Coverage vs. cost: The US health care reform in

Transcription

Current Issues
Coverage vs. cost
International topics
May 20, 2010
The US health care reform in perspective
Following a protracted legislative battle, President Barack Obama signed a
landmark health insurance reform into law in late March 2010. The
legislation represents the most significant reform of the US health care system
since the introduction of Medicare in the 1960s, expanding insurance coverage
to a large portion of America‘s uninsured and, to a lesser degree, addressing
issues of cost and quality.
The reform aims to sharply reduce the number of Americans without
health insurance, by an estimated 32 million by 2019, with nearly ninetyfive percent of citizens projected to have health insurance coverage by the
end of this decade, compared to 83% today. The expansion in coverage, at a
gross cost of USD 938 bn over ten years, is achieved through an expansion of
public insurance programs as well as by requiring individuals to carry basic
health insurance and creating a system of state-run private insurance
exchanges, with subsidies to help purchase insurance. The legislation imposes
a number of new restrictions on insurance practices, such as prohibiting the
denial of coverage on the basis of pre-existing conditions.
The Congressional Budget Office estimates that the reform will reduce the
federal budget deficit by USD 143 bn in the first decade and by up to 0.5%
of GDP in the second decade. The cost of expanding coverage is offset by a
variety of tax increases and program cuts, including an excise tax on expensive
insurance policies; an additional Medicare payroll tax for wealthy Americans;
penalties for individuals who do not buy insurance and companies who do not
offer health insurance policies for their employers; and reductions in Medicare
payments to providers. Some of these offsets may prove politically difficult to
carry out, thus presenting a potential upside risk to the net cost of the reform.
Author
Amy Medearis
+49 30 3407-2950
[email protected]
Editor
Klaus Deutsch
Technical Assistants
Judith Runge
Angelika Greiner
Deutsche Bank Research
Frankfurt am Main
Germany
Internet: www.dbresearch.com
E-mail: [email protected]
Fax: +49 69 910-31877
Managing Director
Thomas Mayer
The reform falls short with respect to ‘bending’ the health care cost curve,
i.e. slowing the increase in the share of GDP devoted to health care
(currently over 17% of GDP and rising). The act contains some worthy
measures that could help moderate the growth in health care spending, but their
impact will be gradual and relatively limited. Additional reforms will be necessary
in the future to build on the strategies that prove effective at reducing health care
spending and improving the quality and efficiency of health care delivery. Getting
health care cost inflation under control is a key element to putting the US back
on a sustainable fiscal path.
Coverage vs. cost
The major public health programs
Background: The long and winding road to reform
Medicare
Enacted in 1965, Medicare provides health
insurance coverage to Americans age 65 and
older, individuals under age 65 with certain
disabilities. 14.3% of the US population was
covered by Medicare in 2008 (Census 2009).
Medicare consists of several types of
insurance:
Part A (hospital insurance) helps cover
inpatient care in hospitals and skilled nursing
facilities (not including custodial or long-term
care). It also helps cover hospice care and
some home health care for beneficiaries who
meet certain conditions. Part A benefits are
financed mainly through a payroll tax of 2.9%
of income (half of which is paid by the
employee and half by the employer). Most
people do not pay a premium for Part A
because they or a spouse already paid for it
through their payroll taxes while working.
Part B (supplementary medical insurance)
helps cover services provided by physicians
and other practitioners, as well as hospital
outpatient care. It also covers some other
medical services deemed necessary that Part
A does not cover, such as some of the
services of physical and occupational
therapists, laboratory and medical equipment
fees, and some home health care. Most
people pay a monthly premium for Part B
based on a sliding income scale, and these
premiums cover about one-quarter of the cost
of Part B benefits.
Medicare advantage (sometimes referred to
as Medicare Part C), an optional insurance
offered by private insurers, provides additional
insurance, e.g. for dental and vision, not
covered by Medicare Parts A and B. Originally
designed to have lower costs, the gradual
introduction of payment floors to attract
insurance plans, in particular for rural regions,
resulted in an acceleration of Medicare
Advantage plan costs over the past decade.
In 2009, payments to Medicare advantage
plans per enrollee averaged 114% of the
traditional fee-for-service Medicare plans.
Part D (prescription drug plan), enacted under
the Bush Administration in 2003, provides
expanded coverage for prescription drugs to
Medicare beneficiaries. Part D is partially
financed (less than one-quarter) through
premiums.
Medicaid
Medicaid is available only to certain lowincome individuals and families who fit into an
eligibility group that is recognized by federal
and state law. Although the federal
government establishes general guidelines for
the program, Medicaid is administered by the
states, with each state setting its own
guidelines regarding eligibility and services. In
2008, 14.1% of the US population was
covered by Medicaid (Census 2009).
May 20, 2010
‘This legislation will not fix everything that ails our health care
system. But it moves us decisively in the right direction. This is what
change looks like.’ – President Barack Obama, March 21, 2010, in a
speech following passage of the final health care reform legislation
by the US House of Representatives
After over a year of intense debate and political haggling, the United
States Congress narrowly passed an historic health care overhaul,
which President Obama signed into law at the end of March. The
legislation expands health insurance coverage to a large portion of
the nearly 50 million Americans without insurance, introduces for the
first time an insurance mandate requiring nearly all Americans to
have coverage, and ushers in significant changes to insurance
rules. It is being touted as the biggest change in domestic social
policy since the 1960s.
The US health care system desperately needs reforming. Despite
spending vastly more money on health care than any other country
(an estimated USD 2.5 trillion in 2009), the US does not enjoy health
outcomes commensurate with its high level of spending. US national
health expenditures amount to over 17% of GDP, compared with the
OECD average of about 9% of GDP, but the US ranks in the lower
third of advanced countries on major measures of health such as life
expectancy and infant mortality. Moreover, if left unchanged, the
burgeoning costs of the US system will put unsustainable fiscal
pressure on public finances in the coming years.
In addition, a large and rising share of the US population is left
without health care coverage. Providing a vehicle to insure many of
these people, as the new legislation does, moves the US toward a
more egalitarian health care system. Because the large number of
uninsured persons adds to health care spending, there are also
direct and indirect economic gains to be reaped from increased
health insurance coverage. Substantial further economic gains could
result from more broadly trimming the inefficiencies that are
prevalent throughout the US health care system.
Yet therein lies the real challenge. While the health care reform
legislation succeeds in vastly expanding health insurance coverage,
it does not do enough to increase efficiency in the system and slow
the growth in US health care spending. This is partly because of the
powerful health care interest groups (the top US lobby organisations
represent the elderly, hospitals, drug companies and physicians)
that resist a more radical overhaul of the complex system from
which most actors benefit. Moreover, there is little public or political
appetite for moving to a single-payer (government-run) system in
the US. There has also been little scope in the reform debate to
tackle two of the largest distortions in the US health care system,
namely the tax-free status of employer-provided health insurance
plans, and the fee-for-service based system that compensates
providers for quantity rather than quality of care. Truth be told,
Americans like ‗all-you-can-eat‘ health care and reject plans that
ration or ‗manage‘ care. As a result, many proposals that could have
led to greater reductions in health care spending, even ones
recommended by top health economists, were not included in the
reform legislation because they would have radically altered the
system (e.g., moving to a single-payer system, shifting from a feefor-service to a pay-for-performance payment
3
Current Issues
On average, federal Medicaid payments
represent approximately 57% of total
Medicaid payments, with the states‘ share of
outlays approximately 43%. CBO (2009)
estimates that total federal Medicaid payment
outlays amounted to USD 255 billion in 2009.
Beneficiaries in some states pay a small part
of the cost (co-payment) for some medical
services.
Children’s Health Insurance Program
(CHIP)
Begun in 1997, CHIP is a program
administered by the Centers for Medicare and
Medicaid Services that provides health
insurance to nearly 10 million children and
pregnant women. The program was
reauthorised through the Children's Health
Insurance Program Reauthorization Act of
2009 (CHIPRA), which finances CHIP through
2013. Like Medicaid, CHIP is jointly financed
by the federal and state governments and is
administered by the states. Within broad
federal guidelines, each State determines the
design of its program, eligibility groups,
benefit packages, payment levels for
coverage, and administrative and operating
procedures. CHIP provides a capped amount
of funds to states on a matching basis. The
federal budgetary authority for CHIP
amounted to $16 billion in 2009.
Military personnel and veterans
Military health care encompasses a diverse
range of programs, each serving a total
military population of more than 9.2 million
people, including active duty personnel and
families, retirees and their families, and
eligible veterans. The major military health
care programs are operated through the
Department of Defense (covering active duty
service members and retirees from all
branches of the US military and their eligible
family members) and the Department of
Veterans Affairs (covering veterans and their
eligible family members). Each program has
different eligibility criteria, benefits packages,
and financing structures.
Sources: Centers for Medicaid and Medicare Services
Weak popular support
Would you say that you support or
oppose the changes to the health
care system that have been
enacted by Congress and the
Obama Administration?
100
80
60
40
46%
50%
Support
Oppose
20
0
Source: Washington Post-ABC News poll
conducted March 23-26, 2010
4
1
system, or an end to the tax preference for employer-sponsored
health care plans). Still, the reform does represent a start to
controlling run-away health care inflation, and this is certainly an
achievement relative to the unsustainable status quo.
