[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.

Opinion_Bug8Certainly, 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.”

Starting Point

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.”

ACA as Cost Controller?

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.

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17 responses to “Affordable Care Act Architect Says the Law Is Working”

  1. I am against this law. Whatever happened to American freedoms & liberties? I DO NOT want the Federal Government telling me I have to have Insurance. I DO NOT want to pay for someone else to have insurance (NO ONE has ever given me a damn thing. I have had to earn my own way).
    The premise that pre-existing conditions are covered is ridiculous. Should I be able to wreck my car and buy insurance to have it fixed? Should I have a fire at my home and then buy insurance to have it fixed? The answer to those questions is no. Why shoukd an insurance company be force to pay tens of thousands of dollars for treatment if physical ailments that occurred before their policy is put in force.

    I have worked hard my whole life fir what littke I have. I don’t want to soend the rest of my working years to pay for someone else’s well being. I have all I can do to care if my family and myself.

    The Federal Government dies one hell of a terrible job running this country. There is no way anyone can convince me that the Fed can come close to adequately running “Obama Care”.

    Leave me and my neighbirs alone and let us handle our own affairs.
    Leave me alone and ket me handle my own private afairs

    • Absent some other option yet to be offered, preumably you would rather continue doing what you have been doing pre-ACA — paying for the medical care of tens of millions of Americans who cannot afford medical care, have no related insurance, and so rely on emergency rooms for care. Since they cannot afford that either, the costs are just passed on to you and me — at sky high, premium emergency room rates. You may be happy to pay the cost of an emergency room team and sometimes even an ambulance for a condition a regular doctor could have handled, but between the two, I would rather help pay for their health insurance so they can go to a much cheaper family doctor most of the time.

  2. The ACA has a fundamental flaw that no one seems to want to discuss and that is based upon the precept that pricing of whatever is always based upon the supply of the specified product versus the demand for the same. Now, how can you add millions of additional demands for a product without first preparing for the supply? The ACA as designed is going to fail based upon the above. If anyone really wants to create a national health care system for the USA wherein everyone is not only covered for basic health care but the cost per user actually goes down they need to review the proposed layout for such a system found in the book “True Freedom – The Road to the First Real Democracy”. I found that very long book on the site http://www.democraticroad.com and it certainly is worth taking a look at it.

  3. My assessment of the ACA is that it makes little economic sense. How do we manage demand? If prices are held artificially low, I would expect demand to explode. (And any Week 1 student of Macroeconomics 1 would know). And there isn’t sufficient supply to handle that demand. I don’t know about you but I normally wait in the doctor’s office before I get in. Exploding demand will worsen that problem.

    In the three years since the law was passed, expected costs have doubled from $1 trillion to $2 trillion. And this was while there were no citizens being covered. I would expect that to increase when actual costs are incurred.

    I have been dismayed by the lack of information available regarding premiums, deductibles and co-payments. I have been involved in medical insurance renewals for a long time and those are key data points. Information is starting to dribble out and those attempting to sign up are experiencing sticker shock. Not surprising. I see the same reaction when employees go on COBRA and see what their medical insurance premium will be. Usually a lack of information provided by the federal government means bad news is being hidden.

    Finally, I expect the federal government to game the system. That is, federal accounting is so inept that billions of dollars are spent without even knowing the payee. Good thing they can just add it to the debt. My point is that I doubt the federal government will account for costs honestly so that the renewal rates that would be due next October 1 will reflect an increase that is representative of the costs incurred during 2014. I mean, October 1 is six weeks before the next congressional election.

  4. The bigger issus is that now that you have added all these folks that had pre-existing conditions, you have not established a method or process for reviewing them to ensure we really understand the the root cause of their medical issue. As an example, my daughter was told for over eleven years that her pain was all in her head and all she wanted was drugs, yet in March she was admitted to the hospital with a hemoglobin of 3. Turns out the Dr. who did the original gastric by-pass in 2002 compromised the blood supply to the intestines. Over $100,000 to fix a problem caused by a Doctor, mis-diagnosed by multiple Doctors. If it was not for the team of Doctors at Christus St. Catherine, my daughter would have been dead. Doctors do not use root cause analysis to figure out issues and since they are all specialists, they do not talk to other Doctors. So nobody put two and two together for my Daughter. The questions is of these persons with existing conditions, have they been mis-diagnosted or just ignored because Doctors will not work together to resolve problems. Where are the review boards, who is reviewing to see if we can improve their lives or at least try to get them back as active tax paying members of society. Great to get us all to pay for it, but the medical system needs a closer look at how it handles patients with long term issues. Paying for it is only part of the problem. As far as I am concerned you and Obama care did not go far enough.

    • The problem of doctors not talking to each other is addressed in the Affordable Care Act, which promotes the creation of Accountable Care Organizations. ACOs are groups of medical providers who provide coordinated care for patients while minimizing duplication of efforts.

      • The problem is “case workers” who are not doctors, who work for insurance companies, who are now told to delay certain treatments for their covered. Doctors are losing control as to what they feel is best path of treatment for THEIR patients. Insurance companies are denying procedures and making up their own “standard of care”. Guess who it hurts?

