The Council of Economic Advisers 

February 2019

September 29, 2017 

Deregulating Health Insurance 

Markets: Value to Market Participants
CEA • Deregulating Health Insurance Markets: Value to Market Participants 1

Executive Summary

February 2019

The Trump Administration’s broad policy agenda is to deregulate markets and expand choice 

and competition to keep costs down for consumers and taxpayers. This report considers three 

changes that have the effect of expanding consumers’ health insurance options: (1) reducing, 

through The Tax Cuts and Jobs Act of 2017, the individual mandate penalty to zero owed by 

consumers who did not have federally approved coverage or an exemption; (2) permitting, via 

a June 2018 rule, more small businesses to form Association Health Plans (AHPs) to provide 

lower-cost group health insurance to their employees; and (3) expanding, through an August 

2018 rule, short-term, limited-duration insurance (STLDI) plans. 

Previous assessments of the Affordable Care Act (ACA) have relied on ad hoc metrics and 

rationales that are related to but do not directly measure or address the impact of regulations 

on market participants. To overcome this problem, we use standard methods of welfare 

economics to assess the potential efficiency gains to the consumers and taxpayers affected by 

the deregulatory reforms. We rely on estimates from the Congressional Budget Office and other 

reliable statistical sources for the basic inputs into this welfare analysis.

Our overall finding is that these changes, including the Trump Administration’s deregulatory 

reforms to expand health coverage options, will generate benefits to Americans that are worth 

an estimated $450 billion over the next 10 years. The reduction of the individual mandate 

penalty to zero accounts for $14 billion per year; the AHP rule accounts for $8 billion per year; 

the STLDI reform accounts for $8 billion per year; and the reduction in the excess burdens of 

labor taxation accounts for $15 billion per year. We estimate that the reforms will benefit lowerand middle-income consumers and all taxpayers but will impose costs on some middle- and 

higher-income consumers, who will pay higher insurance premiums. The benefits of giving a 

large set of consumers more insurance options will far outweigh the projected costs imposed 

on the smaller set who will pay higher premiums. We provide estimates that these reforms do 

not “sabotage” the ACA but rather provide a more efficient focus of tax-funded care to those in 

need. 
CEA • Deregulating Health Insurance Markets: Value to Market Participants 2

Introduction

The Trump Administration’s broad policy agenda is to deregulate markets and expand choice 

and competition to keep costs down for consumers and taxpayers. This report considers three 

deregulatory reforms that expand consumers’ health insurance options: (1) reducing, through 

The Tax Cuts and Jobs Act of 2017, the individual mandate penalty to zero owed by consumers 

who did not have federally approved coverage or an exemption; (2) permitting, via a June 2018 

rule, more small businesses to form Association Health Plans (AHPs) to provide lower-cost 

group health insurance to their employees; and (3) expanding, through an August 2018 rule, 

short-term, limited-duration insurance (STLDI) plans.1 Both 2 and 3 stem from the President’s 

October 2017 Executive Order 13813, “Promoting Healthcare Choice and Competition Across 

the United States” (White House 2017b).

The deregulatory reforms we consider expand options mainly for consumers who purchase 

health insurance individually, through what is known as the nongroup market. Such insurance

provides coverage for about 15 million American consumers in 2018, or a little more than 5 

percent of the population, according to the Congressional Budget Office (CBO 2018b).

2 Many 

consumers who purchase insurance in the nongroup market are in lower- to middle-income 

households. Of the 15 million consumers in the nongroup market, over 60 percent purchased

it in 2018 through the health insurance exchanges established by the Affordable Care Act (ACA). 

Most consumers on the exchanges purchase health insurance that is subsidized through the 

ACA’s premium tax credits and cost-sharing reductions (hereafter, “premium subsidies” or 

“exchange subsidies”). 

The 2010 ACA made several changes to how American consumers obtain health insurance. In 

addition to establishing insurance exchanges in the nongroup market, the ACA expanded 

Medicaid insurance coverage for low-income adults. A growing body of research finds that the 

Medicaid expansions and the ACA premium subsidies have reduced the number of uninsured 

(Courtemanche et al. 2017; Frean, Gruber, and Sommers 2017; Kaestner et al. 2017). However, 

the ACA also imposed a tax penalty on nonexempt consumers who chose not to have ACA

minimum essential coverage. Further, regulations promulgated under the ACA and other laws 

banned a number of insurance options that were popular among consumers who made 

choices based on what was best for them. These regulations are not required by the ACA or 

other laws, so the deregulatory reforms we consider restore and expand options in health 

insurance markets within the existing statutory frameworks, including the ACA. 

In assessing the impact of the ACA and other health insurance regulations, it is crucial to focus 

on how the population being regulated—mainly lower- and middle-income consumers and the 

 1 Throughout the report, we will treat the reduction of the individual mandate penalty to zero as a deregulatory 

action because it removes a regulatory burden, though it is technically considered a legislative change. 2 All the health insurance enrollments cited in this paragraph are CBO (2018b) projections.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 3

taxpayers supporting them—is affected. However, most previous policy assessments have 

focused on metrics, such as how many consumers are insured on the exchanges and the ACA’s

premium growth rates.3 Many public and Congressional evaluations of the ACA have also 

focused on these metrics. However, these metrics relate to, but do not directly capture, the 

well-being of consumers and taxpayers in terms of the full set of costs and benefits they face. 

In this report, we therefore use standard methods of welfare economics to assess the potential 

efficiency gains to the consumers and taxpayers who are being affected by the recent 

deregulatory reforms of health insurance. For example, as opposed to previous evaluations, in 

assessing the mandate penalty tax cut, we use traditional tax incidence analysis. Also, in 

performing our standard welfare analysis, we rely on CBO projections, the analyses contained 

in the AHP and STLDI rules, and other studies.4

Our overall finding is that the Trump Administration’s health insurance deregulations to date 

will generate benefits to Americans that are worth about $450 billion over the next 10 years. 

Setting the individual mandate penalty to zero annually leads to $14 billion in benefits; the AHP 

reform, $8 billion; the STLDI reform, $8 billion; and the reduction in the excess burdens of labor 

taxation, $15 billion.5 We estimate that the reforms will benefit lower- and middle-income 

consumers and all taxpayers, but will impose costs on some middle- and higher-income 

consumers, who will pay somewhat higher premiums. The benefits of giving some consumers 

more insurance coverage options outweigh the costs imposed on those consumers who are 

projected to pay higher premiums. 

One aspect of the projected benefits of the Administration’s deregulatory reforms is that they 

reduce Federal expenditures on ACA premium subsidies and reduce the deficit by $185 billion 

(CBO 2017b, 2018b). Generally, eliminating taxes and subsidies has larger welfare effects 

beyond government revenues due to the excess burden of such measures. The CEA thus finds 

that the regulatory reforms will generate benefits that are larger than the reduction in Federal 

spending. For example, until the AHP and STLDI deregulatory reforms, insurance regulations 

created additional private sector administrative costs that were ultimately borne by 

 3 An exception that focuses on ACA exchange enrollees is the research by Pauly, Leive, and Harrington (2018). A 

partial exception is the CBO’s assessment of the distributional effects of the provisions of the ACA that affected 

means-tested transfers and Federal taxes (CBO 2018a). The CBO’s analysis of the ACA’s impact on the 

distribution of household income is a useful and important step, but it does not capture all the effects included 

in the CEA’s cost-benefit analysis. Examples that focus on the number of consumers insured on the exchanges 

and ACA premiums include Eibner and Nowak’s (2018) assessment of the repeal of the individual mandate 

penalty, and Blumberg, Buettgens, and Wang’s (2018) assessment of State-based individual mandates. 4 To the extent that CBO projections and other projections underestimate or overestimate the effects of the 

reforms on insurance enrollments, our analysis underestimates or overestimates the actual efficiency gains. The 

appendix includes a quantitative analysis of the sensitivity of the results to different assumptions about 

insurance enrollments.

5 In the remainder of the report, the cost benefit analyses show estimates for 2021, when the CBO (2017b, 2018b) 

projects that markets will have largely adjusted to the reforms. The benefits grow over time, so the benefits in 

2021 are lower than average annual benefits over the 10-year horizon.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 4

consumers. Reducing these costs has provided benefits to consumers, even though the costs 

did not appear in Federal budgets. 

As we discuss in more detail later in this report, the often-expressed view that deregulation 

“sabotages the ACA” by giving consumers more insurance coverage options is misguided, for 

several reasons. First, as of February 2018, 87 percent of the enrollees in the ACA’s exchanges

receive premium subsidies and as a result only pay a fraction of their health insurance costs. 

The premium subsidies stabilize the ACA exchanges because the net premiums paid by healthy 

consumers are not a critical source of revenue for the exchanges. Second, as some lower- and 

middle-income consumers potentially depart from the ACA’s exchanges,they will gain benefits 

because they will have a larger range of coverage alternatives. We estimate that 5 million 

consumers will benefit because they will be able to obtain lower-cost insurance that better 

meets their needs through AHP or STLDI coverage. Another 5 million consumers will benefit 

because setting the mandate penalty to zero gives them the option of not paying for health 

insurance they did not want; instead, they can purchase other goods and services that they 

value more highly. Although the benefits of dropping health insurance may be disputed by 

policy analysts focusing on specific insurance-market metrics, our metrics also include the

value held by those who are regulated and can make choices in their own best interest. Our 

metrics also account for “adverse selection” and other frictions that may affect insurance 

markets. We find that consumers and taxpayers can simultaneously benefit when the mandate 

penalty is removed.

In addition to being part of the Trump Administration’s healthcare policy agenda, the health 

insurance reforms are also part of the Administration’s broad deregulatory agenda established 

by Executive Order 13771, “Reducing Regulation and Controlling Regulatory Costs” (White 

House 2017c). Under this Executive Order, in fiscal year 2018, Federal agencies eliminated 176 

regulatory actions and reduced regulatory costs by an estimated $23 billion. This estimate

understates the full impact of deregulation because incomplete information was used in 

accounting for the cost savings.6 Two of the health insurance deregulations featured in this 

report are good examples because they had been the subject of qualitative reviews and thus 

were not included in the estimated $23 billion cost reduction. We estimate that by themselves,

these two deregulations eliminated net costs in the tens of billions of dollars associated with 

restrictions on consumer choice. 

The rest of this report is outlined as follows. The first section explains why the deregulatory 

reforms should not be expected to destabilize the market for ACA-compliant insurance. The 

second section provides background on the deregulatory reforms. This section also reviews 

CBO projections and other studies that provide the basic inputs into our analysis, such as the 

 6 The Office of Information and Regulatory Affairs and Federal agencies established consistent accounting 

standards for regulatory cost savings. However, sometimes agencies are able to provide only qualitative 

information about costs, or are able to only estimate the savings in compliance costs and omit opportunity cost 

savings.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 5

impact of the reforms on the numbers of enrollees in different types of plans and the impact 

on premiums. The third section presents our estimates of the potential effects of the 

deregulatory reforms on consumer welfare. The report concludes with a summary showing 

that over the next 10 years, the potential positive effects of the reforms will be about $450 

billion. 

Deregulatory Reforms and the Stability of the Nongroup Health 

Insurance Market

Some have argued that all the components and regulations of the ACA need to work together 

in order for the act to work economically. In particular, three features are supposed to be 

essential and mutually reliant—the so-called three-legged stool (see Gruber 2010). The stool’s 

first leg is guaranteed issue and community rating, where consumers must be offered coverage 

without the premium varying by preexisting condition or health status. The stool’s second leg 

is the mandate penalty on the remaining uninsured, so that healthy consumers do notjust wait 

to fall ill to sign up. The stool’s third leg is the system to subsidize premiums, so that lower- and 

middle-income consumers can afford coverage. Under this view, deregulatory reforms that 

expand health coverage options outside the ACA’s insurance markets run the risk of 

destabilizing or even sabotaging the ACA’s insurance markets. The relatively healthy 

consumers who might best respond to expanded options are seen as critical sources of ACA 

insurance market revenue because their premiums are expected to exceed their healthcare 

claims.7

However, several features of insurance markets contradict this logic. Most important, the 

common argument that the individual mandate is valuable is misguided, due to the large ACA 

premium subsidies. The view that deregulation sabotages the ACA is based on the assumption 

that the premiums paid by unsubsidized healthy consumers are a critical source of exchange 

revenue.8 But Federal subsidies through premium tax credits and cost-sharing reductions are 

far more important. Figure 1 displays annual premiums as a function of family income and 

composition. Only consumers who are ineligible for premium subsidies—typically, those with 

incomes higher than 400 percent of the Federal poverty line—actually pay the entire premium. 

In 2018, only 13 percent of consumers who purchased insurance on the ACA’s exchanges did

 7 When it adopted the ACA, Congress itself evidently believed that the individual mandate was necessary to a 

regulatory scheme that included guaranteed issue and community rating. Congress expressly found that the 

individual mandate was “essential to creating effective health insurance markets in which improved health 

insurance products that are guaranteed issue and do not exclude coverage of pre-existing conditions can be 

sold” and that “the absence of the [individual mandate] would undercut Federal regulation of the health 

insurance market” (42 U.S.C. § 18091). 8 This is closely related to “adverse selection”: the departure of a healthy person from a risk pool is purported to 

be adverse in terms of reducing plan premium revenue more than it reduces claims. Due to the ACA subsidies, 

adverse selection will operate differently, in that subsidized healthy persons will have less of an incentive to 

leave the ACA’s exchanges.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 6

not receive subsidies and therefore paid the full premium.

9 The other 87 percent of exchange 

consumers receive subsidies through the ACA premium tax credits and thus pay just a fraction 

of the full premium. For example, a family of four with an annual income of $55,000 after the 

subsidy pays under $4,000 in premiums, or about 17 percent of the full premium. ACAcompliant coverage is sold both on and off the ACA’s exchanges, but subsidies are available 

only for coverage purchased on the exchanges. Including both on- and off-exchange ACAcompliant individual market coverage, about 30 percent of consumers who purchased

insurance on the ACA-compliant individual market paid the full premium in 2017.

