Health Care Reform: The Patient Protection and Affordable Care Act

Transcription

1 C H A P T E R T W E N T Y - S I X Health Care Reform: The Patient Protection and Affordable Care Act Learning Objectives After reading this chapter you should be able to: LO1 LO2 LO3 LO4 Understand that the Patient Protection and Affordable Care Act imposes significant new regulations on the health insurance industry. Understand that both Medicare and Medicaid are significantly changed by the act. Understand that there is no employer mandate for providing health insurance but that the mandate is on the individual and that large employers who do not provide insurance must pay a fine. List and explain the taxes that were imposed to pay for the expansion of coverage and demonstrate that the economic and statutory incidence of those taxes differ depending on various elasticities. Chapter Outline Changes to the Health Insurance Industry Changes to Medicaid Changes to Medicare Institution of Requirements That Large Employers Provide Health Insurance or Pay a Fine The Exchanges and the Subsidies to Individuals Buying and Small Employers Providing Health Insurance through Them Increases in Taxes Other Assorted Provisions This chapter reviews the Patient Protection and Affordable Care Act of 2010, or as some may know it better, Obamacare, from the point of view of economists. The chapter is designed to be positive in the Chapter 1 sense that it explains the changes and the likely implications of those changes. Though you may, in your own conversations about the wisdom or the lack of wisdom of the act refer to it as Obamacare or health care reform, this chapter will refer to the act by its formal name, the Patient Protection and Affordable Care Act or its abbreviation PPACA. One other note with regard to this chapter: though the book is designed so that each issue chapter depends only on the theory in the first eight chapters, for this one you would benefit from having previously read Chapters 23, 24, and 25. This chapter looks at the many ways in which this particular law, presuming that it survives Republican attempts to repeal and replace it, will impact the health care and health insurance industries. Coming out of Chapters 23 (Health Care), 24 (Government-Provided Health Insurance), and 25 (The Economics of Prescription Drugs), this chapter surveys the impacts on the health insurance industry, the significant expansion in the offing for Medicaid, the changes to Medicare (specifically the changes to Medicare Advantage and Part D), the provisions requiring large and medium-sized businesses to provide basic health insurance to their employees or pay a fine, and the requirement that individuals who do not work for such an employer to buy it themselves, and the subsidies and exchanges that would make that possible. 281 gue23232_ch26_ indd 281

2 282 Chapter 26 Health Care Reform: The Patient Protection and Affordable Care Act Changes to the Health Insurance Industry Several provisions of the bill change how the health insurance industry operates. Under laws existing prior to the enactment of PPACA, health insurers could cut off dependent children from coverage under their parents health insurance the first year after their children reached 23 and were free to consider, charge more for, and deny coverage for any medical condition a prospective client had prior to purchasing insurance through the company. They were free to set annual and lifetime limits on how much they would cover. They were free to set prior conditions by which they could rescind coverage, and they were free to raise the rates of those who became ill (and therefore expensive to the company). They were free to charge rates that were different for men and women. They were free from most government intervention when it came to premiums, profit, and the proportion of premiums taken up with administrative costs. Much of this ended or was scheduled to end with the passage of PPACA. The law as it stands (or in some cases as it will soon stand) will require that health insurers allow dependent children to stay on their parents health insurance through age 26, that the insurers accept everyone without regard to health status, charge the same to healthy and the unhealthy alike, and charge the same for men and women. They can no longer set lifetime limits, and after 2014, they can no longer set annual limits. 1 They can no longer rescind coverage or raise rates on the sick. To the untrained eye and ear each of these provisions might be considered unambiguously good, but consider the fact that each one of them will come with a cost that will, in all likelihood, be passed on to the people who pay the premiums for health insurance, the people who work for companies who provide them with health insurance, and the people who buy goods and services from those companies. Take the most simple of these provisions, the extension of dependent coverage to children through age 26. This provision means that you (because the majority of those reading this book are college students under age 26) will be able to go to graduate school and/ or have some time to find that first good job. However, your parents employer will face extra costs associated with having you on their health insurance plan. How will they react? Depending on the elasticity of demand and supply for labor, the elasticity of demand for the good or service your parents employer produces, and some 1 New policies can set annual limits in 2011, 2012, and 2013, but those limits rise rapidly and then disappear in other factors, that means your