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Health actuaries have borne a heavy burden over these past few years: We’re the ones all of our Facebook friends turn to every time they have a question about something they see in the news about health care reform. And between “death panels,” “if you like your plan, you can keep it,” two major Supreme Court decisions, “corporate bailouts for health insurers,” eye-popping rate increases in the Affordable Care Act (ACA) exchanges … there have been plenty of questions to answer!
It seemed until recently that this burden was about to ease: Hillary Clinton would be president; therefore, the ACA would remain fundamentally intact; therefore, health policy would by and large be a much less prominent topic in the closing years of the 2010s than it has been in the decade so far.
But, to paraphrase Michael Corleone in “The Godfather III,” just when we thought we were out …
As I write this in early 2017, it is quite unclear exactly how health policy will unfold over the next few years, and I’m not going to attempt to forecast future developments. However, it is clear that health policy will remain a hot-button topic for years to come. Given that, my aim in this article is to lay out a framework for contextualizing, and thereby helping to explain to others, whatever health policy news we may be reading over these next few years.
And, yes, this article actually is an outgrowth of something I recently wrote on Facebook, in helping to answer the following question from a friend: Why are Republicans talking about exchanges for Medicare when they don’t like the ACA’s exchanges?
The Framework: Four Fundamental Questions
Health policy is a complicated and far-reaching subject, and health actuaries are naturally going to approach the subject from a different angle than would, say, medical practitioners. The framework that I’m about to develop in this article feels natural to me, given my professional background, but can hardly capture all of the dimensions of the issues involved. Despite that inherent limitation, my hope is that this framework will be useful in helping understand the health policy landscape in the years ahead. (Note that in this article I’m intentionally scoping out policy issues related to custodial care.)
As I see it, on some level every issue discussed in health policy relates to one of the following four fundamental and interrelated questions:
- How should the health care economy be organized?
- How should health care be financed?
- What should govern the availability and pricing of health care services?
- What should govern the availability and pricing of vehicles used to finance health care (e.g., insurance)?
In the remainder of this article, I talk about each of these four questions in turn, organized around addressing the following three points. First: What is the theoretical spectrum of possible alternatives? Second: Where does the United States sit, as of 2016, along that spectrum? And finally: Should we expect to be talking much about this question in the foreseeable future?
Question 1: How should the health care economy be organized?
On one end of the spectrum—let’s call it the left—one could imagine complete governmental control of the health care economy: All health care facilities are owned by the government; all health care providers are employees of the government.
And on the opposite end of the spectrum, one could imagine complete deregulation of the health care economy, with no government involvement in determining what entities or individuals can provide health care services.
Between these extremes, there is room for a wide variety of approaches to organizing the health care economy. Positions along the spectrum are differentiated from one another based on the answers to such questions as:
- What types of entities are permitted to operate health care facilities? (Public entities only? Private entities only? Specified types of private and/or public entities?)
- Which individuals are allowed to provide health care services? (Can anyone call themselves a “physician” or is there professional regulation? Are physicians independent contractors, employees of health care facilities and/or employees of the government?)
- What restrictions exist on profits earned from the provision of health care? (Can hospitals be operated on a for-profit basis? Are physicians’ salaries regulated?)
- What restrictions exist on the types of health care services that can be provided? (How are pharmaceuticals regulated? Are certain types of procedures prohibited? Is overlap between the services the government provides and the services the private sector provides permitted or prohibited?)
Where we are
The United States sits very much on the right (deregulated) end of this spectrum, especially compared with similar economies such as Canada and Britain. In particular:
- Very few U.S. health care facilities are government-owned, and very few U.S. health care providers are government employees. The primary exception is the Veterans Health Administration (VHA), which provides care to veterans using government-owned facilities and government-employed physicians.
- There are relatively few restrictions on the corporate structure of entities participating in the health care economy. For instance, there is no prohibition on organizing health care enterprises as for-profit entities, and vertical integration of health care facilities and health care provider groups is permitted and has been accelerating in recent years. On the other hand, there is some governmental oversight regarding construction of new health care facilities, via the certificate-of-need regulatory concept. Also, in principle, antitrust law can serve as a limiting factor on the consolidation of health care entities, although in recent decades consolidation has proceeded apace.
