Health Care Reform: An Overview and Its Long-Term Financial Effects

The proposals for comprehensive health care reform currently being considered by the U.S. Congress are extensive. Comprehensive reform will likely cost between $800 billion and $900 billion. To pay for this undertaking, Congress is fundamentally restructuring tax policy, provider payments and insurance markets.

The short- and long-term ramifications of reform are both staggering and difficult to predict. Given the substantial price tag, it is important to carefully evaluate impending ramifications: where and how our health care dollars are currently spent, how resources will be allocated in the future, who will emerge as dominant payers and what benefits and the risks that reform poses to the industry and individuals. As a bankruptcy attorney, you may have experienced the shattering effects of the comparatively modest Medicare reductions in the late 1990s. At least two industries were dramatically impacted: home health and nursing homes. In the home-health industry, many businesses were forced to close. In addition, the nursing home industry underwent major restructuring, with many leading nursing home companies filing for bankruptcy.

Given the breadth of the current reform legislation, the long-term financial effects will no doubt be significant. Although the financial ramifications are difficult to predict while health care reform continues to be debated and continues to evolve, there is no doubt that there will be both near-term and long-term financial implications resulting from this overhaul of the health care system, and such financial implications are likely to be more far-reaching and dramatic than those experiences in the late 1990s.

Below is an overview of each of the key components to the government’s health care reform plan, and any one of these changes would impact the health care industry dramatically. If all of these changes are approved, the impact on the industry will be far-reaching and well beyond the health care industry alone.

Expansion of Coverage and Cost
There are many different variables that make health care reform a historically difficult undertaking. First, and perhaps foremost, is the challenge of expanding coverage to the approximately 47 million uninsured. Efforts to tackle this threshold issue lead to further complications regarding the creation of affordable insurance options, the appropriate subsidization for people who cannot afford coverage and the impact of changes on those who currently have coverage.

Resolving the matter of coverage is inseparable from the issue of costs. Not only is health care spending rising at two to three times the rate of inflation, but there is also concern that the system is not producing an appropriate value for these expenditures. The challenge for legislators seeking to reform our health care system is to address the unsustainable health care inflation, while at the same time expand coverage to a significant uninsured population. The proponents of reform argue that the expansion of coverage itself will bring down systemic costs. With more individuals covered, the cost of health insurance should decrease as insurance pools grow. With fewer individuals uninsured, the cost to the government of uncompensated care will shrink. Furthermore, the legislation under consideration carries a historic reduction in Medicare spending—more than $500 billion over 10 years. 

Reforming Health Insurance Markets
As President Obama asserted before a joint session of Congress, greater choice and competition in health care will benefit consumers.[2] The Justice Department and the Federal Trade Commission have echoed this sentiment, concluding that vigorous economic competition among health care providers, health plans and other health care firms improves consumer welfare.[3] In 34 states, 75 percent of the insurance market is controlled by five or fewer companies. In Alabama, one company controls almost 90 percent of the market. Too many states lack real competition, increasing costs and reducing quality.[4]

Current imperfections in our health care system are impeding the growth of competitive markets.[5] To spur competition, each of the reform proposals currently being considered by Congress provides for the creation of health exchanges where individuals and small groups can purchase insurance with transparent information on costs and benefit structures.  Policymakers have designed these exchanges to encourage competition on price and quality, rather than through benefit manipulation or the exclusion of needy patients. To further ensure access to coverage through this new insurance marketplace, the legislation makes available new refundable and advanceable affordability credits for low-income individuals who seek to purchase coverage through the exchange.[6] Depending on the proposal, beginning in 2013 these affordability credits will provide insurance subsidies to individuals with incomes between 133 percent and either 300 or 400 percent of the Federal Poverty Level (FPL). These are sliding-scale credits designed to limit the percentage of income that an individual or family must spend on premiums for an essential benefit package. For families at the lowest income levels, credits will be available when the cost of coverage exceeds 1.5 and 2 percent of income. As income increases, the availability of these credits will adjust, so that those at 400 percent of the FPL will receive benefit credits only when health care costs exceed 11 or 12 percent of income.[7]