The legislative road to health care reform was nothing short of a
political rollercoaster ride. During the 2008 presidential campaign, a
widespread consensus around the need for health care reform
began to materialise among the public and across political party
lines. Yet political and public support for a comprehensive reform
started to wane last summer, for a number of reasons. Although
most Americans agree that the health care system as a whole is
plagued with problems, the overwhelming majority is satisfied with
the quality of health care that they personally receive. As President
Obama and Congressional Democrats pursued wide-reaching
legislation, they weren‘t successful in communicating clearly the
benefits of reform to the average American who has satisfactory
health insurance, and were criticised for spending too much time on
health care at the expense of other domestic priorities, in particular
job creation.
Meanwhile, the Republican opposition hailed the legislation as a
‗government take-over‘ of one-sixth of the economy, and gradually
succeeded in raising fears that ‗Obamacare‘ would result in higher
taxes, higher health insurance premiums, and higher government
debt. Public concern and skepticism, together with the momentum of
the anti-reform ‗Tea Party‘ movement and the political weight of
interest groups opposed to fundamental change of the health care
system, shifted public opinion narrowly against the legislation in the
crucial last months of the debate.
Nevertheless, Democratic leaders in Congress pushed ahead with
their reform proposals and, after months of hearings and back-room
dealing, the House of Representatives and the Senate both passed
health reform legislation, the House on November 7, 2009 by a
margin of 220-215 votes, and the Senate on December 24, 2009 by
60-40, the slimmest of margins necessary to avoid a Republican
filibuster. Informal talks between House and Senate leaders began
in January 2010 and were making progress toward ironing out the
differences between the bills, particularly with respect to the
offsetting sources of revenue to finance the expansion of insurance
coverage. But these talks were halted when Republican Scott Brown
won the open Senate seat in Massachusetts, thereby depriving the
th
Democrats of the 60 vote in the Senate necessary to cut off debate
and pass a bill.
The defeat caught Democrats off guard, and at several points in
February and March the health care reform legislation appeared to
be dead. Yet rather than changing course and pursuing a much
smaller package of measures, as some of his advisors had urged,
Obama inserted himself into the middle of the debate and convinced
Democratic Congressional leaders to continue to pursue
comprehensive reform legislation, despite what appeared to be
insurmountable obstacles. They adopted a strategy whereby
changes to the Senate legislation could be made through a socalled budget Reconcilation and approved with a simple majority
rather than 60 votes.
Even that proved difficult. But in the end, the risky political gamble
paid off for the President, with the passage of the Senate‘s
st
legislation by the House on March 21 , followed by the passage of
th
the Reconciliation Bill by both houses of Congress on March 25 .
May 20, 2010
Coverage vs. cost
The longer-run political (and economic) pay-off will depend on how
the administration and Congress are able to sell the benefits of the
reform to a public that is not convinced of its merits.
Deficit angst
5%
16%
This report attempts to summarise the US health care system and
its fundamental problems, to explain the key measures in the health
care reform legislation, and to evaluate the impact of the legislation
on the health care system and on the federal budget. The analysis
takes an economic perspective in evaluating the legislation, and in
particular tries to judge whether the changes within the reform will
slow the rapid growth in national health care spending that currently
represents the greatest longer-term threat to US fiscal sustainability.
65%
14%
Increase
Decrease
No effect
No answer
Overview of the US health care system
Do you think these changes to the health
care system will increase the federal
budget deficit, decrease it, or have no
effect?
Source: Washington Post-ABC News poll
conducted March 23-26, 2010
2
Most Americans get health insurance
through an employer …
Coverage by type of health
insurance, 2008
%
No insurance
Military
Medicaid
Medicare
Any government
Direct-purchase
Employer-based
Any private
15.4
3.8
14.1
14.3
29.0
8.9
58.5
66.7
Source: US Census Bureau
3
… but rising costs have forced some
firms to drop coverage
Spending on health care in the United States is financed through a
combination of private and public sources. In 2008, the private share
accounted for just over half, or 52.7%, of national health
expenditures, while the public share accounted for 47.3% (34.9%
federal and 12.4% state and local) (CMS, 2010a). This is a fairly low
public share compared to the OECD average, but in the United
States, publicly-sponsored health care covers a much smaller
portion of the population (only the very poor, elderly, and disabled)
compared to the universal coverage offered in most OECD
countries. The main publicly-sponsored health care programs in the
US are Medicare (for Americans 65 years of age and older),
Medicaid (for the poor and disabled), and the Children‘s Health
Insurance Program. Although nearly half of health care spending is
financed publicly, most of the services are furnished by private
providers.
According to the most recent official data, 66.7% of Americans were
covered by private insurance in 2008, with 58.5% of Americans
receiving or purchasing insurance through an employer and 8.9%
purchasing private health insurance directly from insurers.
Government insurance covered 29% of Americans, and 15.4% of
Americans had no health insurance coverage whatsoever (Census
2009).
The dominance of employer-based health insurance in the United
1
States came about largely by historical accident , but has been
encouraged through the tax code, under which employer-provided
health care benefits are tax-free. The employer-based system also
receives strong political support from labor unions, because many
union members benefit from generous health insurance plans, for
example those offered by big manufacturing companies. Yet while
the vast majority of Americans under the age of 65 get private
insurance through an employer, this percentage has fallen in recent
years as the high cost of health insurance premiums has driven
some employers (particularly small businesses) to cease offering
health insurance, and/or to classify more jobs as part-time so as to
reduce the number of workers covered by company plans.
Moreover, despite the steady growth in the share of government
insurance coverage (and thus of the public share of health care
financing) over the years, the number of people without health
insurance has also risen, and an increasing number of families
struggle to afford health care insurance premiums and/or out-ofpocket health care payments.
1
May 20, 2010
During the Second World War, wage controls led many employers to start
compensating their employees through health care benefits in lieu of salary
increases.
5
Current Issues
This rather confusing patchwork of public and private insurance
financing and coverage (or lack of coverage) has resulted in a
complex system that is both difficult to comprehend, expensive to
administer, and difficult to change.
Problems with the US health care system
The US health care system is plagued by three major problems:
Uninsured rate 1999-2008
1. Inadequate insurance coverage;
% of total population
16
15.5
3. Uneven quality of care.
15
14.5
Inadequate coverage
14
For one of the richest countries in the world, the United States has a
substantial number of people who lack health insurance coverage.
The number of uninsured reached 46.3 m in 2008, representing
about one-sixth of the non-elderly population (Census 2009). That
figure would be much larger if the statistics also counted as
uninsured those people who experience a gap in insurance
coverage at any time in a given year, rather than counting as
insured anyone who has health insurance for at least part of a given
year. Moreover, children make up a large portion of the uninsured,
with 7.3 m children (9.9% of children under age 18) lacking health
insurance in 2008.
13.5
13
12.5
99 00 01 02 03 04 05 06 07 08
4
Uninsured by age, 2008
%
35
30
25
20
15
10
5
0
< 18 18 – 25 – 35 – 45 – 65 >
24
34
44
64
5
Uninsured by race, 2008
%
35
30
25
20
15
10
5
0
White, Black
not
Hispanic
2. High and rising costs and
Asian Hispanic
(any
race)
6
In contrast to a universal, single-payer health care system, the
American patchwork system of private and public insurance
described above leaves out many people: those who do not have
access to health insurance through their own or a family member‘s
employer; those who are not old enough, poor enough, or disabled
enough to qualify for Medicare or Medicaid; those who cannot afford
to purchase health insurance in the private market; and those with a
high propensity for risk (generally the young and healthy) who
choose not to purchase health insurance. Studies show that for the
majority of the uninsured, going without insurance is not a choice.
Lower-income Americans are disproportionately uninsured, with
some 48% of households with incomes less than twice the federal
poverty level (about USD 40,000) lacking health insurance at some
point during 2007 (OECD, 2008). Also among the disproportionately
uninsured are young adults and non-whites (especially Hispanics,
many of whom are illegal immigrants).
Rising costs for health care and health insurance explain more than
half of the decline in insurance coverage over the past three
decades. The ranks of the uninsured have risen primarily because
soaring premiums have left many individuals unable to afford health
insurance and many employers no longer willing or able to provide
insurance to their employees. Since the early 1980s, the share of
the non-elderly with employer-provided insurance has declined by
nearly ten percentage points, from 73% in 1983 to 63%, as the
increasing cost of providing insurance to employees forced many
employers to either cut coverage completely or to hire more parttime and temporary workers. Even large companies who traditionally
offered generous health care benefits to their active and retired
employees have been forced to cut back on these plans to remain
2
competitive.
2
6
A well-known and powerful example: a General Motors auto contains more
healthcare than steel.
May 20, 2010
Coverage vs. cost
Uninsured by income, 2008
USD 1,000
%
30
25
20
15
10
5
0
<25,000 25,000 - 50,000 - 75,000
49,999 74,999
or >
7
Lack of health insurance results in
high ‘hidden’ costs
25
14,000
20
12,000
10,000
15
8,000
10
6,000
4,000
5
0
00 03 06 09 12 15 18
Per Capita, USD (left scale)
% of GDP (right scale)
May 20, 2010
It is estimated that over 2 million Americans per year are involved in
medical bankruptcies. According to a Harvard University study,
medical illness or injury contributed to over 62% of all bankruptcies
in 2007 (Himmelstein, 2009). That rate probably rose in the recent
economic downturn. Surprisingly, nearly 78% of those forced into
bankruptcy for medical reasons were insured at the start of the
illness. In many cases, illness led to job loss, and with it the loss of
health insurance.
