Federal Health Reform Is Largely Market-Based, Despite Contrary Assertions Randall R

Federal Health Reform Is Largely Market-Based, Despite Contrary Assertions Randall R. Bovbjerg and Stan Dorn October 2012

Introduction and Summary leaders for market-based health reform.1 A market works only for those who can afford to participate, so Opponents regularly deride the Patient Protection and the ACA creates advance tax credits for modest- Affordable Care Act as a government takeover of income people that will help millions of the otherwise- American health care. But the ACA relies primarily on uninsured purchase private coverage within the the private market to achieve coverage expansion, exchanges and add to the competitive rewards using public regulation to make the market work. available to plans. All legal residents with incomes The ACA is a direct descendant of the “pro- from 100 to 400 percent of FPL are eligible for competitive” reform strategy of the Reagan era, which subsidies, unless they are instead eligible for also proposed to structure competition among private Medicaid/CHIP or another public plan, or are offered health plans to expand coverage and promote better employer-sponsored insurance that the ACA value. After the ACA, as before, the vast majority of classifies as affordable. Americans younger than Medicare age will enroll in Incentives to seek good value in health coverage are privately operated insurance plans and will receive created by the ACA’s subsidy structure for individuals care from private physicians and hospitals. The ACA choosing among exchanges’ tiered offerings of plans. will expand coverage from private insurers as well as These incentives will be strengthened by a cap on the under Medicaid and CHIP (which also rely heavily on federal tax exclusion for employment groups with very private plans). high premiums that begins in 2018, the so-called 2 The ACA establishes new ground rules for insurance “Cadillac tax” —which will also encourage value- competition, similar to traditional practices of large conscious trade-offs in coverage decisions. employment groups, which require insurers to The structure of credits is a key feature for promoting compete on efficiency, rather than on avoidance of value. The new federal subsidy is pegged to the risky or costly enrollees. Starting in 2014, competing second-lowest premium charged for a “silver” health private health plans will cover the previously plan in the enrollee’s area—the so-called “reference uninsured, both under the new insurance-purchasing premium.” Silver is the label for plans with the second exchanges and under states’ Medicaid programs. -highest level of cost sharing (more than for platinum Most already covered Americans will be largely or gold, less than for bronze). Silver plans are to have unaffected, especially in large firms. an “actuarial value” of 70 percent; this means that Reform operates mainly by structuring incentives for payouts from the plan are projected to pay 70 percent private actors and states and by giving them new of the full expense of the covered services used by a information and coverage options rather than by standard population. Additional subsidies for imposing direct controls on behavior. As a result, the consumers with incomes at or below 250 percent of ACA does far more to expand personal choice and FPL raise actuarial value to between 73 and 94 autonomy than to reduce them, most obviously for the percent, depending on income. As with most insurance, much higher cost sharing applies for using tens of millions of Americans who are now either 3 uninsured or offered only a single option for insurance out-of-network caregivers. coverage. Subsidies cover the amount of reference premium that exceeds an enrollee share deemed reasonable in How the ACA Creates a More Effective light of family income. This is no government Insurance Market giveaway: all enrollees pay at least 2 percent of their income for the reference plan, which is the level Incentives, infrastructure, and information are key expected from enrollees with incomes from 100 to ways to achieve an effective marketplace. These 133 percent of FPL. Consumer premium obligations three i’s were memorably set out by early thought rise to 9.5 percent of income at 300–400 percent of

FPL. Everyone wishing to upgrade to a more costly (e.g., open enrollment, comprehensive benefits, silver plan or to a gold or platinum plan must pay the choice of plan, and enrollee contributions that do not full difference in premium themselves; and, while vary based on health status, age, or gender), from accepting a bronze plan lowers the enrollee’s pioneering states’ experience (e.g., coverage of premium share, it substantially increases out-of- childless adults, health insurance exchanges), and pocket costs. Premium subsidies are indexed to rise from prior pro-competitive and Republican proposals more slowly than expected health care costs, which (e.g., individual mandate, risk adjustment). means that consumers may see their premium charges rise in future years. In particular, two underappreciated aspects of traditional large-group financing parallel what the ACA Two key features of the subsidy design are so seeks to accomplish. First, such employers finance important that they deserve reemphasis: the “employer share” of premiums by setting aside funds that would otherwise be paid as wages.8 In 1. The full marginal cost of any upgrades is borne by effect, because wage offsets are not individualized, all enrollees. The structure creates a very powerful incentive for enrollees to carefully weigh added value employees are “taxed” to create a shared pool of against added cost, to seek out efficiencies much funding that supports all employees’ benefits. Employees who seek to postpone enrollment until more widely than is asked of enrollees in typical large they really need care can save only the relatively employment groups. A similar approach is used by small “employee share.” Given the extent of benefits the federal employees health benefits program, long lost by opting out, this arrangement gives employees lauded by conservatives as a good market model for 9 health insurance.4 Having consumers pay for the full strong incentives to enroll promptly and not free ride. price differentials, as noted by conservative thought Second, employers also typically charge the same share of premium to all employees, a form of full leaders, also “triggers much stronger price/quality “community rating.” competition among plans seeking