parents paychecks will be smaller than they would otherwise be, your parents employer may employ fewer workers than they might have and will have smaller profits than they might have had, the people who buy the goods or services your parents produce will have to pay more, or some combination of these. The cost of providing you with health insurance, or the cost of paying whatever health-related bills you face as a 24-, 25-, or 26-year-old will go from being your problem (perhaps with your parents help) to being someone else s problem. While that is good for you, it is not necessarily good for society. All of these other provisions have a similar problem associated with them. Again the benefits to those not cut off, or not charged more, or not denied coverage will be greater. However, those costs and burdens will go somewhere. They will not disappear. Take another example. Women, on average, are more costly than men throughout the health care life cycle because they face cancer risks specifically, ovarian, breast, and uterine cancer that men either do not face or, in the case of breast cancer, with much less frequency. Just as in the auto insurance industry teenage boys pay more for car insurance than teenage girls because boys get in more serious accidents than do girls, women used to have to pay more for individual health insurance, and groups that were disproportionately women paid more than groups of the same size that were disproportionately men. What does that mean with regard to this provision? Men will pay more because women are paying less. The aforementioned provisions affecting insurance that present the greatest challenge to the health insur ance industry itself are the provisions that prevent insurance companies from denying coverage to the people based on pre-existing conditions. This, by itself, could adverse selection Those in most need of insurance are the most willing to pay for insurance and drive up the price of insurance with their illnesses to such a degree that those people who are not as sick leave the market altogether. (were it not accompanied with another provision requiring that everyone buy health insurance or have it provided to them) lead to the end of all private health insurance. To understand why, we need to return to the discussion, first laid out in Chapter 23, on adverse selection. Adverse selection arises when, instead of a true crosssection of the population buying insurance, those in most need of insurance are the most willing to pay for insurance and drive up the price of insurance with their illnesses to such a degree that those people who are not as sick leave the market altogether. Recall what happens gue23232_ch26_ indd 282

3 Changes to Medicare 283 to jeopardize the insurance market: the sick are only too happy to buy insurance and the healthy and uninsured are not, and this leads to an increase in the price of insurance for everyone who buys it. The premium increase that results when healthy people exit the insurance market drives more people out of the market until only sick people are left buying insurance, and that insurance is very expensive. This insurance death spiral is an almost guaranteed outcome of a system that allows healthy people to stay out of the health insurance market until the moment they are no longer healthy. The resolution to the death spiral imagined by the PPACA is through a combination of provisions that expand coverage. Through a large expansion of Medicaid, through state-run insurance exchanges, and through an employer requirement (all explained later in this chapter), coverage will likely be extended to three-quarters of those who are currently uninsured. Still, those provisions alone would likely not be enough to forestall the death spiral. It is mandation that does this. Mandation is the requirement that everyone buy insurance if insurance is not provided to them. Requiring the healthy to buy insurance (forcing them to pay a tax or fine if they do not) makes the problem of adverse selection disappear. 2 In the individual health insurance market, insurance companies will have significantly less freedom to charge differential prices to buyers. They will be allowed to charge older customers no more than three times what they charge younger ones (though younger ones typically cost one-fifth or less than what older ones cost), and only be able to charge 50 percent more to tobacco users. They may set up broad geographic price differences and may change more for larger families than smaller ones. This all is opposed to few, if any, federal limits that had been in place with regard to market segmentation. Remember that, under normal circumstances, insurers maximize profits by charging premiums based on actual experience. There is one other, in the grand scheme of things, relatively minor provision change that is potentially important to young people; that is the provision that requires that administrative costs and profits make up not more than 15 percent of premiums (in large groups and 20 percent for small groups). It is this provision that affects those in the relatively low-wage restaurant and retail industries. Fulltime employees are frequently offered the ability to buy mini-med policies (described more fully in Chapter 23) that provide, for a low premium, some minimalist benefits. These policies tend to be very expensive to administer. 