High and rising costs
Total spending on health care in the US has surged in recent
decades, from 5.2% of GDP in 1960 to an estimated 17.3% in 2009,
with growth in health care spending exceeding the rate of consumer
price inflation by 2.5 percentage points per year on average with
only brief interruptions throughout those decades (CMS, 2010b).
According to the latest available data from the National Health
Expenditure Accounts, US health care spending growth actually
decelerated in 2008 (to 4.4% compared to 6.0% growth in 2007), but
this ‗improvement‘ was due to the economic recession as
consumers cut back spending (including spending on health).
2,000
Source: Centers for Medicare and Medicaid Service
The lack of health insurance for so many Americans compromises
health and puts additional stress on individual as well as public
finances. The uninsured are much more likely to skip regular checkups, tests, and even treatment for chronic conditions such as
diabetes. This leads to worse health and more emergency visits to
hospitals, with resulting costs for ‗uncompensated care‘ – costs
incurred by hospitals and physicians for the care they provide to the
uninsured and for unpaid bills. A large portion of these
uncompensated care costs is reimbursed by federal and state
government, to the tune of approximately USD 43 bn per year in
2008 (Hadley et al., 2008). Moreover, the indirect costs linked to
being uninsured – including lost health, decreased workforce
productivity, developmental and educational losses among children,
and shorter life spans – have been estimated at USD 100-200 billion
per year (CEA, 2009; Axeen and Carpenter, 2008).
Indeed, the need for health insurance can result in labor market
distortions, as workers who might seek new employment or move
into self-employment may be reluctant to do so because they fear
losing their health insurance. This ‗job-lock‘ phenomenon has been
studied by several health economists, many of whom have
advocated dismantling the employer-based insurance system in
favor of a system of universal coverage (see a.o. Endhoven, 2007).
However, opposition from interest groups (unions in particular)
prevented such a radical change in the employer-based system
from being considered in the current health care debate.
National Health
Expenditures 2000-2019
16,000
Given these trends, the number of uninsured is projected to
increase rapidly to 54 m in 2019 in the absence of reform. Although
the number and percentage of uninsured children declined in 2008
(to 9.9%, down from 11.0% in the previous year), this was due solely
to the increases in federal outlays for CHIP contained in the 2009
stimulus legislation. Most observers expect a further jump in the
number of uninsured in 2009 and 2010, due to the impact of the
economic recession that has left many people unemployed and,
thus, without health insurance.
8
While growth in private health insurance premiums and out-ofpocket spending on health care decelerated, spending for Medicare
and Medicaid grew at a faster rate, in part due to provisions
7
Current Issues
Insurance cost-sharing explained
Premium: The cost of the insurance policy,
which is normally paid on a monthly basis.
Under employer-sponsored plans, a portion of
the premium is paid by the employer and a
portion by the employee through monthly
payroll deductions.
Co-payment (or copay): A specified fixeddollar amount paid by the policy enrollee at
the time of service.
Co-insurance: A specified percentage of the
cost of the medical service to be paid by the
enrollee. Not all policies require co-insurance,
but for those that do the cost-sharing ratio is
normally 80-20 or 70-30 (the portion paid by
the insurance company to that paid by the
insured).
Deductible: A specified fixed-dollar amount
that enrollees must pay ‗out of pocket‘ before
the insurer begins paying for medical
services.
Cost-sharing requirements differ by type of
plan, and tend to be higher in the individual
insurance market (particularly under
‗consumer-driven health plans‘ whose policies
generally carry higher premiums). Costsharing is very low under Medicaid and
somewhat higher under Medicare (but
generally not as high as individual or
employer-sponsored plans). For the most
common type of plan, an employer-sponsored
preferred provider plan, the average annual
premium amounted to USD 4,824 for single
coverage and USD 13,375 for a family in
2009, a 131% increase for family coverage
compared to 1999. In 2009 the deductible for
an employer-sponsored preferred provider
family plan averaged about USD 634 per year
and exempt regular physician visits within the
network of preferred providers. The
copayment averaged USD 20 per primary
care physician visit and USD 28 for specialist
visits within the network of preferred
providers. Covered workers with coinsurance
requirements paid on average 18% of the cost
of a primary care physician visit in 2009. That
share is typically as high as 30-35% for visits
outside the network of preferred providers,
though coinsurance requirements normally
vary by type of service. Most employer-based
insurance plans require the enrollee to pay a
portion of the cost of advanced diagnostic
tests and outpatient surgery (coinsurance
being more common) and for emergency
room and urgent care visits (copayments
being more common). Most plans also limit
total out-of-pocket spending that enrollees can
incur in a given year. For a typical preferred
provider plan, average out-of-pocket
maximums are about USD 2,000 for individual
coverage and USD 4,000 for family coverage.
Since 2000, employee cost-sharing for health
care services has increased and well outpaced inflation.
Sources: Kaiser Family Foundation (2009), CBO (2008),
Fronstein (2007).
8
associated with the American Recovery and Reinvestment Act of
2009. As a share of GDP, total health expenditures in 2008
continued to rise (to 16.2%, up from 15.9% in 2007), as health
spending reached USD 2.3 trillion, or USD 7,681 per person. The
Centers for Medicare and Medicaid Services predict that growth in
health care spending will persist, with national health expenditures
projected to reach nearly USD 4.5 trillion, or USD 13,400 per capita,
in 2019 (CMS, 2010b).
The rising cost of health care in the US is borne by households,
employers and the government alike. In 2009, average annual
medical spending for a typical American family of four covered by an
employer-sponsored plan reached USD 16,771, up 7.4% from the
previous year. Employers paid about 59% of the total in the form of
subsidies to cover a portion of the monthly health insurance
premium costs, employees paid about 24% of the total cost in the
form of employee contributions to the monthly insurance premiums
(normally through payroll deductions), and an additional 17% in outof-pocket costs (e.g., copayments and deductibles) at the time of
service.
Looking longer term, the current trajectory of health care spending is
clearly unsustainable. Barring changes to the current system, health
spending will continue to rise sharply in coming years, putting
severe pressure on personal and public finances and crowding out
private and government spending on other things. The non-partisan
Congressional Budget Office, in its most recent assessment of longterm health care costs, predicts that the share of GDP devoted to
health care will rise from over 17% currently, to 25% of GDP in
2025, 37% in 2050, and 49% in 2082 (CBO, 2007). Federal
spending on Medicare (net of beneficiaries‘ premiums) and Medicaid
alone would rise from 4% currently to 7% in 2025, 12% in 2050, and
19% in 2082. Projections of the Trustees of Medicare and Medicaid,
the body that oversees those federal programs, are a bit less
pessimistic, since they assume that spending on these programs will
grow slower than it has in the past, resulting in less drastic
increases for the out years in particular. Yet even under less
pessimistic scenarios than the CBO‘s, it is clearly unthinkable that
healthcare would be permitted to engulf such a large portion of the
federal budget, and eventually something would have to change.
But these long-term predictions, even if imprecise and unrealistic,
illustrate the undeniable fact that spending on health care will reach
unsustainable levels if fundamental reforms to the system are not
made.
Several factors lie behind the higher levels of health care spending
and faster growth in health care costs in the United States.
Compared to other OECD countries, the US spends more on inpatient and out-patient hospital care as a percentage of overall
spending, and much more on administration. According to OECD
comparative health data, health price levels in the United States
exceed the OECD average by about 25%, with prices for hospital
services, pharmaceutical prices, and physician remuneration much
higher than in other OECD countries. There are also, on average,
fewer doctors and hospital beds per capita, suggesting that
insufficient supply may in some cases be pushing prices higher. Yet
although there are fewer doctor visits and shorter hospital stays in
the US relative to other OECD countries, the US has vastly higher
rates of activity (i.e., more procedures and tests, particularly those
associated with innovative technology and medicine) (OECD, 2009).
May 20, 2010
Coverage vs. cost
Health economists confirm that advances in technology and medical
science are the leading driver of high US health spending. In
particular, the high rate of usage of new (and expensive) diagnoses
and treatments in the United States, compared with other countries,
exerts upward pressure on costs. Medical innovation leads to
demand for improved technology, and the availability of new
technology has led to greater demand for state-of-the-art tests,
treatments and drugs. The result is a continuous upward pressure
on costs.
At least in part in response to this technology-driven increase in
demand, health insurers have expanded the health care benefits
covered under insurance plans, with more generous policies
accompanied by higher premiums but resulting in less out-of-pocket
spending required by policy holders. If anything, this has
exacerbated the problem of perverse cost incentives within the US
health care system that lead to more consumption (and in some
cases overuse and over-prescribing). The ‗fee for service‘ system
prevalent in the US means that providers (doctors and hospitals) are
paid per service they perform, rather than per health episode or
patient outcome. As a result, health providers prescribe more tests
and procedures, and have a greater financial incentive to use
expensive technology. Insurers have little incentive to curb costs
either, since they earn management fees from administering
company health plans, and those fees increase with spending.
Studies based on regional data show that the higher proportion of
specialists in the US also contributes to the higher cost of health
care. These specialists rely more on expensive technical procedures
and are more highly paid than primary care physicians.
