Briefing Report: The Affordable Care Act on the Eve of "Full" Implementation

Friday, August 30, 2013


On March 23, 2010, President Obama signed the Affordable Care Act (ACA). The law enacts  wide-ranging, comprehensive changes to health insurance and health care delivery, scheduled to phase in over the next four years, culminating with nation-wide, state-based health benefit exchanges offering health coverage, some of it subsidized, effective January 1, 2014.

In implementing the ACA in the three and half years since it was enacted, much has happened as originally scheduled. However, the road to implementation has been much rougher than proponents expected, starting with House Democrats losing majority control to House Republicans in the 2010 mid-term elections, the ACA facing a constitutional challenge it very nearly lost, and bureaucratic delays and missteps resulting from the law’s contact with the real-world. With California on the verge of opening enrollment in its health benefit exchange on October 1, 2013, it is a good time to review what has happened with the ACA, what is scheduled to follow, and what that may mean.

ACA Goals

In seeking to increase federal power over health care for Americans, the Obama Administration’s stated goals for the ACA are to:

  • Reduce long-term growth of health care costs for businesses and government
  • Protect families from bankruptcy or debt because of health care costs
  • Guarantee choice of doctors and health plans
  • Invest in prevention and wellness
  • Improve patient safety and quality of care
  • Assure affordable, quality health coverage for all Americans
  • Maintain coverage when you change or lose your job
  • End barriers to coverage for people with pre-existing medical conditions

ACA Funding

These goals require a massive increase in federal expenditures, resulting in a need to identify and secure new funding for the ACA's provisions with new taxes and spending offsets. Major sources of new revenue include increasing Medicare taxes on incomes over $200,000 for single and $250,000 for joint filers, imposing an annual fee on insurance providers, and imposing a 40% excise tax on "Cadillac" insurance policies. Congress did not provide for income levels to be adjusted for inflation, meaning the taxes on incomes over $250,000 will result in more paying the taxes as inflation drives income increase. The ACA also imposes taxes on pharmaceuticals, expensive diagnostic equipment, and a 10% federal sales tax on indoor tanning services. Congress assumed spending offsets from expected savings resulting from changes in the Medicare Advantage program. Most of the tax increases and spending offsets were pushed back rather than immediately effective.

Summary of ACA Tax Increases: (ten-year projection)

  • Increase Medicare tax rate by 0.9% and impose added tax of 3.8% on unearned income for high-income taxpayers: $210.2 billion
  • Charge an annual fee on health insurance providers: $60 billion
  • Impose a 40% excise tax on health insurance annual premiums in excess of $10,200 for an individual or $27,500 for a family: $32 billion
  • Impose an annual fee on manufacturers and importers of branded drugs: $27 billion
  • Impose a 2.3% excise tax on manufacturers and importers of certain medical devices:$20 billion
  • Raise the 7.5% adjusted gross income floor on medical expenses deduction to 10%: $15.2 billion
  • Limit annual contributions to flexible spending arrangements in cafeteria plans to $2,500: $13 billion
  • All other revenue sources: $14.9 billion

Summary of Spending Offsets: (ten-year projection)

  • Reduce funding for Medicare Advantage policies: $132 billion
  • Reduce Medicare home health care payments: $40 billion
  • Reduce certain Medicare hospital payments: $22 billion

Significant ACA Events to Date:

The ACA includes numerous provisions to take effect over several years beginning in 2010. There is a grandfather clause on policies issued before then that exempt them from many of these provisions, but other provisions may affect existing policies. While the changes wrought by the ACA are far too numerous to list here, the follow are probably the most significant changes that may be noticed by consumers and employers during implementation, by year:

2010 Changes

Because most of the ACA’s tax increases and spending offsets were delayed, most of the immediate changes were mandates on private insurers rather than in government programs.

