The Temptuous Crisis Invitation

Policymakers would be wise to let the ACA fully develop before making substantial changes Greg Fann


During a past presidential campaign season, the then-U.S. president accepted an invitation to speak at a state university commencement service. The state’s governor was in attendance, which is now an interesting historical footnote. The president did not mention the word “health” or the word “care”—or any other words we typically associate with federal health action—but that day set the stage for a new national course on health policy.

After an election victory, the president’s charisma and persuasive skills, along with a new, friendly Congress, enabled him to forever change the American health policy framework. That University of Michigan commencement address became known as “The Great Society Speech,” which refers to a recurring phrase that described this president’s new national vision. Fourteen months later, at President Truman’s library in Independence, Missouri, then-President Lyndon Johnson enacted the Social Security Amendments of 1965, which instituted the U.S. Medicare and Medicaid programs.

While the events of the mid-1960s precede many of us, the narrative of a charismatic new president ushering in major changes to the American health care framework is familiar to us all—and primal to those of us who have practiced in the health insurance space during the last decade. Forty-eight years after the Great Society was formed, the former Michigan governor’s son was the Republican nominee aiming to oust the Democratic president who had just signed into law the most significant health policy since Medicare and Medicaid. But former President Barack Obama was re-elected, and the new markets developed from the law are “stronger than ever.”1 While at record popularity2 among the general public, the legislation is attacked incessantly from both sides of the political spectrum, and its 10th anniversary recently was “celebrated alone.”3

Yesterday’s Pre-ACA Environment

Between 1965 and 2010, there was little alteration to the overall structure of the American health care system. Expectedly, new federal laws were passed to adjust to a changing environment, pharmaceutical drugs became a Medicare benefit, and privacy/technology rules were updated; but the core structure of how Americans receive health coverage did not change for 45 years.

At the turn of the century, Medicare and Medicaid were well-established as entrenched parts of the national health care landscape. When the Affordable Care Act (ACA) was passed in 2010, the impact of the 1965 law was understood, markets had settled, and the weak points and concerns in the overall U.S. health care structure were recognized. With goals similar to the Medicare and Medicaid programs, the ACA dramatically reduced the nation’s uninsured rate by targeting specific population groups with new federal financial assistance. Medicare provided care for the elderly, Medicaid eligibility was based on specific aid categories and income level, and the ACA aimed to fill in conspicuous gaps, subsidizing low- to middle-income individuals and those with chronic conditions.

I often have described the requirement for catalyzing major federal health legislation as a “critical mass of people without solutions in the marketplace of last resort.”4 The 1965 and 2010 laws directly targeted certain populations where a critical mass of uninsured people existed. More recent proposals to change the U.S. health care laws have been haphazard and lack a direct connection between policy strategy and targeted population groups. In some cases, they interfere with existing programs without a clear intention of addressing an understood problem. Also, they do not skillfully complement current law, as the impact of current law is still developing and is quite fluid.

It took many years for Medicare and Medicaid programs to take root. Every state has a Medicaid program today, but Arizona did not adopt Medicaid until 1982—17 years after it originated. When the ACA was passed in 2010, it was clear where the cracks in the system were. The Medicare and Medicaid programs had developed, and the populations they served were well-recognized. Among the nonpoor, nonelderly population not served by government programs and employer-sponsored health benefits, the level of health insurance premiums was acknowledged as problematic, and the uninsured rate was a growing concern. The 2010 reform legislation clearly was designed to fill a gap where a large population group was uninsured. While the ACA was contentious, partisan and ultimately not as robust as anticipated, it was passed with a clear understanding of the existing challenges and the population groups who would benefit from it.

A Little Patience

Ever since the ink dried on the ACA, there has been nonstop discussion about the next federal law to either amend or replace it. Fittingly, a recent ACA-related Strategic Initiative of the Society of Actuaries (SOA) Health Section Council reflected the temporal sentiment and was titled “Commercial Healthcare. What’s Next?”5 As the law is complicated and has a phased-in approach, its real implications will not be fully known for some time. It can be fairly stated that some among us believe “we have to replace the bill before we find out what’s in it.” Perhaps we would be wise to employ a little patience here.

