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Summary of "Alternatives to the ACA's Affordability Firewall"

Core Content

This report evaluates two potential modifications to the Affordable Care Act (ACA) affordability firewall, which currently restricts Marketplace subsidies for individuals with access to employer-sponsored insurance (ESI) that is deemed affordable. The study uses the COMPARE microsimulation model to predict the effects of these changes on health insurance coverage, government spending, and family health care costs.

Key Findings

• Affordability Firewall Mechanism: Under the ACA, individuals and families cannot receive Marketplace subsidies if the worker's share of the single ESI premium is less than 9.5% of household income, even if family ESI premiums are higher.
• Nongroup Enrollment Increase: Modifying the affordability firewall could increase nongroup enrollment by 4.1 million under the "entire family" scenario and 1.4 million under the "dependents only" scenario.
• Uninsured Reduction: The number of uninsured individuals would decrease by 1.5 million and 0.7 million, respectively.
• Crowd-out Effect: The difference between increased nongroup enrollment and reduced uninsurance is due to ESI crowd-out, which is more significant in the "entire family" scenario.
• Subsidy Eligibility: Approximately 1.3 million families that currently have ESI and unsubsidized nongroup coverage would become eligible for Marketplace subsidies under the alternative scenarios.
• Cost Reduction: For these families, the risk of spending at least 20% of income on health care would drop by more than two-thirds.
• Government Spending: Federal spending would increase by $8.9 billion for the "entire family" scenario and $3.9 billion for the "dependents only" scenario compared to the ACA.

Main Policy Options

Option 1: Entire Family

• Allows all family members to access Marketplace subsidies if the family ESI premium contribution exceeds 9.5% of the worker's household income.
• Results in a larger decrease in ESI enrollment and a more substantial reduction in the number of uninsured.
• Leads to a greater increase in nongroup enrollment and a larger drop in health care spending for families.

Option 2: Dependents Only

• Only dependents (not the worker) are eligible for Marketplace subsidies if the ESI premium contribution exceeds 9.5% of the worker's household income.
• Proposed by the U.S. Senate in 2014.
• Results in a smaller decrease in ESI enrollment and a less significant reduction in the number of uninsured.
• Leads to a smaller increase in nongroup enrollment and a moderate drop in health care spending for families.

Methodology

• COMPARE Model: A microsimulation model that uses data from the 2008 SIPP, 2010 and 2011 MEPS, and 2010 Kaiser Family Foundation Annual Survey of Employer Benefits.
• Assumptions:
  • Perfect compliance with the affordability firewall.
  • No new penalties for employers under the alternative scenarios.
  • Employers pass savings from reduced ESI enrollment to workers as increased wages.
• Modeling Approach: Utilizes a utility maximization framework to simulate individual and family decisions based on costs, benefits, and financial risk.

Health Insurance Coverage Changes

• Marketplace Subsidies: Under Options 1 and 2, 10.2 million and 4.2 million people gain access to Marketplace subsidies, respectively.
• ESI Enrollment: Both options lead to a decrease in ESI enrollment, with a larger decline under Option 1.
• Uninsured: The number of uninsured individuals decreases by 1.5 million and 0.7 million for Options 1 and 2, respectively.
• Nongroup Coverage: Increased nongroup enrollment comes from individuals shifting from ESI and those previously uninsured entering the nongroup market.
• Premium Changes: Nongroup premiums decrease significantly in both options, with a larger drop in Option 1, driven by healthier individuals moving to the nongroup market.

Government Spending and Revenue

• Marketplace Subsidies: Government spending on Marketplace subsidies increases by $12.4 billion for Option 1 and $4.6 billion for Option 2.
• Medicaid Spending: Increases slightly in both scenarios.
• Uncompensated Care: Decreases in both options due to reduced number of uninsured individuals.
• Individual Mandate Revenue: Decreases by $0.4 billion in Option 1, but remains unchanged in Option 2 due to exemptions for dependents.
• Tax Revenue: Increases by $4.6 billion and $2.0 billion for Options 1 and 2, respectively, due to higher wages from reduced ESI enrollment.
• Net Budget Impact: Federal spending increases by $8.9 billion and $3.9 billion for Options 1 and 2, respectively.

Family Health Care Spending

• Total Spending: For the 1.3 million previously insured, newly subsidized families, total health care spending decreases by $2,274 per year under Option 1 and $2,080 per year under Option 2.
• Out-of-Pocket Costs: OOP spending decreases significantly, with a 29% drop in Option 1 and a 31% drop in Option 2.
• Income Risk: The risk of spending at least 10% of income on health care drops from 87.3% under the ACA to 46.7% under Option 1 and 57.6% under Option 2.
• Risk of 20% Spending: Falls by more than two-thirds in both options, with a more pronounced effect in Option 1.

Conclusions

• Modifying the ACA's affordability firewall involves trade-offs between increasing access to affordable insurance and the risk of ESI crowd-out.
• Both options lead to increased government spending and reduced uninsurance, with Option 1 having a more significant impact.
• Policymakers must weigh the benefits of expanded coverage and reduced health care costs against the potential for ESI disruption and increased federal expenditure.

Notes

• Estimates are based on 2014 MEPS data, inflated to 2017 levels.
• The "entire family" option allows all family members to access subsidies, while the "dependents only" option limits subsidies to dependents.
• The report highlights the importance of considering both the direct and indirect effects of policy changes on health insurance markets and government budgets.