3.5. Private health insurance

This section focuses mainly on employer-group insurance but also covers individual insurance. It begins with a discussion of the market role and size of the private insurance sector, and then discusses market structure, market conduct and selected public policy issues.

3.5.1. Market role and size

As shown earlier in Table3.5, 173 million Americans were covered by private insurance in 2017, 87% (151 million) of whom had employer-sponsored coverage, with the remainder purchasing it individually. (By comparison, total enrolment in Medicare was about 59 million and in Medicaid about 74 million.) In spite of these numbers, expenditures on private health insurance are lower than those of government-sponsored programmes. This is because, in serving a working-age population, per capita expenditures tend to be much lower than for Medicare, which serves the over-65 population and disabled people, and for Medicaid, which, while it does serve younger people, also provides nursing home care to seniors and has disabled people among its beneficiaries.

Table3.5

The 2012 data patterns illustrate several barriers that certain Americans previously faced in obtaining employer-sponsored private coverage. Firstly, it is necessary to be employed or be a family member of someone employed. The labour force participation rate in the United States was about 63% in 2018, although many of those not in the labour force can receive coverage from a family member. Secondly, at that time employers were not required to offer coverage and even now small employers are not required to do so. In 2017 just 53% of firms with 3–199 employees offered coverage, compared to 99% with 200 employees or more (Kaiser Family Foundation, 2017i). Thirdly, if coverage was offered, the employee had to be eligible for it. For example, part-time employees (often young adults) usually are not offered coverage, although this varies by firm size. In 2017 offer rates for part-time employees at firms with fewer than 200 employees were 12%, but they were 62% for those with 5000 or more workers (Kaiser Family Foundation, 2017i). Finally, even if eligible, the employee has to be willing to pay the employee’s share of the premiums, which, as noted below, can be considerable. So-called “take-up rates” – defined as the percentage of employees that are offered coverage by their employers who actually purchase it – average around 75–80% (Kaiser Family Foundation and Health Research and Educational Trust, 2010). To reiterate, all four of the above are necessary for a person to obtain employer-sponsored coverage.

It is the people who are better off economically who are able to meet the four conditions mentioned above. They are more likely to be employed or have a family member who is in a firm that offers coverage, have an employment arrangement (e.g. full-time work) that results in coverage, and be able to afford their share of premiums. To illustrate, less than 40% of those between 100 and 250% of the poverty level had employer coverage in 2014, compared to about three quarters of those with higher incomes.

Individuals and families without an entry into the employer insurance market, and who are not eligible for Medicare and Medicaid, often seek coverage individually. Prior to implementation of the major parts of the ACA, individual coverage had several disadvantages over employer-group coverage and therefore would normally have been purchased only if the alternative was unavailable. It was almost never subsidized; administrative costs tended to be high (25–40%); health examinations were often necessary; cost-sharing requirements were, on average, higher; fewer types of services tended to be covered (e.g. maternity care may have been excluded); and frequently the insured person was put in an actuarial group characterized by poor or uncertain health (Whitmore et al., 2011). As noted elsewhere in this book, the ACA changed much of this: it provides significant subsidies, prohibits high administrative costs, has no health restrictions on enrolment, and requires that people of the same age be charged the same premiums regardless of health status.

Finally, a number of factors drive the demand for coverage, including the size of the employed population and subsidies available to employers to provide coverage. (The ACA provides some subsidies to employers with fewer than 25 full-time employees when average wages are less than US$ 50 000.) One of the main drivers is the cost of insurance. As health care costs rise, insurance becomes more costly to both the employer and the employee, depressing both offer and take-up rates. Moreover, coverage becomes less comprehensive through increases in patient cost-sharing requirements. Blavin et al. (2014) concluded that declines in employer-sponsored coverage are due almost entirely to the fact that per capita health spending rose more quickly than personal income.

Another driver is the changing nature of employment in the United States and, in particular, the gradual decline in manufacturing jobs and the increase in retail jobs – as well as the move from larger to smaller employers and full-time to part-time jobs. One result was fewer workers in unions; traditionally, those in unions are more likely to have health insurance (Swartz, 2006).

