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An overview of the Affordable Care Act, aka “Obamacare”

October 2013

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A talk on “Obamacare” --- Why should you be interested?

As a patient

• The quality and cost of your personal healthcare will be impacted.

As a healthcare market researcher

• Reimbursement and treatment dynamics as well as usage patterns may be affected, and anytime our clients experience change, they may need to do research to understand it. We should be prepared to discuss intelligently.

As a citizen

• Healthcare is a large and growing part of our federal “balance sheet.”

• Many fellow citizens are cannot get the care they need.

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Today’s Approach

Stick to the facts (and cut through the politics)

• Much of the debate is heavily politicized, and is related to differences in philosophical ideologies (e.g. role of government, how high taxes should be, appropriate balance between individuals and the state, etc.).

• We will focus on what is in the ACA, why it is in there, and what the expected impact might be.

Simplify and focus on the main ideas

• The final law is over 2400 pages in length detailing hundreds of separate provisions.

• We will necessarily only focus on the main ideas and issues.

• We assume that you are not a policy “wonk”, but just want to better understand what all the buzz is about.

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Contents

● Background: Our “Dysfunctional” Healthcare System

● The ACA: An Overview

● Main Points of Contention

● Health Insurance Exchanges – A New Way to Buy Insurance

● Impact on Different Stakeholders

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Our dysfunctional healthcare system (I)

• We spend far more on healthcare than other countries, even after adjusting for relative wealth.

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• Despite the high level of spending, life expectancy at birth is far below the trend line

Our dysfunctional healthcare system (II)

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• Furthermore, our spending on healthcare is rising to unsustainable levels

Our dysfunctional healthcare system (III)

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Our dysfunctional healthcare system (IV)

• Finally, the number of uninsured Americans is large and growing

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The ACA was passed in an attempt to address all these problems

Increase the quality of healthcare

Reduce Healthcare

Costs

• For individuals

• For the government

Increase the rate of coverage

• Reduce the number of uninsured and underinsured

• Goals are lofty, but are they achievable?• And are some of these goals conflicting?

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Contents

● Background: Our “Dysfunctional” Healthcare System

● The ACA: An Overview

● Main Points of Contention

● Health Insurance Exchanges – A New Way to Buy Insurance

● Impact on Different Stakeholders

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The ACA: A High-Level Perspective (I)

Provision Key Elements Motivation / Idea

Restrictions on Payer Policies

• Guaranteed Issue: Insurers are prohibited from denying coverage or setting rates based on health status (e.g. pre-existing conditions). Rates can only be based on age and geography. Also, payers cannot cancel policies if you fall ill.

• No annual or lifetime limits on coverage allowed

Ensure that people that need care can get coverage (and thus get care)

Insurers cannot “cherry pick” healthy customers only

The Individual Mandate

• Everyone must get insurance, or pay a penalty.

• Penalty is greater of 2.5% of income or $695 ($2085 for families), with some exceptions, and tied to inflation

Without this, Guaranteed Issue would result in people not buying insurance until they got sick, which would result in skyrocketing premiums (and defeat the whole point of insurance)

Increasing Accessibility to Coverage

• Medicaid Expansion: Those that make less than 133 percent (up from 100 percent) of the federal poverty level will qualify for Medicaid

• Federal Subsidies for individuals based on income level

• States will set up insurance exchanges where people (especially those that cannot get insurance through an employer) can buy insurance.

• Children can be covered on parents policy up to age 26

• Employer Mandate: Those with more than 50 employees must provide insurance, or be subject to fine. Those with more than 200 employees must provide insurance

If there is an individual mandate for people to get insurance, the system must also make insurance relatively accessible (i.e. not too costly) and easy to get, particularly for the lower income, unemployed, etc.

• Fundamentally the ACA has 3 main areas of reform, which are intimately related. These are: Restrictions on Payer Policies, The Individual Mandate, and Increasing Accessibility to Coverage

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The ACA: A High-Level Perspective (II)

Payers Individuals(i.e. Patients)

Must provide affordable insurance to all

(Guaranteed Issue)

Must have insurance(Individual Mandate)

Government

Facilitate this union(exchanges,

subsidies, employer mandate, Medicare

expansion, etc.)