- The primary focus of what regulation does exist over the health care economy has been on issues relating to public safety: the education and licensing of health care providers (e.g., via state medical boards); the approval and marketing of pharmaceuticals (e.g., via the Food and Drug Administration); and the safety of health care facilities (e.g., via state health departments).
Should we expect to be talking about this?
No, not really.
Even in years when Democrats have held the majority, there has never been any serious discussion in the United States of taking such steps to reshape the health care economy as nationalizing the hospitals or eliminating for-profit ownership of hospitals or even treating health care facilities as public utilities subject to significant regulation of their profit margins. Although those concepts have been adopted in other developed Western economies, these ideas have no real traction in the United States and are likely viewed by many people as being fundamentally “un-American.”
In short, when it comes to this fundamental question, the scope of debate has always taken place within a narrowly prescribed subset of the spectrum, one that presupposes a strong role for market capitalism in the provision of health care in the United States.
And regardless of how one feels about that personally, there is sound reasoning for it: The inertia of the past is immensely difficult to overcome. This was articulated particularly well last year by economist-cum-blogger Megan McArdle:
Having said that, there is one area that seems likely to be on the health policy agenda during the Trump years and that does fall under this question: how health care services are provided to veterans. One of the current president’s campaign policy planks regarding veterans was to “ensure every veteran has the choice to seek care at the VA or at a private service provider of their own choice,”2 which, in our current context, can be framed as the potential introduction of private-market competition to a subsector of the health care economy that heretofore has been primarily under governmental control.
Question 2: How should health care be financed?
On one end of the spectrum—let’s call it the right this time—you could imagine a world with no governmental role whatsoever in the financing of health care: Individuals would be completely responsible for funding the costs of the health care services they consume, and if they can’t afford services, then they don’t get them (not unlike broccoli).
The opposite end would be a world where all health care services are financed in full by the government.
As with the first question, these extremes are unrealistic, and there are a wide variety of intermediate points on the spectrum. Here, positions along the spectrum are differentiated from one another based on the answers to such questions as:
- To what extent is private insurance available as a financing vehicle and risk-pooling mechanism?
- Is there explicit subsidization by the government of the cost of private insurance?
- Is there implicit subsidization by the government of the cost of private insurance, via tax incentives?
- Is there a government-provided option competing against private insurers?
- Are there “safety net” features built into the system, creating a duty to provide certain types of services without regard to affordability?
To make this more concrete, in the discussion below I focus on six areas along the spectrum, starting at A near the right end, and moving continuously left toward F:
A. No governmental role in providing or financing health care, other than a requirement that emergent care be provided to all.
B. Individuals receive tax incentives to pre-fund their own health care services and/or purchase private insurance.
C. Employers receive tax incentives to provide private health insurance to employees and their dependents.
D. Individuals receive explicit subsidies (e.g., premium support and/or cost-sharing support) toward the purchase of private health insurance.
E. Individuals have the option of receiving explicit subsidies toward the purchase of private health insurance or participating in a government-financed program.
F. Individuals participate in a government-financed program, with no private-market alternatives.
Where we are
The United States, perhaps more than any similar country, currently employs fundamentally different approaches to health care financing for different subpopulations.
At the risk of oversimplifying, let’s divide the non-veteran population into four categories: retirees; the employed; the self-employed; and the indigent (for lack of a better word). As of 2016, these subpopulations generally fall into the following above-defined positions on the spectrum:
- Retirees were historically at F under traditional Medicare for medical services, but at A for drugs. However, since the Medicare Modernization Act’s reforms took effect in 2006, the medical part of Medicare is now at E rather than F (beneficiaries can choose between traditional Medicare and private Medicare Advantage plans), and the new Medicare Part D drug benefit is at D (beneficiaries can choose between private insurance options only but premiums are heavily subsidized).
