Affordable Care Act

The inefficiency and excess costs associated with the healthcare system in the United States has been of primary concern to lawmakers since the early 1990’s, when the Clinton administration tried unsuccessfully to get a bill passed that would have fundamentally changed the way healthcare is delivered and administered in America. Since that time the primary cost issues associated with the healthcare system have continued to worsen, and with the rise of chronic disease reached an unsustainable level. The rise in costs has both facilitated and resulted from the enormous number of people who are uninsured, topping 50 million in 2010 (1). With this level of lack of access given the amount of resources being devoted, it was unsurprising that the Obama administration decided to make healthcare reform one of it’s most immediate priorities.

The country engaged in a heated national debate on the best strategy to address the given system issues. An early casualty of this debate was the idea of transitioning to a single-payer system similar to those previously implemented in many other industrialized countries. While most of the research showed that this would dramatically reduce costs associated with administration, it also made people uncomfortable in that to some, it brought to mind images of a socialized political system getting dangerously close that of China or communist Russia. This fear was used as a tool by lobbyists and politicians to fight against the notion of any fundamental change in the structure of the current system.

One of the other major points of contention was the proposed “mandate” for insurance coverage. This is a provision that established a time period (ending in 2014) for people to gain access to the system and then face a significant tax-penalty ($95 in 2014, moving to $325 in 2015, and $695 in 2016, then based on cost of living thereafter) if they were still without coverage (2). The thought process behind the mandate seems to be that it would reduce the costs associated with catastrophic illness suffered by those without coverage and become a significant financial burden for the institution where they are treated. A well-publicized counterpoint to this argument was that it’s unconstitutional to “mandate” that an individual purchase any product. It’s important to note that this has been the case with car insurance in most states for many years now.

At the conclusion of the healthcare reform debate, President Obama signed the Patient Protection and Affordable care act into law on March 23, 2010 (2). While it doesn’t fundamentally change the way healthcare is delivered, it does contain several important alterations to government programs as well as the individual mandate for insurance coverage. Over the course of the next several paragraphs I will attempt to summarize the major ACA (Affordable Care Act) provisions and the projected effect on costs and access. I’ll also touch on what those cost projections were before the bill was passed.

The Affordable Care Act will significantly affect Medicare, the government program tasked with providing medical benefits to the elderly in several key ways. One is through a reduction in Medicare Advantage payments that began in 2010 and is estimated to save $34.9 billion by 2020 (4). This provision is operating off of the belief, backed by data, that the Medicare Advantage program has been severely over-funded and inefficient in the way that it allocates coverage.

The bill also expands a system of oversight designed to reward/penalize high and low quality plans. This is based on a 5-star rating system and rewards those plans that receive 4 stars or more with payment increases (1.5% in 2012, 3% in 2013, 5% in 2014 and beyond). Poor performing providers are judged based off of the “medical loss ratio” and must maintain a ratio of at least 85% or pay the difference between their figure and .85 multiplied by total revenue under Medicare part C. The government retains the right to cancel a provider’s contract that fail to meet the 85% threshold for five consecutive years.

Furthermore it addresses two critical issues in the Medicare part D, or prescription drug section. There had been a well-established “gap” in coverage that left many elderly without access to prescription drugs, that is at least partially remedied with a $250 annual rebate to be provided until 2020 (2). It mandates that coverage for generic and brand name drugs that are currently in the coverage-gap be extended to Medicare enrollees. For generic drugs this started in 2011 with a minimal amount of coverage, only equaling 7% of the overall cost, enrollees were expected to cover the other 93% through coinsurance. Coverage is expanding each year and Part D will be responsible for 75% of the cost by 2020. In regard to brand-name drugs, coverage will begin in 2013 at 2.5% and while this level will also rise each year, is much more limited, and will equal 25% in 2020 (2).

The second government program that has been significantly affected by the Affordable Care Act is Medicaid. Changes to this entity are the primary strategy for increasing access to the healthcare system. According to OACT projections, 24 million individuals will gain enrollment in Medicaid by 2016 (6). It accomplishes this by raising the level of eligibility to 133% of the FPL (Federal Poverty Line) standard an increase from a pre ACA threshold of 64% FPL (2). This provision also opens up access to many who were previously uncovered because they were single, without children and not pregnant. A related component that will be simplified is the way by which Medicaid eligibility is determined. The MAGI (Modified Adjusted Gross Income) test that was used as the method for qualifying people has been streamlined. In addition this test will begin to be applied across all insurance affordability programs, available in the form of a single application. Since Medicaid is primarily a state-based program but is provided annual financial support the through the Federal Medical Assistance Percentage (FMAP), the federal government has guaranteed to cover 100% of the initial costs of covering the large number of newly eligible individuals, and then provide staggered annual financing. As it’s scheduled right now the maximum amount each state would be responsible for covering would 10% of the cost of the newly eligible (4). Essentially it shifts the financial burden from the states to the federal government, eliminating what would undoubtedly be a significant obstacle to implementation of the Medicaid reforms.

