Realizing Health Reform’s Potential

Using a budget-based approach to measuring affordability, this issue brief explores whether the subsidies available through the Affordable Care Act are enough to make health insurance affordable for low-income families. Drawing from the Consumer Expenditure Survey, the authors assess how much “room” people have in their budget, after paying for other necessities, to pay for health care needs. The results show that an overwhelming majority of households have room in their budgets for the necessities, health insurance premiums, and moderate levels of out-of-pocket costs established by the Affordable Care Act. Fewer than 10 percent of families above the federal poverty level do not have the resources to pay for premiums and typical out-of-pocket costs, even with the subsidies provided by the health reform law. Affordability remains a concern for some families with high out-of-pocket spending, suggesting that this is the major risk to insurance affordability. OVERVIEW The Patient Protection and Affordable Care Act (Affordable Care Act) includes massive new subsidies to health insurance that are designed to make coverage more affordable for low-income families in the United States. Will they work? Will the Affordable Care Act live up to its name? This study investigates that question using a budget-based approach to measuring affordability. Drawing from the Consumer Expenditure Survey, the nation’s largest representative survey of consumption expenditures, we assess how much “room” people have in their budget to pay for health care needs after paying for other necessities. We consider both premiums and out-of-pocket spending not covered by insurance, incorporating tax credits to premiums and cost-sharing subsidies for low-income populations. Using this method, we find that an overwhelming majority of households do have room in their budgets for the necessities, health insurance premiums, and moderate levels of out-of-pocket costs established by the Affordable Care Act. Fewer than 10 percent of families above the federal poverty level ($10,890 for an individual and $22,350 for a family of four) do not have the resources to pay for For more information about this study, please contact: Jonathan Gruber, Ph.D. Professor of Economics Massachusetts Institute of Technology [email protected] The mission of The Commonwealth Fund is to promote a high performance health care system. The Fund carries out this mandate by supporting independent research on health care issues and making grants to improve health care practice and policy. Support for this research was provided by The Commonwealth Fund. The views presented here are those of the authors and not necessarily those of The Commonwealth Fund or its directors, o!cers, or sta". To learn more about new publications when they become available, visit the Fund's Web site and register to receive e-mail alerts. Commonwealth Fund pub. 1493 Vol. 2 2 The Commonwealth Fund premiums and typical out-of-pocket costs even with the subsidies put in place by the health reform law. Affordability remains a concern, however, for those with high out-of-pocket spending—in particular, those with household incomes ranging from two to three times the poverty level. This suggests that the major risk to affordability under the Affordable Care Act comes from exposure to high out-of-pocket costs. BACKGROUND Perhaps the most controversial aspect of the Affordable Care Act is the “individual mandate,” the requirement that most people in the United States purchase health insurance coverage. Proponents of a mandate argue that requiring “free riders” to join the health insurance system will combat “adverse selection” in nongroup insurance markets—which occurs when a disproportionate number of sicker-than-average individuals enroll in a health plan and incur costs above what the insurer expected. Without a mechanism to prevent adverse selection, these proponents note, insurance market reform is close to impossible. Opponents of the mandate, meanwhile, argue that it infringes on individual freedoms, and that it might force some individuals to purchase insurance they cannot afford. The purpose of this brief is to address that last concern: Is health insurance “affordable” under the health reform law? Divining an answer to this question is difficult because ultimately the definition of affordability is a subjective one. In this brief, we focus on one source of data that can help shed light on the answer: information on the allocation of consumer budgets. In particular, we ask whether individuals spend so much of their resources on necessities that they cannot afford health insurance or the associated out-of-pocket medical spending. If a family can pare back its spending on non-necessities and use the resulting savings to pay for health insurance, then health insurance can be considered affordable. This is not the only possible definition of affordability, but it is a very useful reference for thinking about this critical question. There is one rule of thumb that should be emphasized when analyzing affordability for any broad class of citizens: an item is clearly not affordable if no one in a group can afford it. But, by the same token, it is wrong to say an item is unaffordable if some people in a group cannot afford it. In considering affordability for a group, it is important to establish a sensible benchmark whereby insurance is considered affordable if “most of ” a group can afford it. We will not define such a benchmark here, but it is important to keep in mind in reviewing the results below that goods may be considered affordable even if somewhat less than 100 percent of the group can afford them. AFFORDABILITY UNDER THE AFFORDABLE CARE ACT Under the Affordable Care Act, individuals may obtain health insurance from a variety of sources. Most people will remain enrolled in the employer-sponsored insurance that is the major source of coverage today. The lowest-income residents—those with incomes below 133 percent of the federal poverty level (FPL)—will be eligible for free public insurance through the Medicaid program. All others will be able to purchase insurance through the newly established state insurance exchanges. Through the insurance exchanges, employers and individuals will be able to choose among plans that have a federally determined essential-benefits package. While the exact details of this benefits package have yet to be specified, health plans in the insurance exchanges must have an “actuarial value” of at least 60 percent; that is, for the typical population, the insurance plan must cover, on average, 60 percent of the The vast majority of America’s poorer families can a!ord health insurance premiums and typical out-of-pocket health care costs under the schedules speci"ed by the A!ordable Care Act. Will the Affordable Care Act Make Health Insurance Affordable? 3 costs of insurance. In addition, the out-of-pocket limit for enrollee spending cannot exceed the regulated level for health savings accounts (roughly $6,000). The exchanges will feature four different levels of cost-sharing: bronze (covering an average of 60% of an enrollee’s medical costs), silver (70%), gold (80%), and platinum (90%). A major feature of the Affordable Care Act is assistance for low-income individuals purchasing insurance through the exchanges. Those with incomes from 133 percent to 399 percent of FPL are eligible for income-based tax credits to help defray the cost of purchasing insurance in the state exchanges. These families will pay the percentage of income specified in Exhibit 1 for the second-lowest-cost silver plan available in their area, and the government will pay any remaining costs above that level. Some low-income individuals are also eligible for cost-sharing subsidies that offset the outof-pocket costs in the silver plan. These cost-sharing subsidies raise the actuarial value of plans by income group, and lower the out-of-pocket limits on spending. A BUDGET-BASED APPROACH TO AFFORDABILITY Framework Our budget-based analysis involves setting a standard for expenditures on “necessities” and then assessing whether there is sufficient additional income to pay for health insurance and other health care needs. There are several questions inherent in this approach, which we address below and in greater detail in the Appendix. What are necessities? Which purchases are more necessary than health care or health insurance? This is inherently subjective and will by definition vary from family to family. The key challenge is where to draw the line. The Family Economic Self-Sufficiency Standard (FESS, described at www.sixstrategies.org) is an attempt to make such judgments. It considers necessary expenditures as: child care food housing taxes transportation miscellaneous (calculated as 10% of other costs). The calculation for “miscellaneous” is supported by research conducted in 2006 by the Greater Boston Interfaith Organization, which asked individuals about the cost of “other necessities.” The values reported were almost exactly 10 percent of the FESS categories of necessities. Another way to define necessities would be to add clothing, auto repairs and maintenance, and home repairs and maintenance to the list, instead of to the miscellaneous category. Analysis shows that the FESS definition is the more conservative of the two (it yields more problems with affordability than the alternative), so we have used it for our analyses. Exhibit 1. Premiums and Cost Sharing Subsidies Under the A"ordable Care Act Reported Income (% poverty level) Premium Subsidies (% of income cap) Actuarial Value Out-of-Pocket Maximum