The regulatory reforms expand health coverage options, and to the extent that the consumers 

who choose these options and leave the ACA exchanges are healthier than average, their 

departure is expected to somewhat raise gross premiums for those who remain on the 

exchanges.10 But for most consumers who remain on the exchanges, the higher premiums will 

 9 “Grandfathered” plans that were in effect when the ACA was passed are exempt from some of the ACA 

provisions. The fraction of workers with employer-sponsored insurance enrolled in grandfathered plans 

decreased from 56 percent in 2011 to 16 percent in 2018 (Kaiser Family Foundation 2018). During the transitional 

period, another set of “grandmothered” plans have also been exempt from certain ACA provisions.

10 Below, we cite and use CBO projections that the combined effect of the three deregulatory reforms will be to 

increase exchange premiums by 12.5 percent (CBO 2017b, 2018b; CMS 2018b). The projections assume that the 

reforms will induce healthier-than-average members to leave the exchanges, which can be justified by the 

observation that the difference between premiums and expected healthcare claims risk is greater for healthier 

consumers. The CEA adopts the same assumption, but notes that claims risk is often not the primary 

characteristic determining who is insured (Cawley and Philipson 1999; Cohen and Siegleman 2010; Einav and 

Finkelstein 2011).

0

5,000

10,000

15,000

20,000

25,000

25,000 35,000 45,000 55,000 65,000 75,000 85,000 95,000 105,000

Household Income (dollars, 2018)

Unsubsidized premium

Subsidized premium

Figure 1. Subsidized and Unsubsidized Premiums as a Function of 

Household Income for a Family of Four, 2018

Maximum payment (dollars, 2018)

Sources: Kaiser Family Foundation; CEA calculations.

Note: The annual premium is the national average for a family of four with two 50 year-old adults and two teenagers 

with no tobacco use.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 7

be mainly paid by taxpayers, not the consumers themselves. Although the CBO projects that 

setting the individual mandate tax penalty to zero will encourage healthier-than-average 

enrollees to leave the ACA’s exchanges, the CBO also projects that their departure from 2018 

through 2027 will reduce Federal expenditures on ACA premium subsidies by $185 billion (CBO 

2017b; Gruber 2010).

11 It is surprising that setting a tax to zero reduces the Federal deficit. Of 

course, CBO projections of Federal expenditures are uncertain. But figure 1 shows the origin of 

the projections: For consumers with family incomes less than 400 percent of the Federal 

poverty line, the individual mandate penalty taxes them for turning down large amounts of 

government assistance. 

Encouraging consumers to buy ACA-compliant individual coverage by prohibiting various 

alternative types of coverage would be even more inefficient than pushing them with a 

financial penalty. The prohibitions destroy value without delivering any funds to the Treasury

(or to taxpayers).

The role of the ACA premium subsidies in stabilizing the exchanges is acknowledged by others

(CEA 2017; Sacks 2018; Collins and Gunja 2018). The premium subsidies’ stabilizing role is 

consistent with the experience of the past few years, as rising premiums have not curtailed 

demand. ACA exchange premiums have almost doubled in just a few years (figure 2), while 

there has been hardly any change in exchange enrollment.12 Figure 2 illustrates how the U.S.

Treasury (i.e., taxpayers) has shouldered almost the entire premium increase for ACA plans. 

Even though gross premiums almost doubled between 2014 and 2018, many lower- and 

middle-income consumers were insulated from the effects of these increases by the subsidies. 

Although there may have been other factors at work, these trends are consistent with CBO 

(2017b, 2018b) projections that further increases in the full exchange premiums (usually 

referenced as the “gross” premiums) will not destabilize the ACA’s exchange markets. As 

further evidence of the stability of the ACA exchanges, from 2018 to 2019 the benchmark ACA 

premiums dropped by 1.5 percent.

 11 Taking into account all the effects of setting the individual mandate penalty to zero, the CBO projects a $338 

billion reduction in Federal expenditures from 2018 through 2027, $179 billion of which is a reduction in Federal 

expenditures on Medicaid (CBO 2017b). 

12 Figure 2 does not include cost-sharing reduction (CSR) payments or reinsurance payments; Fiedler (2018) 

calculates that CSR payments were equivalent to about 9 percent of average exchange premiums in 2017.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 8

The individual mandate penalty adds an unnecessary leg to the ACA stool, which results in 

economic inefficiencies. Comprehensive insurance, particularly with extremely low cost

sharing, could cause patients to consume healthcare that provides little benefit relative to the 

cost.

13 The significant decline in premium subsidies as income rises also distorts labor markets 

by taxing income and some types of full-time employment and introduces another marriage 

penalty into the tax code (Mulligan 2015).

14 Consumers have heterogeneous preferences for 

risk, smooth cash flow, and a range of coverage. As such, it is wasteful to use a tax penalty to 

coerce people to purchase insurance that does not meet their needs (Mulligan and Philipson 

2004). 

In sum, the three-legged-stool justification for the individual mandate tax penalty is not 

consistent with the basic facts of how the ACA is structured. The penalty and other restrictions 

on consumer choice are not needed to support the guaranteed issue of community-rated 

 13 The possibility that insurance causes patients to use healthcare that provides little benefit relative to cost is 

known as moral hazard. Moral hazard is not unique to ACA-compliant insurance, but the requirements of the 

ACA restrict market mechanisms for reducing moral hazard. Some evidence suggests that higher cost sharing to 

reduce moral hazard causes consumers to reduce healthcare used across the spectrum of services, including 

potentially valuable services (Brot-Goldberg et al. 2017). Cost sharing may be a blunt tool to limit moral hazard, 

but it is only one potential market response. The CEA (2018) discusses the large body of evidence that the 

additional healthcare consumed by consumers as the result of insurance provides little benefit relative to cost. 14 Unfortunately, many of the “health insurance simulation models” ignore moral hazard and any effect of health 

insurance policy on labor market equilibrium. The simulations therefore rule out by assumption many of the 

benefits of allowing consumers to voluntarily leave ACA-compliant plans. See Gallen and Mulligan (2018) for 

further discussion of these issues.

1,447 1,480 1,509 1,527 1,529

3,128 3,149 3,504

4,521

6,520

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2014 2015 2016 2017 2018

Out-of-pocket premium cost Premium tax credit

Figure 2. Gross Premiums Per Member Per Year for Subsidized 

Enrollees, 2014–18 

Dollars

Source: Kaiser Family Foundation.

Note: Annual data show average national premium for a single, nonsmoking 50-year-old earning 200 percent of the 

Federal poverty line with no children.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 9

health insurance to all consumers, including those with preexisting conditions. The ACA 

premium subsidies stabilize the exchanges.

The Trump Administration’s Deregulatory Health Insurance

Reforms

In this section, we provide details of the three deregulatory health insurance reforms, the 

regulations they replaced, and the available estimates of how many consumers are thus 

expected to change insurance status. First, we discuss the individual mandate penalty, and 

then the expansions of Association Health Plans (AHPs) and short-term, limited-duration 

insurance (STLDI). This report looks primarily at Federal programs and regulations related to 

private health insurance and the insurance status of nonelderly consumers whose income is 

above the poverty line. The CEA is still examining deregulation effects on Medicaid 

participation.

Setting the Individual Tax Mandate Penalty to Zero

The Tax Cuts and Jobs Act of 2017 involved a tax cut on uninsurance as well as people 

purchasing noncompliant ACA coverage like STLDI by setting the individual mandate penalty

to zero, becoming effective in the 2019 tax year. The ACA individual mandate requires 

nonexempt consumers to have one of several enumerated forms of insurance coverage. It was 

enforced with a monetary penalty that by 2016 was 2.5 percent of income above the tax-filing 

threshold or $695 per adult per year, whichever is greater, but capped at the national average 

bronze plan premium amount.

15 Part of our analysis is the amount of penalty revenue that 

would have been collected over the next 10 years if the act had not set the penalty to zero. We 

take the revenue projections from the CBO, and note their consistency with actual collections 

for tax year 2016, which is the first year that the ACA put the full penalty in place. In that year, 

about 4 million returns included individual mandate payments, down from 6.7 million for tax 

year 2015 (table 1). The average 2016 penalty paid per household return was $708.

16 The 

mandate tax penalty is a regressive tax that falls more heavily on the relatively poor; the 

majority of those who paid the tax penalty in 2015 were lower- and middle-income consumers 

with incomes less than 400 percent of the Federal poverty line. 

 15 See IRS (2018). The penalty is half the amount for children under age 18. The flat part of the penalty is capped 

at $2,085 per family in 2016. The ACA adjusted the dollar amounts for inflation in years after 2016. Before 2016, 

lesser amounts applied.

16 Note that the penalty applies only to the months and family members that failed to have either coverage or an 

exemption. 
CEA • Deregulating Health Insurance Markets: Value to Market Participants 10

Table 1. IRS Reporting of Individual Mandate (IM) Payments, 2014–16

Tax Year

Returns Paying IM 

Penalty (millions 

of people)

IM Revenue

(billions of 

dollars)

Mean Penalty 

Paid (dollars)

Minimum 

Statutory Penalty 

per Person-Year

(dollars)

Exemptions

(millions of 

people)

2014 8.1 1.69 210 95 12.4

2015 6.7 3.11 465 325 12.7

2016 4.0 2.83 708 695 10.7

Sources: Internal Revenue Service; Taxpayer Advocate Service; Busch and Houchens (2018); CEA calculations.

Analyses looking at the effect of removing the individual mandate penalty provide a range of 

estimates of the impact on the number of insured consumers and on gross ACA premiums. The 

estimates refer to increases in the full ACA premiums (gross of subsidies), not the out-of-pocket 

(net) premiums enrollees pay after taking into account the premium subsidies they receive.

The CBO projects that setting the mandate tax penalty to zero will result in 3 million fewer 

consumers with ACA-compliant nongroup insurance coverage in 2019, 4 million fewer in 2020, 

and 5 million fewer each year from 2021 through 2027 (CBO 2017b).17 Because the enrollees 

who leave ACA-compliant individual coverage are projected to be healthier than those 

remaining, the CBO also projects that the gross premiums will rise by an average of 10 percent.

Nevertheless, the CBO projects that the 2018–27 budgetary impact of setting the mandate 

penalty to zero will be to reduce the Federal deficit, which includes a $185 billion reduction in 

Federal expenditures on ACA premium subsidies. A study published by the Commonwealth 

Fund analyzed the impact of setting the individual mandate penalty to zero under 10 scenarios

(Eibner and Nowak 2018). Each scenario reflected different assumptions about how people 

respond to both financial and nonfinancial factors. In this study’s baseline scenario, setting the 

mandate penalty to zero is predicted to reduce enrollment in the nongroup market by 3.4 

million in 2020 and to increase the gross premium for bronze plans on the ACA’s exchanges by 

7 percent (Eibner and Nowak 2018). 

Association Health Plans 

On October 12, 2017, President Trump signed Executive Order 13813, “Promoting Healthcare 

Choice and Competition Across the United States” (White House 2017b), which directed the 

Secretary of Labor to consider proposing regulations to ease employers’ abilities to form 

Association Health Plans (AHPs) that allow small businesses to group together to self-insure or 

purchase large group insurance. AHPs enable employers to band together, which decreases 

administrative costs through economies of scale. The Department of Labor finalized this new 

rule on June 21, 2018, pursuant to its authority under the Employee Retirement Income 

Security Act (known as ERISA). 

 17 The CBO also projects voluntary reductions in Medicaid enrollment and enrollment in employment-based 

coverage. The CEA is still studying these effects, which thus are not included in the current analysis.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 11

The 2018 AHP rule allows small businesses to form associations to provide more affordable 

health coverage by taking advantage of economies of scale. Many uninsured Americans today 

work for small businesses. The ACA subjected health insurance coverage for small businesses 

to mandated coverage of essential health benefits and price controls that are not required for 

large businesses. The AHP rule also broadens plan participation eligibility to sole proprietors. 

New AHPs can form by industry or geographic area (e.g., metropolitan area, State). Fully

insured AHPs could be established beginning on September 1, 2018, while self-funded AHPs 

will need to wait until early 2019.18

Two studies provide estimates of the effects of the AHP rule on insurance coverage and ACA 

premiums. The CBO (2018b) projects that after the rule is fully phased in, it will expand AHP 

enrollments by about 4 million people. And the CBO projects that the consumers who switch 

to AHP coverage will be healthier than average. Based on these CBO projections, we estimate 

that the AHP rule will cause gross (of subsidy) premiums in the individual market to increase 

by slightly more than 1 percent.

19 These CBO projections also imply that the 2018–28 budgetary 

impact of the AHP rule will be to reduce the Federal deficit by $0.45 billion.20 Another study 

estimated that the proposed rule on AHPs will cause 3.2 million enrollees to leave the 

individual and small group markets and enter AHPs by 2022 (Avalere 2018).

Short-Term, Limited-Duration Insurance

Executive Order 13813 also directed the Secretaries of the Treasury, Labor, and Health and 

Human Services to consider issuing regulations to expand the market for short-term, limitedduration insurance (STLDI). On August 3, 2018, these departments published a final rule that

extended the length of the initial STLDI contract term to less than 12 months and allowed for 

the renewal of the initial insurance contract for up to 36 months, which is the same as the 

 18 Existing associations may establish a self-funded AHP on January 1, 2019, and new associations may establish 

a self-funded AHP on April 1, 2019. 19 The CBO (2018b) projects that the combined effect of the AHP and STLDI rules will be to increase gross 

premiums in the individual and small group markets by about 2.5 percent. We estimate the fraction of the 

premium increase that is due to the AHP rule, as follows. The CBO projects that after the rules, 3.6 million 

currently insured consumers will switch into AHPs, and 1.35 million currently insured consumers will switch into 

STLDI coverage. Avalere (2018) estimates that 30 percent of the new AHP enrollees will be from the individual 

market and 70 percent will be from the small group market. Based on these estimates, we assume that about 1.1 

million consumers will switch from individual coverage into AHP coverage and 2.5 million will switch from small 

group coverage into AHP large group coverage. We assume that 100 percent of the 1.35 million new STLDI 

enrollees will be from the individual market. Based on these assumptions, the AHP rule accounts for 1.1 million 

of the 2.45 million enrollment drop caused by the two rules, which is 45 percent. We estimate that it accounts for 

the same share (45 percent) of the 2.5 percent premium increase rate, i.e., slightly more than 1 percentage point. 20 The CBO projects that the combined effect of the AHP and STLDI rules will be to reduce the Federal deficit by 

$1 billion. For reasons explained in footnote 19, we estimate that the AHP rule will account for 45 percent of the 

reduction. 
CEA • Deregulating Health Insurance Markets: Value to Market Participants 12

maximum coverage term required under COBRA continuation coverage (83 FR 38212; U.S.

