Systemic Reform of Health Care Delivery and Payment

Henry J. Aaron
Henry J. Aaron The Bruce and Virginia MacLaury Chair, Senior Fellow Emeritus - Economic Studies

December 10, 2010

The authors in this special issue of The Economists’ Voice were asked to write as if the Patient Protection and Affordable Care Act (the ACA, for short) is here to stay and all of the elements of the bill will be implemented. They have obliged. Chapin White describes the new law. David Cutler acknowledges that modifications may be made, but explains how the ACA, as drafted, will deal with coverage, quality, and cost. Mark Duggan and Bob Kocher briefly describe the challenges that administrators must surmount if the new health insurance exchanges are to improve the efficiency of the small-group and individual insurance market and deliver the subsidies on which the extension of coverage depends. Dana Goldman and Darius Lakdawalla look beyond the ACA to steps that could directly improve health.

The ACA became law on March 23, 2010,
but little of it is yet actively in effect. Not until
January 1, 2014 will the Medicaid extensions,
the individual mandate to buy insurance, the
state-managed health exchanges, and the subsidies
to make insurance affordable take effect.
The tax on high-premium plans will not
be imposed until 2018. Tight restrictions on
the operations of the Independent Medicare
Advisory Board will remain until 2018.

Before those dates, the law will have
to clear four hurdles. The odds that it will
emerge unscathed are small. It is important
to understand those obstacles and to consider
how they may change the reform or even prevent
it from taking effect.

The first hurdle is judicial. Several states
are challenging the constitutionality of the individual
mandate—the requirement that everyone
(with a few exceptions) who is not insured at
work or covered by a public program must personally
buy health insurance. Scholars are divided
on whether the Constitution empowers the
federal government to impose such a requirement.
The courts will decide.

If the individual mandate is unconstitutional
and Congress puts nothing in its place,
actual adverse selection, or the fear of adverse
selection, would render key elements of the
ACA unenforceable. The law bars insurance
companies from refusing coverage to anyone. It
establishes bands within which premiums must
be set. And it bans insurers from cancelling
coverage for those who have insurance. All three of these provisions would become unsustainable if the courts were to throw out the individual mandate. Without the mandate, people could wait to buy coverage until they became ill. How many would do so is unclear, given the subsidies available under the law to most families and individuals. But insurers would have to set prices to protect themselves against the possibility that many would ‘go bare’ until illness strikes. They would have to set premiums high enough to cover the costs of covering the sick. A dynamic, known as a ‘death spiral,’ could occur, in which ever-higher premiums would make insurance unattractive to all but an increasingly narrow group of increasingly sick people. Or the insurers could simply stop selling health insurance. Thus, the insurance market reforms hinge on the constitutionality of the individual mandate—or on an alternative incentive that is sufficiently powerful to maintain the risk pool.

Second, Republicans have sworn to seek repeal of the ACA. Doing so while President Obama remains in office is improbable. However, the election of a declared opponent to the ACA in the 2012 elections would leave a full year for repeal of much of the law. For that reason, the question of repeal will remain alive at least until the 2012 elections. In that election, Republicans may well win control of the Senate, as 21 Democratic senators (plus two Independents who caucus with them), but only 10 Republicans, will be up for re-election. Should the economic recovery proceed as sluggishly as current forecasts indicate it will, then the Republicans’ chances of winning the presidency will also be quite good. Repeal of all or major parts of the bill or substantial revision would then become possible, if not likely.

The third challenge confronting the bill is implementation. The technical challenges of implementation are enormous. For example, many observers believe that health insurance subsidies should be based on data that are more current than the tax information currently available to the IRS. Collecting such data, processing the information, paying out subsidies, and recovering overpayments are daunting tasks.

Implementation also faces major political obstacles. The ACA contains 115 specific or general authorizations to spend money for various purposes. Before expenditures can be made, however, Congress must appropriate funds under each of these authorizations. In addition, the ACA appropriated $1 billion for implementation, but this sum is only a small fraction of the $5-10 billion that the Congressional Budget Office estimates will be necessary to carry out the bill. Congress could stall the bill by failing to appropriate these funds. Congressional opponents could also stall the bill by refusing to appropriate the authorized funds. Equally effective would be language in appropriation bills forbidding the expenditure of funds for specified purposes, necessary to implement the bill. (Such purposes might include hiring staff or purchasing computers to collect and process information that is needed for the payment of subsidies or for the enforcement of specific provisions, such as the mandate that businesses provide insurance to their employees.) Bills might also include language barring federal employees from processing state applications for grants under the ACA. Given the balance of political forces, tough fights lie ahead.

The fourth group of obstacles is found in state capitals. The ACA requires each of the fifty states to set up health insurance exchanges.
It grants the states wide discretion as to how to organize the exchanges and where to place them in the state governmental structure. The ACA provides initial funding for the exchanges. After a brief period, however, each state will be responsible for the costs of operating the exchanges. Together with state agencies responsible for regulating health insurance, the exchanges will set the rules under which individuals and small groups buy insurance through the exchanges or outside of them.

