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Business and Health Care Reform, Part II

Earlier this week, the U.S. Supreme Court heard oral arguments on the legal challenge to the landmark health care reform law. Officially known as the Patient Protection and Affordable Care Act, and unofficially as “Obamacare,”
the law imposes dramatic changes on the American health care payment system. Supporters say the legislation will help improve access to health care for many people, especially the poor, and trigger badly needed changes in the delivery system. Opponents argue its costs and complexity will prove to be a crushing burden for an already weak economy.

In the February edition of Outlook, we interviewed a strident critic of the law – Robert Graboyes, senior fellow at the National Federation of Independent Business. Graboyes contended in the interview (available here) that the law will do nothing to quell rising health care costs while discouraging job growth among small businesses. This month, in order to provide a balance of perspectives, we interview economist Henry J. Aaron, a senior fellow at the Brookings Institution and a supporter of the law. We asked Aaron to respond to the criticisms leveled by Graboyes. While conceding that the law is complex and difficult to implement, he believes its benefits greatly outweigh the costs.

OUTLOOK: Talk about the most significant benefits of health care reform.

Henry Aaron: One is a dramatic expansion of Medicaid. Roughly 15 million to 16 million more people will be added to Medicaid rolls, so millions more Americans will have health insurance when that change takes effect in 2014. The federal government will pick up virtually all of the cost the states would otherwise incur, so at least for the first several years there’s negligible incremental fiscal obligation on the states.

The second major provision requires insurers to cover all who come, and it limits the degree to which they can vary premiums based on personal characteristics. There’s also a prohibition on canceling insurance regardless of the individual customer’s claim history. The insurance companies were in contact with the Obama Administration early on and said, “Look, if you’re going to do that, we need a requirement that everyone except those covered by Medicare, Medicaid, or employer-sponsored plans must have coverage. Otherwise, the sickest will disproportionately seek coverage and that will drive up premiums to unaffordable levels. That led to the individual mandate, requiring individuals to show that they have health insurance coverage.

There’s a requirement for businesses employing 50 or more full-time workers to provide coverage that meets certain standards, which will vary from state to state based on regulations. The companies must provide a minimum portion
of the cost of that insurance as a fringe benefit. Also, in order to carry out the requirement that individuals have insurance, the law establishes health insurance exchanges, which are essentially regulatory agencies to supervise
the marketing of the insurance, and to provide subsidies to low- and moderate-income households in order to hold down the cost of insurance.

OUTLOOK: Are there any other key benefits?

HA: Lots of them, and some are quite important. Some are also quite controversial. Those include the independent payment advisory board, which will have duties only if per capita Medicare costs rise faster than targets specified in the law – eventually growth of per capita Gross Domestic Product plus 1 percentage point a year. If Medicare spending growth exceeds that level, the IPAB must recommend ways to hold down the growth of spending in ways that do not ration care or reduce benefits of enrollees. If Congress disapproves of the way the IPAB proposes to control spending, it
can legislate alternative controls.

There also will be an increase in federal funding for comparative effectiveness research, which will evaluate how effectively alternative forms of care achieve medical outcomes. The legislation does not empower anyone to deny or limit care in any way, but comparative effectiveness research will give everyone information on how to provide the best care at given costs.

And there will be various pilot programs to change the way physicians practice medicine to bring them into patterns of practice that are generally recognized to provide superior care. Accountable care organizations will encourage varying specialties to join together under one centralized management so people get a full range of care for a particular condition
from one organization. There will also be pilot programs testing new ways of paying physicians so they are paid not for individual, micro-defined services, but for broad classes of conditions. For instance, there might be a bundled
payment for the treatment of someone who had a heart attack, rather than separate payments for angioplasty, other hospital care, physician fees, follow-on care and drugs.
OUTLOOK: The law imposes financial penalties on businesses if their employees qualify for subsidies. How burdensome will that be?

HA: The simplest way to comply with the law and avoid the risk of any penalties is to provide a health plan that meets state regulations. I think the way to approach such provisions, if they result in hardship or draconian penalties, is to amend the law. It’s not a reason to abandon the very significant and constructive reforms in the legislation. There aren’t very many supporters of the Affordable Care Act who will insist the legislation was drafted in an ideal fashion or is free of mistakes. But they will say it represents an enormous step forward for improving health insurance coverage and the practice of medicine in the United States; those reforms need to be preserved, and where provisions of the law don’t work right or inflict hardship, the thing to do is fix them, not repeal the law.