the business of enrollees. Plans [must] compete to satisfy customers The ACA’s allegedly heavy-handed provisions are who are motivated to pick a plan according to the full much weaker than these widely applicable private- package of premium, services, quality, and sector practices. The ACA’s payments from anticipated out-of-pocket costs.”5 individuals who remain uninsured are much smaller 10 2. Government contributes toward a modest plan and much less reliably enforced than is the only, not the best plan or what families or their employer share of premium held aside from wages for caregivers consider “needed.” This approach is a all workers, whether or not they accept employer deeply conservative one, classically espoused by coverage offers. And the ACA calls only for “modified” President Reagan’s Commission on Ethics in rather than full community rating; premiums can vary Medicine and vigorously promoted by Professor Alain substantially by age and tobacco use and somewhat Enthoven, that era’s leading proponent of pro- by geographic location, with significant latitude for competitive reform.6 The level of premium subsidy state variation, as well as variation across plans depends on income, asking more of people who can within states. afford more, and cost sharing is subsidized for people The ACA likewise creates modest incentives for up to 250 percent of FPL. But every enrollee must medium and large employers to contribute to the cost pay some premiums and some out-of-pocket cost of their workers’ health coverage, rather than allow sharing, up to limits that also vary by income and tier 11 7 such costs to be paid entirely by taxpayers. While of coverage chosen. these payments are significantly below the cost of The requisite purchasing infrastructure comes from group coverage to most employers, they establish the new nongroup and small-group exchanges, along modest disincentives against firms dropping coverage with new ground rules for insurance that create the entirely or structuring health coverage offers to shift lifetime protections of open enrollment—protections costs to the public sector. not available at any price within unstructured insurance markets. Such rules are essential to avoid Modestly standardized benefit structures are another the segregation by risk that inevitably excludes many infrastructural component that promotes more people from coverage. Rules are also essential to effective competition. The ACA requires that plans create insurance market competition that focuses include 10 “essential health benefits.” Echoing that most on the value of health coverage rather than same federal employees plan previously so admired mainly on how insurers and customers can sort by conservatives, the ACA sets out only broad categories like ambulatory care, emergency services, themselves out according to medical risk and 12 expected expenditure. and hospitalization. It has been implemented not to impose a single, uniform national package for all but The ACA’s basic concepts and ground rules come to allow state discretion to adapt benefits from a wide from traditional practices of large employment groups range of private-sector models. Each state defines its

© 2012, The Urban Institute Health Policy Center • www.healthpolicycenter.org page 2 own comprehensive benefits package, and out-of- The Medicaid expansion also relies heavily upon pocket cost sharing can vary dramatically, even within private health plans. Medicaid and CHIP expansion “color” tiers, as long as overall actuarial value targets are an important part of the ACA. These are public are met.13 Competition would likely be enhanced with programs, of course, but new enrollment and service much greater standardization than the ACA calls for, delivery will occur mainly in private plans, as many and states have the option to move toward such states have largely privatized these programs’ standardization. Still, within each state, prospective coverage. Half of enrollees nationwide are already in enrollees will be helped to compare plans, the “color” private plans. By law, each such enrollee must have tiers sort plans by overall generosity, and it will be at least two plan options, so choice and information harder for a plan to compete through benefit remain important here, although low-income people variations that attract healthier enrollees or deter do not generally make premium contributions under chronically ill applicants.14 conventional Medicaid. Overall, at least 65 percent of the higher ACA enrollment will likely occur in private Another key set of ground rules further addresses this health plans.19 Thus, after the ACA, as before, a large tendency of individual insurance competition to focus majority of Americans younger than Medicare age will on risk segmentation. To actually lower growth in enroll in privately operated insurance plans, even health spending, plans need to hold down the cost of Americans eligible for Medicaid or CHIP. care and increase medical productivity, which attracting lower-cost enrollees does not accomplish. In addition, ACA implementation is striving to de- Plans that offer good benefit for reasonable price bureaucratize public help and to integrate access to should thrive, and plans should fail if they offer low Medicaid/CHIP and private coverage through benefit or high benefit mainly for people with low need exchanges. These strategies seek to lessen and, if of health care to begin with. Key rules here include possible, eliminate waiting lines, voluminous enrollment that is open to all regardless of health risk, paperwork, small print, and general “hassles.” State, risk adjustment and reinsurance payments that federal, and foundation efforts are creating vastly reduce the value to plans of attracting low risks, improved automated systems. The fledgling systems requirements that experience be pooled across feature online applications, real-time access to different policies sold by each insurer, both inside and information, eligibility determinations facilitated or outside the exchange, and severe penalties for plans made by an automated “rules engine” rather than civil that structure benefits or marketing campaigns to -service employees, electronic data verification of attract low-risk enrollees.15 income and citizenship (still required for assistance), and other improvements.20 (Privatization occurs here, Improved information for consumers is the third pillar too, as software and systems support for these efforts of the ACA structure. Standardized information on