  • Rescission: Prior to the ACA, health insurers and plans could rescind coverage due to mistakes or otherwise unreported information.
  • Lifetime Limits: Health insurers and plans will be prohibited from imposing lifetime dollar limits on essential benefits, like hospital stays.
  • Small Business Health Insurance Tax Credits: Initially provides a credit worth up to 35% of the employer’s contribution to the employees’ health insurance. Small non-profit organizations allowed to receive up to a 25% credit.
  • “Free” Preventive Care: All new plans mandated cover certain preventive services such as mammograms and colonoscopies without charging a deductible, co-pay or coinsurance.
  • Federal High-Risk Pool for Pre-Existing Conditions: The Pre-Existing Condition Insurance Plan (PCIP) provides new coverage options to individuals who have been uninsured for at least six months because of a pre-existing condition. Program ends January 1, 2014 with the opening of health benefit exchanges.
  • Extending Family Coverage for Dependent Adults: Young adults will be allowed to stay on their parents’ plan until they turn 26 years old.

2011 Changes

Medicare beneficiaries can get preventive services without charge, and receive a 50% discount on brand-name drugs in the Medicare “donut hole.”

  • Prescription Drug Discounts. Seniors who reach the coverage gap will receive a 50% discount when buying Medicare Part D covered brand-name prescription drugs. Over the next ten years, seniors will receive additional savings on brand name and generic drugs until the coverage gap is closed in 2020.
  • Preventive Care for Medicare. No charge for preventive services, such as annual wellness visits and personalized prevention plans for Medicare beneficiaries.
  • Minimum Cost Ratio. Mandates health insurers and health plans spend at least 85% of all premium dollars collected for large employer coverages on health care services and health care quality improvement. For plans sold to individuals and small employers, mandates at least 80% of the premium must be spent on benefits and quality improvement.

2012 Changes

The ACA created “Accountable Care Organizations” (ACOs) and other programs to help doctors and health care providers work together to deliver better care; these programs and ACOs started implementation in 2012.

  • Integrating Health Systems. The ACA provides incentives for physicians, hospitals and others (including insurers and plans) to join to form “Accountable Care Organizations.” These are intended to improve patient care, help prevent disease and illness and reduce unnecessary hospital admissions.
  • Health Information Technology (HIT): The ACA initiates a series of changes and incentives to standardize billing and requires health plans to begin adopting and implementing rules for the secure, confidential, electronic exchange of health information.

2013 Changes

Open enrollment in the state-based and federal health benefit exchanges begins on October 1st.

  • Preventive Health Coverage: The ACA provides new federal funding to state Medicaid programs choosing to cover preventive services for patients at little or no cost.
  • Increasing Medicaid Reimbursements for Primary Care Physicians: The ACA requires states to pay primary care physicians no less than 100% of Medicare payment rates in 2013 and 2014 for primary care services. The federal government initially funds the increase.
  • Enrollment Opens for State and Federal Health Benefit Exchanges: Starting October 1, 2013, individuals and small businesses can enroll in “qualified health benefit plans” in the state.

2014 Changes

State and federal health benefit exchanges are supposed to be running; middle and low-income families (with incomes up to 400% of the federal poverty level) will receive tax credits toward the cost of coverage purchased through an exchange. Medicaid expansion is slated to occur as well.

  • Guaranteed Issue: The ACA requires that health policies be issued regardless of any medical condition, and partial community rating requires insurers to offer the same premium to all applicants of the same age and geographical location without regard to gender or most pre-existing conditions (excluding tobacco use, although California disallows the use of tobacco use as a rating factor in coverage costs).
  • No Annual Limits on Coverage. The ACA prohibits new plans and existing group plans from imposing annual dollar limits on the amount of coverage an individual may receive.
  • Employer Coverage Mandate: Firms employing 50 or more people but not offering health insurance will also pay a shared responsibility requirement if the government has had to subsidize an employee's health care. (POSTPONED TO 2015)
  • State and Federal Health Benefit Exchanges: Individuals whose employers do not offer coverage will be able to buy coverage directly in a health benefit exchange.
  • Tax Subsidies: Low-income individuals and families between 100% and up to 400% of the federal poverty level (FPL) will receive taxpayer subsidies on a sliding scale if they choose to purchase coverage in an exchange.
  • Small Business Tax Credits:  The ACA implements the second phase of the small business tax credit, allowing small businesses to qualify for taxpayer subsidies if they purchase coverage through an exchange. The credit increases to 50% of the employer’s contribution to provide health insurance for employees. The credit for small non-profits increases to 35%.
  • Medicaid Expansion: Expands Medicaid eligibility to include all individuals and families with incomes up to 133% of the poverty level, and simplifies the CHIP enrollment process. States are to receive 100% federal funding for the first three years to support expanded coverage, then federal funding is scheduled to reduce to 90% in subsequent years.
  • Individual Mandate: The ACA requires all individuals not covered by an employer sponsored health plan, Medicaid, Medicare or other public insurance programs to secure an approved private-insurance policy or pay a penalty, unless the applicable individual is a member of a recognized religious sect exempted by the Internal Revenue Service, or waived in cases of financial hardship.