How well the states do this job is of critical importance. Insurers will be tempted to try to dump high-cost patients in the exchanges. If they succeed, premiums charged in the exchanges will be very high, rendering insurance through the exchanges burdensome or unaffordable for many people (Jost, 2010). Many governors, attorneys general, and state legislators oppose the ACA. Some are party to the litigation alleging that the requirement that individuals carry insurance is unconstitutional. Should a state fail to set up an exchange or run it adequately, the ACA authorizes the federal Department of Health and Human Services to step in and perform the functions that the exchange is supposed to perform. However, the law cannot specify just what constitutes nonperformance. The risk, therefore, is that some governors or state legislatures, opposed to the bill as a whole, may create marginally-effective insurance exchanges, providing them with enough money and staff to prevent federal preemption, but not enough for them to operate effectively.

Should the mandate requiring individuals to carry health insurance be declared unconstitutional, much of the rest of the bill would become unsustainable, unless some alternative mechanism to create a sustainable risk pool were to be found. Various alternatives could work. Paul Starr has suggested that people who refuse each year to buy insurance should be barred for an extended period—say, four years—from buying insurance in the regulated market and from qualifying for income-related subsidies. The German health system uses such an arrangement and achieves near-universality. The answer to the question whether such a penalty could be adopted in the United States is not obvious. Nor is it clear how well such a penalty would work in the United States. Uninsured Americans would be able, as now, to show up at emergency room doors if they are seriously ill, because federal law requires that hospitals provide them services. The subsidies in the ACA might well tip the balance for most in favor of buying insurance. Such a provision would not have to work perfectly, just well enough to prevent the collapse of the health insurance pool.

Were the individual mandate to be declared unconstitutional, enacting some replacement would doubtless open up the whole bill to amendment. Approval of a time-limited exclusion from subsidized coverage or any other mechanism to maintain a risk pool would require 60 votes in a badly-fractured Senate and approval by a majority in a House of Representatives now controlled by a party that has pledged to repeal the law. Opponents of the law would be disinclined to agree to provisions that sustain it; at a minimum, their price for accepting such amendments would be high.

The possible denial of funding for implementation, and the possible inclusion of restrictive language, raise so many possibilities that it is not possible to explore them all. The administration might manage to cobble together sufficient resources or staff from other appropriations to move implementation
planning ahead, but delays would be likely. Whole provisions could be blocked. A few examples, chosen almost at random, include demonstration projects to test global payments covering the treatment of all services for particular conditions (section 2705); accountable care organizations of pediatric care (section 2706); grants or contracts for the development of measures of quality (section 3013); support of trauma care centers (section 3505); and funds to establish a prevention and public health fund (section 4002). In brief, Congress can effectively repeal much of the bill simply by failing to appropriate “such funds as are necessary” or the sums specifically authorized in the ACA.

The risks posed by failure to create viable state health insurance exchanges are less obvious than those described so far, but equally serious. Even with the best of will, state legislatures face difficult challenges in designing health insurance exchanges. To make competition among health insurance plans work, exchanges will have to design a limited number of insurance models, so that people are not overwhelmed by complex variations that are impossible to understand. The exchanges must design descriptive and evaluative information and present it so that customers can understand their options. States must regulate the sale of insurance both within and outside of the exchanges (or bring all insurance under the exchanges) in ways that avoid adverse selection. And they must discourage insurers from incurring high administrative costs through needless selling expenses. Success in avoiding competition via risk selection will hinge on the development of an adequate risk-adjustment system under which premiums will be allocated among insurers based on the risk profiles of enrollees. If exchanges are inadequately funded or staffed, the promised improvement in the efficiency of the small-group and individual insurance market will remain unrealized.

As things now stand, the future of the Affordable Care Act is highly uncertain. Yet, its success is of critical national importance. The reason, paradoxically, is the promise of the very provisions that have been subject to most criticism—those related to cost control. Quite apart from the bill’s extension of coverage to nearly all legal residents, the ACA is the instrument now at hand to control the growth of health care spending, the principal driver behind projections of growing federal budget deficits. To be sure, the ACA does disappointingly little to curb the tax advantages associated with employer-financed health insurance, a failing deplored by virtually every economist, Republican or Democratic. Apart from this serious failing, however, the bill contains, at least in embryonic form, virtually every idea for cost control that any analyst has come up with:

  • The bill retains health savings accounts.
  • It adds pilots and demonstration programs to develop accountable care organizations and medical homes.
  • It contains provisions to test the practicality of bundled payments and to develop value-based health insurance.
  • It contains additional funding for comparative-effectiveness research. It spurs the introduction of health information technology.
  • It directly curbs growth of Medicare spending and establishes a commission to recommend further reforms (although the Commission’s powers are undesirably limited).
  • It contains a significant expansion of preventive care, although the cost-reducing potential of preventive care is often greatly exaggerated (Mongan, 2008).

This menu includes all available ideas on how to control the growth of health care spending within the next few years. The most practical cost-control strategy that is now available to Congress is to accelerate the implementation of these provisions, not to stymie them.