• Another way to understand the ACA is that it is based on the idea that “We are all in this together.” Payers must accept everyone into the insurance pool, and everyone must participate in that pool.

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Reduction of 25 million uninsured

ACA Impact on Coverage

• Medicaid Expansion: Requires states to offer Medicaid to people with incomes up to 138 percent (133 percent plus a 5 percent income disregard) of the federal poverty level (FPL)*

• Federal Subsidies: Premium subsidies and limits on OOP spending for those with incomes up to 400% of the FPL, for those that buy insurance through exchanges

• Guaranteed Issue: Remove restrictions and discrimination (pre-existing conditions, payers cannot remove individuals if the get sick, etc.)

• Individual Mandate: Get insurance or pay penalty

• Health Insurance Exchanges: Virtual marketplaces where people can choose from a wide set of policies, independent of their employment

* Most, but not all states will comply with this (more on slide 20)

Before ACA After ACA

55 million

30 million

Number of uninsured in 2019 – CBO Estimate

• The impact of many parts of the ACA is in dispute. However, practically everyone agrees that it will reduce the number of uninsured individuals.

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Does not receive regular, preventative

care

First interaction with the healthcare system is an

emergency situation, which is very costly.

By law, uninsured patients cannot be refused emergency

care, so costs are passed on to payers and insured patients

anyways*

Un

insu

red

ACA Impact on Overall Healthcare Costs – In Theory

• Fewer uninsured should lead to more preventative care and less emergency care, reducing overall costs to the healthcare system

• “An ounce of prevention is worth a pound of cure” – Benjamin Franklin

*Currently, uninsured people account for 20% of ER visits, costing hospitals as much as $56 billion / year (http://articles.latimes.com/2012/jun/18/nation/la-na-emergency-care-20120619)

Seeks out and receives regular, preventative care

Few require emergency care

Insu

red

Suffering

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Other provisions in the ACA

Provision Motivation / Idea

Eliminating barriers to preventative servicesAll new insurance plans must cover preventive care and medical screenings rated Level A or B by the U.S. Preventive Services Task Force. Insurers are prohibited from charging co-payments, co-insurance, or deductibles for these services.

Encourage preventative care and screenings --- with hope that this will reduce overall healthcare costs. “An ounce of prevention is worth a pound of cure.”

Eliminating the Medicare “Donut Hole”Manufacturers voluntarily agreed to provide $80 billion in prescription drug discounts over 10 years for beneficiaries in the Medicare donut hole. These discounts, coupled with federal subsidies, will close the coverage gap by 2020.

The U.S. Department of Health and Human Services estimates that more than a quarter of Part D participants stop following their prescribed regimen of drugs when they hit the donut hole. This can lead to poor health outcomes which may cost the health system more in the long run.

Minimum Medical Loss Ratio for InsurersInsurers must spend a certain portion of premium dollars on healthcare (85% for large group plans; and 80% for individual/small group plans), leaving only 20% and 15% respectively for administrative costs and profits. If an insurer fails to meet this requirement, a rebate must be issued to the policy holder.

This prevents payers from price gouging, and provides a disincentive for them to challenge / withhold coverage to maximize their profit (beyond a certain level).

Governance of BiosimilarsAuthorizes the FDA to approve generic versions of biologic drugs and grant biologics manufacturers 12 years of exclusive use (data exclusivity) before a biosimilar can be filed for approval.

Clears a pathway for biosimilars, allowing for potentially cheaper versions of biologic drugs to become available.

• The ACA contains hundreds of other provisions. Here are a few of the more impactful ones.

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Contents

● Background: Our “Dysfunctional” Healthcare System

● The ACA: An Overview

● Main Points of Contention

● Health Insurance Exchanges – A New Way to Buy Insurance

● Impact on Different Stakeholders

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Some History

2008 2009 2010

Obama proposes plan to cover 45 million uninsured

using a subsidy, but not a mandate.

Congressional back and forth, House and Senate with different bills.

Republican leadership directs its

legislators to oppose the

individual mandate, saying it is

unconstitutional*.

Bipartisan committees

formed to address issues.

