The Health Care Reform Legislation: An Overview

The Health Care Reform Legislation:
                                                   An Overview
                                                                               CHAPIN WHITE

            he Affordable Care Act (ACA) rep-                    for Medicare by reducing the growth in out-       one percentage point a year—apply broadly
            resents the most significant over-                   lays, and increasing Medicare taxes paid by       to most types of medical services, except for
            haul of our health care system                       high earners.                                     physicians (who have no reductions) and
            since the establishment of Medi-                         This paper provides non-specialists with a    home health care agencies (which face dispro-
            care and Medicaid.                                   guide to the major provisions, their logic, and   portionately large cuts).
    The ACA does two things: First, it funda-                    the federal budgetary implications. (All rev-          On the revenue side, the ACA raises Medi-
mentally shifts the social contract in the U.S.                  enue and spending figures below refer to 10-      care hospital insurance (HI) taxes by over $200
Starting in 2014, individuals will be required                   year totals for FY 2010 to 2019 and are based     billion. Starting in 2013, earnings above a cutoff
to have health insurance; in return, the fed-                    on CBO and Joint Tax Committee estimates.)        ($200,000 for singles; $250,000 for couples)
eral government will significantly expand                                                                          will be subject to an additional 0.9 percent tax,
low-income health insurance subsidies. Sec-                      medicare                                          on top of the current 2.9 percent. Also starting
ond, it significantly rebalances the financing
                                                                 T   he ACA reduces Medicare outlays by
                                                                     roughly $400 billion. Two-thirds of this
                                                                 comes from reduced growth in the payment
                                                                                                                   in 2013, high-earning families will pay a new
                                                                                                                   3.8 percent HI tax on net investment income
                                                                                                                   (interest, dividends, rents, and taxable capi-
Chapin White is a Senior Health Researcher, Center for           rates that medical providers receive in the       tal gains). ACA also raises the premiums that
Studying Health System Change (HSC). He was an analyst
at the Congressional Budget Office (CBO) from 2004 through       traditional fee-for-service program (see Table    high-income Medicare beneficiaries will pay
2010, and was one of the lead analysts working on the scoring    1). Most of the rest comes from reductions        for physician and prescription drug coverage,
of the health care reform bill. The analysis and conclusions
expressed in this paper are the author’s alone, and should not   in premiums paid to privately managed care        and reduces federal subsidies to hospitals that
be interpreted as those of the CBO or HSC.                       plans. The payment rate reductions—roughly        disproportionately serve low-income patients
© Berkeley Electronic Press                                                                                          The Economists’ Voice December, 2010
(“DSH”). Also, deductibles and co-                                                                                               the ACA’s “most important institu-
                                                                       Table 1
insurance in Medicare Part D pre-                      Summary of the Major Provisions in the ACA
                                                                                                                                 tional change.” The concept was
scription drug plans (the “donut                                                                  Effect on Federal Deficit
                                                                                                                                 to delegate to a body outside Con-
hole”) will shrink over the next de-     Medicare Provisions                                        (2010-9, $ billions)         gress the authority to make fiscally-
cade, due to a combination of man-         Reduced provider payment rates                                   -230                 sound, but unpopular, changes to
ufacturer discounts and additional         Reduced premiums to private plans                                -140                 Medicare. But IPAB is highly con-
federal financing.                         Increased premiums for high-income beneficiaries                 -40                  strained in its design. Its reforms are
    The combination of reduced             Close “donut hole”                                                40                  limited in nature (no rationing, no
outlays and increased revenues sub-        New HI tax on high-earners                                       -210                 restricting benefits); in scope (hos-
stantially improves Medicare’s fiscal      Miscellaneous (DSH, IPAB, CMI, ACOs, bundling, etc.)             -50                  pitals and most other providers are
picture, and pushes the Part A insol-      Net, Medicare Provisions                                         -610                 off-limits until 2019); and in timing
vency date—the year in which the         Coverage and Revenue Provisions                                                         (IPAB can only make reforms if pro-
Medicare Trustees project that the         Medicaid expansion                                               430                  jected Medicare-spending growth
HI trust fund will be exhausted—           Exchange credits                                                 460                  exceeds a target growth rate). Cru-
from 2017 to 2029. The reduction           Small business credit                                             40                  cially, IPAB’s target growth rate—
in premiums paid to Medicare Ad-           Tax on health insurers and manufacturers                         -110                 GDP per capita plus one percent-
vantage will likely lead those plans       Penalties on firms and individuals                               -70                  age point—is unsustainably high,
to raise premiums or cut benefits,         Limit deductibility of health care expenses                      -30                  which essentially ensures that IPAB
which will cause some beneficiaries        Non-health revenue provisions                                    -50                  will not solve Medicare’s long-term
to shift out of those plans and back       High-premium excise tax                                          -20                  financing problem.