(100% 2014-2016, 95% in 2017, 94% in 2018, 93% in 2019, and 90% for 2020 and beyond)

Given the significant expansion in the state Medicaid system it’s unsurprising that associated costs are projected to rise, at least in the short-term. The estimated increase in state expenditures between 2014 and 2016 is $12.6 billion, and $80.3 billion from 2012 to 2021 (4). However there is also a large amount of expected savings coming from a sharp decrease in “uncompensated care,” once many of the existing uninsured/underinsured are covered under the expanded FPL threshold.

Another major state-based component of the ACA, is the establishment of health insurance “exchanges,” with the primary goal of boosting the ability of small businesses and low-income individuals to purchase private insurance coverage. Each state is initially provided the opportunity to establish and oversee an exchange. If they elect not to, the Department of Health and Human Services is compelled by the ACA to step in and implement an exchange, with the responsibility of oversight and regulation (7). Health insurance providers who wish to operate in a state exchange must adhere to uniform guidelines with regard to levels of coverage and benefits offered. Coverage will be provided at four set tiers including platinum, gold, silver, and bronze based on the estimated value of provided benefits. There are ten medical services identified by the ACA as “essential health benefits,” and must be covered. These include ambulatory patient services, emergency services, hospitalization, maternity and newborn care, hospitalization, mental health and substance use disorder services, prescription drugs, rehabilitative and habilitative services and devices, laboratory services, preventive and wellness and chronic disease management, and pediatric services (2). In addition to the requirements of exchange insurers there are qualifications that people who wish to purchase coverage in an exchange must meet. Access is restricted to those who are U.S. citizens, legal immigrants, and those who aren’t incarcerated (7).

One aspect of the state exchange system that seems a little out of place considering the content of the rest of the ACA, is the creation of a not-for-profit, member run insurance company in each state. There are specific organizational requirements that insurers of this type must meet. They must not be an existing insurer, not be sponsored by a state/local government, administration must be in the form of a majority vote of it’s members, and any profits must be used to lower premiums or improve quality of care provided to beneficiaries. In theory it appears that these insurance companies would be similar in administrative organization as non-profit credit unions like BECU. Although the initial funding to set up the program would come from a $4.8 billion federal appropriation.

Prior to the passage of the Affordable Care Act, the apparent consensus on healthcare costs in the United States was that they were rising at a rate that would become unsustainable in a relatively short period of time. This is evident in the projections published by the Congressional Budget Office (CBO) in November 2007. According to this report share of GDP devoted to healthcare would rise from 16% (already highest in the world, and a jump of 8% over the last years) to 25% in 2025 and would hit 49% in 2082. In addition the burden carried by Medicare and Medicaid would also increase substantially, from 4% in 2007 to 19% in 2082. Per capita spending on healthcare has been growing at a faster rate (4.2% since 1975, vs. 2.2%) then the economy overall.

The projected effect of the ACA on healthcare spending in the near future is available through a report compiled by the Department of Health and Human Services. According to this document the initial phase of the policy reform bill would increase overall costs by $828 billion between 2010 and 2019, as millions of individuals are added to state Medicaid plans (3). Percentage of GDP is expected to be 21% in 2019, a .2% increase from pre-reform estimates. While it would seem that the ACA at least initially fails in controlling healthcare cost growth, in theory this may only be true in the short term. This is because the ACA does seem to be modestly successful in slowing the rate of healthcare spending after the first few years of implementation. This is reflected by a .1 and .15% decrease from a reduction in Medicare payments and a .05% decrease as result of newly implemented excise taxes (3). There would also be a shift in expenses from out-of-pocket to government of $237 billion. This illustrates that while overall government spending would increase, the financial burden placed on individuals would be lessened. Conventional wisdom would assume that with less money devoted to healthcare, people would spend more in other sectors of the economy.

1 MNT. USA wastes more on health care bureaucracy than it would cost to provide health care to all of the uninsured. Medical News Today, 2004 May 28. Disponivel em: .

2 HENRY J. KAISER FAMILY FOUNDATION. Focus on Health Reform: Summary of New Health Reform Law. The Henry J. Kaiser Family Foundation. Washington D.C., p. 1-11. 2011.

