Saturday, August 6, 2016

The Affordable Care Act, 2016

Here we are a little over six years, and two Supreme Court challenges, after enactment of President Obama’s signature piece of legislation, The Patient Protection and Affordable Care Act (also known as ACA and Obamacare), and today’s question is how well is it doing?

To answer that question, I think it important first to remind ourselves what the Administration and the Congress said when it was enacted.  What did they promise?

Much has been made of the promises of the President, i.e. “if you like your Doctor you can keep him, if you like your insurance you can keep it, etc.” but as in most things said by the government the devil is in the details and the marketing BS is usually just that.  At the end of the day what were the real expectations by those who wrote the legislation?

When it was enacted by the Congress it promised: Lower costs, coverage for those previously uninsured, removal of co-payments and coverage caps for essential services, an on-line exchange to promote competition, subsidy payments for those who could not afford the costs of mandated insurance, penalties for those who chose not to participate, and changes to Medicare and Medicaid to improve affordability, and penalties for small business and corporations that did not provide government approved coverage for their employees.

I don’t intend to get into the philosophical debate on whether universal health care is a human right, and an obligation of the government, or rather an undue imposition on a free market system.  Those who have opinions on this have already made up their minds on the answer and nothing I will write will make any difference to them.  I intend only to examine, with the help of the internet, how well the administration has kept its promise, and where it has fallen short perhaps look at why.  The one caveat I will make - is to point out we, the United States of America, already spend more on individual health care per capita than most of the rest of the developed world, and we as a nation also spend way more on everything than we take in through taxation and tariff.  Just to be clear when we create a new program it comes with a cost.  That cost is either paid through our revenue or our borrowing.  Right now these programs are part of our deficit spending. 

So let’s get to the discussion.

At its enactment, the proponents for the ACA said it would lower an average family’s health care costs by about $2,500 per year.  According to Forbes what we have actually seen is a continuation of straight line growth in costs that far exceed a simple inflation index.  For example, at the time of the ACA enactment the average family of four’s annual cost of health care was $18,074 (this included employer contributions, employee contributions, and out of pocket expenses).  In 2013 that cost had risen to $22,030, averaging over $6.5% per annum (a bit lower than the historical average), in 2015 (one year after full enactment) that annual cost had climbed to $24,671, or a 4.5% per annum increase[i].  So, from what I find on Forbes, and the Milliman actuarial firm’s analysis, this promise of lowered costs goes unmet.  One could and I suppose the government would say it has seemed to have a relatively minor impact (lower slightly) on the cost growth medical care has seen since the mid-90s.

The ACA changed the way the health insurance industry managed its risk (to maintain or increase their profitability).  Under the ACA the insurance companies must: allow young people to remain on their parents plans until 25, not drop customers who get sick while insured (i.e. reach their insurance caps), remove limitations for pre-existing conditions, and finally establish requirements for essential services and limit co-payments.  Essential services are defined by the government as covering about 8 to 10 specific areas ranging from ambulatory care to pediatric care.[ii]  Of course this government requirement directly affects the profitability of the health insurance industry so there is a quid pro quo requirement the government placed on the citizens and the taxpayer.  Specifically, all eligible people are mandated to have insurance and therefore increase the number of healthy people who will pay the costs of the sick.  The legality of this requirement was the basis for the first challenge to reach the SCOTUS.  In National Federation of Independent Business v Sebelius[iii] the court ruled the mandate equated to a tax and Congress had the right to impose such a tax.

Obviously it has been easy for the government to mandate the changes to industry standards, but in those mandates it has also attempted to continue its push to fully mandate the inclusion of abortive services on those organizations who sought to claim a religious exemption provided under the Religious Freedom Restoration Act (an act proposed by Democrats, passed almost unanimously by the House and Senate, and signed into law by a Democratic President[iv]).  In Burwell v Hobby Lobby[v] the court found for the defendants, forcing the government (i.e. Department of Health and Human Services) to develop a compromise position that ultimately overcame the defendants objection of having to pay for services they found morally objectionable.

Now we come to the question of the individual mandate.  This individual mandate is central to the success or failure of the ACA.  For those who don’t understand how insurance works it is really simple.  You might not like it, but it is really simple. Think of it as a Las Vegas table game.  A group of investors, really smart people, get together to bet that something will not happen.  They have looked at all the odds, they have weighted all the possibilities and they think the odds are a ship won’t sink, a plane won’t crash or you won’t get sick.  They then offer this bet to the person who wants to be protected if something bad happens.  They know the odds, and are willing to take some risk, but they also want to win the bet so they don’t enter into the agreement haphazardly.  They make similar bets with all kinds of people.  What they want to do is bring down their risk to as low as possible.  If they only insured people who know they were going to get sick they would not make a return on their bet, so they would have to charge the person who was sick a lot more.  What they want is a pool of really healthy people who are paying to cover the cost of the people who do get sick.  To help them out with this the Government promised them it would make all the healthy young people buy insurance to cover the cost of paying for the older sick people.  This is the individual mandate.  If you do not buy the insurance the government promised to insurance companies you would buy then they will lose money, stop insuring people, or raise the rates as we have seen for the past 40 years.  To incentivize you to buy the insurance they threaten you with a penalty in the form of an increase to your taxes.  If too many people choose to pay the penalty the cost of insurance goes up.

