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The Patient Protection and Affordable Care Act, usually known simply as the Affordable Care Act (ACA) or Obamacare, became law on March 23, 2010. Its main goals are to make health insurance and health care more accessible, more efficient, and more affordable. Those most immediately affected are people not previously covered by Medicare, Medicaid, or private health insurance, but all Americans are expected to benefit from the reforms. The ACA contains 905 pages. This entry will summarize the law’s main highlights: the individual and group private insurance market reforms, including the exchanges, the individual and employer mandates, and the rulings on premiums and cost sharing; the expansion of Medicaid; and the measures suggested to improve the health care system. It examines those aspects of the ACA that have been most contested since the passage of the law. This examination will reveal that the implications of the legal challenges to the individual mandate and the premium subsidies are intertwined.
The Individual Mandate
Section 1501, Subtitle F, “Shared Responsibility for Health Care, Part I—Individual Responsibility,” requires adults over age 26 to maintain a minimum level of essential insurance coverage or to pay a penalty that will be increased over time. Beginning in 2016, the penalty is $695 per adult and $347.50 per child or 2.5 percent of the family income, whichever is higher. However, individuals up to age 30 are allowed to have less extensive coverage (for example, high-deductibles), and parents’ policies can cover resident adult children through age 26.
The individual mandate is essential to the viability of the law because insurance pools are priced according to the average cost to the insurer of insuring the pool of subscribers. If people can choose whether to buy insurance, the most high-risk people will be more likely to buy insurance, and this will drive up the policies’ premiums. This is known as adverse selection. As the price of the insurance rises, more young and healthy people will decide that it is not worth buying insurance. As they leave the pool of insured, this further raises the price and discourages even more people from buying insurance. This is known as the “death spiral,” since it may ultimately cause insurance markets to fail. Thus, the argument that requiring everyone to buy insurance will increase demand and drive up the price is faulty. The price depends on who is in the insurance pool, not how many.
Another requirement of the ACA compounds the problem of establishing a viable insurance market without the individual mandate: The law prohibits insurers from excluding coverage for preexisting medical conditions. Without the mandate, a person could wait until she or he got sick to buy an insurance policy.
The law states that the mandate “substantially affects interstate commerce,” and this tying of the requirement to the Commerce Clause in the U.S. Constitution became the basis of several legal disputes, which were settled by the U.S. Supreme Court in June 2012. The Supreme Court did not uphold the Commerce Clause’s basis for the individual mandate but ruled that the penalty for not complying with the mandate could be considered a tax and as such is legal and consistent with the Constitution, thus sidestepping the objection that the federal government does not have the power to compel citizens to purchase health insurance (or any product).
The Employer Mandate
Firms with 50 or more employees must offer health insurance coverage or pay a fee per employee, excluding the first 30 employees. Firms with 50 or more employees that provide health insurance to employees, at least one of whom receives a federal tax credit toward the premium, are required to pay fees based on the amount of the employee subsidies (see the section “Insurance Subsidies and Reduced Cost Sharing for Low-Income Subscribers”). Employers with 25 or fewer employees with average annual wages under $50,000 are eligible to receive tax credits if they offer employee health insurance.
Reforms Of The Insurance Marketplace
Creation Of Exchanges (Insurance Marketplaces)
In an attempt to make health insurance more affordable and widely available, the law provides for the establishment of health insurance exchanges. These exchanges are modeled on the Massachusetts health care reform law enacted in 2006. The original ACA specified that each state “not later than January 1, 2014” establish an exchange in order to facilitate a market for individual and small businesses to purchase “qualified” health plans that would be regulated with respect to coverage and pricing. To be qualified, a basic set of services must be covered, no previous medical conditions should be excluded, and there should be no price discrimination. Over time, lifetime and annual limits to pay-outs must be eliminated from qualified policies. Technical support and financial assistance were to be provided by the federal government to the states to help them set up the exchanges.
However, 34 states have failed to establish exchanges. The law provides that the federal government can facilitate exchanges in states that do not have their own. Some states have established exchanges jointly with the federal government; others have no state exchanges but use federally facilitated marketplaces; and in some states, residents must go directly to the U.S. Government Web site to sign up.
Insurance Subsidies And Reduced Cost Sharing For Low-Income Subscribers
Section 1401, Part I, Subtitle E, “Affordable Coverage Choices for All Americans,” provides health insurance premium assistance to low-income taxpayers in the form of refundable tax credits for portions of premiums paid for qualified health plans. The subsidies are available only to those with incomes that fall between the federal poverty level (FPL) and 400 percent of the FPL. The bill states that subsidies are to be available for insurance purchased through an exchange, with subsidies also available for some low-income families with access to employment-based group insurance.