Policy makers and leading Democrats convince Obama that an individual

mandate is necessary to avoid

the free rider problem.

Obama identifies fixing healthcare as

one of top 4 priorities in he wins

presidency.Obama wins

general election.

*Interestingly, previous Republican healthcare reform proposals included an individual mandate (most notably a 1993 Republican alternative to the Clinton bill called the HEART act, as well as Romney’s state-level plan for Massachusetts in 2006).

• The ACA had a difficult, partisan “birth.”• It was rammed through Congress, with not one Republican voting for it in the House.

Bill passes House by 219 to 212 vote, with all 178

Republicans voting against

it.

The same day, several states file a lawsuit

challenging the constitutionality

of the ACA!

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The Individual Mandate Debate

It is unconstitutional for government to require people to purchase something. Government cannot force commerce.

The whole point of insurance is to share and spread risks. If everyone

does not participate (or worse, if only the riskiest people participate) –

insurance doesn’t work. Cannot have guaranteed issue without the

individual mandate.

But governments already do this – e.g. state laws requiring purchase

of auto insurance

This is the similar to a tax, and the government is allowed to levy taxes

Auto insurance is different because you can choose to have a car or not.

……

• There are arguments and counterarguments around the Individual Mandate, but at root the debate is about the appropriate size and reach of the Federal government.

Arguments For Arguments Against

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The 2012 Supreme Court Ruling

● On March 23, 2010, the same day that the ACA was signed into law, several states filed a lawsuit challenging the constitutionality of o The Individual Mandateo Medicaid expansion

● In June 2012, the US Supreme court ruled as follows:

Individual MandateThis is constitutional, as it is the same as Congress’ power to tax. Passed by a 5-4 decision.

Had it not been ruled this way, Obamacare would be dead, for all intents and purposes.

Medicaid ExpansionMedicare expansion is fine, but the Federal government cannot force states to participate in Medicare expansion under threat of withholding existing funding

• In 2012, the US Supreme Court upheld the Individual Mandate, but limited the Federal Governments capability to force states to participate in Medicaid expansion

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State-by-State Participation in Medicare Expansion

• Only about half of the states will participate in Medicare expansion, somewhat blunting the impact of the ACA.

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Contents

● Background: Our “Dysfunctional” Healthcare System

● The ACA: An Overview

● Main Points of Contention

● Health Insurance Exchanges – A New Way to Buy Insurance

● Impact on Different Stakeholders

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Health Insurance Exchanges – What are they?

• Individuals (unemployed, self-employed, or working for companies that do not offer insurance, etc.)

• Small businesses looking for insurance

• Those who require federal subsidies for insurance

• Delinking insurance from employment ensures that people can have insurance in between jobs.

• Only approved plans that meet certain standards (e.g. no discrimination by pre-existing condition, will be allowed to be sold on the exchanges

• States may charge insurers a fee (up to 3.5% of premiums) for the right to sell on the exchange

Health Insurance Exchange

• An HIX is a regulated, virtual marketplace, administered by either federal or state government, where private insurers may sell plans to individuals and small business starting January 2014.

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Health Insurance Exchanges – Greater Access, but Additional Complexity

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Health Insurance Exchanges – State by State Approach

Some states will operate their exchanges as a clearinghouse (i.e. all qualified plans will be available there).

Other states, like California, will only offer selected plans, based on negotiated rates with insurers

Reasons for states to set up their own exchanges: Federal subsidies, more local controlReasons for states not to set up their own exchanges: Cost and administration, politics

• 17 states are building their own HIXs, 7 others are assuming some responsibilities, and 26 states are defaulting to a Federally administered exchange

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Contents

● Background: Our “Dysfunctional” Healthcare System

● The ACA: An Overview

● Main Points of Contention

● Health Insurance Exchanges – A New Way to Buy Insurance

● Impacts on Different Stakeholders

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ACA Implications – Consumers (I)

Financial support for many to get insurance(Medicare expansion, subsidies)

Individual Mandate will mean some healthy individuals who may not need health insurance will be required to purchase it (or pay a fine)

Some high income consumers (>$200K for individuals, >$250K for joint filers) will have to pay more Medicare taxes

Pros Cons

Insurance plans can no longer have copays/coinsurance requirements for a long list of preventative measures

Health insurance exchanges will, in principle, provide people with more choice of plans, and help

them find the most appropriate plan for their situation

Insurance plans can no longer have lifetime limits or maximums

Guaranteed Issue prevents payers from “cherry picking” healthy patients only

(no exclusions due to pre-existing conditions, no terminating policies when patients get sick, etc.)

