ECONOMIC REPORT OF THE PRESIDENT

But these efforts left significant gaps even for children. They left even larger
gaps for adults. Prior to the ACA, most state Medicaid programs did not
cover adults without children, no matter how low their incomes, and the
median state only covered working parents with incomes below 61 percent
of the Federal Poverty Level (Heberlein, Brooks, and Alker 2013). As a
result, low- and moderate-income non-elderly adults were by far the age and
income group most likely to lack health insurance, as illustrated in Panel B
of Figure 4-3.
Failures of the Individual Health Insurance Market
In addition to the affordability challenges described above, many
uninsured Americans faced an additional barrier: the dysfunction of the
individual health insurance market. While most non-elderly individuals
had access to coverage through an employer, it was far from universal, even
at relatively high income levels, as depicted in Figure 4-4. Retirees, many
students, the self-employed, people working part-time due to family or other
obligations, and the unemployed were all particularly likely to lack access to
coverage through the workplace, as were individuals who happened to work
at smaller firms or in industries where insurance coverage was not commonly
offered. These individuals, if they did not qualify for public programs,
had no choice but to turn to the individual market.
The fundamental flaw of the pre-ACA individual health insurance
market was that, unlike the employer market, the individual market lacked
a mechanism for forming broad pools that included both relatively healthy
and relatively sick individuals. The employer market forms broad pools by
taking advantage of the fact that people are matched to employers based on
a wide variety of factors, many of which are only loosely related to health status.
In addition, employers typically cover around three-quarters of the premium,
ensuring participation by a broad cross-section of their workforces,
including both healthier and sicker workers (KFF/HRET 2016). Insurers
offering coverage through employers can therefore be confident that their
products will attract a balanced pool of healthier and sicker enrollees. As a
result, their economic incentives generally drive them to design products
that maximize the well-being of the pool as a whole.
By contrast, insurers in the individual market had to contend with the
possibility of “adverse selection,” the tendency of people with greater health
care needs—and thus higher costs to insurers—to prefer more generous
insurance coverage. Insurers’ concerns that they would attract an adversely
selected pool drove them to engage in a wide range of practices aimed at
discouraging enrollment by sicker individuals. These practices kept the
individual market from performing the core functions of a health insurance
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