Congress 1985).

21 The 2018 STLDI rule reversed a rule issued by the previous Administration in 

2016. The 2016 final rule expressed a concern that consumers were purchasing STLDI as their 

primary form of coverage to avoid ACA requirements. The 2016 rule therefore shortened the

total duration of STLDI plans from less than 12 months to less than 3 months (81 FR 75316).

Because STLDI plans are not considered to be individual health insurance coverage under the 

Health Insurance Portability and Accountability Act and the Public Health Service Act, STLDI 

coverage continues to be exempt from all ACA restrictions on insurance plan design and 

pricing. This allows STLDI to offer a form of alternative coverage to those who do not seek 

permanent individual health insurance coverage. The STLDI rule requires that STLDI policies 

must provide a notice to consumers that these plans may differ from ACA-compliant plans and, 

among other differences, may have limits on preexisting conditions and on health benefits, and 

have annual or lifetime limits.22 Insurers were allowed to begin issuing STLDI plans on October 

2, 2018—60 days after publication of the final rule.

Four studies provide estimates of the nationwide effects of the STLDI rule on insurance 

coverage and ACA premiums. The CBO projects that the STLDI regulatory reform will result in 

an additional 2 million consumers in STLDI plans by 2023 (CBO 2018b). Based on CBO 

projections, we estimate that the STLDI rule will increase gross premiums by slightly more than 

1 percent in the same time frame.

23 Based on CBO projections, we estimate that the 2019–8 

budgetary impact of the STLDI rule will be to reduce the Federal deficit by $0.5 billion.24 The 

Centers for Medicare & Medicaid Services (CMS 2018b) projects that by 2022, 1.9 million 

consumers will take up STLDI policies and that, as a result, gross premiums for ACA coverage 

could increase by up to 6 percent by 2022. A study published by the Urban Institute in 2018 

 21 The 1985 Consolidated Omnibus Budget Reconciliation Act (COBRA) provides for the continuation of employer 

health coverage that would be otherwise canceled due to job separation or other qualifying events. 22 ACA compliant coverage, included coverage offered on the exchange, continue to have no limits on preexisting 

health conditions.

23 The CBO (2018b) projects that the combined effect of the AHP and STLDI rules will be to increase gross 

premiums in the individual and small group markets by about 2.5 percent. We estimate the fraction of the 

premium increase that is due to the STLDI rule as follows. The CBO projects that after the rules, 3.6 million 

currently insured consumers will switch into AHPs and 1.35 million currently insured consumers will switch into 

STLDI coverage. Avalere (2018) estimates that 30 percent of the new AHP enrollees will be from the individual

market and 70 percent will be from the small group market. On the basis of these estimates, we assume that 

about 1.1 million consumers will switch from individual coverage into AHP group coverage. We assume that 100 

percent of the 1.35 million new STLDI enrollees will be from the individual market. Based on these assumptions, 

the STLDI rule accounts for 1.35 million of the 2.45 million enrollment drop caused by the two rules, which is 55 

percent. We estimate that it accounts for the same share (55 percent) of the 2.5 percent premium increase rate—

i.e., slightly more than 1 percentage point. 24 The CBO projects that the combined effect of the AHP and STLDI rules will be to reduce the Federal deficit by 

$1 billion. For reasons explained in footnote 23, we estimate that the STLDI rule accounts for 55 percent of the 

reduction.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 13

predicts that the rule could increase STLDI enrollment by 4.2 million while slightly reducing 

deficits, but does not provide an estimate of the impact on gross ACA premiums.25 A 2018 study 

published by the Commonwealth Fund estimates that the rule could increase STLDI enrollment 

by 5.2 million and could increase gross ACA premiums by 2.7 percent (Rao, Nowak, and Eibner

2018).

Cost-Benefit Analysis of the Deregulatory Reforms

In this section, we report the results of traditional welfare analyses of the Trump 

Administration’s deregulatory reforms that expand consumer health coverage options. This 

contrasts to most previous policy assessments, which examined various metrics such as the 

fraction insured or the growth rate in ACA exchange premiums. These metrics are related to, 

but do not directly capture, the well-being of those regulated. We first present and discuss the 

analysis of the effects of the reforms for 2021, when the CBO (2017b, 2018b) projects that 

markets will have largely adjusted to the changes. When we sum up the results in the 

conclusion, we provide estimates of the reforms’ total benefits from 2019 through 2029. 

We use CBO projections and other estimates to conduct prospective cost-benefit analyses of 

the three deregulatory reforms.26 We discuss each reform’s benefits and costs separately, but 

our analysis accounts for interactions between them. Specifically, the CBO (2018b) projects the 

combined impact of the AHP and STDLI rules, and incorporates the effects of the repeal of the 

mandate penalty. For example, CBO projections of the growth in STLDI coverage take into 

account the zero mandate penalty. Because the reforms are not independent, if one of the 

deregulatory reforms were repealed, it would be necessary to re-estimate the other reforms’ 

benefits and costs.

Analysis of Setting the Individual Mandate Tax Penalty to Zero

Setting the ACA’s individual mandate penalty to zero benefits society by allowing people to 

choose not to have health coverage without facing a tax penalty, and potentially by saving 

taxpayers money if fewer consumers purchase heavily subsidized ACA coverage. We estimate 

that setting the mandate penalty to zero in 2021 yields benefits worth $12.6 billion.

 25 Blumberg, Buettgens, and Wang (2018), contrary to the CEA’s analysis, assume that STLDI is unavailable 

without the new rule.

26 It would be instructive to use data on how health insurance markets evolve over the next few years to followup this study with a retrospective cost-benefit analysis. The Department of Labor conducted a regulatory impact 

analysis of the AHP final rule. The Department of the Treasury, the Department of Labor, and the Department of 

Health and Human Services conducted a regulatory impact analysis of the STLDI final rule. Our cost-benefit 

analyses of the AHP and STLDI rules build on and provide quantified estimates of benefits and costs in these 

regulatory impact analyses. Our study relies on CBO projections that were published after the end of the 

comment periods for the AHP and STLDI final rules.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 14

We first describe in qualitative terms our cost-benefit analysis of the effects of setting the 

mandate penalty to zero. Without the tax penalty, consumers are likely to choose to reduce 

their ACA-compliant coverage, which refers in this section to coverage purchased on the ACA 

exchanges and coverage obtained outside the exchanges as long as it complies with the 

provisions of the ACA. Our analysis begins by recognizing that consumers value the ACAcompliant coverage they give up: the coverage yields social benefits.27 To the extent that these 

consumers are healthier than average, including them in the insurance pool also benefits 

others in the pool by reducing the premium needed to cover the pool’s average healthcare 

expenditures. 

At the same time, of course, society incurs costs to provide health insurance coverage. 

Providing insurance to those who value it most highly nets large social benefits. Insuring more 

and more of the population nets progressively smaller social benefits, because the coverage 

still costs society but is directed at enrollees who do not value the coverage as highly. When 

insuring even more of the population requires providing insurance to enrollees who value the 

insurance at less than what it costs society, on net the social benefits become negative. In 

figure 3, this is captured by the downward-sloping net marginal social benefits (MSB) schedule,

which shows that as enrollment increases, the net social benefits decline and eventually 

become negative. The MSB schedule is the cumulative distribution of net social benefits; for 

illustrative purposes only, the MSB schedule in figure 3 is linear.28 The appendix provides more 

discussion of figure 3. 

Our cost-benefit analysis summarized by the MSB schedule in figure 3 uses standard methods 

in welfare economics. Consumers’ decisions about whether to have ACA-compliant coverage 

reveal the value that consumers place on this coverage. The value consumers place on 

insurance reflects their expected healthcare expenditures and the value they place on reducing 

their financial risk. After the mandate penalty is set to zero, some consumers who choose not 

to have ACA-compliant coverage might have higher healthcare expenditures than they 

 27 Following much of the cost-benefit literature, the CEA uses the Kaldor-Hicks criterion, which means that all 

citizens’ benefits and costs are measured in dollars, with all citizens’ totals getting the same weight. In keeping 

with this focus on Kaldor-Hicks economic efficiency, our analysis estimates the value of health insurance

coverage to the consumers themselves. The appendix discusses an extension that allows for health insurance 

coverage for low- and middle-income consumers to be a merit good. Although the merit good argument 

supports public subsidies for health insurance coverage for low- and middle-income consumers, it is not clear 

that it justifies imposing a tax penalty, or imposing regulations that degrade unsubsidized coverage, to force 

those consumers to accept the subsidies. 

28 As noted below, our triangle analysis assumes that the MSB schedule is approximately linear in the portion of 

the distribution that responds to the removal of the tax penalty. We also assume zero economic profits for 

insurers, in that premium revenues are exhausted by claims and loads. Loads, in turn, reflect competitive 

payments to labor and capital employed in the insurance industry.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 15

expected and also lack coverage. This would not necessarily mean that these consumers were 

unwise in their choice of insurance; they were simply unfortunate.29

Figure 3. Benefits of Setting the Individual Mandate Penalty to Zero

Although the MSB schedule shown in figure 3 reflects the value that consumers place on their 

own health insurance, it also captures a set of third-party effects. First, some consumers who 

lack insurance coverage and then fall ill or have an accident receive uncompensated care from 

providers. The providers might bear some or all of the costs of uncompensated care; or they 

might pass some of the costs along to other third parties, such as privately insured patients. 

Garthwaite, Gross, and Notowidigdo (2018) analyzed confidential hospital financial data and 

concluded that, on average, each additional uninsured person costs hospitals about $800 each 

year. We use this result to estimate the third-party effects of uncompensated care provided to 

consumers who do not have ACA-compliant coverage. Second, to the extent that the enrollees 

who choose to leave the market are healthier than average, their health insurance decisions 

will increase insurance premiums charged to those who remain in ACA-compliant coverage. 

Most of the enrollees who remain in ACA-compliant coverage receive premium subsidies, 

which means that this effect mainly increases Federal expenditures on the subsidies. A subset 

of enrollees who do not receive subsidies will pay higher premiums. Our empirical 

 29 The appendix discusses the alternative approach in behavioral welfare economics that assumes that 

consumers make systematically unwise decisions that are not in their own best interests. The appendix 

discusses in qualitative terms the implications of this extension for the results of our cost-benefit analysis.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 16

implementation of the MSB schedule incorporates the third-party effects on uncompensated 

care, on Federal expenditures for premium subsidies, and on premiums paid by nonsubsidized 

enrollees.

We conclude that setting the individual mandate penalty to zero benefits society by reducing 

inefficient coverage in the market for ACA-compliant health insurance. The ACA premium 

subsidies are the first source of inefficiency. The premium subsidies are provided to make 

health coverage more affordable to lower- and middle-income consumers. Although the 

subsidies help the enrollees who receive them, on net the subsidies reduced the social benefits 

from health insurance because they resulted in a number of enrollees who valued the 

insurance at less than its cost. Pauly, Leive, and Harrington (2018) also estimate that many 

uninsured consumers experience financial losses due to ACA coverage.30 The tax penalties that 

enforced the individual mandate are the second source of inefficiency and exacerbate the 

inefficiency due to the premium subsidies. 

Setting the individual mandate penalty to zero may reduce some ACA premium subsidy 

payments and, if it does, generate a social gain. It is often the case in cost-benefit analysis that 

a reduction in subsidy payments is merely a transfer that leaves social benefits unchanged; the 

benefits to taxpayers are exactly offset by the costs to the recipients who lose the subsidy. The 

ACA premium subsidy is properly treated as a transfer when the task is evaluating the effects 

of the subsidy—that is, when comparing the ACA with premium subsidies with a hypothetical 

ACA without subsidies. But the purpose of this report is to evaluate the effect of relaxing 

restrictions on consumer choice, not changing the ACA premium subsidy rules. We refer 

readers to the subset of individuals who, as shown in figure 3, may have subsidized ACA 

coverage only due to the mandate penalty. To illustrate: An individual who voluntarily gives up 

his or her $6,000 subsidy when the $861 penalty is removed is not, by comparison with his or 

her situation with the penalty in place, harmed because the Treasury is no longer providing a 

subsidy.

31 Instead, the individual has received a benefit by no longer being constrained by a 

penalty at the same time that taxpayers benefit by no longer having to finance the $6,000 

subsidy. The CEA’s application of standard welfare economics to this situation is proper but 

unfamiliar because of the ACA’s complicated design and related regulations.

32

 30 On the basis of research in behavioral economics, some might question the judgment of consumers for whom 

a large subsidy is not enough by itself to induce them to purchase ACA-compliant insurance. Such an 

assessment ignores the reality of the ACA’s exchanges. With administrative loading fees, price controls, moral 

hazard, premium subsidies that distort labor markets, and heterogeneous preferences, it is perfectly 

reasonable, and consistent with economic efficiency, for a risk-averse person to go uninsured when his or her 

risk is low enough. The appendix includes additional discussion of the implications of behavioral economics 

research for our analysis.

31 This report does not consider a policy of changing the subsidy amounts specified in the ACA. Reducing these 

amounts would harm even the marginal individuals who receive the subsidies solely because of the individual 

mandate.

