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Acting on the New Healthcare Act

8/17/2012 --

Professor Tom Buchmueller shares his firsthand view of the Affordable Care Act gained from a year on the Council of Economic Advisers.

ANN ARBOR, Mich. — Tom Buchmueller spent the morning of June 28 like many Americans, hunkered by a computer awaiting the U.S. Supreme Court's ruling on the Affordable Care Act (ACA). But he had more skin in the game than most. Buchmueller, the Waldo O. Hildebrand Professor of Risk Management and Insurance and professor of business economics and public policy, had just wrapped up a year-long stint as senior health economist for the president's Council of Economic Advisers. His task: help implement the ACA, popularly known as Obamacare. The court's affirmation of the law was a major relief for Buchmueller, who wanted to see the policy work on which he assisted continue. But it was just the first step. In this Q&A, Buchmueller talks about the tough tasks ahead, what the ongoing political battle could bring, how the insurance and healthcare industries are gearing up, and how he spent his year in Washington, D.C.

Now that the Supreme Court upheld the Affordable Care Act, what should we be thinking about, outside the ongoing political arguments?

Buchmueller: For the government, a lot of work remains to be done by 2014, when the health insurance exchanges must be up and running and the expansion of Medicaid goes into effect. Over the longer term, both the government and the private sector must figure out how to control the growth in health spending. Healthcare, as a percentage of the economy, has been growing steadily, and eventually that growth will be unsustainable. Increased health spending brings real benefits, in terms of better health and longer lives. But if we don't "bend the cost curve," that growth will crowd out other important priorities.

Was it the right policy call to expand coverage before designing a plan to control costs?

Buchmueller: Yes. We know more about how to expand coverage than how to control costs. Cost control will take a long time to craft and even longer to implement before you see any effect. To say we're going to control costs before expanding coverage is effectively saying we'll never expand coverage. Also, when you have wider coverage and costs rise, you're forced to be more serious about taking action. Massachusetts is having a more serious discussion about cost control because it enacted a similar system to the Affordable Care Act.

What was your specific role as senior health economist for the Council of Economic Advisers (CEA)?

Buchmueller: I was the CEA's point person on all issues related to health policy, of which the Affordable Care Act clearly was the biggest. The act was passed in March 2010, and now the departments of Health and Human Services, Treasury, and Labor are writing the regulations and other types of guidance necessary to implement the law. I represented the CEA on the team of people from those departments and the White House. A related issue I worked on had to do with ensuring we will have the right data to evaluate the impact of the ACA. This involved helping different statistical agencies add new questions to federal surveys, and examining how we can leverage administrative data for research. In addition to these types of longer-term projects, other short-term issues arose that required some type of quick analysis. It was an exciting year and an interesting time to be in Washington, D.C.

Was the constant political milieu surrounding the ACA difficult?

Buchmueller: It was interesting. But there's so much work left to do to get these health insurance exchanges set up by January 2014, that there wasn't a lot of time to worry about the politics. It always was in the background, but it didn't influence a lot of what I did.

What does the health insurance industry think of the ACA?

Buchmueller: The ACA introduces a number of important new consumer protections that will change the individual health insurance market significantly. Premiums no longer will be allowed to vary according to an individual's health status, and insurers won't be able to deny or limit anyone's coverage on the basis of a pre-existing condition. The individual mandate is critical to ensuring that the new rules will be effective.

Without the mandate, these rules could have the unintended effect of reducing coverage. In the absence of a requirement that everyone maintain insurance coverage, a law that says insurance companies must cover you no matter your health status creates an incentive for people to wait until they are sick before buying health insurance. So the insurance industry was very concerned about the fate of the individual mandate. They have to be relieved that it was upheld.

Another major change facing the industry will come from the health insurance exchanges. Because today the vast majority of private health insurance is employer-based, large insurance companies get most of their business by selling to large employers. With the health insurance exchanges, insurance companies will have to think about marketing to individuals in a way they haven't before.

How big is the opportunity for insurance companies?

Buchmueller: The estimate is that the ACA should expand coverage to 30 million Americans. Half of that is expected to come from the Medicaid expansion and half through these exchanges. Since most state Medicaid programs contract with private insurers, both pieces of the expansion represent a significant opportunity for the industry. Insurance markets in most states are very concentrated, with few insurers. I think it has the potential to allow some smaller insurers, or insurers that are new to the market, to come in and compete on a level playing field in markets where maybe they felt disadvantaged before.