Factors contributing to higher US
health spending
— Technology-driven demand
— ‗Fee-for-service‘ system
— Too many specialists, too few primary
doctors
— Lack of cost transparency
— Medical liability insurance
— Administrative costs
Average annual family
medical cost
USD
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
2005 2006 2007 2008 2009
9
Source: Milliman Medical Index (MMI), 2009
Projected spending on
health care
% of GDP
60
50
40
30
20
10
0
2007 2021 2036 2051 2066 2081
All other health care
Medicaid
Medicare
Source: Congressional Budget Office
May 20, 2010
10
On the consumer side, individuals pay a relatively small (albeit
growing) share of their health expenses ‗out-of-pocket‘, and this
generally encourages over-consumption. Whereas consumers were
responsible for 43% of total national health care expenditures in
1965, over the years this share fell to 11.9% in 2008, as growth in
expenditures by private insurers, Medicaid and Medicare grew at
much faster rates (de Rugy, 2010). If, as under most health
insurance policies, consumers only pay a fraction of the actual cost
(normally in the form of a co-payment), then there is little incentive
for consumers to opt for less expensive tests and treatments even if
evidence suggests that their cost outweighs the benefits. Moreover,
lack of transparency means that consumers have little information
about the actual cost of the health services they use, leading them
to demand more and in many instances to over-use health care.
Also contributing to the higher level of spending in the US relative to
other advanced countries are the proliferation of medical lawsuits
(which drive up the cost of medical liability insurance and the
incidence of unnecessary tests and procedures), the relatively high
level of physician income, and higher prices for pharmaceutical
drugs. Moreover, the US system of multiple insurance providers and
sources of financing translates into much higher administration costs
in the US. This, along with high hospital re-admission rates, has led
to lower productivity in the US health care system relative to other
countries.
Yet another factor driving health care spending is population aging,
which translates into an expansion of Medicare outlays as more
people become eligible for the program (as well as for the long-term
care services offered under Medicaid). However, population aging
has not been a significant factor in the growth of health care
9
Current Issues
Growth in Medicare and
Medicaid spending
% of GDP
20
18
16
14
12
10
8
6
4
2
0
07 17 27 37 47 57 67 77
Effect of excess cost growth
Effect of aging
No aging or excess cost growth
11
spending in the US up to now, and projections for the next 70-plus
years show that even an acceleration in the effect of population
aging will be a relatively moderate driver of growth in federal
spending on health care. The much larger impact comes from
excess cost growth (i.e., when increases in health care spending for
an average individual exceed the growth in per capita GDP).
It is important to note that not all of the causes of higher spending
on health care are negative. For example, in the US and elsewhere
the increase in average personal disposable incomes translates into
higher spending on health, which is a superior good (i.e., the richer
people become, the more health care they demand and thus
consume). A high level of spending on health care is, in and of itself,
a positive and natural development (in the US as in other advanced
countries) that has led to longer and healthier lives (Cutler, 2004).
What is problematic is not that the US is spending more, but that it is
not getting as much as it should for its higher spending.
Uneven quality and efficiency of care
Economists and policymakers alike would have less reason to be
concerned about health care cost inflation if higher spending on
health care in the US was yielding commensurate gains in health
outcomes. Yet the evidence suggests that much of the additional
spending on health care in the US does not lead to better health,
and that the US health system operates far from its efficiency
frontier.
Health outcomes are better in
countries that spend much less
Comparisons with other advanced countries show that health
outcomes by many measures are worse in the US than in other
advanced countries that spend far less on health care. Although
health expenditures per capita in the US are by far the highest
among OECD countries, life expectancy at birth has risen at a
slower rate in the US over recent decades than in most OECD
countries. The increase in life expectancy at age 65 has also been
less than the OECD average. Moreover, the gap in life expectancy
between socio-economic groups in the US has increased markedly.
And another key indicator of population health status, infant
mortality, has decreased at a slower pace in the US than in other
OECD countries.
Health expenditure per capita, 2007
USD PPP
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
OECD
US NO CH LU CA NL AT FR BE DE DK IE SE IS AU GB
'06
Private
FI GR IT ES JP NZ PT KP CZ SK HU PL MX TR
'06
'06
'05
Public
Source: OECD Health Data, 2009
Up to one-third of US health care
spending is wasted
10
12
Health care economists who have analysed spending and quality
have determined that a surprisingly large share of US health care
spending – up to one-third, or close to 5% of GDP – does not
contribute to health care gains. Looking at it from a positive angle,
May 20, 2010
Coverage vs. cost
this apparently vast waste represents both an opportunity and
challenge to reduce health care costs without impairing health
outcomes.
Life expectancy at birth, total population, 2006
In years
84
82
80
78
76
74
72
70
68
HU TR SK MX PL CZ US DK PT KP LU BE FI GB GR DE IR NL AT SE NZ NO CA FR AU ES IS IT CH JP
Source: OECD Health Data , 2009
No regional correlation between
spending and quality of care
Regional variation in
spending
% increase from previous year
Miami, Florida
East Long Island, New York
5.0
US National Average
3.0
Boston, Massachusetts
3.0
San Francisco, California
2.4
Salem, Oregon
2.3
4.0
Average annual growth in per capita Medicare
Expenditures, 1992-2006
Source: Fisher et al., 2009
14
Medicare spending per
beneficiary
Quintile
1st
Inpatient
days
1.4
per
beneficiary
2nd 3rd
1.6
1.8
4th
2.1
5th
Case studies of health care spending and health outcomes within
the United States show that ‗more isn‘t always better‘ in health care,
i.e., that more expensive care does not necessarily mean higher
quality care. The great variation in Medicare spending per
beneficiary by US region is vast, as are variations in spending
among medical centers, providing a useful laboratory for
3
comparative research.
The Dartmouth Atlas Project has analyzed regional variations in the
practice of health care delivery and spending, principally for the
Medicare population, and found no correlation between the quality
of care and level of Medicare spending by state – defying the
conventional view that more spending on health care automatically
translates into better health outcomes. Specifically, Dartmouth
researchers found a 2.5-fold variation in Medicare spending in
different regions of the country, after adjusting for differences in local
prices, and the age, race and underlying health of the population.
They conclude that ‗patients who live in areas where Medicare
spends more per capita are neither sicker than those who live in
regions where Medicare spends less, nor do they prefer more care.
Perhaps most surprising, they show no evidence of better health
outcomes‘ (Fisher et. al., 2009).
Patient outcomes in some cases actually suffer in higher-spending
regions, as a result of an excessive number of physicians with too
little information involved in a patient‘s care, increasing the likelihood
of mistakes. Physicians in regions with a higher per capita supply of
hospital beds and specialists are more likely to prescribe hospital
stays and specialist visits, leading to more intervention and higher
costs but on average not resulting in better health outcomes.
Indeed, Dartmouth Atlas finds higher mortality rates in higherspending regions compared with lower-spending regions for several
health problems (e.g., acute heart attack, hip fracture, and colon
cancer). As the researchers conclude, ‗hospitals are dangerous
places to be if you do not absolutely need to be there‘.
2.1
Physician
visits
10.7 12.1 13.0 13.6 14.5
per
beneficiary
MRIs per
16.6 17.6 19.3 19.7 21.9
100
beneficiaries
CT scans
46.9 54.0 58.7 61.2 61.4
per 100
beneficiaries
Source: Sutherland et al., 2009
15
What are the sources of this regional variation? Using data from the
Medicare Current Beneficiary Survey, Dartmouth researchers
3
May 20, 2010
13
For example, researchers found that Medicare spending for patients in the last six
months of life was on average nearly twice as much at the University of California
Los Angeles hospital as at the Mayo Clinic in Minnesota.
11
Current Issues
conclude that patients in the highest-spending regions spend more
time in the hospital, have more frequent physician visits, and
undergo more magnetic resonance imaging (MRI) procedures and
computed tomographic (CT) scans. Indeed, most of the regional
variation in spending appears to stem from discretionary decisions
by physicians. This suggests that there are substantial savings to be
achieved through health care payment and delivery system reforms,
without rationing care (Sutherland et al., 2009).
The major elements of the 2010 health care reform
What follows is a summary of the major elements of the final health
care reform legislation, which comprises the Patient Protection and
Affordable Care Act (as passed by the Senate on December 29,
2009 and by the House on March 21, 2010) and the Health Care
and Education Affordability Reconciliation Act (whose final version
was passed by both houses of Congress on March 25, 2010).
Federal subsidies under
the exchanges
Income as Income
% of FPL* level**
USD
Premium
(% of
Income***)
Up to 133 29,326
2.0
133-150
29,326-33,075
3.0-4.0
150-200
33,075-44,100
4.0-6.3
200-250
44,100-55,125
6.3-8.05
250-300
55,125-66,150
8.05-9.5
300-400
66,150-88,200
9.5
Health insurance coverage mandate and subsidies
(*Federal Poverty Level, **2010 Poverty Guidelines,
***increasing from to)
Sources: US House of Representatives and US
Department of Health and Human Services
16
Individuals with incomes less than
USD 88,200 will get subsidies as of
2014
Penalty for individuals
without health insurance
USD
amount
In % of
income
2014
95
1.0
2015
325
2.0
2016 on
695
2.5
Source: US House of Representatives
12
17
The legislation contains several measures aimed at significantly
reducing the number of legal US residents without health insurance.