3 FOSTER, R. S. Estimated Effects of the "Patient Protection and Affordable Care Act," as Amended. Department of Health and Human Services. Baltimore, p. 1-17.

4 CENTERS FOR MEDICARE AND MEDICAID SERVICES. Medicaid Program; Eligibility Changes under the Affordable Care Act of 2010. United States Government. Baltimore. 2011.

5 CONGRESS OF THE UNITED STATES. The Long-Term Outlook for Health Care Spending. Congressional Budget Office. Washington D.C. 2007.

6 NCSL. American Health Benefit Exchanges. National Conference of State Legislatures, 1 February 2012. Disponivel em: . Acesso em: 15 February 2012.

Rising Health Care Costs in America and Contributing Factors

In the last thirty years there has been a significant increase in the amount of resources the United States devotes to providing medical care. In 1980 health care costs accounted for 9% of GDP, in 2004 this number had climbed to 16%. This upward trend is also reflected in per capita costs, rising from $1,106 in 1980 to $7,290 in 2007. Clearly this has impacted total annual health care spending, increasing from $255 billion in 1980 to $2.2 trillion in 2008. Taken together these facts point to fundamental challenges facing the healthcare system in the United States. To understand how costs have climbed so rapidly in recent years it’s critical to examine several contributing factors in detail. It’s also important to compare the quality of care delivered in comparison with other nations who on average, spend significantly less per-capita, and as a share of GDP.

A breakdown of the underlying factors that have collectively had an impact on rising health care costs in the United States could begin with the emergence of chronic diseases as the most common ailment and primary cause of mortality. Over 133 million Americans are classified as having a chronic illness, accounting for almost half of U.S. adults. Close to 70% of total annual mortality, or 1.7 million deaths, are caused by the presence of one or more of these afflictions. The top three diseases for mortality (heart disease, cancer, and stroke) are all of this type. This is a far cry from the days when communicable diseases such as small pox, syphilis, polio and others, were the main health concerns in America. Not only are chronic diseases much more rampant, they are also extremely expensive to treat. In fact over 75%, of total annual health care costs or $1.6 trillion, are attributable to chronic illnesses.

The impact of chronic diseases is also evident in the current distribution of health care costs in the United States. It’s a system that has become extremely top-heavy with regard to expenditures. A significant percentage of health care expenses (49%) are centered in a relatively small population (5%). The majority (61%) of the group was over 55. In addition, the top 15 most expensive health conditions make up 44% of total spending, and all but one are classified as chronic.

Another contributing factor in the rise of health care costs has been escalating financial inefficiency in the form of extraordinarily high administrative expenses present in both the private and public sectors. A Harvard study conducted in 1999 found that costs associated with health administration were $294.3 billion and equated to $1,059 per capita. It’s important to remember that these aren’t costs for providing actual medical care, but rather the bureaucratic processes involved in maintaining the system. Overhead costs, particularly in the private insurance sector made up a sizable percentage of overall administrative costs. In 1999 for instance, private insurance entities spent 11.7% of total premiums collected on administrative overhead, compared with Medicare (3.6%), and Medicaid (6.8%). Hospital administration also accounted for a significant percentage of total costs (24.3%), at $315 per capita. In order to put the high level of these costs into context the study compared the data with that from equivalent sectors in the Canadian health care system. The administrative costs in the United States were consistently much higher than those in Canada, especially when considered at a per capita level. Total admin costs for America were $1,059 per capita, compared to only $307 in the Canadian system. It’s important to note that Canada operates under a publicly funded national health system, whose uniformity effectively cuts out much of the bureaucracy, and allows for the elimination of many of the administrative expenses present in the public/private system.

Prescription drug costs are a third important component in the rise of overall health care spending. Expenditures associated with this industry have exploded in the last twenty years. In 1990 drug costs were at $40.3 billion, by 2008 this number had risen dramatically to $234.1 billion. For much of the 90’s and early 2000’s prescription drugs were the fastest growing health cost contributor (18% in 1999). Overall the prescription drug sector accounted for 13% of the total health care cost growth in a 10-year period from 1998-2008. During the same time-period the average cost of a prescription drug rose substantially, from $38.43 to $71.69. It’s evident that this is at least partially due to an increase in demand for prescriptions, which rose by 39%, or about a billion total prescriptions between 1999 and 2009. Another aspect of these high costs is the difference in price between generic and name brand drugs ($35.77 compared to $137.90). Pharmaceutical companies have a significant profit motive to retain exclusive patent rights for name-brand drugs beyond the 20 years allowed by the FTC. Often this takes the form of “pay-for-delay” deals in which firms holding expiring drug patents pay those companies developing a generic version not to release them. Arrangements such as these are responsible for several billion in additional prescription drug expenses each each year.

