“Too many [employers], though, take a surprisingly cavalier attitude toward their medical spend. In many cases, the cost of medical care is one of a company’s top three or four expenses. But whereas managers scrutinize the purchase of new equipment and raw materials, the cost to rent or own and upgrade their facilities, and employee expense reports, they effectively give workers a blank check to seek care at the equivalent of Subway, an Olive Garden, or a Capital Grille, depending on the employees’ preferences and without regard for price and quality.”
William G. (Bill) Stuart
Director of Strategy and Compliance
March 19, 2020
Mid-March marks two important 10-year anniversaries in healthcare. One will be acknowledged nationally. The other is largely forgotten because it was specific to a single state and is an afterthought even in that single jurisdiction.
The Affordable Care Act Turns 10
The Patient Protection and Affordable Care Act was signed into law March 23, 2010, by President Obama, following its controversial passage on a partisan basis days earlier. The 2,000-page bill cleared both chambers of Congress by the slimmest of margins. Democrats in the House and Senate drafted separate bills, but couldn’t iron out their differences. Their only hope of passage was for the House to accept the Senate bill and focus on amending the law after its passage. But Republicans took control of Congress in the 2010 midterm elections, shutting the door on positive amendments to the law.
Legal Challenges to the ACA
The law has survived several legal challenges and faces another. In 2012, the Supreme Court ruled on two challenges to the law in National Federation of Independent Business v. Sebelius. The plaintiffs challenged two aspects of the law:
- It was unconstitutional to require private citizens to purchase a private product (medical insurance) or face a fine. The Court upheld this provision, calling the fine a tax and citing Congress’ power to levy taxes.
- It was unconstitutional to force states to expand Medicaid. The ACA expanded Medicaid to include low-income adults without children. A number of Republican-led states balked at the expansion. The Court ruled that states could opt out of expanding eligibility. States that expanded Medicaid enrolled roughly 10 million adults with generally positive outcomes, although Medicaid expenditures are the No. 1 budget item in most state budgets today and are rising far faster than state revenue.
In 2014, the law survived another challenge. The ACA provided premium subsidies for people unable to afford insurance, based on a specific financial formula. The law permitted these subsidies when people purchased coverage through public marketplaces run by individual states, but not federally facilitated marketplaces that most states adopted. Though the statutory language was clear, the Supreme Court ruled that Congress intended to extend premium credits to all applicants who met the eligibility criteria, regardless of where they purchased a plan.
Today, another challenge is working its way through the federal court system. Plaintiff states argue that because Congress eliminated the tax (penalty) for failing to purchase coverage. Without an effective individual mandate, the nongroup market would collapse. And because the law doesn’t allow an unconstitutional section to be removed while the balance of the law stands, the plaintiffs argue that the entire law is unconstitutional. A federal district court judge agreed, but allowed the ACA to stand pending appeal. The appeals court agreed, but let the law stand as it sent the base back to district court. The Supreme Court recently agreed to hear oral arguments during its next term – possibly in October 2020, in the heat of the presidential and congressional elections.
The State of the ACA
Has the Affordable Care Act been a success or failure? It depends on whom you ask.
The law has expanded coverage to about 20 million Americans who previously didn’t have coverage. But that figure is about 40% of proponents’ goal of 50 million. Roughly half of the 20 million are enrolled in Medicaid, coverage that offers a limited network of providers. And the number in private coverage declines each year – particularly among people who don’t qualify for premium subsidies yet can’t afford to pay the equivalent of a second mortgage payment for coverage.
The decade has seen the introduction of the term underinsured to describe people with coverage that includes prices for treatment that are unaffordable. The size of that population is roughly the same as it was before the law.
Because insurers can’t adjust premiums to reflect risk, they have redesigned the product that they offer in the nongroup market. These plans have higher cost-sharing, narrower networks, and more restrictive prescription-drug formularies than nongroup plans before passage of the ACA and large group plans today.
The law included payment reforms, electronic medical records, and other measures designed to manage costs. President Obama boasted that the law would actually reduce the average family’s healthcare costs would decline. Instead, costs continue to grow at about twice the rate of general inflation, mirroring the rate of growth since the federal government introduced Medicare and Medicaid in the mid-1960s.
Congressional Republicans have sponsored a number of bills to modify the Affordable Care Act. All have failed. The closest the GOP came to major reforms came in 2017, when the House passed a reform bill, but President Trump and the Senate’s Republican leaders weren’t able to secure enough votes in the upper chamber for passage.
The Trump Administration has issued executive orders to provide additional choices in the market. His initiatives have included:
- Increasing the duration of short-term, limited-duration plans. These plans provide temporary coverage, typically for people between jobs or early retirees waiting to enroll in Medicare at age 65. They are medically underwritten, so insurers can reject applicants and vary premiums based on risk.
- Expanding association health plans. Federal law allows small businesses who meet certain criteria – such as operating in the same industry or geographic area – to band together and purchase coverage as a single large entity. The Trump Administration included additional criteria to qualify as an association.
- Using HRAs to fund premiums. Prior to the ACA, a number of employers gave employees a tax-free stipend, through a Health Reimbursement Arrangement, that employees could use to purchase nongroup coverage. But the Obama Administration disabled this approach. President Trump restored it as an option for all employers.