I am old enough to remember going to the drugstore, dropping off camera film, and returning a week later to wait in line and pick up photographs. Technology now saves us a lot of time and trouble. In the 1970s, “instant cameras,” led by the Polaroid corporation, became popular—but they were not “instant” like the pictures on your phone today. They were more like the slowest printer in your office, the one you think might print faster if you pull on the paper to help it along.

With instant cameras, photographs exited the camera like paper from a printer, but photographers had to then patiently wait for the film to develop. How impatient were we? It’s hard to measure, but anecdotally, three decades later, long after the instant camera technology had become antiquated and forgotten, the fourth most popular song of the 2000s included the lyrics “shake it like a Polaroid picture.” The reference to the impatient impulse, seemingly with a false hope of speeding up film development, stirred the mostly disremembered, bankrupt-inflicted Polaroid to arise and respond that “shaking or waving can actually damage the image.”6

Before we rewrite, amend or shake up the ACA, we need to let the law develop so we can fully appreciate its successes and clearly understand where its shortcomings are. Many of the goals that have been proposed—expanded premium subsidies, for example—are placidly being realized7 without legislative adjustments to the law. Like many of the law’s unique mathematical dynamics, it is unclear how well the catalyzing dynamics and progressive market improvements are understood. In the next section of this article, some potential market disruptions to key ACA mechanics are explored, all of which support the general theme that the best way to elude a health insurance crisis is to avoid starting one.

The ACA Jungle

The ACA individual market is convoluted8 and elusive.9 It is not well understood by many observers because the consumer premium dynamics are so dissimilar to other health insurance markets. To complicate matters, political overtones hover over the marketplace, and the directional results of policy implications often have been the opposite of what many politically inclined10 stakeholders expected.

After initial legal and operational challenges were resolved, ACA markets were struggling11 with financial and market realities in 2016. The election of President Donald Trump signaled expectation of a new direction, but a lack12 of a cohesive strategy precluded serious legislative repeal efforts. Rather, President Trump has put his fingerprints on the ACA through executive action, and the results are being phased in at different speeds13 in each of the individual state markets.

The most significant action occurred in October 2017 and set the ACA on a new course. After a legal recommendation from the Department of Justice, President Trump stopped reimbursing insurers for cost-sharing reduction (CSR) payments; insurers were, however, still responsible for these payments. The funds were never appropriated by Congress, and a court had ruled they were illegal—although they were paid in the later months of the Obama presidency and the first nine months by the Trump administration.

The impact of this decision is not fully understood today, and it was less understood at the time. In August 2017, I noted14 that the action would paradoxically result in benefits to low-income consumers, as insurers would respond with higher silver premiums, upon which federal premium subsidies are based. A few weeks later, the Congressional Budget Office (CBO) reached a similar conclusion.15 However, the CBO also predicted that insurers’ understanding of the implications of the policy would not be immediate and that there would be a delayed market response.

The ultimate result of the CSR decision is the calibration of premium subsidies at a higher silver level, generally believed to be between gold and platinum. In 2018, the CBO projected that silver premiums would be higher than gold premiums “by the end of the coming decade.”16 Between 10 and 15 states already have reached that equilibrium,17 and this number should gradually grow each year. Concurrently, financial results have dramatically improved,18 insurers have returned to ACA markets,19 and the law’s least popular provision20 has been stricken. Sharply increasing premium rates suddenly have flattened,21 and consumer popularity is at a record high (as mentioned previously), with polling responses indicating “more people have been helped and fewer have been harmed” by the law since 2016.22

While President Trump’s policy has resulted in a makeover23 of the law, it is not clear that everyone is aware of the new premium relationship (silver higher than gold), and future policy guidance may not be informed by the developing market improvements. Joe Biden’s presidential campaign website states “the Biden Plan will increase the size of tax credits by calculating them based on the cost of a more generous gold plan, rather than a silver plan.”24 President Trump’s campaign website25 speaks more of achievements than future plans, in title and in substance, yet it does not reference the consequential premium dynamic changes. His first-term efforts have been primarily regulatory in nature, adding state flexibility26 and leaving much to be implemented by individual states27 and the marketplace.28 The president does not propose new legislation, something that causes chagrin among commentators who demand constant government manipulation to federal health policy.

In addition to premium subsidy adjustments, the other two prominent proposed alterations to ACA markets have been a “public option” and lowering the age of Medicare eligibility. The “public option” is a vague signal of larger government involvement without identification of a specific problem29 and without a stated strategy of providing solutions to a targeted group. Lowering the Medicare age would have an unanticipated impact on ACA premium rates.

