• Will public insurance displace private insurance under the Affordable Care Act?

    Last December, PolitiFact.com selected “a government takeover of healthcare” as the Lie of the Year for 2010.  Their reasoning was that, despite the claims of numerous candidates and pundits, the ACA will mostly build on the existing employer-based insurance system.

    I agree with PolitiFact about the rhetoric, but several months ago I started to wonder how each provision of ACA would affect the balance between public and private insurance in the long run.  In particular, the “Cadillac” tax, a 40% excise tax levied on high-premium health plans, seems likely to erode the favorable tax treatment of employer-based insurance over time.  This is because the premium threshold where the tax begins to bite is indexed to inflation, but health insurance premiums have historically grown substantially faster.  If employer-based coverage becomes less attractive, how many more people will choose public coverage?

    Answers to these questions can be found in my new working paper (also available here), co-authored with Austin and Lisa Iezzoni.  We used recent data from the Medical Expenditure Panel Survey and carefully followed published methods for studying the effects of Medicaid expansions and variations in tax rates on public and private insurance coverage for workers and their families (see the paper for details and references).

    The bottom line is illustrated in the chart above.  The Medicaid expansion and individual mandate will lead to growth in both public insurance and private insurance in 2014.  In 2018 the excise tax will be implemented, and we assume that it affects a growing share of the workforce as the thresholds erode over the next 12 years.  By 2030 the effect of the tax is to shift about 3% of workers and their families from private coverage to public coverage.  Total private coverage remains at about 80%, the same as before reform, but public coverage grows from 6% now to 14% in 2030, which is a 233% increase.1 In addition, 5% will enroll in subsidized private coverage through exchanges.

    Is this a problem?  Others may disagree, but we have no philosophical objection to more public insurance, provided we can afford it.  So can we afford it?  At this point, we don’t know.  As far as we can tell the official projections from the CBO and the CMS Office of the Actuary (OACT) do not account for this tax-induced shift from private to public insurance.  On the other hand, the shift will occur because of the excise tax, which could generate a lot of revenue.  Furthermore, the excise tax could induce firms to shift compensation from health benefits to wages, increasing income tax revenues.  We’d be very interested to hear from the official scorekeepers (CBO and OACT) what they think the budgetary implications are.

    1 These figures do not match other published predictions because the study was conducted using a sample of workers and their families aged 25-61 and featured some other sample restrictions.

    UPDATE: See also How a Cadillac tax becomes a Chevy tax.

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    • The general model design seems reasonable to this non-economist. However, the assumption that health care costs will continue to go up at historical levels over the next 10 years is not one I share.

      If I read you correctly (also going by common sense here) the crowd-out will most affect lower income workers. Doctors, lawyers, bankers and CEOs will keep their Cadillac plans. But if we are talking about lower income employees, I do not see why health plans won’t effectively respond to the tax by reducing the cost of premiums. They are already planning for a world of smaller networks, EPO rather than PPO products, tighter cost controls, medical home/ACO models, higher cost sharing and better consumer tools to improve sensitivity to the value proposition of different care options. All this stuff will be what lower income folks get, reducing the crowd-out effect as long as the plans are still better than Medicaid.

      I think this will start bending the curve by 2014 regardless of the success of government programs to improve the cost/quality proposition via Medicare and elsewhere. Of course, we are all just guessing, but note that insurers will see this coming a mile (7 years) away.

    • Jonathan,
      We agree with most of your comments. We assume that health care costs will continue to grow, but that doesn’t mean that insurance premiums will grow equally fast. In fact, we expect many if not most firms to redesign benefits in order to avoid the tax. As these changes take place, employer-sponsored insurance will compare less favorably to Medicaid for some workers and their families and they will shift from private to public coverage.
      We don’t know whether redesigned health plans will succeed in bending the cost curve. If they do, the trends we predict will take a little longer– but not much longer– to take place.

    • “If employer-based coverage becomes less attractive, how many more people will choose public coverage?”

      Can you clarify something for me? Are you saying that the options, under healthcare reform, are sticking with the employer-based coverage or going onto public coverage? And is Medicaid your definition of public coverage?

      Have not had time to read the many pages in the healthcare reform bill. It was my understanding that private insurance would be more available and affordable as a result of this legislation. Am I way off base?

      “By 2030 the effect of the tax is to shift about 3% of workers and their families from private coverage to public coverage. Total private coverage remains at about 80%, the same as before reform, but public coverage grows from 6% now to 14% in 2030, which is a 233% increase.1 In addition, 5% will enroll in subsidized private coverage through exchanges.”

      If the percentage of private coverage remains the same, but the public coverage goes up to 14%, where are those people coming from? The ranks of the uninsured today? If so, what are the cost savings to the system to have formerly uninsured people use insurance to obtain primary care through primary care doctor, rather than the ER?

      Has the legislation done anything to level the playing field for consumers? Make it simpler to understand the cost of the healthcare one receives? Find pricing in advance of treatment so one can perhaps shop around for the most affordable option? Those are key issues for cost containment, but I don’t know if the legislation addresses any of them.

      And re: the two commenters above who do not assume premium and healthcare costs will continue to rise astronomically, I’d love to know what info they’re using to determine that! Based on my own personal experience of having been self-insured for the better part of a decade, I simply cannot assume that cost increases are in any way going to slow down.

    • The Kaiser Family Foundation has some convenient summaries of the legislation (http://healthreform.kff.org/), some in video form.

      Very briefly, the law creates insurance exchanges through which individuals with incomes below 400% of the Federal Poverty Level can purchase federally subsidized private insurance. It also expands eligibility for Medicaid to those with incomes up to 133% of poverty. These two provisions will make affordable coverage much more available to many people who currently have difficulty affording it. The exchanges may make insurance easier to understand as well, although that depends how the states run them.

      Our research shows that the law will greatly reduce the number of uninsured in 2014. Then, starting in 2018 the tax provision will cause a modest shift from private to public insurance. By 2030 private insurance will be back to where it started and public insurance will be much higher.