frequently come from private vendors.) plans must be made available electronically (and, hence, at low cost). The ACA also calls for exchange “navigators,” call centers, and outreach agencies to Market Changes at the Care Level help enrollees understand their options and make 16 The ACA does not impose changes in how care is good choices. In addition, the ACA continues delivered. It relies on newly motivated insurers and preexisting federal support for research on how well enrollees to effectuate improvements through market different medical interventions reduce morbidity and forces. mortality and improve health, which is what people 17 most want from insurance. Such information is vital The new insurance infrastructure, new rules, and for designing value-driven benefits, for example. new subsidies together empower purchasers of Research findings have already influenced how care, while substantial cost sharing promotes insurers pay for pharmaceuticals through tiered value-conscious shopping. Insured people enjoy benefits that encourage use of pharmacologically wider choice of caregivers than do the uninsured, but equivalent generic drugs. their decisions are influenced not only by their own preferences and resources but also by the options The ACA also promotes the use of information and incentives that their insurance creates for them. technology throughout all the complex parts of health What those options will be under the ACA depends care and coverage, extending earlier, often bipartisan on market developments in private coverage, but the efforts. This development holds great promise for 18 legislation makes two main contributions to this cost- improving quality and avoiding errors. It is also control strategy. expected to lower transactions costs and support more informed shopping. In addition, it undergirds the First, the tiered-benefit structure of the exchange simplification of coverage search and enrollment that (platinum, gold, silver, bronze) encourages very high is an important goal of the ACA. It is difficult and time levels of cost sharing at the time of service, heavily consuming to shop for insurance or to enroll in offset for lower-income households by sliding-scale Medicaid as traditionally operated. subsidies.21 The premium subsidy structure will likely

© 2012, The Urban Institute Health Policy Center • www.healthpolicycenter.org page 3 channel most modest-income people into the silver that a form of medical home could slow cost growth level of benefits, which carry an average of 30 while improving quality. Aspects of all these percent cost sharing. Actuaries estimate that such innovations have spread across plans, both public plans could offer, for example, insurance with an and private. individual deductible of roughly $2,000 to $4,000, 22 along with 20 percent coinsurance payments. The ACA Does Not Take Over or Regulate Some additional income-related protection comes from the ACA’s rules that limit out-of-pocket (OOP) the Health Care Economy cost sharing. The unadjusted ceiling is the relatively To judge from the partisan vitriol directed against it, high level already set for health savings account– one would think the ACA had enacted a fully public, qualified health plans, $5,950 for single coverage far-left-wing reform from the 1960s rather than the and $11,900 for family coverage in 2010, indexed center-right, consumer-choice law now on the books. for inflation thereafter (amounts substantially higher than similar OOP limits for many group plans).23 The ACA is not a “2,700 page monstrosity.”25 This This OOP ceiling is reduced by as much as two- figure overstates the true length by a factor of three. thirds for people with incomes between 100 and 250 But length in no way indicates the extent of an percent of FPL. intervention’s public control over the economy or over personal decisionmaking, and those are the effects Second, various provisions of the ACA support that determine how truly regulatory a statute is. A very increased development of information on the short statute could have ended private insurance and effectiveness of different modalities of care in moved all Americans into Medicare, but such a law’s support of better patient and provider brevity would offer little comfort to supporters of decisionmaking. The ACA also provides consumers private insurance markets. with much-improved information about the cost and quality of services offered by particular providers, as The ACA is not a federal “takeover” of health well as about potential conflicts of interest. This care.26 To the contrary, the ACA leaves in place most approach parallels new information on health plans of the current private “system” of insurance and all of and will help sharpen market competition when current care delivery. Most people can keep the consumers with significant out-of-pocket cost- coverage they had before reform.27 And states will sharing responsibilities choose a provider or have great flexibility to define many parameters of medical intervention. reform—including whether exchanges simply list available health plans or aggressively bargain or limit New forms of delivery are expected to evolve. To plan participation; whether exchanges are run by prosper in the restructured marketplace, insurance federal agencies, state agencies, or nongovernmental plans will need to devise new methods of operation organizations; how essential benefits are defined; that go far beyond the simple paying of caregivers’ which benefits newly eligible Medicaid consumers bills, even discounted bills. Likely this calls for receive; and whether exchanges determine Medicaid changing accustomed modes of delivering or paying eligibility or send applications to state Medicaid for care or encouraging enrollee-patients to do so. agencies. The ACA lays the groundwork for such innovation through numerous experiments with new methods Americans will not “now have a government of provider payment and health care delivery. Any bureaucrat between you and your doctor.”28 successful innovations can be applied more broadly Rather, privately insured patients will continue to by private insurers in their quest for lower-cost, make treatment choices under the rules set by each higher-value products that help them increase health plan, just as now. No civil servants will be market share and earnings. looking over patients’ shoulders as they and their caregivers decide the course of care. Under the ACA, new modes of care delivery and financing are likely to spread in all directions, as all The ACA