Re-Analysis Of The Affordable Care Act
What does the new health care law really mean for you?
Posted Oct 06, 2013
WARNING: The time required to read this post will violate my five-minute rule—by a wide margin. This isn't so much to punish readers for my decision to read all 1,163 pages of the "Patient Protection and Affordable Care Act" (HR3590) and all 337 pages of the "Health Care and Education Reconciliation Act of 2010" (HR4872)—known collectively as the Affordable Care Act—but rather because a shorter post couldn't possibly do an analysis of it justice (not that a longer post will either, but here goes...).
SPECIAL NOTE: Claiming I read "all 1,163 + 337 pages of the health care law" requires some clarification. My eyes did indeed follow all the sentences (if you can call them that), but HR3590 and HR4872 both contain large parts that are largely indecipherable, referring, as they do, to other laws often by stating things like this: "(1) IN GENERAL—Section 1861(s)(2) of the Social Security Act (42 U.S.C. 1395x(s)(2)) is amended—(A) in subparagraph (DD), by striking 'and' at the end." I was simply unable to carve out the time or summon the mental energy to refer back to all the other statutes the health care law amended. Further, the law is written backwards (a standard for lawmakers, I presume), by which I mean declarations are made that require an understanding of other declarations and terms that are described below them—and often far below them. This required a lot of re-reading and parsing of sentences that induced severe brain fatigue and more than a few headaches. Finally, though in several places the meaning of the law's provisions was plain, the thinking and the intent behind them often (though not always) remained obscure. Lawmakers rarely include explanations for why their laws say what they do. This is all to sound a warning that what follows represents my sometimes uncertain understanding of the substance of the law and may actually contain errors of fact. Knowledgeable readers are encouraged to point out any they identify. The law is unbelievably complex and the one overriding impression with which I was left after reading it is this: I doubt anyone, even the law's principal authors, fully understands the way it will change American health care.
The health care law certainly contains a number of controversial provisions, but among the most controversial (as evidenced by the contesting of its constitutionality in front of the Supreme Court) is that all Americans are mandated to have health insurance beginning in 2014. If they don't purchase it, the law says, they have to pay a tax penalty of no more than $750 per year (prorated by number of months they go without insurance) multiplied by a cost-of-living adjustment beginning in 2016. The rationale for mandating that every American be required to purchase health insurance is that "by significantly increasing health insurance coverage, requiring all Americans to purchase health insurance will minimize adverse selection and broaden the health insurance risk pool to include healthy individuals, which will lower health insurance premiums."
This reasoning seems logical at first glance: increase the number of (presumably healthy) people who pay insurance premiums but who are less likely as a group to need health care services (and thus who will require insurance companies to spend less money on them) and insurance companies will be able to cover the cost of providing coverage for all the additional beneficiaries who get sick.
Yet because insurance companies will no longer be able to refuse to insure someone because of a pre-existing condition, to motivate healthy people currently without health insurance to purchase it before they perceive they actually need it, the cost must be less than the penalty for failing to purchase it. And it's not: who believes anyone will be able to find insurance for less than $750 per year?
But let's put that problem aside for a moment and assume that enough healthy people currently without health insurance will indeed purchase it (it's way too early to tell, but so far it doesn't seem that too many people actually have purchased new policies). But if we assume they eventually will, I agree that almost certainly then there will be an even distribution of these new healthy enrollees across most insurance plans—"spreading the wealth" so to speak—that will minimize adverse selection (where certain insurance companies get stuck with the sickest patients who cost the most). But the idea that this will lower premiums simply doesn't follow. First, it ignores the actual cause of increased premiums—the continually increasing cost of providing health care. It costs doctors and hospitals more to provide care as time goes on so they charge more, so insurance companies have to pay more, so they raise premiums. The increased revenues insurance companies will enjoy from the huge influx of new (healthy) enrollees may widen their profit margins enough to enable them to hold off on increasing premiums for a while. But eventually they'll have to start raising premiums again when health care costs rise above a certain threshold. Which they will, as nothing in the health care law directly addresses the true cause of increasing health care costs (as I discussed in a previous post, A Prescription For The Health Care Crisis, and which I discuss again below).
