Thoughts on the Affordable Care Act

By: Matthew Kukla, Ph.D.

Dear friends and family,

I just finished my PhD in Health Systems Financing, Economics and Policy and recently returned from working at the World Health Organization in Geneva.  While my background focuses on the U.S. health care system, most of my work involves reforming health systems in other developed and developing countries.  I essentially deal with (a) how institutional frameworks, governance, and political systems impact health care and (b) how health care dollars are collected, pooled, and redistributed / paid among the big three (insurance, individuals and medical providers).  Because this is the primary goal of the Affordable Care Act (Obamacare) and given the tremendous amount of misinformation circulating about these issues, I have written a summary of (a) what our existing health care system looks like, notably the root causes of rising costs and the uninsured, (b) the true content of the Affordable Care Act, (c) what the ACA should have done differently, and (d) some additional insights into our health care system that you might find prevalent and interesting.

While I have much to learn over the course of my career, I want to ensure your confidence that this write-up is accurate and non-biased.  My data comes from my own work and a range of sources including the World Bank, World Health Organization, top academic literature, and the best non-partisan policy think tanks (RAND, Commonwealth Fund, Health Affairs, Kaiser).  I have also been critical of many liberal and conservative “talking points” as well as the ACA, while providing the most updated evidence where possible.

The Problem

Interestingly, the U.S. health care system is not actually a system, but something that has been put together piecemeal over decades of policymaking.  Our political system is built for incremental policymaking at best; thus health care reforms have built on one another only to fill in any existing gaps.  Yet we have never stepped back, looked at the big picture and restructured the entire system to be coordinated, efficient or effective.  It’s like continuing to put band-aids on a gushing wound, when what’s needed is surgery.  Or it’s like having 40 workers operate an assembly line that’s meant for 15 people — instead of removing them and simplifying, we add more people to manage those 40.  The system becomes increasingly layered, inefficient, ineffective, complex and stagnant.  The following is a brief overview of what our existing health care system looks like as a result of this reform process.  While there is no silver bullet or single change that will fix our health care system (despite what people tell you), overwhelming evidence from dozens of developed countries and the US suggests that the following factors account for the vast growth in our healthcare costs (18 percent of GDP vs. 8-13 percent in most other developed countries) and lack of health care coverage (19 percent of the population / 49 million vs. 1-2 percent in other countries).

(a)   Multiple insurance schemes finance U.S. medical care (private insurance companies, Medicare, Medicaid, SCHIP).  Studies cite that smaller insurance schemes that group fewer individuals are costlier than larger ones due to worse economies of scale and negotiating power.  All developed countries have found that merging multiple insurance schemes into one or two large insurers has lowered insurance costs by up to 20 to 23 percent.  While private insurance has historically been small and public insurance large, this doesn’t have to be the case.  Many of the most efficient health systems have a large, non-profit private or semi-public insurer that collects money from all citizens, is autonomous from government, yet is also subject to accountability and regulated.  Purely public insurers by definition are not autonomous from government and should be avoided when possible, because they come with greater inefficiency, corruption, fraud, waste.  Multiple smaller, private insurers typically exist under the larger insurer and compete for this funding by contracting high quality medical providers and thus attracting more patients.  In the health care field this is called “managed competition” and has proven extremely successful.  It uses a large insurance pool to reduce insurance costs and smaller pools to maximize provider and patient competition where it works.

(b)   Among these schemes, private health insurance is the U.S.’s primary form of medical coverage (60 percent of the population).  There are mounds of literature by the World Bank, WHO and other agencies suggesting that without any regulation, private insurance offers plans that optimally match each individual.  In other words, every person can choose his or her own, unique medical plan but should expect to pay his or her actuarial cost.  For the sick or elderly, this means incredibly high costs; for young and healthy individuals this means extremely inexpensive insurance.  As such, completely unregulated private insurance is highly inequitable, because most people (especially the sick, elderly and poor) cannot afford the true cost of medical coverage they need.  Improving its equity requires that it be regulated (setting minimum coverage levels, preventing insurers from excluding the sick, limiting how much they can increase premiums, mandating that individuals buy insurance, etc).  Countries that want private insurance must also expect to incur very high costs due to worse negotiating power, greater administrative expenses, or if necessary more regulation.  For these reasons, when a developed country uses private insurance to cover basic care for the general population, they regulate it.  However, if they want to use private insurance as supplemental care (ie allow patients the choice of better doctors, hospital rooms, additional coverage for elective care or other services) for a select population, like the wealthy, countries leave it unregulated.  The U.S. is the only country in the developed world where private insurance is the predominant form of coverage and lacks adequate regulation.  This is the major cause of our high-uninsured population.

