The House Republicans have put forward the first of a three-part effort to repeal and replace the Affordable Care Act (ACA).1 In this first step, many (perhaps most) of the ACA benefit-related provisions are maintained while most of the taxes levied to fund the ACA are eliminated. Other changes include eliminating mandates, widening federal age ratings for premium bands, shifting federal support to tax credits and health savings accounts, and capping and indexing federal per capita Medicaid payments to the states beginning in 2020.
The Republican plan has met with a firestorm of opposition. This opposition adds to rising frustration with the health care system overall because:
In other words, the current system frustrates almost everyone at the same time that there is no consensus on how to improve it.
The lack of information, confusion, and uncertainty stems from the fact that over the past 55 years, health insurance — both public and private — has come to dominate a system that was once funded in large part out of pocket. In 1960, almost 50 percent of health care spending was out of pocket. Health insurance was relatively scarce, accounting for about 30 percent of all health care spending. Other third-party providers, public health programs, and various types of investment like research made up the remaining 20 percent of payments.3
Over time, health insurance has emerged as the almost all-encompassing funding source for American health care. Out-of-pocket spending has shrunk to almost nothing. In 2015, for example, health insurance accounted for 74 percent of all sources of health care spending while the out-of-pocket share declined to only 11 percent.
The rising health insurance share is due in large part to increasing access to higher-cost care, which prompts demand for broader and more costly health insurance coverage. The ACA was constructed on the foundations of a system for health care payments that was already in place (Chart 1).
We are all familiar with home insurance and auto insurance, where we insure against unpredictable/unavoidable events that can result in substantial financial loss. In the case of life insurance, death has a 100 percent probability but we all don’t die at the same time. Traditional insurance is a professionally managed savings program that invests money received in the form of premiums to provide a guarantee of payment when the insured event occurs.
What we call health care insurance is, by contrast, pooled current spending. Everyone who is covered pays into the health care system according to the requirements of the insurance plan(s) in which they participate. (There are 7.5 million people who have chosen to pay a penalty rather than be covered by the ACA.) The sponsoring insurance providers and public agencies contribute according to complicated formulas for coverage and premium support.
Virtually all payments into the system are distributed among the services provided by the system in the same calendar year.4 In the case of Medicare, revenues and expenses are in rough balance today, but the program will shortly begin to pay out more in benefits than it receives in revenues. The trust fund balance is projected to be exhausted in 2028.
In order to manage within this system, insurers merge to gain scale and negotiating power relative to providers. At the same time, providers themselves merge and combine to give them more monopoly power relative to insurers. Individuals, increasingly pushed to the sidelines, have no role in choosing among providers in terms of price (there are no prices), quantity, or quality of service beyond (possibly) selecting a health care plan.
The result has been to take a system that was 5 percent of GDP in 1960 to almost 18 percent today. Given an aging population and rising incomes, the health care sector has grown relative to the economy as a whole. In our January 2013 Chart of the Month, Health Care Spending: Bad but Solvable, we observed that per capita health care spending rises as per capita income rises.
The angst among American voters about repealing and replacing the ACA is not so much that anyone is enamored by the ACA as the fact that the Republicans are proposing that Americans move from one insurance system they don’t understand to another insurance system they don’t understand.
In either case, no individual household or family can absorb health care costs as they do for other types of household spending. The political blowback is based on genuine anxiety over burdens being shifted in a health care system that no one can afford.
If individuals assumed all the expenditures in the health care system unaided by business or government, costs would consume 40 percent of all wages and salaries. The health insurance portion alone, including both public and private insurance, would take up to 30 percent of wages and salaries (Chart 2).5
Every business and every level of government faces the affordability challenge.
Despite the appearance of stability, all providers, public and private, are angling for ways to push health care onto other sources of funding. Small private employers have either moved employees into private markets or more recently on to exchanges. Medicare has responded to its cost pressures and ACA requirements by increasing individual contributions through income-related premiums and deductibles, and reductions in coverage.
This cost shifting has been going on for decades. Since the expansion of public funding through Medicare between 1960 and 1980, health sector funding has been shared almost equally between public and private sources. Even the ACA used a plethora of rules and mechanisms to sustain the private share while increasing public funding.
The ACA and its Republican counterpart, the American Health Care Act, are only the latest chapters in the American health care challenge. The unique character of America’s health care system is its cultural bias toward private-sector delivery and choice combined with various public and private sources to support the costs.
In order to take the pressure off the funding system, health care needs to be completely revolutionized in ways that substantially increase geographic and service access. Examples from other countries point to important benefits from increasing the mix and density of community primary care centers, public primary care centers and hospitals, and substantial reduction in the costs of training health care professionals. Revisions in the licensure designed to increase the number of types of health care professionals and reduce the cost of training them would also have benefits.
How we get from where we are to where we need to be is far from clear. The first step would be to recognize that health insurance is neither access to health care nor insurance protection. We need much deeper restructuring of the delivery system that matches cost and value and increases the capacity of individual decision making along the way.
1 In his March 9 press conference, Speaker Paul Ryan indicated that Congressional action on repeal and replace would be followed by a second set of administrative actions by Secretary Tom Price to liberalize the insurance market and provide more choice among insurance policies. The third stage would be a series of legislative actions focused on true health care market reform, for example, permitting insurance shopping across state lines.
4 A small gap between total revenues into the system and expenditures is due to administrative costs assigned to public and private payers and a small amount of profits allowed to private insurers.
5 Other calculations like average health care spending per household and average premium per household would absorb 35.4 percent and 25.7 percent as a share of average household income in 2016, roughly in line with the percentage shown above.
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