to the fee-for-service program.            Reduce Medicaid Rx prices                                        -40                       Three other Medicare provisions
    Rhetoric claiming that the ACA         Miscellaneous (administrative simplification,                    -30                  have also received outsized attention:
                                           high-risk pool, early retirees, etc.)
will accomplish more fundamen-                                                                                                     • Center for Medicare and Medic-
                                           Net, Coverage and Revenue Provisions                             590
tal Medicare reform is generally                                                                                                      aid Innovation (CMI). The ACA
overblown. For example, the new         Note: This table excludes off-budget effects of the ACA on the Social Security                expands the executive branch’s
                                        program, and excludes the CLASS act and the education provisions in the ACA.
Independent Payment Advisory                                                                                                          authority to conduct “dem-
Board (IPAB) has been touted as                                                                                                       onstrations” testing alternative
                                                                                                                       The Economists’ Voice December, 2010
payment and delivery systems in Medi-             only creates a limited pilot program for             Subsidies. Medicaid—which provides health
  care and Medicaid. How the CMI will play          payments for hospital and post-acute care.      care coverage with no premiums and very low
  out is highly uncertain. CBO projected                                                            or no cost-sharing—has historically only been
  that it would have essentially no impact       coverage                                           available to children in very low-income fami-
  on spending.
• Accountable care organizations (ACOs).
  The concept behind ACOs is to encour-
                                                 T    he ACA’s core coverage goals were (1) to
                                                      ensure that everyone, regardless of health
                                                 status or income, has adequate access to health
                                                                                                    lies, and their parents. Starting in 2014, the
                                                                                                    ACA will expand eligibility to every person
                                                                                                    below 138 percent of the federal poverty level
  age medical providers to form integrated       insurance and health care; and (2) to minimize     (FPL) including, most importantly, adults with-
  systems, and to incentivize those systems      disruptions to the current system. The ACA’s       out young children. This expansion is, in my
  to reduce utilization while meeting qual-      coverage provisions have four interdependent       judgment, the largest single component of the
  ity benchmarks. But under the ACA, pro-        components: (1) subsidies for low-income           ACA. It accounts for roughly half of gross cover-
  vider participation is purely voluntary,       individuals; (2) an individual mandate; (3) a      age costs. By 2019, it will shift roughly 16 mil-
  and incentives are one-sided: Bonuses are      prohibition on insurers’ denying coverage or       lion people into Medicaid (a number nearly as
  available for ACOs that come in below a        varying premiums on the basis of health sta-       large as the number of elderly persons who en-
  spending target, but there is no penalty for   tus; and (4) the definition of a minimum health    rolled in Medicare when it was first launched.)
  overshooting. Some ACOs will likely end        insurance package. Without the subsidies,          For the non-elderly and non-disabled, the ACA
  up earning windfall bonuses due to the         health care is unaffordable for those with low     standardizes the income-counting rules used for
  natural variability in health spending. CBO    incomes. Without the mandate, healthier indi-      determining Medicaid eligibility, and eliminates
  guessed that, on the whole, ACOs would         viduals opt out of the market, possibly lead-      asset tests. Additional provisions streamline and
  very modestly reduce Medicare spending,        ing to collapse. Without the limits on insurers,   simplify enrollment in Medicaid.