Elimination of Medicare “Donut Hole” will help out many elderly patients who are otherwise

stopping treatment when they reach the “hole”

• More people will get covered, and coverage will be better

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ACA Implications – Consumers (II)

Guaranteed Issue means that insurers will have to take on anyone, including those with pre-existing conditions and other unhealthy individuals

Reasons premiums will decrease Reasons premiums will increase

An ounce of prevention is worth a pound of cure As the number of uninsured and underinsured is

reduced (via Medicare expansion, federal subsidies, etc., preventative treatments will increase, and

emergency treatments will decrease

Individual Mandate will bring some healthy people into the pool who would otherwise not get insurance

Health Insurance Exchanges will increase competition, increase transparency, in theory should

bring prices down

* The Minimum Medical Loss Ratio for Insurers will prevent premiums rising to a level where Insurers make unreasonably huge profits, though.

Where this will “net” out is unclear. It may take some time for the “ounce of prevention” dynamic to play out, so it may be that premiums will rise initially,

only to fall down the line. ? ?

• There are strong reasons to believe that insurance premiums will increase, however, at least initially*

No lifetime limits or annual maximums, no copayment of various preventative measures --- payers will pass on costs through increased premiums.

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ACA Implications – Payers

Compared to employers, individual customers will more easily “churn” --- i.e. hunt for better rates and customer service. The market will be more akin to the wireless market

Potential benefits Potential challenges

Minimum Medical Loss Ratio will cap payer profits to a percentage of what they collect in premiums. If they exceed these limits, they must provide refund checks to policy holders.

More people covered will lead to more top line revenues

Health insurance exchanges will heighten competition for customers as the marketplace becomes more transparent and customers have more options.

• Payers will feel the squeeze and will need to adapt as the market gets more competitive and increasingly driven by individual customers (as opposed to employers)

Individual Mandate will lead to many healthy individuals buying insurance that would otherwise

not do so

Insurers have to accept high-risk individuals, those with pre-existing conditions, etc.

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ACA Implications – Payer / Premium Calculus

• The ACA will increase the pool of insured individuals by about 25 million• Payer profits as well as whether premiums increase or decrease will depend on the shape of the risk/population curve

below.

Some will be those who now get

insurance because of increased

accessibility through HIXs, via federal subsidies, and

through Medicaid expansion.

Level of health risk /Amount insurers will have to pay out

The ACA will increase the pool of insured individuals by about 25 million

HighLow

Nu

mb

er

of

ne

wly

insu

red

ind

ivid

ua

ls

Some will be high-risk individuals, those with pre-

existing conditions, etc., that payers would have refused coverage before, but now have to accept because of

Guaranteed Issue.

Some will be healthy individuals that would not

have previously gotten insurance before, but now do so because of

the Individual Mandate.

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ACA Implications – The Federal Budget

• There is a lot of dispute about the net impact of the ACA on the Federal Deficit, but the CBO predicts the ACA will reduce the deficit by about $100B over the next ten years.

• However, a lot of this is due to cuts in Medicare spending, which are unlikely to stand.

Medicare Expansion

Federal Subsidies

provided through HIXs

Increasing hospital insurance (HI) payroll taxes for high income individuals, and extending it to investment income

Reducing Medicare payments, particularly to Medicare Advantage programs

Penalty payments from employers(who don’t provide insurance)

Penalty payments from individuals(who are not getting insurance)

Excise tax on “Cadillac” insurance plans

Other tax revenue increases, e.g. to pharma companies

Est

imat

ed I

mpa

ct o

n F

eder

al

Def

icit

over

the

nex

t 10

yea

rs(v

alue

are

app

roxi

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$1T

$2T

Net savings of about $100B over 10 years

Will this really happen? Past reductions in Medicare payments have been postponed time and again. Additionally, one in five physicians are restricting the number of Medicare patients in their practice and one in three primary care doctors – the providers on the front lines of keeping the cost of seniors’ care low – are restricting Medicare patients, according to a 2010 AMA survey of more than 9,000 doctors who care for Medicare patients

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ACA Implications – Providers

More covered individuals means more treatment, and more earlier treatment. More treatment of chronic conditions, less of acute conditions, more preventative treatment, less emergency treatment.