It includes a first-ever requirement for individuals to obtain insurance
(the so-called individual mandate), starting in 2014, and establishes
insurance exchanges where individuals otherwise without access to
health insurance can purchase it. Federally-funded ‗premium tax
credits‘ (i.e., subsidies) will be provided to help people with low- to
middle-incomes purchase health insurance through the exchanges if
they cannot get insurance through an employer. The subsidies will
be available to individuals and families with incomes between 133%
and 400% of the federal poverty level (currently, between USD
29,326 and USD 88,200 annually). Incomes under 133% will be
eligible for Medicaid. The subsidy is calculated on a sliding scale
beginning at two percent of income for those at 100% of the federal
poverty level and phasing out at 9.5
percent of income at 300-400% (see chart). If an employer offer of
coverage exceeds 9.5% of a worker‘s family income, or the
employer pays less than 60% of the premium, the worker may enroll
in the exchange and receive credits. Starting in 2019, the subsidies
are scheduled to increase at the rate of inflation (consumer price
index), which would slow their growth relative to the expected rate of
overall health care spending and premiums. In other words, the
subsidies will become less generous over time. CBO (2010)
estimates that the average exchange subsidy per subsidised
enrollee would amount to USD 5,200 in 2015, and would gradually
rise to USD 6,000 in 2019. For the first decade of the legislation
(2010-2019), the insurance exchange subsidies and related
spending would add USD 464 bn to the federal deficit.
To encourage enrollment of the uninsured and to help finance the
expansion, individuals and businesses that do not fulfill the
insurance mandate will be penalised. Individuals who do not
purchase health insurance, and whose income is over the tax filing
threshold, will be assessed a penalty amounting to the greater of
USD 695 or 2.5% of income by 2016 (phased in from 2014). The
penalty was made more progressive in the Reconciliation Act, which
lowered considerably the flat payment amounts (to which lowerincome earners would be subject) but raised the percentage of
income payment amounts (to which higher-income earners would be
subject), relative to the Patient Protection and Affordable Care Act.
Firms with more than 50 workers that do not offer coverage will have
to pay a penalty of USD 2,000 for each full-time employee, if any of
May 20, 2010
Coverage vs. cost
their workers obtain subsidised coverage through the insurance
exchanges. The first 30 employees would be exempted under the
legislation, meaning that a firm with 51 workers that does not offer
coverage would pay an amount equal to 51 minus 30, or 21 times
the USD 2,000 per full-time employee.
Small businesses get a tax credit
from 2010 if they offer insurance
To help small firms afford to offer health care plans for their
employees, the legislation offers tax credits that take effect already
in 2010, well before the launch of the exchanges and penalty
system in 2014. Small businesses with fewer than 25 full-time
employees would be eligible to receive a tax credit for 35% of their
cost in health care premiums for plans they offer to their employees.
After the start of the exchanges in 2014, this tax credit would
increase to 50%. The Congressional Budget Office estimates the net
cost of these small employer tax credits will add USD 40 bn to the
federal deficit in 2010-2019.
A new marketplace for the uninsured to buy coverage
State-run exchanges come on line in
2014
Health insurance would be offered to previously uninsured
individuals and to small businesses through a new system of health
insurance ‗exchanges‘ created and run by the 50 states, beginning
in 2014. States will have the choice of whether to offer separate
exchanges or a single exchange for individuals and small groups,
and will also have the option of partnering with another state to form
a joint exchange. And for states that choose not to operate their own
exchange, the federal Department of Health and Human Services
will run a multi-state exchange. Policies purchased through the
exchanges (or directly from insurers) would have to meet several
requirements, and would be subject to oversight of state insurance
commissioners with respect to consumer protections, rate review
and solvency. In particular, insurers would have to accept all
applicants, would be forbidden from limiting or refusing coverage for
preexisting medical conditions, and could not vary premiums to
reflect differences in enrollees‘ health. The exchanges will not
include a government-offered insurance plan (the so-called ‗public
option‘) that was originally included in the House bill.
The largest expansion of Medicaid since 1965
More people will qualify for Medicaid
May 20, 2010
Beginning in 2014, most nonelderly citizens with incomes below 133
percent of the federal poverty level (USD 29,327 for a family of four)
will be eligible for Medicaid, including low-income childless adults
who are currently ineligible under most state rules. In an effort to
ensure that physicians will accept these new Medicaid patients,
payments to primary care doctors under Medicaid would be
increased in 2013 and 2014 to bring them up to Medicare payment
rate levels. The legislation also limits the burden of expanded
Medicaid coverage and payments on cash-strapped states. The
federal government would cover 100% of the increase in Medicaid
payments to primary care physicians, and would cover 100% of the
costs of covering newly eligible enrollees through 2016. In
subsequent years, the federal share of spending would vary
somewhat from year to year but would average about 90% by 2019
for most states. (Under current rules, the federal government usually
pays about 57%, on average, of the costs of Medicaid benefits.) In
addition, states would be required to maintain current coverage
levels for all Medicaid beneficiaries until the exchanges become fully
operational; and coverage levels for children under Medicaid and
CHIP would have to be maintained through 2015. Beginning in
2014, states would receive higher federal reimbursement for CHIP
beneficiaries, increasing from an average of 70 percent to 93
13
Current Issues
percent. All told, the Medicaid and CHIP-related measures are
estimated by the CBO to add USD 434 bn to the federal deficit in the
2010-2019 period.
Medicare: Expanded drug coverage; cuts to Medicare
payments
Medicare ‘donut hole’ phases out by
2020
The legislation would gradually close the gap in coverage under
Medicare‘s prescription drug plan, commonly referred to as the
‗donut hole‘. Under the Medicare drug plan (Part D), individuals are
responsible for 100% of the cost of the drugs after they hit a certain
dollar amount of individual spending on pharmaceutical drugs, until
they reach a much higher level of spending at which the government
again covers 75% of the cost. Under the reform, Medicare Part D
enrollees who enter the ‗donut hole‘ will receive an annual USD 250
rebate in 2010. Beginning in 2011, pharmaceutical manufacturers
will be required under the law to provide a 50% discount on brandname drugs, which would gradually increase to completely close the
donut hole, with 75% discounts on brand-name and generic drugs
by 2020. The Medicare Coverage Gap Discount Program, which
was greatly expanded under the Reconciliation Act, is estimated to
cost USD 42.6 bn over the 2010-2019 period.
Cuts in various Medicare payments make up a large portion of the
overall cost savings of the reform. The major Medicare savings
measures include
Steep cuts in Medicare payments to
hospitals and insurers foreseen
— A freeze on payments in 2011 under Medicare Advantage (MA),
the private plan alternative to Medicare. In addition, MA payment
benchmarks would be reduced relative to current levels starting
in 2012 to bring them in line with payments under traditional
Medicare plans. Reductions will vary by region and will be
phased in gradually. Over the ten-year window, these lower
payments are expected to reduce spending by USD 136 bn.
— Permanent reductions in the annual updates to Medicare‘s feefor-service (FFS) payment rates for inpatient hospitals, long-term
care hospitals, inpatient rehabilitation facilities, psychiatric
hospitals and outpatient hospitals, that is estimated to save
approx. USD 196 bn over the ten-year period 2010-2019.
4
— A reduction in so-called Disproportionate Share Hospital (DSH)
payments beginning in 2014, yielding savings of USD 22 bn over
the ten-year window. Medicaid DSH payments would also be
reduced, by an estimated USD 14 bn over ten years.
Tighter rules on insurers
Insurers can no longer deny or
rescind coverage
Insurers will face a number of new restrictions under the health
reform law, in return for the additional business they will have as a
result of millions of new customers entering the health insurance
market after the mandate and exchanges take effect in 2014.
Insurers will no longer be able to put lifetime or annual limits (caps)
on health care coverage. They will also be banned from dropping
people from plans if they become ill (referred to as ‗rescission‘) or
denying coverage on the basis of a pre-existing condition (or
gender, race, income, etc.). And insurers will be subject to the
decisions of a new, independent claims appeals process for
consumers under new plans. Insurers will also have to provide
4
14
Disproportionate Share Hospital (DSH) adjustment payments provide additional
help to those hospitals that serve a significantly disproportionate number of lowincome patients. The program seeks to continue to encourage hospitals to provide
health services for these individuals. There are DSH programs for both Medicare
and Medicaid.
May 20, 2010
Coverage vs. cost
preventive care at no cost under Medicare (co-pays and deductibles
for most preventive care and wellness visits will be disallowed) and
under new private plans under the exchanges. This will be the case
for all plans as of 2018. In addition, insurers will have to guarantee
that a certain percentage of the cost of health insurance premiums
is devoted to health care, rather than to administration of plans.
Starting in 2011, individual and small group insurance plans will be
required to spend 80% of premium dollars on medical services, and
large group insurance plans 85%. In an attempt to reduce the
number of uninsured young adults, insurers will be required to cover
individuals up to 26 years of age under their parents‘ policies.
How is the reform financed?
Reform is paid for by a 40% tax on
the most expensive health plan …
Agreeing on how to finance the expansion of coverage was one of
the most difficult elements in the legislative battle over health care
reform. During the final stage of negotiations, greater savings
through both Medicare payment cuts (as outlined above) and
various taxes needed to be found to offset increased costs in the
form of more generous subsidies and a larger expansion in
Medicaid coverage. The Senate legislation relied on a tax on highcost health care plans, while the House legislation included a tax on
wealthy Americans. In the end, the Senate‘s excise tax on high-cost
plans provided the basis for offsetting revenues; however, the
introduction of the tax was postponed until 2018 (from 2013 in the
Senate bill) and its threshold amounts were raised. The final
legislation imposes a 40 percent excise tax on employer-provided
insurance plans worth more than USD 10,200 for individuals and
USD 27,500 for families. By comparison, the average cost of a
family policy offered by an employer was USD 13,375 in 2009, i.e.,
considerably lower than the threshold. Just how many plans would
fall under the excise tax in 2018 has not yet been officially
5
estimated, though it is unlikely to be more than one-tenth of plans.