What about Democrats? Do they still support the ACA? They’re divided. In the large field of presidential candidates assembled in 2019 (subsequently whittled down to three active candidates), everyone proposed a larger role for the federal government in the design, delivery, and financing of medical care. But the candidates and members of the party are divided on whether that larger role should take the form of strengthening the ACA or scrapping it in favor of a government monopoly. Former Vice President Biden proposes strengthening the ACA, whereas Sen. Sanders (joined by more than half the Democrats in the House of Representatives and at least 14 Senate colleagues) support a move to a government monopoly.
The Future of the ACA
The law’s future remains in doubt. Outright repeal won’t happen. But over time, the law will either be replaced by a government monopoly or changed. And change won’t necessarily involve congressional action. The law provides more than 1,400 opportunities for the Secretary of Health and Human Services to write regulations around specific provisions of the ACA. That flexibility gives each administration – Democrat or Republican – leeway to mold the law to meet its wishes.
The Massachusetts Market
On March 16, 2010, then-Attorney General Martha Coakley of Massachusetts issued a report (news article here on the cost of medical care in the state. Her conclusions weren’t surprising. And in annual reports issued since then (see 2019 report here), the state reports what can best be described as mixed results.
The report concluded that a handful of hospitals in Massachusetts used their negotiating leverage – derived from patient volume and market reputation – to receive reimbursement levels far higher than other hospitals in the state. These higher reimbursement levels were not at all related to:
- Quality of care
- Sickness of the population served or complexity of services provided
- Percent of patients covered by Medicare and Medicaid (which reimburse providers at rates far lower than commercial plans), or
- Differences in the cost of providing care
The report further stated that most of the increases in healthcare costs were driven by increases in unit prices, not units consumed (utilization). That conclusion reflects the national market today: Although an aging population requires more care, the key driver of higher costs is the escalating price of care rather than increase in services received.
The report concluded that to contain costs, “[i]f we accept that our health care system can be improved by better aligning payment incentives and controlling cost growth, then we must begin to shift how we purchase health care to align payments with ‘value,’ measured by those factors the health care market should justly reward, such as better quality.”
The report called on insurers to lead this effort because “[i}nsurers are in the best position to align price with quality, complexity, and other rational values.” It further pushed for “increased transparency about pricing and health care cost drivers . . . to empower consumers in cost containment efforts.”
Subsequent legislation called for price transparency, but it left insurers in charge of defining and executing a transparency strategy. But insurers and providers aren’t eager to pull back the iron curtain that conceals this information from employers (who pay most of the premium for private coverage) and employees/patients. The system works best for them when prices aren’t visible.
Insurers did create products that excluded the most expensive hospitals or required patients to pay more to receive care at those facilities. But employers are reluctant to offer those products – even when positioned side-by-side with a full-network option. And when employers have offered them, most employees haven’t enrolled. And those who have were receiving care at the lower-price providers already, so employers receive no additional net savings.
Insurers introduced rudimentary price-transparency tools. But only a small percentage of patients use them. Private companies offer more robust price-transparency apps and redirection to lower-price providers (even offering a financial reward), but few employers purchase these services and few employees ever use them.
And during the subsequent decade, the most expensive hospitals have expanded their control of the market by purchasing or aligning with community hospitals and physician practices that previously had lower reimbursement rates and opening outpatient surgery centers that skim profitable day surgery from lower-price community hospitals.
In response, other hospitals have banded together with the stated goal of providing a market counter lever. And the states No. 2 and No. 3 insurers as measured by membership are working their way through regulatory approval of a merger with the hope that they can more effectively compete against the No. 1 insurer and strengthen their negotiating position with the growing hospital systems.
Massachusetts as a Microcosm
Massachusetts’ experience reflects what’s happening nationally. In urban areas, providers are consolidating their control over the local market at levels that wouldn’t pass regulatory muster if they were banks, pharmacies, or other critical businesses. They use their power to negotiate reimbursement levels with insurers that are unrelated to price or value. Insurers, afraid that losing contracts with those market giants will make their products less attractive, negotiate from a position of weakness.
Employers care about the cost of care, since they bear the brunt of that cost. In many cases, the cost of medical care is one of a company’s top three or four expenses. But whereas managers scrutinize the purchase of new equipment and raw materials, the cost to rent or own and upgrade their facilities, and employee expense reports, they effectively give workers a blank check to seek care at the equivalent of Subway, an Olive Garden, or a Capital Grille, depending on the employees’ preferences and without regard for price and quality.
Massachusetts, like the rest of the country, has a long way to go if it wants its medical-delivery market to align price and quality as the availability of information does in markets as diverse as electronics, groceries, vacations, transportation, and entertainment. Short of the level of price transparency that empowers consumers to purchase the most appropriate goods and services in those markets, medical markets will continue to offer prices completely unrelated to quality. And this misalignment will continue to financially stress employers, employees, and patients.
What We’re Reading
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You know that a Health Savings Account can be an important part of your retirement plan. And now, thanks to this excellent article, so do many Forbes readers.