32 Goulder and Williams (2003) discuss the importance of including general equilibrium interactions when 

estimating the net social loss due to an excise tax when there are preexisting distortions in other markets. In 
CEA • Deregulating Health Insurance Markets: Value to Market Participants 17

We use data from the CBO’s (2017b, 2018b) projections to estimate the effects of setting the 

individual mandate tax penalty to zero. The CBO projects that setting the tax penalty to zero

will decrease enrollment in ACA-compliant coverage in 2021 by 5 million enrollees. We estimate 

that after accounting for the average premium assistance received and the other third-party 

effects, each of these 5 million enrollees reduces third-party expenditures by $2,083.

33 If it had 

not been set to zero, the average tax penalty would have been $861 in 2021.

34 As a result of 

these two market frictions, we estimate that each of these enrollees valued their coverage by 

$2,514 less than what it cost society.35 In figure 3, the social benefits of repealing the mandate 

are given by the base of area A (5 million) multiplied by its average height, which measures the 

value gap ($2,514). That is, aggregated over the 5 million enrollees, we estimate that setting 

the individual mandate tax penalty to zero will yield social benefits of $12.6 billion in 2021. 

 

their framework, the tax penalty on being uninsured creates an additional social cost in the market for ACAcompliant coverage because that market is distorted by the ACA premium subsidies. The additional social cost is 

measured by a “rectangle” equal to the preexisting subsidy times the change in quantity in the ACA-compliant 

market caused by the mandate penalty tax. That is, the premium subsidy payments were part of the social loss 

created by the tax penalty. So, in our analysis, the reduction in the subsidy payments are part of the social 

benefits created by the tax penalty repeal. Our analysis accounts for important general equilibrium interactions 

between the deregulatory reforms and preexisting distortions created by the premium subsidies and labor 

market taxation. However, our analysis does not account for all possible interactions. We assume that additional 

potential distortions are small, often because they are addressed by other existing policies. For example, laws 

requiring vaccinations address potential positive externalities, and antitrust laws address potential market 

power in health insurance and healthcare markets. The appendix discusses in qualitative terms the sensitivity of 

our analysis to the extent of certain market frictions not included in our baseline approach. 33 That is, the difference could be negative if there were no premium assistance. The CBO (2017b) projects that 

the net impact of the individual mandate penalty repeal is to reduce premium assistance paid in 2021 by $19 

billion. This captures the reduction in premium assistance due to lower ACA enrollment and the increase in 

premium assistance provided to the subsidized enrollees who remain on the ACA exchanges. The increase in 

premium assistance is due to the CBO’s projection that the enrollees who leave are healthier than average, so 

they were previously paying cross-subsidies to the remaining subsidized enrollees. The CBO projects that the 

mandate penalty repeal leads to 5 million fewer enrollees in 2021, so the average net saving is $3,800 per 

consumer. The enrollees who leave were also previously paying cross-subsidies to the unsubsidized enrollees 

who remain on the exchanges. Taking into account the projected increase in premiums paid by unsubsidized 

consumers reduces the net value from $3,800 to $3,072 per consumer who leaves ACA-compliant coverage. We 

also take into account the projected increase in hospitals’ uncompensated care costs. Garthwaite, Gross, and 

Notowidigdo (2018) estimate that in 2011, each additional uninsured person costs hospitals about $800 each 

year. We use the CMS Personal Health Care Price Index and CMS (2018b) projections to estimate that the value of 

uncompensated care in 2021 will be $989 per uninsured person. This reduces the net value from $3,072 to $2,083 

per consumer who leaves ACA-compliant coverage. 34 From table 1 above, the average tax penalty paid in 2016 was $708. We assume that the tax penalty would have 

grown at an annual rate of 4 percent.

35 We use the standard Harberger triangle analysis to measure the deadweight loss of the tax penalty. The tax 

penalty averages $861 per enrollee, so the triangular area of deadweight loss per person induced to take 

compliant coverage equals half of $861, which is $431. This is added to the $2,083 net subsidy to arrive at an 

average gap of $2,514. 
CEA • Deregulating Health Insurance Markets: Value to Market Participants 18

It is important to note that our analysis takes into account both benefits and costs, including 

the costs imposed on third parties. First, our analysis accounts for the costs imposed on third 

parties when uninsured consumers received uncompensated care (Garthwaite, Gross, and 

Notowidigdo 2018). Second, our analysis accounts for the possibility that setting the mandate 

tax penalty to zero imposes new costs because insurance premiums might increase. Because 

the enrollees who leave the individual market are expected to be healthier than average, the 

CBO (2017b) projects that the zero tax penalty will increase premiums in the nongroup market 

by about 10 percent. There are certainly reasons to believe 10 percent is too high, such as the 

decline in benchmark premiums from 2018 to 2019 despite the individual mandate penalty 

being set to zero in 2019. Our analysis uses the estimate of 10 percent and accounts for the 

third-party effects on Federal expenditures for premium subsidies and on premiums paid by 

nonsubsidized enrollees. 

Analysis of the Deregulatory Reform of Association Health Plans 

The AHP rule benefits society by expanding small businesses’ ability to join AHPs, which 

enables them to offer their workers more affordable and potentially more attractive insurance 

coverage, and potentially by saving taxpayers money when consumers join an AHP instead of 

purchasing more subsidized ACA-compliantindividual coverage. We estimate that the AHP rule 

will yield benefits in 2021 worth $7.4 billion. 

The AHP rule will allow small businesses to offer their workers more affordable health coverage

by reducing the administrative cost of coverage through greater economies of scale. The share 

of the premium accounted for by administrative costs falls with insurance group size: the share 

is 42 percent forfirms with 50 employees or fewer, compared with 17 percent for firms with 101 

to 500 employees and 4 percent for firms with more than 10,000 employees (Karaca-Mandic, 

Abraham, and Phelps 2011). On the basis of this pattern, we assume that every 10 percent

increase in group size reduces the administrative cost share by almost 3 percent.36 The AHP 

rule allows the average group size to expand, which reduces the average cost of AHP 

coverage—a significant advantage for many small and medium-sized businesses.

The AHP rule expands organizations’ ability to offer AHPs on the basis of common geography 

or industry. For example, existing organizations such as local chambers of commerce could 

offer potentially large AHPs. According to the Association of Chamber of Commerce Executives, 

local chambers of commerce range in size from a few dozen firms to more than 20,000 firms. 

Depending upon the number of workers per chamber member, the potential group size of 

chambers of commerce–based AHPs range from the hundreds into the tens of thousands.

 36Based on the results of Karaca-Mandic, Abraham, and Phelps (2011), we calculate that the elasticity of cost 

share with respect to group size is –0.27. 
CEA • Deregulating Health Insurance Markets: Value to Market Participants 19

The expansion of the AHP market and other provisions of the AHP rule could substantially 

increase the average AHP group size and significantly reduce administrative costs. We estimate 

that before the new rule,there were at least 5 million enrollees in AHPs.37 The CBO projects that 

the AHP rule will lead to 4 million additional AHP enrollees, which is a 90 percent increase. 

Noting the greater flexibility to form larger AHPs, we assume that the AHP rule will increase the 

average AHP group size by 100 percent. Based on the relationship between group size and 

administrative costs, this implies that the AHP rule will reduce the share of premiums 

accounted for by administrative costs by 27 percent. Assuming that before the rule the average 

administrative cost share was 15 percent, this corresponds to a reduction of about 4

percentage points.38

The AHP rule also gives small businesses more flexibility to offer their workers health coverage

more tailored to their needs.39 At this point, it is speculative whether AHPs will provide 

relatively comprehensive coverage or provide more tailored coverage. Providing more tailored

coverage options can have substantial value to consumers. An analysis of choices made in the 

employment-related group market found that offering multiple plan choices was as valuable 

to the median consumer as a 13 percent premium reduction (Dafny, Ho, and Varela 2013). Our 

analysis does not include a separate estimate of the value of more tailored plan options. We 

note that in some circumstances, there may be a trade-off between AHP group size and the 

extent of tailoring, because the more tailored plan might not be attractive to all potential AHP 

members. In this context, our estimate of the benefits of reduced administrative costs provides 

a lower-bound estimate of the benefits; consumers who do not take advantage of the lower 

administrative costs of larger AHPs do so because they value tailored coverage more highly 

than the cost savings. 

Our analysis of the effects of the AHP rule parallels our analysis of setting the mandate tax 

penalty to zero, as shown in figure 3, with modifications to capture important sources of 

additional benefits. Although figure 3 analyzes an explicit tax penalty, the AHP rule reduces 

administrative costs that made insurance coverage more costly. The AHP rule affects four 

groups of people: consumers who move out of the individual market; consumers who move 

out of small group coverage; consumers who would have AHP coverage with or without the 

rule; and consumers who would have been uninsured without the rule. The different benefits 

 37 Kofman et al. (2006) report an estimate that registered multiple-employer welfare associations covered 5 

million enrollees in AHPs. Underreporting due to incomplete registrations creates uncertainty about the number 

of AHP enrollees.

38A commenter on the AHP final rule suggested that the reduction is not likely to be more than 2 to 3 percentage 

points. In our judgment, this understates the potential economies of scale from the formation of large and very 

large AHP groups, where the administrative cost is as low as 4 percent (Karaca-Mandic, Abraham, and Phelps 

2011). 

39 As discussed further in the STLDI section of this report, the choice of range of coverage is not a zero-sum game. 

A person saving, say, $1,000 in premium payments by carving out a certain type of coverage is not imposing a 

$1,000 cost on others in the insurance market because of moral hazard and insurance loadings.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 20

for each of these groups make the analysis more complicated than in figure 3. The appendix 

presents an illustration.

To estimate the effects of the AHP rule, we use data from CBO (2018b) projections and 

estimates of administrative costs. The first step is to estimate the benefits that flow from 

consumers moving out of ACA-compliant coverage in the individual market to the AHP’s ACAcompliant coverage in the group market. The CBO projects that the AHP rule will lead to 4 

million more consumers with AHP coverage, and that 90 percent of them, or 3.6 million, would 

have been insured in the absence of the rule. From several sources, we estimate that over 1 

million of these will move out of ACA-compliant coverage in the market.

40 Based on differences 

in administrative costs of ACA exchange plans in the individual market versus AHPs, we 

estimate that each enrollee who shifts from coverage that is compliant with ACA small group 

and individual market rules to AHP coverage saves $619 in administrative costs and enjoys 

$309 in net surplus from the cost reduction.

41

In addition, we estimate that after accounting for the loss of cross-subsidies and their effects 

on ACA-compliant individual market insurance premiums and subsidies, each enrollee who 

shifts from such ACA-compliant individual coverage to ACA-compliant AHP group coverage

reduces third-party expenditures by $1,933.

42 Aggregated over the 1.1 million enrollees who 

shift, in 2021 these effects of the AHP regulatory reform will yield benefits worth $2.5 billion. 

 40Based on Avalere’s (2018) estimates that 30 percent of the new AHP enrollees will be from the individual 

market and 70 percent from the small group market, we estimate that about 1.1 million consumers will switch

from individual coverage to AHP coverage and 2.5 million will switch from small group coverage to AHP 

coverage. We note that the CBO projections are for 2023, when the CBO estimates that the effects of the rule will 

be fully phased in. We assume that the effects of the rule will be fully phased in by 2021. 41 The CMS (2018b) projects that the average ACA premium in 2021 will be $8,364. We assume that the 

administrative cost share of the ACA premium is 18.4 percent (Commonwealth Fund 2016). As explained above, 

we assume that after the AHP rule, the administrative cost share of the AHP premiums will be 11 percent. The 

administrative cost savings are 7.4 percent of $8,364, which is $619. The deadweight loss of surplus due to the 

cost reduction equals half the size of the reduction. 42 Recall our discussion in the previous section of why, to the extent that a tax or regulation induces consumers 

to receive a subsidy, the additional subsidy expenditures are properly treated as a social loss rather than a 

transfer. This same issue arises a third time with our STLDI analysis. Our estimate of the change in third-party 

expenditures accounts for reduced Federal spending on ACA premium subsidies, increased Federal tax 

expenditures on AHP insurance, and reduced cross-subsidies to the subsidized and unsubsidized enrollees who 

remain in coverage that is compliant with ACA small group and individual market rules. We assume that, on 

average, each consumer who shifts out of coverage that is compliant with ACA small group and individual 

market rules reduces Federal expenditures for premium subsidies, which is partly offset by the higher premiums 

paid by the Federal government on behalf of those with subsidized coverage, leaving $3,800 Federal savings per 

enrollee in ACA transactions, which is the same amount derived in footnote 33 above in connection with 

consumers leaving coverage that is compliant with ACA small group and individual market rules in response to a 

zero mandate penalty. We estimate that, in addition, the average enrollee who shifts to ACA-compliant AHP 

large group coverage becomes eligible for an average in $1,519 of tax expenditures for employer-sponsored 

coverage, leaving $3,800 – $1,519 = $2,281 net Federal savings per enrollee. Finally, we estimate that the average 

enrollee who leaves coverage that is compliant with ACA small group and individual market rules was paying 
CEA • Deregulating Health Insurance Markets: Value to Market Participants 21

The second step is to estimate the benefits that flow from the estimated 2.5 million consumers

who respond to the rule by moving from small group coverage to AHP coverage.43 By allowing 

enrollees to switch to AHPs that are larger than their existing small group plans, we estimate 

that the AHP rule will on average reduce insurance administrative costs by $1,924, so each 

enrollee enjoys $962 of surplus from this cost reduction.

44 We assume that the reduction in 

administrative costs also reduces Federal tax expenditures on health insurance on average by 

$349 per enrollee.45 Aggregated over the 2.5 million enrollees who make this shift, these effects 

of the AHP rule yield benefits worth $3.3 billion. 

The third step is to estimate the benefits the AHP rule generates for the consumers who would 

have AHP coverage with or without the rule. As explained above, we estimate that at least 5 

million consumers would have AHP coverage with or without the rule. Due to the increase in

average AHP group size, we estimate that the rule reduces administrative costs by $335 per 

enrollee.46 We assume that the reduction in administrative costs also reduces Federal tax 

expenditures on health insurance on average by $61 per enrollee.47 The aggregate benefits 

from this effect of the AHP rule are worth $1.7 billion.