2015 Changes

In 2015, the ACA shifts focus to physician payments and outcomes. The ACA seeks to tie physician payments to the quality of care they provide. Physicians will see their payments modified so that those who provide higher value care will receive higher payments than those who provide lower quality care.

Mixed Results So Far – Constitutional Challenges and Administrative Fumbling

Constitutional Challenge to the ACA:

The single largest threat to the ACA was the legal challenge to the constitutionality of the ‘Individual Mandate.’ On November 14, 2011, the Supreme Court of the United States issued a writ of certiorari to the United States Appeals Court for the Eleventh Circuit to consider appeals to its rulings in National Federation of Independent Business v. Sebelius and Florida v. United States Department of Health and Human Services. The Court heard oral arguments March 26–28, 2012 and decided the consolidated case on June 28, 2012. Though the Supreme Court declared that the Commerce Clause did not protect the law, and that under that justification it was not constitutional, the Court declared that the legislatively declared "penalty" was constitutional, as it would more properly be construed as a tax collected under Congress's taxing power, thereby upholding the individual mandate.

The Court also limited the federal government’s power to force expansion of Medicaid to all states, as initially proposed under the ACA. States can now choose to expand Medicaid, or not. All other provisions of the ACA continue to be in effect, with some limits on the Medicaid expansion.

Poor Drafting and Administrative Failures

In addition to the legal challenge that nearly ended the ACA, poor drafting due to the rush to enact the bill, as well as administrative failures, have resulted in a number of missteps and failures to implement the ACA as intended.

  • The CLASS Act: The healthcare law included a new insurance program for long-term care, known as the CLASS Act. The program could not be implemented as written, and Congress eventually repealed the program.
  • Funding For Federal Insurance Exchanges: Only 18 states (and the District of Columbia) are operating state-based health benefit exchangesi. The ACA provides massive funding for states to set up their own exchanges — and no funds at all for the federally run exchanges. Because 33 states have declined to operate their own exchanges, the Administration has had to cobble together funds from other programs so that it can build the remaining 33 marketplaces.
  • The Employer Coverage Mandate: The most recent stumble came early this summer, when the White House announced that it would delay enforcement of ACA’s employer mandate by one year, to 2015. The effect of this on the ACA is unknown, but it does prove the difficulty the federal government assumed in taking responsibility for changing America’s health care systems.
  • The Small-Business Exchange: Before delaying the employer mandate, the administration delayed by one year a part of the new insurance exchanges for small business. Although the exchanges will be up and running next year as planned, employers will have to wait another year before they can let their workers choose from a range of plans, rather than selecting just one for the entire company.
  • More than 1,200 Special Interest Waivers from the ACA: The Administration has approved more than 1,200 waivers from a provision of the ACA that gradually eliminated annual caps on benefits.
  • IRS Form 1099 Reporting: As enacted, the ACA compelled businesses to report nearly all transactions worth more than $600 to the IRS, on Form 1099. Business groups characterized the provision as unnecessary red tape, excessively intrusive in daily business operations, and a compliance nightmare.
  • Child-Only Plans: One provision of the ACA, requiring health insurers and plans to cover children’s pre-existing conditions if they sold child-only plans, resulted in health insurers and plans to stop issuing new policies just for children.
  • The Federal High Risk Pool: PCIP: The $5 billion Pre-Existing Conditions Insurance Plan (PCIP) offered health coverage to sick patients waiting for full implementation of ACA. PCIP failed to enroll as many people as anticipated, and its costs were higher than expected. In February of this year, the Administration stopped accepting new applicants into the program to ensure it would have enough money to cover people already enrolled.
  • The Basic Health Plan: The Administration decided to delay an ACA program known as the Basic Health Plan. The Basic Health Plan would let states bargain directly with insurance companies to create a scaled-down plan for people who aren’t eligible for Medicaid but might not be able to afford the more expensive private plans sold through the exchanges.
  • Waiver for Congressional Staff: During legislative debate on the ACA, Democrats accepted a GOP amendment from Senator Grassley saying members of Congress and their staffs had to use ACA. The Administration waived this requirement for Congressional staff.