3.5.2. Market structure

Some employers, particularly larger ones, offer a number of choices of health insurance products to their employees, while small employers tend to offer far fewer choices. For federal government employees, however, there can be dozens of choices. Generally, firms hold an open enrolment period prior to the beginning of the year. In the United States the term “open enrolment” refers to the period of time when employees can switch to a different plan irrespective of their health history or status.

Among all firms that offered health benefits in 2017, 81% offered one plan type; 83% of small firms (fewer than 200 workers) offered only one plan type, compared to 45% of large firms with more than 200 workers (Fig3.8). Among large firms, 42% offered two plan types, and 13% offered three or more, significantly greater choice than offered to employees at small firms (Kaiser Family Foundation, 2017i). The most common plan type offered by employers is a PPO. Among firms with 200 or more employees that offered health insurance to their employees in 2017, approximately 80% offered one or more PPO choices, compared to about 32% that offered one or more HMO plans. In recent years high-deductibles plans with savings options (HSAs) have become much more prevalent, with about 60% of firms offering them. Among all covered workers in 2017, 49% were enrolled in PPOs, 16% in HMOs, 6% in a hybrid called point-of-service plans, and 29% in high-deductible plans (Kaiser Family Foundation, 2017i).

Fig3.8

The biggest change in recent years has been the relatively rapid rise of high-deductible plans with a savings option, many of which are classified as Health Savings Accounts (HSAs) (see Fig3.9). Legislation encouraging their adoption was approved during the administration of President George W. Bush. In HSAs, the policyholder agrees to purchase insurance with a high deductible (currently averaging about US$ 2000 annually for individual coverage and twice that for family coverage). Premium contributions can be made by the individual and/or employer. These contributions are tax deductible, can accumulate year to year if unspent and therefore can be used for future medical expense. They can be withdrawn to pay for eligible medical care.[9]

Fig3.9

Advocates claim that they encourage people to purchase coverage that protects against major rather than minor expenses, the latter of which need not be insured. (All HDHPs provide first-dollar coverage for specifically defined preventive services, and recent adjustments have been made by the IRS to define additional services for chronic disease management that may also qualify for first-dollar coverage; Council for Affordable Health Insurance, 2009; Truong, 2019). This, in turn, makes their premiums lower and therefore more affordable. Detractors suggest that they favour the young, healthy and wealthy (who can afford the large deductible). While evidence is conflicting, most studies have found that HSAs, HDHPs and other kinds of “consumer directed” health insurance products experience favourable selection (Lo Sasso, Shah & Frogner, 2010).[10] This is problematic in two ways. Firstly, those whose behaviour could be most affected by the cost-containment potential of HSAs will be less likely to enrol in them. And secondly, to the extent that they experience favourable selection, other insurers will obtain a less healthy mix of patients, although this behaviour may be somewhat mitigated by risk adjustment in the individual and small group markets.

As employment is the cornerstone for US health care, employers generally subsidize not only the employees’ coverage but also that of family members. Often, however, the subsidy for family members is smaller. One of the earliest provisions of the ACA, which went into effect in 2011, was to require employers offering this coverage to include children up to the age of 26 (rather than the previous limit, age 23).

Employers finance health insurance in different ways and this does not change markedly with the passage of the ACA. They collect funds directly or indirectly from employees through the premiums they charge, and augment these funds with their own to pay for health care. This is typically done in one of two ways.

Firstly, employers may act as direct agents for their employees and seek out health insurance coverage for those whom they deem eligible. This places the risk on the insurer if health expenses are higher than anticipated. In this case employers pay for all or part of the cost of the insurance policy they purchase for their employees and pass on the remainder, in the form of premiums, to employees.

Secondly, employers may choose to self-insure. This means that they pay for the health care for their employees and purchase services for them directly, rather than purchasing a health insurance policy from a health insurance company. In addition, however, they contract with an insurance company to carry out administrative tasks such as claims processing, provider payment, management of provider networks and utilization management. In that role insurers are often called “third party administrators” providing “administrative services only”. Rather than bear the entire risk, many of them also purchase reinsurance or some other form of stop-loss coverage that limits the employer’s liability if, in a particular year, employer medical expenses are higher than anticipated. In 2010 about 59% of those with employer-based insurance were in self-insured plans (Employee Benefit Research Institute, 2009.)