The fourth step is to estimate the benefits the AHP rule generates for consumers who would 

have been uninsured without the rule. The CBO (2018b) projects that the AHP regulatory reform 

will reduce the number of uninsured consumers by 400,000. Because they are responding to a 

reduction in administrative costs that averages $619 per enrollee (calculated above), each of 

the newly insured AHP enrollees enjoys a consumer surplus of $309 from their purchase. We 

also estimate that third-party costs of uncompensated care fall by $989 for each newly insured 

AHP enrollee. Offsetting these benefits, we estimate that Federal tax expenditures on health 

insurance increase by $1,519 per newly insured AHP enrollee. The aggregated net costs ofthese 

effects of the AHP rule are $0.1 billion.

Summing up over the four groups of consumers whose insurance options are expanded by the 

AHP rule, we estimate that the rule will yield social benefits worth $7.4 billion in 2021. It is 

 

$348 of cross-subsidies to the unsubsidized enrollees who remain, leaving total third-party savings of $2,281 –

$348 = $1,933. 

43 Footnote 19 above provides the sources for this estimate. 44 We estimate that the administrative cost share in existing small group plans is 34 percent, compared with our 

estimated 11 percent for AHP. We calculate the administrative cost savings assuming the average premium is 

$8,364, which is the CMS (2018b) projection for 2021. The administrative cost reduction is 23 percent (= 34 – 11) 

of $8,364, which equals $1,924, half of which is consumer surplus.

45 The ratio of the average tax expenditure of $1,519 and the average premium of $8,364 is 18 percent. We 

assume that the $1,924 reduction in administrative costs reduces tax expenditures by 18 percent, or $349. 

46 We assume that the administrative cost share in AHPs drops from 15 percent to 11 percent. We calculate the 

administrative cost savings assuming the average premium is $8,364, which is the CMS (2018b) projection for 

2021. 

47 The ratio of the average tax expenditure of $1,519, and the average premium of $8,364 is 18 percent. We 

assume that the $335 reduction in administrative costs reduces tax expenditures by 18 percent, or $61. 
CEA • Deregulating Health Insurance Markets: Value to Market Participants 22

important to note that our estimate of social benefits takes into account both benefits and 

costs, including the possibility that the AHP rule imposes new costs on a subset of enrollees in 

the nongroup market who pay higher insurance premiums. 

Analysis of the Deregulatory Reform of Short-Term, Limited-Duration Insurance 

The STLDI regulatory reform benefits society by allowing greater choice and lower-cost 

coverage for the subset of the population seeking short-term, limited-duration insurance and 

potentially by saving taxpayers money that would otherwise be spent on subsidized ACA 

coverage. We estimate that the STLDI rule will yield benefits worth $7.3 billion in 2021.

Under both the Obama Administration’s and Trump Administration’s rules, STLDI plans are 

exempt from ACA requirements, including the mandated coverage of the 10 essential health 

benefits (CCIIO 2011). The Obama Administration’s 2016 STLDI rule limited the duration of an 

STLDI contract to less than 3 months. The 2016 rule’s restrictions on the duration of an STLDI 

contract exposed potential STLDI enrollees to the risk of losing their coverage, or if they could 

obtain another STLDI policy, having their deductibles reset, among other things. We therefore 

model both the duration restriction and the limited terms as an addition to the load and hassle 

costs of STLDI associated with applying for coverage every 3 months rather than every 36 

months, which are hereafter referred to as “loads.”48 Assuming no tax penalty on the 

uninsured, we compare high-loaded STLDI (2016 rule) with low-loaded STLDI (new rule), and 

take the difference to be the impact of the new rule.

Allowing for (excessively expensive) STLDI under the 2016 rule makes the CEA’s analysis 

different from those of some others (e.g., Blumberg, Buettgens, and Wang 2018) that assume 

that no STLDI is available under the 2016 rule, and fundamentally changes some of the results.

According to the CEA’s approach, even under the 2016 rule, there would be little reason for 

consumers paying premiums far in excess of their expected claims to continue with ACAcompliant individual coverage, because at least they have the expensive but not impossible 

option of reapplying for STLDI coverage every three months. As we explain further in the 

appendix, the marginal STLDI enrollees must instead be those who receive either an exchange 

subsidy or a cross-subsidy from other members of the ACA-compliant individual market risk 

pool.49 The CEA’s approach also does not permit adding an additional benefit to STLDI 

enrollees from relief from the essential health benefits mandate, because they already had this

relief under the previous rule, albeit with higher loads.

 48 The CEA notes that, under the 2016 rule, a consumer having difficulty continuing STLDI coverage could turn to 

ACA-compliant plans, which in a sense is a choice with extra loading, to the extent that the applicable 

regulations deviate from the consumer’s preferences.

49 It is possible that the 2017 ACA-compliant risk pool included a number of consumers with a low ratio of 

expected claims to net premiums, but this report is looking at plan years 2019 through 2028, when the individual 

mandate penalty is zero and market participants have had time to adjust to the reality of high premiums for 

ACA-compliant plans.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 23

Lower premiums result from smaller loads because premiums finance both claims and loads. 

However, with the exemption from ACA regulations, STLDI plans also have more freedom to 

control moral hazard and to dispense entirely with loads associated with unwanted services 

by excluding those services from the plan. These are some of the reasons why premiums for 

STLDI coverage are often less expensive than premiums on ACA-compliant individual market 

insurance plans (CMS 2018b; Pollitz et al. 2018).

Many health insurance simulation models treat consumer choice as a negative- or zero-sum 

game. A person who reduces his or her net premium spending by $1,000 when he or she forgoes

unwanted coverage merely increases by $1,000 the premiums that must be collected from 

those who retain this coverage. This assumption is unrealistic because of moral hazard, 

administrative costs, and the fact that the exchanges cap and means-test premiums. For 

example, this person’s gross premium for the forgone coverage may have been $1,500 (he or 

she receives premium subsidies on the exchange), $300 of which goes to administrative costs, 

and with another $1,200 going to the person’s own claims that were of little value but are made 

as long as they are forced to have the coverage. This person’s enhanced choice saves taxpayers 

$500, and imposes no cost on the risk pool. As demonstrated in this report, a broader and more 

realistic range of insurance market frictions, and thereby more reliable conclusions, are

possible without unduly complicating the analysis.

Our analysis of the effects of the STLDI rule parallels our analysis of setting the mandate tax 

penalty to zero. The analysis of the additional loads created by the 2016 STLDI rule is similar to 

the analysis of the individual mandate tax penalties, except that the loads are a social loss 

rather than a transfer from the public to the Treasury. In this application, the marginal social 

benefit curve is a comparison of the benefit of ACA-compliant individual coverage with the 

benefit of STLDI. The STLDI rule is projected to affect three groups of consumers: consumers 

who move from ACA-compliant individual coverage to STLDI coverage because of the rule; 

consumers who would have chosen STLDI coverage with or without the rule; and consumers

who would have been uninsured without the rule. The different benefits for each group makes 

the analysis more complicated than figure 3. The appendix presents an illustration.

To estimate the effects of the STLDI rule, we use data from the CBO’s (2018b) projections, 

estimates of the elasticity of demand for health insurance, and estimates of the administrative 

and time costs of STLDI coverage. The first step is to estimate the benefits that the STLDI rule 

generates for consumers who move from ACA-compliant individual coverage to STLDI 

coverage because of the rule. The CBO projects that the rule will result in 2 million new 

enrollees in STLDI plans. We assume that over 1 million of these are consumers who shift from 

ACA-compliant individual coverage to STLDI coverage.50 The CMS projects that the average 

 50The CBO (2018b) projects that 65 percent of the 2 million new STLDI enrollees, or 1.3 million consumers, would 

have had insurance in the absence of the STLDI rule. We assume that these 1.3 million consumers would have 

purchased ACA-compliant individual insurance. 
CEA • Deregulating Health Insurance Markets: Value to Market Participants 24

STLDI premium in 2021 will be $4,200. Assuming that the elasticity of demand for STLDI 

coverage is -2.9, we estimate that by removing the combined effects of the renewability 

restrictions, the limited term, and the administrative and hassle costs, the STLDI rule reduces 

the load by $1,218.

51 On average, each enrollee who switches from ACA-compliant individual 

coverage to STLDI coverage thus enjoys a consumer surplus of $609.

52 After accounting for the 

loss of cross-subsidies, we estimate that each enrollee who shifts from ACA-compliant 

individual coverage to STLDI coverage reduces third-party expenditures by $3,459.53

Aggregated over the 1.3 million enrollees who shift, in 2021 these benefits of the STLDI rule are 

worth $5.3 billion.

The effects of the STLDI rule depend upon how many consumers shift from ACA-compliant 

individual coverage to STLDI coverage, and of those, how many received ACA premium 

subsidies. We use CBO projections that over 1 million consumers will switch from ACAcompliant individual coverage (CBO 2018b). The economic analysis in the STLDI final rule 

assumes that 600,000 enrollees will switch from ACA exchange plans to STLDI coverage in 2021, 

and another 800,000 will switch from off-exchange plans. With respect to how many switchers 

received ACA premium subsidies, we assume that the STLDI switchers will be on average 

similar to the enrollees projected to respond when the tax penalty is set to zero (CBO 2018b). 

This assumption is again uncertain. The CMS (2018b) projects that mostly unsubsidized 

enrollees will switch to STLDI coverage. Similarly, the economic analysis in the STLDI final rule 

anticipates that most consumers who switch to STLDI coverage will have incomes that make 

them ineligible for ACA premium subsidies. The sensitivity analysis given in the appendix 

reports the estimated benefits from the STLDI rule under different assumptions about the 

 51 A recent econometric study of choices between different ACA plans estimated that the own-premium elasticity 

of demand is –2.9 (Saltzman 2017). Using this estimate in a constant semielasticity demand function, the CBObased estimates that the rule will increase STLDI enrollment by 1 million implies that the rule’s effects are 

equivalent to a $1,218 reduction in costs. We note several pieces of supporting data for our estimate that the 

STLDI rule is equivalent to a substantial reduction in costs. First, estimates that administrative costs account for 

50 percent of STLDI premiums (CMS 2018b) imply that there is considerable scope for the STLDI rule to decrease 

premiums by allowing the fixed cost of underwriting, sales commissions, and other policy administration costs 

to be spread over a longer period of coverage. Second, even before the STLDI rule, some insurers were spreading 

administrative and hassle costs over a longer period of coverage by selling “four-packs” of three-month 

coverage (Pollitz et al. 2018). The demand for STLDI four-packs supports our estimate that consumers will place 

a high value on spreading administrative and hassle costs over three years, which is made possible by the STLDI 

rule. 

52 The average net surplus equals half the total cost savings of $1,218. 

53 We assume that on average each consumer who shifts out of ACA-compliant individual coverage reduces 

Federal expenditures for premium subsidies, which is partly offset by the loss of cross-subsidies paid to 

subsidized enrollees, leaving $3,800 per enrollee. We assume that the enrollees who shift out of ACA-compliant

individual coverage in response to the STLDI rule are similar to the enrollees who shift out of ACA-compliant 

individual insurance in response to the reduction of the mandate tax penalty. So we use the same estimate of 

$3,800, which is explained in footnote 33 above. We estimate that the average enrollee who leaves ACAcompliant individual coverage was paying $341 of cross-subsidies to the unsubsidized enrollees who remain in 

ACA-compliant individual coverage, leaving net third-party savings of $3,800 – $341 = $3,459.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 25

number of consumers who switch from ACA-compliant individual coverage and the number of 

unsubsidized switchers. 

The second step is to estimate the benefits that the STLDI rule generates for consumers who 

would have chosen STLDI coverage with or without the new rule. We assume that 750,000 

consumers would have chosen STLDI coverage with or without the new rule.54 Each of these 

consumers gains the $1,218 in reduced load costs estimated above. Aggregating over 750,000 

consumers, the STLDI rule yields an additional $0.9 billion in benefits.

The third step is to estimate the benefits that the STLDI rule generates for those consumers

who would have been uninsured without the rule. The CBO (2018b) projects that the STLDI 

deregulatory reform will reduce the number of uninsured consumers by 0.7 million, each of 

whom also enjoys a consumer surplus of $609 from their purchases (estimated above). We also 

estimate that third-party costs of uncompensated care will fall by $989 for each newly insured 

STLDI enrollee. Aggregated over 0.7 million, the benefits for previously uninsured consumers

who move to STLDI plans add another $1.1 billion in benefits. 

Summing up over the three groups of consumers whose insurance options are expanded by 

the STLDI rule, we estimate that the rule will yield benefits worth $7.3 billion in 2021. It is 

important to note that our estimate of social benefits takes into account both the benefits and 

costs, including the possibility that the STLDI rule will impose new costs on a subset of 

enrollees in the nongroup market who pay higher insurance premiums. 

Additional Benefits from Reducing the Excess Burden of Labor Taxation of Federal

Expenditures 

In addition to the estimated $27.3 billion in direct economic benefits in 2021, the three 

deregulatory reforms will provide additional social benefits because they will reduce economic 

inefficiency due to the excess burden of taxation. We estimate that in 2021, the value of these 

reform benefits will be worth $13.7 billion.

The deregulatory reforms not only reduce inefficiency in health insurance markets but also 

have interaction effects that ripple into other economic sectors. Before the AHP and STLDI 

rules, administrative costs were unnecessarily high. These extra costs of AHP and STLDI 

coverage, along with the original ACA’s individual mandate penalty, are functionally equivalent 

to taxes on consumption, albeit not broad-based ones. Specifically, the mandate penalty and 

 54 The STLDI final rule cites estimates of the size of the STLDI market in 2017 as ranging from 120,000 to over 1 

million enrollees. We assume a market size of 500,000 enrollees in 2017. Assuming that the elasticity of demand 

is –2.9 (Saltzman 2017), reducing the mandate tax penalty from $861 to zero is predicted to increase STLDI 

enrollment by 54 percent, to about 750,000 enrollees even without the STLDI rule. 
CEA • Deregulating Health Insurance Markets: Value to Market Participants 26

the extra administrative costs—in fact, all the regulations’ net costs—were reducing the 

purchasing power of labor income and therefore reducing the supply of labor.

