An Overview and Thoughts on Healthcare

An Overview and Thoughts on
Healthcare Reform
John Garen
Gatton Endowed Professor of Economics
University of Kentucky
March 2013
Main Points of Discussion
The motivation for reform.
Contrasting visions for reform.
An overview of the fiscal impact of PPACA.
Some basic regulatory rules of PPACA.
Discussion of aspects of the healthcare
reform law under contrasting visions.
6. Alternative reform approaches.
7. Where do things stand now?
Some Well-Known Issues
• Large number of uninsured; some with low incomes
and serious health conditions.
Estimates: 15-17%; 45- 50 million
• Growth in healthcare costs: premium increases,
growth in spending.
Share of GDP. 13.8% in 2000; 17.9% in 2010.
• Funding crisis in government-operated health plans.
Medicare and Medicaid are now about 23% of
federal budget, up from about 18% in 2000. More baby
boomers coming.
One Vision For Reform
• Health care as a “quasi-right;” all are entitled.
• Supported heavily by tax dollars; any
premiums are relatively uniform; not risk
• Cost control from central authorities to adopt
“best practices,” e.g., evidence-based
medicine, accountable care organizations,
electronic records.
An Alternative Vision
• Embrace of market-driven reforms combined
with a safety net.
• Individual-based insurance; elimination of tax
preference for employer-provided.
• Competition among insurers and providers;
consumerism among patients, customers.
• Anticipated innovations: high deductibles,
healthy lifestyle premiums, casualty-style “health
status” insurance.
• Safety net. Premium assistance for low-income,
poor health.
Overall Summary - Budgetary
Billion $
10-Year Spending
10-Year Projection on
Deficit Reduction
CBO, 2010-2019
(March 2010)
CBO, 2013-2022
(July 2012)
Sources for this and two following tables:
CBO, 2010-2019
(March 2010)
CBO, 2013-2022
(July 2012)
Exchanges: start up, subsidies
Exchange premium credits
Small employer tax credits
$ 37
Medicaid/SCHIP expansions
Billion $
Spending Reductions; Tax Increases
CBO, 2010-2019
(March 2010)
CBO, 2013-2022
(July 2012)
Reductions in planned Medicare FFS
Reduction in Medicare Advantage Rates
Lower Medicare/Medicaid Hospital
Other Medicare/Medicaid reductions
Community Living Asst. (CLASS) net chg.
$ 36
$ 87
$ 40
Employer and Uninsured penalties
Excise tax on high-premium plans
Fees on certain drug and device mfgs.
Additional Hospital Insurance Tax
Other taxes (incl. “payroll” tax on some
interest/dividend income)
$ 65
$ 32
Billion $
Some Initial Observations
• Note greater spending 10-year projection from 2012 than
from 2010. Rising projections already. Can costs be
• Adds to the entitlement spending of Medicaid.
• Medicare reductions. Are they feasible?
Approximately $75 billion per year over 10 years.
2011 spending: $480 billion.
$75 billion out of $480 billion = 15.6%
• Method of reduction. Cuts in reimbursements; price controls.
Reduced incentive to serve Medicare patients.
Fundamental Tenets of PPACA
Stresses the importance of increased coverage with standardized
policies and premiums.
• Guaranteed issue with prohibition on exclusion for pre-existing
• Community rating on premiums (with age, tobacco use differences
• Mandatory coverage.
Designers of PPACA understand that these three operate together.
Everyone is in the insurance pool; contributions and coverage are
relatively equal. Similar to a government program.
In Practice: Aspects of PPACA
• health insurance exchanges where individuals can
purchase insurance.
• coverage is mandated
• subsidies are available to buy insurance
• pricing of insurance is controlled; certain levels of
coverage are required
• employer mandates on types of plans offered.
• employer penalties for no insurance plan.
• cost control initiatives: ACOs, IPAB.
The Conflict of Visions
• For PPACA approach to make sense, it must be
that there are minimal incentive effects of health
insurance and healthcare costs on behavior. I.e.,
health status is essentially fixed and is not altered
by behavioral incentives.
• Similarly, it is important that incentive effects on
providers and insurers are small.
