Essentials of ACA

Essentials of ACA have been described in multiple publications, many of them partisan and opinion based. We endeavor to present the facts while limiting our commentary.

There are charges for those who fail to buy health insurance and a penalty on employers above a certain size who do not cover their employees. The Internal Revenue Service is the agency charged with enforcement. Those penalties on individuals, after a brief start-up period, are $695 annually for each individual (limited to three times that amount for any family) or 2.5% of income, whichever is greater. An individual without the required insurance and with an income of $20 000 pays a tax of $695; at $50 000 the tax is $1250; at $100 000 it is $2500.2

The ACA establishes a system of subsidies for the purchase of health insurance that are based primarily on income and family size.

The first subsidy is an expansion of the existing Medicaid program to include every American whose income is under ‘133% or138% of poverty’. In practical terms, in 2014, when Medicaid expansion takes place, individuals with incomes less than ∼$15 800 or families of four with incomes less than ∼$32 300 will become eligible for comprehensive, affordable health insurance.

Under ACA, there will be a new national uniform income qualification—having an income below the ‘133% or 138% of poverty’ level—and there is no longer any requirement to spend other assets or to belong to a covered category. This expansion of Medicaid eligibility is expected to provide health insurance to ∼18 million additional Americans by 2019.2

The second of these subsidies is an extensive cost-sharing arrangement for health insurance purchased through new ‘Exchanges’. The Exchanges are designed to be state-run administrations that will organize and approve heath insurance plans being sold by the insurance industry and present those plans accurately and in place as a form of ‘one-stop shopping’.2 The health insurance offered through these Exchanges is primarily available to those without employer-provided health insurance. These subsidies are available to Americans whose income is up to ‘400% of poverty’ ($93 700 for a family of four in 2014). At ‘133% or 138% of poverty’, an individual is responsible for the cost of health insurance up to a level of 2% of their income. For incomes above this level, the maximum percentage of income that anyone should have to pay increases in steps to 9.5% of income at ‘400% of poverty’. Table 2 provides examples of cost of insurance and contributions.5

The third subsidy consists of temporary (2-year) tax credits to small businesses as an incentive to begin offering health insurance. The credit can be up to 50% of the employer's contribution in businesses with fewer than 10 employees and an average wage under $25 000. There is no legal mandate for employers to offer insurance; however, there are penalties for employers of >50 persons who do not offer insurance or whose insurance places too much of the cost on the employee, which vary from $2000–$3000. These anticipated penalties are a substantial source of the revenue that is used to pay for the ACA.2

The ACA enacted a set of new insurance industry requirements. The ACA requires insurers to issue policies to anyone qualified who applies, to renew policies without regard to the health status of the insured, to eliminate pre-existing condition limitations and to require that rates in the Exchange and small group markets vary only based on age, the geographic area, family composition and tobacco use, thus reducing adverse selection.2 There are other requirements on the insurance industry including at least 85% of the premiums they collect from large groups to be spent for medical care.

Impact on healthcare spending

According to Congressional Budget Office (CBO) estimates, the number uninsured will be reduced by 32 million from the current level of 50 million. Despite this seemingly impressive number it will leave 23 million residents without health insurance in 2019 after the Act is fully implemented.6 7 It is also estimated that private insurance enrollment will rise steeply as a projected 15.8 million obtain coverage through health insurance Exchange plans in 2014.8

Provisions to expand coverage under the ACA will not affect large numbers of Americans until 2014. In the interim, it is likely that employer-sponsored insurance will continue to decline because premiums will almost certainly grow faster than wages and salaries,7 and the number of uninsured people is likely to increase.

After 2014, self-employed Americans and most workers in small firms will be allowed to purchase coverage through insurance Exchanges. The Medicaid expansion will add comprehensive coverage at little or no cost for the lowest-income adults with help to solidify the safety net and prevent the erosion of coverage among adults in future economic downturns.

In dealing with those who are privately insured, there is substantial debate on the impact of the ACA on premiums. While the administration officials have said that there will be reduction in premiums of $2500 for each individual,9 others have estimated that these premiums will increase significantly. However, the Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS) in their report released in April 2010 projected that ACA would increase the number of Americans with health insurance coverage but would also increase projected spending by ∼1% over a period of 10 years.10

Per the authors of the law, the ACA includes a series of Medicare reforms that will generate billions of dollars in savings for Medicare and strengthen the care Medicare beneficiaries receive.11 In addition, the Medicare Hospital Insurance Trust Fund is increased by 12 years, more than doubling the time before the exhaustion of the trust fund.12 CMS also noted that, historically, Medicare has often led the entire healthcare system in the adoption of quality and payment innovation. Consequently, they claim that the ACA ensures that Medicare will continue to serve as a leader in driving the widespread adoption of innovative quality and payment strategies.

Based on their claims of the savings, the law's authors have projected Medicare's fiscal outlook, both with and without passage of ACA. According to their calculations, by 2019 Medicare spending will grow by 6.8%, reaching $978 billion; with reform, spending will grow 5.3%, reaching $852 billion (figure 1).

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Figure 1

Projected Medicare fiscal outlook.