55 The 

regulations’ effect on the supply of labor is therefore associated with an additional welfare cost 

due to, among other things, the fact that labor is taxed. Although the impact per person is 

small, the aggregate impact can be substantial, due to the number of workers affected and the 

large magnitude of preexisting labor market distortions (Goulder and Williams 2003). 

An example of the additional regulatory costs is the distortion of labor markets when the 

Federal government collects additional payroll, excise, or income taxes to fund additional 

Federal expenditures on ACA premium subsidies. We use standard methods to include the 

reduced excess burdens of labor taxation in our cost-benefit analysis (Boardman et al. 2017, 

64–65). In line with the usual estimates of the compensated elasticity of taxable income with 

respect to the after-tax share, we assume that the marginal excess burden is $0.50 per $1

(Feldstein 1999; Saez, Slemrod, and Giertz 2012; Weber 2014). The reduction in the excess 

burdens in 2021 due to the three deregulatory reforms yields net social benefits worth $13.7

billion.56

Conclusion

To sum up, after taking into account both projected costs and benefits, the effects of the three 

deregulatory reforms that expand health insurance options will yield benefits worth over $40

billion in 2021. Setting the individual mandate tax penalty to zero accounts for $12.6 billion; 

the AHP rule, $7.4 billion; the STLDI rule, $7.3 billion; and the reduction in the excess burdens 

of labor taxation, $13.7 billion.57

Table 2 provides the estimated benefits over 10 years, from 2019 to 2028. The table provides 

the sum over 10 years and the discounted present values calculated when future benefits are 

discounted at rates of 3 and 7 percent. Over 10 years, the benefits of the three deregulatory 

reforms total $453 billion; the discounted present value of the net benefits are $376 billion at 3 

percent and $298 billion at 7 percent.

 55 A loss of purchasing power of wages has the usual substitution effect in the direction of reducing the labor 

supply. Administrative costs also have an aggregate income effect in the direction of additional labor supply, 

although the AHP administrative costs are tied to employment and an important part of the STLDI 

administrative costs are consumer hassle costs, which means that they both have more than the usual 

substitution effect reducing the labor supply.

56 The $0.50 excess burden rate is applied to the net benefits and therefore, for example, nets uncompensated 

care costs and forgone penalty revenue from the Federal savings on premium tax credits. The CEA notes that the 

individual mandate penalty was concentrated on a small fraction of the population, but has not yet assigned 

any benefit to the shift from a concentrated tax to general revenue. The CEA also notes that the usual estimates 

of excess burdens assume that workers are purchasing consumer goods at their marginal costs; alternatively, 

incorporating “markups” would result in even greater estimates of the net benefits of the deregulatory reforms. 57 The appendix provides quantitative and qualitative analyses of the sensitivity of these results to alternative 

assumptions.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 27

Table 2. Net Benefits of the Deregulatory Reforms: 2019–28

Type of Reform

Total Benefits

(billions of dollars)

Discounted Present 

Value, r = 3%

(billions of dollars)

Discounted Present 

Value, r = 7%

(billions of dollars)

Setting mandate tax penalty to 

zero 136 112 88

AHP rule 84 70 56

STLDI rule 82 69 55

Reductions in excess burden of 

labor taxation 151 125 99

Total 453 376 298

Source: CEA calculations.

The benefits reported in table 2 reflect the value of improving the efficiency of health insurance 

markets by expanding consumer insurance options. Although we have not conducted a 

complete analysis of the distributional consequences of the reforms, the broad patterns of how 

the benefits and costs are distributed across income groups are as follows. We estimate that 

the reforms benefit lower- and middle-income consumers with incomes between 100 percent 

and 400 percent of the Federal poverty line. The reforms also benefit all taxpayers. In addition, 

setting the individual mandate penalty to zero specifically eliminates a tax burden that was 

mainly borne by lower- and middle-income consumers. Because we estimate that some 

consumers will have to pay somewhat higher premiums, the reforms will impose costs on some 

middle- and higher-income consumers with incomes above 400 percent of the Federal poverty 

line. 
CEA • Deregulating Health Insurance Markets: Value to Market Participants 28

Appendix

Analysis of the AHP Rule 

The cost-benefit analysis of the AHP rule is illustrated in figure 4. The area labeled B measures 

the net social benefits from the estimated 1.1 million consumers who are projected to switch 

from ACA-compliant coverage in the individual and small group markets, to ACA-compliant 

coverage through an AHP. The area labeled C measures the net social benefits from the 

estimated 5 million consumers who would have had AHP coverage with or without the rule. As 

described in the text above, the AHP rule affects several other groups of consumers. Although 

not shown in figure 4, we use the same approach to measure the social benefits for the other 

groups affected. 

Figure 4. Benefits of the AHP Rule

Analysis of the STLDI Rule

The cost-benefit analysis of the STLDI rule is illustrated in figure 5. The area labeled D measures 

the net social benefits from the estimated 1.3 million consumers who switch from ACAcompliant exchange coverage to STLDI coverage. Because the marginal social benefit of ACAcompliant individual insurance is negative for these consumers, the move out of ACAcompliant individual insurance yields the benefits measured by area D. The area labeled E 
CEA • Deregulating Health Insurance Markets: Value to Market Participants 29

measures the benefits from the estimated 0.75 million consumers who would have had STLDI 

coverage with or without the new rule. The MSB schedule does not apply to these consumers, 

because with or without the new rule, they would purchase noncompliant STLDI coverage. But 

after the new rule, the cost of STLDI coverage is reduced by $1,218 per consumer on average; 

the aggregate benefits are measured by area E. As described in the text above, the STLDI rule 

affects several other groups of consumers. Although not shown in figure 5, we use the same 

approach to measure the social benefits from the other groups affected. 

Figure 5. Benefits of the STLDI Rule

Additional Discussion of the Analytical Framework 

The analytical framework illustrated in figure 3 and appendix figures 4 and 5 follows the 

standard approach for cost-benefit analysis (Boardman et al. 2017). The benefits and costs of 

the effects of the deregulatory reforms are measured based on consumers’ revealed 

preferences in health insurance markets. Figures 3, 4, and 5 show the schedules of marginal 

social benefits (MSB) that correspond to each level of enrollment in ACA-compliant individual 

insurance coverage. We use the MSB schedules for ease, but we note that they are equivalent 

to the supply-and-demand framework, which is more familiar to readers with a background in 

economics. In the familiar supply-and-demand framework, the height of the supply curve 

shows the marginal cost of providing insurance coverage to an additional enrollee. The height 

of the demand curve shows the marginal enrollee’s willingness to pay for ACA-compliant

individual coverage. The vertical distance between the marginal cost and demand curves is the 

net marginal social benefit shown by the MSB schedules in figures 3, 4, and 5. At the 
CEA • Deregulating Health Insurance Markets: Value to Market Participants 30

intersection of supply and demand—that is, at the equilibrium of an unregulated market—

marginal social benefits equal zero, so the MSB schedule intersects the horizontal axis. At this

point, the social surplus from ACA-compliant individual coverage is maximized, where the 

social surplus is the sum of consumer surplus and producer surplus. The expositional 

advantage of the MSB framework is that it avoids the need for multiple shifts of demand and 

cost curves needed to analyze deregulatory reforms.

Sensitivity Analysis

We follow good practice in cost-benefit analysis and explore the sensitivity of the results to 

alternative assumptions. An important set of inputs into our analysis are from the CBO’s

(2017b, 2018b) projections of the effects of the deregulatory reforms on health insurance 

enrollments. The CBO does not include ranges or other measures of uncertainty about the 

projections we use, but it (CBO 2018b) acknowledges the uncertainty in its estimates and tries 

to develop estimates in the middle of the distribution of potential outcomes. Earlier CBO 

projections overestimated ACA enrollments by 14 percent in 2014, 23 percent in 2015, and 50 

percent in 2016 (CBO 2017a). CBO projections might either overestimate or underestimate 

responses to the deregulatory reforms we consider. For example, some business groups 

appear reluctant to establish AHPs. However, the potential gains to consumers create strong 

incentives for small businesses and health insurance providers to learn to navigate the new 

rules, perhaps in innovative ways that were unanticipated in CBO projections. 

Policy innovations might also affect the accuracy of CBO projections. For example, on 

October 24, 2018, the Centers for Medicare & Medicaid Services, Department of Health and 

Human Services, and Department of the Treasury published new guidance related to section 

1332 of the ACA. The new guidance is intended to give States more flexibility to pursue 

waivers to improve their individual insurance markets. States might pursue and be granted 

waivers that could further expand the markets for AHP and STLDI coverage. Of course, the 

effects of future market and policy innovations are speculative.

Our sensitivity analysis uses a range that is the larger of plus or minus 50 percent of CBO 

projections; or the range of estimates from other studies of the deregulatory reforms 

(reviewed above). We have not formed any conclusions on the relative accuracy of the various 

sources. Table 3 summarizes the quantitative sensitivity analysis.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 31

Table 3. Sensitivity of Estimated Benefits of the Deregulatory Reforms, 

2021

Source of Societal 

Benefits

Key CBO 

Projection

Range for Sensitivity 

Analysis

Benefits Based on 

CBO Projection

(billions of dollars)

Benefits Based 

on Range 

(billions of 

dollars)

Setting tax penalty to 

zero

5 million fewer 

enrollees 

2.5–7.5 million fewer 

enrollees 12.6 8.1–24

AHP rule 4 million AHP 

enrollees 

2–6 million AHP 

enrollees 7.4 5.8–8.9

STLDI rule 2 million STLDI 

enrollees 

1–5.2 million STLDI 

enrollees 7.3 3.8–18

Reductions in excess 

burdens of labor 

taxation

13.7 8.9–25

Total 41 26.6–75.9

Source: CEA calculations.

In addition to uncertainty about the total number of new STLDI enrollees, the effects of the 

STLDI rule also depend upon how many of the consumers who shift from ACA-compliant 

individual market insurance coverage (referred to in this section as “ACA-compliant coverage”) 

received ACA premium subsidies. CMS (2018b) projections and the economic analysis in the 

STLDI final rule assume that most of the switchers will be unsubsidized. As a sensitivity 

analysis, we assume that all the switchers will be unsubsidized. Given this assumption, we 

estimate that the STLDI rule will yield benefits worth $2.4 billion in 2021. 

The results of the cost-benefit analyses are also sensitive to other assumptions that are more 

difficult to quantify. We now discuss in qualitative terms the sensitivity of the estimates to 

other uncertainties.

First, it is difficult for microsimulation models like those used by the CBO to capture dynamic 

responses on the supply side of the health insurance market. Setting the mandate tax penalty 

to zero combined with the expansion of options through the AHP and STLDI rules create 

incentives for insurers to develop new insurance products to better meet consumers’ 

preferences. Additional AHP and STLDI plans might also drive down premiums and profit

margins for other insurance products. The possibility that the deregulatory reforms will spur 

further expansion of insurance options means that our analysis understates the net benefits 

of the reforms. 

Next, we discuss in qualitative terms the sensitivity of the results of our cost-benefit analysis of 

the deregulatory reforms to the extent of frictions in the market for ACA-compliant insurance 

coverage: adverse selection, advantageous selection, individual failures to optimize, and 
CEA • Deregulating Health Insurance Markets: Value to Market Participants 32

societal preferences for health insurance. Figure 6 illustrates the implications of each of these 

frictions for our cost-benefit analysis of setting the mandate penalty to zero. As is explained in 

more detail below, the different frictions are summarized by different schedules that show the 

MSBs of ACA-compliant coverage under various hypothetical scenarios. The baseline schedule,

labeled MSB2 in figure 6, corresponds to the MSB schedule shown in figure 3, which itself is 

inferred from the CBO’s projections.

Figure 6. Marginal Social Benefits of ACA-Compliant Coverage under

Different Hypothetical Scenarios

Adverse selection can be analyzed in the standard supply-and-demand framework, or 

equivalently the MSB framework. The key modification in the supply-and-demand framework 

is that the supply side of the health insurance market is described by downward-sloping 

marginal cost and average cost curves (Einav and Finkelstein 2011). The cost curves slope

downward based on the assumption that demand-side selection into insurance is driven by 

differences in expected healthcare costs, so the consumers with the highest willingness to pay 

for insurance are the most costly to cover. More adverse selection increases the vertical 

distance between the marginal cost and demand curves and shifts the MSB schedule up. The 

baseline schedule incorporates CBO projections that setting the mandate penalty to zero will 
CEA • Deregulating Health Insurance Markets: Value to Market Participants 33

lead healthier-than-average consumers to leave ACA-compliant insurance (CBO 2017b, 2018b). 

That is, the baseline schedule assumes a degree of adverse selection. The schedule labeled 

MSB3 in figure 6 corresponds to substantially more adverse selection; it represents a case in 

which the CBO overestimated the Federal savings from setting the individual mandate penalty 

to zero. 

With more adverse selection, an unregulated insurance market reaches an equilibrium level of 

enrollment N2, which is below the level N3 where MSB3 = 0 and social surplus is maximized. The 

MSB3 schedule also reflects the administrative costs of insurance and moral hazard, where 

comprehensive insurance with low cost sharing leads consumers to consume healthcare that 

provides little benefit relative to the cost. Given administrative costs and moral hazard, even 

with adverse selection, it is not efficient to enroll the entire population (Einav and Finkelstein 

2011); thus in figure 6, N3 is less than N that corresponds to 100 percent of the population

(N100%).

Substantial adverse selection changes the critical assumptions used in the cost-benefit 

analyses of the reforms presented above. In qualitative terms, the changes would lead to lower 

estimated net benefits from each of the deregulatory reforms we consider. Figure 6 illustrates 

the example of setting the individual mandate penalty to zero. With the MSB3 schedule as 

drawn for adverse selection, the reduced tax penalty yields benefits given by the area labeled 

F in figure 6. In contrast, under the assumptions used in the text, the reduced penalty yields 

benefits given by the area labeled F plus the area labeled G in figure 6 (equivalent to the area 

labeled A in figure 3 above in the main text).