(c)   While all insurers in the U.S. pay medical providers differently, nearly all of them reimburse medical providers inefficiently.  In other words, their existing payment methods encourage doctors and hospitals to over-provide medical care and charge fees more than other payment methods would.  Studies show that cutting payments to doctors and hospitals would only decrease health care costs by 2-3 percent, while reducing work ethic and morale significantly.  However, the real cost savings come from reducing excess medical tests and treatments – particularly specialty care and drugs that are expensive.

(d)   Every different insurance scheme negotiates with each provider for every medical service via paper records (not electronic).  As a result, two things happen.  First, this creates major administrative expenses.  Second, because patients have no electronic medical record and because insurers, hospitals, and doctors do not coordinate medical care, the redundancy and overlap of tests and treatment is astronomical.  Overall, medical costs rise.

Imagine then for a moment that you are writing the health care bill.  You know the problem and acknowledge that you must expand coverage, drastically cut costs yet improve quality of care – but realize that you are restricted in several ways.  First, the population wants to keep this system largely in tact — private insurance, Medicare, Medicaid, insurance through companies — so you can’t overhaul it but must work with what you’ve got.  Second, if you did slash costs and re-structure the entire system all at once into an efficient and simplified machine, such drastic cuts would shock the economy as unemployment rose (recall health care makes up 18 percent of our economy).  Finally, our political system is the primary culprit, because it leads to inefficient and ineffective policymaking (partisanship is only making this worse).  If you don’t want interest groups to crush your bill, you must appease them.  If you want Congress to vote for your bill, you must also buy their vote.  Those who hold out the longest get the most in return — they get bridges in Alaska and billions of dollars that have nothing to do with healthcare, but end up in the final bill.  As president, you acknowledge that of the 2500 pages in the ACA only half of it actually matters.  Even the half that matters, while well crafted and effective, is only as good as the political system that developed it.  Yet you can’t veto single items in the bill, so you accept it all or reject it all.  Going back to the drawing board will kill you politically and even alternative health care bills will face these same limitations.  Further still, the political landscape will change and the opportunity to pass a new bill will disappear.  What do you do?  In short, presidents steer major policy decisions but are often, but not always, held captive by broader political, legal and cultural structures.

The Bill

As such the Affordable Care Act aims for incremental change by primarily expanding insurance coverage and modestly tackling medical costs (though leaving the bulk of this work for later reforms).  This is by and large what most other countries have done, and evidence suggests that (a) this is a necessary first step and (b) future reforms to tackle costs are critical for a health care system to remain viable, efficient and effective.

As you may know, this reform – according to the Congressional Budget Office – will (a) reduce the uninsured from 50 million to roughly 17 million and (b) be budget neutral.  Why is this?  Because despite the cost of expanding coverage, the bill actually tackles some of the above problems mentioned in a-d.  There is also an enormous amount of fat to trim from our health care system, which will spend 30 trillion dollars over ten years while the ACA will only spend 900 billion once.  However, it is true that the ACA does not tackle costs as well as it could or should.  This is a major concern for myself and more experienced health economists, as our ballooning health system costs will cripple the economy and are unsustainable.

With that said, the following is a summary of the ACA:

(1)   Because private insurance remains the primary form of health coverage in the US, the ACA solves the issues above in part (b) by expanding regulation of private health insurance.  This includes (1) an individual mandate to expand coverage and reduce costs, (2) requiring insurance companies to offer a number of pre-defined benefit packages, (3) preventing insurance companies from dropping individuals or increasing their premiums beyond a reasonable level, (4) requiring that only moderate to large companies above 50 employees offer health insurance, (5) requiring insurance companies to keep administrative costs below a certain level.

(2)   To help individuals afford and purchase private insurance coverage, the ACA (1) offers subsidies for insurance premiums to households, (2) offers tax breaks and incentives for companies to provide insurance to their employees

(3)   The ACA also increases taxes on private insurance companies and pharmaceutical companies, particularly for very comprehensive and costly plans / drugs.  Most economists (myself included) view this as harmful and largely inefficient, with the govt only using it as a way to increase tax revenues.