- The employed and their dependents are at C, to the extent that employers offer health benefits. (However, in some cases, particularly with respect to dependents, the subsidy offered by the employer toward the cost of coverage may be so minimal that the employer coverage is unaffordable.)
- The self-employed were historically at B. More recently, under the ACA many of the self-employed with comparatively low incomes have become eligible for subsidies on the exchanges and hence moved to D, while others with higher incomes remain at B.
- The situation for the indigent is more nuanced. Many are eligible for Medicaid, a program that, depending on which state one lives in, may fall under F (no Medicaid managed care), E (Medicaid managed care options competing against a state program), or D (mandatory Medicaid managed care). Others became eligible under the ACA for subsidized insurance on the exchanges, putting them at D. Still others may fall between the cracks of various programs (particularly in states that rejected the ACA’s Medicaid expansion after the Supreme Court’s decision in NFIB v. Sebelius), putting them at A.
Should we expect to be talking about this?
Yes, quite a bit.
In the context developed above, much of the ACA can be characterized as an effort to move various subpopulations leftward along the spectrum. In particular:
- The ACA’s Medicaid expansion provisions moved millions of people from being uninsured (hence, at A) to having Medicaid (hence, at F/E/D, depending on their state’s Medicaid program, as discussed above).
- The ACA’s introduction of subsidized insurance via the exchanges for moderate-income individuals moved millions of people from A (either being uninsured or having no government support for their self-purchased insurance) to D. While there was supposition that it would also lead to millions of people moving from C to D, with employers ceasing to offer coverage once the ACA exchanges were operative, this does not appear to have happened in any meaningful volume.
- The political debate in 2009 about whether the ACA should include a “public option” can be framed as a debate about whether certain populations previously at A should be placed at D (private market alternatives only) or at E (private insurers competing against a public program).
Consequently, the now-expected political discussion of ACA repeal will inevitably touch on the fundamental question of how health care for certain populations ought to be financed.
More broadly, from an ideological perspective one would expect that Republicans will seek to restructure health care financing in a manner that shifts each population further toward the right end of the spectrum than where that population currently sits. Note that this could mean embracing a solution for one population at the same time as that very same solution is abandoned for a different population! (Hence, my Facebook friend’s previously mentioned confusion about Republican interest in using exchanges for Medicare.) Such a result is not as ideologically inconsistent as it might seem at first glance, but instead reflects the reality that different populations have different current positions on the spectrum, coupled with a practical preference for incremental solutions.
In particular, given recent policy discussions in Republican circles, the following broad concepts may be under discussion in the years ahead:
- Reducing or eliminating subsidies in the individual market, thus shifting individuals from D back toward A.
- Reducing eligibility for Medicaid, thus shifting individuals from D/E/F back to A.
- Migrating Medicare from E toward D over time, e.g., increasing private-sector involvement in Medicare even further and eventually phasing out the public Medicare option.
- Weakening the tax incentives for employers to provide insurance (e.g., eliminating or capping the tax deductibility of employer-provided coverage) while strengthening the tax incentives for individuals to purchase their own coverage (e.g., creating a tax deduction for those who are not self-employed for self-paid premiums), which might lead over time to a subset of employers dropping coverage and thereby causing a migration of people from C to B.
Question 3: What should govern the availability and pricing of health care services?
The spectrum of options for this question depends to an extent on where society is positioned on the spectrum of options for Question 1. For instance, if the government were the predominant owner of health care facilities and employer of health care workers, then that presupposes an intense degree of government involvement in issues around the availability and pricing of health care services, thus narrowing the universe of options for Question 3.
With that caveat, the theoretical extreme ends of the spectrum are fairly clear-cut. On the right end, there would be no governmental role in setting prices for health care services or in determining what services can be offered and to whom; on the left end, the government would not only set prices for health care services but also play a leading role in rationing decisions regarding the provision of services.