To provide context for the level of spending in the United States on healthcare it’s useful to compare it with other advanced nations. This comparison is with regard to both expenses and whether this equates to quality of care. It seems to be a common belief that because the United States spends by far the most per capita ($7,290, 2.5 times higher than the OECD average) on health care, that it must also be providing the highest quality of care. In looking at comparative health data this appears to only be sporadically true. The United States has an infant mortality rate of 6.7, which is significantly higher than the OECD average of 4.7. It’s also middle of the pack in life expectancy (28^th in the world, at 78.2 years), trailing far behind countries like Japan (86.4 years) that spend about a third as much as the U.S. per capita. In terms of access, the United States is the only OECD country that has a significant population that has been left uncovered by the healthcare system. Staffing is another measure where the United States lags behind the OECD average, with regard to doctors per capita (2.7 physicians per 1,000, OECD average is 3.1), and nurses per capita (8.1 per 1,000, OECD average is 9.0). While all of the preceding data indicates that the United States high costs haven’t led to a particularly high level of care, however there is one area where cost does seem to equal quality. The United States scores at or near the top of OECD rankings in the screening and treatment of many forms of cancer such as melanoma, prostate, breast, ovarian, cervical, and both Hodgkin’s and non-Hodgkin’s lymphoma.

Based on the research presented above the United States has been saddled with ever increasing health care costs due in part to the rise in chronic disease, drug prices, and an extremely inefficient administrative process. These are facts that were featured prominently in 2010, during the national debate based around exactly how to reform the system. The piece of legislation known as the Affordable Care Act, passed as a compromise in that debate, attempts to address the cost and access issues without fundamentally altering the structure of the system. The degree to which this effort will ultimately help contain costs won’t be seen for several years, as the act will not be fully implemented until 2014. However there are projected future cost and access levels available and will be examined in detail, with the specifics of the Affordable Care Act, in the next post.

American Medical Association. (2005, January 11). Administrative costs of health care coverage. Retrieved February 5, 2012, from American Medical Association: www.ama.org

Angrisano, C., Farrell, D., Kocher, B., Laboissiere, M., & Parker, S. (2007). Accounting for the Cost of Health Care in the United States. Washington D.C.: McKinsey Global Institute.

Centers for Disease Control. (2009, February 23). Chronic Diseases. Retrieved February 7, 2012, from Centers for Disease Control: http://www.cdc.gov/chronicdisease/resources/publications/aag/chronic disease

Council of State Governments. (2006, April 17). Costs of Chronic Disease: What are States Facing? Retrieved February 9, 2012, from Council of State Governments: www.healthystates.csg.org

Daily Mail. (2011, November 24). What's killing America? U.S. ranks 28th in life expectancy (lower than Chile and Greece) while it pays the most for health care. Retrieved February 10, 2012, from Mail Online: http://www.dailymail.co.uk/news/article-2065548

Docteur, E., & Berenson, R. A. (2009). How Does the Quality of U.S. Health Care Compare Internationally? Washington D.C.: Robert Wood Johnson Foundation; Urban Institute.

Federal Trade Commission. (2010, July 10). Reporter Resources: Pay-for-Delay in the Pharmaceutical Industry. Retrieved February 9, 2012, from Federal Trade Commission: http://www.ftc.gov/opa/reporter/payfordelay.shtm

Hunkar, D. (2009, July 5). Comparing U.S. Healthcare Spending with Other OECD Countries. Retrieved February 7, 2012, from Seeking Alpha: http://seekingalpha.com/article/146992-comparing-u-s-healthcare-spending-with-other-oecd-countries

Kaiser Family Foundation. (2010, May 1). Prescription Drug Trends. Retrieved February 9, 2012, from The Henry J. Kaiser Family Foundation: www.kff.org

Stanton, M. W. (2006, June 10). Research in Action. (M. Rutherford, Ed.) Retrieved February 4, 2012, from Agency for Healthcare Research and Quality: www.ahrq.gov

Thomas, J. R. (2004, May 25). Patents and Drug Importation. Retrieved February 8, 2012, from Congressional Research Service: www.crs.gov

UC Santa Barbara Model United Nations. (2007, May 13). WHO: Prescription drug patent laws. Retrieved February 9, 2012, from UC Santa Barbara Model United Nations: www.sbmun.org

Woolhandler, S., Campbell, T., & Himmelstein, D. U. (2003, August 21). Costs of Health Care Administration in the United States and Canada. New England Journal of Medicine , 768-775.

