The most serious health care problem faced by most Americans is affordability. A December Reuters/Ipsos poll found that 62 percent of Americans surveyed, including 62 percent of Republicans and 67 percent of Democrats, were concerned about the position of presidential candidates on health care affordability. Only national security ranked higher among Americans’ concerns.

Another recent poll by the Kaiser Family Foundation found that the cost of health care, health insurance, and drugs was the most important health issue to voters considering potential presidential candidates. And a recent New York Times/Kaiser Family Foundation study found that over half of all Americans without health insurance—and 20 percent of Americans with health insurance—face problems dealing with medical debt.

While the Affordable Care Act (ACA) has made health insurance more affordable for the uninsured, premiums and cost-sharing are still too high for many Americans. And cost-sharing has been edging ever higher for the majority of Americans who have coverage through employer-based plans. This post examines the affordability problem and offers suggestions for tackling it that combine approaches in the ACA with proposals by the law’s detractors.

Why Average Americans Cannot Afford Health Care

The problem of affordability is fundamentally a problem of cost. Health care costs a great deal. The Centers for Medicare and Medicaid Services estimated that in 2014 we spent on average $9,695 for every man, woman, and child in the United States on health care. This means that the average household of 2.54 persons spent on average, over $24,625. The median household income in the United States in 2014 was $53,697 so the average household with a median income would have spent almost 46 percent of its income on health care — were costs and income evenly distributed across the population.

But health care costs are not evenly distributed. In any given year, 1 percent of the population is responsible for over 21 percent of health care costs, 5 percent for half. On the other hand, half of the population spends almost nothing on health care in any given year. Because of this disparity in the distribution of health care costs, the United States, like every other developed nation, depends on health insurance.

Health insurance puts health care consumers into a common pool and moves money from those who are healthy at any given time to those who are not. It allows high-cost users to gain access to health care that they could never otherwise afford. Indeed, few Americans would be able to afford really expensive, intensive hospital care or some specialty pharmaceuticals if they had to pay out-of-pocket.

A cash and carry health care system is also not possible because of another great disparity in the United States — the disparate distribution of income and wealth. Almost half of our nation’s income goes to the top 10 percent of the population. Distribution of wealth is even more inequitable: the wealthiest 3 percent of the population own over half of the nation’s assets, while the wealthiest 10 percent owns over three quarters.

One recent study found that the non-elderly Americans with incomes between 100 and 250 percent of the poverty level had net assets of $326, while those with incomes between 250 and 400 percent of poverty had net assets of $2,089. Many do not have enough to even pay for the deductible of their coverage, much less the out-of-pocket limit. To make health care affordable for most Americans, money must be moved from those who have it to those who do not, and the only way to do this is through taxes and public programs.

The Affordable Care Act: A First Step Toward Making Health Care Affordable…

For this reason, nearly half of the money spent on health care in the United States is spent directly by government, in particular through the Medicare and Medicaid programs. The federal and state governments also heavily subsidize employer-sponsored coverage by excluding employer, and often employee, contributions for coverage from income and payroll taxes.

A primary goal of the ACA was to improve access to health care. It has improved access to health coverage for high-cost individuals by prohibiting preexisting condition exclusions and health status underwriting and imposing guaranteed issue and renewal requirements on insurers. It also established a risk adjustment program for the individual and small group market, transitional three-year reinsurance and risk corridor programs, and an individual responsibility requirement to attract low-risk, low-cost individuals to health insurance markets. These programs effectively move the cost of health care from individuals with higher health care costs to those with lower costs.

The ACA also increased the affordability of health insurance coverage, and of health care itself, for lower income Americans. Abandoning traditional distinctions between the “worthy” and “unworthy” poor, the ACA expanded Medicaid to cover all adults and children with incomes not exceeding 138 percent of the federal poverty level (although the Supreme Court undermined this expansion by making it optional with the states, leaving 3 million individuals in 19 states without access to affordable health care). The ACA offers premium tax credits to individuals with incomes between 100 and 400 percent of the federal poverty level. The ACA’s benefits are paid for in part by increased taxes on households earning over $250,000 a year ($200,000 for single individuals), moving resources from the wealthy to those who lack the ability to pay for health care.

The ACA imposed out-of-pocket limits on in-network cost sharing and ended annual and lifetime limits on coverage in all markets. It also required insurers to reduce cost sharing for enrollees in silver-level plans with incomes between 100 and 250 percent of poverty, and reimbursed insurers for these cost-sharing reductions. For enrollees with incomes below 200 percent of poverty, deductibles, copayments, coinsurance, and out-of-pocket limits are reduced significantly. Cost-sharing for Medicaid beneficiaries, particularly those with incomes below the poverty level, is strictly limited.