2 Refer to footnote 5 in Chapter 23. Changes to Medicaid Referring back to Chapter 24, you will recall that Medicaid covers all children in households with incomes below 133 percent of the poverty line and with young children in households with incomes below 185 percent of the poverty line. Until 2014, when everyone regardless of age will be covered by Medicaid when they are in households below the 133 percent figure, that leaves millions of adults and older children uncovered. This expansion to all members of the household will cost approximately $40 billion per year, with $30 billion of that coming from the federal government and $10 billion from the states. It will, in doing so, also close one of the biggest portions of the coverage gaps. This provision, as well as the provision on mandation, has at least 26 states suing the federal government. The increase in costs associated with the Medicaid program extension will be entirely borne by the federal government through the year 2017, but will eventually be borne through the same cost-sharing arrangement that currently applies to the program. Those states that are protesting their portion of the increased cost view it as an unconstitutional passing of costs from the federal to the state governments. Those defending the provision note that states may opt entirely out of the Medicaid system and as a result there is no requirement for coverage. Changes to Medicare The two most significant changes to Medicare resulting from the PPACA involve a program called Medicare Advantage and the prescription drug benefits under Medicare Part D. The changes to Medicare Advantage remove some of the options that had been offered through private insurance companies. Under prior law, private insurance companies could offer plans to Medicare-eligible seniors that would provide greater benefits in some areas and lower benefits in others or would allow for lower premiums but at the cost of higher deductibles. It was this last option, higher deductibles and/or copayment rates, that Medicare Advantage plans could no longer utilize. Further, the payments that these plans got from Medicare were frozen or reduced, making it very likely that Medicare Advantage will disappear over time. The other principal change to Medicare is to its Part D prescription drug program. First, rebate checks of $250 gue23232_ch26_ indd 283

4 284 Chapter 26 Health Care Reform: The Patient Protection and Affordable Care Act per beneficiary were distributed to all Medicare part D participants to help them cover a portion of the donut hole (that part of the part D plan that stops coverage in a range of prescription drug expenses). The PPACA also requires that drug companies sell their drugs to Medicare at a 50% discount relative to the retail price and reduces the subsidy for Medicare part D to those senior individuals with incomes above $85,000 ($170,000 for couples). There are four relatively minor changes to Medicare within the bill as well. These are limits on physicianowned hospitals, coverage of health risk assessments and behavioral modification programs, a requirement that those Medicare Advantage programs that exist after 2014 have administrative and profit margins that are less than 15% of total premiums, and full coverage of preventive care. The first of these prohibits new physicianowned hospitals from taking Medicare patients. The second is designed to assist seniors in lowering their own costs by changing their dietary and smoking habits, recognizing their chronic issues such as blood pressure and diabetes so as to preventatively treat them, and to encourage appropriate exercise. 3 Institution of Requirements That Large Employers Provide Health Insurance or Pay a Fine Beginning in 2014 employers of more than 50 full-time employees will be required to provide their employees with at least a minimal insurance plan. That minimal plan can require no more than 40 percent of the expenses to come from the employees themselves. At the other end, after 2018, employers would have to pay a 40 percent tax if they offered health insurance plans that were overly generous (as defined as costing $10,200 for individuals and $27,500 for families). When the requirement begins, employers that do not provide at least minimal health insurance will be required to pay a fine if even one of their employees is given a subsidy to buy insurance in the state-sponsored exchanges (described below). These fines will be $2,000 per employee if greater than 30 employees or $3,000 per employee receiving the federal insurance subsidy, whichever is less. This provision has some economists worried that the PPACA lessens the incentive that firms have to employ 3 It is this particular counseling area that some vehemently pro-life groups came to label as death panels because of the possibility that end-of-life conversations would be part of those counseling efforts. new workers by raising the cost of that worker. To see their point, consider the following: A firm has 49 fulltime minimum-wage employees and that employer does not provide health insurance (because small employers with fewer than 50 workers do not have to). If 30 of those employees are individuals who, because of the mandate that individuals purchase insurance, buy that insurance through a subsidized exchange, then if that firm hires just one additional worker, the total cost associated with that one hire would be nearly $55,000 even though that one employee is being paid only $15,000. The rest would represent the $40,000 in fines the employer would owe because that employer would now be a large employer rather than a small one. Clearly that employer would be reticent to jump over the 50 figure. The employer would have to go over the 50 number by a large margin for it to make a little