Code Red: Two Economists Examine the U.S. Healthcare System

March 31, 2014

Taking Stock of the ACA

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 11:09 am

With the ACA exchange enrollment deadline behind us, this is a good time to take a look at the big picture. Three years after the first baby steps of implementation, what has the ACA accomplished?

When we consider the ACA, we can think of two broad goals. The “easy” goal was expanding coverage to the uninsured. We say “easy” because regulators should be able to succeed by simply throwing money at the problem, and that is a task our elected officials seem particularly adept at accomplishing. The “hard” goal was bringing down the rate of growth in health care spending. This has proven to be a difficult task for policy makers, who have been trying (and failing) for decades and have often done more harm than good.

We first consider the goal of expanding coverage to the uninsured. From its onset, the ACA chalked up a small victory by requiring plans to continue coverage for dependents under age 26. This provided coverage to as many as three million uninsured, albeit the healthiest members of the population. The lion’s share of the reduction in the numbers of uninsured was supposed to come from Medicaid expansions and private exchanges. And here is where the problems emerge.

Medicaid ranks have swelled in the 27 states (including DC) that have chosen to expand the program. Republican leadership in other states continue to assert they will not expand Medicaid, but given the exceptionally generous federal funding for this expansion, we find it hard to believe that most of these states won’t soon join the expansion. After all, even Louisiana eventually raised its drinking age to 21 to get its share of federal highway funding. Similarly, we can’t imagine that the red states will turn down billions of dollars in federal funds.

Even with half the states sitting out Medicaid expansion, as many as nine million Americans could be added to Medicaid rolls, half of whom reside in California, Illinois, and New York. While this seems like a sizeable percentage of the nearly 50 million Americans who were uninsured when the ACA was enacted, we should not celebrate too soon. If experience from previous Medicaid expansions is a guide, then most of these new enrollees previously had private health insurance. Research studies put the Medicaid crowd out rate from prior expansions at about 60 percent. If past is prologue, then perhaps only 3.6 million new Medicaid enrollees were previously uninsured. Of course the number of newly enrolled that were previously uninsured might be higher, but many of these may have already been eligible for Medicaid and simply failed to take up coverage. Tennessee’s state Medicaid system has seen a large enrollment increase even though it has yet to expand eligibility. While getting these individuals to sign up is a laudable outcome, these enrollees are covered by the less generous non-ACA matching rate and will further strain state budgets – which already unable to cope with the ever growing cost of public health insurance. Perhaps the folks boasting about the large expansion of Medicaid should wait for all the data to come in.

And that is the good news. By now most people are well-versed in the troubled roll out of the private exchanges. It is currently estimated that enrollments will top six million, although it is also estimated that less than five million of those enrollees will pay their first month’s premiums. And at least one survey suggests that only 14 percent of exchange enrollees were previously uninsured. Let’s be generous and double the McKinsey estimate. This suggests that about 1.4 million individuals who will purchase insurance through the exchanges were previously uninsured. The other 3.6 million previously footed the bill for their own insurance; now many of them are enjoying public subsidies. While these subsidies may make care more affordable, we must remember that they come at the expense of even more federal expenditures on health premiums and a growing disconnect between the cost of health care and the cost of health insurance. The cost of these subsidies could continue to rise if, as we expect, many employers scale back their offering of health insurance benefits.

By our count, the ACA has brought coverage to 8 million previously uninsured. This is somewhat smaller than the 9.5 new enrollees reported elsewhere in a study that seems to assume that all exchange enrollees will pay their premiums and does not speculate about crowd out. But both figures are low, representing less than 20 percent of the uninsured, with a large fraction of this coming from enrolling young adults on their parents plans – something that could have been accomplished by a one page regulation. So what did the remaining 2000 pages of legislation bring us? Apparently, the biggest accomplishment of the ACA is to take millions of people who were willing and able to purchase their own health insurance and place them on the public dole. While ACA supporters would say that many of these people now have “better” insurance, and they may be right, but that was certainly not how the ACA was sold. In any event, the limited data that we do have about the characteristics of new enrollees suggests that we must be careful before we state the ACA has unequivocally provided insurance to a large fraction of the uninsured.

