Here's What You Need To Know About The Affordable Care Act

This article is part of a mini-series on the healthcare industry. My previous posts talked about how healthcare in the US works and who the key players are, but in the post we will be talking about The Affordable Care Act (ACA).

The Affordable Care Act (ACA), also known as Obamacare, was signed into law in 2010 and attempts to reform the healthcare system by providing more Americans with affordable quality health insurance, and to curb the rising cost of healthcare in the US. The aim of this post is to cover the basics of what is a very complicated reform plan. For those interested in digging deeper, I highly recommend reading Steven Brill's book entitled "America's Bitter Pill" which provides a deep dive on the subject.   

The ACA is largely based off of Governor Mitt Romney's "RomneyCare" implemented in Massachusetts. The framework is often described quite simply with the "3-legged stool" analogy (image below). The three legs of the stool are 1) individual mandate, 2) guaranteed issue, and 3) subsidies. In other words, everyone is required to have insurance, everyone should be able to easily obtain insurance and not be excluded due to pre-existing conditions, and government subsidies will be provided for those who can't afford it.

More specifically, the ACA focuses on reforms in several key areas: 

Individual mandate - As mentioned in the above, the government wants everyone covered. A lot of people, especially younger people, have a tendency to "risk it" and not obtain health insurance. Now, there are penalties in place for people who don't enroll or who have "non-qualifying insurance", meaning insurance lacking the required minimum benefits. The penalties in 2014 were $95 per adult (or 1% of income) and $47.50 per child, with a $285 max per family. The penalties are set to increase each year to force more people to buy health insurance. Since insurers are being force fed new members and making less profit in general, it's important that it's not just the old and sick that are signing up (insurers would lose a lot of money). The key is to also sign up the young and healthy in order to create a more balanced risk pool.  

Note: The individual mandate essentially forces U.S. citizens to buy a private insurance product, which many deemed unconstitutional. Interestingly, this went all the way to the Supreme Court and was upheld.   

Employer mandate - Similar to the individual mandate, large employers are required to provide health insurance to their employees, as are many small businesses (though smaller employers may qualify for some tax breaks).

Insurance regulation - The ACA stipulates quite a few regulations for insurance companies. They can no longer deny members due to pre-existing conditions, or drop coverage for sick people by exploiting loop holes in the paperwork. There are now limits on how much insurers can price discriminate based on factors such as age, gender, etc. Profits are also capped at 20% per the medical loss ratio (MLR), and any excess profits must be reimbursed back to members. Additionally, insurance companies must now offer some minimum benefits in every plan, such as women's wellness visits, mammograms, immunizations, general preventative care, etc. There are a slew of other regulations as well. 

Medicaid expansion - The ACA also expands Medicaid coverage to many lower middle class people that are above the poverty line in order to help them pay for plan premiums. The subsidies that you typically hear about come from this initiative. 

Medicare reform - There are also a series of reforms aimed at moving us away from the predominant fee-for-service model and towards outcomes-based care. Post-ACA, Medicare is increasingly paying out a flat fee for certain conditions, say pneumonia, rather than paying for each individual test performed. The idea here is to incentivize hospitals to provide better care at a lower overall cost and keep people out of hospitals rather than charge patients an arm and a leg for unnecessary diagnostic and therapeutic procedures.   

Health Insurance Exchanges - As part of the ACA, the government set up a public exchange where individuals and small businesses can compare and shop for health insurance plans. Now, people without employer-sponsored healthcare can get the same "group buying" power thanks to the federal government. Insurers plug into the marketplace and compete alongside one another for new patients.

The ACA requires that every state offer an exchange to its residents, and states can either 1) create and run its own exchange, 2) federal government can run it for them, or 3) the state can partner with the federal government and run a joint exchange. Consumers choose between standardized bronze, silver, gold, or platinum tier plans, and all plans cover ten "essential health benefits", so things such as hospitalization, preventative services, and prescription drug coverage are all standard. Also, each plan must cover at least 60% of all estimated costs.

 There are also private exchanges that are operated by brokers or insurers. Under private exchanges, employers give their employees a set amount of money and then direct them to a private exchange where employees are free to select plans that they want based on options pre-selected by their employer. Most private exchanges have been around for many years, predating ACA.

Conclusions

Pre-ACA, there were approximately 30M or 40M uninsured people in the US, or over 10% of our population. The ACA's goal is to get everyone covered and to EVENTUALLY reduce overall healthcare expenditures substantially. However, this is all coming at a big initial cost - the ACA is estimated to run us about $1.2 trillion by 2025, though that is partially offset by the reduced growth in healthcare spend.  

Most developed countries around the world have superior healthcare systems compared to our own. The prevalent model is usually some version of universal healthcare coverage, and often times a true single payer system. The ACA is not a full reform, it is a halfway measure. To push the law through, many concessions had to be made with all of the major powers in the healthcare ecosystem. While we are well on our way to universal coverage, the rising cost issue is more complicated. I only hope that we are on the right path.

[originally posted at mahesh-vc]

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