The tax, levied on insurers or employers, would apply to the value of
the plan in excess of the threshold amount. For retirees and
employees in high-risk professions, and for firms with a
predominance of female and/or older workers, the plan value
thresholds are set higher, at USD 11,850 for single coverage and
USD 30,950 for a family. After 2020, those amounts would be
indexed to the overall inflation rate (rather than inflation plus
1 percentage point in 2019). This means that if premiums continue
to increase at a faster rate, more plans will be subject to the excise
tax each year. CBO estimates that the excise tax will raise USD
32 bn by 2020 (USD 12 bn in 2018, its first year in effect, and USD
20 bn in 2019).
… and hefty tax hikes for highincome earners
To make up for the reduced revenue from the excise tax relative to
the Senate bill, the Reconciliation Act also institutes fairly hefty tax
increases on higher-income earners. Specifically, families earning
over USD 250,000 (and individuals over USD 200,000) will be
subject to an increased Medicare Part A (Hospital Insurance) payroll
tax. The tax rate would be raised by 0.9 percentage point, to 2.35%
of income, up from the current 1.45% rate). In addition, the
investment income of these high-income earners would also be
subject to a Medicare tax of 3.8%. Under the original House
legislation, the Medicare payroll tax surcharge would have been
5
May 20, 2010
CBO estimated in November, 2009 (CBO, 2009d) that 19% of employer-sponsored
health insurance policies would fall under the excise tax according to the lower,
original Senate thresholds. CBO has not yet published an estimate for the
thresholds in the final reform legislation.
15
Current Issues
larger (5.4%) but would have ensnared only those with incomes
over USD 500,000 per year (USD 1 m for a family). In this respect,
the tax base is broadened, hitting upper-class Americans rather than
only the very wealthiest.
Impact of the reform
Sharp reduction in the number of uninsured
94% of Americans will have health
insurance coverage by 2019
Impact on coverage, 2019
Non-elderly people, million
Without reform
Uninsured
Exchanges*
Nongroup
& other
Employer
Medicaid/
CHIP
180
160
140
120
100
80
60
40
20
0
With reform
*There are no exchanges without reform.
18
The Congressional Budget Office and Joint Committee on Taxation,
in their final estimate of the impact of the Senate legislation as
amended by the Reconciliation bill from March 20, predict that by
2019 the Act will reduce the number of uninsured Americans by
about 32 million, leaving approximately 23 million non-elderly
residents uninsured. About one-third of those 23 million would be
unauthorised immigrants, who are not permitted to take part in the
new insurance exchanges under the reform law. This reduction
would put the share of legal nonelderly residents with insurance
coverage at about 94%, compared to 83% currently – a
considerable expansion that approaches, but does not fully reach,
universal coverage.
The sources of insurance coverage will also shift, though most
Americans will retain their current health insurance (e.g., with their
employer). According to CBO (2010), 29 million individuals would be
covered under the exchanges by 2019 (24 m of whom would
purchase their own coverage with the help of subsidies and another
5 million who would enroll in exchange plans offered by their
employers but would not be eligible to receive subsidies). An
additional 16 m people would be covered under Medicaid and CHIP.
In contrast, the number of people purchasing individual coverage
under private plans outside the exchanges would fall by 5 m, and
the number of people insured under employer-sponsored plans
would decline by 3 m. The net change in employer-based coverage
would result from an additional 6-7 million people enrolling in plans
as a result of the insurance mandate, another 8-9 million people
who would lose their employer coverage as a result of smaller
employers choosing not to offer insurance, and 1-2 million people
who would opt to purchase insurance through the exchange rather
than keeping their employer coverage.
Although the cost of this expansion in coverage is large, it will
reduce the expenditures associated with uncompensated care for
the uninsured (paid for by providers and federal, state and local
governments). Expanded coverage will also yield economy-wide
savings through improved health – e.g., fewer sick days taken, lives
saved, less risk of personal bankruptcy caused by health expenses
– net welfare gains that could amount to tens of billions of dollars in
savings per year (CEA, 2009).
Positives and negatives for health consumers and providers
The reform will affect most
Americans, even though the vast
majority will not change their health
insurance
16
For individual consumers of health care, the impact of the reform will
vary greatly by age, level of income, type of employment (employed
or self-employed), and type of coverage (if any) prior to the reform.
Beyond the issue of new taxes, which as noted above will hit upperincome and wealthy Americans (2.8% of families earned over
USD 250,000 in 2008), the reform will affect several specific groups
of individuals. It will benefit young adults (under 26 years of age)
currently without insurance, who now will be covered under their
parents‘ policies. Childless adults with very low incomes will benefit
from expanded Medicaid eligibility. Seniors will be affected in several
ways by the changes to Medicare: Those who are insured under
May 20, 2010
Coverage vs. cost
Medicare Advantage will probably see their premiums and out-ofpocket costs increase as Medicare payments to those plans are cut
sharply under the reform. But Medicare patients will no longer have
to pay for preventive care, and many will also be paying less for
prescription drugs as a result of the closing of the Medicare Part D
‗donut hole‘.
Net effect on premiums estimated to
be modest overall
The greatest impact of the reform on consumers of health care (both
individuals and companies) potentially could come through the
legislation‘s effects on health insurance premiums and out-of-pocket
health care costs. The Congressional Budget Office and Joint
Committee on Taxation estimated that, on average, health insurance
premiums will remain about the same or edge slightly lower than in
the absence of reform (CBO, 2009d). That is because they find only
very moderate change in premiums of employer-sponsored plans,
which will still comprise the vast majority of the total insurance
market (83% in 2016, compared to 17% of the market for non-group
6
plans).
People who purchase insurance
individually will pay higher premiums
(but will get more coverage, in most
cases)
Effect on average premiums for health insurance
in 2016
In %
Non-group
market
Small group Large group
market
market
Distribution of nonelderly
population insured in these
markets under the reform
17
13
Estimated differences in
average premiums
relative to no reform,
before accounting for subsidies
+10 to +13
+1 to -2
0 to -3
Share of people
receiving subsidies
57
12
n.a.
For people receiving
subsidies, difference
in average premiums paid
after accounting for subsidies
-56 to -59
-8 to -11
70
n.a.
The non-group market includes people purchasing coverage individually either in the proposed insurance
exchanges or in the individual insurance market outside the insurance exchanges. The small group
market includes people covered in plans sponsored by firms with 50 or fewer employees. The large
group market includes people covered in plans sponsored by firms with more than 50 employees.
Premium subsidies in the non-group market are those available through the exchanges. Premium
subsidies in the small group market are those stemming from the small business tax credit.
19
Specifically, CBO concludes that the average premium per person
for employer-based insurance policies in the small group market
(plans sponsored by firms with 50 or fewer employees) would range
between 1% higher and 2% lower in 2016 than without the reform.
For the large group market (plans sponsored by firms with more
than 50 employees), the reform would yield an average premium per
person that is zero to 3% lower in 2016 relative to no reform. For
non-group policies, including plans under the insurance exchanges,
the effects would be larger, with the average premium per person
6
May 20, 2010
The CBO‘s estimate of the effect on premiums, published on November 30, 2009,
was based on the Senate-passed legislation. In its cost estimate of the final
legislation in March 2010, the CBO states that the effect on premiums would not
differ substantially from its original estimates on the basis of the Senate legislation
alone (CBO, 2009d).
17
Current Issues
estimated to be about 10% to 13% higher in 2016 than without the
reform. However, that increase reflects the greater amount of
insurance coverage on average for enrollees in this market, due to
regulations for the new exchanges that will require insurance
policies to cover a minimum specified set of benefits and a minimum
actuarial value (i.e., a higher share of costs for covered services
paid by the insurer, resulting in higher premiums but lower out-ofpocket spending). In addition, about half of non-group market
enrollees would receive government subsidies that would reduce
their costs 56-59% below the premiums that would be charged for
the same policies in the absence of the reform. A study published by
the Lewin Group, on the basis of the original legislation passed by
the House and Senate, estimated that total annual health care
spending per household (premium payments plus out-of-pocket
expenses) would be less than USD 100 higher under the reform,
though premiums for families with newly-insured members would be
significantly higher (over USD 1,000) due to the cost of the new
coverage (Sheils, 2009).
18
Small companies not offering
coverage already will have to pay
more …
For companies, the impact largely depends on firm size and whether
insurance coverage was offered to employees prior to the reform.
Large companies stand to be little affected, and smaller companies
could wind up paying more (by either having to provide insurance or
having to pay a fine), depending on whether they are small enough
to be exempt from the penalty or to qualify for a tax credit. Sheils
(2009) estimated that health care spending for firms currently
offering insurance would increase by USD 133 more per worker per
year under the original House bill, while under the Senate bill
spending would decrease by USD 233 per worker due to the lower
employer penalties that would lead some employers to discontinue
offering health care coverage. Firms not offering coverage now
would pay USD 800 more in health care spending per worker under
the House bill and USD 316 more under the Senate bill, again
reflecting the lower penalty for employers under the Senate bill.