It is in the Government’s interest to paint a rosy picture about how many people are enrolling for insurance under the individual mandate.  In the first enrollment period in late 2013 to mid-2014 the government claims that over 8 million Americans signed up.  They are proud of the fact that of these 8 million about 2.2 million are in the young (18 to 34) age group.  What goes unsaid is that about 5.8 million would be in the older age groups more likely to need the insurance they are buying.  As Kavata Patel of the Brooking Institute[vi] points out this skewing of sign ups was not totally unexpected and the ACA has provisions for allowing the health insurance companies to increase rates to address the increased risk.

According to the IRS (always a trustworthy source), almost an equal number of people (7.5 million) chose to pay a penalty rather than sign up for insurance.  Additionally, another 12.5 million claimed exemptions that allowed them to not sign up. This is significantly higher than what the administration had projected and does not bode well for the ACA if the trend continues.  At the end of the day there are still 48 million Americans who do not have health care coverage.  I don’t believe this accounts for all the illegal refugees the administration has allowed entry so the number may be significantly higher.

To improve competition, the ACA called for states and the Federal Government to establish on-line insurance registration where an individual should, in theory, be able to shop around and get the best insurance for their personal needs at the most affordable rates.  This on-line exchange was supposedly modeled on what Massachusetts had established for its statewide programs.  We should all recall the fiasco that Secretary Sebelius and the Department of Health and Human Services went through as they tried to launch the federal site. 

Research shows the federal government has spent over $5 billion dollars trying to get the state exchanges up and running with a variety of successes and failures.  A significant number of states have opted not to even establish a state exchange.  From what I see only 17 of the 50 states have established an exchange,[vii] so competition certainly cannot be at the levels expected by the proponents of this legislation.  This fact is probably a significant contributor to the lack of participation and the increased costs of insurance the ACA has seen.

The next thing ACA did was to authorize subsidies for those who can’t afford the insurance.  We can debate the pros and cons of this, but so far no one seems willing to discuss the only germane question.  What do we not do to pay for this?  So far no one is willing to say how the government will balance the books.

Next we come to changes in Medicaid (state and federally funded programs for the poor and those with approved disabilities) and Medicare (federal program for the elderly).  The ACA changed the eligibility requirements for Medicaid, upping the income eligibility to 133% of the poverty level.  For Medicare there is a fundamental shift in how the government intends to reimburse the doctors and hospitals that provide care.  More on that in a couple of paragraphs.

Since Medicaid is jointly run by the states and the federal government it is hard to say definitively that everything is good or bad.  The ACA has in a number of cased significantly expanded the eligibility of the disabled to gain access to Medicaid, and the ACA promises to fully fund the expansion of coverage for the first three years and then fund only 90% of the cost after that.  Prior to the ACA Medicaid covered roughly 60 million citizens, after ACA it is estimated fully half of the newly insured people will come from the Medicaid expansion.  This is obviously a bill directly to the taxpayer or an increase to the annual deficit.

Medicare and Tricare remain as previously defined in law, but ACA funds the expected Medicare bills through 2029 (assuming Congress actually does what it promises).  The most significant change is how Medicare will reimburse the Doctors and Hospitals for care.

When the ACA was enacted people like Sarah Palin talked about “Death Panels” who would make a determination on the amount of heath care an individual would receive.  President Obama assured the nation that was not true, and the press ridiculed her for not knowing what she was talking about.  The Democrats remained united that this would not happen.  Well it turns out she was kind of right. It all hinges on the way the medical profession is compensated for their efforts.

Prior to enactment of the ACA Medicaid reimbursed Doctors and Hospitals for services rendered.  It is alleged that is why your doctor orders 18 different tests to determine your headache is not a brain tumor, or why the hospital bills you for using the toilet, or why each tissue you use is inventoried and billed to the government.  Under the ACA there is an expectation that payments will be made on an outcome basis.  Specifically, different illnesses have different expected outcomes and costs.  Rather than reimburse the Doctor or Hospital for what they have done, the government will provide a sum of funds available for treatment with the expectation the doctors/hospitals will spend that money wisely to insure the best possible outcome for the patient.  The problem comes up when the funds run out and the government says they won’t pay anymore and the patient is still sick.  If medicine were an exact science and patient care was fully understood and standard this might work, but I think we can agree it isn’t.  So somewhere along the line the Medical Professional will have to make a call, do I continue treatment or do I cast the patient off for someone else?

So who decides what the appropriate outcome based cost reimbursement schedule should be.  Why a group of bureaucrats and medical experts sitting on a panel in Washington of course.  What could possibly go wrong with this?

Finally, the ACA said that employers must provide group health insurance and pay their employees enough so they can afford any co-payment.  This has an obvious impact on the number of employees a company may hire, but so far that is okay for the proponents.  The limited job growth does not seem a reasonable excuse for those who want universal insurance.


We see that the ACA has failed on reducing the cost of health care for the average family.  It is more expensive today than it was when enacted and it does not appear that it will reduce costs anytime soon.  Why?  I think the answer to this is the fact the government proponents entered into this contract with the people and the insurance industry by placing the insurance industry’s needs and wants first.  They laid out a series of talking points and lies to convince the people it was a good deal, but at this time it is only making the insurance companies richer.

It has been successful in expanding coverage of the poor, the sick and the disabled, but it has failed to draw in the requisite number of healthy people to offset the costs.  This will mean future year costs for those who pay for coverage will be more expensive then the estimates show today.

The outcome based reimbursement schedules have not yet been fully implemented so it will be interesting to see how that affects the medical professions willingness to work with the Medicare dependent elderly.

 In conclusion:  I found this video to be a good (i.e. neutral) summary of what ACA is supposed to do. 

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