Unless carefully tailored, a public option could unintentionally compete with ACA exchanges or disrupt30 the premium structure for low-income enrollees by compressing31 premium subsidies.32 Contrarily, President Obama’s call for a public option in 2016 was limited to certain geographic regions and intended to target a specific problem—a lack of private plans. He was clear that “Congress should continue its work to ensure all Americans have access to affordable health coverage by adding a public option to the exchange marketplace in counties lacking competition.”33 As regional gaps have been filled in the improving ACA environment, today’s public option discussion is not a practical solution aimed at filling market gaps. Rather, it is philosophical and promoted by many who may not understand34 the disruptive dynamics it could impose on ACA markets.

On the surface, a proposal to lower the Medicare eligibility age appears to have several benefits. A lower Medicare age would lower the average age of both the Medicare population and the residual individual market population. As health care costs increase with age, this intuitively suggests a cost reduction in both markets. The reality is that the rating rules and premium subsidy dynamics have attracted a broad older population and a less healthy younger population. A reduction in the Medicare eligibility age would increase35 ACA premium rates and essentially provide a non-ACA option to a population that was best served by the ACA, rather than complement the ACA by addressing one of the law’s problematic gaps.

Many commentators believe the largest ACA concern is the “subsidy cliff,” which results in people with incomes above 400 percent of the federal poverty level (FPL) paying high “community-rated” premiums rather than net premiums based on an income-based formula. While some stakeholders have advocated for federal legislative adjustments, this concern is being addressed without federal legislation:

  • California has added state-based subsidies up to 600 percent of FPL. Reinsurance waivers have reduced premium rates in some states.
  • Section 133236 allows states to redistribute federal premium subsidy dollars.
  • Other states have adopted measures that are mostly performative.37
  • All states still have opportunities38 to optimize their markets.

Lastly, the increasing39 level of premium subsidies should attract a larger segment of healthy lower-income enrollees and lead to lower premiums through a healthier risk pool. Rewriting federal legislation before allowing the law to develop is counterproductive. Current gaps in the ACA are being filled, and we will be able to develop better legislative policy once we have a clearer understanding of the permanent gaps in ACA policy.

Last month, the air conditioner stopped working in a rental house that I own. The refrigerant had leaked out and needed to be replaced. As refrigerant is expensive, my request was naturally that the leak be fixed prior to replacing the refrigerant. I was told that it was impossible to know where the leak was, and the only solution was to replace the refrigerant, simultaneously add a colored dye, and let it leak again to identify the problem location. At the time of this writing, I have an imperfect air conditioning system with a known problem, but I am waiting to pinpoint where the problem is and how big it is before wasting time and money to execute a wrong correction. This is where we are with ACA markets today, although I am not sure the air conditioner technician fully appreciated my ACA analogy.

November Rain

Presidential elections raise the pressure for new solutions. Even if the best idea is to leave things alone, campaigns are designed to attract attention and are based on new ideas and change. The rains fall on current law before every quadrennial November. Each 2020 Democratic primary candidate had a plan that was mathematically disruptive to the ACA, even those who claimed to “build upon it.” President Trump is not championing a legislative replacement for the ACA, which leads some commentators to hypothetically build one for him,40 as if letting current law develop is outside the realm of policy discussion. With a little shift in focus, those who are accustomed to writing stories about new legislative solutions might find there is much more to write about the implications of a law being left alone.

Without explicitly promoting current law or disparaging other ideas, I believe it is generally wise to consider understanding the dynamics of current law before making wholesale changes. It takes significant time for health policy to be implemented. If we do not let the film develop, we do not have a clear view of the image.

The ACA was passed in 2010, but the centerpiece of the legislation—reformed individual and small-group markets—was not implemented until 2014. The first three years were a development period with temporary risk-mitigation41 programs. A makeover42 began in 2018, which will reconstruct ACA markets through the end of the 2020s.