Since the final legislation contains higher employee penalties than
the original Senate bill (though exempting the first 30 employees for
small firms), the net effect for employers is likely to be about neutral
for firms currently offering insurance (as long as the policies are not
so expensive as to eventually be ensnared in the excise tax) and
modestly negative (i.e., about USD 500 per worker) for firms who do
not currently offer coverage. Very small firms (under 25 employees),
which make up the bulk of businesses not offering health insurance,
might even accrue some savings per worker thanks to the small
employer tax credit.
… but the smallest firms will get tax
credits toward the extra costs
Among provider groups, hospitals stand to benefit from increased
business through the expansion of insurance coverage and
decreased costs for uncompensated care of the uninsured. But
expanded Medicaid eligibility could be a mixed blessing for
hospitals, since Medicaid generally reimburses hospitals for less
than the actual cost of treating Medicaid patients. Hospitals also will
bear about USD 155 bn of the cost of expanded health insurance by
accepting lower payments under Medicare. On average, hospitals‘
bottom lines will probably be little affected. Physicians will also
benefit from more customers and a decline in uncompensated
(‗charity‘) care to uninsured patients. The American Medical
Association, one of the top US lobby groups and the major voice of
medical professionals, concludes that the reform, which it
supported, will also significantly reduce the time and cost burden for
May 20, 2010
Coverage vs. cost
physicians associated with the administrative aspects of health
plans, which they judge would be simplified under the reform.
Impact on the net federal
deficit, 2010-2019
Change in the federal deficit, USD billion
938
Gross cost of
coverage provisions
- Exchange subsidies
and related spending
464
- Medicaid and Children‘s
Health Insurance Program
outlays
434
- Small employer tax credits
40
Net cost of
coverage provisions
- Penalty payments by
uninsured individuals
788
-17
- Penalty payments by employers -52
- Excise tax on high-premium
insurance plans
-32
- Other effects
-49
Change in deficit from
other spending reductions
-441
- Reduced Medicare
fee-for-service payment rates
-196
- Reduced Medicare Advantage
payment rate
-136
- Reduced Disproportionate
Share Hospital payments
-36
- Other
-73
Change in deficit from other
revenue-raising provisions
-210
- Fees on manufacturers
and insurers
-107
- Community living assistance
(CLASS)
-70
- Other
-103
Net change in the deficit
Deficit-reducing, with caveats
-490
- Medicare tax increases on
high-income individuals
-143
The immediate reaction of financial markets to the passage of the
7
reform has been quite muted , perhaps because many of the major
provisions won‘t take effect for several years, and because it will
take even longer for the full impact of the reform to become clear.
The Dow Jones Industrial Average rose moderately on the news of
the legislation‘s passage, with stock prices rising slightly for hospital
operators and pharmaceutical companies, and falling slightly for
insurance companies. Health insurers will benefit from a larger pool
of customers through expanded insurance coverage, but they will be
subject to greater fees and restrictions. In general, they will be
compelled to take less healthy, costlier patients since they are
restricted under the legislation from refusing or rescinding insurance
coverage on the basis of health, gender, age and income. Drug
makers largely managed to escape the tough regulation they
originally feared would be part of a comprehensive health care
reform. Pharmaceutical companies will benefit from more customers
and closure of the Medicare 'donut-hole', as many seniors who
currently fall into the hole simply resort to buying less medicine (or
to buying generics). But drug makers will have to contribute about
USD 85 bn over ten years toward the cost of the reform in the form
of industry fees and lower prices paid under Medicare‘s prescription
drug program. The impact on medical device companies will
probably be neutral, as they will benefit from expanded insurance
but also are subject to an annual fee in the legislation.
20
The Congressional Budget Office estimates that the reform will
reduce the federal budget deficit by USD 143 billion in the first
decade (2010-2019). The gross cost of coverage expansion (USD
938 bn in the first 10 years) mainly comprises the subsidies and
other spending associated with the health insurance exchanges
(USD 464 bn) and the expansion of Medicaid and CHIP (USD 434
bn). These costs are partially offset by spending reductions in public
programs (mainly Medicare) amounting to USD 511 bn. Revenuegenerating measures also serve to offset the cost of coverage
expansion, chief among these the Medicare tax hikes for highincome earners, the excise tax on high-premium plans (though due
to its delayed start date of 2018, the excise tax would only yield
USD 32 bn in revenues for 2010-2019), penalty payments from
individuals and firms that choose not to take up coverage, and fees
on insurers and other groups. In its second decade, the reform is
projected to reap even greater savings, ‗in a broad range around
one-half percent of GDP‘ over the decade 2020-2029 (CBO, 2010).
The eventual larger savings come from the slower growth in
premium subsidies beginning in 2019, as well as the change in the
indexing of the threshold at which the excise tax on high-premium
plans kicks in. Beginning in 2020, this would be indexed to the rate
of general inflation, instead of the inflation rate plus one percentage
point, meaning that increasingly more high-cost plans would be
taxed. While Democratic leaders touted these savings as evidence
that the health care reform bill will help bring down deficits and debt
over time (proponents of the reform translated the 0.5% of GDP into
USD 1.2 trillion in savings by assuming relatively strong rates of
7
May 20, 2010
The muted market reaction stands in contrast to the political reaction, with
Democrats hailing this as the legislation of the century and Republicans claiming it
a catastrophe of massive proportion.
19
Current Issues
GDP growth over the period), CBO stresses that its long-term
estimates are fraught with uncertainty.
Some costs aren’t counted in the
CBO cost projection, and some
questionable savings are included
Deficit hawks and opponents of the health care reform have
criticised the CBO projections for being overly optimistic, and some
skepticism is justified. The CBO estimates don‘t take into account all
costs and count as savings other things unrelated to health care.
Specifically, the estimates don‘t include the potential impact of the
legislation on discretionary spending, for which CBO has provided a
separate estimate. Additional discretionary outlays which are
expected to arise from the legislation, but which must be
appropriated by Congress, include at least USD 50 bn in specified
and estimated authorisations for grant and other programs
associated with the implementation of the legislation, in addition to
USD 10-20 bn in costs for various government departments (e.g.,
Internal Revenue Service and Health and Human Services) to
implement the subsidy program and the changes in Medicare,
Medicaid and CHIP. On the other side of the ledger, the CBO counts
USD 70 bn in ‗revenue‘ from a new voluntary long-term care
programme (The Community Living Assistance Services and
Supports, or CLASS), even though the fees initially paid to the
program must be used for payments to enrollees in the second
decade of the reform. In addition, the cost estimates include USD 19
bn in additional revenues from changes to the federal student loan
program, which were included in the Reconciliation legislation but
are totally unrelated to health care. If all of these additional costs
and questionable revenues are factored in, the federal deficit in
2019 would be approximately unchanged or slightly higher, rather
than USD 143 bn lower (compared to the baseline).
Congress has consistently
overridden a formula to keep
Medicare payment cost growth in
check – and may continue to do so
A larger potential upside risk to the cost of the reform is the political
uncertainty associated with some of the reductions in Medicare
spending. The CBO estimates that cuts in Medicare payments will
slow the growth in federal spending on Medicare to 6% per annum
in the next two decades, down from 8% growth per annum in the
past two decades (CBO, 2009). But this assumes the
implementation of reductions in Medicare payment rates for
physicians and other providers that ‗might be difficult to sustain over
a long period of time‘. Specifically, the reform leaves out a planned
21% reduction in physician Medicare payments, to put payments in
8
line with the ‗sustainable growth rate‘ (SGR) formula , which
Congress has postponed each year since 2003. The original House
legislation included a permanent correction to the SGR at a cost of
USD 228 bn over ten years; this ‗fix‘ was not included in the final
reform but is currently being considered in separate legislation. The
reform foresees further reductions in physician payments under
Medicare in subsequent years, as well as payment rate increases
for other providers of Medicare services (hospitals, etc.) below the
rate of inflation – all of which may prove politically difficult to
implement given the lobbying power of physician and hospital
interest groups.
8
20
The Sustainable Growth Rate formula, introduced in 1997, sets a target each year
for Medicare expenditures on physician services. If expenses are more than the
target, Medicare balances spending by cutting physician payments. Spending has
exceeded Medicare‘s target every year since 2002, and since 2003 Congress has
overridden the SGR formula and increased fees by a small percentage each year,
in an effort to keep doctors in the program. On April 16, 2010, Congress approved
another temporary postponement of the Medicare physician payment cuts. By
avoiding the cuts calculated by the SGR formula, the difference between targeted
and actual spending on physician services accumulates. Payment cuts are
postponed and therefore become larger every year.
May 20, 2010
Coverage vs. cost
The impact of the excise tax on costly
plans is uncertain
Another uncertainty that could have implications for the longer-term
cost of the health care reform is how companies will react to the
excise tax on high-cost health insurance plans. Employers may
switch to lower-cost plans even before the tax takes effect in 2018,
in order to avoid the tax itself (since the tax will be levied on
companies who ‗self-insure‘, i.e., pay their employees‘ health care
bills directly) or to avoid the increases in premiums that will
inevitably result as insurance companies pass on the tax. Firms that
decide to offer less generous health plans might compensate their
employees through higher wages (Gruber, 2009), though whether
this happens in practice remains to be seen. A general shift away
from the most costly health plans would be a positive development
in terms of trimming the premiums of overly expensive plans. But it
would likely result in higher out-of-pocket spending for individuals,
as a result of the reduction in plan premiums (and, in many cases,
plan coverage). Moreover, this shift would result in less revenue
generated from the excise tax, since fewer plans would exceed the
tax threshold, thus limiting the net savings estimated to result from
the reform in its second decade.
