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In a 5-4 ruling, the U.S. Supreme
Court has preserved the individual mandate and upheld the
constitutionality of the Patient Protection and Affordable Care Act (PPACA),
with the notable exception that states can now opt out of Medicaid
expansion. Milliman consultants cannot offer legal interpretations of
this historic decision, but we can offer perspective on what it means to
the healthcare system. The many stakeholders that have been preparing
for PPACA for more than two years can continue
that preparation. And while there remains some uncertainty—a Republican
victory in November could still lead to a repeal of the law—many
stakeholders that have been slow to move may now see an incentive to do
In this article, we outline 10 strategic considerations for insurers, employers, providers, taxpayers, and the government.
In 2009, as the American healthcare
reform conversation began in earnest, Milliman was already several
years into an effort to better understand American healthcare reform. We
had invested millions of dollars in research, developing models and
methodologies that could study vast changes to the current system. At
that time, we recognized that there were certain ideas that might have
been controversial before but that are now anticipated to be part of the
solution. Value-based pricing. Prevention. Managed care. Evidence-based
medicine. A move away from fee-for-service. Improved transparency,
especially around costs. Electronic health records. Consumerism.
But there is a difference between knowing what to do and doing it. PPACA
jumpstarted several efforts, forced lessons around some of these
concepts (sometimes difficult lessons), and mobilized the industry to
change. Now in 2012, the healthcare industry—especially insurers,
employers, providers, and the government—has learned some things it did
not know before. The ultimate test is acceptance by the public once
these concepts are implemented on a widespread basis.
we awaited the Supreme Court's decision, we realized that regardless of
the outcome many of these concepts are now becoming entrenched in the
system. While this decision has important and unique ramifications, much
of the change coming to American healthcare is already underway.
Ten strategic considerations
- Adverse selection may still be a challenge.
Guaranteed issue and community rating make the individual insurance
market more accessible to the uninsured, but without an effective
individual mandate these reforms create adverse selection.1
The key word there is effective. If enrolling in a healthcare plan is
viewed as optional for U.S. citizens because the penalties have limited
teeth, those who consider themselves healthy are less likely to enroll
because it may not be in their immediate economic best interest. For
pricing to be sustainable, these healthier people must enroll in order
to balance out the insurance pool costs and health risk.
Milliman analysis on the effectiveness of the individual mandate
indicates that much depends on a person's household income, age, and
family type.2 As the exchanges come online in 2014, many will
be focused on the enrollment to determine how this theoretical
underpinning bears out in actuality.
One new wild card: The court's ruling on Medicaid expansion
complicates the adverse selection question, because the decision raises
access questions for certain low-income individuals. Which brings us to
- Medicaid expansion just became a far more complex and variable proposition.
The Supreme Court decision gives states the option not to participate
in Medicaid expansion. In states that opt not to participate, there are
big questions about how their Medicaid programs will function and how
all this may affect the population that would have been
Medicaid-eligible through the expanded coverage.
If a state does not participate in the Medicaid expansion, to what
extent will those below the 133% federal poverty level (FPL) threshold
qualify for premium tax credits and cost sharing subsidies?
Is a partial expansion possible? Are states that opt out of Medicaid
expansion able to receive any portion of the enhanced federal funding
available under PPACA through a partial expansion using waivers or a state plan amendment?
Are provisions of PPACA that are not
explicitly tied to Medicaid expansion still in effect for states that
opt out of the expansion? For example, will states have to abide by the
primary care physician fee schedule increase that is scheduled for 2013
With the court upholding the exchanges and other components of the
law, the interaction between Medicaid and these components creates a
maze of issues for states, insurers, employers, and the uninsured.
- Employers grapple with new options and plan requirements.
Employers need to consider how the employer-sponsored insurance (ESI)
model fits in their future. Many employers are intent on maintaining
such benefits, recognizing a distinct recruiting and retention
mechanism. Reports of ESI's demise are premature as of this date.
Employers will continue to review and amend their plans in efforts to
control costs, and there are distinct advantages and cost pressures
brought on by PPACA. There may also be new
incentives for pursuing a self-funded approach, even by certain small
employers. And the law does include some disruptive elements for ESI
that bear watching. For example, many feel that the summary of benefits
and coverage statements that employers must send to employees are
burdensome and won't be sufficiently useful to employees.
The change to Medicaid expansion could also complicate matters for employers. Under PPACA,
employers with over 50 employees may be subject to additional plan
affordability penalties for employees under 133% FPL—unless these
individuals are Medicaid eligible. If a state does not expand Medicaid,
employers above 50 lives may be subject to more plan affordability
penalties than they would be were their state to pursue Medicaid
expansion. In this sense, a state's decision to expand Medicaid may have
cost implications for employers. How will the anticipated healthplan
costs for employers change now that low-income employees may not be able
to qualify for Medicaid in certain states?