Where we are
To my tastes, one of the distinguishing features of the U.S. health care system is its reliance on affordability as the dominant rationing mechanism: If you can afford to pay for the care, then there generally aren’t many administrative barriers preventing you from receiving it. While that may seem like an obvious truth to many Americans, other countries employ rationing systems oriented around attrition (e.g., waiting lists) and/or determination of need (e.g., the U.K.’s National Institute for Health and Care Excellence (NICE) guidelines) that can’t be circumvented by an ability and willingness to write a check (at least, not without flying to the United States to seek treatment). Exceptions to this principle tend to focus on issues relating to patient safety, such as the government playing a strong role in approving new pharmaceuticals for public use.
Of course, to the extent that most Americans are not actually self-financing their health care, but are instead participating in a private-market or public health care financing program as discussed above, the bodies that finance health care may end up making cost-based rationing decisions regarding the provision of services.
This is, to be sure, an extremely touchy subject. When the financing body is a private insurer, particularly one that operates as a for-profit enterprise, the insurer’s cost-benefit analyses are often subject to considerable public criticism. This issue recurs throughout time, although the details change as medical technology evolves. When I entered the profession two decades ago, the controversial topic du jour was the insurer’s process for making decisions around bone marrow transplants, whereas today we’re more likely to be talking about expensive pharmaceutical regimens such as the new class of Hepatitis C therapies. And when the financing body is itself a government agency—Medicare or Medicaid—then there is even more societal unease around having “government bureaucrats” make health care decisions. The Oregon Medicaid program’s introduction in the 1990s of a prioritized list of health care services, used to determine which care will and will not be financed for a population, remains an outlier two decades later.
In this context, decisions around which services to provide get indelibly connected to decisions around how prices for services are set. Again it is useful to distinguish between the government in its role as general regulator of the economy, versus the government in its role as a financer of health care. Consistent with the earlier discussion about the inherent dominance of market capitalism in the U.S. health care economy, there is relatively little government involvement in promulgating health care prices in general. Rather, each entity involved in health care financing, whether public or private, negotiates separately with health care providers to set the prices it will pay for services. (A singular exception is the Maryland all-payer model, under which an independent commission sets prices for each hospital that apply across all private and public payers.) Of course, between Medicare and Medicaid, the government does end up playing a significant role in setting prices for a large share of the overall health care economy, albeit in its role as a financing body.
Historically, these prices have largely been on a fee-for-service basis, thus creating potential incentives for overutilization of services. Various efforts have been made over time for payers to develop alternative payment methodologies that in effect shift utilization risk to providers. The most recent flavor of payment reform, launched by the ACA, goes under the rubric of Accountable Care Organizations (ACOs); the jury is still out on whether ACOs will lead to lasting change in the payer-provider dynamic.
Should we expect to be talking about this?
Probably not very much, but if anything the wind will likely blow in the direction of reducing the already-limited governmental role in these areas.
Republicans in general have tended to be very leery of having the government play a significant role in making decisions about the provision of health care. And the new Secretary of the Department of Health and Human Services (HHS), former Rep. Tom Price, is a surgeon who has been at the vanguard of Republicans pressing such concerns. Given that, we are unlikely to see the government increase its oversight of how health care services are provided anytime soon.
One area to watch will be the extent to which payment reform initiatives such as ACOs survive whatever ultimately happens with respect to ACA repeal. Similarly, one can imagine an expressed governmental aim on initiatives to “bend the cost curve”—i.e., reduce the differential that has persisted for decades between health care inflation and general inflation—but it is not clear what specific policies might be proposed in an effort to accomplish this.
In that vein, the pricing practices of pharmaceutical manufacturers have received an increasing amount of bad publicity during the recent election cycle. But will anything actually come of that angst, from a health policy standpoint? When the Republicans were in power a decade ago and initiated the Medicare Part D program, they declined the opportunity to have the government play a role in negotiating drug prices on behalf of all Part D carriers, in favor of a model where each private insurer negotiates drug prices separately with manufacturers (in practice using pharmacy benefit managers, or PBMs, as negotiating intermediaries). Would the Republicans really reverse course now and advocate for a stronger governmental role in setting drug prices, when doing so would be inconsistent with their traditional free-market ideology?
Question 4: What should govern the availability and pricing of vehicles used to finance health care (e.g., insurance)?