more sense. For instance, hiring 11 workers would cost approximately $160,000 without the fines and an additional $60,000 in fines. This would represent a 37.5 percent markup because of the fines rather than the 367 percent markup of hiring just one employee. Still, the fines, when we are talking about minimumwage workers, are relatively large. Small businesses that employ fewer than 50 low wage workers would be hard pressed to cross that 50 full-time employee threshold. Other economists believe that without the employer fines, employers would be motivated to drop their existing employees health insurance and have them deal with the insurance exchanges on their own and get the subsidy. This is the classic problem of trying to provide, through government assistance, a benefit to everyone that some are already getting. You have to figure out a way to make sure that those who are already providing the benefit do not stop providing it. Additionally, if the alternative to employer mandates is a single-payer system, some economists believe that avoiding the latter is worth the former. The Exchanges and the Subsidies to Individuals Buying and Small Employers Providing Health Insurance through Them Because the problem of adverse selection is so significant when there is no ability of insurance companies to deny coverage to prospective customers based on previous medical histories, the means by which individuals and small businesses are provided insurance requires significant regulatory control. It is necessary so that insurance companies do not attempt to cherry pick, that gue23232_ch26_ indd 284

5 Increases in Taxes 285 is, provide insurance to a narrow, healthy segment of the market. If everyone has to accept everyone, then there is no ability of insurance companies to cherry pick, and premium competition is based solely on reducing administrative costs. As a result, those selling insurance in the small-group market cannot charge different prices based on the size of the group nor can they base their premiums on the gender makeup of the group. Additionally, because those who are likely to be in the individual market and those who work for small employers are likely to earn less than those who work for large employers, subsidies are required if mandation is going to be a reasonable policy. For that, small businesses will be provided subsidies if they provide health insurance when they are not required to. Larger businesses, those with 50 to 100 employees, will also be subsidized because, for many, it is likely the case that the fines will be less than the costs of the insurance. Individuals will be encouraged to comply with the individual mandate through income-dependent subsidies. Recall that families with incomes below 133 percent of the poverty line will be assigned to Medicaid. Families with incomes above 133 percent of the poverty line all the way to 400 percent of the poverty line (nearly $90,000 per year for a family of four in 2010) will get a subsidy. The target for the subsidy is that families will have to pay no more than approximately 10 percent of their income on health insurance premiums. To increase the prevalence of insurance companies in these individual markets, there will be insurance exchanges set up at the state level. Within each state there must exist two not-for-profit options, and insurers must provide policies that cover at least 60 percent of expenses; the total out-of-pocket for any client can be no more than the maximum allowable health savings account deposit of $2,000 (for individuals or $4,000 for families). For small states, multistate consortiums will be allowed so that the insurers in the consortium can take advantage of economies of scale. It is here where the public option A state or federally run insurance option within a state exchange. debate occurred over the public option. Those who favored the public option, a state or federally run insurance option within a state exchange, believed that the exchanges might not garner enough insurance company interest, rendering them useless to individuals and small businesses. Because the states are required to develop the exchanges, there is no perfect description that will likely apply to them all. They may turn out to be a simple means by which customers search for available policies that have been vetted by the states as being in compliance with the provisions of the PPACA, or they may be complicated financial arrangements that securitize the insurance market in a way that is analogous to what Fannie Mae and Freddie Mac do for home mortgages. It will all depend on what the states choose to do. This uncertainty bothers many. Though the expenses for setting up the exchanges will be paid by the federal government, the operational expenses will fall to the states. There is no guarantee that every exchange will have insurers willing to participate. Individuals who fail to purchase the minimum insurance will be fined $95 or 1 percent of their income (whichever is greater) in 2014, $325 or 2 percent in 2015, and $695 or 2.5 percent in 2016 and beyond (with those figures adjusted for inflation). Increases in Taxes In addition to shifting the burden of who pays for health insurance, this extension of Medicaid to every family member in households earning less than 133 percent of the poverty line, the significant narrowing of the donut hole in Medicare part D, and the subsidies paid to individuals and small businesses to provide health insurance will cost nearly $1 trillion over 10 years and trillions more over the long run. The taxes imposed by this