…But Affordability Remains A Problem

Nevertheless, affordability remains a problem. Many young and healthy individuals with incomes too high for premium tax credit eligibility saw their premiums rise sharply as the ACA’s market reforms became effective and the risk pool was required to absorb those previously excluded because of the high cost of their care. The family glitch has barred many families with employer coverage offers from premium tax credit eligibility when the employee family member can afford individual employer coverage, even though family coverage is unaffordable.

Cost sharing remains high for many in individual coverage; the standard silver plan deductibles for individuals without cost-sharing reductions average above $3,000, a greater amount than many families have available in liquid assets. Cost sharing is also growing in group health plans, driven (or at least justified) in part by the impending high-cost (Cadillac) health plan excise tax. The Cadillac tax has been delayed for two years by the 2016 Budget bill and may indeed never go into effect because of the political opposition it faces, but increases in cost sharing that employers have already made in anticipation of the tax are unlikely to be rolled back. Finally, as health plans have narrowed network coverage, consumers have increasingly faced increased bills for out-of-network coverage.

The ACA’s approach to making coverage and care affordable is also very—and arguably needlessly—complex. Coverage for moderate-income enrollees is subsidized through advance premium tax credits (APTC), which are based on projected income and must be reconciled annually at tax filing time based on actual annual income. It is nearly impossible for most moderate-income Americans to accurately project their income a year in advance, so most individuals who receive APTC are either underpaid or have to pay money back — and all have to fill out and file complicated tax forms.

The ACA imposes a penalty on large employers who fail to provide some coverage to their full-time employees, but the actual coverage that employers must provide to avoid the penalty is woefully inadequate, while the reporting requirements with which employers must comply are disproportionately burdensome. Finally, the ACA imposes a penalty on individuals who can afford health insurance but choose not to purchase it (and who do not qualify for one of many exemptions). However, for most people the penalty costs considerably less than coverage, creating a temptation for healthy individuals to pay the tax rather than purchase coverage, and the ACA does not provide an effective mechanism for collecting the penalty, making widespread noncompliance possible.

Beyond The ACA: On The Left And The Right

The problem is how to move beyond the ACA to make health care more affordable for more Americans while decreasing the regulatory burden imposed on individuals and employers. Senator and presidential candidate Bernie Sanders has sketched out a single-payer proposal that could make health care much more affordable for ordinary Americans. Indeed, Sanders projects that his single-payer proposal would save a family of four almost $6,000 a year.

Sanders’ savings projections are contested, however, and depend on heroic assumptions about the ability of a single-payer system to save money — assumptions that are probably unwarranted given the ability of health care providers and insurers in the United States to protect their incomes and profits in our political system. A move to a single-payer system would also be massively disruptive to existing arrangements. One virtue of the ACA, often not appreciated, is that it in fact made only minor changes in the coverage of most Americans — those with employer coverage, Medicare, and traditional Medicaid. A single-payer system would disrupt all these arrangements. In any event, a move to a single-payer system is not politically possible in the foreseeable future.

Opponents of the ACA have yet to unite behind a single alternative proposal, and it is unlikely that they will. Some libertarians oppose any redistribution through tax credits or deductions. They believe all should be responsible for their own health care costs, perhaps aided by tax-subsidized savings accounts — an impossible dream realized nowhere in the world. But most ACA opponents recognize that some form of insurance and of government support for insurance is necessary.

Most would begin by “repealing Obamacare.” By this they presumably do not mean reopening the Medicare donut hole, restoring Medicare provider payment levels to projected pre-ACA levels, kicking adult dependents off their parents’ health plans, or perhaps even denying access of people with preexisting conditions to health insurance. Rather they mean rolling back the ACA’s health insurance regulatory requirements, individual and employer mandates, Medicaid expansions, subsidies for moderate income Americans to provide access to health care, and taxes.

What they offer instead is an assortment of proposals that would continue to provide redistribution of health care costs but that are structured and targeted differently than the ACA. First, they would repeal the requirement that insurers cover preexisting conditions and insure individuals regardless of health status. In its place they propose continuous coverage requirements or state-based high risk pools.

Continuous coverage requirements would mandate that insurers continue to cover individuals with health problems who lose coverage if those individuals had already been covered and maintain their coverage without gaps. This is similar to requirements already in place under the Health Insurance Portability and Accountability Act before the ACA. The problem with this approach is that it takes care of those who are already covered but, unlike the ACA, does not ensure coverage for those who are not already covered. An initial open enrollment period might be offered to give the uninsured a chance to sign up, but experience with open enrollment periods for the ACA suggests that only a fraction of the uninsured would take advantage of this opportunity. Few are uninsured because they believe they can get by without insurance; most remain uninsured because they believe that coverage is unaffordable, and continuous coverage requirements would not change this.