Medical Bankruptcy

Rising healthcare costs have been a critical issue at the heart of a system that has led to thousands of individuals exhausting their savings due to the onset of a major illness. The sad reality is that a majority of bankruptcies filed each year have a medical cause (62.1% in 2007). A broad study conducted by Harvard Medical School indicated that this was an issue that began to seriously manifest itself between 2001 and 2007, as the number of medical bankruptcies rose by 50%. It’s interesting to note that around the same time per-capita healthcare costs also rose substantially, as chronic conditions that are expensive to treat such as diabetes, heart disease, and hypertension began to increasingly present themselves in the U.S. population.

Contrary to what many would believe, the majority of people who were forced to declare bankruptcy actually possessed some medical coverage, but in fact, they were underinsured. Close to 75% had carried some form of health insurance two years prior to the bankruptcy filing. In many cases these individuals were dropped from an employer provided plan upon being diagnosed with a chronic or major illness, but were unable to qualify for either Medicaid or Medicare. Out-of-pocket medical expenses for those who lost coverage averaged $22,568, reflecting the presence of a costly disease.

A similar study conducted by the Northwestern University Economics Department examined the effect of chronic or major illness on individual assets in greater detail. A key difference between the two studies was that this one contrasted the effect on those who were uninsured with fully insured individuals. Not surprisingly the amount of asset loss was much higher in the uninsured group. It was found that those without insurance suffered a 30 to 50 percent greater reduction of assets.

The rise in the number of medical bankruptcies over time appears to be partially influenced by the trends in the expansion of state Medicaid programs in the mid-to-late nineties. In 1997, all states increased the threshold for children’s Medicaid coverage to 133% of the Federal Poverty Line, and some states such as New Jersey (350% of FPL) chose to expand coverage even further. A study published in the Journal of Economics examined the link between states Medicaid coverage threshold and the number of bankruptcies. The states with no increase beyond the 133% level saw a rise in bankruptcies from 14,421 in 1992, up to 31,205 in 2004. This represented a large percentage increase (46%) when compared with those states that used a threshold beyond 133%, (52,650 in 1992, increasing to 53,478 in 2004). These statistics are important because they highlight the importance of public programs such as Medicaid in a family being able to weather the financial storm brought on by an unexpected illness. It’s clear that in many of the states that don’t have high FPL thresholds, many people are caught in a limbo between being underinsured, carrying large amounts of medical debt, and at the same having incomes that may be low but don’t allow them to qualify for Medicaid.

In an attempt to respond to the increasing problems presented by medical bankruptcy, two congressional bills were introduced in 2008, and again in 2009. House bill 5138 and Senate bill 1624, known collectively as the “Medical Bankruptcy Fairness Act,” was drafted by Rep. Carol Shea-Porter with the goal of expanding features of bankruptcy protection to those individuals classified as “medically distressed debtors. “ Essentially this would have allowed people who had accumulated medical debts amounting to over 25% of their prior year income to be relieved from their remaining re-payment obligation, while also retaining possession of primary assets such homes and cars, a critical protection not included in normal chapter 7 bankruptcy filings. While both bills would have undoubtedly had enormous value for thousands of medical debtors, they were unable to make it out of committee and won’t be enacted into law anytime soon. Until a new bill is introduced and actually voted upon many of the individuals faced with a unmanageable amount of medical debt will ultimately be forced to choose between giving up the assets they own, whether through bank seizure or as a requirement for bankruptcy protection.

Cook, K., Dranove, D., & Sfekas, A. (2010). Does Major Illness Cause Financial Catastrophe? Northwestern University, Department of Economics. Evanston: Northwestern University.

Gross, T., & Notowidigdo, M. J. (2011). Health insuracne and the consumer bankruptcy decision: Evidence from expansions of Medicaid. Journal of Public Economics , 767-778.

Himmelstein, D. U., Thorne, D., Warren, E., & Woolhandler, S. (2009). Medical Bankruptcy in the United States, 2007: Results of a National Study. The American Journal of Medicine .

Shea-Porter, C. (2008, January 28). H.R. 5138 Medical Bankruptcy Fairness Act of 2008. Retrieved February 3, 2012, from opencongress.org: http://www.opencongress.org/bill/110-h5138/text

Whitehouse, S. (2009, August 6). Text of S: 1624 [111th]: Medical Bankruptcy Fairness Act of 2009. Retrieved February 3, 2012, from Govtrack.us: http://www.govtrack.us/congress/billtext.xpd?bill=s111-1624