Who Are the Uninsured Eligible for Premium Subsidies in the Health Insurance Exchanges?

Who Are the Uninsured Eligible for Premium Subsidies in the Health Insurance Exchanges?

HSC Research Brief No. 18
December 2010
Peter J. Cunningham

One of the central elements of the national health reform legislation is the establishment of state-level exchanges designed to offer more affordable coverage options, particularly for those without insurance. Even with premium subsidies available to individuals earning up to 400 percent of the federal poverty level -- equivalent to $88,200 for a family of four in 2010 -- and a mandate requiring individuals to obtain coverage, it remains uncertain who will ultimately sign up for exchange-based plans, especially in the early years. Nearly 40 percent of uninsured individuals who qualify for exchange subsidies suffer from chronic health conditions or describe their health as fair or poor, while an additional 28 percent have recently encountered difficulties obtaining medical care or covering medical expenses, according to new national research by the Center for Studying Health System Change (HSC). Yet roughly one-third of subsidy-eligible uninsured adults report no recent difficulties with health status, medical access, or medical bill payments. Persuading these seemingly healthy uninsured individuals to enroll will be difficult but critical for preventing adverse selection -- the disproportionate enrollment of higher-cost individuals -- within the exchanges. Without their participation, insurance premiums in the exchanges could exceed projections.

Contrary to widespread assumptions, a significant share of these healthy, low-cost uninsured individuals describe themselves as risk-averse, which may serve as a powerful motivator to obtain coverage even in the absence of pressing health or access concerns. Furthermore, the majority of uninsured people acknowledge that they need health coverage, though a smaller proportion feel that insurance is currently worth its price -- a dynamic that may shift once premium subsidies become available in 2014.

If You Build Exchanges, Will the Healthy Come?

Among the foundational provisions of the Patient Protection and Affordable Care Act (PPACA) of 2010 are the creation of state-operated insurance exchanges and health insurance tax credits targeting individuals who lack access to employer-based or public coverage. These credits, set to take effect in 2014, will make individually purchased coverage through the exchanges substantially more affordable for those with household incomes ranging from 138 percent to 400 percent of poverty. The subsidy structure ensures that if a family selects a lower-cost "silver" plan, their premium spending as a share of income ranges from slightly above 3 percent at the bottom of the eligibility scale to 9.5 percent for those earning between 300 percent and 400 percent of poverty. These subsidies will dramatically improve insurance affordability for many people whose sole current option is the nongroup (individual) insurance marketplace.

Beyond the subsidies, the health reform law also requires that most individuals secure health insurance or face a financial penalty. This individual mandate -- among the law's most contentious features -- has drawn criticism both for being excessively intrusive and for lacking sufficient strength to effectively drive enrollment. By 2016, when the penalty reaches full implementation, it will amount to the greater of a flat-dollar figure -- $695 per uninsured adult and half that for uninsured children -- or 2.5 percent of household income. For a considerable number of currently uninsured individuals, the penalty would still be lower than the post-subsidy premium for a basic exchange plan, leading some to opt for the penalty over enrollment.

Although the Congressional Budget Office projected that 8 million people would obtain individual coverage through the exchanges in 2014, rising to 24 million by 2019, forecasting actual enrollment numbers, the pace of sign-ups, and the profile of enrollees versus those who remain uninsured is inherently challenging. Beyond the law's built-in financial incentives, the motivation to enroll will hinge on numerous factors. These include the medical care needs of prospective enrollees -- shaped not only by their health conditions and chronic disease burden but also by their attitudes toward seeking care when ill and the availability of free or reduced-cost services through the safety net or other providers. Irrespective of medical demand, uninsured individuals and others who have recently struggled with affording or accessing care due to lacking or insufficient coverage will also have strong reasons to join the exchanges. More nuanced attitudes regarding the worth and importance of insurance and personal tolerance for financial risk when uninsured will further influence enrollment choices.