We have a great deal of experience with high-risk pools, and it is not encouraging. They are very expensive, both for the states that would finance them and for the enrollees who would be covered by them. Defining eligibility is also problematic, with opportunities for gaming by insurers and enrollees. Finally, segregating individuals with health problems into separate risk pools is likely to result in worse coverage for those high-risk individuals.

In place of the premium tax credits and cost-sharing reduction payments offered by the ACA to low and moderate income Americans, replacement proposals would offer fixed-dollar tax credits or less generous means-tested tax credits, possibly adjusted for age. Alternatively they would offer the insured tax deductions. Proposals usually include expanded tax subsidies for health savings accounts. They would also usually eliminate or cap the current tax exclusion for employer-sponsored coverage. They would likely repeal the taxes the ACA imposed on high-income Americans, ending the redistribution of wealth afforded by the ACA.

In our progressive income tax system, tax deductions—either to cover insurance premiums or encourage health savings account deposits—are valuable to individuals in high tax brackets but useless to many of those helped by the ACA, who pay little or nothing in income taxes. Fixed dollar tax credits (or deductions against payroll taxes) would be far easier to administer than the current ACA tax credits, but their usefulness to those helped by the ACA would depend on how generous they were and whether they were adjusted for age and geographical area.

Most of those at the bottom of the income scale who receive the most help from the ACA, as well as older individuals and those who live in high-cost areas, would not have the financial ability to cover the gap between the amount provided by the fixed dollar tax credits and the actual cost of their coverage. Coverage that would be affordable with the fixed dollar credits would also come with very high cost sharing, which would make health care itself unaffordable to lower-income Americans, even if they could afford a catastrophic policy. Finally, abolishing or limiting the tax subsidies currently offered for employer coverage would, unless replaced by equally effective incentives for coverage, lead many employers to drop coverage, increasing the number of the uninsured.

ACA replacement proposals would repeal the individual and employer mandates. This would, of course, remove the regulatory burden imposed by these requirements, but could also dramatically increase the number of uninsured and destabilize nongroup insurance markets.

ACA replacement proposals often include a number of other changes. They propose increasing the transparency of health care costs, a universally applauded but surprisingly difficult to achieve policy goal; permitting sale of health insurance across state lines, already permitted by the ACA and in several states without perceptible results; and encouraging association health plans, a prime vehicle for risk selection.

Finally, ACA replacement proposals generally call for dialing back on the Medicaid expansions and replacing Medicaid with block grants to the states or grants subject to per capita caps. Limiting federal Medicaid support to the states would almost certainly result in eligibility and coverage cuts in most states. The expansion population would likely be the first to go. Replacement proposals suggest that those who lose Medicaid eligibility could purchase private coverage using the tax credits. But unless the tax credits fully covered the cost of coverage with minimal cost sharing—the equivalent of Medicaid coverage—it would be essentially useless to the expansion population.

Building On Affordable Care Act Progress

While the ACA dramatically increases the accessibility and affordability of health care for Americans with low incomes and preexisting conditions, repeal and replace proposals are much less generous, and would leave uninsured many who have gained access to coverage under the ACA. But, on the other hand, while the benefits of the ACA phase out quickly as income rises, replacement proposals would provide more generous benefits for middle- and upper-income Americans, and they would simplify regulatory requirements. They would be particularly beneficial to high-income Americans who would no longer pay the increased taxes imposed by the ACA but likely continue to receive subsidies for their employer coverage.

How could the advantages of both the current ACA and replacement proposals be combined? First, the Medicaid expansions for adults and children with incomes below 138 percent of the federal poverty level should remain in place. But the financing for the adult expansion population and for low-income children and pregnant women and dual-eligible Medicaid and Medicare beneficiaries should be taken over completely by the federal government. Very low-income Americans should continue to be offered coverage without having to pay premiums and with minimal cost sharing. Since the federal government is currently funding 100 percent of the cost of the expansion—and will be paying 90 percent even once the program is fully phased in—it might as well own the program.

Full federal coverage of the expansion population would also solve the state coercion problem the Supreme Court discovered in the National Federation of Independent Business v. Sebelius case, allowing expansion to be nationwide as originally intended. In exchange for the federalizing of this part of the Medicaid program, the states should be given full responsibility for the elderly, disabled, and those in long-term care. This population has historically been of more concern to the states and arguably is better able to look out for itself in the state political process.