  but those windfalls could very easily end      market pressures force them to charge higher            Beginning in 2014, the ACA will offer a re-
  up increasing it instead.                      premiums to individuals in poor health status,     fundable tax credit for the purchase of health
• Bundling. Paying medical providers for a       or deny them coverage altogether. The defined      insurance through newly-established health
  broadly-defined “bundle” of services (rath-    minimum benefit package is necessary to de-        insurance markets (“exchanges”). These credits
  er than by individual service) holds great     termine whether individuals have satisfied the     (discussed in the article in this issue by Dug-
  promise for reining in cost growth. The        mandate, and whether they have enrolled in         gan and Kocher) account for the bulk of the
  ACA includes a bundling provision, but         coverage that is eligible for the new subsidies.   remainder of gross coverage costs. The ACA
                                                                                                      The Economists’ Voice December, 2010
also includes an employer tax credit that can      the basis of health status; and rescind cover-      meeting additional criteria relating to plan
offset up to half of employer contributions for    age if the insurer uncovers “misstatements”         quality, marketing, and value.
health insurance, but only for very small firms    (whether intentional or not) on the enrollee’s
with low-wage workers. This credit, compared       application. Under the ACA, starting in 2014,       revenues
to other aspects of the ACA, is small and has
relatively little impact on coverage.
    Individual mandate. Also beginning in
                                                   all four of those practices will be prohibited
                                                   in the individual-insurance market. The ACA
                                                   also places new restrictions on insurers in the
                                                                                                       T    o offset the cost of its subsidies, the
                                                                                                            ACA raises federal revenues from vari-
                                                                                                       ous sources, mostly within the health care
2014, the ACA will require almost everyone         small-employer and large-employer markets,          system. These revenues include: broad-based
in the U.S. to enroll in health insurance. Once    but those restrictions are generally not binding.   taxes on health insurers and makers of brand-
fully phased-in, the penalty for not doing so           Minimum coverage. The ACA defines three        name prescription drugs and medical devices;
will equal the greater of a flat dollar amount     rings of insurance coverage: The outermost          penalties on large employers that do not of-
($695 per uninsured adult) and 2.5 percent         ring consists of all coverage satisfying the        fer affordable health coverage, and on unin-
of family income. Groups exempt from the           individual mandate. (This includes every-           sured individuals; limits on the deductibility
penalty include families with income below         thing we would deem ‘real’ health insurance:        of medical expenses for individuals and firms;
the income-tax-filing threshold; American          Medicare counts, but not, say, vision-only.)        and some miscellaneous non-health revenue
Indians; and families for whom the cost of         The second, smaller ring consists of all small-     provisions (e.g., an excise tax on indoor tan-
coverage would be unaffordable (defined as         group and individual coverage. Starting in          ning). The ACA also includes several provi-
exceeding 8 percent of income) or would re-        2014, these plans must provide ‘essential           sions that reduce federal outlays and thereby
sult in hardship (to be defined later). The IRS    health benefits,’ which includes coverage of a      offset some of the coverage costs, such as a
will monitor compliance and assess penalties       broad set of services (hospital, prescription-      reduction in the prices that Medicaid will pay
through the tax system.                            drugs, etc.), and must choose a cost-sharing        for prescription drugs.
    Limits on insurers. In most states, health     design that fits into one of five actuarial value
insurers in the individual market have been        tiers (‘platinum,’ ‘gold,’ etc.). The innermost     markets
permitted to choose whether to offer coverage
based on an individual’s health history; exclude
coverage for ‘pre-existing’ (i.e., already-diag-
                                                   ring consists of ‘qualified health plans’: plans
                                                   offered through the new exchanges and po-
                                                   tentially eligible for exchange credits. These
                                                                                                       S   everal major components of the ACA
                                                                                                           attempt to correct perceived market
                                                                                                       distortions, create new markets, or improve
nosed) medical conditions; vary premiums on        plans must be certified by the exchanges as         the functioning of existing markets. Besides
                                                                                                         The Economists’ Voice December, 2010
exchanges, discussed in the article by Duggan       insurance has never really gotten off the           and 85 percent in the large-group market.