But even if the rise of our nation's health care bill plateaued, why would higher profits lead insurance companies to reduce their premiums if no one can take away their customers? Everyone in America will now be required to have health insurance and large insurance companies (that might be able to afford reducing premiums) operate in relatively competition-free markets (residents of one state can't buy insurance from companies that operate in another). The end result? Consumers currently have almost no ability to "vote with their feet." Thus, no competitive pressure exists to motivate insurance companies to lower their premiums at all (remember, just because there are multiple plans on the exchanges doesn't mean they're being offered by as many companies). Quite the opposite: they have every reason in the world to pocket that extra money (as long as it doesn't exceed the limit the Act puts on their profits—see below) they'll get from all the new enrollees (for one thing, it makes their shareholders happy, which means you if your 401K happens to include a health insurance company or two). No wonder the stock market valuations of most large insurance companies surged when the health care law was first passed.
So why would Congress expect premiums to go down when they failed to create a system in which free market forces have a chance to operate? The answer is because of all the provisions they crafted into the health care law that regulate the health care insurance industry—and not just with respect to insurance company practices (a reasonable role for the government to play when market forces aren't strong enough to safeguard consumers against abuses) but with respect to what premiums companies can charge their customers. Even more than that, with respect to what insurance companies can do with their revenues. There is legitimate disagreement in our country about the role government should play in regulating any private business, but as I pored through the health care law I found myself astounded at the reach the government is taking into the private enterprise of health insurance. For example:
- Insurers must rebate enrollees for money they spend (with revenue generated from premiums) on non-claim costs above 20% (group market) and 25% (individual market). This essentially means 80% of the revenue that insurance companies make in the group insurance market and 75% of the revenue insurance companies make in the individual insurance market must be spent on benefits paid to health care providers for patient care. Any excess profit must be rebated to enrollees.
- The Secretary of Human Health and Services shall establish a process for review of unreasonable increases in premiums; insurers must submit a rationale to Secretary prior to implementing an unreasonable increase. What represents an "unreasonable" increase? The health care law provides no guidelines.
- The Federal government has given the states the power (and money—$250 million) to review rate increases and bar any insurance company from the states' Exchanges (see below for a definition of an "Exchange") if their premium increases are judged "unreasonable." Further, justification for such "unreasonable" increases must be posted on the companies' web sites.
I find it ironic that charges of socialism have been leveled against the Obama administration when these provisions in the health care law seem far more reminiscent of the principles of communism (in which market prices are set by a central body rather than the market). (Please note I'm not using this label to be pejorative—the only objection I have to communism is that it doesn't work.) What will set the price insurance companies can charge isn't the market but the judgment of specific individuals whose primary concern is the affordability of insurance to consumers. This last is, of course, critically important, but if the system that ensures premiums are affordable also creates a business model that's unsustainable, the health care insurance industry will eventually collapse. Those who support the government single-payer model will perhaps be delighted to imagine this happening, but moving to a government single-payer model by itself won't do anything to control rising health care costs. One way or another, we'll still have to pay for it: if premiums aren't higher under a government single-payer model, taxes certainly will be.
Truly, I don't have a well-formed opinion about the wisdom of maintaining a private insurance/government payer model vs. a single government payer model. But if we want to give the private insurance model a fair chance to work (and I recognize that's a big "if" for many), we need to create incentives where each participant in the system (health care providers, patients, and insurance companies) are internally motivated to act in a way that sustains it. Currently, none of the three has those incentives. Physicians are motivated to order more tests and perform more procedures because the advance of technology enables them to (and, in fact, in many cases brings real benefit we all want), because many of them make more money if they do, and because they fear malpractice suits if they don't—all of which drives up the cost of health care by increasing utilization. Patients are motivated to want more tests and treatments because they perceive more intervention leads to better outcomes (even though studies suggest it often doesn't), which makes them complicit in increasing health care resource utilization. Insurance companies are motivated to charge high premiums because of the high cost of health care and to avoid paying out promised benefits because such payments subtract directly from their bottom line. I've already written about the first two points in my previous post, A Prescription For The Health Care Crisis; regarding the last—I'd be curious to see what would happen if insurance companies were forced to compete across state lines so that enrollees could choose the best rates and benefits in the entire country (or just those plans that fit their perceived needs best) and then flock to those plans, forcing the other plans to reduce rates and improve service (i.e., willingness to pay claims) in order to remain competitive. I should note, however, that I doubt interstate competition would lower premiums enough to enable people currently unable to afford health insurance to swing it. That problem would have to be solved separately.