There are several advantages to self-insuring: it makes the firm less subject to state mandates (e.g. covering particular services) because self-insured firms are subject to the federal ERISA rather than state regulations; state taxes (on premiums and state high-risk insurance pools) are typically lower; premiums do not have to be paid in advance; and with less money going to insurance companies, administrative expenses are lower. The main determinant of self-insuring is firm size, which relates to how well a firm could afford unexpected medical losses and take advantage of the laws of large numbers. While only 12% of firms with 3–199 employees are self-insured, it is true of 88% of those with 5000 or more employees. The self-insurance arrangement is an unusual feature of the US system: much of the work of US insurers does not entail taking on much risk but rather is purely administrative. Employers reimburse insurers for this administrative work even when they are self-insured.

Small businesses (up to 50 or 100 employees) have a much harder time, compared with large businesses, in providing health insurance for their employees at reasonable cost. It is harder to pool funds and reduce risks because with fewer workers the chance of incurring very high costs when a few employees fall ill is very great. Moreover, firms of that size usually do not have the purchasing power to effectively negotiate such arrangements. For this reason, 28 states in the United States had organized small business purchasing pools by 2009, many of which are no longer in existence. This type of pooling of small groups reduces the insurer’s risk and lowers the costs of insurance to small businesses, making it easier for them to provide insurance for their employees.

To some extent these pools were supplanted by the ACA, and in particular, the Consumer Operated and Oriented Plan (CO-OP) programme. The programme, funded by the distribution of US$ 6 billion from the federal government, was earmarked to go to member-run, non-profit organizations offering qualified health plans in both the individual and small group markets (NCSL, 2016). Most of these CO-OP programmes failed in the first two years due to a host of problems, including less funding than was originally promised, adverse selection and lack of enrolment because premiums were higher than alternative options. Recent trends suggest that the employers in the small group market have responded to changes to risk-pooling under the ACA by self-insuring. “Lower-risk” small firms may be more likely to self-insure now that the ACA has imposed community rating to pool risk in the small-group market (Trish & Herring, 2018).

As in the small group market, pooling fund and reducing risk in the individual market have been difficult in the United States. Prior to the ACA, most states allowed insurers in the individual market to underwrite each applicant separately, using information about their medical history and age. Insurers in the individual market were therefore able to select whom to cover and at what price, leaving many high-risk individuals without adequate or affordable coverage (Baicker & Dow, 2009). Such behaviour was no longer allowed when relevant ACA provisions went into effect in 2014.

This may change going forward, however, with the repeal of the ACA’s individual mandate and the Trump Administration’s policy to allow insurers to sell non-ACA conformant “short-term” plans for up to 36 months, as discussed in Chapter 6.

Market share in health insurance is dominated by larger firms that generally market nationally. The top six firms (UnitedHealth Group, Anthem, Humana, HealthCare Services Group, Aetna and Centene) controlled 43% of the health insurance marketing in 2016 (Statista, 2018), but market share continues to shift. In 2017 the top six firms based on the number of enrollees were UnitedHealth Group, Anthem, Aetna, Cigna, Humana and Centene (Forbes, 2018). A study by the AMA concluded that 73% of geographical markets are highly concentrated, as well as 96% of HMO markets and 88% of PPO markets (AMA, 2018), mainly as a result of mergers and acquisitions.

Typically, premiums are shared between employers and employees. In 2018 employers paid an average of 82% of premiums for single coverage and 71% for family coverage, with employees paying the remaining amount (Kaiser Family Foundation, 2018b).

3.5.3. Market conduct

Nearly all health insurance products in the United States provide benefits in the form of services rather than cash. Although there are some policies that provide certain dollar benefits per day in hospital or if a disease such as cancer is contracted, they are fringe products that constitute only a tiny fraction of the market.

Premium rating systems

There are, in general, two ways in which insurers price their products: experience rating and community rating. Under experience rating, which is the most common technique used in the large group market, insurers charge employers on the basis of past cost experiences or, when data are lacking, on predicted expenditures. In contrast, community rating entails charging the same amount to all groups. Sometimes community rating is adjusted so that, for example, everyone of a particular age is charged the same amount. As discussed in section 2.1.2, when commercial insurers entered the health insurance marketplace after the Second World War, they were able to use experience rating to attract younger and healthier groups from Blue Cross and Blue Shield plans, which were then forced to move to experience rating.

