[Editor’s note: Opinions attributed to Jonathan Gruber are his own. Those not attributed are the opinions of the author.]
CFO’scoverage of the Affordable Care Act has included much scrutiny of new costs companies must bear to comply with the law. We’ve focused relatively little on the purposes of the ACA and its potentially positive long-term cost implications.
There may be no more apt spokesman for those matters than Jonathan Gruber, a Massachusetts Institute of Technology economics professor who helped design both the ACA and the Massachusetts Health Connector program on which it was based. Gruber recently served as keynote speaker at a conference for health-insurance brokers hosted by Sun Life Financial, a Canada-based group-benefits provider.
Certainly, finance executives who are skeptical or even scornful of the ACA well outnumber those who see some chance that the law could move the U.S. health-care system in a positive direction over time. Gruber’s views may not hold much weight with the former group, especially since he makes no pretense of being unbiased. “You will probably not find a more biased observer of this law than me,” he told the conference attendees.
“Nonetheless,” he also said, “the facts speak very clearly to how successful it’s been.”
At a basic level, supporting the ACA, or at least not rejecting it outright, demands some level of agreement with the premise that too many Americans are uninsured, often because they don’t have access to affordable health insurance. Opposing arguments that begin (and/or end) with “we can’t afford to provide that access to everyone” miss the point, which is that we have to find a way to do that in order to think of our society as a modern, civilized, humane one.
Gruber, of course, agrees. “We’re the only developed nation in the world where you can be denied insurance or charged incredibly high prices for insurance just because you’re sick. That defeats the entire concept of insurance,” he said. “In no meaningful sense do Americans have insurance if they don’t get it from their employer or from the government.”
He noted that the traditional position of those on the political left favored a single-payer system where everyone gets insurance from the government, which would regulate prices to minimize health-care cost inflation. “The problem with that solution is that it’s political infeasible, partly because most Americans are actually pretty happy with their insurance arrangements.” They may wish it cost less, Gruber said, but for the most part what they get from their employers or the government works for them. Another problem with the preference of the left: The $850 billion private health insurance industry is not going away. “A single-payer system is not happening,” Gruber said.
On the right, the prevailing sentiment was, and remains: “Look, we have a system that works pretty well for most people. Maybe it’s unaffordable [for some]. Let’s give people some tax credits and just let the system run,” Gruber said. “The problem with that solution is that it ignores the sizable minority of individuals for which the system doesn’t work.”
Into “that chasm,” he pointed out, walked Mitt Romney, the Massachusetts governor who pushed through the Health Connector program in 2006 and, quite ironically, lost the presidential election six years later to an opponent who ran largely on the merits of that program’s progeny, the ACA.
Both laws were built on a “three-legged stool,” noted Gruber: reforming insurance markets so insurers no longer discriminate against the sick; requiring everyone to buy health insurance, so that insurers would pick up enough new, healthy customers that they would be able to guarantee coverage for the sick without going out of business; and providing subsidies to make insurance affordable for people with low incomes.
He acknowledged that the law is financed in significant part by tax increases: new taxes on sectors that benefit from health-care reform, like the insurance industry and medical-device makers, and a large new Medicare tax on individuals and families earning more than $250,000 a year. Several other Medicare reforms comprise the other major component of ensuring that the law pays for itself. And there are, as noted, a number of new costs imposed on employers.
That points to a key difference between the ACA and the Health Connector program. The latter was actually paid for by the federal government. No one is paying the ACA’s tab on behalf of the federal government, hence the need for the aforementioned cost-saving and revenue-producing measures.
But Gruber pointed out the success of the Massachusetts program and suggested that if the ACA is indeed at least revenue-neutral, success can also be expected for the ACA, after the individual mandate and subsidies for buying insurance through the new public exchanges take effect on January 1.
“That [Massachusetts law] had two goals,” he said. “The first was to lower the rate of un-insurance, which we did. We covered two-thirds of the uninsured in the state. The rate of un-insurance is now at 3 percent compared to 18 percent nationally. The second was to fix a broken individual insurance market, which we also did. Premiums in the individual insurance market fell by 50 percent relative to national trends. Basically the national law is just the Massachusetts law with more zeros.”
A key second difference between the two is that the ACA addresses cost control. It’s been popular for finance executives, and others, to dismiss the law as not doing anything to rein in costs in the health-care system. But the corporate finance mindset, while not devoid of long-term considerations, is for the most part squarely focused on this month, this quarter, this year or at the most, the next three years.
That mindset has many corporate executives angry at President Obama and the Democrats over the heightened costs they are enduring in the short term (as well as for getting involved in private enterprise’s affairs rather than letting free-market forces determine outcomes).
However, the ACA has lots of elements that, if allowed to play out over years, may promise to wring much cost out of the system.
For example, the law funds research, in progress now, to compare the effectiveness of different types of drugs, treatments and procedures. “The truth is the [Food and Drug Administration]’s job is to decide whether something works, not whether it works cost effectively,” Gruber said. “We have new drugs approved all the time that may be 1 percent better than previous drugs and cost three times as much. There was nobody in charge of evaluating that.”
The law also created many experiments with new ways to reimburse health-care providers and reform the health-care system. In one massive experiment starting this month, Medicare payments to hospitals and clinics, which, like most health-care payments have historically been based on a fee-for-service model, were linked to provider performance and patient outcomes. That accomplishes several cost-positive things – for one, decreasing care providers’ motivation to perform excessive diagnostic tests and medical procedures that don’t contribute to better outcomes.
Hospitals across the country have had to revamp their systems and procedures to comply with the law. With that work already done, it’s only a matter of time before group and individual health plans for non-retirees start paying health-care providers in that mode too.
Another ACA measure that may keep costs down provides incentives for groups of doctors, hospitals and other health-care providers to set up Accountable Care Organizations that coordinate with one another on care provided to Medicare patients. The goal is to make sure the chronically ill get the right care at the right time from the right provider, while avoiding unnecessary duplication of services. There are already about 400 ACOs operating nationwide. Given the massive share of overall health-care costs rung up by Medicare patients, anything that brings down costs for them should have a major impact on overall cost in the system.
The ACA also imposes penalties on hospitals for readmitting patients too often.
Gruber says the pressure the law is putting on everyone involved in the health-care system to lower costs may already be having an effect, with the annual rate of increase having slowed this year and expected to in 2014 as well. For large employers, Towers Watson expects that rate to fall between 5 percent and 6 percent next year after taking into account plan-design changes, down a couple of points from the norm over the last decade.
The normal increase, after taking plan-design changes into account, has been more like 7-8% for most of the time since 2000. That started to moderate in 2012, continued in that direction this year, and is expected to continue again next year. So what was the norm for a long time is apparently no longer the norm.
“Some would argue that Obamacare gets some of the credit for that slowdown,” Gruber said in an interview with CFO. “I don’t really know. But the drop in the growth rate more than offsets all the extra costs under the law.”
And then there’s the Cadillac tax. The controversial ACA provision will, starting in 2014, require companies to pay a 40 percent excise tax on the value of group health benefits that exceeds a threshold amount. Technically the tax will be imposed on insurers, but observers agree that it’s a virtually forgone conclusion that insurers will pass that cost to their customers.
Look for an article on CFO next week that will explore the Cadillac tax more fully.