The Supreme Court struck down the part of the law that allowed the federal government to penalize states that opt out of the Medicaid expansion. So now some states are saying they may opt out. How will that affect the coverage estimates and the effectiveness of the law?

Buchmueller: The cost of Medicaid is split between the federal government and the states. With the ACA Medicaid expansion, the federal government will pick up a much larger share of the cost than it does currently. For the first few years, the federal government is picking up 100 percent of the incremental cost; by 2020 the federal share will level off at 90 percent. This is a very good deal for the states. For 10 cents on the dollar, they get a substantial increase in the number of insured residents.

Some states are saying that even 10 percent of the cost is more than they can afford. It is true that state budgets are tight and Medicaid accounts for a very large fraction of public spending in every state. But people who say that their state cannot afford the Medicaid expansion ignore the fact that it will reduce the need for existing programs that fund indigent care, which lowers the state cost of the expansion even more. And the expansion will benefit healthcare providers in the states, since they won't be as burdened by uncompensated care.

This clearly is a hot political issue, and at this point a lot of the arguments made by governors and state legislators are driven more by election-year politics than by detailed policy analysis. A lot of evidence suggests that expanding health insurance coverage improves access to care and ultimately improves population health. My hope is that state policymakers will recognize this and conclude that going through with the expansion is in the best interest of their state, even in these challenging fiscal times.

Given the political backdrop and the fact that some states may opt out of the Medicaid expansion, will implementation be rocky?

Buchmueller: As I said, there is a lot of work to be done between now and January 2014. The legislation envisioned states taking the lead on the exchanges, though because of politics, many states have dragged their heels. Some states that were saying it didn't make sense to move forward until the Supreme Court ruling now are saying they need to wait until after the election. The fact that the individual mandate was upheld means implementation of the insurance market reforms should go smoothly — certainly more smoothly than if the mandate were struck down but the other reforms remained. But the ruling on the Medicaid expansion introduces new uncertainty. Also, we may have to tweak the law in ways we can't think of right now. Until you start enrolling consumers in these plans, you don't know how it will work. As much as the ACA draws on research experience with other coverage expansions, we're doing a lot of things for the first time.

Employers with more than 50 workers must offer health insurance or pay a penalty. Might we see these companies drop coverage because it's cheaper to pay the penalty?

Buchmueller: Some employers might choose to drop coverage once their employees are eligible for tax credits through an exchange, though other workers may start to receive employer-sponsored insurance because of the ACA. On net, the best estimates are that the number of people with employer-sponsored insurance will not change very much.

In thinking about how employers might respond, it is useful to distinguish three different types of employers. Essentially, all firms with more than 100 employees currently offer health benefits. These large firms aren't likely to drop coverage. Today, the business case for offering health insurance comes from the favorable tax treatment of employer-sponsored coverage and the cost advantages associated with providing coverage through a large group. The ACA does not fundamentally alter this business case. In fact, because large employers will face a penalty if some of their employees end up getting tax credits in an exchange, the ACA should make them even less likely to drop coverage.

Firms with fewer than 50 employees will not be subject to penalties if they don't offer insurance. For very small firms, especially those with a predominantly low-wage workforce, their employees may be better off getting coverage through the exchange, where they will qualify for generous subsidies. But small, low-wage firms tend not to offer insurance in the first place.

In the middle are medium-sized firms that offer insurance currently. In some cases, they will decide that the value of the current tax subsidy is greater than the exchange subsidies their employees would qualify for, so they will maintain their coverage. In other cases, the workers will be better off if the firm drops health benefits and increases their wages. This tradeoff might be worthwhile even if the employer has to pay a penalty. At the same time, it is important to keep in mind that the individual mandate may cause some workers to accept employer-sponsored coverage they previously had declined, and the individual mandate plus the employer penalties may induce some firms to start offering coverage.

While it's hard to predict how these various responses will net out, the best evidence suggests that the overall change in the number of people with employer-sponsored insurance will be small.

How might the presidential election affect the ACA? Mitt Romney said he'd work for its repeal, if elected.

Buchmueller: The way that healthcare reform has played into the election debate has been interesting, if a little weird. The ACA was modeled closely on the Massachusetts reforms that were enacted under Governor Romney. So candidate Romney has the difficult job of running against his own policy. It is a job that is made harder by the fact that those reforms have been extremely successful, both in achieving their policy goals and in terms of public support. Like other opponents of the ACA, Romney as a candidate has been quite vocal about his desire to repeal the law — but less clear about what he would put in its place.

— Terry Kosdrosky



For more information, contact:
Terry Kosdrosky, (734) 936-2502, terrykos@umich.edu