Just as the spectrum of options for Question 3 depends to an extent on where one is positioned on the spectrum for Question 1, so too does the spectrum of options for Question 4 depend to an extent on where one is positioned on the spectrum for Question 2.
The right end of the spectrum is fairly clear—a world with no governmental role in guaranteeing access to health care financing or in restricting the ability of insurers to price based on their assessment of the individual’s risk characteristics.
The left end of the spectrum is a little harder to articulate crisply but would involve a strong governmental role across multiple dimensions, potentially including many or all of the following (depending on the financing paradigm in place):
- Guaranteeing an individual’s right to participate in the financing vehicle or potentially even mandating participation.
- Requiring that premiums be socialized across individuals having disparate risk characteristics.
- Selecting which insurers (or categories of insurers, e.g., not-for-profit, investor-owned) are permitted to offer products.
- Restrictions on how insurers are allowed to design products (e.g., what benefits are covered, how enrollee cost-sharing mechanisms work).
- Strong forms of rate regulation (e.g., governmental preapproval of premium rates before products can be marketed).
- Risk equalization mechanisms across insurers.
- Sharing financial risk with insurers, and/or limiting insurers’ profits.
Of course, as health actuaries know all too well, there are deep interrelationships across these concepts.
Where we are
As noted earlier, we currently operate in very different parts of the Question 2 spectrum for different subpopulations. Given that, it shouldn’t be too surprising that we operate in different parts of the Question 4 spectrum for different subpopulations. That is, the general framework of governmental involvement in insurance regulation varies widely across different customer markets, as discussed below.
Having said that, the general theme is that we are currently far closer to the left end of this spectrum than we are for any of the other spectra discussed earlier. Put differently, health policy in the United States is oriented around regulating health insurance far more than it is around regulating health care per se.
Here is a snapshot of the status quo on insurance regulation, circa 2016:
- For indigent populations covered by Medicaid, there is a very strong governmental role in selecting insurers, setting premium rates, designing the benefit structure and assisting insurers in identifying and enrolling eligible individuals (often including auto-assignment of individuals to insurers). There is also frequent use of risk-sharing mechanisms between insurers and the state program.
- For retiree populations covered by Medicare, there is likewise a strong governmental role in selecting insurers, reviewing the proposed premium rates and putting parameters around the benefit design, although the total package of governmental involvement is somewhat less than in the Medicaid case. Also, risk equalization (e.g., Medicare risk adjustment) and risk-sharing (e.g., Part D risk corridor) mechanisms are in use.
- For populations getting financing through employers, there has been a general recognition going back to the 1990s that smaller employers benefit from a greater degree of rate regulation, whereas larger employers do not need the same level of governmental oversight in their negotiations with insurers. At a conceptual level, the ACA did not materially alter the nature of how large group health insurance is regulated, apart from the introduction of a participation mandate. Because most large employers already were providing health insurance, the practical impact of that mandate is unclear. Changes made by the ACA to this market were incremental and aimed at benefit structure and eligibility criteria, e.g., elimination of lifetime benefit limits, extending coverage for children to age 26. For the small group market, the ACA did make some changes to increase government involvement in rate regulation, but the market was already relatively heavily regulated.
- For other populations, the ACA has radically restructured the individual health insurance market in basically all of the ways listed earlier: adding a guaranteed access requirement (and theoretically a participation mandate, albeit a very weakly enforced one); banning gender or health status (apart from smoking status) as variables in pricing and limiting the use of age as a variable; increasing the governmental role in selecting insurers and preapproving premium rates, with the degree varying significantly from state to state; placing a number of restrictions on how insurers can design benefit packages (e.g., the “metallic levels”); adding risk equalization and risk-sharing features (although the latter did not operate as originally intended, to the detriment of many insurers, and many would argue the former has not quite operated as intended either); and adding a form of profit limitation on insurers, via the medical loss ratio (MLR) requirements leading to premium rebates.
Should we expect to be talking about this?
As our new president might say: big league.