This analysis characterizes the population eligible for premium subsidies through the newly created insurance exchanges -- those with gross family incomes between 138 percent and 400 percent of poverty -- with a particular emphasis on the uninsured who currently have no employer-sponsored coverage and will not qualify for expanded Medicaid. The focus on subsidy-eligible uninsured individuals is warranted because the availability of premium subsidies will shape their insurance decisions to a far greater degree than for uninsured people above 400 percent of poverty, who may purchase exchange coverage but will receive no subsidies.

Current Coverage of Nonelderly Adults

Among adults meeting the income thresholds to qualify for exchange subsidies and who will be ineligible for Medicaid expansion (those with incomes between 138%-400% of poverty), nearly 80 percent carried some form of health coverage in 2007, while 20.8 percent lacked insurance (see Data Source and Table 1). The majority (62.1%) had employer-sponsored insurance, with 6.4 percent holding nongroup coverage and 10.7 percent enrolled in some type of public program, such as Medicaid or Medicare.

Among the income-eligible uninsured, roughly one in five had access to employer-based coverage, either through their own position or a spouse's job (findings not shown). Individuals with employer coverage access generally will not qualify for exchange participation unless their employer plan fails to satisfy the affordability benchmarks outlined in the law. To the degree that these individuals gain coverage once both the employer and individual mandates begin in 2014, most will likely enroll through their employers, since they or their spouses typically work for larger firms (50 or more employees) that will face penalties for not providing coverage (see Supplementary Table 1).

The majority of subsidy-eligible uninsured individuals lack access to employer-sponsored insurance, and most will continue without such access after reform implementation because they are self-employed or employed by small businesses (41.5%) or are not currently working (40.7%). Most people who presently hold nongroup coverage and meet the subsidy-eligibility criteria are likely to transition their plans to the exchanges, since the subsidies will reduce their premium burden.

Individuals currently enrolled in nongroup coverage tend to be older and exhibit higher chronic disease rates than the uninsured, a reflection of the stronger demand for insurance among those with health issues (see Supplementary Table 2). Nonetheless, chronic disease prevalence among nongroup enrollees is comparable to those with employer-sponsored coverage. The uninsured display lower rates of chronic conditions relative to both privately insured groups.

Health Profiles of People Eligible for Exchanges

Numerous uninsured individuals qualifying for exchange subsidies will be driven to enroll by either their significant medical needs or their recent encounters with barriers to care and unpaid medical bills. In total, approximately 40 percent of the subsidy-eligible uninsured had chronic health conditions or rated their health as fair or poor (see Table 2). Many of these people also reported forgoing or postponing necessary medical care during the preceding year (65.7%) or experiencing difficulty paying medical bills (53.6%), creating further incentive to secure health insurance (findings not shown). On average, they spent nearly $1,000 in out-of-pocket medical costs in the year before the survey.

A further 28.2 percent of subsidy-eligible uninsured individuals reported excellent or good health with no chronic conditions, yet still faced problems obtaining necessary care or managing medical bill payments over the previous year. While the survey data do not specify the underlying reasons or medical conditions behind their access and bill difficulties, these individuals spent approximately $1,400 out of pocket on health care in the prior year. Even if the medical expenses were tied to injuries or acute episodes that are relatively short-lived, their negative experiences with accessing care and paying for services are likely to encourage them to obtain coverage.

Roughly one-third of the subsidy-eligible uninsured report no health, access, or medical bill difficulties, and their out-of-pocket medical spending averaged just $156 over the prior year. These "healthy" uninsured individuals tend to be younger than their counterparts with health-related concerns. Their engagement in the exchanges is vital for staving off adverse selection, yet they may prove the hardest to enroll given their lack of immediate medical needs or negative experiences that might prompt action. They also have somewhat higher incomes relative to uninsured people facing health, access, or financial problems, meaning the premium subsidies they receive will be proportionally less generous. This gives them a stronger financial rationale to simply pay the penalty rather than purchase coverage.

Moreover, two specific provisions in the health reform law could channel younger, healthier individuals away from the exchanges, potentially heightening adverse selection risk. The first permits adult children to stay on their parents' insurance plans until age 26. The second allows insurers to market catastrophic plans to individuals under 30 or those granted an affordability exemption from the individual mandate.

