Why Affordability Is Not Obamacare’s Primary Goal

Last week, in an unprecedented Friday decision, the Supreme Court made an early announcement that it will delve into the language and purpose of the Affordable Care Act (ACA), specifically the availability of subsidies to residents of states that have opted not to set up their own health insurance exchanges. One of the Administration’s central arguments will be that the ACA has a single overriding purpose—to deliver more affordable coverage to more Americans—and therefore it is simply not plausible to read the Act as denying subsidies in states that did not establish exchanges—though most of the judges who have looked at the ACA’s language agree that it appears to say exactly that.

However, neither the ACA nor its implementing agencies’ interpretation of the Act have squared with the notion that affordability trumps other aspects of the statute (or for that matter other policy objectives that can’t even be found in the ACA), even in circumstances when relatively clear choices to promote affordability were on the table. I’ll cite four examples: (1) community rating; (2) the employer mandate; (3) the “keep your plan” exception; and (4) defined contribution alternatives.

Community rating. The ACA requires carriers to overprice young and healthy Americans (relative to their actuarial risk) and underprice older and less healthy consumers. We know from the recently released October 2013 video from Jonathan Gruber, one of the ACA’s prime architects, in which he states that this cross-subsidization was a key feature of the ACA and that it needed to be concealed to allow its passage. There may be policy reasons for this, but the impact is reduced affordability for the poster children of ACA advocacy—the young and healthy uninsured. Prior to the ACA, under-30 healthy consumers could obtain relatively robust individual coverage for $100 per month or less in most states. The ACA and community rating raised that price tag to something in the $250 range. Except for young people earning only a bit more than the minimum wage, subsidies do not offset that price increase.

The agencies tasked with implementing the ACA—the Department of Health and Human Services and Internal Revenue Service chief among them—have done nothing to defer the onset of community rating for the previously uninsured, despite their wide-ranging claims of authority to defer nearly every other aspect of the ACA.

The employer mandate. The agencies initially ruled that employers could comply with the mandate without making any contribution to the cost of an employee adding dependents. They refused, however, to make any adjustments to a working parent’s obligation to accept, and fully pay for, the cost of adding those dependents to his or her coverage, or pay the individual mandate penalty.

In the process, they essentially created an environment where a one-income family of four making $50,000 would likely be required to pay as much as 20 percent of its household income to fund participation in an employer plan, with no access to the exchanges and no required contribution by the employer to the cost of the family’s coverage. And after leaving this working family with group coverage worse off than it might have been absent the ACA, the agencies proceeded to postpone the employer mandate altogether, gutting one of the ACA’s central affordability planks—namely incentives for employers to assist their workers with meeting their health care costs.

The “keep your plan” exception. This provision has raised costs for an even broader cross-section of consumers (albeit by amounts yet to be fully noticed). It was well known within the insurance industry and the agencies that the President’s rhetoric about “keeping your plan” would not come to pass in the real world, because carriers would have no interest in undercutting the marketability of their ACA-compliant plans or of administering plan designs with a handful of enrollees. The agencies then faced the problem of carrier cancellations of group and individual plans that were no longer ACA-compliant. In response, the Administration threw carriers that wanted to continue those plans into the political briar patch by branding those plans “lousy coverage,” even though many consumers liked them and wanted to keep them.

As video of the President’s stump speeches on the ACA received increased scrutiny, both on television and online, the agencies issued to the states a non-enforcement letter, letting them decide whether to “grandmother” these plans (the actual industry term) and whether to exempt them from nearly all aspects of the ACA, including the otherwise sacrosanct community rating rules, perhaps forever. In the process the agencies left the states to create a patchwork of inconsistent rules, defeating the supposed ACA objective of creating nationally uniformity. Since then, carriers have said publicly that the “grandmothered” plans have detracted from the exchange pool and driven their costs higher than projected. As a result, everyone participating in the exchanges will have to pay more to deal with the political consequences of the President’s careless rhetoric.

Defined contribution alternatives. The agencies’ decision to essentially outlaw defined contribution strategies is probably the least explicable blow they have directed at affordability. Upon its passage, the ACA presented an opportunity for employers who did not want to shoulder the burden of administering a fully ACA-compliant group plan to instead simply contribute to the premiums paid by their employees for individual market coverage, subsidizing the cost of that coverage as a way to support their employees and compete for labor. The new guaranteed issue and community-rating rules made individual market coverage instantly more attractive for less healthy consumers who previously had to rely on employer-provided group coverage.

Long before the ACA, many smaller employers had opted to contribute to the cost of insurance purchased by their employees, and the IRS had ruled that those contributions would be not be taxed. Nothing in the ACA even remotely suggested that this strategy would be a problem. To many observers, defined contributions were a more attractive alternative than a group plan, a way to advance affordability, and would reduce the employer burden to wade through the complexities of ACA regulation.

But then in 2013, the agencies ruled that using defined contribution accounts to cover health care premiums or expenses would violate the ACA as of January 2014, because that would turn those accounts into group health care plans that didn't adhere to ACA rules prohibiting caps on group health benefits. In the process, the agencies declared not that employers could not make any contributions tied to their employees’ individual market costs, either pre- or after-tax. As a result, employers that were making individual market coverage more affordable were required to stop and those that would have begun to contribute were prevented from doing so. In effect, they were obligated to leave their employees to fend for themselves.

Given what has transpired to date in the lower Courts, the Administration and others will undoubtedly try to influence the Justices’ consideration of the case by harping on the impact that a decision for the plaintiffs would have on affordability. But the Justices likely will be well aware of the reality that both Congress and the states will have further decisions to make regarding the ACA, regardless of the outcome, and that there is now a widespread political consensus that the ACA needs to be fixed. Several of these anti-affordability features of the ACA (as implemented) could be easily reversed if affordability is really the seminal objective.

So when the Supreme Court Justices hear the Administration and agencies wax poetic about affordability as the ACA’s central overarching goal, arguing that any change in subsidy availability would defeat that goal, I hope they’ll look at the entire record of what the ACA has actually done. Millions of Americans with fewer and more costly health insurance options would benefit from fixing the ACA—or better yet, replacing it. The Supreme Court now has the opportunity to jumpstart a process that could lead to a better outcome for a broader range of Americans.