The Affordable Care Act (ACA) starts the final phase of its roll out tomorrow Tuesday. It is the largest expansion of the U.S. safety net in more than 40 years. It really is a big, big deal. It is also, despite all the noise, a fairly simple, elegant piece of legislation, based on some pretty simple ideas. The original blueprint behind the ACA framework comes from a Heritage Foundation policy paper (I am not joking) that you can read here. The law is a refinement of this model, with a few minor additions.
To explain the ACA, we have to begin with a simple question:
Why health insurance companies did not cover preexisting conditions?
The two main issue with health care coverage pre-ACA was simple: first, health care coverage was expensive. Second, health insurance companies did not cover patients with preexisting conditions.
Both issues seem to be unrelated, but they are not. Insurance companies basically work by pooling risk: they have X amount of clients paying premiums that barely need health care, and a tiny percentage of clients that need a lot of it. The premiums of the healthy are used to cover the bills of the sick. We sign up for insurance mostly because we really don´t know if we are going to be sick or not; we pay a little now just to lower the risk of being hit with huge bills later.
Patients with preexisting conditions, however, are different: for an insurer point of view, they are people that have a much higher risk of needing health care. That is, they are always more expensive to cover, so insurance companies try to avoid them. They want their risk pool to be balanced, with a small percentage of sick people and a big group of healthy-premium payers to cover their bills. If you are unlucky and had an accident, illness or chronic condition around, tough luck.
A health care system that excludes former cancer patients, people with HIV or diabetes, however, is obviously unfair. It is no one´s fault to get ill; the government should not allow this to happen. Let´s say that legislators reacted and decided to ban insurance companies from denying insurance to patients with preexisting conditions, trying to right this wrong. This is one of the founding stones of the ACA, and one of the most important features of the law. What would happen?
For starters, no one will get health insurance. If you are healthy and you know that you can sign up for a plan the moment you get sick, why should you pay monthly premiums? Everyone will wait until they get sick before signing up for coverage, leaving the insurers with a risk pool full of sick people. Only people that really need insurance will get it, so the premiums will skyrocket. An insurance dead spiral that will leave everyone without coverage.
To prevent that from happening, the ACA uses a pretty simple, straightforward solution: the individual mandate.
The individual mandate
In a world with preexisting condition coverage, every one has a very strong incentive to free ride: remain insurance free, and hope someone else is paying the bills. The individual mandate strives to avoid that: to make sure that no one is shirking his responsibility by not paying into the system until they get sick, the government mandates everyone to get insurance, or pay a penalty.
Although the individual mandate is the most unpopular piece of the ACA it is by far its most important component, as it enables the rest of the law to work. If everyone must have insurance coverage, no matter their health, the risk pool will have a good mix of sick and healthy individuals, making risk sharing through insurance possible. The penalty works like a tax on free riding: for those that don´t feel like participating in the system, they at least have to cover the risk of them falling ill and applying for insurance when they need it.
The individual mandate also plays a role in enabling the ACA to use community rating: insurers can not charge higher premium to women, and have limits on how much extra they can charge by age. Insurers prefer to attract young people to their rolls, as they get ill less often. The individual mandate essentially forces the young and healthy to the risk pool, enabling the ACA to keep premiums for seniors lower.
We are mandating coverage, then, to make sure that people that are too old or too sick to get health coverage have access at the same price as the rest of the population. What we haven´t yet resolved, however, is access to those that are simply too poor to afford insurance, and can not pay for coverage, even with these regulations in place.
Fortunately, the ACA has a solution for this issue: subsidies.
Medicaid expansion and tax credits
The ACA mandates the purchase of health insurance coverage. Its designers, fortunately, understood that not everyone can pay for it right away, so the legislation includes an extensive system of subsidies and supports for those that need them.
First, Medicaid eligibility is greatly expanded: anyone under 138% of the Federal Poverty Line will be eligible for the program in the states that choose to embrace the expansion. In practice this means than liberal-leaning states like Connecticut will be able to enroll tens of thousands of people in health insurance, with the costs being covered by the Federal government.
For those above the threshold, the ACA includes additional support in the form of tax credits to purchase private insurance. Any family or individual between 138 and 400% of the Federal Poverty Line (note that 400% FPL is above the median income in the US, so this subsidies do cover a lot of people) will be able to claim these subsidies, calculated on a sliding scale.This means that for many working families purchasing insurance in the open market the ACA will cover most of the premiums, making coverage affordable.
The structure of the law is, in fact, remarkably simple: we want to cover preexisting conditions, so we need an individual mandate. If we force everyone to have insurance, we need to help low income families comply by subsidizing it. This is the ACA in a nutshell.
Odds and ends: exchanges, employee mandate, small business credits
Some final details worth pointing out. All of the above is only immediately relevant for the currently uninsured or for those getting health insurance in the private market, and not through their employer. The health insurance exchanges / market places like Access Health CT focus on those groups. The exchange is essentially a central hub for people that are not covered by their employers to compare private insurance plans and get their tax credits automatically.
The ACA has two additional features for the the employer-based system: first, large business are mandated to provide health insurance to their full time workers, or they will have to pay a penalty. Second, small businesses that offer health coverage will get a tax credit. The employer mandate as it stands in the law is notoriously clumsy, and it has been delayed for a year. Small businesses will also be able to purchase insurance through a dedicated exchange/market place, but its roll out has been delayed until November.
All in all, The exchanges get rolling tomorrow; the tax credits, individual mandate, tax credits and Medicaid expansion kick in January 1st. It is a good law: simple, elegant and conservative in the best way possible, not trying to fix what is not broken. The country will be better off with it. Tomorrow is a big day.