of American health care is ACA’s Medicaid provisions. Half of the coverage expansion in the ACA depends on a change in Medicaid eligibility that the Supreme Court has now allowed states to ignore.

Medicaid is a health insurance program for the poor run jointly by the states and the federal government, with the latter providing between 50 and 83 percent of funding (states with lower per capita income get more federal help) and stipulating minimum eligibility criteria. Prior to the ACA, states had to cover children under five years old and pregnant women with income up to 133 percent of the federal poverty level. Children between six and nineteen years old also were covered up to 100 percent of the poverty line. Some states chose to cover other populations as well.

The ACA as written changed the eligibility criteria to include all poor people: everyone under 133 percent of the federal poverty level became eligible for Medicaid. The federal government would pay 100 percent of the cost of the newly eligible for three years and 90 percent thereafter.

However, now that the Supreme Court has ruled that the federal government cannot force states to expand Medicaid coverage, a number of conservative governors wary of federal intrusion have asserted that their states will not comply. They claim to be especially worried about the fiscal burden. They fear future Congresses will reduce federal matching funds and that an untold number of currently eligible but unenrolled individuals will now come forward and seek coverage.

To be sure, Medicaid is a considerable burden on state budgets. It constitutes the largest share of state spending after elementary and secondary education. But the opt-out threat will adversely affect millions of Americans: Congress assumed under the ACA that everyone under 133 percent of the federal poverty level would become eligible for Medicaid; such individuals are not eligible for subsidies on the health exchanges, which are intended for those between 133 and 400 percent of the federal poverty level. In the states that reject the expansion, the poorest will be left without coverage.

Will conservative governors really carry out their threat? When Medicaid was created in 1965, a number of states, particularly in the South, resisted, although most joined the program by 1970. (Arizona held out until 1982.) We can expect more holdouts now, after decades’ worth of evidence of the fiscal threat from Medicaid and health care costs. And elected officials feel little compunction about ignoring the preferences of poor Americans, who tend not to vote. However, voters might exert substantial pressure in favor of expansion. In states that do not participate in the Medicaid expansion, health care will continue to be provided by safety net hospitals that serve uninsured patients at considerable expense to taxpayers. And the federal tax dollars that they pay will go to states that participate. This will be a difficult position to defend, even for the most ardently conservative anti-ACA governor.

Perhaps in the long term the combined effects of the ACA and the Great Recession, which battered state budgets, will force a reconsideration of the hybrid federal-state model for public health coverage. Almost twenty years ago, political scientist Paul Peterson argued that states were ill suited to redistributive policy because they had an incentive to provide the lowest possible means-tested benefits in order to repel poor people and retain affluent taxpayers. The Great Recession also laid bare the devastating costs of the inability of nearly all states to run budget deficits and to engage in countercyclical spending during economic downturns. For many years, governors have urged the federal government to take on the portion of Medicaid that pays for nursing home stays for the disabled elderly. Maybe now the time has come to federalize Medicaid altogether. Doing so would remove an enormous burden from state budgets and put an end to variations in state policy toward the poor that can have near-barbaric results. For example, in Texas, one of the states whose government plans to opt out, the working parents of Medicaid-eligible children can only get coverage for themselves if their income is below 26 percent of the federal poverty level. For a family of three, that’s $4,900 in annual income.

Constitutionality is no barrier to federalization of Medicaid. The only question is whether it is politically feasible.