Long Term ACA Problems

Two-tiered Medicaid System: Under the ACA, states receiving federal funds to expand Medicaid must offer certain preventative care services to newly eligible Medicaid enrollees. While the federal government provides funds as an incentive for states to extend these additional services to existing Medicaid enrollees, they are under no obligation to accept those incentives, per the Supreme Courts’ ruling, and some have already chosen not to do so.

Exchange Navigators and ID Fraud: Nationally, there is increasing concern over the safety of exchange enrollees’ personal information and the potential for fraud. To be fair, both the federal government and state exchanges are sensitive to this concern, with the federal government issuing guidelines to state exchanges on background checks for exchange navigators. California has enacted SB 509 (DeSaulnier and Emmerson), allowing California’s exchange the necessary authority to conduct background checks for persons who do not hold an insurance agent or broker’s license, but are selling coverage through the exchange, in an effort to protect consumers private information.

Consumer concerns with ID theft and fraud could significantly undermine consumer confidence in purchasing coverage through exchanges; recent revelations regarding the federal government’s National Security Administration extensive monitoring of American’s communications and the IRS using tax status to further partisan Democratic Party interests presumably hurts broader public confidence in the exchanges.

The ACA’s Primary Promises – To Expand Coverage, Improve Care and Reduce Costs

Expanding Care and Provider Shortages

One of the signature goals of the ACA is to expand coverage, to provide coverage for nearly all legal citizens. Yet the reality of providing universal coverage is that America already suffers from a physician shortage, especially of primary care providers, and most acutely in rural areas. Yet the ACA does very little in addressing this problem; there is no funding for new medical schools; there is no law addressing scope of practice for mid-level practitioners such as Nurse Practitioners and Physician Assistants to expand access to care; there is no law (or significant funding) to balance the disparity between primary care providers and specialists. All of these failures, coupled with increased demand for medical services will exacerbate the physician shortage and decrease access to care as more patients wait longer for care. As many have noted, giving someone a health insurance card does not guarantee access to a doctor.

Improving Care

The ACA also promises a health care system that improves patient safety and quality of care, and invests in prevention and wellness programs. It is true that those with health care coverage generally have better health care, and better health care outcomes, than those without coverage. It is also accepted as true that HIT may improve efficiencies and quality of care, but that is not yet proven consistently true.

The physician shortage directly plays into the ability to improve care. Merritt Hawkins & Associates, a physician search and consulting firm, conducted a survey of physician wait times in 15 different metropolitan areas nationwide, and concluded:

"… Boston experiences by far the longest average wait times of any of the 15 metropolitan markets. In addition, wait times in Boston increased in 2009 over 2004 in three of the four specialties where comparisons are possible: dermatology, Ob/Gyn and orthopedic surgery. In general, wait times decreased in 2009 relative to 2004 in most metropolitan markets surveyed, with several exceptions.”

Examining wait times is Boston in notable because Massachusetts adopted a health care reform initiative in 2006 similar to the ACA. The initiative succeeded in covering many of the state’s uninsured patients. However, survey results demonstrate that many patients in Massachusetts are encountering difficulty in accessing physicians. Long appointment wait times in Boston signals what is likely to happen nationally once coverage is expanded through the ACA. Expanding coverage to approximately 49 millionii uninsured Americans can be expected to extend doctor appointment wait times in many areas.

Notwithstanding the potential improvements to patient care resulting from greater deployment of HIT, without a significant infusion of primary care physicians into the workforce, it is very unlikely the ACA can fulfill its promise to improve care for all Americans. Waiting longer to access care, as noted in Boston, will be the natural result of increasing demand by expanding coverage.