Young and Healthy Invincibles?

Notwithstanding their youth and good health, the one-third of subsidy-eligible uninsured individuals without any health, access, or medical bill concerns are equally likely to be risk-averse as their uninsured peers who do have health problems. This is a significant finding because earlier research has demonstrated that an individual's perceived willingness to assume greater risk than the typical person is strongly associated with the decision to decline employer-sponsored coverage, even when such coverage is heavily subsidized. Using the same risk-tolerance measure from that prior work, approximately half of these healthy uninsured people identified themselves as risk-averse -- a proportion that was statistically indistinguishable from that of uninsured individuals with health issues. This finding indicates that many young, healthy uninsured people do not feel as invulnerable as conventional wisdom suggests, and -- provided premiums are affordable -- they would be willing to pay for coverage they do not presently need in order to guard against catastrophic future expenses. One contributing factor to their risk aversion may be that many healthy uninsured individuals also have family members who lack coverage (41.9%), including spouses and/or children. The desire to ensure health coverage for dependents may serve as an additional motivator for individuals who might not otherwise find it compelling enough to buy insurance solely for themselves.

Attitudes About Health Insurance

Some observers also argue that many people go without insurance voluntarily because they place little value on health coverage, preferring to allocate their income toward other goods and services instead of insurance premiums. To explore differences in insurance-related attitudes between the uninsured and insured populations, this study analyzed data from the Medical Expenditure Panel Survey (MEPS), which posed two questions to respondents about whether they agreed or disagreed with these statements: (1) "I'm healthy enough that I don't need health insurance;" and (2) "Health insurance is not worth the money that it costs."

Overall, the results show that uninsured people who lack employer coverage place somewhat less value on health insurance than their insured counterparts. The uninsured were more inclined to agree that they were healthy enough to forgo insurance and that insurance was not worth its price, compared with individuals enrolled in employer-sponsored plans (see Table 3). Despite these gaps, the majority of uninsured people -- more than 60 percent -- rejected the notion that they do not need health coverage, with upward of 40 percent strongly disagreeing. However, a smaller share of uninsured individuals -- roughly 41 percent -- rejected the idea that insurance is not worth its cost, pointing to greater ambivalence about the value of health coverage.

This ambivalence is particularly pronounced among people with nongroup coverage. On one hand, they resemble those with employer-based plans in that most recognize they need health insurance. On the other hand, they are more likely than both the uninsured and employer-insured populations to feel that health insurance is not worth its expense. Because nongroup coverage premiums are not currently subsidized, this seemingly paradoxical perspective likely reflects the exceptionally high costs that enrollees bear for individual market plans.

Uninsured individuals are more inclined to reject the view that they do not need health coverage if they are older, live with chronic conditions, have encountered access-to-care difficulties in the prior year, or have incurred out-of-pocket costs exceeding 5 percent of their income (see Table 4). Nevertheless, even among subgroups with relatively modest needs -- such as younger adults or those without chronic conditions or access barriers -- most still believe they need health insurance.

There is less variation among uninsured individuals in their views on whether insurance is worth the price. For instance, no statistically significant difference emerged between those with and without chronic conditions in the proportion disagreeing that insurance is not worth its cost. This tension between the perceived "need" for health coverage and the perceived "value" of that coverage likely stems from the reality that existing insurance options remain unaffordable for lower-income uninsured people who lack access to employer plans. Taken together, these findings suggest that affordability and cost considerations -- rather than a belief that insurance is unnecessary -- drive the decision to remain uncovered for most uninsured individuals.

Policy Implications

The individual mandate stands as one of the most debated elements of health reform. Opponents argue that the federal government should not compel people to buy insurance. Supporters maintain that a mandate -- coupled with the requirement that insurers end medical underwriting -- is indispensable for preventing adverse selection in the exchanges that would result from young, healthy individuals choosing not to participate. Yet the significance of the individual mandate to enrollment levels may be overstated. Enrollment decisions will ultimately hinge on whether subsidized coverage is truly affordable and whether the anticipated benefits of insurance outweigh the cost to each individual. Many uninsured people with considerable health needs will sign up because the exchange premium subsidies will substantially lower their healthcare expenses and improve their ability to access care.