does create a new, nonmarket way for payers strive to curtail the upward curve of future Medicare policymakers to address future growth in medical spending. In the past, private plans have per capita spending that exceeds specified levels. In introduced many innovations, such as tiered such cases, a quasi-public Independent Payment payment, other value-based benefits, and wellness Advisory Board—composed of appointed experts plans. On the public side, California’s Medicaid rather than civil-service “bureaucrats”—is required to program, Medi-Cal, pioneered selective contracting; propose measures to curb Medicare spending without New Jersey’s rate-setting program introduced restricting benefits or dictating treatment protocols, hospital payment based on diagnosis-related among other limits on its authority. Any IPAB groups, or DRGs,24 Medicare was a pacesetter for proposals will receive expedited consideration in hospital prospective payment more broadly; and Congress, which may substitute different changes to North Carolina’s Medicaid program demonstrated achieve the same budgetary savings or accept

© 2012, The Urban Institute Health Policy Center • www.healthpolicycenter.org page 4 implementation of the IPAB suggestions. This most ACA opponents. Policy complexity and a strong, procedure applies only if Medicare spending growth central role for the federal government need not go exceeds specified levels. The IPAB effectuates a form hand in hand. of federal budgetary discipline similar to the military base-closing paradigm, overcoming political pressure “Regulation” is not synonymous with public- from each provider group to stop changes in sector management of previously private reimbursement methods; it does not impose or decisions. In fact, as described above, the ACA’s encourage rationing, which is in fact explicitly barred rules heavily promote private health plans and by statute.29 markets. ACA implementation does largely occur through formal “regulations,” as opponents charge, The “individual mandate” can be characterized as although they again cannot resist exaggerating page the epitome of personal responsibility, not an length. However, opponents exercise mere semantic “intrusion upon individual liberty.”30 If the ACA’s sleight-of-hand by implying that any and all regulation insurance reforms were not accompanied by new exercises government power to shackle freedom. incentives to obtain coverage, people could more Regulation is the form taken by government action, readily than today choose to “go bare,” thereby “free regardless of the action’s content. Even tax cuts are riding” on insurers and their premium payers, implemented by regulation. 31 including government. Going bare to a lesser extent Further, government is supposed to act through would also free ride on hospitals, as it already does regulation. The requirement that it take consequential today. Hospitals routinely supply emergency services actions through written statute or regulation is a to the uninsured, heavily influenced by federal statute 32 fundamental aspect of the rule of law that prevents and subsidies from all government levels. The ACA arbitrary exercise of governmental powers.38 Open seeks to reduce such free riding by asking Americans regulation promotes transparency with clear to take personal responsibility and obtain a minimum explanations required and invites full input from level of coverage, assisted by income-related affected stakeholders. Such stakeholders routinely subsidies. Alternatively, they may pay the statutory sue if public action is unauthorized by regulations that penalty as a kind of free-rider fee. This call for meet these requirements. Regulation can, of course, responsibility is almost universally termed a mandate, be overdone or have unintended side effects—which although the law does not use the term, and the is why substantial rules cannot be promulgated provision is neither mandatory nor punitive—as the 33 without documenting their expected costs relative to Supreme Court took pains to explain. Long before benefits achieved and why oversight from Congress the ACA, such personal responsibility was supported can be valuable.39 The value of some rules may also by conservative thought leaders, House and Senate be debatable (the authors certainly do not always Republican leadership during the 1990s, and by both 34 agree on ACA issues). The larger point here is that parties in the Massachusetts reform of 2006. rules deserve to be debated on their own merits, not arbitrarily condemned en masse. “Bewildering complexity” does not face “everyone affected by this law.”35 Opponents have promulgated a diagram that purports to illustrate the What Alternatives to the ACA Are on ACA. It is crammed with boxes and interconnecting Offer? arrows of various shapes and sizes in bright colors. 36 The prime goal of alternatives offered by leading And it does look bewildering. So do the blueprints opponents of the ACA is not greater insurance and engineering flow charts for the construction of coverage but lesser government. They assert that even a small building. But that very complexity is deregulation would unleash market forces that would essential to assure that the building can actually be then reduce medical spending, thus eventually constructed and stand up to its intended uses. making insurance more affordable.40 Moreover, nearly all of that complexity is invisible to the building’s users. Numerous other policy ideas have been proposed as alternatives: help for people with preexisting The ACA leaves in place most features of the conditions, high-risk pools for uninsurable people, underlying U.S. financing and delivery “system,” high-deductible “consumer-directed” health insurance, which is itself already stunningly complex. This and deregulation of insurance by allowing insurers to starting point necessitates a complex measures to fill sell across state lines are policy perennials for today’s current gaps and correct current distortions.37 conservatives, along with tax subsidies for individuals Building the exchanges is probably the most rather than subsidies for group coverage.41 In complicated task in ACA implementation. Yet the general, such provisions seek to make health complexity will be largely invisible to exchange buyers insurance markets more like the markets for other and sellers. Finally, Medicare for All would have been goods and services and place great faith on much less complex but also much less acceptable to unstructured competition to improve value.