Many states require that insurers price their products within a rate band in the small employer market, for example around plus or minus 25% of the average premium charged (Families USA, 2011). Insurers employ actuaries to determine what rates should be charged. While past health claims are perhaps the most important determinant of rates, other factors include the characteristics of the employees, such as their age, gender, occupation, region where living and health habits. Since health insurance is a competitive business, the premiums charged by insurers are bound by competitive pressures. Other elements in the premium calculation besides expected medical expenses are a “risk premium” to account for uncertainty on the part of the insurers, administrative expenses and profits. One of the main ways in which premiums can be controlled is to employ larger co-payments or limitations on services covered. These topics are discussed below.

Until 2014, in the individual and small group insurance markets, premiums were generally experience rated. Each individual went through medical underwriting to assess their risks. Under the ACA, the marketplaces combined, with the individual mandate to purchase insurance (the mandate being repealed effective 2019), are intended to reduce adverse selection problems in the individual and small group market by requiring plans selling in marketplaces to use community rating (older individuals can be charged up to three times more than younger but differences within age cohorts are prohibited), rather than experience rating, and by increasing risk pooling to a far greater extent than has been the case in the past in the United States. Marketplaces also reduced the need for individuals to purchase insurance through agents or brokers, whose fees can absorb 20% of the total premium during the first year of enrolment.

Risk adjustment

Payments to insurers and health plans may be adjusted for differences in the risk characteristics of the population enrolled in coverage. Risk adjustment is designed to compensate insurers for the risks they assume and reduce their incentive to select enrollees based on risk, particularly when insurers are constrained in their ability to vary premiums by enrollee health status. Among employer-based plans, risk adjustment can be used to modify payments to insurers when firms offer multiple plan options. If, for example, a firm offers both low-cost and high-cost sharing plans, high utilizers of health care may opt to enrol in the low-cost sharing plan. The low-cost sharing plan would have higher premiums than the high-cost sharing plan due to differences in the actuarial values between them. However, the premiums may not reflect the full effect of sicker employees enrolling in the low-cost sharing plan. Risk adjustment can therefore be used by a health plan to reallocate funds to adjust for selection in cases where premiums reflect differences in plan design but are unable to fully account for adverse selection (American Academy of Actuaries, 2010). However, despite evidence of adverse selection when employers offer multiple plans, formal risk adjustment is rare in the employer-sponsored market. Possible reasons for the slow rate of adoption posited include: lack of available data; concern by firms about the validity of risk-adjustment models; and the prevalence of other mechanisms attempting to address biased selection in the market (Ellis, 2001). Unlike the employer-sponsored market, risk adjustment payments are quite common among US public purchasers. The CMS uses risk adjustment in Medicare Advantage plans and Medicare Part D drug plans. Many state Medicaid programmes also make use of risk adjustment in payments to managed care organizations. Finally, the ACA uses risk adjustment in a variety of ways, including in the individual and small group markets (Kautter, Pope & Keenan, 2014).

Premiums and cost-sharing

There are significant user charges associated with private insurance. Beginning with premiums, the average cost of employer-based single coverage was US$ 7188 in 2019, 17% of which, or US$ 1242, was paid by the employee. For family coverage (generally, employee, spouse and one or more children) 29%, or US$ 6015, of the total cost of US$ 20 576 was paid by the worker. The percentage of family coverage paid by the employee has been stable for nearly 10 years for individual coverage. High-deductible plans with savings options, not surprisingly, have lower premiums than other plan types – about 10–12% less than HMOs and PPOs (Kaiser Family Foundation, 2017i, 2019c).

In recent years premiums paid by employees and their families have risen somewhat faster than earnings and overall inflation. As shown in Fig3.10, from 2000 to 2005 premiums rose far faster than earnings and inflation (Kaiser Family Foundation, 2017i). Since that time, with the exception of a single year (2011), premium increases have exceeded inflation by one or two percentage points, with worker earnings generally tracking overall inflation fairly closely except in the recessionary year of 2009.

Fig3.10

Fig3.11 shows two bands of lines. The steeper set of lines indicates how family premiums and worker contributions to these premiums have changed since 2000, while the much shallower lines show changes in workers’ earning and overall inflation. Over this 20-year span worker contributions to health insurance premiums have climbed by 3.5-fold while their earnings have risen only about 70% (Kaiser Family Foundation, 2017i, 2019c).