For uninsured individuals with minimal anticipated medical needs, however, paying the penalty may be significantly cheaper than purchasing private coverage, depending on their income level. Convincing these individuals to enroll -- an imperative for preventing adverse selection in the exchanges -- will depend on their openness to the proposition that insurance delivers value through long-term financial protection and better access to care, even if the short-term payoff is limited. The study's findings indicate that the notion that most uninsured individuals do not value coverage and are comfortable risking catastrophic expenses is exaggerated, though ultimately whether they sign up will hinge on whether the perceived benefits meet or exceed the subsidized premiums they would pay.

Significant regional and geographic variation in exchange enrollment is also anticipated, mirroring the existing pattern of uninsured rates across the country. Many observers highlight the success of Massachusetts' health reform -- which served as a model for many PPACA provisions -- in cutting that state's uninsured rate in half. However, a critical distinction between Massachusetts and the broader nation is that Massachusetts historically had among the lowest uninsured rates in the country, partly due to a deeply rooted culture of insurance coverage among employers, state government, and residents. Whether the Massachusetts experience can be readily reproduced in regions where uninsured rates have historically been elevated and public opposition to national health reform -- particularly the individual mandate -- runs stronger is an open question.

Efforts to boost enrollment through outreach and simplified sign-up processes will be essential to the exchanges' success, just as they have been for Medicaid and the Children's Health Insurance Program (CHIP). The health reform law includes several provisions addressing enrollment and outreach, such as the deployment of Web portals and navigators to inform and guide consumers through their insurance options. However, outreach and enrollment strategies for the exchanges will require a fundamentally different approach than those used for Medicaid and CHIP, where eligibility and enrollment often occur at the point of service when individuals actually seek medical care. By contrast, exchange outreach efforts face the far more formidable task of achieving adequate enrollment among healthy, low-cost uninsured people who have little or no interaction with the healthcare system yet would be expected to pay more than a token premium amount.

Establishing defined open-enrollment windows in the exchanges will help mitigate the adverse selection that occurs when people can delay enrollment until they require care. Continuous open enrollment has been identified as a factor contributing to adverse selection in the combined small-group and individual health insurance market in Massachusetts. The federal health reform law mandates that exchanges offer an initial open-enrollment period, along with annual and special enrollment periods modeled on Medicare Part D, though the specific timing and duration of these periods will be set through regulation. Public education campaigns during open-enrollment periods should emphasize not only the financial penalties tied to the individual mandate, but also the substantially improved access to medical services that insurance provides and the personal financial jeopardy of remaining uninsured in the face of unexpected medical costs. The study's findings suggest that even the majority of "young and healthy" uninsured individuals will be receptive to this messaging.

Notes

1. Congressional Budget Office, "Letter to Nancy Pelosi on H.R. 4872, Reconciliation Act of 2010 (Final Health Care Legislation)," Washington, D.C (March 20, 2010).

2. Ibid.

3. Uninsured people with family incomes between 100%-138% of poverty also are eligible for the exchanges, although under the PPACA they also will be eligible for Medicaid. According to the law, all adults younger than 65 will be eligible for Medicaid if their income does not exceed 133% of poverty, after a deduction of 5 percent based on the upper income limit for that group (effectively making 138% of the federal poverty level the cutoff for Medicaid eligibility). Given lower cost-sharing for premiums and services in Medicaid relative to what is likely to be available through private insurance, it is expected that most individuals in this group will enroll in Medicaid.

4. Passel, Jeffrey S., and D'Vera Cohn, A Portrait of Unauthorized Immigrants in the United States, Pew Hispanic Center, Washington, D.C. (April 2009).