The law also requires that out-of-pocket limits be lowered for low-income subscribers who qualify for subsidies. After a certain amount has been paid out for qualified medical expenses in a given year, the insurance plan must cover 100 percent of the additional expenses.
A law suit, King v. Burwell, challenged the legality of subsidies for those not purchasing insurance on state exchanges. The basis for the suit was a sentence in the ACA tying eligibility for subsidies to insurance purchased on exchanges “established by the State under section 1311.” On June 25, 2015, the Supreme Court ruled that the clear intent of the law is to include subsidies for insurance purchased on federal exchanges, since the ACA allows states to opt out of establishing their own exchanges.
If King v. Burwell had been upheld, this ruling would not only have imposed a major hardship on millions of low-income households but would also have threatened the very survival of the ACA. For, according to the ACA, low-income families and individuals cannot be required to buy insurance that is for them unaffordable, defined as costing more than 8 percent of their annual income. Thus, the viability of the individual mandate is contingent on subsidies being available to many low-income Americans who do not qualify for Medicaid.
Title II, Subtitles A to J, covers the public programs Medicaid and CHIP (the Children’s Health Insurance Program).
The ACA allows states to expand Medicaid eligibility to households with incomes up to 133 percent of the FPL. Because of the way in which modified gross income is defined, the de facto ceiling is 138 percent of the FPL. States that expand Medicaid coverage receive federal subsidization of a large part of the cost of the expansion: The federal government covers 100 percent of the cost for 2014–16; 95 percent for 2017–19; and 90 percent from 2020 on. As of March 2015, 30 states, including the District of Columbia, have adopted the program; 3 are considering adoption; and 18 have not done so.
States that have failed to expand Medicaid argue that they have not done so because they cannot afford the cost of the expansion even with the subsidies, because they fear that the subsidies will be discontinued in the future, or, in some cases, because of an aversion for expansion of federal programs or for the ACA in particular.
The failure of states to participate in the expansion of Medicaid threatens the ACA’s goal of nearly universal health insurance coverage for Americans. Many people with incomes well below the FPL are ineligible for both Medicaid and private market premium subsidies (in states that have not expanded their Medicaid programs). In 2015, the national median level of income (for parents) covered by Medicaid was only 44 percent of the FPL. Some states provide no Medicaid coverage for adults who are not parents, no matter how low their incomes. Thus, it is the very lowest-income adults who are most likely to have access to affordable health care blocked by their state’s failure to expand Medicaid.
Children and pregnant women are treated differently. The Omnibus Reconciliation Acts of 1989 and 1990 extended Medicaid eligibility to all pregnant women and children up to age 8 in families earning up to 133 percent of the FPL. In 1996, when eligibility for Medicaid and Welfare were uncoupled, Congress established the CHIP as Title XXI of the Social Security Act. The CHIP was designed for children from low-income families whose income places them above the Medicaid eligibility threshold but below the level that makes private health insurance affordable. It is available to children who do not qualify for Medicaid whose families have incomes below 200 percent of the FPL. The ACA set up a commission, the MACPAC (Medicaid and CHIP Payment and Access Commission), to work out ways of simplifying and better coordinating CHIP and Medicaid payments.
The ACA also includes certain other provisions for expanding Medicaid and streamlining it. It expands drug coverage to include more new singlesource (nongeneric) drugs. It provides support for hospitals that have a disproportionate share of Medicaid patients. It raises reimbursement rates for physicians treating Medicaid patients to near parity with those treating Medicare patients. It coordinates dual-eligible beneficiaries, for example, those covered by both Medicare and Medicaid.
One part of the ACA that has caused considerable confusion is Part II, Section 1251, which states,
—–Nothing in this Act (or an amendment made by this Act) shall be construed to require that an individual terminate coverage under a group health plan or health insurance coverage in which such individual was enrolled on the date of the enactment of the Act.
Since the individual mandate requires that people have a “minimal level” of “essential” insurance coverage (or be subject to a fine), some insurance policies available in the market did not qualify. This caused insurers and/or employers to discontinue some plans. In some cases, individuals and families found their former plans still available but now considered substandard, thus exposing them to penalties. Opponents of the ACA argued that the law falsely asserts that people will be able to continue to enroll in their current plans if they so choose. Because of widespread criticism and unhappiness on the part of consumers, there was leniency in the implementation of the ACA, allowing at least temporary grandfathering of some substandard plans.
Improving Efficiency: Controlling Costs While Improving Quality
A number of reforms included in the ACA aim to reduce the level of health care costs, not just slow their rate of increase. These include the following:
- Improved monitoring of fraud and abuse in the Medicare and Medicaid programs: The nonpartisan Congressional Budget Office estimates savings of $7 billion over 10 years from the reduction in fraud in these programs.