plan are somewhat shotgun in their approach. Unlike the Social Security system that is funded by one easy-to-understand tax, this is funded through taxes on what are viewed as overly generous health insurance plans, an increase in the percentage that health expenses must exceed before they are deductible, a 10 percent tax on indoor tanning, new taxes on health insurance companies as well as makers of brand name prescription drugs and medical device makers, and an increase in the taxes paid by certain wealthy individuals (through a surtax on high-income earners, the extension of Medicare taxes to unearned income for those with total income above $200,000, and through a cap on the deductibility of compensation paid to insurance company executives from corporate income taxes). While it is possible that the people that Congress and the administration intend to pay for this reform, and for the extension of coverage to more people, will be the ones who actually pay for it, it is far more likely that they will not. Consider what you learned in Chapter 3 with regard to elasticity. If there is a tax on a certain gue23232_ch26_ indd 285

6 286 Chapter 26 Health Care Reform: The Patient Protection and Affordable Care Act good or service, economists of almost every stripe are quite certain that the statutory incidence of the tax (who writes the check for the taxes owed) and the economic incidence of the tax (who is hurt by the tax) will not be the same. To illustrate this difference, consider the taxes imposed on medical device makers. Medical devices range from those things implanted in people (such as artificial knees and hips) to the screws and plates that secure them, to the stents that keep blood vessels open, to the diagnostic equipment that determines what treatment you require. Each company will pay a portion of the total industry tax bill based on its relative size of the market for taxable devices. That means that each device it sells will increase the company s relative size compared to the market and will, as a result, carry with it a tax. Congress intended that the device makers pay the tax because device makers are the ones who have made enormous profits as a result of Medicare s increasing willingness to replace knees and hips in people who are just over As you can see in Figure 26.1, an increase in the tax on a good when the statutory incidence of the tax is on producers will move the supply curve vertically higher by the amount of the tax. Because people rarely get a hip or knee replacement on a whim and because most of the expense is covered by Medicare and, therefore, patients rarely consider the price of such an operation, the demand for replacement knees and hips is very inelastic. The supply of such devices is likely upward sloping with several competing device companies providing similar products. In Figure 26.1, the price of the replacement prior to the tax had been P* and is now higher at P after the tax. The quantity sold was Q* prior to the tax and is now Q after the tax. Because the demand for the replacement is so inelastic (made even more so by the fact that there is Medicare), the incidence of this tax falls almost entirely on the demand side. We know this because the amount of the tax revenue collected is the tax rate times the new quantity Q. The area labeled is the amount of the tax borne by those who pay for the replacement, and the area labeled is the amount of the tax borne by those who provide the replacement. As is obvious from Figure 26.1, because the tax paid by those who pay for the replacement is much greater than the amount paid by those who provide the replacement, this tax does not do what it intends to do. Even more strange, because the 4 It had been the case that artificial knees and hips were reserved for those between 70 and 80 because they lasted only 10 to 15 years and removing, and replacing them in someone over 80 whose device had worn out was considered overly risky. FIGURE 26.1 Legal Incidence versus Economic Incidence of Taxes. Price P P* Q Q* procedure is paid for (almost in its entirety) by Medicare itself, Medicare will pick up the tab for the tax. When this type of analysis is duplicated for each of the other revenue sources for reform, it shows that workers and consumers will face the burden of higher taxes even if they are not the ones who actually owe them. Other Assorted Provisions D S tax There are other notable but less significant changes in the bill as well. Those who have health savings accounts can no longer use those accounts for over-the-counter medications without a prescription from a physician, and the most they can deposit in such accounts was halved. Tax deductions that currently exist to employers who provide postretirement drug benefits will disappear. W-2 forms will include a portion that shows the employer s payment for employee insurance coverage. This will not be an actual accounting of how much care an employee used but how much the employer s contributions to insurance premiums were per employee. Large employers will be required to assume that employees want to opt in on insurance when they are hired rather than being allowed to assume they wish to opt out. Though much of the law is still subject to the normal process of creating the regulatory language, there are some obvious implications that the regulators and you should consider. Chief among these is that the large employer small employer distinction is based on fulltime employees. Firms, especially those that hire young people, will likely make sure that whatever definition of S Devices gue23232_ch26_ indd 286