OUTLOOK: What’s the risk that employers that no longer want to deal with the rising cost of health insurance will shift the burden of health insurance to the government?

HA: Most research has suggested employers are unlikely to stop sponsoring health insurance plans to any significant degree. The best outside analysis was done by MIT professor Jon Gruber, who concluded that only a few employers will drop coverage. However, some employers also will start offering coverage so that, on net, the shift will be very small. Estimates by the Congressional Budget Office reach similar conclusions. I’m not going to say the scenario of employers shifting the burden of insurance to the government is an impossible one, but it’s been looked at very carefully.
And most analysts and business owners understand that businesses provide insurance because it’s a good way to attract good employees and they’re unlikely to drop it wholesale. Some will begin offering health insurance because
they will be able to access it on better terms than in the past. They may need to do so to compete with other firms.
[If] provisions of the law don’t work right or inflict hardship, the thing to do is fix them, not repeal the law.
OUTLOOK: Is it fair to say that employers dropping coverage could emerge as an unintended consequence?

HA: This is a large piece of legislation, and whenever we have a large piece of legislation, there are uncertainties. We are moving into unfamiliar territory. People are going to be subject to rules they haven’t faced before.

They are going to modify their behavior, and when they change their behavior, they are going to influence others. Analyzing those kinds of effects is extremely difficult.

OUTLOOK: Most of the key provisions of the law don’t take effect until 2014 and beyond. Assuming the law isn’t struck down or repealed, how challenging will that be from an administrative standpoint?

HA: It’s going to be hell on wheels to put into effect. The enrollment of 15 million people in Medicaid is going to strain state Medicaid administration. Getting the health insurance exchanges up and running, paying out subsidies, recovering improperly paid subsidies, making sure the health insurance offerings are understandable to potential customers – all of these things are extremely difficult. The states are going to face very significant administrative responsibilities. I
would be the last person in the world to say this is easy. In fact, this whole debate is very, very far from over because the administrative challenges that will have to be surmounted are so formidable.

OUTLOOK: Elaborate on that concern.

HA: The two terms that come to mind are, first, “massive resistance” – the term used for Southern states resisting desegregation back in the 1950s and 1960s – and, second, a phrase former Senator Daniel Patrick Moynihan used for how people sometimes respond, which he called “dumb insolence.”  It’s not refusing outright to administer the law, because if states do that, the federal government will take over and administer it. It’s dragging their heels
and not doing the job properly. That could cause very serious problems. I hope that doesn’t materialize, but the way some state administrations have been talking recently, there’s cause for concern.

OUTLOOK: Does the law adequately address the problem of the rising costs of health care?

HA: Yes and no.

Yes, in that there really isn’t anything that anybody has proposed as a way of slowing the growth of health care spending that isn’t in this law in at least some form. And no as well, for two reasons: First, not all of the ideas in the law are being pursued as aggressively as I think are desirable. I think the changes in the tax rules covering very, very generous health insurance plans could have been written more tightly and pushed harder to discourage such plans. Second, the current health care system itself could hardly have been designed better if the goal was to frustrate cost control. There is massive decentralization, no single center of power to force limits on the growth of health care spending, and very few incentives to do so. So there are very few levers to pull effectively at the present time. Developing those levers is going to take a lot of time and require a lot of change.

Congress actually did a reasonably good job with the tools that were available and, given the political divisions that separate the two parties and exist within each party, to limit the growth of spending. At the same time, I think we’re going to see rapidly rising growth of health care spending, not because of the health reform, but because of the health care delivery system and payment arrangements that now exist. It is that system, not the reform legislation, that’s going to put real pressure on both public and private budgets for many years to come.

OUTLOOK: Talk about the prospects of the legal challenge to the reform law.

HA: The court set aside a truly extraordinary amount of time for oral arguments, more than any case since 1966. The arguments were spread over three days. The most important single issue is the debate about the constitutionality of
the individual insurance mandate. Those arguing against the constitutionality have presented what has colorfully been characterized as “the broccoli argument,” which is “If you can require people to buy health insurance, where does it stop? Could Congress require them to purchase anything at all, even broccoli?” The lower courts have come down on different sides of that issue.

OUTLOOK: How do you think the court will rule?