Fig3.11

Employer plans also employ cost-sharing requirements, which also have been rising considerably over time (in part as a way to reduce premium increases). Beginning with annual deductibles and co-payments, among PPOs – the most common plan in use – 85% required a deductible in 2019, and among those, the average amount was US$ 1655 for individual coverage. Interestingly, deductibles in firms with 3–199 employees (US$ 2271) were over 60% higher than those in large firms (US$ 1412) (Fig3.12). The percentage of employees in PPOs with a US$ 1000 deductible rose from 34% to 47% from 2012 to 2019. Similarly, the median co-payment for a physician office visit was US$ 25 in 2019, up from US$ 20 10 years earlier (Kaiser Family Foundation, 2017i, 2019c).

Fig3.12

As is the case in many high-income countries, there are often substantial co-payments for prescription drugs. In most employer-sponsored plans, there are multiple “tiers”, each of which has its own cost-sharing requirements. Their purpose is mainly to encourage cheaper drugs, particularly generics, the use of which has grown substantially in recent years (see section 3.7). It is difficult to summarize average cost-sharing requirements because sometimes coinsurance is used, and in other cases co-payments. Co-payments tend to be more common. In 2017 average co-payments were US$ 11 for drugs in the first tier, US$ 33 for the second tier, US$ 59 for the third tier and US$ 110 when there was a fourth tier (Kaiser Family Foundation, 2017i, 2018b, 2019c). (Tier 1 drugs are usually defined as lower cost generic drugs; Tier 2, medium cost generic and some brand-name drugs; Tier 3, higher cost brand-name drugs; and Tier 4, specialty drugs.)

One way in which employer coverage tends to be more generous than Medicare’s is that there is usually a limit on annual OOP expenditures. Almost all (98%) of employers with coverage are in plans with an annual OOP maximum. In 2017 the median worker had an annual maximum of about US$ 3000. The actual situation is more complicated, however. Many plans offered by firms vary in their calculation of OOP costs and cost-sharing, thus there is wide variation in spending limits and how expenditures are counted towards an annual OOP maximum. Not surprisingly, for high-deductible plans it was much higher, with a medium of about US$ 4000 (Kaiser Family Foundation, 2017i).

Services covered

As with most aspects of employer-sponsored coverage, it is difficult to generalize about particular service types. Prior to implementation in 2014 of several key coverage requirements under the ACA, states were primarily responsible for determining which services must be covered, and many employers were not subject to these rules if they were self-insured. A key component of the ACA’s policy strategies to increase access to care includes its requirement that all private health plans must cover at minimum a range of preventive services without imposing cost-sharing, a requirement applicable even to firms in the large group market and self-insured firms that employ third-party firms (such as insurers) to perform administrative and payment functions. As of 2014, the ACA also requires all insurers in the individual and small-group markets to provide a minimum set of “essential health benefits”, but employers who self-insure are not currently required to offer these benefits, subject only to state requirements in this area, though many choose to do so (Kaiser Family Foundation, 2020a).

National data are scarce regarding how common it is for particular services to be covered by employer-sponsored plans. In general, though, nearly all employees receive coverage for hospital and doctors’ office visits and prescription drugs, with many firms also offering access to supplemental dental, vision, long-term care and critical illness insurance, though not all firms contribute to the costs of these supplemental plans (Claxton et al., 2019). It should be kept in mind that there are often limits on coverage; deductibles and co-payments are discussed elsewhere in this section. In addition, as health care costs have risen, employers have responded by shifting some of the costs of rising premiums to workers in the form of higher deductibles and increased cost-sharing, leading employees in employer-sponsored plans to see the greatest rate of growth for underinsurance (OOP costs and deductible compared to annual income) in recent years (Commonwealth Fund, 2019).

One thing that can limit the scope of coverage is utilization management activities (previously called utilization review). These include such things as requiring prior permission to be hospitalized or obtain certain services; second opinions before obtaining reimbursable services; and retrospective reviews after services are already received. Some of these activities, it may be argued, have the potential to reduce unnecessary services, thereby enhancing the quality of care.