Determining the extent of adverse selection in the market for ACA-compliant health insurance 

is a difficult empirical problem. Although the theoretical possibility of adverse selection in 

insurance markets has attracted much attention from academic economists (e.g., Cutler and 

Zeckhauser 2000; Rothschild and Stiglitz 1976), the limited empirical evidence is mixed. 

Adverse selection is a feature of some insurance markets but not others (Cawley and Philipson 

1999; Cohen and Siegleman 2010; Einav and Finkelstein 2011). Cutler and Reber (1998) provide 

an empirical case study of a death spiral in a health insurance plan offered to Harvard 

University employees. Some recent empirical research explores adverse selection in contexts 

that are more relevant for the ACA’s exchanges (Chandra, Gruber, and McKnight 2011;

Finkelstein, Hendren, and Shepard 2017; Hackman, Kolstad, and Kowalski 2015). However, 

much of the discussion of adverse selection and the ACA continues to rely on qualitative 

predictions from the theoretical economic model rather than quantified empirical analysis. 

The second market friction we consider is advantageous selection, which is the opposite of 

adverse selection. If consumers have heterogeneous risk preferences and select insurance 

based on these preferences, the consumers with the most willingness to pay for insurance are 

the least costly to cover. Consistent with this possibility, descriptive evidence shows that 

insured consumers are less likely to be sedentary, smoke, fail to use seatbelts, and fail to own 
CEA • Deregulating Health Insurance Markets: Value to Market Participants 34

a smoke detector (Cutler, Finkelstein, and McGarry 2008; Kenkel 2000). The case of 

advantageous selection corresponds to the schedule labeled MSB1 in figure 6, and corresponds 

to a case in which the CBO underestimated the Federal savings from setting the individual 

mandate penalty to zero. With advantageous selection, an unregulated market insures an 

inefficiently high fraction of the population (Einav and Finkelstein 2011). In figure 6, this result 

corresponds to the result that N2 is larger than N1. 

Substantial advantageous selection changes critical assumptions used in the cost-benefit 

analyses discussed above. In this case, the changes would lead to higher estimated net benefits 

from each of the deregulatory reforms we consider. Figure 6 illustrates the example of setting 

the individual mandate penalty to zero. With the MSB1 schedule as drawn for advantageous 

selection, the reduced tax penalty yields benefits given by the sum of the areas labeled F, G, 

and H in the figure. In contrast, under the assumptions used in the text, the reduced tax penalty 

yields benefits given by the area labeled F plus the area labeled G in figure 6 (equivalent to the 

area labeled A in figure 3 above in the main text).

The third market friction we consider is an individual’s failure to optimize, which happens 

when a consumer fails to choose the option that is in his or her own best self-interest. If this 

happens, observed consumer choices in markets are no longer reliable guides to infer their 

preferences about policy outcomes (Bernheim and Taubinsky 2018). A possibility that has 

received attention in insurance choices is behavioral inertia, where consumers tend to stick 

with their previous choices rather than switching to plans that are a better option for them

(Ericson 2014; Handel 2013). Inertia implies that after the deregulatory reforms, consumers 

might fail to switch from ACA-compliant individual health insurance to lower-cost options like 

STLDI coverage. The supply-and-demand framework can be used to analyze optimization 

failures like inertia by distinguishing the observed demand schedule that reflects errors versus 

the rational demand schedule that reflects optimization (Cutler et al. 2015). The schedule 

labeled MSB1 in figure 6 can be reinterpreted as the corresponding rational MSB schedule. With 

inertia, too many consumers keep their ACA-compliant insurance, and the unregulated market 

reaches an equilibrium N2, which is larger than N1. 

Substantial inertia changes the critical assumptions used in the cost-benefit analyses 

discussed above. As was the case with advantageous selection, the changes to capture inertia 

would lead to higher estimated net benefits from each deregulatory reform we consider. Figure 

6 illustrates the example of reducing the individual mandate penalty to zero. With the MSB1

schedule as drawn for behavioral inertia, the reduced tax penalty yields benefits given by the 

sum of the areas labeled F, G, and H in the figure. In contrast, under the assumptions used in 

the text, the reduced penalty yields benefits given by the area labeled F plus the area labeled 

G (equivalent to the area labeled A in figure 3 above in the main text).

Determining the extent of optimization failures in health insurance choices is yet again a 

difficult empirical problem. Compared with previous CBO projections, the CBO’s (2017b) 
CEA • Deregulating Health Insurance Markets: Value to Market Participants 35

projections of the impact of setting the mandate tax penalty to zero incorporate a slower phase

in over three years; the impact during the first year is only 60 percent of the full impact. Eibner 

and Nowak (2018) also build inertia into some of their projected scenarios. The evidence base 

for inertia is growing but remains thin (Ericson 2014; Handel 2013). The CEA is unaware of any 

direct empirical evidence on the existence or magnitude of inertia of choices in the nongroup 

insurance market. To complicate matters, there are other possible reasons consumers might 

fail to make optimizing choices in health insurance markets (Bernheim and Taubinsky 2018). 

Some possible consumer errors provide other reasons that the market is best described by the 

schedule MSB1, while other consumer errors suggest that the market might be best described 

by the schedule MSB3. 

The fourth market friction we consider is the argument that the MSB schedule based on 

consumers’ preferences should be adjusted to capture additional societal preferences for 

insurance. Health insurance coverage for the poorest members of society might be viewed as 

a merit good that deserves special societal concern. The merit good argument suggests

adjusting the MSB schedule upward for some consumers. However, this considerations is not 

as relevant for the non-Medicaid population that is affected by the deregulatory reforms we 

consider. Another reason to adjust the MSB schedule upward is to capture positive externalities 

from insurance coverage for vaccinations. However, there are not likely to be large remaining 

externalities from vaccinations because other public policies, including mandatory childhood 

vaccination laws, already address the problem. 

In light of the evidence, we view our framework of analysis as a reasonable approximation of

the appropriate model of the market for ACA-compliant insurance. Ongoing and future 

research might suggest refinements and modifications to capture the most relevant market 

frictions.

Further Analysis of the Choice Margin between STLDI and ACA-Compliant Insurance 

Coverage 

Our analysis of the benefits of the STLDI rule use estimates of how many of the consumers who 

will shift from ACA-compliant individual health coverage would have received ACA premium 

subsidies. Above, in the text, we discuss empirical uncertainty about these estimates. Earlier in 

this appendix, we report the sensitivity of our results to different assumptions. Here, we discuss 

the economic reasoning and evidence for our baseline estimates. Economic reasoning

suggests that the types of enrollees who are at the margin between ACA-compliant coverage 

and STLDI coverage must be receiving a subsidy, either directly from the Treasury or indirectly 

as a cross-subsidy from other members of the same ACA-compliant risk pool. The previous 

STLDI rule therefore results in a larger Federal deficit than the new rule does because the new 

rule requires less Federal spending on ACA premium subsidies, even though the new rule may 

increase the gross premiums for ACA-compliant individual market plans. In contrast, other 
CEA • Deregulating Health Insurance Markets: Value to Market Participants 36

analyses conclude that the new rule will increase ACA premiums and Federal expenditures on 

ACA premium subsidies (CBO 2018b; CMS 2018b).58

Rulemaking in the Obama Administration made STLDI coverage less attractive (i.e., more 

costly) than it is under the Trump Administration. Two key facts, then, drive economic 

conclusions: (1) both STLDI and ACA-compliant individual market coverage have nonzero 

market shares under both rules, and (2) STLDI plans are less regulated than ACA-compliant

individual plans. From fact 1, it follows that, under either rule, there are enrollees on the margin 

between the two types of coverage. From fact 2, it follows that, under the new rule, STLDI must 

be more attractive to an enrollee who receives no Federal subsidy and no cross-subsidy 

because he or she could take their funds to the STLDI market where it is possible to have 

additional controls on moral hazard, forgo coverage of unwanted services, or even just be 

exposed to more pleasant advertising (STLDI plans are not regulated in terms of the fraction of 

premiums that must be spent on claims). Therefore, the marginal enrollee must receive a 

subsidy if he or she chooses an ACA-compliant individual plan. We let s denote the amount of 

the marginal subsidy.

This reasoning does not predict whether the subsidy is in the form of a premium subsidy from 

Federal expenditures or as a cross-subsidy from other members of the risk pool. We expect that 

the marginal enrollees are a mix of both; that is, some are high-income sick enrollees and some 

are low- or medium-income healthy enrollees who would receive ACA premium subsidies if 

they chose an exchange plan.

The previous rule did not ban STLDI, but rather made it more difficult to use because the 

enrollee had to go through underwriting every 3 months, as compared with the new rule that 

permits a single policy to be renewed up to 36 months. The CEA models the previous rule as 

significantly adding to STLDI loads and enrollees’ hassle costs (hereafter, both are summarized 

as “loads”), as compared with the loads present under the new rule.

As a conceptual exercise, start with the new rule and add a small bit of load to STLDI plans. This 

addition takes STLDI plans only a small part of the way toward their situation under the 

previous rule. By making STLDI plans less attractive, it brings the aforementioned marginal 

enrollee from STLDI into the ACA-compliant risk pool. If this enrollee receives an ACA premium 

subsidy, then this addition to STLDI loads increases the Federal deficit because the premium 

subsidy must be financed by the Treasury. But if, instead,this enrollee receives a cross-subsidy, 

then this addition to STLDI loads still increases the deficit because adding this comparatively 

sick enrollee to the ACA-compliant risk pool raises premiums and therefore adds to the 

premium subsidies of the inframarginal exchange plan members.

 58 Here, we use “spending on PTCs” broadly to include tax expenditures, and therefore including two legally 

distinct transactions according to the refundable and nonrefundable parts of the PTCs.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 37

Although the small addition to STLDI loads unambiguously increases the deficit, it may

increase or reduce the premiums on ACA-compliant individual plans. It is theoretically possible 

that the marginal enrollees tend to be high-income sick consumers, in which case adding to 

the load (as the previous rule did) makes the ACA-compliant risk pool sicker. Perhaps it is more 

likely that the marginal enrollee is a low- or middle-income healthy person, in which case 

adding him or her to the exchanges reduces ACA-compliant premiums. Either way, the

application of economic reasoning to facts 1 and 2 contradicts the assertion that the marginal 

enrollee is a high-income healthy person.59

With the small addition to STLDI loads, we have a different marginal enrollee whose subsidy is 

somewhat less than s, but is still positive, because he or she is indifferent in choosing between 

an ACA-compliant individual market insurance plan and a slightly loaded STLDI plan. It follows 

that adding still more load to the STLDI plans will increase the Federal deficit. As we continue 

adding loads to STLDI plans, we eventually reach a point where the marginal enrollee’s subsidy 

is exactly zero. The addition to loads required to reach this point is equal to cost c (to the 

unsubsidized consumer) of the extra regulations on ACA-compliant individual plans. Therefore, 

adding c or less to STLDI loads must increase the Federal deficit.

We conservatively estimate c, which is the combined additional costs of ACA-compliant 

individual coverage from the perspective of an enrollee receiving neither an ACA premium 

subsidy nor a cross-subsidy, to be $1,000 per year. This exceeds our estimate of the addition to 

STLDI loads (broadly defined) by the previous rule, which means that the marginal enrollee 

would be receiving a subsidy even if the previous rule had remained in place. Therefore, the 

new STLDI rule must reduce the Federal deficit. 

The analysis by the CMS (2018b) does not discuss how consumers choose between STLDI and 

ACA-compliant individual plans under the previous rule; but its analysis assumes that there are 

marginal enrollees with negative subsidies. We note, in the neighborhood of the previous rule, 

that negative subsidies at the margin are possible if the previous rule made STLDI prohibitively 

expensive. The CEA does not agree that the previous rule added several thousands of dollars 

per enrollee, on an annual basis, to the cost of having STLDI coverage, which is required to 

reach the CMS deficit conclusions because deficit effects of enrollees with negative subsidies

must be enough to offset the deficit effects of consumers near the margin under the new rule.

The CEA also notes that the dollar value to consumers of ACA premium subsidies is far less than 

their cost to the Treasury because the subsidies significantly distort the labor supply, imposing 

 59 To be clear, this discussion refers to the market equilibrium over the next 10 years, with the new rule and with 

the previous rule, and in both cases without an individual mandate penalty. Because the individual mandate 

penalty was not zero in, say, 2017, and because consumers and insurers may take some time to adjust to rule 

changes, it is possible that ACA-compliant plans had a significant number of healthy high-income enrollees in 

2017.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 38

marginal tax rates of about 40 percent on income (on top of all other income and payroll taxes) 

and, in most cases, on full-time employment (Mulligan 2015). 

The CBO’s analysis of the deficit effects of repealing the individual mandate is informative (CBO 

2017b). CBO projections imply that enrollees on the margin of ACA-compliant individual 

market insurance plans and no insurance are receiving a large subsidy: at least $3,800 per year.

If the CBO is correct, many subsidized consumers are unhappy with ACA-compliant individual 

plans—so unhappy that they leave these plans to become uninsured. The vast majority of highincome enrollees in ACA-compliant individual plans must be comparatively unhealthy—that is, 

receiving a cross-subsidy—in order to justify paying the high premiums. Therefore, to the 

extent that the new rule induces high-income enrollees to leave ACA-compliant individual 

market insurance plans, many of them must be receiving cross-subsidies.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 39

References

Avalere. 2018. “Association Health Plans: Projecting the Impact of the Proposed Rule.” 

Prepared for America’s Health Insurance Plans. 

Bernheim, D., and A. Rangel. 2009. “Beyond Revealed Preference: Choice-Theoretic 

Foundations for Behavioral Welfare Economics.” Quarterly Journal of Economics 124, 

no. 1: 51–104.

Bernheim, D., and D. Taubinsky. 2018. Behavioral Public Economics. NBER Working Paper

24828. Cambridge, MA: National Bureau of Economic Research.

Brot-Goldberg, Z., A. Chandra, B. Handel, and J. Kolstad. 2017. “What Does a Deductible Do? 