Discussions of the many ways that health sector subsidies on a sliding scale for those with modest competition differs from normal expectations trace incomes. Moreover, the ACA creates strong back to the early-1960s insights of Nobel laureate incentives for careful spending: Insurance premium Kenneth Arrow.42 Full consideration of how well the subsidies are pegged to a low-price plan, and above alternatives address his points goes beyond enrollees pay the full marginal cost of upgrading their the scope of this article. However, such alternatives coverage. Substantial cost sharing applies at the time seem likely to exacerbate rather than reduce the risk of care, again much reduced for modest-income segmentation of today’s unregulated nongroup people (although preventive services documented as market. Indeed, if individual tax subsidies were effective are covered without cost sharing). Large introduced without sufficient adjustment for health employers face a phased-in “Cadillac tax” if they risk, such reforms would expand segmentation into provide very high cost benefits. Finally, the ACA puts today’s group market. The young and healthy would substantial public effort into generating better get lower premiums (albeit with high administrative information about the content and price of private costs) but mainly through the equal but opposite health plans, the value and cost of services offered by reaction of higher prices for the older and less particular providers, and the effectiveness of medical healthy—that is, for those of them still able to get any services. Good information is, after all, the lifeblood of coverage at all. Reductions in overall health spending markets. are not guaranteed under such a cost shift.43 Unadjusted tax benefits for individual and group As all substantial government actions must be, the coverage alike would have a substantial probability of ACA is being implemented through open and public accelerating the decline of group coverage, thus regulations. Most of these regulations expand losing the advantages of low operating overheads choices, create incentives, provide states with multiple and broad risk pooling; proponents have a heavy options, and pay for research and trials of innovative burden of demonstrating that any new replacement approaches that, if successful, can later be adopted infrastructure would retain these advantages of voluntarily in the private market, as has frequently employer-sponsored insurance.44 occurred in the past. Fewer regulations operate to command and control Concluding Observations private actors, with important exceptions that restructure insurance markets. For example, insurers The ACA attempts to balance the equity goal of face new rules about their coverage much like the assuring coverage and the efficiency goal of rules imposed by large employers. Both individuals producing better value for money in health insurance and medium-to-large firms have new “mandates” to and care. provide or obtain coverage—financial incentives, To achieve these ends, the ACA makes tens of really, and non-draconian ones. Coverage must millions of Americans new consumers in markets for include certain minimum benefits, although states and private health insurance. That insurance will be insurers have substantial ability to alter the specifics. available on an open-enrollment basis, regardless of Employers sponsoring unusually generous coverage health history, and benefits will cover preexisting will also eventually face the new Cadillac tax. conditions, much as occurs today in large Health insurance under the ACA will continue to employment groups. Competition within the feature both public and private plans as well as both exchanges is being structured to focus on adding government-enacted “rules of the road” and market- value in medical services rather than segregating based incentives and mechanisms. Overall, the enrollees by health risk, as occurs in unstructured reform uses market strategies of informed choice markets serving individuals. among competing alternatives to effectuate the public All exchange enrollees will pay premiums and out-of- ends of expanded coverage and reduced growth in pocket cost sharing, reduced by new federal spending.

Endnotes 1. Paul Fronstin, ed., Consumer-Driven Health Benefits: A 2. The ACA would have begun the capping in 2013, but Continuing Evolution? (Washington, DC: Employee the Reconciliation Act amendments postponed it. Benefit Research Institute, October 2002). On cost sharing and out-of-pocket limits, see Larry Levitt and 3. The Kaiser Family Foundation (KFF) posts numerous Gary Claxton, “What the Actuarial Values in the explanations of ACA provisions at http:// Affordable Care Act Mean” (Menlo Park, CA: Kaiser healthreform.kff.org/. Relevant to the discussion here, Family Foundation, 2011); and “Patient Cost-Sharing for example, is Levitt and Claxton, “What the Actuarial under the Affordable Care Act” (Menlo Park CA: Kaiser Values in the Affordable Care Act Mean.” Family Foundation, 2012).