HA: I’ve given a few talks and gotten a laugh by saying “No sensible person should forecast what the Supreme Court will decide, and here is my prediction.” I think that the court will not invalidate the law. If it rules on the individual mandate, I think it will probably sustain it by a vote of 7-2 or even 8-1. However, it might avoid a decision. It could do so if it rules that what people must pay if they don’t carry insurance is a ‘tax’ rather than a penalty levied to regulate interstate commerce. Under a law passed in 1867, taxpayers can’t sue to invalidate a tax until they have actually paid it. And
since the mandate doesn’t take effect until 2014, no one could be forced to pay the tax until after that, and only then could they sue. Now, I could be wrong. The court could rule that what people pay is a penalty, not a tax, and the five conservatives might unite in declaring the mandate unconstitutional.

The four liberal justices are almost to certain to say it’s OK, and that leaves everyone except Clarence Thomas in play. He’s pretty much a sure bet to say it’s beyond federal powers. I think the key vote is Scalia, and I think he’s likely
to vote to sustain the bill. If he does, Chief Justice John Roberts isn’t going to want to be sitting out in the minority on this one, because this is a decision that’s going to mark the court for years and define his place in history as a
chief justice. Then there’s Justice Kennedy, and I think if Scalia and Roberts were to affirm the constitutionality, Kennedy would as well. That leaves Alito, and he could be the second on the ‘no’ side.

OUTLOOK: What are the prospects for a full repeal of the legislation in 2013 if a Republican wins the White House?

HA: I don’t think Republicans are likely to take 60 seats in the Senate, so the filibuster shoe is likely to be on the other foot if that occurs. If Mitt Romney wins the White House, his steadfastness in adhering to his previous positions is decidedly limited. He’s been on both sides of the health reform issue already. And anybody who calls for rolling back the Affordable Care Act – well, let me put it this way: If you break it, you own it. Right now, anything that goes wrong can be laid at President Obama’s feet. If the health reform is scaled back or repealed, then anything bad that happens belongs to – for purposes of this discussion – the incumbent Republican president. So there’s considerable risk in repealing the bill.

That said, the primary campaign has led all the Republican candidates into taking such hard and firmly stated positions that it’s pretty hard to see how they could do anything other than call for repeal. Whether they’d get it is whether the Republicans are close to 60 in the Senate. Democrats are notoriously fragmented and I have no idea how they would behave in that environment.

OUTLOOK: If the law was fully repealed, or if it’s struck down by the Supreme Court, are there other reforms out there that could help businesses or consumers?

HA: If this bill is repealed, nothing is going to be enacted, in my opinion. It would poison the atmosphere around health insurance reform in a very major way. I’m laying aside the possibility there’s a Republican landslide; in that
environment, they come into office with a very powerful mandate and could do many things and implement one variant or another of legislation embraced in the past.

But the Republican alternative program on health reform is thin. The ideas they have put forward are not estimated to have a very big effect on cost or coverage. I think the likelihood of a landslide Republican victory is not great, and if they win narrowly, we have gridlock in the other direction. The most likely change to be debated is to convert Medicaid from its current format into a block grant program; I would expect to see a Republican White House push for that proposal. And another is to replace Medicare with a voucher program; I think that will be debated seriously after the election.
If this bill is repealed, nothing is going to be enacted. The Republican alternative is thin. The ideas they have put forward are not estimated to have a very big effect on cost or coverage.

OUTLOOK: If President Obama is re-elected, what do you expect to see then in terms of implementation of the law?

HA: I believe that a second Obama administration will produce political trench warfare even more intense than we have already seen. The 2016 presidential campaign will begin the day after the votes are counted in November. It now appears that both houses of Congress will be closely divided. The health reform will proceed, as there will be no prospect of repeal. But some states will lack the ability or the will to enforce it effectively. Even with the best of will, the law would be a real challenge to administrators. So, one should expect myriad implementation problems, political back-biting,
and controversy. But we should never have expected anything else.
People care deeply about their health care. They spend a lot of their income on it, often without fully realizing how much. Millions of people derive their income from providing health care. Lots of dollars are getting shifted around because of health reform. Lots of professionals are going to face incentives to make uncomfortable changes in the way they operate. Health reform initiates what will be a decades-long journey to assure all Americans access to care, to control the unsustainable growth of health care spending, and to improve the quality of care Americans receive. It will not be a smooth or easy trip, but it is a journey we have to take and that President Obama’s health
reform has begun.

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