Administrative costs and profits

Across OECD countries administrative costs have remained stable over the last decade, but health care systems vary in their levels of administrative spending due to different cost demands under voluntary or multiple payer systems compared to compulsory or single payer systems. Voluntary systems exhibit the highest administrative spending, followed by multiple payer systems, among those with countries with compulsory schemes, which may be due in part to a wider variety of required administrative activities and reduced opportunities for economies of scale (Hagenaars et al., 2018). Thus, administrative costs in the United States tend to be higher in private insurance than in government-sponsored programmes such as Medicare and Medicaid. This is a result of several factors in addition to the need for profits. Private insurers engage in “underwriting” activities, which involve examining past claims expenses to determine a competitive, yet still profitable, premium to charge. While this is generally not permitted in the individual market and small group markets under the ACA, it is still the norm in the large group market, which has the large majority of enrolment. They also need to market and advertise. This can involve the use of brokers or agents who have to earn commissions. Moreover, to protect themselves against unexpectedly high claims, insurers often need to factor in a risk premium.

Beyond that, there is little agreement on the magnitude of the differences. To cite a single example, observers on the left often tout Medicare’s low administrative cost ratio, sometimes putting it as low as 2% of total expenses. But those on the right say this is an artefact of a high denominator – that is, when administrative costs are added to direct costs, even if administrative costs are high, Medicare beneficiaries are older and sicker and therefore direct medical costs are significantly higher and represent a larger share of total costs. They further contend that on a per enrollee basis, administrative costs are lower in private insurance (Kessler, 2017).

There is general agreement, however, that administrative costs as a percentage of total health care spending is higher for individual coverage and for small employers compared to large employers. This is partly a result of economies of scale – there are fewer individuals over which fixed costs can be spread (Blumberg, 2009). This is reflected in the ACA’s different thresholds for minimum loss ratios, which is defined as the proportion of premiums returned to policyholders in the form of health services. The ACA set the medical loss ratio for insurers at 80% for individual and small group insurance and 85% for large group insurance.

There is also general agreement that US spending on administrative costs is higher than in comparable countries – not surprisingly, given the greater reliance on private insurance in the United States. The OECD estimates that the United States spends much more on administrative costs than other countries: 8%, compared to an average of 3% among 30 countries studied. It should be noted that these figures do not include administrative costs spent by providers such as hospitals (OECD, 2017). If it did, the United States would likely be more of an outlier since US hospitals and physicians’ offices tend to have more personnel devoted to billing and other paperwork requirements (Jiwani et al., 2014).

3.5.4. Public policy issues

This subsection discusses two sets of public policy issues regarding private health insurance: its content and sale, and its tax treatment. (See also Box3.4 for the key gaps in coverage.)

Box3.4

Content and sale of health insurance

As discussed in section 2.5, by and large the regulation of private insurance has traditionally been left to the states. The type and extent of regulation, however, varies greatly by state. For example, some states review health insurance premiums before giving their approval, while others simply require that rates and rate increases be filed with the state. Other regulations may include such things as: providing consumers with information about plan rules and benefits; rules governing disputes, particularly when a claim is denied; requiring that groups or individuals not be denied coverage or renewed coverage based on health status; limiting the extent of annual premium increases; and the mandating of coverage for particular benefits or providers (e.g. minimum maternity lengths of stay and/or coverage of reconstructive surgery after mastectomies; coverage of psychologist and/or chiropractor services – to name a few) (Kofman & Pollitz, 2006).

Since health insurance traditionally has not been mandatory (the 2014–2018 period being an exception), there are few federal regulations regarding the ownership and content of private health insurance policies outside of those in the ACA. As discussed in section 2.5, the major exception is ERISA, which governs self-insured employer-sponsored plans. These plans account for more than half of covered employees. ERISA, however, does not dictate the content of coverage.

As noted, ERISA does not require that employers offer health insurance but governs the administration of the plans that are offered. ERISA has been amended several times over the years. Some of the current requirements are that plans: provide enrollees with information about plan features and funding; establish procedures governing grievances, appeal of denied medical claims, and rights to sue; provide patients with the right to continue coverage (for a fee that is usually somewhat higher than the total premium that was paid by the employer and employee during employment) for a limited time after the loss of a job; provide annual and lifetime mental health benefits equivalent to those provided for medical and surgical benefits if they offer mental health coverage; and cover minimum maternity lengths of stay and reconstructive surgery after mastectomies.