Reducing Costs – Rationing Care?

The remaining signature goal of the ACA was to improve affordability, with the president promising his plan would "bring down premiums by $2500 for the typical family," reduce long-term growth of health care costs for businesses and government, protect families from bankruptcy or debt because of health care costs, assure affordable, quality health coverage for all Americans, all while investing in prevention and wellness programs. The ACA seeks to achieve these savings through better health information technology (HIT) systems broadly deployed throughout the nation’s health care facilities and systems, and increased emphasis on prevention and wellness programs. Yet the president’s former Budget Director, Peter R. Orszag, previously headed the Congressional Budget Office when it published an analysis discounting the savings resulting from HIT: "Research indicates that in certain settings, health IT appears to make it easier to reduce health spending if other steps in the broader health care system are also taken to alter incentives to promote savings. By itself, the adoption of more health IT is generally not sufficient to produce significant cost savings." Additionally, it is not clear that prevention and wellness programs offer sufficient savings to fulfill the ACA’s promise to reduce health care costs. An article by research professor Louise Russell published January 2010 in Health Affairs concludes: "Over the past four decades, hundreds of studies have shown that prevention usually adds to medical spending." Russell cites 279 cost-effectiveness ratios for preventive interventions from 599 studies published between 2000 and 2005 in which 20% of preventive options produced cost savings, while 80% added more medical costs than they save.

Critically, the ACA fails to recognize medical utilization drives coverage costs. According to a January 2006 study by PricewaterhouseCoopers (PwC) report titled "The Factors Fueling Rising Healthcare Costs,” approximately 86 cents out of every premium dollar go directly towards paying for medical services such as hospital care, physician care, medical devices and prescription drugs. The remaining costs are spent on consumer services, marketing, government regulation and three percent for insurer profits. Moreover, premium increases very closely follow health care spending growth over time. In the ten-year period (1993-2003) for which data are available, premiums grew at an annual rate of 7.3 percent, while the cost of healthcare services grew at an annual rate of 7.2 percent.

As medical utilization is the primary driver of health care costs, the only way to ensure controlling these costs are to ration care directly by limiting services, or indirectly by capping provider reimbursement rates. Neither approach will give Americans access to care as promised by the ACA.

ACA Embedded Cost Drivers

At the same time, other ACA provisions take effect that will significantly increase the cost of coverage, such as the health insurance tax, minimum essential benefits, and restrictions on age rating. The cumulative impact of all of these provisions increases not only the cost of coverage, but also the likelihood that some individuals, especially younger ones, will choose to purchase insurance only after they become sick or injured, further increasing the cost of coverage for everyone else with insurance.    


In enacting the ACA, there were a number of risks to implementation, some unforeseen but others predictable. Congressional Democrats were notably dismissive of the ACA’s vulnerability on Constitutional grounds, and had the Chief Justice not determined the ACA’s penalty on non-compliance to the individual mandate to be a “tax,” the ACA itself may have been overturned. Additionally, as the ACA’s specific details grow clearer, especially the potential taxpayer subsidy of health insurance for families making up to $94,000 annually, and its effect on providing employers an incentive to expand their part-time workforce in lieu of full-time jobs, public opposition may grow. In this light, it is important to note the ACA has almost never enjoyed public support. Currently, the Kaiser Family Foundation’s tracking poll on the ACA shows in June 2013 that 43% opposed, 35% support and 23% of respondents “don’t know or refused to answer” when asked their views of the ACA.iii

The ACA is predicated upon a number of assumptions that very likely will not hold once tested by reality: that significant expansion of coverage through public programs like Medicaid and subsidized coverage through health insurance exchanges will result in cost-saving improvements to America’s public health; that unproven technology and prevention programs can significantly reduce inefficiencies and costs; that federal regulations can realize health care efficiencies that will reduce costs and improve care; that there are near enough doctors and hospitals to accept the greater demand that will naturally result from expanding subsidized coverage; that a government that mismanages Social Security and Medicare can now, magically, manage to provide Americans with better, cheaper, and more health care coverage than the market has provided in previous decades.

For additional information, please visit: Key Health Care Reform Issues, found at the California State Senate Republican Caucus Homepage.