How to judge Obamacare

June 30, 2014
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"Obamacare is saving lives!"

"Obamacare is ruining the country."

It's hard to go a day without seeing some version of those comments in public.

As a result, I spend a fair bit of time thinking about how we can judge whether Obamacare, as it actually plays out in the marketplace, is successful or not.

It’s not an easy thing to do.

That’s because health care in America was a mess long before Obamacare—and on a path to getting messier. So here’s how I think about it.

If, after Obamacare, U.S. health care actually is less of a mess than before, then we absolutely should call Obamacare a success.

If health care merely remains equally messed up, but no worse than before, then I will gladly declare Obamacare a success.

If health care gets messier—even messier than it would have been without Obamacare, then I think we have to say the law is a failure.

The really TOUGH case is if health care gets worse, but the mess isn’t any bigger than it was on pace to be before Obamacare. That’s more of a judgment call.

For me, passing a complicated law with lots of new rules and new taxes should have a payoff at the end of that process. That was clearly the goal with Obamacare. But if the law ends up having no real effect, then I think it's at least fair to judge the law a failure.

It's that "no real effect" kind of failure that I suggested would happen in a controversial post earlier this month. That post did not focus on whether Obamacare would succeed long-term in reducing the number of uninsured Hoosiers and Americans (early evidence suggests it is), although I'll touch on that related topic at the bottom of this post.

Here’s what I said, in a nutshell:

1. Most of Obamacare’s new rules are designed to make private health insurance companies offer better benefits, with stronger consumer protections, for less money—after generous federal tax subsidies, of course.

2. However, across the country, only two of every five people are even covered by the kind private health insurance that Obamacare reforms. In Indiana, it’s just one of five.

So how is everyone else getting insurance? Through their employers, which operate something called “self-funded health plans.”

How are self-funded health plans different from private health insurance?

Actual health insurance means my company pays money every month—called premiums—to Anthem. That money buys three things: the discounts Anthem has negotiated with doctors and hospitals, the handling of medical bills racked up by employees and, finally, for Anthem taking the risk that those bills might actually cost more than the total amount of premiums we pay that year.

A self-funded health plan hires Anthem for only the first two of those three things—the discounts and the handling of the bills. But in a company that self-funds its health plan means, the company actually writes checks every month to cover the amount of medical bills its employees have wracked up.

If those bills go higher than expected, the company is on the hook, not Anthem.

Self-funded companies then buy a different kind of insurance—called stop-loss or reinsurance—which says that if your medical bills run higher than a large amount, say, $50,000, then we’ll pick up the rest. But everything below $50,000, the company has to pay out of its own coffers.

Why is this important for Obamacare? Because most of Obamacare’s new rules do not HAVE TO BE followed by self-funded plans. Self-funded health plans can still, if they want to, exclude coverage for some of the 10 “essential benefits” that Obamacare requires to be in all real health insurance plans. Excluding coverage of those benefits would, certainly, cut costs for an employer.

What are these essential benefits? Here you go:

1.    Doctor’s office visits
2.    ER care
3.    Hospitalization
4.    Maternity and newborn care
5.    Mental health and substance abuse care
6.    Prescription drugs
7.    Rehab services and equipment
8.    Lab tests
9.    Preventive and wellness care
10.  Pediatric care, including dental and vision care

One comment to my post came from Sally McCarty, the former commissioner of insurance for Indiana, who also worked in the Obama administration, helping to some of the regulations flowing out of the Affordable Care Act. She is now a senior research fellow at Georgetown University's Center on Health Insurance Reforms. (As an aside, let me say that I love it that Sally reads and responds to my blog. Her comments always add a lot of depth and make the whole discussion smarter.) Sally ponited out that Obamacare indirectly pushes self-funded health plans to cover the essential health benefits, or EHBs, as she calls them.

“Please note, that even though self-funded plans aren't required to provide the essential health benefits—not exactly something to be celebrated by those covered under those plans—they ARE subject to many of the protections that apply to EHBs if they offer the same benefits," Sally wrote. As examples, she mentioned, Obamacare's prohibition on waiting periods over 90 days, required dependent coverage up to age 26, prohibition on discrimination based on health status, prohibition of pre-existing condition exclusions, prohibition of annual and lifetime dollar limits on essential health benefits, limits on out-of-pocket expenses for essential health benefits, and coverage of preventive services with no patient cost-sharing.

The key phrase in her comment is, “if they offer the same benefits.” I expect, as I think Sally does too, that most self-funded employers will offer those essential health benefits.