Health insurance should continue to be available to individuals without regard to preexisting conditions or health status. Although this results in more expensive coverage for the healthy, this is largely an issue of allocation of costs over time — most people eventually need high-cost coverage. A form of community rating has been applied within employer-sponsored groups for decades without significant problems. The real problem is how to make coverage affordable for all within the risk pool, recognizing that any individual might end up needing coverage for high-cost care. Segregating the risk pool causes more problems than it solves.

Coverage should also continue to be reasonably comprehensive, as it is now under health plans in the individual and small group market. Most health plans covered the most expensive services mandated under the ACA essential health benefit package before its mandates went into effect. The services added by the ACA that were not commonly covered before—pediatric oral and vision, habilitation services, and to a lesser extent maternity and mental health and substance abuse disorder coverage—are generally not the highest-cost services. Some are also services where noncoverage presents concerns about discrimination on the basis of gender or disability. Mental health and substance use disorder federal mandates, for example, were enacted independent of the ACA.

Individuals with incomes below 300 to 400 percent of the federal poverty level will continue to need substantial help to afford health insurance and health care. Current Republican proposals do not offer them assistance adequate to meet their needs. Moderate-income Americans, however, have some capacity to pay for their coverage and care, so it makes sense to require them to continue paying something for premiums and at point-of-service. The means-tested tax credits currently in place do allow a calibration of assistance to ability to pay.

There are, however, two problems with the current approach. First, premium payments and in particular the cost-sharing requirements remain too high. This is a result of the budget constraints under which the ACA was adopted and can be fixed by raising both the levels of assistance and the metal level of the standard plan to which assistance is keyed. The Urban Institute has put forward reasonable recommendations to accomplish this by lowering the percentage of income that households would be required to spend on premiums to receive tax credits (with a maximum of 8.5 percent of income) and raising the actuarial value of the standard plan from 70 to 80 percent.

A more difficult problem (administratively if not politically) is finding a way to ensure the accuracy of advance premium tax credits without imposing unrealistic paperwork and repayment burdens on persons eligible for assistance. One approach that would improve accuracy would be to send quarterly notices to tax credit enrollees reminding them of their initial income projections and asking them to update this information based on their current income.

Tax credit recipients could still be required to file tax returns to remain eligible. But the IRS could, using the income reported on the 1040 and the information currently reported by the marketplace on the 1095-A, itself reconcile credits that individuals received with those they were entitled to. In the unusual situations where additional information was needed—where there was a marriage during the year or where a tax dependent is shared—the enrollee could be required to file an additional form.

As long as the reconciled amount was reasonably close to the amount actually paid, for example, within 10 percent, no further action would be taken absent evidence of fraud or misrepresentation. In any event, recoveries should be capped, as they are now.

Moving Forward By Adapting Proposals From ACA Opponents

Means-tested tax credits help low-income Americans, but moderate and middle-income Americans also struggle with affordability issues. Means-tested tax credits could phase out at 300 to 400 percent of the federal poverty level, but at that point be replaced by fixed dollar tax credits, as proposed by ACA opponents. These could be age adjusted but could also be adjusted to take account of geographical variations in health care costs. Under one typical ACA replacement plan these tax credits would range from $1,200 to $3,000 depending on age. Fixed dollar tax credits could either be assigned to an employer to pay for employer coverage or be used in a public or private exchange to purchase insurance in the nongroup market, at the direction of the individual recipient.

Fixed-dollar tax credits could only be used for health coverage that covered a set of essential health benefits, established on a state-by-state basis, and that had an actuarial value of at least 60 percent. Tax credits would be payable in advance if used in the nongroup market, but employers could claim the tax credits by adjusting withholding, with end of the year reporting. As the tax credits would be fixed and not depend on income, there would be no need for reconciliation or for clawing back overpayments.

Tax credits could be available to all, or could be available only for households with incomes below a reasonably high limit, say $250,000. Fixed dollar tax credits could be set at a high enough level so that there would be a smooth transition from means-tested to fixed dollar tax credits at some point around 400 percent of federal poverty level.

With fixed dollar tax credits available to subsidize employer coverage, current employer coverage tax exclusions could be phased out. Employees could initially be given the choice either to use their fixed dollar tax credits to purchase coverage from their employer or to continue taking advantage of current tax exclusions, but the tax exclusions would be phased out over a period of time, say five years, to transition federal subsidies of employee benefit plans entirely to the fixed dollar tax credits. The tax exclusion would remain in place for health benefits subject to a collective bargaining agreement until the termination of the agreement.

