Henry J. Aaron on Health Care Reform

In the following excerpt from Henry J. Aaron’s “Systemic Reform of Health Care Delivery and Payment,” which appears in The Economists’ Voice 2.0: The Financial Crisis, Health Care Reform, and More, Aaron examines some of the challenges confronting the implementation of The Affordable Care Act. He concludes by arguing “As things now stand, the future of the ACA is highly uncertain. Yet its success is of critical national importance.”

THE AFFORDABLE CARE ACT (ACA) became law on March 23, 2010, but little of it is yet actively in effect. Not until January 1, 2014, will the Medicaid extensions, the individual mandate to buy insurance, the state-managed health exchanges, and the subsidies to make in­surance affordable take effect. The tax on high- premium plans will not be imposed until 2018. Tight restrictions on the operations of the Independent Medicare Advisory Board will remain until 2018.

Before those dates, the law will have to clear four hurdles. The odds that it will emerge unscathed are small. It is important to under­stand those obstacles and to consider how they may change the reform or even prevent it from taking effect. The first hurdle is judicial. Several states are challenging the consti­tutionality of the individual mandate—the requirement that everyone (with a few exceptions) who is not insured at work or covered by a public program must personally buy health insurance. Scholars are divided on whether the Constitution empowers the federal govern­ment to impose such a requirement. The courts will decide….

Should the mandate requiring individuals to carry health insur­ance be declared unconstitutional, much of the rest of the bill would become unsustainable, unless some alternative mechanism to create a sustainable risk pool were to be found. Various alternatives could work. Paul Starr has suggested that people who refuse each year to buy insurance should be barred for an extended period—say, four years—from buying insurance in the regulated market and from qualifying for income-related subsidies. The German health system uses such an arrangement and achieves near-universality. The an­swer to the question whether such a penalty could be adopted in the United States is not obvious. Nor is it clear how well such a penalty would work in the United States. Uninsured Americans would be able, as now, to show up at emergency room doors if they are seri­ously ill, because federal law requires that hospitals provide them ser­vices. The subsidies in the ACA might well tip the balance for most in favor of buying insurance. Such a provision would not have to work perfectly, just well enough to prevent the collapse of the health insurance pool.

Were the individual mandate to be declared unconstitutional, enacting some replacement would doubtless open up the whole bill to amendment. Approval of a time-limited exclusion from subsidized coverage or any other mechanism to maintain a risk pool would re­quire sixty votes in a badly fractured Senate and approval by a major­ity in a House of Representatives now controlled by a party that has pledged to repeal the law. Opponents of the law would be disinclined to agree to provisions that sustain it; at a minimum, their price for accepting such amendments would be high.

The possible denial of funding for implementation and the possi­ble inclusion of restrictive language raise so many possibilities that it is not possible to explore them all. The administration might manage to cobble together sufficient resources or staff from other appropria­tions to move implementation planning ahead, but delays would be likely. Whole provisions could be blocked. A few examples, chosen almost at random, include demonstration projects to test global pay­ments covering the treatment of all services for particular conditions (section 2705); accountable care organizations of pediatric care (sec­tion 2706); grants or contracts for the development of measures of quality (section 3013); support of trauma care centers (section 3505); and funds to establish a prevention and public health fund (section 4002). In brief, Congress can effectively repeal much of the bill sim­ply by failing to appropriate “such funds as are necessary” or the sums speci.cally authorized in the ACA.

The risks posed by failure to create viable state health insurance exchanges are less obvious than those described so far but equally serious. Even with the best of will, state legislatures face difficult challenges in designing health insurance exchanges. To make com­petition among health insurance plans work, exchanges will have to design a limited number of insurance models so that people are not overwhelmed by complex variations that are impossible to under­stand. The exchanges must design descriptive and evaluative infor­mation and present it so that customers can understand their options. States must regulate the sale of insurance both within and outside of the exchanges (or bring all insurance under the exchanges) in ways that avoid adverse selection. And they must discourage insurers from incurring high administrative costs through needless selling expenses. Success in avoiding competition via risk selection will hinge on the development of an adequate risk-adjustment system under which premiums will be allocated among insurers based on the risk pro.les of enrollees. If exchanges are inadequately funded or staffed, the promised improvement in the efficiency of the small-group and in­dividual insurance market will remain unrealized. He concludes by arguing

As things now stand, the future of the ACA is highly uncertain. Yet its success is of critical national importance. The reason, paradoxi­cally, is the promise of the very provisions that have been subject to most criticism—those related to cost control. Quite apart from the bill’s extension of coverage to nearly all legal residents, the ACA is the instrument now at hand to control the growth of health care spending, the principal driver behind projections of growing federal bud get deficits. To be sure, the ACA does disappointingly little to curb the tax advantages associated with employer-financed health insurance, a failing deplored by virtually every economist, Republi­can or Democratic. Apart from this serious failing, however, the bill contains, at least in embryonic form, virtually every idea for cost control that any analyst has come up with:

* The bill retains health savings accounts.
* It adds pilots and demonstration programs to develop account­able care organizations and medical homes.
* It contains provisions to test the practicality of bundled payments and to develop value-based health insurance.
* It contains additional funding for comparative-effectiveness research. It spurs the introduction of health information technology.
* It directly curbs growth of Medicare spending and establishes a commission to recommend further reforms (although the commission’s powers are undesirably limited).
* It contains a significant expansion of preventive care, although the cost-reducing potential of preventive care is often greatly exaggerated (Mongan, Ferris, and Lee 2008).

This menu includes all available ideas on how to control the growth of health care spending within the next few years. The most practical cost-control strategy that is now available to Congress is to accelerate the implementation of these provisions, not to stymie them.