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UnitedHealth Group Inc
Bank of Montreal
More than one of every four Americans last year received a free mammogram, colonoscopy, or flu shot, thanks to a federal law that many of them despise. Roughly 3.6 million Medicare recipients saved an average of $604 as the same law began closing a gap in their prescription drug coverage. And 2.5 million young adults were allowed to remain on their parents’ health insurance plans until their 26th birthday.
For two years, even as a debate has raged over what Republicans deride as Obamacare, the new health-care law has begun benefiting consumers and refashioning a $2.6 trillion industry. Insurers, hospitals, and doctors are forming alliances and adopting new procedures, preparing for a reshaped market that will materialize when—or if—the law aimed at covering at least 30 million uninsured Americans is fully implemented in 2018. “This is probably the most transformative period I’ve lived through,” says Dr. David Longworth, chairman of the Medicine Institute at Ohio’s Cleveland Clinic, who heads teams making the health-care changes there.
Illustration by Team Macho
As the U.S. Supreme Court weighs the constitutionality of the law’s mandate that almost all Americans buy health insurance, those tangible changes underscore an unappreciated reality: There may be no going back to the world before March 23, 2010, when President Barack Obama signed the Patient Protection and Affordable Care Act before a cheering, whistling crowd in the East Room of the White House.
The way millions of Americans receive and pay for medical services is going to be different, driven both by the new law, which goes by the acronym ACA, and industry responses to the escalating costs it was intended to curb. So far the law’s influence over whom insurers cover and how they cover them tilts toward benefits—such as coverage for children with preexisting medical conditions—rather than the soaring premiums and market disruptions that critics warn are inevitable. The coverage improvements are “very popular,” says Paul Keckley, executive director of the Deloitte Center for Health Solutions. “I think all of that will stay regardless of the individual mandate.”
The mandate, the health-care law’s essential feature and its most unpopular one, ignited a proxy war over the role of government and the limits of individual liberty. A Supreme Court finding that it’s unconstitutional would upend Obama’s signature achievement and roil the 2012 presidential campaign. It would also confront insurers and medical-care providers with a distorted market: In the worst case, many young, healthy Americans could hold off on obtaining coverage until they became sick or were injured, knowing that insurers would be unable to turn them away because the new law requires them to take all comers. That would drive up premiums for those with insurance and undercut the law.
Illustration by Team Macho
Still, much that has happened in health care over the past two years is distinct from the mandate and would likely survive its demise, in part because the political cost of reverting to the status quo ante is prohibitive. “The early deliverables are on the way and hard to reverse,” says Jonathan Gruber, an economist at the Massachusetts Institute of Technology who was instrumental in crafting both the 2010 law and its 2006 precursor in Massachusetts.
At the Cleveland Clinic, which Obama has praised for offering “top-notch” care at costs below the national average, doctors are focusing more on “quality metrics” that demonstrate the effectiveness of medical services, says Longworth, who is also a practicing internal medicine specialist. The goal is to prevent illness rather than treat it, an objective the law promotes by withholding a portion of Medicare payments from hospitals with high readmission rates.
Care will be more proactive, with doctors reaching out to chronically ill patients to make sure they attend scheduled appointments and take prescribed medicines. And it should be better coordinated, with primary and specialist physicians working as a team to provide more effective and presumably less expensive treatments.
Perhaps the most fundamental shift the law encourages is a move away from the traditional fee-for-service model in which doctors are paid for each test, treatment, or X-ray they provide. UnitedHealth Group (UNH) said in February it would instead pay doctors based on patient outcomes, offering higher payments for better-quality care. The company, the largest health insurer by sales, said the new arrangement would apply to as much as 70 percent of its commercial members by 2015, from less than 2 percent now. “This changes the business model, changes the reward and payment system for better care and better health at lower cost,” says Sam Ho, chief clinical officer of the insurer’s UnitedHealthcare unit.
Even with the uncertainty over the mandate’s fate, health-care companies are revamping their operations. Hospitals and physicians are joining in voluntary collaborations known as accountable care organizations, which seek to improve Medicare patients’ care and share in any resulting cost savings. Insurers are acquiring data and payment companies to gain the capability to manage these new approaches.
“Many, many things already have been done,” says Drew Altman, chief executive officer of the Kaiser Family Foundation in Menlo Park, Calif. “The health-care industry has begun to respond to the ACA as if it’s a done deal and not going to be reversed.”
Aetna (AET), the nation’s third-largest health insurer, last year spent $1.6 billion on acquisitions that were at least partly a response to the law. In January 2011, the Hartford-based insurer completed a $500 million purchase of Medicity of Salt Lake City, which allows hospitals and doctors to exchange medical data. “We believe that certain provisions of the law, including many of those which have already been implemented, are unlikely to change,” Mark Bertolini, Aetna’s chairman and CEO, told investors in February.