4. Stuart M. Butler and Edmund F. Haislmaier, eds., A defined the ‘types’ of benefits that ‘may be’ provided” National Health System for America (Washington, DC: and left implementation to negotiation and oversight of Heritage Foundation, 1989). See also Robert E. Moffit, participating plans’ contracts by the Office of Personnel State-Based Health Reform: A Comparison of Health Management. Insurance Exchanges and the Federal Employees Health Benefits Program (Washington, DC: Heritage 13. The benefit approach adopted by CMS seems quite Foundation, 2007). loose as opposed to controlling. Not only can each state craft its own essential health benefit list, but 5. Stuart Butler and Robert E. Moffit, “The FEHBP as a insurers may also offer benefit packages that exclude model for a new Medicare program,” Health Affairs 14 items on the state-adopted list, as long as the overall (4): 47–61, at 57 (1995), doi: 10.1377/hlthaff.14.4.47. value of covered benefits is comparable to the state model. Lisa Clemans-Cope, Linda J. Blumberg, Judy 6. President’s Commission for the Study of Ethical Feder, and Karen Pollitz, “Protecting High-Risk, High- Problems in Medicine and Biomedical and Behavioral Cost Patients: ‘Essential Health Benefits,’ ‘Actuarial Research, Summing Up: Final Report on Studies of the Value,’ and Other Tools in the Affordable Care Ethical and Legal Problems in Medicine and Act” (Washington, DC: The Urban Institute, 2012); Biomedical and Behavioral Research (Washington, Centers for Medicare and Medicaid Services, DC: U.S. Government Printing Office, 1983); Alain C. “Frequently Asked Questions on Essential Health Enthoven, “The History and Principles of Managed Benefits Bulletin,” February 2012; Phil Galewitz, “States Competition,” Health Affairs 12(suppl 1): 24–48 Moving Ahead on Defining ‘Essential’ Health Insurance (January 1993), doi: 10.1377/hlthaff.12.suppl_1.24. Benefits under Federal Law,” Kaiser Health News, 7. This brief takes no position on what level of subsidies September 30, 2012. On benefits under Medicaid, see best balances the competing goals of broadening Jocelyn Guyer and Julia Paradise, “Explaining Health access to care and creating incentives for value- Reform: Benefits and Cost-Sharing for Adult Medicaid conscious purchasing. Some conservatives argue for Beneficiaries,” pub. 8092 (Menlo Park, CA: KFF, 2010). tilting in the latter direction, progressives in the former. 14. Enthoven (1993; see note 6); Statement of Mark A. Hall 8. According to economic theory and some evidence, before the U.S. Senate Committee on Finance, Hearing labor-market competition generally reduces wages by on “47 Million and Counting: Why the Health Care enough to offset the employer’s cost of providing Marketplace Is Broken,” June 10, 2008. benefits. Mark V. Pauly, Health Benefits at Work: An 15. Risk adjustment is complex, and any system may be Economic and Political Analysis of Employment-Based “gamed,” so changes are likely to occur going forward. Health Insurance (Ann Arbor: University of Michigan That has been the experience in Switzerland, as Press, 1999); Ezekiel J. Emanuel and Victor R. Fuchs, sketched by Ewout van Ginneken and Katherine “Who Really Pays for Health Care?” Chicago Tribune, Swartz, “Implementing Insurance Exchanges—Lessons March 27, 2008. from Europe,” New England Journal of Medicine 9. Private insurers typically will not even sell on a group 367:691–93 (2012). The ACA creates penalties for basis without a high employer share of premium and gaming in Section 1313(a)(6). broad employee participation—which also keep down 16. State exchanges themselves decide whether agents administrative costs and the overall price per enrollee. and brokers can earn commissions to help their clients 10. Most tools used by the Internal Revenue Service (IRS) buy exchange plans, albeit subject to federally specified to enforce tax obligations are unavailable to collect regulatory limits. The Massachusetts exchange decided penalty payments for uninsurance. In effect, the IRS’s to provide for such fees, lest agents steer small only method of securing penalty payments from a businesses people away, but made them lower than in resisting taxpayer is to reduce the taxpayer’s refund the private market in light of the sales assistance amount—a method easily circumvented, in most cases, provided by the exchange structure itself. by simply reducing tax withholding amounts. See also note 33. 17. Patient-Centered Outcomes Research Institute (PCORI). 11. ACA Section 1513. If a firm with at least 50 full-time employees does not offer coverage, and any full-time 18. David Blumenthal, Health Information Technology: employee receives premium tax credits, the company What Is the Federal Government’s Role? report must pay $2,000 a year for each full-time employee in prepared for the 2006 Bipartisan Congressional Health excess of 30. If a firm with 50 or more full-time workers Policy Conference, March 2006; Office of the National does offer coverage, but some of those workers qualify Coordinator for Health Information Technology (ONC), for and receive tax credits in the exchange because the home page. coverage offer is not affordable, the company pays 19. All exchange enrollees will have private coverage. The $3,000 for each such worker who obtains subsidies in 65 percent figure assumes that two-thirds of net new the exchange. ACA expansion will occur through Medicaid and CHIP 12. As explained by Butler and Moffit in note 5 above. (Fredric Blavin, Matthew Buettgens, and Jeremy Roth, “Private plans within the FEHBP [Federal Employees State Progress Toward Health Reform Implementation Health Benefits Program] must meet ‘reasonable [Washington, DC: The Urban Institute, 2012]; minimal standards’ regarding benefits. But the law Congressional Budget Office, letter to Nancy Pelosi, creating the FEHBP does not specify a comprehensive Speaker, U.S. House of Representatives, March 18, set of standardized benefits. Congress has merely 2010) and that 49.96 percent of these enrollees join