The ACA had a major impact on private health insurance (see Box2.1) with most provisions beginning in 2014.

Box2.1

• Nearly all individuals are required to obtain health insurance or pay a penalty – this “individual mandate” was repealed effective 2019 so was in effect for only five years. To make insurance more affordable, subsidies have been – and will continue to be even after the mandate’s repeal – available on a sliding scale to those with incomes up to four times the federal poverty level (approximately US$ 100 000 in 2018 for a family of four).
• Employers with more than 50 employees are required to offer health insurance, or pay a penalty – a mandate that at the time of writing had not been repealed.
• Health insurance marketplaces were established by each state to coordinate the marketing and sale of health insurance policies to individuals and small firms. People in states not establishing their own marketplace use the federal marketplace; 39 states have chosen to do that.
• Minimum benefits must be provided by the health insurance policies. While all plans must provide these benefits, different “tiers” can employ different patient cost-sharing requirements. The tiers (Platinum, Gold, Silver and Bronze) indicate the expected amount of health care costs covered by the policies: 90%, 80%, 70% and 60%, respectively. To illustrate the differences, Gold plan deductibles sold to individuals (as opposed to families) averaged US$ 1320 in 2018. For Silver plans annual deductibles averaged US$ 4033 for medical care, and for Bronze plans the average was US$ 5861 (HealthPocket, 2017).
• Insurers operating in the individual and small-group marketplaces are required to accept all applicants and charge the same premium irrespective of health status or pre-existing conditions. (Older individuals can be charged no more than three times the premium of younger ones, and smokers can be charged 1.5 times as much as non-smokers.) The renewability of policies is guaranteed.
• Insurers are prohibited from placing a lifetime limit (e.g. US$ 2 million) or an annual limit on coverage.
• Insurers are required to present information about their plans in a standard format, and a website will be developed to allow for the comparison of plans.
• Insurers must provide, without any cost-sharing on the part of the patient, particular preventive services.
• Medical loss ratios must be at least 80% in the individual and small group market and 85% in the large group market.
• Insurers with particularly expensive benefit packages would be subject to a surcharge (the “Cadillac Tax”, discussed below), although implementation of this controversial tax was pushed back and not scheduled to go into effect until 2022, then ultimately repealed in 2019.
• States are required to monitor health plan premium increases and require that particularly large increases be justified. However, the ACA does not provide the federal government with the authority to block large rate increases. As of May 2014, 40 state insurance regulatory commissions had the authority to disapprove insurer premiums if they were deemed inappropriately high (NCSL, 2016).

Taxation of health benefits

As discussed in section 2.1, tax regulations have, historically, had a major impact on the private insurance market. Since the Second World War employer contributions to employee fringe benefits such as health insurance have not been considered as taxable income for the employee. This so-called tax expenditure was estimated to cost US$ 248 billion in lost revenue in 2013 (CBO, 2013).

Moreover, tax exemptions on fringe benefits have encouraged employers to provide coverage – and more comprehensive coverage – in lieu of higher wages. To illustrate, suppose that an employee obtains family health insurance coverage from their employer, and that the family’s taxable income is US$ 75 000. In 2010 the average family plan cost the employer US$ 10 000 in premiums (the employee paid another US$ 4000) (Claxton et al., 2010). Furthermore, the marginal federal tax rate was 25% at that income level. State tax rates vary. In California, one of the higher states, it was 8.25%. Thus, the total marginal tax rate was 33.25% in California. If the employer share of premiums was not tax deductible, the family would have had to pay US$ 3325 more in income taxes. This encourages employees and unions to seek more of their compensation in health benefits rather than income. Not coincidentally, perhaps, labour disputes in the United States now are more likely to be over cuts in health benefits rather than about wages.

For decades advocates of managed competition have called for the elimination or capping of this tax exclusion (Enthoven, 1980; Enthoven & Kronick, 1989). One provision of the ACA is that it caps the tax-exempt status for very generous health plans. Called the “Cadillac Tax”, it was originally legislated to go into effect in 2018, but had been pushed back to 2022 before being repealed in 2019. Unpopular among members of both major political parties, it levied a 40% surcharge on health plans that are worth more than US$ 10 200 for individual coverage and US$ 27 500 for family coverage.