The law’s opponents, looking to the Supreme Court, say they still hope for victory. Most of the act’s main provisions, including the rollout of health insurance exchanges where people can purchase coverage, aren’t scheduled to take effect until 2014, and the insurance reforms that have been introduced represent minor tinkering, they say. “The administration is trying to create the perception that the changes that are already under way are a big deal. They’re not,” says James Capretta, a former Bush administration health-care expert now with the Ethics and Public Policy Center, a research group in Washington. “You can turn the clock back.”
Some companies are feeling the sting of government activism. In January, the U.S. Department of Health and Human Services—exercising the law’s new rate review authority—said Trustmark Life Insurance’s planned 13 percent rate increase in five states was “unreasonable” and should be scrapped. And Covidien (COV) is bracing for a 2.3 percent medical device tax, scheduled to take effect in 2013, which will cost the Dublin-based surgical products maker about $105 million, according to regulatory filings.
These new federal powers, however, amount to something less than runaway Big Government. After HHS Secretary Kathleen Sebelius criticized Trustmark, the Lake Forest (Ill.)-based insurer rebuffed the administration and said it would proceed with the higher rates affecting more than 10,000 customers. Covidien Chief Financial Officer Charles Dockendorff said the new tax wouldn’t prevent the company from meeting earnings goals.
All this has been happening while legal challenges to the law grind through the courts. Within minutes of the 2010 signing in the East Room, a group of 14 states that objected to the requirement to obtain insurance sued the government in district court in Florida. They have since been joined by a dozen others. Americans believe the mandate is unconstitutional by a margin of 72 percent to 20 percent, according to a USA Today/Gallup Poll released on Feb. 27.
The law requires insurers to offer coverage to everyone, regardless of preexisting conditions, and to price policies according to community averages, regardless of an individual’s health status. With few exceptions, all Americans must maintain insurance or pay a penalty. By 2016 the fine will be the larger of $695 or 2.5 percent of household income. The math of this new model works only if additional numbers of young, healthy individuals purchase insurance and thus help underwrite protection for heavier users. “Let’s say the individual mandate is thrown out,” says Keckley. “Bad debt to doctors and hospitals will continue to go up. They’ll continue to have more people who get care that don’t have a nickel.”
The nation’s hospitals absorbed more than $39 billion in uncompensated care in 2010 and backed the health-care overhaul only after receiving assurances that the mandate would boost revenue by more than the cost of implementation. If the mandate—and its millions of new paying patients—goes away, much of the extra $170 billion in expected revenue wouldalso vanish.
In Massachusetts in 2009, the most recent data available, 26,000 residents who could afford insurance but didn’t get any were assessed a penalty, according to the state department of revenue. That was less than 1 percent of the 4.7 million people who filed a state tax return.
Dave Shove, a health insurance analyst at BMO Capital Markets (BMO) in New York, doesn’t think the ACA will achieve such an extraordinary level of compliance. “It’s going to be a different story when you get to the states where half the bumper stickers say, ‘If you want my gun, you’ll have to pry it from my cold, dead hands,’ ” he says. The Congressional Budget Office estimates that 4 million people will pay the federal penalty in 2016, less than 3 percent of the tax returns the Internal Revenue Service receives.
The Supreme Court is scheduled to begin three days of arguments in the Florida case on March 26, with a decision expected by the end of June. The U.S. Justice Department contends that the three elements of insurance reform—the mandate; guaranteed issue, which requires insurers to cover all applicants; and community rating, which means people in a given region pay the same premium regardless of health status—are inseparable. So if the mandate goes, they all go.
There’s no guarantee the court will agree. The nine justices could uphold the mandate, or strike it down, while leaving the remainder of the law intact. Or they could void the entire act.
Ruling the mandate unconstitutional would leave 16 million more uninsured individuals in 2019 than if the law survives unscathed, according to the CBO. Without the effective subsidy from additional healthy policyholders, insurance premiums would be 15 percent to 20 percent higher, the budget office concluded. “The law will be less effective,” says MIT’s Gruber. “There’s no question about that.”
Evidence can be found in the experiences of states that revamped health insurance in the 1990s without mandating individual coverage. In 1993, New Jersey began requiring insurers to sell policies to everyone and to price them based on community averages. After an initial surge in individual enrollments outside the employer-based insurance market, numbers covered fell to 84,968 at the end of 2001 from 186,130 in 1995, according to a 2004 study in the journal Health Affairs. Premiums surged for coverage offered under the new state program. The most expensive plan rose to $10,231 in 2000, compared with $4,245 in 1996, the study found.
Still, even if the mandate dies, there are other ways of persuading the holdouts to buy insurance. Individuals who refuse to buy a policy could be barred from later obtaining coverage for any preexisting conditions, says Laszewski. The difficulty is that the Obama administration would need Congress to approve any such do-over. And that wouldn’t be easy. But then neither would be going back to the pre-reform world. “There’s an old adage in politics,” says Kaiser’s Altman. “Benefits once conferred are almost impossible to take away.”