Health Insurance Tax | Age Rating | Essential Health Benefits | Health Care Costs |
Frequently Asked Questions
The Affordable Care Act (ACA) will help millions of people get coverage for the first time, but the new health insurance tax, costly benefit requirements and age rating restrictions will drive up the cost of coverage for many consumers and employers. When this happens, many younger and healthier Americans could decide not to get coverage, which would further drive up costs for everyone else.
It's time to focus on affordability.
January 1, 2014 Reforms
The broad market reforms outlined in the ACA take effect on January 1, 2014. Individuals and families purchasing insurance in the individual market will be guaranteed coverage for pre-existing conditions, and their premiums cannot vary based on their gender or medical history. There will also be subsidies to help consumers afford the cost of coverage, and new state-based health insurance exchanges will help consumers find the policies that best meet their needs.
At the same time, other provisions take effect that will significantly increase the cost of coverage for millions of individuals, families, and small businesses:
The ACA imposes a new $100 billion sales tax on health insurance that will add to the cost of coverage for people purchasing coverage on their own, small employers, Medicare Advantage beneficiaries, and Medicaid managed care programs. The Congressional Budget Office (CBO) has said that this tax will be “largely passed through to consumers in the form of higher premiums.” An analysis by Oliver Wyman estimates that this tax alone “will increase premiums in the insured market on average by 1.9% to 2.3% in 2014,” and by 2023 “will increase premiums 2.8% to 3.7%.”
An updated report by Oliver Wyman, “Annual Tax on Insurers Allocated by State,” estimates the impact this tax will have on individual market consumers, employers, and Medicare Advantage beneficiaries in all 50 states, as well as the impact on state Medicaid managed care programs.
The ACA strictly limits how much premiums can vary based on a person’s age, which will result in significantly higher premiums for younger individuals and families. This increases the likelihood that younger, healthier people will choose to wait to purchase health insurance until after they get sick or injured, thus driving up costs for everyone else.
A new study by Oliver Wyman found that age rating restrictions will increase premiums 42 percent for people aged 21 to 29 and 31 percent for people aged 30 to 39.
All health insurance policies sold in the individual market and to small employers will be required to cover a broad range of mandated benefits, many of which are not included in some policies today. As a result, millions of people will be required to “buy up” and purchase health insurance that is far more costly than they currently have. The CBO found that premiums would increase because policies “would cover a substantially larger share of enrollees’ costs for health care (on average) and a slightly wider range of benefits.”
Rising Health Care Costs
Any increase in premiums as a result of the ACA will be on top of the unsustainable rise in underlying medical costs. Soaring medical costs are driving up the cost of coverage, taking up a greater share of federal and state budgets, and threatening the long-term solvency of our nation’s public safety net programs. While the ACA takes a number of preliminary, but promising, steps toward reforming the delivery system, much more needs to be done to control health care cost growth.
To help shine a spotlight on medical cost drivers, AHIP recently released a new iPad app that consolidates fifty years of federal health care spending data into a series of easy-to-use, interactive charts. App users can view historical and projected health care spending data at the national level, state-by-state, on a per capita basis, or as a percent of GDP. The app also provides a detailed breakdown of how much the nation is spending on different aspects of the health care system, such as hospital care, physician services, prescription drugs, and health plan administrative costs, and how each of these components contributes to health care cost growth.
Health plans are leading efforts to reform the payment and delivery system by partnering with providers to reward quality care, promoting prevention and wellness, and helping patients and physicians manage chronic disease. These initiatives have demonstrated results in better health outcomes, improved patient safety, fewer preventable hospital readmissions, and lower health care costs.
Frequently Asked Questions
How will premiums be impacted?
Families and employers currently have broad flexibility to purchase the coverage that best meets their specific health care and financial needs. The impact the ACA will have on their premium depends entirely on the type and amount of coverage they have today. For example, a person who currently has comprehensive coverage through their employer will not see the same impact on their premium as someone with individual market coverage who has chosen to purchase a low-premium, high-deductible plan that provides coverage for catastrophic health care costs.
An analysis by Aon Hewitt on the impact of the ACA reforms that have already taken effect found that “the impact of these changes on health care cost is likely to be highly variable, with disparate impacts being seen across different lines of business and different health plans.”
Simply looking at the average increase does not tell the whole story about what these changes may mean for a particular individual or employer.
What about subsidies?
The ACA provides premium and cost-sharing subsidies to help low- and moderate-income Americans purchase insurance. Subsidies will clearly help many families pay for health care coverage, but subsidies will do nothing to bring down the actual cost of that coverage. Suggesting that they will is comparable to saying that Pell Grants reduce the cost of college tuition. Pell Grants enormously help families afford the high cost of education, but they do not lower tuition levels. Meanwhile, tuition prices soar.
Importantly, according to the CBO, millions of people are not eligible for subsidies and the amount of the subsidy declines significantly as incomes rise. The CBO states that more than 40 percent of people purchasing coverage in the individual market today would be ineligible for premium subsidies. Individuals with incomes between 250-300 percent of the federal poverty line (FPL) would receive subsidies sufficient to cover 42 percent of the cost of the second lowest-cost “silver” plan while those with incomes between 350-400 percent of the FPL would receive subsidies sufficient to cover just 13 percent of the premium. Moreover, due to how the subsidies are indexed, CBO states that over time “the shares of the premiums that the subsidies cover will decline.”
Doesn’t the individual mandate solve the problem of people waiting until they are sick to buy coverage?
Starting on January 1, 2014, individuals and families purchasing insurance in the individual market will be guaranteed coverage for pre-existing conditions, and their premiums cannot vary based on their gender or medical history. The ACA also includes a requirement that all Americans carry health insurance. The individual mandate is intended to reduce the incentive for people to wait to purchase coverage until after they are sick or injured, which would unfairly penalize everyone with insurance. Yet many experts question whether the coverage requirement will be sufficient to encourage younger and healthier people to take up coverage, especially when they are faced with significantly higher costs due to the health insurance tax, benefit mandates, and rating restrictions included in the ACA. In fact, the penalty for failing to carry insurance in 2014 will be as low as $95 – far below the cost of purchasing insurance.
What about health plan administrative costs and profits?
Health plans’ administrative costs and profits are sometimes cited as a reason why premiums are rising. The evidence clearly contradicts this unfounded claim. Health plan profits account for less than one penny out of every dollar spent on health care. Further, government data show that last year the portion of premiums allocated to health plans’ administrative costs was the second lowest in the last nine years, even though health plans have been incurring new compliance and regulatory costs related to the health care reform law.
Moreover, despite evidence that medical costs are driving premium increases, the ACA imposes a new arbitrary federal cap on health plans’ administrative costs and profits (referred to as the "Medical Loss Ratio") and establishes a new federal rate review process on top of existing state laws and regulations governing premiums. To make health care coverage more affordable for families and employers, the focus needs to be on all of the factors driving premium increases, including soaring medical costs, changes in the risk pool, and new taxes, benefit mandates and regulations.