The law includes many provisions that protect the insured. Insurance companies may no longer:
- Put lifetime limits on the dollar value of benefits (meaning no limit exists to how much money your insurance company is obligated to reimburse providers for your care over the course of your lifetime).
- Place unreasonable annual limits on dollar value of benefits (meaning no limit exists to how much money your insurance company is obligated to reimburse providers for your care over the course of any one year).
- Rescind health care insurance except in cases of fraud (meaning if unintentional mistakes are made in an insurance application, insurers are prohibited from canceling benefits).
- Impose any preexisting condition exclusions (meaning no insurer can refuse to cover medical expenses for conditions people develop prior to applying for insurance). In fact, no insurer may turn down any employer or individual in the state they provide coverage at all.
- Vary rates by any criteria other than age, tobacco use, and what's defined as a rating area. Each state will establish rating areas "for the purpose of applying the requirements of fair health insurance premiums," but nowhere in the law did I find mention of what criteria will be used to create them.
- Charge deductibles that exceed $2,000 for individuals.
- Make any applicant wait more than 90 days to be accepted into a plan.
- Prevent anyone from choosing any primary care physician or pediatrician in an insurer's plan.
Points #1 through #3 seem at first glance like basic protections consumers should be able to enjoy. And though I'm confident these provisions will indeed be of great benefit to hundreds of thousands of people, if not more, and should be included in our health care reform, I also feel bound to sound an alert that they simultaneously help sustain a moral hazard that currently contributes significantly to our country's rising health care costs: patients in America no longer pay themselves for the tests or treatments they receive so have no incentive to think carefully about whether or not they should get them. Though cost shouldn't be a limiting factor on one's ability to get a test or receive a treatment, having to pay nothing for a service makes it hard psychologically to not want it, even when getting it may not actually be in one's best interest, as I noted above.
Point #4 is tricky. As a physician I find myself enraged when I diagnose a patient with a disease whose treatment they can't afford because they lost their previous insurance through no fault of their own and whose new insurance won't pay for the treatment I want to give them until, for example, they've been on their books for a year. From an insurance company's point of view, I understand the rationale: if they can't refuse granting insurance or paying claims for patients with preexisting conditions, what's to stop someone from waiting until they get something bad and then applying for insurance, essentially becoming a profit-drainer from the very first day they're covered? While I hate preexisting condition clauses and agree they should be prohibited, how are insurance companies to guard against the potential for abuse? If everyone in America buys health insurance as the health care law mandates, this won't be a problem—but as I mentioned above, as the law is currently written, I'm not so sure this will happen.
I have no quarrel with the following provisions:
- Tax credits shall be provided against the cost of premiums for people with incomes from 100% to 400% of the poverty line. Cost-sharing shall be reduced for enrollees with incomes less than 400% of the poverty line. The Secretary of Health and Human Services shall reimburse qualified plans for the cost-sharing reductions they provide to such enrollees.
- All patients can visit an ER without prior authorization to any ER, whether it's an ER that participates in the patient's plan or not for any "emergency situation." An "emergency situation" is defined as a patient contracting "acute symptoms of sufficient severity (including pain) that a prudent layperson, who possesses an average knowledge of health and medicine, could reasonably expect the absence of immediate medical attention to result in a condition described in clause (i),(ii), or (iii) of section 1867(e)(1)(A) of the Social Security Act."
- Health care cost information shall be made readily available to the public via the Internet. All U.S. hospitals must list publicly their standard charges for items and services rendered.
- Children may remain on their parents' policy until age 26.
All insurance companies must also cover preventive care interventions with evidence-based ratings of "A" or "B" according to the U.S. Preventive Services Task Force, as well as cover immunizations. Further, all insurance companies must cover "essential health benefits," which are defined as:
- ER services
- Maternity and newborn care
- Mental health and substance use disorder services
- Prescription drugs
- Rehabilitation services
- Lab services (I saw nothing in the law that mentions outpatient scans like MRIs, CTs, PETs, or even exercise tests.)