Further, Foster,13 Chief Actuary of CMS, in his analysis accompanying the Annual Report of the Medicare Board of Trustees, noted that Medicare per assumptions of the ACA, predicts that payment rates for doctors and hospitals serving seniors will be cut by 30% over the next 3 years. While the ACA, as amended, makes important changes to the Medicare program and substantially improves its financial outlook, there is a strong likelihood that certain of these changes will not be viable in the long range. He further reported that, specifically, the annual price updates for most categories of non-physician health services will be adjusted downward each year by the growth in economy-wide productivity. The best available evidence indicates that most healthcare providers cannot improve their productivity to this degree—or even approach such a level—as a result of the labor-intensive nature of these services.

Medicare Advantage Plans will have a significant impact on the Medicare budget and seniors.14 15 Medicare payments to plans are estimated to total $116 billion in 2010, accounting for 22% of total Medicare spending. The ACA reduces the federal payments to Medicare Advantage Plans over time, bringing them closer to the average costs of care under the fee-for-service Medicare program. The law also provides new quality bonus payments to plans, beginning 2012, and beginning in 2014, will require plans to maintain a medical loss ratio of at least 85%, restricting the share of premiums that Medicare Advantage firms can use for administrative expenses and profits.

Estimates from the CBO suggest that Medicaid will add 16 million enrollees, 50% of the expected 32 million, to Medicaid. The expanded coverage will be free to the states at least through 2016 and to uninsured persons whose income qualifies them for it. That having been said, it is well known that eligibility for health insurance does not always translate into actual enrollment—as evidenced by the millions of uninsured adults who are already eligible for Medicaid under current law.16

There are multiple other regulations impacting Medicare and Medicaid in the healthcare law. One such is the 15-member Independent Payment Advisory Board (IPAB) whose task is to make recommendations to reduce the per capita growth rate in Medicare spending.17 Another law having an affect is the Physician Quality Reporting Initiative, or PQRI.18

Under ACA, CMS officials will also be charged with designing 20 new payment systems for physicians. The statute specifically calls for the reduction of Medicare payment away from traditional fee-for-service, which serves ∼77% of seniors today, in favor of salaried physician payments.19 One of the challenges in evaluating the ACA involves cost estimates related to the sustainable growth rate (SGR) formula. Relying on statutory corrections and temporary doctors fixes, most observers agree that this system requires updating. As it remains the current system presently, it has been utilized for savings and deficit reduction measures in affordable healthcare law cost estimations and savings. Beyond methodological challenges, there are issues with the use of the SGR system in these calculations, that is, a system that most observers agree needs to be reformed.

Administrative spending and regulations

Regulatory reform is a part of the ACA. To put the size of the existing regulatory regime into perspective, Conover,20 estimated that the net cost of health services regulation was $169.1 billion annually in 2004.

In October 2009, a Thomson–Reuters report stated that the healthcare system wastes between $505 billion and $850 billion every year, an estimated one-third of the nation's healthcare bill.21 This report indicates that healthcare waste can be attacked and healthcare costs can be reduced without adversely affecting the quality of access of care. This report shows that elimination of paper-based medical record systems will save 6% of the spending.

Impact on practice of medicine

The ACA will make health insurance available to an additional 34 million Americans.2 However, while insurance may be provided, the coverage for many procedures may be either diminished or eliminated. There are well over 100 sections of the law dealing with various aspects of the Medicare programs including some reduction in payments for physician services.

The Congressional Research Service in its 21 April 2010 report22 observed that the law makes several changes to the Medicaid program that have the potential to affect physicians and how they practice. The report also adds that while some of the provisions have clear and direct consequences, for instance, altering physician reimbursement right away, others have the potential to influence how physicians might practice in the future by changing the incentives to encourage improvements in the organization and delivery of care.

Patient Centered Outcomes Research Institute

The Patient Centered Outcomes Research Institute (PCORI) focuses on comparative effectiveness research and provides impressions about the effectiveness of various modalities. It cannot be used for denial of coverage. PCORI is similar to the National Institute for Health and Clinical Excellence in the UK.24 25 Interestingly, the role of the National Institute for Health and Clinical Excellence in the National Health Service, which is highly proscriptive, has been questioned and the National Health Service is attempting to empower practicing physicians.26–28

Cost controls

Controlling the cost of healthcare is a major motivator for supporters of the ACA. They state that the projections suggest that with reform, total healthcare expenditure as a percentage of the gross domestic product will be 0.5% lower in 2030 than it would otherwise have been. Indeed, the commonwealth fund projected that expenditure for the whole healthcare system will be reduced by nearly $600 billion in the first decade.29

The CBO, in its scoring of the ACA, considered that one of the significant ways of paying for expanding health insurance coverage was the use of premiums from the new Community Living Assistance Services and Support (CLASS) Act Entitlement. In this proposal, the legislation begins collecting premiums for this insurance in 2015, but does not begin paying out benefits until 2020, which is outside of the CBO 10-year time horizon.1–3 The CBO scoring of the legislation takes those first 5 years of premiums and drives them to pay for its expansion and coverage. The diversion represents $70 billion of the offsets to the costs of the legislation. It also assumes that when it becomes necessary to begin paying benefits in 2020, there will be other premiums from other Americans to cover the cost. The second issue is related to the credit of $198 billion savings from reducing Medicare provider rates in future years. This is widely opposed by the physician community and has never been realized in the past.1–3 30 31