5. No subsidies are available for the catastrophic coverage, so depending on their income and the premium difference, subsidy-eligible individuals may find it cheaper to enroll in a more comprehensive subsidized plan. To the extent catastrophic plans are offered and the premium/subsidy trade-off makes them attractive for enrollment, this segregation of younger, lower-risk individuals will reduce the "pooling" effect of the exchange. However, like all insurers inside and outside the exchange, those that offer catastrophic plans will be subject to a new risk adjustment system.

6. Cunningham, Peter J., "Declining Employer-Sponsored Coverage: The Role of Public Programs and Implications for Access to Care," Medical Care Research and Review, Vol. 59, No. 1 (March 2002).

7. Long, Sharon K., and Karen Stockley, "Sustaining Health Reform in a Recession: An Update on Massachusetts as of Fall 2009," Health Affairs, Vol. 29, No. 6 (June 2010).

8. Tu, Ha T., et al., State Reform Dominates Boston Health Care Market Dynamics, Center for Studying Health System Change, Washington D.C. (September 2010).

Data Source

This Research Brief draws on two nationally representative household surveys. Insurance coverage estimates were derived from the 2007 Health Tracking Household Survey (HTHS), a nationally representative telephone survey of the civilian, noninstitutionalized population funded by the Robert Wood Johnson Foundation. The survey sample encompasses approximately 18,000 individuals in total, including 4,500 persons aged 19-64 with family incomes between 138 percent and 400 percent of poverty. The analysis of the population eligible for exchange subsidies combines the 2007 HTHS with the 2003 Community Tracking Study Household Survey. The combined sample of uninsured persons aged 19-64, with family incomes between 138 percent and 400 percent of poverty, and lacking access to employer-sponsored insurance (ESI) totals approximately 2,100 individuals. Both surveys employ identical questionnaires and data collection methods. Population weights account for selection probability and nonresponse differences based on age, sex, race or ethnicity, and education.

Estimates of attitudes toward health insurance coverage are drawn from the 2005-2007 Medical Expenditure Panel Survey-Household Component (MEPS-HC) sponsored by the Agency for Healthcare Research and Quality. MEPS is likewise designed to be nationally representative of the civilian, noninstitutionalized population. The combined 2005-2007 sample of individuals aged 19-64 with family incomes between 138 percent and 400 percent of poverty numbers approximately 20,000, of which about 3,250 are uninsured persons without access to ESI coverage.

Under the PPACA, premium subsidy eligibility is limited to U.S. citizens and lawful immigrants. Ideally, unauthorized immigrants should be excluded from the analysis since they are not eligible for exchange subsidies. However, unauthorized immigrants cannot be explicitly identified in either the HTHS or MEPS, and they are likely underrepresented in the HTHS due to its reliance on random landline telephone number sampling. To partially account for the inclusion of unauthorized immigrants in the HTHS, the analysis excludes noncitizens who exhibit characteristics strongly correlated with unauthorized status. This encompasses a combination of having been in the U.S. for fewer than 20 years, holding no public insurance coverage (for which they generally do not qualify), possessing less than a high school education, and working in sectors such as agriculture, construction, manufacturing, hotels, personal services, and restaurants. It was not practical to simulate the unauthorized population in the MEPS because that survey does not collect citizenship information for sampled individuals.

Funding Acknowledgement

This research was supported by the Robert Wood Johnson Foundation.

Sources and Further Reading

Congressional Budget Office — ACA Coverage Projections — CBO analyses of health insurance coverage under the Affordable Care Act, including exchange enrollment and subsidy cost projections.

AHRQ Medical Expenditure Panel Survey — The primary data source used in this study for measuring attitudes toward health insurance among insured and uninsured populations.

Kaiser Family Foundation — Health Reform — Comprehensive data and analysis on ACA marketplace enrollment, premium subsidies, and the uninsured population.

Robert Wood Johnson Foundation — The foundation that funded this research, supporting national efforts to improve health and health care access in the United States.

Census Bureau — Health Insurance Coverage — Official federal statistics on uninsured population estimates, coverage trends, and demographic breakdowns used in health policy research.