(4)   The ACA expands public insurance coverage by (1) expanding eligibility for Medicaid (the program for the poor) by increasing which individuals are eligible to join and offering 100 percent funding to states through 2018, 90 percent through 2010, and the states take over significant responsibility afterwards, (2) expanding eligibility and federal funding to states for SCHIP (the program for poor kids)

(5)   The ACA solves part (a) and (b) above by creating a public or private non-profit insurance company in each state called the “Exchange.”  It is subject to all the regulation above, and only offers coverage to individuals as well as companies below 50 employees.  Over time, companies up to and above 100 employees can join.

(6)   To solve part (c) above but only through Medicare (plan for the elderly) and Medicaid, payments will reward providers and private insurance plans if they offer better quality of care.  Medicare will also establish an advisory board to limit cost growth and determine how much should be paid for various services.  This advisory board can only limit provider payments – not how much patients pay or the services they receive.  These programs will also finance generic drugs more than brand name, expensive drugs.  It will also increase reimbursements to primary and preventative care so as to incentivize patients to not overuse unnecessary and expensive specialty care.  The ACA does relatively little to change how private insurers pay providers.

(7)   To solve part (d) above, the ACA funds the development of electronic medical records as well as offers financial rewards for care coordination among providers and insurance companies (if they work together to provider high quality medical care for each patient).  These are called “Accountable Care Organizations” as well as “Medical Homes.”

(8)   To solve part (c) above, the ACA funds comparative effectiveness research to ensure that we are paying providers for the most efficient and valuable care.

(9)   The ACA rewards states that come up with viable solutions to medical malpractice (tort) reform, but does nothing to resolve this issue at the federal level.

What Else Could the ACA Have Done?

I’d like to begin this part by saying I’ve become a realist.  An ideal model of what I believe and evidence suggests would be a sound health care system is highly unlikely in the U.S.  This section takes that constraint as a given, and instead talks about realistic changes that could and should have been made in the ACA or will be needed in the future given our existing model.

(1)   Evidence from the Dartmouth Atlas study suggests that the federal government could cut 500 billion dollars from Medicare simply by reducing the unnecessary variation in payments to medical providers.  Medicare currently spends 300-400 billion per year.  By doing this, patients in Medicare would not be impacted at all.

(2)   Along these lines, the federal government should have done more to ensure that private insurers pay medical providers based on their quality of care and efficiency.  Further still, the private sector must encourage utilization of primary care, preventative care, and generic pharmaceuticals – factors that can drastically reduce health care costs.  However, industry and special interest groups (doctors, pharmaceuticals, hospitals) have too much clout and prevented this from happening in Congress.  While cuts in Medicare and Medicaid payments without cuts in payments from private insurers genuinely risk crowding out vulnerable populations (ie doctors and hospitals stop seeing the poor and elderly), the reality is slightly less severe than you’d think.  Because public programs represent nearly 40 percent of health spending, many providers (especially in states like Florida) would go bankrupt if they refused to treat these patients.

(3)   The ACA needed to focus more on improving transparency, specifically with regards to quality of care and medical prices.  In doing this, free market forces would work much better as patients and insurers have better information to make medical decisions and choose the best providers.  This is arguably the primary reason (there are many others) why markets fail in health care.

(4)   Tort reform has two different bits of evidence.  On one hand, medical providers claim that medical malpractice has a severe impact on health care costs and influences their decisions.  On the other hand, empirical evidence suggests that medical malpractice only causes about 1-2 percent of the total rise in health care costs.  Either way, this issue should have been tackled but wasn’t.

(5)   If the entire system were overhauled, individuals would join larger insurance pools independently and businesses would not need to offer insurance except on rare occasions.  Yet because the existing system must stay in place, businesses will always play a role in paying for health care.  We need more innovative solutions that will free businesses from these costs while still covering employees.  This begins with reducing national health care costs, which would in turn reduce the cost of health care for businesses.

11 “General Truths” About the ACA and the U.S. Health Care System

Economists are always told in training that there are very few absolutes in the world.  Through my life experiences and work, I’ve also found this to be the case.  As such, I’ve labeled the following comments “General Truths” instead of “Facts or Fiction” even though they are backed by ample evidence.