and Kocher, these changes include:                  ground due, at least in part, to the inherent       In the individual market, many insurers
  • Limiting the tax subsidy for employer-spon-     instability in private insurance contracts          currently have loss ratios well below this
    sored coverage. The tax treatment of em-        spanning many years or decades. The ACA             cutoff, which means that their current
    ployer-sponsored health benefits—i.e.,          establishes the CLASS program, a new, vol-          business model and cost structure are no
    deductibility for the employer, and ex-         untary, community-rated long-term care              longer viable. It remains to be seen wheth-
    clusion from taxable income for the em-         insurance product administered by the               er MLRs will improve the individual mar-
    ployee—has long drawn fire from econo-          federal government. If all goes as planned,         ket, or seriously disrupt it.
    mists, most notably Martin Feldstein, for       the premiums and benefits will be in bal-           (The ACA contains numerous other provi-
    putting upward pressure on health care          ance so that the program is self-sustaining.    sions, most relating to quality-improvement,
    costs. The ACA takes a small step in the      • Administrative simplification. The ACA          public health, home-based services, and the
    direction of limiting that tax subsidy. Be-     broadens the scope of federal regulations       health care workforce. They include expanded
    ginning in 2018, insurers and self-insured      governing interactions among health in-         federal funding for community health centers;
    employers will be subject to an excise tax      surers and providers (e.g., submission of       state-run high-risk pools; and health benefits
    on employer-sponsored health benefits in        claims for payment, eligibility verifica-       for early retirees. They are mentioned here
    excess of a ceiling. The ceiling will be at     tion). CBO judged that the resulting re-        only in passing, as they are relatively un-
    least $10,200 for single plans and $27,500      duction in premiums would be ‘modest’ in        important fiscally and unrelated to the core
    for family plans in 2018—higher if premi-       percentage terms, but the base over which       coverage provisions.)
    ums grow faster than expected, if an em-        those savings accrue—almost the whole of
    ployer’s workforce is unusually old, or if      health spending in the U.S.—is enormous.        conclusions
    the enrollee is a retiree or a worker in a
    high-risk profession. The ceiling, which is
    indexed to CPI-U, will likely grow more
                                                  • Minimum loss ratios (MLRs). The ACA re-
                                                    quires, as of 2011, that health insurers
                                                    spend at least a minimum percentage of
                                                                                                    H     istorically, the pattern has been for the
                                                                                                          Medicare program’s fiscal condition to
                                                                                                    deteriorate until—with insolvency looming—
    slowly than premiums, which means that          their premium revenues on medical claims        Congress temporarily rights the ship by re-
    its impact is projected to grow gradually.      (i.e., losses) or quality-improvement ac-       ducing outlays and raising revenues. The ACA
  • A new long-term-care insurance product.         tivities. That minimum equals 80 percent        fits squarely in that tradition, but with a ma-
    The private market for long-term-care           in the individual and small-group markets,      jor twist: All of the Medicare savings and new
                                                                                                      The Economists’ Voice December, 2010
revenues were spent on a major coverage ex-         In The Nature Of A Substitute To H.R. 4872,
pansion. The result is that Congress soon will      The “Reconciliation Act Of 2010,” As Amend-
be looking either for more Medicare savings or      ed, In Combination With The Revenue Effects
revenues, or for other ways to offset the cost of   Of H.R. 3590, The “Patient Protection And Af-
the coverage expansion. Either way, the policy      fordable Care Act (‘ACA’),” As Passed By The
focus will almost certainly shift rapidly from      Senate, And Scheduled For Consideration By
coverage to health-care cost-containment.           The House Committee On Rules On March 20.
                                                    Available at:
Letters commenting on this piece or others may
be submitted at

references and further reading
House Office of the Legislative Counsel
(2010) Patient Protection and Affordable Care
Act (ACA & HCERA; Public Laws 111-148 &
111-152: Consolidated Print). Available at:
CBO (2010) Cost estimate for the amendment
in the nature of a substitute for H.R. 4872, in-
corporating a proposed manager’s amendment
made public on March 20. Available at: http://
Joint Committee on Taxation (2010) Esti-
mated Revenue Effects Of The Amendment
                                                                                                     The Economists’ Voice December, 2010
You can also read