What about the future of the exchanges? Some have argued that we have reached the number of enrollees necessary for sustainable risk pools. But, it isn’t the number of enrollees that necessarily matters here; the ultimate success of the risk pools hinges on the mix of healthy and sick enrollees. It is too soon to tell but there are certainly enough young enrollees to give hope. If insurers can make a profit off of the current pricing and enrollment mix, then premiums could remain stable and enrollments could climb. But the big problem will remain that millions of the uninsured might rather pay a modest penalty and remain uninsured than purchase subsidized insurance.

This raises a related issue. One benefit of coverage expansion is that it eases the burden on providers who must treat the uninsured regardless of their ability to pay. In many ways, these providers have served as an underfunded source of public insurance. It will be interesting to see whether those who choose not to buy insurance can continue to obtain charity care from these providers. This is particularly true given that the ACA will drastically redistribute the disproportionate share payments these facilities depend on. Ultimately, we believe that access to care, more than anything else, will determine whether the uninsured choose to remain uninsured.

Now that we’ve discussed the “easy” goal, let’s talk very briefly about the hard goal – the ACA as a blueprint for cost containment. On this dimension, casual empirical evidence was encouraging, as healthcare spending seemed to have leveled off. But there is considerable evidence that most of the slowdown in spending was due to the lingering effects of the downturn in the economy, particularly the sluggish labor market. Indeed, the most recent data reveals a sharp uptick in spending, which coincides with a rebounding economy. On the other hand, there is considerable evidence that providers are taking very seriously the challenge of cost containment. Hundreds of Accountable Care Organizations have signed up to share the financial risk of caring for Medicare and privately insured individuals. In the process, providers are organizing into large regional healthcare systems that present many promises and perils. While advocates of integration believe that this is the only way to bend the cost curve, economists who have studied the theory and evidence on integration are less sanguine. A recent Brookings Institute report notes that the benefits of integration are uncertain, but that giant systems, which are hard to undo, may obtain market power that allows them to resist market pressures for cost containment. This is ironic, as market power is completely antithetical to the purported ACA goal of achieving savings through a competitive health economy. Even more than the evidence on raising coverage, it will take many years to understand how this restructuring of our health economy will turn out. We just hope that regulators and policymakers take heed of the literature on this point.

Overall, supporters of the ACA boast how payers, providers, and even patients are actively changing the U.S. healthcare system. But coaching legend John Wooden reminded us not to confuse activity with accomplishment. On the latter score, there is less for supporters to cheer.


  1. You know, these posts are interesting and all that. Nice to hear someone comment on things that are really being commented on everywhere. However, just pointing out the problems – well, as an alumni of the Kellogg School, frankly we would hope for more. What actually should be done to make it better? The ACA is not perfect. Big surprise. In the polarized, pugnacious environment that currently exists in congress, the President was able to pass what he was able to pass. And I think that the cost side will eventually come around as the ACOs, MSSP, and other risk and shared savings initiatives come into full fruition. So far, we are barely just scratching the surface. But to those who say the intricacies of that 2000 page document does nothing to address costs….as a healthcare executive, I say they are dead wrong. So from you guys – what should be done? Where should it be changed? What is the solution (or, are the solutions) to the American healthcare crisis? You don’t like certain provisions of the ACA? Well, OK. But what are your specific, suggested improvements? And as scholars, and hopefully not just talking heads, what is your analytical support for those suggestions?

    Comment by Robert — March 31, 2014 @ 3:35 pm

  2. Reblogged this on Aashya and commented:
    A must read for anyone who is interested in framing a debate about ACA.

    Comment by Aashya — April 14, 2014 @ 7:49 am

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