It’s one thing to articulate a policy objective that the ACA needs to be repealed, but it’s entirely another thing to structure a new regulatory scheme for a health insurance market after having just torn up the existing scheme, particularly given the intrinsic interconnectedness of different regulatory concepts.
Will the new individual market have guaranteed access? Will there be a participation mandate, and, if not, will there be barriers to individuals entering the market at will? Will the government continue to subsidize participation in the market for lower-income individuals? How will pre-existing conditions be treated? What restrictions will exist on pricing based on gender, age and/or health status? Will governmental preapproval of premium rates be diminished? Will there be risk equalization across carriers? Will insurers be given broader ability to develop product designs? What about network breadth requirements? What about premium rebates? What about high-cost claimants? Most critically: Will the new system cohere?
And the fun may not be restricted to the individual market: To the extent that the Republicans proceed with the concept of moving Medicare rightward along the financing spectrum, as discussed earlier, then there will likely be a need to restructure existing regulatory mechanisms around the Medicare Advantage market.
Another wildcard to watch for is the longtime Republican concept of “allowing insurers to sell across state lines.” While rarely articulated in such stark terms, in my view it’s appropriate to view this as a massive shift rightward along the insurance regulatory spectrum, in that it would likely encourage a regulatory race-to-the-bottom: So long as one state were to develop a relatively lax regulatory approach, insurers could offer products regulated by that state on a nationwide basis, with the effect of obviating other states’ efforts to impose more rigid regulatory regimes. There’s a reason why the credit cards in your wallet are regulated by South Dakota, Nevada or Delaware, regardless of where you happen to live.3
To quote Derek Jacobi’s famous line from the end of one of my favorite films, 1991’s “Dead Again:” “Well I, for one, am v-v-very interested to see w-w-what’s going to happen next.” This is bread-and-butter territory for health actuaries to be keenly involved in health policy debates, as many of us were during the Obama years (and some of us before that, during the early years of the Clinton administration). Strap in, the roller coaster is about to take off again …
It wasn’t that long ago that I and a number of other health actuaries worked to assemble a Society of Actuaries publication called “The ACA@5,” in honor of the fifth anniversary of the act’s passage. Part of my thought process in instigating that project was a feeling that the ACA was about to become part of the permanent landscape of the U.S. health care economy, and there would be value in documenting many of the implementation issues we went through in the ACA’s early years before memories started to fade, for the benefit of future generations.
So much for that.
Instead, as I write these words, we sit at a very different juncture, with health policy yet again front and center on the national stage. I don’t know what’s going to happen next, or what may have already happened by the time you get to read these words.
But whatever does happen in the years ahead, there is value in stepping away from the weeds for a moment—those lovely, lovely weeds in which we health actuaries frolic—and try to understand how the news of the day fits into the larger picture. What health policy debates are we really having? And what health policy debates aren’t we having? My hope is that this article has helped you think about those questions.
Note: The views expressed are those of the author and do not necessarily reflect the views of Ernst & Young LLP.
The author expresses gratitude to the Society of Actuaries’ Health Section for supporting the publication of this article. The author would also like to thank the following: Craig Reynolds, FSA, MAAA, for asking the original question on Facebook that started the ball rolling on this article; Sara Teppema, FSA, MAAA, for expressing enthusiasm about the article’s proposed title before there was an article; and Darrell Knapp, FSA, MAAA, and Andrea Christopherson, FSA, MAAA, FCA, for providing constructive feedback on early drafts and in particular assuring me that the article was not wholly devoid of merit.
- 1. McArdle, Megan. “The Public Option: It’s Baaaaaaaack!” Bloomberg, July 12, 2016. ↩
- 2. This quote was from item 10 of Donald Trump’s July 2016 ten-step plan for VA reform, which is no longer available on www.donaldjtrump.com. For a contemporaneous account: Leonard, Kimberly. “Trump Releases VA Plan.” U.S. News, July 26, 2016. ↩
- 3. Curry, Pat. “How a Supreme Court Ruling Killed Off Usury Laws for Credit Card Rates,” Nov. 12, 2010. ↩