The (sometimes un-) Affordable Care Act

Consider four families of four, each with two children, living near Albany, New York. The breadwinners in the family recently took jobs that do not offer health insurance. As the Affordable Care Act was written, they were required to purchase health insurance.

Families I and II earn nearly the same incomes. Family I has a household gross income of $50,000. When the family went to the New York health plan marketplace, they found a policy through New York’s Essential Plan with no deductibles for $240 annually, and a cap on total medical expenses at $2,000. Their annual maximum health-care cost could be $2,240—4.5 percent of the family’s income, leaving $47,760 for other family needs.

Family II earns just a little more, with a household income of $55,000. They went to the state health-care exchange and found a federally subsidized middle-priced (silver) policy. They found that their children could be covered under the Child Health Plus) program for $720 annually with no co-pays. But they would have to purchase insurance for themselves that, combined with their children’s coverage, would cost $4,500 annually. The plan would cover some preventive services, but all other care would be subject to a $5,000 deductible. This family could pay up to $12,000 in out-of-pocket costs. Their maximum annual health care cost could be $16,500—30 percent of family income, leaving $38,500 for other family needs and $9,000 less than Family I.

Families III and IV also earn nearly the similar total incomes. Family III has a gross income of $100,000. They are also eligible for Child Health Plus but would pay $1,440 annually for their children’s coverage. The annual premium for the two adults in the household and the Child Health Plus coverage would total about $11,000 with a family deductible of $5,000 and an out-of-pocket maximum of $12,000. Their maximum annual health care cost would be $23,000—23 percent of family income, leaving $75,560 for other needs.

Family IV earns $5,000 more than family III. With household income of $105,000, they no longer qualify for any subsidized programs. Their annual premium cost would be more than $19,000 with the same $5,000 deductible and a $12,000 out-of-pocket maximum. Their maximum annual health-care cost would be about $31,000—about 30 percent of their annual income. They earn more than family three but have less money left over after paying for health care.

In each case, the second-lowest cost (silver) policy was chosen for this study (see an explanation of the “metal” levels here). For New York policyholders, where eligible, children are insured through the state’s Child Health Plus program, which is included in the premiums shown, where applicable. Federal subsidies apply on a sliding scale to policies purchased on the exchanges for people with incomes of up to four times the poverty level.

The Affordable Care Act (Obamacare) has a series of thresholds that have the effect of placing families with similar incomes in significantly different financial risk situations. While lower-income families are relatively well protected, families with slightly higher incomes could face substantial financial burdens from health care costs. And, because health insurance policies purchased through ACA exchanges are structured to protect families from truly catastrophic costs, they expose families to smaller, but still potentially unaffordable health care costs that could amount to as much as 30 percent of annual gross income.

Though the ACA has succeeded in reducing the percentage of New Yorkers without health insurance to about 5 percent and ensures that people with pre-existing conditions can buy health insurance, it has significant shortcomings because of the high health-care costs that many insured New Yorkers continue to face.

High premiums, maximum medical costs

The Affordable Care Act had two major components. The first was an expansion of the federal Medicaid program, making people with incomes of up to 138 percent of the poverty level eligible for low-cost coverage. However, a 2012 Supreme Court decision made the program optional at the state level. Thirty-seven states, including New York, participate. The ACA also authorized states to establish programs to cover people with incomes between 138 percent and 200 percent of the poverty level through low-cost health plans with no deductibles. New York calls its plan “The Essential Plan.” The plan is administered by a group of health maintenance organizations and offers low premiums ($0 to $240 annually depending on income) and low maximum out-of-pocket expenses ($200 or $2,000 depending on income).

The second element of the ACA was the establishment of health care exchanges that offer health insurance policies that include federal subsidies to individuals with incomes of up to four times the poverty level ($103,000 for a family of four). Under the law, everyone who did not have health insurance was required to purchase a policy, though the tax penalty for not carrying insurance was much lower than the cost of insurance premiums, particularly for families. The penalty was repealed in 2018.