Today’s proposed legislative changes are mostly philosophical directional signals preceding a presidential election, not forensic identification of specific ACA concerns with targeted solutions to address them. My perspective is not new. On a podcast in March 2019 when I was asked if I thought election awareness would create more changes at the federal level, I responded: “If you look at the market right now, people like it more … premiums are down in 2019 … things are happy … there’s more opportunity for states. The best thing for the federal government to do right now is just ‘do nothing’ and leave things alone. Of course, you’re not going to have a presidential candidate with that campaign platform.”43

A common refrain with health actuaries is that the ACA brought many “unknowns.” Many things did not materialize as expected: Nationwide enrollment is about half of what was projected,44 and the age distribution is older than architects intended. Our understanding of policy implications is informed retrospectively by observing the results of policy.

The ACA was designed specifically to complement existing law. Eligibility for marketplace subsidies requires not being eligible for Medicare, Medicaid or affordable group coverage. We had a known framework. Constant manipulation of existing law disables our ability to understand current law’s true implications. It is constant crisis-like behavior when there is no crisis that may in fact create a crisis.

It is tempting to shake the picture and rush the development. But if we wait until it develops, we will have a better sense of what is working and where we need to focus our corrections. If policymakers are impatient and want to know how a law is working, they are better advised to ask an actuary than to promote specific proposals without deep technical examination. An invitation to initiate a crisis is always open; we would be wise to avoid the temptation.

Federal legislation should be understood as not providing solutions alone—it provides a framework to create solutions. Many stakeholders, including federal regulators, states, insurers and consumers, respond to the legislation. This takes time. One of the key levers in the ACA was Section 1332, which allowed states to waive certain ACA rules and innovate within limits. The initial regulatory guidance was not promulgated until December 2015, and this provision did not become effective until 2017. In October 2018, the Trump administration made the guidance more flexible. There are many opportunities to improve markets, but this is one of many areas that has not been fully utilized yet.

In private discussions, I have learned that many states are reticent to take major steps, whether it is Section 1332 or market optimization through focused rate review,45 because they think the ACA environment is temporary and improvement actions may be wasted effort. An environment of constantly changing and reactive legislation inhibits opportunities for downstream optimization of markets. Policy uncertainty has led to stagnation in ACA markets. This is unnecessarily unfortunate because major legislation has not been on the horizon for a long time. Congressional Republicans did not have the repeal appetite that was anticipated, and Democratic ideas would take time to implement. ACA markets will continue to improve if allowed to do so, but the national pace would be more rapid without the threat of November rain.

A Warm, Safe Place

The temptation of political leaders to enact large changes in laws is always present. No one aspires to be the trailblazer who preserves the status quo. It is important that we remind them that refraining from constant manipulation is not an acknowledgment that current law is the final solution. Policy tranquility allows downstream stakeholders to take appropriate steps to optimize existing markets46 before they are reengineered. In my personal experience, states have been reticent to take appropriate action because they have viewed current law as temporal due to all the noise in Washington, D.C.

While it has become fashionable sport to malign members of Congress, they are generally a bright and talented group of people with prior success in various professions. However, the complexity of insurance mechanics is generally not their specialty. While tempting, premature moves are often misguided, as policy implications are sometimes misunderstood, and markets are put at greater risks.

With specific regard to the ACA, there are many aspects of the current law that are either not yet known or misconstrued.47 Until we have refined our understanding and have a clear view of the gaps that cannot be filled by our current law, it is best to resist the temptation and thereby avoid starting a crisis.

The markets have improved each year since 2016 as consumer popularity has grown. Insurers have returned to marketplaces in 2019 and 2020 after a three-year exodus. The concern I expressed last year, unsurprisingly, was not that ACA markets would not improve if left alone, but that we would not see the progression of market improvement and would grow impatient, “prompting lawmakers unfamiliar with the market mechanics to prematurely stop the gold rush.”48

There are untapped opportunities for states, insurers, employers and consumers in ACA markets. These opportunities require education,49 effort and implementation, which in turn require time and patience. Expectations of legislative stability is crucial. Downstream stakeholders should be assured that there is safety and security in investing resources to improve ACA markets. The ACA should be left alone until its makeover is complete—not because the law is good or bad, but because any legislative adjustments would be based upon nontechnical professionals’ surface-level understanding of a convoluted, fluid law, which is a grossly inadequate basis for restructuring national health policy.

Greg Fann, FSA, FCA, MAAA, is consulting actuary at Axene Health Partners LLC in Temecula, California.

Copyright © 2020 by the Society of Actuaries, Chicago, Illinois.