But where I think Sally and I disagree is whether to credit Obamacare for employers' offering these benefits and adhering to Obamacare’s new restrictions around them. This gets back to our discussion of how to judge Obamacare's effect.

Even before Obamacare took effect, most self-funded employers already had generous health benefits. For two reasons:

1. Because they compete with every other company for talented workers. And health benefits can be vital to attracting and keeping good workers.

2. Because there are huge tax benefits to spending money on health benefits, as opposed to other things. The tax credit for employer spending on health benefits is the single largest tax break in the entire federal tax code, valued at about $250 billion per year.

Those reasons haven’t changed under Obamacare. So my approach to judging whether the law succeeds or fails is not whether it adds protections for consumers who were already protected by these other two forces in the marketplace, but whether it successfully moves more consumers under the umbrella of those protections.

Right now, however, instead of seeing employers embrace Obamacare’s new rules, we see more and more of them seeking out self-funding as a way to dodge those rules—or at least to dodge the cost of them. That’s not a good sign that Obamacare is going to increase the number of people in employer plans covered by these protections.

Obamacare leaves plenty of loopholes for employers that are getting into self-funding as a money-saving move—as is certainly the case with the wave of small employers that have moved to self-funded plans recently.

For example, Obamacare says self-funded companies can’t place a dollar limit on how much their plans will pay for a specific benefit in a year or for one of their worker’s lifetimes.

But there is nothing stopping employers from using other kinds of limits. A company could say, We’ll cover knee surgeries—but only one per year, or only two per lifetime. An employer could say, We’ll cover fertility services, but only one per lifetime. I've not heard of employers doing these things, but these are ways self-funded plans could trim their costs.

Much more significantly, self-funded health plans will avoid Obamacare’s "community rating" rules. Those rules say all small employers and individuals buying from a given insurer will be charged whatever it takes to cover their bills—BUT the oldest person can’t be charged any more than three times as much for coverage as the youngest member.

That helps companies that have lots of older workers—because before Obamacare, health plans charged older members about five or six times more money than the youngest members.

But those rules will hurt companies with younger workers. So those companies might become self-funded, because then their costs will hinge only on the actual medical bills racked up by their own employees—not by anyone else.

Since younger folks tend to be healthier, and since healthier folks consume a very small amount of health care, their costs are likely to be quite low.

If all the companies with young and healthy workers become self-funded, who will be left buying actual health insurance? People with lots of medical bills, which could cause insurance in that marketplace to become very expensive.

This isn’t right-ring fear-mongering. Listen to this quote from a November 2012 report produced by the Commonwealth Fund and the Urban Institute—two organizations that are full-throated supporters of Obamacare:

“Many industry experts are concerned that if low-risk stop-loss plans are available to small employers … the fully insured market (that’s the industry term for what I called real health insurance) could end up being a magnet for bad claims risk with healthier risks diverted to self-insurance. As a result, we could see higher premiums and decreased stability in the fully insured market.”

Translation: Buying health insurance that actually follows all the rules in Obamacare could get really expensive—even after accounting for those generous Obamacare tax subsidies—leading fewer and fewer people to do it.

If fewer people buy coverage in the Obamacare markets, it could seriously hamper Obamacare's goals of reducing the number of uninsured—despite the early positive trends in that area. It could also hinder Obamacre's effort to reduce the costs of health insurance coverage and to increase the amount of protection offered to insurance consumers.

So if we see more employers and their workers take advantage of the self-funding loopholes in Obamacare, then it is at least plausible that Obamacare could fail to improve our messy health care situation.