The increased demand for healthcare will worsen existing shortage of providers, particularly PCPs, general surgeons, nurses, and physicians assistants

Adding millions of people to the Medicaid system will aggravate existing dilemmas with the system• e.g., lower Medicaid payments for providers has resulted in

access problems for low-income individuals and worsened hospital ER overcrowding

Potential benefits Potential challenges

Physicians are incentivized by the 10% Medicare bonus

payment to treat in healthcare shortage areas

• Providers will come under increasing pressure: More patients to treat, new paradigms to deal with. • As costs go down, providers will have a smaller pie to share and only the most efficient will survive.

Reducing Medicare payments will hurt provider pocketbooks

New Medicare payment paradigms (cost savings sharing with Accountable Care Organizations), will push providers to be more cost efficient and focus more on quality outcomes vs. fee for service models.

Increased demand for healthcare by patients with insurance, and

likely reduction in uncompensated care

High quality and cost efficient providers can do better in a

fee-for-value system, e.g. share in cost savings

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ACA Implications – Industry

Potentially more than 30 million newly insured who will purchase prescription drugs, and who will not be

subject to annual or lifetime caps on coverage

12-year brand exclusivity for biologic drugs from date of FDA approval

Potential benefits Potential challenges

Increased sales of drugs from individuals who had previously stopped taking them due to the

Medicare “donut hole”

Drug manufacturers required to provide 50% discount on brand name drugs for Medicare patients in the “donut hole.”

Move to “fee-for-value” from “fee-for-service” could favor using drugs, especially preventative

treatments that would avoid more costly acute care down the road

As more healthcare spending moves from emergency to preventative, there may be a shift in spending from certain types of drugs to others

• The Pharmaceutical Industry supported the ACA, agreeing to contribute to its implementation via excise taxes and rebates. In return, it gets potentially more than 30 million new drug customers.

Excise taxes assessed to manufacturers of branded prescription drugs and medical devices.

Abbreviated approval pathway for biosimilars

* Estimated contribution over the next ten years is in the range of $90B.

*

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APPENDIX

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Reform Implications – Jobs

Potential job creation Potential job elimination

By making it easier to get insurance as an individual, makes it less of an issue to

search for new job or start a new business on ones own.

Expanding Medicaid removes a disincentive to work.

If insurance becomes cheaper, firms will have more

money to hire workers

If firm has more than 50 full time employees, must offer insurance or pay a fine ($2-3K per worker)

People may choose to work less. Subsidies to get insurance, and ability to purchase it as an individual, will reduce incentive to get a job (which for some people is the main motivation for having the job)

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Health Insurance Exchanges – Benefits and Challenges

Potential Benefits Potential ChallengesAccess: Make it easier for people to get insurance, especially those who are unemployed or work for companies that do not offer insurance (i.e. often those that are poorer and need care the most). Delinking insurance from employment ensures that people can have insurance in between jobs.

Transparency and Competition: Easy to compare plans side by side, and make the market more competitive (and thereby reduce costs) by offering more plans than a single employer typically does. Reducing costs in turn will increase access.

Revenue: States have the option of charging a fee (3.5% of the premium) to insurers for the right to participate in the exchange

Confusing: Too many options might be confusing to people. Having to sort through all the different choices and rules/regulations is likely to be frustrating.

Initial “kinks”: May be some initial confusion, particularly since the exchanges must adhere to both federal and different state regulations. Lack of coordination could be problematic.

Disintermediation: Brokers and agents could be threatened. How will they (or how wont they) be integrated into the system?

• HIXs will increase competition, access and transparency.• Insurers will begin to sell increasingly to individuals, and less to employers.