- Preventive and wellness services and chronic disease management
- Pediatric services including oral and vision care
My take on the above: all reasonable protections that provide a baseline level of support many of us will need at one point (or more) in our lives. And though I agree such consumer protections are required in our current system, the size of the new bureaucracy created to enforce them is simply staggering (the details of which are too elaborate to post here). To partially help offset this cost, insurance companies must pay a fee to the government beginning September 30, 2012 equal to $2/covered life per policy offered. Given that our current population is approximately 310 million, this will provide 620 million in revenue to the government. (This tax the insurance companies are forced to pay, by the way, in most cases being is passed on to beneficiaries.)
FURTHER ENLARGED BUREAUCRACY
As we've all been hearing lately in the news, the health care law requires each state to create an American Health Benefit Exchange (government entity or non-profit established by a state) that:
- Must be self-sustaining by Jan 1, 2015.
- Facilitates the purchase of qualified health plans.
- Establishes Small Business Health Options Programs (SHOP Exchanges) designed to assist qualified small employers in getting their employees enrolled in qualified health plans.
- Certifies health plans to ensure quality.
- Operates a toll-free number hotline for assistance.
- Maintains an Internet site to show comparisons of plans, rate health care plans with system developed by the Secretary of Health and Human Services, which enables enrollees to determine actual premium cost to them.
- Decides whether or not to make a health care plan available to enrollees.
My take on the above: In deciding to assign government watchdogs to the health insurance industry rather than create incentives for the industry to regulate itself, Congress is risking the same kind of failures that led to the economic meltdown of 2008 as well as the BP oil rig disaster. Though I'm not arguing for no regulation, no government watchdog can watch everyone and everything (even if it isn't plagued by incompetence). Though far more difficult to legislate, strategies that link an industry's survival directly to behaviors that best serve its customers are far more successful. I would have preferred the main force of regulatory control to come from the clever placement of these incentives (even at the cost of a major restructuring of the health care insurance industry) with governmental regulations sprinkled on top to provide adequate consumer protections. As it is, the cost of maintaining the bureaucracy the health care law creates will add significantly to our nation's health bill. How effective this strategy will be remains to be seen.
Some further examples of insurance industry regulation:
- All plans will be divided into four levels of coverage based on percentage of cost sharing: Bronze (plan pays 60%), Silver (plan pays 70%), Gold (plan pays 80%), Platinum (plan pays 90%).
- Beginning Jan 1, 2015 a plan in the Exchanges can only contract with a hospital that meets safety criteria established by the Secretary of Health and Human Services.
- Health insurance companies can operate outside of Exchanges, and no one can be compelled to enroll in an Exchange health plan; but members of Congress and their staff can only get health insurance through programs created under the health care law.
- The Secretary of Health and Human Services shall establish procedures by which a state may allow brokers to enroll individuals in health plans and to assist individuals in applying for premium tax credits and cost-sharing reductions for plans sold through an Exchange, including establishing rate schedules for commissions.
- Unlawful residents are not eligible to get insurance through an Exchange.
- The Secretary of Health and Human Services shall establish a Consumer Operated and Oriented Plan (CO-OP), whose purpose will be to foster the creation of qualified nonprofit health insurance issuers to offer qualified health plans in individual and small group markets. Secretary shall provide loans for anyone wanting to start up such a CO-OP for start-up costs and to meet solvency requirements
- An advisory board shall be created consisting of 15 members appointed by the Comptroller General of the U.S. who shall not receive pay other than for travel expenses for the purpose of advising the Secretary of Health and Human Services on granting loans for non-profit start-ups.
My take on the above: The intended benefit of the government's Exchanges is that they provide an easy way for consumers to compare different insurance plans as well as confidence that all enrolled plans meet minimum quality standards. But I'm not sure these measures don't add levels of bureaucracy that will create little bang for their buck while adding significantly to the difficulty of navigating our health care system.
In order to cover the millions of Americans currently without insurance, as mandated by the health care law, 90 days after the passage of the law, the Secretary of Health and Human Services established a temporary high risk health insurance pool program that will remain in effect through January 1, 2014 and which:
- Has no preexisting condition clause.
- Covers no less than 65% of health costs but with an out-of-pocket limit not to exceed amount described in section 223(c)(2) of Internal Revenue Code of 1986.