Employer Coverage will Continue with New Requirements
All of the efforts to reform the nation’s health care system begin by working to strengthen the current employer-based system. As a result, reform proposals place varying levels of responsibility on employers. The employers’ obligations range from an employer mandate in the House of Representatives, requiring employers to offer and contribute a fixed amount toward coverage for all full and part-time employees, to a less-onerous “free rider” provision in the legislation drafted by the Senate Finance Committee. Under this “free rider” proposal, employers that do not offer coverage must pay a fee for each employee that receives a tax credit to purchase health coverage through the exchange. If the employer chooses to offer coverage, it must provide first-dollar coverage for prevention services and cannot have a maximum out-of-pocket limit greater than that for a high deductible health plan (HDHP), which is $5,800 for individual and $11,600 for family coverage. The health insurance marketplace will receive an overall cash infusion of $750 billion through the coverage of new individuals in an “insured product” that has catastrophic protection.

Public Plan Option - Improve Competition?
Perhaps the issue that has garnered the most heated political attention is the public-plan option and whether it will “level the playing field” by improving competition in the health insurance marketplace. Advocates insist that administrative costs would be lower for a public plan since it could use existing networks of providers and the Medicare fee schedule to offer insured products. According to CBO, on average the public plan would be about 10 percent cheaper than a typical private plan offered in the exchanges because of the differences that affect all insurance plans’ premiums, including their payment rates to providers, their administrative costs, the degree of benefit management they apply to control spending and the pool of enrollees they attract, which would be partly offset by the risk-adjustment provisions.[8]

The key concern from a provider perspective is that this public plan, when combined with existing enrollment in Medicare and Medicaid, would make the government the largest purchaser and payer of health care services. If payments are inadequate or the rules are complex, providers will have no adequate alternative to generate additional revenue to offset these costs. Politically, it appears that a public plan is not likely to survive.

Offsets: How to Pay for the Reforms
These reform proposals require more than $800 billion in offsets to pay for the subsidies of those who do not have coverage. The legislation produced by the Senate Finance Committee would also generate $458 billion in revenue by taxing some benefits and reducing others.

Half of these offsets are achieved through reductions in payments to Medicare providers—nearly $500 billion in Medicare payment reductions and other changes to providers, including Medicare Advantage premiums. Hospitals have agreed to a $155 billion reduction over 10 years, while pharmaceutical companies have agreed to at least $80 billion in savings. In the Senate Finance proposal, there are payment reductions that affect inpatient rehabilitation facilities ($4 billion), skilled nursing facilities ($14.6 billion) and long-term care centers ($3.4 billion). In addition, there is a new Accountable Care Organizations (ACOs) program that would bundle all Medicare Part B services into a single payment. Physician organizations would, therefore, be at risk for all services under a single fee. These include laboratory, imaging, Medicare Part B drugs, therapy and other Medicare Part B services connected to the fee schedule. The goal of these changes is to move away from a system that creates incentives for the volume of care and toward a “value based” system of reimbursement. These types of payment changes and reductions will likely lead to some disruption in certain provider-types and services. However, this magnitude of payment reductions is much larger than what occurred in the late 1990s.

To What End?
The ultimate question is: What the upsides are in a wholesale reform of the type being promoted by the President and Congress? While the details of any compromise are essential, there may be potential benefits to the reforms contemplated by the current legislation.

If more individuals are covered under a structured insurance system, then providers can have more predictability in their payments and negotiations with insurers. There will be less “bad debt” or uncompensated care. Greater competition in the private insurance market, beyond the current one or two dominant payers, will also increase stability.  As coverage becomes universal through individual mandates, greater insurance products and more competitive markets, providers will no longer provide care without compensation from the recipient. Ostensibly, as the number of uninsured declines and payment rates for services realign, patients may be able to properly compensate providers for the care they receive and the burden of covering these costs will no longer be shifted onto others.

In addition, as Medicare starts revising its payments, there may be a greater opportunity to identify efficiencies and partnering in markets to maximize services. With so many variables, many industries are appropriately concerned with the particulars of health care reform while also looking for opportunities. With $900 billion in costs and offsets within the health care sector, there are likely to be some who can gain greater market share and others that will lose market share. This type of restructuring in the system will lead us all to monitor changes that are occurring in Congress and throughout the regulatory process as we advise our clients on the impact.

Please address any questions concerning the issues addressed in this article to either Nancy Peterman at petermann@gtlaw.com, Nancy Taylor at taylorn@gtlaw.com, Katie Mahoney at mahoney@gtlaw.com or Brendan Dunn at dunnb@gtlaw.com.