Under certain alternative scenarios,
the reform could increase, rather than
decrease, the deficit in its second
decade
The projected longer-term budgetary savings could potentially turn
to deficits if some of these and other politically difficult measures are
not implemented or are partially implemented. Congressman Paul
Ryan, a Republican from Wisconsin who fervently opposed the
health care reform, asked the CBO to analyse the effects of the
health reform legislation under the following alternative scenario:
1) No implementation of the excise tax on high-premium insurance
plans; 2) No change in the indexing of exchange subsidies after
2018 (i.e., subsidies would not effectively decrease; 3) Inclusion of
the ―SGR fix‖ to avoid Medicare payment cuts to physicians; and 4)
No implementation of the Independent Payment Advisory Board.
Taking these changes into account, CBO estimated that the
legislation would increase the federal deficit during the decade
2020-2029 by about 0.25% of GDP, relative to the current baseline
(i.e., no reform) — in contrast to CBO‘s predicted 0.5% of GDP in
budgetary savings if the legislation is implemented as written.
Additional caution is warranted regarding the ultimate cost of the
reform with respect to its potential impact on state and local
government finances, which the CBO estimates do not consider.
Under the final legislation, the federal government assumes 100% of
the cost of Medicaid and CHIP expansion for the first few years, thus
relieving state and local governments from additional costs – but
only temporarily. Many states are already getting nervous about
having to pay considerably more for Medicaid once the federal
government starts to pull back its generous support. With state
finances currently deep in the red, many states were planning to cut
back on Medicaid eligibility and benefits before the reform (or had
already been forced to do so). States may need further federal
assistance in order to attract a sufficient number of Medicaid
providers and avoid curtailing Medicaid benefits and coverage. This
would push up the cost of the reform.
A start at bending the health care cost curve
One-time cuts versus permanent
spending control
May 20, 2010
Most of the big ticket cost-saving measures in the first ten years
take the form of direct program cuts (e.g., reductions in Medicare
Advantage plan payments and Medicare provider reimbursement
rates) rather than fundamental, system-wide changes that would
slow the long-term growth of health care spending, in other words
actually flatten the slope of the cost curve. However, the reform
21
Current Issues
does take some important steps that have the potential to slow
down the growth in health care spending, though mainly over the
longer term:
The exchanges should help bring
down costs, but only for a small part
of the system
— The exchanges themselves should work to cut costs, by
encouraging greater competition among insurers and introducing
greater transparency about costs. Plans under the exchanges
will have to adhere to new rules that 80-85% of premiums must
go toward health coverage, which should help to limit spending
on administration, advertising and brokers. Plans offered in the
exchanges will also be rated on quality and price, potentially
leading to greater cost consciousness on the part of plan
purchasers. It is important to note, however, that the exchanges
will cover less than 9% of the total non-elderly population.
Excise tax takes effect only in 2018
— The excise tax on high-cost (‗Cadillac‘) employer-sponsored
health plans theoretically should encourage employers to switch
to less costly plans and insurers to trim the plans they offer. But
precisely how and when the companies will react is unclear at
this point. The Council of Economic Advisers (2010b) estimated
that the tax could reduce the rate of growth in health care
spending by 0.5 percentage point per year. But whether cost
reduction of this magnitude will actually materialise is
questionable, particularly given that the excise tax was watered
down in the final stages of negotiations, taking effect only in 2018
and with higher thresholds (it is now referred to as a ‗Maserati‘
tax).
Medicare board was watered down in
legislative negotiations
— Starting in 2014, a 15-member Independent Payment Advisory
Board will be tasked with reporting on Medicare spending growth
and presenting recommendations for spending reductions in the
event that Medicare costs are projected to exceed certain
targets. The Board‘s recommendations will take effect unless
Congress passes alternative measures to achieve the same level
of savings. However, the Board is forbidden from making
proposals that ration care, change Medicare benefits, elgibility or
cost sharing standards, or raise taxes or beneficiary premiums.
Likely due to these restrictions (which beg the question, ‗where
else can costs be cut?‘), CBO estimates that the Board will yield
relatively minimal savings of USD 13 bn over 2010-2019.
Medicare pilot programs geared
toward rewarding quality over
quantity
CER has potential to promote costeffective treatments – but funding is
small
22
— An expansion of pilot programs and provisions for so-called
‗bundled payments‘ under Medicare may help encourage
reimbursement of health care providers on the basis of value,
rather than volume, of care. Bundled payments are designed to
move away from fee-for-service toward payment for
performance. Yet while the Medicare pilot projects aimed at
rewarding performance and quality of care, rather than quantity,
are well intended, they will take a long time to bear fruit, and
there is no mechanism in the legislation for ensuring their
system-wide implementation.
— The legislation provides modest new government funding (USD
20 million for the 2010-14, though this follows USD 1.1 billion
allocated in the 2009 stimulus package) for Comparative
Effectiveness Research (CER). CER is a technique that
compares the impact of different options available for treating a
given medical condition for a particular set of patients, with the
goal of identifying cost-effective best practices and implementing
them on a large scale. The CER proposals were watered down
during the legislative debate, and CBO assigns virtually no cost
savings to them in the first decade of the reform.
May 20, 2010
Coverage vs. cost
— The reform also includes measures to cut down on fraud and
abuse related to Medicare and Medicaid payments, but CBO
assigns almost no savings to these measures.
Legislation left out some bigger-ticket
cost control measures
Several recommendations aimed at cost control were not included in
the legislation, including the so-called ‗public option‘, i.e., offering a
government-run health plan in the exchanges, which many experts
believe could have put pressure on private plans in the exchanges
to reduce their premiums. Medical liability reform (commonly
referred to as ‗tort reform‘) was also left out, despite Republican
urgings that it be included. Limits on excessive medical lawsuits and
defensive medicine aimed at avoiding lawsuits could have saved
USD 54 bn over ten years, according to the CBO. Moreover, the
legislation contains only limited measures to promote ‗healthier
living‘ and eliminated some proposals that would likely have had a
large impact in this area (for example, a tax on sugary soft drinks
aimed at reducing obesity, which was cut from the final legislation).
Divergence of opinions on whether
the reform will bend the health care
cost curve
A review of the reactions of prominent US health care economists to
the final legislation yields a wide spectrum of opinions with respect
to the potential of the reform to slow the growth in health care
spending. Some economists, such as Princeton University‘s Uwe
Reinhardt, share the disappointment that the reform did not include
more on cost reduction. Reinhardt concludes that the reform
‗doesn‘t do much‘ to bend the health care cost curve, but agrees that
it does ‗put in the architecture‘ necessary to eventually control
spending growth (Klein, 2010). David Cutler of Harvard University (a
former advisor to Obama) gives the reform better marks for cost
reduction, arguing that it has taken on board most of the ideas put
forth for controlling national health care spending, and concluding
that legislation represents ‗the most significant action on medical
spending ever proposed in the United States‘ (Cutler, 2010b).
How will the reform affect consumer
and provider behaviour?
The ultimate impact of the reform on health care costs will depend a
great deal on how it will affect behavior, which of course is quite
difficult to predict. Will the exchanges produce lower-cost plans and
eventually gain an increasing number of customers? Will they
encourage consumers to factor cost into their health care decisions?
If premiums continue to rise, will the federal government choose to
reduce the subsidies or increase the deficit? Will the excise tax
encourage insurers and employers to offer lower-cost plans, or will
resulting premium increases force more companies to pay the
penalty rather than offer insurance? Will Congress let the Medicare
taxes on high-income earners ensnare an increasing number of
people each year (since the income thresholds are not indexed to
inflation), or will it attempt to ‗fix‘ this through potentially costly
legislation? What will be the net effect of greater preventive care
coverage – to drive up demand (and prices) or to improve health
(and savings)? Unfortunately, none of these questions can be
answered with any certainty so early in the reform process.
Conclusion
On the whole, the health care legislation signed by President
Obama last month is a major reform in terms of health insurance
expansion, but a moderate reform in terms of health system reform
and cost control. Edward Kennedy, the late Democratic Senator
from Massachusetts who spent much of his public career advocating
universal health care coverage, called health care reform ‗the great
unfinished business of our society‘. Even after the far-reaching
reform of 2010, the business of health care reform in the United
States remains incomplete, particularly with respect to slowing the
May 20, 2010
23
Current Issues
unsustainable pace of health care inflation. The steps aimed at cost
reduction are important ones, but they do not go far enough and will
need to be followed up with additional measures and system-wide
implementation of cost-reducing strategies that prove, through
comparative research and other methods, to be effective at
changing the system so that it begins to reward quality and
efficiency of care, rather than quantity. With respect to cost control,
this reform should be viewed as a beginning from which to build. In
his September 2009 speech on health care, Obama declared that
he was not the first US President to try to reform health care, but
that he intended to be the last. He has taken a big step, but the
unsustainable US fiscal trajectory, largely driven by health care
spending, means he cannot be the last.
Amy Medearis (+49 30 3407 2950, [email protected])
24
May 20, 2010
Coverage vs. cost
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26
May 20, 2010
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Coverage vs. cost: The US health care reform in

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