• Also, the plans and practices (e.g., cost control)
must be such that they are suited to the
The Conflict of Visions -- cont’d.
• If behavior/incentives are important then
problems emerge.
• Consider this regarding some major health issues:
heart disease, cancer, stroke, respiratory
diseases, diabetes, obesity, smoking, exercise.
• Similar comments apply to provider and insurer
• How important are knowledge, preferences, and
treatments which are specific to the individual
The Exchanges: Community Rating,
Guaranteed Issue, and Incentive Issues
• Those in poorer health pay less; the healthier pay
more. An implicit tax and spending plan.
• Insurance companies make money from the
healthy and not from those in poor health. Who
will be sought as customers and be well-served?
• Uniform pricing of insurance regardless of risk
works against providing incentives for healthy
behaviors. No scope for lower premiums as an
incentive for healthy behavior. Bad health habits
are, in effect, rewarded
Effects of Minimum Loss Ratio Rule
• Minimum required percent of claims payouts to
• High deductible plans have lower premiums but
not proportionately lower administrative costs.
• Will virtually eliminate “consumer-directed” plans
with high-deductibles and catastrophic coverage.
• These are viewed by some as an important path
to efficiency in health care provision. Consumers
pay everyday, anticipated expenses out of
pockets. Insurance is reserved for significant
medical expenses.
The Individual Mandate – Limiting
Choices, Poorly Targeted
• Minimum loss ratio rule limits availability of highdeductible plans.
• “Minimum essential coverage” rules required
coverage for such items as mental health and
substance abuse treatments, wellness services,
dental and vision care for children, birth control,
and a number of other items.
• Subsidies to purchase phases out at 400 percent
of the poverty level. For a family of four, this is
approximately $88,000.
The Employer Mandate
• The 50 employee limit.
• Penalties for not offering a qualified plan.
• For many workers, the penalty is small relative
to the subsidy that the worker can obtain.
Drop coverage and “pay” the worker for the
subsidized coverage.
• More people on the subsidized exchange.
• More people on Medicaid.
An Uncomfortable Spiral?
More use of the subsidized
exchange, Medicaid
Growth in Medicare
Increased budgetary pressure.
The public’s limit on taxation is reached.
“Cost containment” becomes more
onerous, e.g, rationing.
An Uncomfortable Spiral? – cont’d.
• Independent Payment Advisory Board-type
outcomes more likely?
• Witness the Massachusetts experience with
cost containment.
The “Incentives Matter” Approach Paints
an Unfavorable Picture . . . And Points to
Alternative Reforms
Policies to move to:
• individual-based health insurance
• consumer choice
• competition (in insurance and
healthcare provision)
Policy Alternatives – cont’d.
• Remove the tax preference for employerprovided insurance.
• Enable interstate competition for insurance.
• Remove mandates (state and federal) on
insurance policies.
• Examine and remove unwarranted
impediments to provider competition, e.g.,
onerous scope-of-practice laws, certificate of
need laws.
This View Anticipates . . .
• Competition lowers prices and increases availability and
quality. Reduces the need for a public program.
• Indiv. policies: no loss of insurance with job loss, retirement;
choices of plan, providers, treatments
• Types of insurance options likely to emerge:
- high deductible, consumer-directed plans
- guaranteed renewable and casualty-style plans – no future
“pre-existing conditions” problem;
- Safeway-style plans. Premiums based on individual health
habits; tobacco use, weight, blood pressure, and cholesterol
• For those in true need – poverty, very poor health, “legacy”
health conditions – provide voucher-style assistance to
purchase insurance.
Where Do Things Now Stand with
• Passed the Constitutionality test . . . though in
an odd way.
• The president was reelected.
• But . . .
. . . continuing issues
• State or federal operation of health insurance
exchanges. Will states establish them? If not, are state
residents eligible for subsidies; state employers
required to pay penalties?
• Will states expand Medicaid? The Medicaid program
has problems, e.g., under-reimbursement.
• Will states take the federal support or coalesce to
oppose what a number think is bad policy?
• What will happen to private premiums? Insurers will
likely have to cross-subsidize the exchanges via higher
rates elsewhere.