7 Summary 287 full-time employee the federal regulators decide on, they will have as few employees as possible in that full-time category. For instance, that will mean more part-time and fewer full-time restaurant workers. Because many of the restaurants that young people work for are national chains, this will also mean that it will be more profitable for the chain to be a franchise store rather than a corporate store. Those corporate stores will have to include all of their employees from all stores and will surely exceed 50 full-time workers though each restaurant will not. Those owned locally will not have to pay the fines or pay for insurance because they will not have 50 full-time employees and will certainly be motivated to stay below that figure. Summary You now understan d that the Patient Protection and Affordable Care Act imposes significant new regulations on the health insurance industry and that both Medicare and Medicaid are significantly changed, with the latter being extended to all poor family members. You also understand that though there is no employer mandate for providing health insurance, fines are in place for employers with more than 50 employees if they do not provide such coverage and that there is a mandate on individuals that they maintain coverage. You are able to list and explain the taxes that were imposed to pay for the expansion of coverage and can demonstrate that the economic incidence and statutory incidence of those taxes differ. Key Terms adverse selection, 282 public option, 285 Quiz Yourself 1. Under the fully implemented provisions of the Patient Protection and Affordable Care Act, if a young person works part time and lives in a household with combined income less than 133 percent of the poverty line, a. they are required to buy health insurance themselves but can do so at a subsidized rate. b. their employer is required to provide health insurance to them. c. medicaid covers them. d. medicare covers them. 2. Under the fully implemented provisions of the Patient Protection and Affordable Care Act, if young people work full time (with 20 other full-time employees) and live in households with combined incomes that are twice the poverty line, a. they are required to buy health insurance themselves but can do so at a subsidized rate. b. their employer is required to provide health insurance to them. c. medicaid covers them. d. medicare covers them. 3. Under the fully implemented provisions of the Patient Protection and Affordable Care Act, if young people work full time (with 60 other full-time employees) and lives in households with combined incomes twice the poverty line, a. they are required to buy health insurance themselves but can do so at a subsidized rate. b. their employer is required to provide health insurance to them. c. medicaid covers them. d. medicare covers them. 4. A tax on a medical device or prescription drug is, by law, paid by the drug company, a. which means that regardless of the elasticity of demand for that drug, the drug company will bear the burden for the entire tax. b. however if the elasticity of demand for the drug is high (it is elastic) the drug company will pass this tax on to the people who buy the drug in the form of higher prices. c. however if the elasticity of demand for the drug is low (it is inelastic) the drug company will pass this tax on to the people who buy the drug in the form of higher prices. d. which means that regardless of the elasticity of demand for that drug, the drug company will pass the burden for the entirely of the tax on to customers. gue23232_ch26_ indd 287

8 288 Chapter 26 Health Care Reform: The Patient Protection and Affordable Care Act 5. Those individuals and businesses (with fewer than 100 employees) buying insurance will a. exercise the public option. b. buy it through Medicare. c. buy it through Medicaid. d. buy it through a state-run exchange with a subsidy. 6. Insurance companies will no longer be able to consider when setting premiums. a. the age of the beneficiaries b. the smoking habits of the beneficiaries c. the place the beneficiaries live d. the health of the beneficiaries 7. The individual mandate is necessary to avoid adverse selection and the insurance death spiral, which result from a. the requirement that insurance companies ignore pre-existing conditions. b. the requirement that prescription drug companies have to pay a tax. c. the requirement that large employers provide insurance. d. the subsidy to small businesses to provide insurance. Short Answer Questions 1. Explain why, if found unconstitutional, the individual mandate could be the undoing of the entire PPACA. 2. Explain why elasticity is important in determining who will be hurt by the tax on medical device companies. 3. Explain why employers who have 49 full-time employees have to expand employment greatly, through part-timers only, or not at all. 4. Many believe that it will ultimately be demonstrated that the net effect of the PPACA is to cause fewer people to have private insurance. Why might they believe that? Think about This If the trade-off for providing more people with health insurance is fewer people having jobs, is it worth the tradeoff? Why might that be a false choice? Talk about This If the individual mandate is found constitutional, it would confirm that Congress can mandate that people buy a good as long as they believe that it contributes to the general welfare. What other goods do you think people should be compelled to buy? A college education? Fruits and vegetables? gue23232_ch26_ indd 288