  5. I am continually amazed at how ignorant economists and journalists are regarding risk insurance. The latter might have some excuse. The former? Inexcusable. Being “…denied insurance or charged incredibly high prices for insurance just because you’re sick” does not “…DEFEAT the entire concept of insurance,” it IS the entire concept of insurance! Risk insurance is an industry made up of private businesses, it is not a governmental entity. At least, it was not prior to Obamacare. If you don’t like insurance and private business (most liberals do not), then your argument should be to do away with insurance altogether. But that is not what the libs are arguing. Somehow, they think government can form a coalition with private industry to provide a better product than private industry can provide on its own. Therein lies the rub. Government is supposed to be non-profit. Insurance, at least in its original form, is for-profit. The two cannot co-exist. Either private insurance companies or the government’s involvement in health insurance must lose and go away. And we all know which entity is going to lose that battle. Hello, state-controlled healthcare. Goodbye, insurance companies and the greatest healthcare system in the history of mankind.

    • The econ illiterates come out in droves when some sort of sensible discussion of healthcare policy is offered.

      “Hello, state-controlled healthcare. Goodbye, insurance companies and the greatest healthcare system in the history of mankind.”

      Larry Bradley must now be certified as the dumbest person in hunan history, as evicenced by the statement just noted.

      All you dingbats, read Steven Brill’s March 2013 Time Magazine article on the absurdity of the U.S. medical system, which is by far the worst in human history, given the resource and knowledge inputs. Neither ACA or the pre-ACA approaches deal with the fee-for-service costs madness, which neither market mechanism nor government oversite can control. ACA merely continues the madness.

      • Hey “dude”. You must be cut from the “BULLY” mentality that is Obama as your name-calling suggests. Don’t waste everyones’ time by posting, because I can’t imagine anyone could get past that ignorance.

        • Lynn,

          LOLdudes frustration with American lunacy–and from our vantage point across the pond, it is–is understandable. Sometimes one needs to express in hysterics that the ship is about to crash. From our vantage point in Britain, and in fact, broader, Europe, healthcare works quite fine, and indeed, the footprint isn’t that of a boot on our economies here–rather, a feather, in comparision. Perhaps, you would understand that we’re your nation spending on healthcare at the level of that that we do in the U.K. (%8 of GDP) as opposed to your %18, you yanks wouldn’t be alive to tell about it. It’s all quite silly, you might say, but I admire the U.S. for many things, but now in its dark time, it needs a bit of self examination. So, don’t hold it against LOLDude.


      • No reasonable person is against health care reform. But this generation that is in charge has a knack for finding shortcomings and discarding entire systems or beliefs because they are not perfect. The system, whatever it is, should address these five major areas: Reasonable access to quality health care that is affordable and that limits government and insurance company bureaucracy and maximizes patient choice. I believe these are rational goals that are in fact highly interconnected and crucial to a good customer/patient experience. If we apply these goals universally, then we have universal health care that the vast majority can approve of. But in fact, supply and demand tells us that reasonable access is out the door for all but the wealthiest. Quality is still totally opaque. No one has seen their premiums reduced or the insurance company profits squeezed by ACA (rebates equaled less than 1%). We are all complaining about the bureaucracy that has essentially doubled with ACA. And we are all being forced to change our plans to one choice of 5 (metal tiers) even though we are happy with what we have bought. Let’s start over!

  6. Why do people feel that healthcare is a right? So, you are 55yo, have been obese all your adult life, and you want me to pay for your: bp drugs, insulin, knee replacements, hip replacements, spine surgery and gastric by-pass surgery? All because you can’t get off the couch and exercise, or make healthy choices regarding the food you put in your body? Let’s not forget the fact that you smoke and have lung issues. Get off your butt, push away from the table, and stop smoking. Let’s see how much healthcare costs “society” then.

    I am in a hospital now, and the system is laying off 250 ppl and taking 600 ppl down to part-time. All know that it’s the economics of ObamaCare.

    • Lynn, I’ve got a question and a comment for you. First, surely you’re not suggesting that no one has cancer or diabetes or hypertension or many other common chronic conditions except those who deserve it based on their behavior, are you? Of course not. My own family is probably typical: one family member has cancer, one has Parkinson’s, one recently suffered a near-fatal accident, one had a hip replacement necessitated by a football injury incurred 50 years earlier, and two have Asperger Syndrome requiring cognitive and behavioral therapy in order to be productive members of society. Luckily, all of them were/are insured. But many millions of people aren’t. The question is, where does society draw a line enabling it to say, this person deserves insurance and that person doesn’t? And who should make that call?

      Second, “the economics of Obamacare” are not all about short-term costs. They will play out over many years. Most of the provisions of the law (and there are many) designed to wring cost OUT of the system have yet to take effect, and it may take several years for their effects to significantly change the picture. For example, great hope is to be taken from the efforts of hospital systems across the country to shift from a fee-for-service payment model to a patient-outcomes-based payment model. Among many other positive impacts from that shift, it encourages medical providers to order fewer expensive diagnostic tests and medical procedures that run up cost without improving patient outcomes. Changes like that are one reason why head count at hospitals is being reduced, and while it’s very sad for those who lose their jobs, the changes may contribute to a healthier U.S. economy in the long run, which will help many people. There many other initiatives that show promise as well. So please, let’s reserve judgment for a little while.

      • My 2nd sentence qualified my statements- “you have been obese all your adult life”. That is a choice. Parkinson’s, accidents, are not a choice. Obesity is one of the reasons that medical care costs so much. I see it every day on the operating room table. Go to your local mall, bus stop, amusement park. You don’t have to even know the obesity numbers in the US. You can see for yourself.

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