The Impact of Cost-Sharing on Health Care Prices, Quantities, and Spending 

Dynamics.” Quarterly Journal of Economics 132, no. 3: 1261–1318.

Blumberg, L., M. Buettgens, and R. Wang. 2018. Updated Estimates of the Potential Impact of 

Short-Term, Limited Duration Policies. Washington: Urban Institute.

Boardman, A., D. Greenberg, A. Vining, and D. Weimer. 2017. Cost-Benefit Analysis: Concepts 

and Practice. New York: Cambridge University Press.

Busch, F., and P. Houchens. 2018. “The Individual Mandate Repeal: Will It Matter?” 

http://www.milliman.com/insight/2018/The-individual-mandate-repeal-Will-itmatter/.

Cawley, J., and T. Philipson. 1999. “An Empirical Examination of Information Barriers to Trade

in Insurance.” American Economic Review 89, no. 4: 827–46.

CBO (Congressional Budget Office). 2017a. “CBO’s Record of Projecting Subsidies for Health 

Insurance under the Affordable Care Act: 2014 to 2016.” 

https://www.cbo.gov/publication/53094.

———. 2017b. “Repealing the Individual Health Insurance Mandate: An Updated Estimate.” 

https://www.cbo.gov/publication/53300.

———. 2018a. “The Distribution of Household Income, 2014.”

www.cbo.gov/publication/53597.

———. 2018b. “Federal Subsidies for Health Insurance Coverage for Consumers under Age 65: 

2018 to 2028.” https://www.cbo.gov/publication/53826. 
CEA • Deregulating Health Insurance Markets: Value to Market Participants 40

CCIIO (Center for Consumer Information and Insurance Oversight). 2011. “Essential Health 

Benefits Bulletin.”

https://www.cms.gov/CCIIO/Resources/Files/Downloads/essential_health_benefits_b

ulletin.pdf

CEA (Council of Economic Advisers). 2017. “Understanding Recent Developments in the 

Individual Health Insurance Market.” Council of Economic Advisers Issue Brief.

https://obamawhitehouse.archives.gov/sites/default/files/page/files/201701_individu

al_health_insurance_market_cea_issue_brief.pdf.

———. 2018. “Innovative Policies to Improve All Americans’ Health.” In Economic Report of the 

President. Washington: U.S. Government Publishing Office. 

Chandra, A., J. Gruber, and R. McKnight. 2011. “The Importance of the Individual Mandate:

Evidence from Massachusetts.” New England Journal of Medicine 364, no. 4: 293–95.

Cohen, A., and P. Siegelman. 2010. "Testing for Adverse Selection in Insurance Markets." 

Journal of Risk and Insurance 77, no. 1: 39–84. 

Collins, S., and M. Gunja. 2018 “Premium Tax Credits Are the Individual Market’s Stabilizing 

Force.” Commonwealth Fund.

CMS (Centers for Medicare & Medicaid Services). 2018a. “Certification of Rates of Uninsured.” 

———. 2018b. “Estimated Financial Effects of the Short-Term, Limited-Duration Policy 

Proposed Rule.” 

Courtemanche, C., J. Marton, B. Ukert, A. Yelowitz, and D. Zapata. 2017. “Early Impacts of the 

Affordable Care Act on Health Insurance Coverage in Medicaid Expansion and Non‐

Expansion States.” Journal of Policy Analysis and Management 36, no. 1: 178–210.

Cutler, D., A. Finkelstein, and K. McGarry. 2008. "Preference Heterogeneity and Insurance 

Markets: Explaining a Puzzle of Insurance." American Economic Review 98, no. 2: 157–

62.

Cutler, D., A. Jessup, D. Kenkel, and M. Starr. 2015. “Valuing Regulations Affective Addictive or 

Habitual Goods.” Journal of Benefit-Cost Analysis 6, no. 2: 247–80.

Cutler, D., and S. Reber. 1998. “Paying for Health Insurance: The Trade-Off Between 

Competition and Adverse Selection.” Quarterly Journal of Economics 113, no. 2: 433–

66.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 41

Cutler, D., and R. J. Zeckhauser. 2000. “The Anatomy of Health Insurance.” In the Handbook of 

Health Economics 1, edited by Anthony Culyer and Joseph Newhouse. Cambridge, MA: 

Harvard University and National Bureau of Economic Research.

Dafny, L., K. Ho, and M. Varela. 2013. “Let Them Have Choice: Gains from Shifting Away from 

Employer-Sponsored Health Insurance and Toward an Individual Exchange.” American 

Economic Journal: Economic Policy 5, no. 1: 32–58.

Eibner, C., and S. Nowak. 2018. “The Effect of Eliminating the Individual Mandate Penalty and 

the Role of Behavioral Factors.” Commonwealth Fund.

http://www.commonwealthfund.org/publications/fundreports/2018/jul/eliminatingindividual-mandate-penalty-behavioral-factors.

Einav, L., and A. Finkelstein. 2011. “Selection in Insurance Markets: Theory and Empirics in 

Pictures.” Journal of Economic Perspectives 25, no. 1: 115–38.

Ericson, K. 2014. “Consumer Inertia and Firm Pricing in the Medicare Part D Prescription Drug 

Insurance Exchange.” American Economic Journal: Economic Policy 6, no. 1: 38–64.

Feldstein, M. 1999. “Tax Avoidance and the Deadweight Loss of the Income Tax.” Review of 

Economics and Statistics 81, no. 4: 674–80.

Fiedler, M. 2018. “How Would Individual Market Premiums Change in 2019 in a Stable Policy 

Environment?” Brookings Institution. https://www.brookings.edu/wpcontent/uploads/2018/08/Individual-Market-Premium-Outlook-20191.pdf.

Finkelstein, A., N. Hendren, and M. Shepard. 2017. Subsidizing Health Insurance for Low 

Insurance for Low Income Adults: Evidence from Massachusetts. NBER Working Paper 

23668. Cambridge, MA: National Bureau of Economic Research.

Finkelstein, A., N. Mahoney, and M. Notowidigdo. 2018. What Does (Formal) Health Insurance 

Do, and For Whom? NBER Working Paper 23718. Cambridge, MA: National Bureau of 

Economic Research.

Frean, M., J. Gruber, and B. Sommers. 2017. “Premium Subsidies, the Mandate, and Medicaid 

Expansion: Coverage Effects of the Affordable Care Act.” Journal of Health Economics

53: 72–86.

Gallen, T., and C. Mulligan. 2018. “Wedges, Labor Market Behavior, and Health Insurance 

Coverage under the Affordable Care Act.” National Tax Journal 71, no. 1: 75–120.

Garthwaite, C., T. Gross, and M. Notowidigdo. 2018. “Hospitals as Insurers of Last Resort.” 

American Economic Journal: Applied Economics 10, no. 1: 1-39.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 42

Goulder, L., and R. Williams III. 2003. “The Substantial Bias from Ignoring General Equilibrium 

Effects in Estimating Excess Burden, and a Practical Solution.” Journal of Political 

Economy 111, no. 4: 898–927. Chicago: University of Chicago Press.

Gruber, J. 2010. Health Care Reform Is a “Three-Legged Stool”: The Costs of Partially Repealing 

the Affordable Care Act. Washington: Center for American Progress.

Hackman, M., J. Kolstad, and A. Kowalski. 2015. “Adverse Selection and an Individual 

Mandate: When Theory Meets Practice.” American Economic Review 105, no. 3: 1030–

66. 

Handel, B. 2013. “Adverse Selection and Inertia in Health Insurance Markets: When Nudging 

Hurts.” American Economic Review 103, no. 7: 2643–82.

HHS (U.S. Department of Health and Human Services). 2011. “Essential Health Benefits: 

Individual Market Coverage.” Office of the Assistant Secretary for Planning and 

Evaluation. 

———. 2018. “Trump Administration Delivers on Promise of More Affordable Health Insurance 

Options.” https://www.hhs.gov/about/news/2018/08/01/trump-administrationdelivers-on-promise-of-more-affordable-health-insurance-options.html.

IRS (Internal Revenue Service). 2018a. “Individual Shared Responsibility Provision.” 

https://www.irs.gov/affordable-careact/individuals-and-families/individual-sharedresponsibility-provision. 

———. 2018b. “Individual Shared Responsibility Provision: Reporting and Calculating the 

Payment.” https://www.irs.gov/affordable-care-act/individuals-and-families/acaindividualshared-responsibility-provision-calculating-the-payment.

IRS National Taxpayer Advocate Service. 2018. “While the IRS Continues to Do a Reasonable 

Job in Administering the Affordable Care Act (ACA), Taxpayers Still Encounter 

Difficulties Attempting to Comply With the Complex Provisions.” 

https://taxpayeradvocate.irs.gov/Media/Default/Documents/2018JRC/JRC18_Volume

1_AOF_11.pdf.

Kaestner, R., B. Garret, J. Chen, A. Gangopadhyaya, and C. Fleming. 2017. “Effects of ACA 

Medicaid Expansions on Health Insurance Coverage and Labor Supply.” Journal of 

Policy Analysis and Management 36, no. 3: 608–42.

Kaiser Family Foundation. 2018. “2018 Employer Health Benefits Survey.” 

https://www.kff.org/health-costs/report/2018-employer-health-benefits-survey/.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 43

Karaca-Mandic, P., J. Abraham, and C. Phelps. 2011. “How Do Health Insurance Loading Fees 

Vary by Group Size? Implications for Healthcare Reform.” International Journal of 

Healthcare Finance and Economics 11: 181–207. 

Kenkel, D. 2000. “Prevention.” In Handbook of Health Economics, edited by A. Cuyler and J. 

Newhouse. Oxford: Elsevier. 

Ketcham, J., N. Kuminoff, and C. Powers. 2016. “Choice Inconsistencies among the Elderly: 

Evidence from Plan Choice in the Medicare Part D Program—Comment.” American 

Economic Review 106, no. 12: 3932–61.

Kofman M., K. Lucia, E. Bangit, and K. Pollitz. 2006. “Association Health Plans: What’s All the 

Fuss About?” Health Affairs 25, no. 6: 1591–1602.

Mulligan, C. 2015. Side Effects and Complications: The Economic Consequences of Health Care 

Reform. Chicago: University of Chicago Press.

Mulligan, C., and T. Philipson. 2004. “Insurance Market Participation under Symmetric 

Information.” Paper presented at American Economic Association Meetings. 

Pauly, M., A. Leive, and S. Harrington. 2018. “Losses (and Gains) from Health Reform for NonMedicaid Uninsured.” Journal of Risk and Insurance, July. 

https://doi.org/10.1111/jori.12255.

Pollitz, K., M. Long, A. Semanskee, and R. Kamal. 2018. Understanding Short-Term Limited 

Duration Health Insurance. San Francisco: Kaiser Family Foundation. 

http://files.kff.org/attachment/Issue-Brief-Understanding-Short-Term-LimitedDuration-Health-Insurance.

Rao, P., S. Nowak, and C. Eibner. 2018. “What Is the Impact on Enrollment and Premiums If 

the Duration of Short-Term Health Insurance Plans Is Increased?” Commonwealth 

Fund. https://www.commonwealthfund.org/publications/fundreports/2018/jun/what-impact-enrollment-and-premiums-if-duration-short-term.

Rothschild, M., and J. Stiglitz. 1976. “Equilibrium in Competitive Insurance Markets: An Essay on 

the Economics of Imperfect Information.” Quarterly Journal of Economics 90, no. 4: 

629–49.

Sacks, D. 2018. “The Health Insurance Marketplaces.” Journal of American Medical Association

320, no. 6: 549–50.

Saez, E., J. Slemrod, and S. Giertz. 2012. “The Elasticity of Taxable Income with Respect to 

Marginal Tax Rates: A Critical Review.” Journal of Economic Literature 50, no. 1: 3–50.
CEA • Deregulating Health Insurance Markets: Value to Market Participants 44

Saltzman, E. 2017. Demand for Health Insurance: Evidence from the California and Washington 

ACA Marketplaces. University of Pennsylvania Wharton School of Business Working 

Paper. Philadelphia: University of Pennsylvania Scholarly Commons. 

https://repository.upenn.edu/cgi/viewcontent.cgi?article=1140&context=hcmg_paper

s. 

U.S. Congress. 1985. “H.R.3128 Consolidated Omnibus Budget Reconciliation Act of 1985.” 

https://www.congress.gov/bill/99th-congress/house-bill/3128. 

———. 2010. “Public Law 111-148 Patient Protection and Affordable Care Act.” 

https://www.gpo.gov/fdsys/pkg/PLAW-111publ148/pdf/PLAW-111publ148.pdf.

Weber, C. 2014. “Toward Obtaining a Consistent Estimate of the Elasticity of Taxable Income 

Using Difference-in-Differences.” Journal of Public Economics 117: 90–103.

White House. 2017a. “Presidential Executive Order Minimizing the Economic Burden of the 

Patient Protection and Affordable Care Act Pending Repeal.” 

https://www.Federalregister.gov/documents/2017/01/24/2017-01799/minimizingtheeconomic-burden-of-the-patient-protection-and-affordable-care-act-pendingrepeal.

———. 2017b. “Presidential Executive Order Promoting Healthcare Choice and Competition 

Across the United States.” https://www.whitehouse.gov/presidentialactions/presidential-executive-order-promoting-healthcare-choice-competitionacross-united-states/.

———. 2017c. “Presidential Executive Order Reducing Regulation and Controlling Regulatory 

Costs.” https://www.gpo.gov/fdsys/pkg/FR-2017-02-03/pdf/2017-02451.pdf.
ABOUT THE COUNCIL OF ECONOMIC ADVISERS

The Council of Economic Advisers, an agency within the Executive Office of 

the President, is charged with offering the President objective economic 

advice on the formulation of both domestic and international economic 

policy. The Council bases its recommendations and analysis on economic 

research and empirical evidence, using the best data available to support 

the President in setting our nation's economic policy.

www.whitehouse.gov/cea 

February 2019