Making Sense of Healthcare Reform

The June 28, 2012 decision by the U.S. Supreme Court to uphold the constitutionality of the Patient Protection and Affordable Care Act (PPACA), perhaps better known as the ACA, or “Obamacare,” means that the 2010 legislation and its provisions will go forward largely as designed. The legislation is very complicated and expansive, covering Insurance, State programs, instituting new taxes and rebates and more. Consequently even careful observers and industry participants remain unsure of how the ACA will impact them, and how it will impact the country as a whole. This post is designed to give some insight into the legislation’s potential impacts.

The first and perhaps the most significant impact the legislation will have is the expected expansion of health insurance coverage to around 30 million currently uninsured people. Employers will face penalties if they do not provide their employees with coverage and individuals will be penalized if they don’t purchase it themselves. The new state-based exchanges, which are intended to make it easier for individuals and small businesses to find cheap coverage, will be put in place as intended. All of this means that, by 2014, around 9 in 10 Americans eligible for health insurance will likely be covered.

It should be noted that relatively few individuals will be penalized by the much-discussed “individual mandate” in the ACA. According to Karen Pollitz, a senior fellow with the Kaiser Family Foundation in Washington, D.C. 90% of Americans won’t be penalized because they are either covered are are exempt.

The expansion in the number of insured has the real potential to make health premiums go up. The Affordable Care Act’s proponents say that it will reduce the federal government’s deficit but it is more likely that the extension of government-subsidized healthcare to millions of new customers is more likely to cause healthcare utilization to increase. These increases in utilization will drive expenditures, and as costs increase, insurers will try to pass them along to consumers.

Predictably, the federal government’s spending will swell as a result of the Affordable Care Act, but nobody is quite sure by how much. The Congressional Budget Office’s estimates are somewhat unrealistic, since they are based on improbable expectations built into the law (like the 27% Sustainable Growth Rate cut in physician Medicare payments). Regardless of the precise figures, the Congressional Budget Office has concluded that the amount of GDP spent on healthcare in 2037 will be 25%, up from the current spend of 17% of GDP on healthcare. Someone will need to pay for this increase, and that entity is likely going to be the federal government.

An important additional impact of the ACA is that it will likely prompt employers to cease offering health insurance to their employees. A study conducted by McKinsey & Co. found that 30% of employers plan to drop employee health plans after 2014. These employers have reasoned that the $2,000-per-worker penalty they will receive for not offering insurance is cheaper than what it would cost to provide an insurance policy.

The Affordable Care Act will now be implemented largely as it was intended. As I hope this post has suggested, the legislation will have many and varying impacts but, one thing is for sure, it will cause momentous changes to the healthcare industry.

Image Courtesy of Chicago Art Department