- What is the effect on early retirees? PPACA may change the landscape for how employers handle early retiree healthcare coverage.3
New options emerge for those between ages 55 and 65, with the exchanges
becoming very attractive for attaining affordable coverage. The absence
of medical underwriting, the limitations placed on age rating (i.e., a
maximum 3-to-1 ratio between insurance premiums for the oldest and
youngest), and the availability of premium and benefit subsidies make
the exchanges an affordable place for people 55-65 years old to purchase
- Rate review scrutiny and no risk selection: Something's got to give. PPACA
has brought about increased scrutiny of rate increases, and it seems
likely this will continue. But with a 10% increase now deemed
potentially "unreasonable" by federal regulators, and with traditional
underwriting/risk selection taken out of the system, there are all the
signs of an inevitable collision. An influx of less-healthy people could
make it very difficult for many plans to stay below the 10% ceiling
without losing money and risking financial instability. If the
individual mandate works as hoped, this may be mitigated. Risk
adjustment, reinsurance, and risk corridors are also supposed to help
with this issue, but will they be enough? This is one to watch.
- Which states will get on the exchange bandwagon?
Some states have pushed forward aggressively with implementing a state
health insurance exchange, while others have resisted. Will the Court
decision set exchange efforts in motion in the states that were not
Given the often political nature of this resistance, and the
outstanding question of the presidential election and whether a
Republican victory could bring about a repeal of PPACA,
in many states the delay may continue. With states empowered to opt out
of Medicaid expansion, states that have pushed back against exchanges
have another front on which to not participate with PPACA.
But states with efforts already under way now have more wind at their
backs. The 2014 deadline is becoming imminent, creating an incentive to
get moving. And states also face a deadline on January 1, 2013, at
which time the federal government will assess whether states have the
infrastructure in place to proceed with an exchange. For some states
these two deadlines may be enough to begin implementation efforts.
- Minimum loss ratios (MLR) pose an ongoing challenge for insurers.
While the minimum loss ratio requirement—the idea that 80-85 cents of
every healthcare dollar should go toward medical care—sounds good, it is
out of step with the financial realities many insurers face. Claims do
not always move in a predictable way, meaning that medical costs can be
volatile.4 Previously, an insurer's lower claim cost years
could help balance out the higher claim cost years. However, under the
MLR rules, insurers need to pay out rebates during lower claim cost
years as opposed to building up reserves for higher claim cost years.
This dynamic will be amplified if the individual mandate is ineffective
and adverse selection ensues.
The MLR rules, as written, also present challenges to high-deductible
health plans (HDHPs), because the MLR calculation only includes plan
expenses, not patient expenses. These plans give consumers greater skin
in the game, thereby encouraging more judicious use of care.5
Expenses to administer these plans are typically higher as a percentage
of premium than they are for richer benefit plans. To the extent that
the MLR requirement takes these plans off the table, it could also
remove a possible cost-reducing concept from the mix.
The MLR rules challenge smaller insurers, which are more susceptible
to the underwriting cycle because they lack the volume to absorb down
years or to spread risk across multiple business lines.6 The
MLR rules also do not allow smaller health plans to pool large claims
across states, creating a significant issue for small multi-state plans.
Efforts are afoot to tweak the MLR rules and fix these problems, but
that doesn't change the reality that this rule is hard on insurers. The
difficulty is exacerbated by new rating rules. Insurers face a low
ceiling and a high floor, without much room to stand up.
- Risk adjustment is essential. The idea that
fee-for-service is broken and the reimbursement paradigm should be
turned on its head has popular support. Risk adjustment7 is
an important part of this new paradigm because it helps align revenue
with health status, a key calculus in a system that competes on health
and efficiency rather than volume.
To the extent that the exchanges face adverse selection challenges,
risk adjustment may be even more important. With a higher concentration
of morbidity potentially entering the market, there's an increased need
to balance those costs between carriers based on their relative risk
- Will cost shifting hold steady, increase, or decrease?
The current system includes various examples of cost shifting.
Uncompensated care pushes the cost of the uninsured onto other payors,8
and many providers cite low Medicare and Medicaid rates as an excuse to
push higher costs onto the employer-sponsored insurance market.9 While cost shifting is not inevitable,10 it bears watching. If PPACA's
efforts to cover the uninsured are successful, the uncompensated care
cost shifting will decrease. But with Baby Boomers increasing the number
of Medicare enrollees and at least some Medicaid expansion ongoing,
there will be added pressure to cost shift—unless providers can find the
efficiency to keep their costs in order.11
Costs will also shift on the consumer level. The changing rules
around age rating and medical underwriting will create subsidies funded
by young and healthy people to lower costs for older and less-healthy
people. Consumers who receive care in this market may not always
understand why their costs are going up—especially young people and
young men in particular—who will be subsidizing other more expensive
populations thanks to limited age, gender, and health ratings.12
- The cost problem persists. What can be done about it? PPACA
focuses on expanding coverage and insurance reform, and in some cases
it shifts costs from one party to another, but it does not directly
affect the unit costs and utilization that are among the major
underlying drivers of healthcare costs.