private managed care plans (the rate for October 2010; the health reform promise that people who like what Kathleen Gifford, Vernon K. Smith, Dyke Snipes, and they have can keep it, at least in the near future. If a Julia Paradise, A Profile of Medicaid Managed Care plan changes substantially from what people previously Programs in 2010 [Washington, DC: Kaiser bought, in key provisions like cost sharing, it is Commission on Medicaid and the Uninsured, 2012]). considered new coverage that must meet the common That percentage will likely be higher under the ACA. standards. So, the number of grandfathered plans will First, newly eligible Medicaid enrollees will be healthier decline over time. than the current norm, and relatively healthy beneficiaries are particularly likely to receive Medicaid 28. Alana Semuels, “Romney uses healthcare ruling to rev managed care. Second, the observed trend is that over up crowd in New York,” Chicago Tribune, June 29, time states expand the share of enrollees in private 2012. managed care. 29. ACA, sec. 3403 (no recommendation may “ration 20. California HealthCare Foundation, “Enroll UX 2014: health care, raise revenues or Medicare beneficiary Welcome to Coverage,” explanatory web page on the premiums …, increase Medicare beneficiary cost “first class user experience [UX]” design for sharing … or otherwise restrict benefits or modify exchanges, with links to many other sources; “New eligibility criteria”). See also Bara Vaida, “The IPAB: England States Collaborative for Insurance Exchange The Center of a Political Clash Over How to Change Systems, Medicaid and Exchange automation.” The Medicare,” Kaiser Health News, March 22, 2012; resulting de-bureaucratization will often flow beyond Defense Base Closure and Realignment Commission, health care programs. Some states intend to 2005 Defense Base Closure and Realignment horizontally integrate eligibility determinations for a Commission Report, September 2005 (especially broad variety of other programs into their streamlined chapt. 3 on history). automation—including food stamps and income 30. Carmen Cox, “Healthcare: Appeals Court Skeptical of support, according to Urban Institute case studies of Administration’s Argument?” ABC News Radio, June 8, ACA state implementation. 2011 (quoting Florida’s attorney general, Pam Bondi). 21. The silver level of coverage is defined as providing 70 31. Linda J. Blumberg and John Holahan. “The Individual percent of the actuarial value of benefits, but cost- Mandate—An Affordable and Fair Approach to sharing subsidies increase that coverage to 94 percent Achieving Universal Coverage,” New England Journal for enrollees with incomes at 100–150 percent of FPL. of Med 361:6–7 (2009). The subsidies decline to 73 percent for people at 200– 250 percent of FPL; they are phased out at 250 32. Centers for Medicare & Medicaid Services, percent of FPL. Kaiser Family Foundation, “Explaining “Emergency Medical Treatment & Labor Act Health Care Reform: Questions about Health (EMTALA),” March 26, 2012; Jack Hadley, John Insurance Subsidies” (Menlo Park, CA: KFF, 2012). Holahan, Teresa Coughlin and Dawn Miller, “Covering 22. Levitt and Claxton, “What the Actuarial Values in the the Uninsured in 2008: Current Costs, Sources of Affordable Care Act Mean.” The ACA silver tier is less Payment, and Incremental Costs,” Health Affairs 27 generous than typical large employer-sponsored (5):w399–415 (2008), doi 10.1377/hlthaff.27.5.w399. coverage. 33. Howard Gleckman, “Obamacare’s Uninsured Tax Is a 23. Kaiser Family Foundation and the Health Research & Mouse,” Tax Policy Center TaxVox blog, posted July 3, Educational Trust, Employer Health Benefits 2012 2012. Mr. Chief Justice Roberts wrote for the Court that Annual Survey (Menlo Park, CA: KFF, 2012). “the shared responsibility payment merely imposes a tax citizens may lawfully choose to pay in lieu of buying 24. Diagnosis-related groups were pioneered by New health insurance. … Imposition of [this tax] leaves an Jersey, then implemented nationally by Medicare, to individual with a lawful choice to do or not do a certain restructure hospital reimbursement, moving away from act, so long as he is willing to pay a tax levied on that open-ended fee-for-service payment toward a defined choice.” NFIB v Sebelius, 132 S. Ct. 2566, 567 U.S. payment amount for each patient, based on the ___ (2012), No. 11–393, slip opinion at pp. 38, 43–44. patient’s diagnoses. 34. J. D. Kleinke, “The Conservative Case for Obamacare,” 25. NFIB v. Sebelius, transcript of oral argument, pp. 16, New York Times, September 29, 2012; William H. Frist, 27, 38 (Mr. Chief Justice John Roberts and Mr. Justice “An Individual Mandate for Health Insurance Would Antonin Scalia); Mitt Romney, “Replacing Obamacare Benefit All: Nobody Should Fear Bankruptcy due to with Real Health Care Reform,” New England Journal Illness or Injury,” USA Today, September 28, 2009; of Medicine, September 26, 2012 [Epub ahead of print] Martha Bebinger, “Massachusetts Health Reform 1-5, doi: 10.1056/NEJMp1211516. Personal Responsibility: How Mitt Romney Embraced 26. Bill Adair and Angie Drobnic Holan, “PolitiFact’s Lie of the Individual Mandate in Massachusetts Health the Year: ‘A government takeover of health care’,” Reform,” Health Affairs 31(9): 2105–13 (2012), December 16, 2010. doi:10.1377/hlthaff.2012.0814. 27. New rules are most extensive for insurers offering new 35. Joint Economic Committee Republicans, “Updated coverage. Preexisting coverages are “grandfathered” Chart Shows Obamacare’s Bewildering Complexity,” out of most but not all ACA standards (not the new press release, August 2, 2010 (quotation is from rating rules, for example). This approach effectuates Senator Sam Brownback).