This high-risk pool has funding of $5 billion to pay claims in excess funded by premiums. The Secretary of Health and Human Services will "make adjustments as are necessary" to eliminate any deficits in the program. He or she is empowered to stop taking applications to this pool to comply with this funding limitation. That this might mean barring the very people this pool is meant to help remains an open possibility. The program will end January 1, 2014, and all enrollees will be transitioned to a health care Exchange.
My take on the above: I feel that the basic health care needs of every member of our society should be met. To argue otherwise—that we should deny people unable to afford care access to it—is morally unacceptable to me. The issue for me, then, isn't should the rest of us subsidize the care of people unable to afford it themselves but how we do so most cost-effectively. Currently we allow people unable to pay for health care access to health care services mostly through our nation's emergency rooms, which as a result are hopelessly overcrowded with non-emergent cases. This significantly impairs the quality of emergency care we all receive.
Yet as numerous studies demonstrate, significant health benefits and economic savings occur if we can prevent health problems rather than treat them once they've occurred. So to provide access to health care for people unable to afford it makes the best economic and medical sense when that access takes the form of visits to primary care providers who emphasize preventive health measures. In fact, we could make the argument (as yet unproven) that preventing enough serious illnesses in the medically underserved might actually save money overall. Then again, even if we could bring to bear the resources necessary to provide appropriate preventive care services to most people in the country, that wouldn't guarantee most people in the country would take advantage of them or alter their behaviors in ways that decreased their risk of future illness.
Finally, even if we found a better way to motivate people to adopt healthier behaviors, little in this law provides for an effective way to increase the number of primary care providers available to meet the health care needs of the population. Though provisions are included that increase funding for expanding primary care residency slots, as long as reimbursement for primary care services lags behind specialty services, there will remain a relative dearth of medical students who want to go into primary care and an excess of primary care physicians who want to get out of the field altogether. This imbalance between supply (primary care providers) and demand (patients who want to see them) in my view explains most of the customer service failures that have dogged the health care industry for the last decade (increased waiting times to see providers, poor accessibility to providers, and too little time spent with providers during appointments, to name just a few).
THINGS I LIKE ABOUT THE HEALTH CARE LAW
- The Secretary of Health and Human Services shall adopt a single set of operating rules for health information transactions that everyone has to follow (to streamline clerical work).
- Hospitals must report quality measures. Performance information summarizing data on quality measures will be made available on Internet sites for providers of health care. Increased reimbursement will be provided for improving health outcomes; the Secretary of Health and Human Services will develop guidelines for awarding such increased reimbursements. My take: I like motivating health care institutions financially to care about the quality of the care they provide. Health care providers are supposed to care about quality because we're professionals, but big institutions, unlike individuals, aren't as well motivated by a sense of professionalism (nor, I'm afraid I must admit, are all healthcare providers).
- The Secretary of Health and Human Services shall establish a payment modifier that provides for differential payment to providers based upon quality of care furnished compared to cost. Costs shall be evaluated based on a composite of appropriate measures of costs taking into account that less healthy people may require more intensive interventions. Payment modifier shall be implemented in a budget-neutral manner and be done in a way that promotes systems-based care. My take: Nothing wrong with adding a financial incentive to motivate individual providers to care about the quality of the care they provide and to reward those who are already positive outliers. The devil, however, is in the very details this law fails to make clear.
- Hospitals with excess readmissions shall have their reimbursement payments reduced. My take: Hospitals have enormous financial incentives to get patients discharged as quickly as possible. A counterbalancing incentive is sorely needed to return sound medical judgment to its position as the sole determinant of discharge decision-making.
- Secretary shall establish a process to validate RVUs. My take: RVU stands for "relative value unit" and is a means by which to determine the reimbursement level of medical services. For example, the RVU for open heart surgery is far higher than for office counseling on smoking cessation. The medical profession itself is responsible for the imbalance between RVU values for specialty services and RVU values for primary care. Why are so many medical students flocking away from primary care and toward specialties? Because reimbursement for specialty services is higher, all based on RVUs. Varying reimbursement levels is clearly driving an oversupply of specialists and an undersupply of primary care physicians. Here's a lever that can be pulled to increase the supply of primary care physicians to meet the increased demand the health care law will create for medical services.
- The health care law establishes a Prevention and Public Health Fund to invest in prevention programs to improve public health and reduce health care costs. Secretary will award grants to states to develop initiatives that test approaches to encourage behavior modification to get people to adopt preventive health behaviors. My take: we honestly don't know how best to motivate people to adopt preventive behaviors. (Here, by the way, are some of my ideas.) What we need are funds with which to experiment and find out.