Certain aspects of PPACA have the potential to affect costs. The option to implement an accountable care organization (ACO)13
reprises the managed care movement of the '80s and '90s, but with
better technology and information, and by transferring the financial
risk onto the provider to create an incentive for efficiency. With many
potential ACOs already establishing the tools required to succeed,14
this reinvigorated movement is already in motion. The nuts and bolts of
an ACO are still the parts needed for a more efficient system.
Most of PPACA's explicit ACO efforts center
on Medicare, and while the Medicare Shared Savings Program (MSSP) and
Pioneer Programs will continue, the potential for commercial ACOs15 may prove just as significant.
Accountable care is not a solution to everything that ails the entire
healthcare system, but it offers some hope and, to the extent it can
meaningfully control unit costs and utilization, it just may work.
Questions persist as reform marches forward
There is still at least one major point of uncertainty: the November 6 presidential and Congressional elections. PPACA
has survived the first of its existential challenges. But with four
months of intense debate and a presidential election still to come, it
is not yet out of the woods.
In the coming days and weeks the
Supreme Court's decision will be dissected by experts from many fields,
especially as it pertains to Medicaid expansion. Milliman will continue
to publish actuarial and financial analysis of healthcare reform, and
will have more to say about this decision specifically. Check back for
more at www.milliman.com/hcr and www.healthcaretownhall.com.
1Snook, T. &
Harris, R. (October 2009). Adverse Selection and the Individual Mandate.
Milliman Health Reform Briefing Paper. Retrieved May 24, 2012, from http://publications.milliman.com/research/health-rr/pdfs/adverse-selection-individual-mandate.pdf.
2Houchens, P. (March
2012). Measuring the Strength of the Individual Mandate. Milliman
Research Report. Retrieved May 24, 2012, from http://publications.milliman.com/publications/health-published/pdfs/measuring-strength-individual-mandate.pdf.
3Ge, J. (June 2012).
Health insurance exchanges and early retiree health coverage. Milliman
Benefits Perspectives. Retrieved June 16, 2012, from http://publications.milliman.com/periodicals/bp/pdfs/BP-06-07-12.pdf.
4Cookson, J. (May
2011). Healthcare Reform's Minimum Medical Loss Ratios: How to Manage
the Increased Risk? Milliman Healthcare Reform Briefing Paper. Retrieved
May 24, 2012, from http://publications.milliman.com/publications/healthreform/pdfs/healthcare-reform-minimum-medical.pdf.
5Burke, J. & Pipich, R. (April 2008). Consumer-Driven Impact Study. Milliman Research Report. Retrieved May 24, 2012, from http://publications.milliman.com/research/health-rr/pdfs/consumer-driven-impact-studyRR-04-01-08.pdf.
8Families USA (2009). Hidden Health Tax: Americans Pay a Premium. Retrieved June 16, 2012, from http://familiesusa2.org/assets/pdfs/hidden-health-tax.pdf.
9Fox, W. &
Pickering, J. (December 2008). Hospital & Physician Cost Shift:
Payment Level Comparison of Medicare, Medicaid, and Commercial Payers.
Milliman Client Report. Retrieved June 20, 2012, from http://publications.milliman.com/research/health-rr/pdfs/hospital-physician-cost-shift-RR12-01-08.pdf.
10Pyenson, B. et al.
(March 18, 2010). High Value for Hospital Care: High Value for All?
Milliman Client Report. Retrieved June 20, 2012, from http://publications.milliman.com/research/health-rr/pdfs/high-value-hospital-care.pdf.
(June 2010). Why Hospital Cost Shifting Is No Longer a Viable Strategy.
Milliman Healthcare Reform Briefing Paper. Retrieved June 20, 2012, from
12van der Heijde, M.
& Norris, D. (August 30, 2011). The young are the restless:
Demographic changes under health reform. Milliman Insight. Retrieved
June 20, 2012, from http://insight.milliman.com/article.php?cntid=7879.
13Parke, R. &
Fitch, K. (October 13, 2009). Accountable care organizations: The new
provider model? Milliman Insight. Retrieved May 24, 2012, from http://insight.milliman.com/article.php?cntid=6056.
14Fitch, K. et al.
(July 2010). Nuts and Bolts of ACO Financial and Operational Success:
Calculating and Managing to Actuarial Utilization Targets. Milliman
Healthcare Reform Briefing Paper. Retrieved May 24, 2012, from http://publications.milliman.com/publications/healthreform/pdfs/828_HDP.pdf.
15Boyarsky, V. et al.
(April 22, 2011). ACOs Beyond Medicare. Milliman Healthcare Reform
Briefing Paper. Retrieved May 24, 2012, from http://publications.milliman.com/publications/healthreform/pdfs/acos-beyond-medicare.pdf.
CFHA Blog invited Millliman Inc. to share their evaluation of the outcome of the Supreme Court ruling on the Affordable Care Act. Milliman is among the world's largest independent actuarial and consulting firms. CFHA has consulted with Milliman on numerous policy efforts. See www.milliman.com.
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