36. Joint Economic Committee, Republican Staff, would effectively deregulate coverage in states wishing Congressman Kevin Brady, Vice Chairman, to provide more consumer protections and modified “Understanding the Obamacare Chart” (chart originally community regulation akin to the ACA, contrary to released July 2010). See also note 37, next. traditional conservative states-rights federalism. Individual tax subsidies might apply to either 37. Jonathan Cohn, “Your Health Care System: A Map,” supplement or replace today’s employment group The New Republic, July 1, 2009, (graphic covers only subsidies. Focusing all help on individuals could well financing, omits current regulation, by federal, state, end employment-based coverage rather than building local, and private authorities). This and the Republican upon such coverage as the ACA does—quite a radical chart are both presented and discussed in Karen shift, which has not been accompanied by sustained Tumulty, “Health Care: Which Chart Scares You attention on how to replace the natural pooling, More?” Time Magazine/Swampland, July 16, 2009. streamlined purchasing, and open enrollment that 38. “What Is the Rule of Law?” (Washington, DC: World employment groups traditionally provide. It is an open Justice Project). question how much the subsidies might be risk adjusted, although Governor Romney has very recently 39. Office of Management and Budget, Office of seemed to endorse adjustment (Romney 2012; see Information and Regulatory Affairs, 2011, Report to note 25, above). Congress on the Benefits and Costs of Federal Regulations and Unfunded Mandates on State, Local, 42. Kenneth J. Arrow, “Uncertainty and the Welfare and Tribal Entities. Economics of Health Care,” American Economic Review 53:941–73 (1963); Mark A. Peterson, ed., 40. Noam N. Levey, “Republicans focus on repealing, not “Special Issue: Kenneth Arrow and the Changing replacing, ‘Obamacare’: Their retreat from a 2010 Economics of Health Care,” Journal of Health Politics, campaign promise to deal with the nation’s healthcare Policy & Law 26, no. 5 (2001); Gary Claxton, How problems their own way has even some conservative Private Insurance Works: A Primer (Menlo Park, CA: experts saying voters deserve better,” Los Angeles KFF, 2002); D. Andrew Austin and Thomas L. Times, July 11, 2012. Academic proposals exist to Hungerford, The Market Structure of the Health seek expansion as well as different approaches to Insurance Industry, report R40834 (Washington, DC: accentuating market forces, but they have not obtained Congressional Research Service, 2009). political traction. Joseph R. Antos, Mark V. Pauly, and Gail R. Wilensky, “Election 2012: Bending the Cost 43. In addition to the higher administrative costs just Curve through Market-Based Incentives,” New England mentioned, health prices may rise, as a larger number Journal of Medicine 367:954–58 (2012), doi: 10.1056/ of smaller competitors lose leverage in negotiating with NEJMsb1207996. providers. On the other hand, insurers (or providers) that are too large obtain some monopoly power and 41. High-risk pools institutionalize risk segmentation, taking may overcharge customers. Such problems pose a small share of high-risk applicants out of the continuing challenges for public policymakers of all “standard” market but leaving the latter unregulated. political orientations and go beyond the scope of this Senator John McCain’s 2008 Republican presidential brief. See, for example, Stephen Zuckerman and John campaign endorsed them, and transitional pools were Holahan, “Despite Criticism, The Affordable Care Act created by the ACA to help high-risk people until full Does Much to Contain Health Care safeguards become effective in 2014. State pools have Costs” (Washington, DC: The Urban Institute, 2012). almost always been very small, and the new federal pools have been one of the least successful of the 44. Governor Romney has mentioned one important ACA’s early changes, with enrollment far below regulatory intervention: risk adjustment for any subsidy projected levels and average spending per enrollee far (see notes 25 and 41, above). The differential needed above. Consumer-directed health care has come to to equalize purchasing power could be politically mean high-deductible coverage, not a systematic challenging, however, in addressing the actuarial gap reform of market infrastructure, incentives, and between a healthy 20-year-old and a 64-year-old with information. Sales of insurance across state lines multiple chronic conditions.

The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

About the Authors and Acknowledgments Randall R. Bovbjerg and Stan Dorn are senior fellows at the Urban Institute’s Health Policy Center. The authors would like to thank their colleagues John Holahan, Judy Feder, and Matt Buettgens for many contributions to this brief.

The Urban Institute is a nonprofit, nonpartisan policy research and educational organization that examines the social, economic, and governance problems facing the nation. For more information, visit www.urban.org. Additional work by the Health Policy Center and information about its staff can be found at www.healthpolicycenter.org.