Examining The Affordable Care Act’s Effect On Coverage

A recent report released by the Department of Health and Human Services (HHS) claims that 31 million Americans were enrolled in coverage related to the Affordable Care Act (ACA). Without proper context, this number is misleading and is being misinterpreted. Here is what you need to know:


  • There has been virtually no change in private health insurance coverage because of the ACA.


  • The net gain in health coverage because of the ACA is entirely or almost entirely due to an increase in Medicaid enrollment.


  • A sizeable percentage of the new enrollees in Medicaid do not meet eligibility rules for the program.


  • On a per enrollee basis, the ACA’s cost is far higher than was projected.

Coverage Changes According To Government Report

According to the HHS report, 31 million people are enrolled in ACA-related coverage. That includes 11.3 million people enrolled in exchange plans as of February 2021. A total of 14.8 million people were newly enrolled in the Medicaid expansion as of December 2020, an estimated 3.9 million people who were already eligible for Medicaid enrolled in the program as a result of extra outreach and easier enrollment, and 1.0 million individuals were enrolled in the ACA’s Basic Health Program option.

Little, if Any, Change In Private Coverage

The Congressional Budget Office (CBO) expected that 25 million people would be enrolled in the exchanges by now. Yet, enrollment, on an annualized basis, has been stuck at around 10 million people since 2015—60 percent below expectations. Annualized enrollment in 2020 was 10.4 million people.

The size of the entire individual market, which also includes a few million people who purchase coverage off the exchanges, is only about two million people above pre-ACA levels. Overall, individual market enrollment is roughly 18 million people below what the CBO expected before the ACA’s coverage provisions took effect. Enrollment is concentrated among lower-income people who receive large subsidies to buy coverage.

The two million increase in individual market enrollment is offset by a roughly equivalent decline in employer-sponsored coverage among small employers, many of whom had an incentive to stop offering coverage (pp. 22–23) since their workers could then receive subsidies. While the ACA did not produce any increase in private coverage, its main private coverage effect was substantially crowding out unsubsidized individual market purchases with heavily government-subsidized exchange plans.

“Medicaid Expansion Act”

In 2016, Brookings Institution scholar Stuart Butler referred to the ACA as “the Medicaid Expansion Act,” since the exchanges were unattractive to people without large subsidies and the vast majority of the newly covered signed up for Medicaid. This is despite the US Supreme Court decision making the ACA’s Medicaid expansion optional and a dozen states refusing to expand. Significant problems related to Medicaid expansion, as well as political polarization, have led these states not to expand despite the federal government paying nearly the entire cost of the expansion. As private coverage has remained unchanged, the entire coverage gain associated with the ACA—which probably borders on around 15 million people—is the result of Medicaid expansion.

Of note, the 3.9 million people who were previously eligible for Medicaid and enrolled because of increased outreach and enrollment efforts were technically already covered because of retroactive eligibility, which generally permits enrollment into Medicaid for eligible individuals up to three months after incurring medical expenses. Counting these individuals as newly covered inflates the coverage impact of the ACA.

Millions Of Medicaid Enrollees Are Not Eligible for the Program

Late last year, HHS released a report showing that Medicaid improper payments had ballooned to 21.4 percent, or $86 billion in 2020. (The true improper payment rate almost certainly exceeds 25 percent, or $100 billion per year, since one-third of states were excluded from the report’s review.) Importantly, these estimates were completely constructed with data from before the pandemic. According to the government’s report, the surging improper payments largely result from eligibility errors. State verification of eligibility data, such as income, was often not done at all, or was initiated but not completed. People qualify for Medicaid largely based on income, so failing to verify a Medicaid applicant’s income is like failing to check a Medicare applicant’s age.

As a result of lax eligibility verification, many Medicaid enrollees, particularly those who entered the program through the expansion, are not eligible. University of Kentucky economist Aaron Yelowitz and I did a careful statistical analysis and estimated that between 2.3 million and 3.3 million people with income above eligibility thresholds—and who would not be eligible for Medicaid for another reason such as pregnancy or disability—were enrolled in Medicaid in expansion states in 2017. Numerous government audits confirm the problem.