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  • Where have all the philanthropists gone?
    I sure wish there were more people out there who would risk their own capital and create a business simply for the purpose of giving their profits away and making President Obama look like a genius and the Savior-figure he believes he is. Why are we surprised by employers who try to keep the profits they make? I truly believe that the Administration thought they could successfully demonize employers and "force/guilt" them into paying more for health insurance so that other people who don't work for them could get health insurance coverage. Why is that logical to anyone? Spock's logic meter goes off the illogical chart when it comes to the assumptions that were built into Obamacare. Let's please stop the madness!!!
  • Half full or half empty
    Its good that the folks at Commonwealth and Urban Inst. are looking at all the dusty corners for bad things that could happen. If all those possibilities were anticipated the Affordable Care Act legislation would have been twice as thick and its critics would all be sporting hernias as the lugged the thing into the chamber so they could cry and moan about it. On the other hand the bill that was passed will fix a lot of bad practices of insurance firms and employers. Over time the regulations will curb those practices for many - moreover the fact that the rules are out there will give cover to employers and insurance firms to do the right thing. We don't all have to race to the bottom. With economic growth slow and unemployment high JK's point about employers offering health benefits to attract the best employers doesn't have the same power as in a tight labor market. But it still operates for highly skilled workers. But at the other end of the labor market the subsidies and insurance exchanges, Medicaid expansion and even HIP 2.0 will provide benefits so insurance can be obtained that wouldn't be available unless job markets were super tight. So we just have to wait and see. If one writes such a blog as this the pressure is to make a judgement now about the future. But its too soon. Experts at Health Affairs recently noted we won't know for a while how things play out - especially in those dusty corners. If everyone would just take a breath, realize some things are better and be ready to fix things that are not quite right we could be more confident. Experts like Sally see a lot of value in the collection of fixes contained in the ACA. What we don't know yet is whether the balance is right across issues.
  • Thankful
    I am thankful that my three children are able to stay on my companies self-funded insurance plan until they are 26! Otherwise, I would have three uninsured kids, which is not what I want to see happen. Thanks Obamacare ...
    • Mary
      Yes, Mary, it is wonderful that your "kids" are able to stay on your companies self-funded insurance plan. Now, walk into your HR office tomorrow and ask them how much this is costing your company. Ask them (they won't tell you, of course) how much your salary, and the salaries of your co-workers, have been impacted due to this added expense. And when your "kids" start taking advantage of their "free" yearly exams, and their "free" birth control (if they are female) and your company has to pay for these "free" services, let me know how it all plays out in the long run.
    • Steve
      Steve we must be cognizant that it is about reducing costs in the long-run. If having yearly exams saves an individual's life in the future and allows them to live a higher quality of life, then I would say it's a success. Just the mere access this law has created for so many Americans is remarkable. If Medicaid reform/expansion goes through in Indiana, it means roughly 200,000 more individuals covered, perhaps more. I can only imagine the number if all states followed suit. If we can get these individuals to providers sooner rather than later, it will save tremendous costs in the long-run. I would much rather have a pre-diabetic in an office with a physician getting the help they need to live a high quality of life than have that individual wait until they are in dire need of an insulin pump and thousands more in treatment. Of course there is a price to pay, but tax dollars are already paying for this anyway, might as well make the most out of every penny we spend right? Many employers have already bought in and are attempting to lower their healthcare costs through prevention, a huge shift in mentality. It (Obamacare) is not perfect by any means, but I believe it's a step in the right direction and at least it's get Americans talking and brainstorming ideas of how to "fix" this "broken" disease management system.
    • Desperate Measures
      I feel obligated to respond. As much as I admire J.K. as an intelligent and thoughtful journalist, I believe it's a sign of the Affordable Care Act's (ACA) success that he has to resort to claiming it has had "no effect," because so many people are enrolled in self-funded plans, which are exempt from a few of the ACA's protections. However, although many are anxious to jump into the fray and pick at loose threads, the truth is that it is far too early to tell whether the ACA is successful or not. But, if you had to make the call today, it would have to be a resounding "Yes." An article in yesterday's New England Journal of Medicine estimates that 20 million individuals have gained coverage since the ACA Open Enrollment period began on October 1, 2013. TWENTY MILLION -- even after the number is picked at by the anti-ACA folks -- cannot in any way be considered "no effect." That's especially true for those of us who worked with the many people in the heartbreaking situation of needing healthcare and having no coverage options available before the ACA. Here's how the numbers break down: 1 million young adults under 26 covered under parents' plans; 8 million purchasing through Exchanges; 5 million purchasing directly from insurers (outside the Exchanges); and 6 million covered by Medicaid/CHIP...and that's just the first year. I also wanted to make a brief comment on the Commonwealth quote. Those authors -- and many concerned health policy analysts -- were writing about the dangers of small groups self-funding. The effect on the risk pools is one, but the biggest danger is that Stop-loss carriers are "cherry-picking" healthier small employer groups (50 or fewer employees) into these arrangements to avoid the ACA protections and, in the process, putting both the employer and the employees at risk. So, not only do those employees get inferior coverage, their employer is risking bankruptcy. More progressive states are taking action to curb this activity.
      • To Sally McCarty
        As usual, Sally, your comments are informed and thought-provoking. Thanks for letting me turn some of that provocation into a blog post here-even if we still took different views on this. You'll get no argument from me on the ACA's early success at expanding coverage. We'll have to see how it all works in the years ahead.

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