1. Do we have the best health care system in the world?  For those who can afford it, we have the best in the world – quality of care, technologies, and pharmaceuticals.  For everyone else, we have the most expensive and inequitable system in the developed world.  Our national indicators (patient health outcomes, efficiency, health spending) are worse than even some developing countries.
2. The ACA is not a government takeover of healthcare.  We still have a predominantly private health care system – the ACA merely fixes some of the gaps as explained above.  This comment is technically correct, but obviously depends on what you believe is a “government takeover.”
3. The ACA, like our health care system, is held together by many pieces.  Each has its own role and links with other pieces.  Evidence suggests that if those links are broken haphazardly, it may do more harm to the system than if not reform was conducted at all.  For instance, RAND published a study showing that if only the individual mandate were cut, the ACA would only insure 12 million instead of 34 million people, individual health spending would rise by 2-3 percent, and government health care spending per capita would nearly triple (and would be passed on to individuals).  By 2014, over half the ACA will have been implemented.
4. The evidence thus far on privatizing Medicare is mixed though not necessarily positive.  Experience from other countries and theory would suggest that (a) fewer seniors would be insured in the private sector due to higher costs (keep reading for explanation) and (b) public costs would decline, private sector costs would rise, but total health care costs may not drastically change.  This is because costs are merely shifted from one sector to another.  We do have a test case in America, interestingly.  Medicare Part C allows seniors to join private, managed care plans (who agree to take them on and are paid by Medicare).  By leaving traditional Medicare, patients pay lower premiums and are given at least the package of services that they would get in Medicare.  Results have found that seniors are less happy due to reduced choice of providers, drugs and other freedoms, while costs have remained stable or even risen slightly.  The latter is due to these private insurers being smaller and thus having worse economies of scale than public Medicare.  It could be assumed that if left solely to the private market, managed care companies would reduce benefit packages and raise cost sharing (premiums, deductibles, co-pays) to cover their higher costs.  In my opinion, there are more viable options to reform and improve Medicare’s efficiency.
5. Which is better – public or private?  Free market or regulation?  The answer is (a) how do you define “better” and (b) it depends on the context, because they all play different roles.  Neither, by themselves, are the answer to solving our health care crisis.  Yes, free market solutions and competition should be absolutely be used wherever possible in health care to lower costs, improve quality, and overall efficiency.  However, unregulated free markets should be avoided where evidence proves they fail; see the above (a-d) for examples as to why this is the case.  Like most fields, the world works in shades of grey.  Free markets, regulation, public and private sectors all have a role to play – the key is to use evidence to find where and when each works best.
6. As quoted from the World Health Organization’s 2020 Health System World Report: “A review of 317 published works on efficiency performance measures across countries concluded that the evidence was mixed with respect to different types of medical care provision (hospitals, physicians, etc).  It is generally unsafe to generalize on ideological grounds about which is best.  Yet all evidence suggests that public, private for-profit, and private non-profit are all less efficient than they could be at reducing waste and being cost-effective.”
7. We ideally want a health care system that is efficient, encourages innovation, offers excellent quality of care, and attempts to control costs.  Contrary to popular belief, these goals are not mutually exclusive.  We often think they are because (a) ideology blocks people’s ability to think rationally and acknowledge that the world is complex, and (b) our system is so fragmented and dysfunctional that nothing operates as it should.
8. Roughly 1 percent of Americans comprise 30 percent of all U.S. health care costs.  5 percent comprise 47 percent, and 10 percent of Americans comprise 63 percent.  These values hold among Medicare as well.  End of life care (ie the last 5 years) makes up a tremendous amount of medical care spending in the U.S.
9. Medical care only makes up 15 percent of the variation in your health; to truly curb medical costs in the U.S., Americans must change their lifestyle habits such as eating less, eating better, and exercising.  These behaviors make up over 50 percent of the variation in your health.
10. Many Americans want it both ways, but in reality they can’t – they want unfettered choice of medical care services and providers along with unregulated private insurance, but complain about rising medical costs.  Medicare patients tend to have similar demands, but only pay only a fraction of their actual costs.
11. Most individuals will not witness significant changes in their medical care due to the ACA.  You will keep the same insurance plans and same providers.  As mentioned above, this was a major policy pre-requisite for the ACA to even pass in Congress.

This is clearly not a comprehensive look at these topics, but merely an overview.  At the least, I hope I have at steered the health care debate in the right direction. We are only at the beginning stages of fixing our health care system.  I personally feel that while the ACA carries a number of downsides and risks, I would argue it is a relatively necessary and sound reform given our dysfunctional political system.  The success of the ACA, our overall system, and economy also demand reform over the coming years.  Whether we can actually do that is certainly up for debate.