Typical American families had roughly $6,000 in discretionary income  after paying for necessities in 2014. Health care expenses of more than $20,000 would pose a considerable strain on their finances, and for those families that had high medical expenses over several years, the result could be bankruptcy.

The effect of the combination of subsidy programs is that people at different income levels have very different health care expenses. Two “cliffs” where program eligibility changes are the cause of these differences.

For those earning less than $51,500 on Medicaid or the state’s Medicaid expansion plan, costs are quite low—at most, 3 percent of gross income. But at $55,000, expenses could be as high as 30 percent of family income. 

From $55,000 to $103,000, maximum expenses as a percentage of income decrease, dropping to 23 percent. Because subsidies disappear at $103,000, expenses again increase to 28 percent. For incomes above that level, expenses decrease. In our example, at an income of $100,000 maximum expenses would be about $24,000, while at an income of $105,000 they would be $31,000.

A heavy burden for some

From a need perspective, the current system has significant shortcomings. While it is effective in making health insurance affordable for relatively low-income families earning $51,500 or less, health care costs can consume a large share of income for families whose incomes are just above one of the thresholds noted above.  

Policy premiums, even after subsidies, pose relatively heavy burdens for families with modest incomes. Before the ACA, many families had chosen either not to purchase insurance at all (in some cases because policies were unaffordable because of pre-existing conditions) or to buy a very basic plan which could leave them with catastrophic uncovered costs. No doubt many families that were required to purchase comprehensive health insurance found that their budgets were significantly disrupted by a new federal requirement that they find $5,000 to $9,000 each year to purchase it. 

Additionally, the transition from subsidized policies to non-subsidized policies that occurs at $103,000 for a family of four creates a spike in costs near that region that exposes families whose income is slightly above average to two potential problems—premiums for silver-level policies that exceed 15 percent of gross income and potential health-care expenses that could be nearly 30 percent of gross income.

The Affordable Care Act was an incremental solution intended to remedy the failure of America’s health care insurance system to cover all residents. By attempting to work within the existing mix of private and government insurance, a set of inequities resulted. These problems arise largely from the decision to integrate the new requirement to purchase health insurance with the existing mechanisms for delivering health care coverage and the cost constraints that the program’s designers imposed.  

To remedy the discontinuities and provide more perceived value to policy holders, health insurance policies would have lower deductibles and out-of-pocket maximums—both of which would increase policy costs. Program subsidies would need to be increased if the percentage of income that policyholders pay is reduced and the maximum income at which subsidies are available is raised. Both options would significantly shift costs from exchange users to federal taxpayers.

The program’s authors faced a dilemma: since most people earning enough to buy through the exchanges are currently covered by employer-provided insurance, offering larger subsidies to those who were required to buy insurance in the individual market would create a perceived inequity, since employers do not receive government assistance for the policies that they provide.  Only 11.4 million people are covered by the health care exchanges, while 156 million people receive coverage from their employers. To pay for the subsidies, which would cost substantially more than those ultimately created, new or increased taxes would be required of people and businesses that would not benefit.

In this case, the effort to reform health care with a mix of private and public funders resulted in a program that helps some lower-income New Yorkers get health care coverage at a reasonable cost, but leaves others exposed to potentially unaffordable premiums and out-of-pocket costs. 

Increasing insurance affordability for policyholders could increase overall health care spending if, as is likely, they use health care more. Additionally, it could encourage more people to take advantage of the subsidies provided through the exchanges. Overall health care expenditures would rise because people who do not have insurance use health care services at only half the rate of those who are insured. Because the 11.4 million people insured through the exchanges are only 3 percent of the total insured population, the impact would be relatively small compared to the total cost of health care, though marketplace subsidies—currently about $50 billion annually —would increase significantly.

John Bacheller, former head of the policy and research division of Empire State Development, is an author of Policy by Numbers, a blog that focuses on data and policy at the state level, with a focus on Upstate New York.