Cost-sharing reductions should continue to be available as they are currently; indeed they should be expanded and simplified as recommended by the Urban Institute. Individuals with incomes above the eligibility level for cost-sharing reductions would be able to claim a tax credit each year for a fixed dollar amount to a health savings account, say $500 in addition to the tax credits that would be available to them for paying for the premiums. Contributions to HSAs would otherwise be taxable — they should not simply become another retirement savings vehicle. The tax credit would be claimed at filing time, but individuals could adjust their withholding or estimated tax payments in anticipation of it. To claim the tax credit, individuals would only have to provide direct deposit information for their HSA. But to establish an HSA, individuals would have to establish that they had health coverage meeting minimum requirements.

Finally, the employer mandate, and possibly the individual mandate — could be repealed. If the employer mandate was repealed, employers would likely continue to offer coverage for the same reasons that they have offered it historically: to recruit and retain employees and to maintain a healthy and productive workforce. They should be subject to nondiscrimination rules to ensure that they do not discriminate against less healthy workers or favor highly compensated employees, but they could otherwise be free to decide whether or not to offer coverage and what level of coverage to offer — except they would not be entitled to tax subsidies unless they offered coverage meeting minimum standards. Employees not offered coverage would be able to purchase nongroup coverage with their tax credits.

It is less clear what should happen with the individual mandate. The individual mandate plays a potentially important role in prodding individuals who do not have an immediate need for health care to get covered. Under the current law, it may be necessary to create an adequate risk pool, including healthy as well as unhealthy enrollees.

But the mandate is unpopular politically. It also may not be administratively viable long term. The individual mandate enforcement provisions in the ACA are weak and collecting individual mandate penalties that exceed the amount of refunds due to individuals is likely to be difficult administratively. Widespread noncompliance could do more harm than good.

Repeal of the individual mandate would present three problems. First, individuals who chose not to purchase insurance might have a difficult time affording health care if they subsequently needed it. Second, providers would face a higher uncompensated care burden in caring for the uninsured who cannot afford health care. Third, healthy people might remain outside the risk pool, driving up insurance costs for those in the market.

Tax credits that are not claimed should be placed in a special fund. This fund could be used to expand community health center services and to reinsure extraordinarily high uncompensated care claims for hospitals. In this way, some services could be made available to the uninsured when they needed them and hospitals would receive some help with uncompensated care.

Enrollment in health plans would still be limited to annual open enrollment periods, with limited special enrollment periods for changes in life circumstances. Individuals who chose not to become insured would forfeit the fixed dollar tax credit and the HSA contribution, a form of penalty, and face the possibility that they could not enroll until the next open enrollment period when they encountered medical needs. This might provide sufficient incentives to create an adequate risk pool.

Costs

How much would these proposal cost? More than we are spending now. The Urban Institute estimated that implementing their proposals for increasing premium tax credits and reducing cost sharing would cost $221 billion over ten years, and that fixing the “family glitch” would cost another $117 billion.

Offering fixed dollar tax credits to all insured Americans below age 64 and above 300 or 400 percent of the poverty level would cost more. Providing annual federal deposits in health savings accounts would also not be cheap, although the cost would depend entirely on the level at which the tax credits and HSA contributions were set. The Congressional Budget Office (CBO) estimated in 2013, however, that the tax exclusions for employer-sponsored coverage would cost $3.36 trillion over ten years, so there are substantial resources available to reallocate.

These proposals also address only one part of the health system reform puzzle — affordability. Our health care system has many other problems as well — excessive costs, lack of transparency, quality and patient safety issues, workforce gaps, waste, fraud, and abuse, to name a few. Insofar as this proposal would encourage premium competition among health insurers and limit tax subsidies for employer plans, it should contribute to cost control. The competition it would promote among insurers for tax credit dollars could also facilitate quality improvement.

Building On The ACA’s Success

Although the ACA remains intensely controversial six years after enactment, its achievements are undeniable. The number of uninsured dropped by 16 million between 2013 and 2015; the percentage of adults 18 to 64 who are uninsured dropped from 22.3 percent in 2010 to 12.9 percent in 2015. But health insurance and health care remain unaffordable for many Americans. The “repeal and replace” proposals put forward by opponents of the ACA would take us backwards rather than forwards, leaving many low-income Americans once again without the means to pay for health care.

ACA opponents, however, have some constructive ideas, particularly for improving affordability for middle-income Americans. The proposals put forth here combine ACA improvements with those positive recommendations from its opponents. They could put us on the path to addressing affordability, the most serious health care system problem experienced by Americans, and could do so without unduly disrupting the arrangements through which most Americans currently get health care coverage.