Improper enrollment has increased, likely substantially, because of a provision of the Families First Coronavirus Relief Act (FFCRA). Specifically, the FFCRA conditioned increased federal Medicaid expenditures on states’ maintaining program enrollment and not doing redeterminations or removing people who no longer met eligibility requirements. Although Medicaid enrollment increased because of the pandemic, this maintenance of effort requirement has likely led to millions more enrollees on the program who do not meet eligibility rules, particularly as the economy has recovered. Ed Haislmaier found that Medicaid enrollment grew by 7.6 million people from December 2019 through December 2020.

The ACA’s Inefficiencies

In 2020, the aggregate cost of the ACA’s premium subsidies totaled nearly $53 billion. That works out to more than $25,000 per each of the two million newly insured people in the individual market overall compared to before the ACA was enacted. Another way of looking at it: Since these two million people, on net, were shifted from employer coverage to the individual market rather than newly acquiring private coverage, the ACA has resulted in the federal government sending about $49 billion in net subsidies to private health insurance plans with no net gain in coverage. (The $49 billion figure accounts for a $2,000 average tax benefit per person shifted from employer to individual coverage since employer premiums are not subject to federal income or payroll taxes and about two million fewer people with employer coverage.) (These calculations do not reflect differences in coverage between pre-ACA and post-ACA policies.)

On a per-enrollee basis, the Medicaid expansion is also proving much more costly than expected. The Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS) produces an annual financial report on the Medicaid program. In the 2014 report, CMS actuaries projected that the per-enrollee cost of the expansion would be $3,989 in 2018. In its most recent report (the 2018 report), CMS actuaries found that the data suggest the actual per-enrollee expansion cost was $6,089—53 percent above what the actuaries projected when the law’s expanded coverage provisions were just beginning to take effect. It appears that the biggest winners of this new spending are hospitals, with some reduction in uncompensated care, and insurance companies that reaped windfall profits from the expansion.

A Better Way Forward

A primary problem, if not the most glaring problem, with the ACA is that the design of both the Medicaid expansion and premium subsidies produce significant low-value health spending. State spending on Medicaid expansion is almost completely reimbursed by the federal government, which reduces states’ incentives to ensure that spending is put to good use. And the design of health insurance subsidies in the ACA exchanges, which limits what people owe to a certain percentage of their income, generally insulates households from premium increases as the federal government picks up the cost. The American Rescue Plan Act significantly worsens the situation by lifting any income restrictions on who is now eligible for premium subsidies and making federal Medicaid subsidies to states even more generous.

Rather than doubling down on the ACA’s inefficiencies by directing even more subsidies to health insurance companies or trying to coerce more states to expand Medicaid, it’s time for a different approach. Such an approach could build on the new individual coverage health reimbursement arrangements (ICHRAs). Through a rule that took effect on January 1, 2020, employers can now reimburse their employees for individual market coverage. In essence, this rule equalizes the federal tax preference between traditional group plans selected by the employer and defined contribution arrangements that employers use so that their employees can select individual market plans that work best for them. In addition to expanding employee choice over their insurance coverage, it also makes coverage more portable as people will be less likely to lose their plan when they change jobs.

According to projections from the Department of Treasury, by the end of this decade, nearly 11.4 million individual market enrollees will use an HRA to purchase individual market coverage. Of the 11.4 million, about 3.8 million would have had individual coverage without an ICHRA, 6.9 million would have had a traditional employer plan, and 0.8 million would have been uninsured. On net, ICHRAs are projected to add nearly eight million people to the individual market—far more than will likely be added by boosting subsidies to health insurers—without any new federal spending as employer contributions are used. This should help improve the overall individual market without the adverse effects from expanding the ACA subsidy structure.

Building on the ICHRA rule could involve reforms to the ACA’s regulatory structure in ways that would lower average premiums, such as eliminating the law’s age-rating band and minimum loss ratio and loosening benefit mandates; permitting people to use the contributions on a wider range of plans; and permitting lower-income households to combine an employer contribution with a government subsidy to help them afford coverage. Rather than adding more taxpayer money on top of the ACA’s inefficient subsidy structure, this approach would preserve taxpayer dollars and provide households with more options to purchase coverage that works best for them.

Author’s Note

The author is a senior research fellow at the Galen Institute and a visiting fellow at the Foundation for Government Accountability.