- Reducing unnecessary paperwork by imposing uniform electronic standards of record keeping and operating that apply to private insurers, Medicare, and Medicaid: The Congressional Budget Office estimates savings to the federal government of $20 billion over 10 years and to insurers, physicians, hospitals, and other providers, tens of billions per year. Electronic record keeping will also improve the efficiency and quality of health care by reducing the amount of duplication in diagnostic testing of patients.
- Implementing machinery to expedite the approval of generic biologic agents: This will be cost saving by providing less expensive substitutes for drugs with a brand name.
- Medicare will also save money by calculating payment for complex imaging under the assumption that the machines must operate 75 percent of the available time. The current formula assumes 50-percent usage.
- One of the biggest savings, at least during the first years of the ACA, will be the elimination of heavy subsidization of the privatized Medicare Advantage plans that have been subsidized to an extent that the cost per beneficiary is much higher than for those enrolled in traditional Medicare Part B. New benchmarks for payments to Medicare Advantage plans will be established based on competitive bidding.
- An excise tax is to be imposed on “Cadillac” plans—plans that, in 2018, will charge premiums greater than $27,500 for families and $10,200 for individuals, excluding vision and dental benefits. An excise tax of 40 percent will be imposed on the portion of the health insurance premium exceeding the limits. After 2020, the premium threshold for the tax will increase at the rate of inflation in the economy. The tax should create incentives for insurance companies to devise more cost-effective health plans with lower premiums.
Linking Payments To Quality Outcomes
A long-run goal of the ACA is to gradually replace the fee-for-service method of reimbursing health care providers with value-based payments, which link payment to quality outcomes. This type of payment scheme is to be applied to hospital purchasing programs, long-term care and rehabilitation facilities, ambulatory surgery centers, hospices, and physicians and nurses. It requires extensive reporting and feedback about things such as hospital readmission rates and well-thought-out methods of estimating the “value” of all kinds of medical treatments, as well as accurate reporting of the quality of care provided by individuals and institutions.
There will also be a national pilot program on payment bundling for Medicare services to provide pricing that encourages integrated care during an illness episode.
Value-linked pricing, whether in the private or public sector, will not be easy to institute. Professionals working on health care reform in many countries, including Britain’s National Health Service, who are attempting to develop value-based standards of evaluation are facing considerable difficulty in doing so.
Improving Community Health
Many programs are to be instituted within the ACA to improve the quality of health care and to promote community health. These programs are explained in Titles III through V of the act and include the following:
- A Center for Medicare and Medicaid Innovation to be established within the Centers for Medicare and Medicaid Services
- Support for emergency medicine research to be jointly administered by the National Institutes of Health, the Agency for Healthcare Research and Quality, the Health Resources and Services Administration, and the Centers for Disease Control and Prevention
- Community-based care programs, including community health teams to support patientcentered medical homes
- More support for programs to prevent chronic disease and for community wellness programs; technical assistance to be also provided for employer-based wellness programs
- Development grants to increase the supply of health care workers and to improve the quality of their training
Many of these programs should probably be considered items on a “wish list” since they are conditional on Congressional funding appropriations.
However, this ambitious set of programs has been designed to be largely paid for by projected cost savings to be implemented within the ACA.
The Effect Of The ACA On The Rate Of Uninsured
Establishing the health insurance exchanges, expanding Medicaid, including adult children through age 26 on parents’ policies, and creating insurance subsidies have greatly reduced the proportion of uninsured Americans. The rate has dropped from 20.3 percent at the beginning of open enrollment in 2013 to 13.2 percent in March 2015, with 14.1 million adults gaining health insurance coverage (including 3.4 million young adults between the ages of 19 and 25). By May 2015, 10.8 million had been added to Medicaid and CHIP and 9.6 million to employer-sponsored plans.
- Artiga, Samantha, Jennifer Tolbert, and Robin “Year Two of the ACA Coverage Expansions: On the Ground Experiences From Five States.” The Henry J. Kaiser Family Foundation Report, June 22, 2015.
- Gruber, Jonathan. “The Impacts of the Affordable Care Act: How Reasonable Are the Projections?” National Tax Journal, v.64/3 (2011).
- Harrington, Scott E. “U.S. Health-Care Reform: The Patient Protection and Affordable Care Act.” Journal of Risk and Insurance, v.7/3 (2010).
- Oliver, Adam. “The US Supreme Court Decision on the Constitutional Legitimacy of the Affordable Care Act.” Health Economics, Policy and Law, v. 8/1 (2013).
- United States Statutes at Large, 111th Congress, 2D Section, 2010, 124, Part I, 120-1024. Washington, DC: U.S. Government Printing Office, 2012.