- Mental health and substance abuse are now considered "essential health services." My take: it's a travesty that insurance coverage (or I should say, lack thereof) for mental health and substance abuse disorders has lagged so far behind our ability to treat them. If this actually turns out to enable all the people who need these services but can't afford them to get them, that will represent a true victory for this legislation.
The health care law mandates a series of experiments it dubs "demonstration projects" that will be designed to examine different systems for paying for health care. I highly recommend Atul Gawande's article, Testing, Testing, for an excellent analysis of the value of these pilot programs. Though I don't entirely share his optimism, I am encouraged that the law has provisions for trying things out and measuring their outcomes. We need real data to figure out the best way to curb health care costs.
THINGS I DON'T LIKE ABOUT THE HEALTH CARE LAW
- No provisions were made for equalizing the reimbursement rates of different insurance plans, which tend to be negotiated differently with different health care providers. Medicaid will continue to pay pennies for every health care dollar charged by a health care entity while private insurers pay dimes or quarters. The end result: patients with different insurance plans will continue to have differing degrees of desirability. Medicaid (and even Medicare) patients are already being disenfranchised as health care providers focus on marketing themselves to patients with "better" insurance and on making it harder for patients with less desirable insurance to gain access to their services.
- Tort reform remains unaddressed in the health care law. Physicians (especially emergency room physicians) consistently overutilize health care resources because they're afraid of missing something and being sued, even when the likelihood of that something being present remains minuscule. There must be a rational limit placed on the remuneration available to plaintiffs. Physicians must be freed from the excessive worry they have about making a mistake that so powerfully motivates them to overutilize health care resources (though not from responsibility for gross incompetence and laziness that causes significant harm).
Just a few examples of the ways in which dollars will flow to support the provisions of the health care law:
- In 2014, 2015, and 2016, the Secretary of Health and Human Services shall reimburse insurance plans by 50% of the difference between premium revenues and reimbursements to providers if the plans spend more than they take in.
- Tax credits are given to small businesses that provide health insurance to employees in the amount the employer contributed for its employees premiums.
- States shall charge insurance plans whose actuarial risk is less than average and provide a payment to plans whose actuarial risk is higher than average.
How will the mammoth expense of our health care bill be paid?
- All taxpayers will pay an additional 0.5% tax on income in excess of $200,000 for individuals and more than $250,000 for couples.
- Cosmetic procedures will be taxed 5%.
- Indoor tanning services shall be taxed by 10% of fee.
- Beginning in 2018, insurance companies will have to pay a 40% excise tax on so-called "Cadillac plans"—plans that cost individual enrollees more than $10, 200 and families more than $27,500.
- A Medicare tax will be applied to investment income of 3.8%.
Because other than the "demonstration projects" mentioned above nothing in this law directly addresses the real cause of the majority of our increasing national health care costs (overutilization of health care resources by both physicians and patients, and medical innovation), many more Americans than Congress anticipated will likely find themselves enrolled in a "Cadillac plan" without intending to be (as the cost of their premiums rises between now and 2018 in order to keep up with rising medical costs). Which means insurance companies will be paying far more in taxes on these plans in total than Congress expected. Which means they will almost certainly be forced to pass on that extra cost to enrollees, further raising premiums in 2018.
The health care law has begun some much-needed reform. Unfortunately, I find its funding approach flawed and strongly suspect it will prove itself unsustainable. I'm encouraged by the number of provisions in it for experimentation, though, as I believe the best way for us to create a viable health care system is by trial and error; the American medical system is simply too complex for anyone to accurately forecast all unintended consequences. I can only hope Congress and the American people retain their appetite for continued reform and aren't afraid to throw out what doesn't work.
As long and complicated as this post was, it failed, of course, to cover every provision of the new health care law or even to emphasize every issue I think is important in health care reform. I hope readers will feel free to bring up whatever issues interest them in the comments and that the discussion over this critically important topic can continue.
Dr. Lickerman's book, The Undefeated Mind: On the Science of Constructing an Indestructible Self, is available now. Please read the sample chapter and visit Amazon or Barnes & Noble to order your copy today.