November 5th, 2013 | By Nick Sargen
When the Patient Protection and Affordable Care Act (PPACA, also known as "Obamacare") was passed in March of 2010, the stated objectives were to make healthcare coverage more secure and reliable for Americans, make coverage more affordable for families and small business owners, and reduce skyrocketing healthcare costs. The Act recognized that more than 45 million Americans lacked access to affordable health insurance, and many who had insurance were not covered for pre-existing conditions.
My initial assessment was that Obamacare would succeed in enrolling millions of people who were previously uncovered and this would shift out the demand for medical services. However, I was skeptical the legislation would help bend the cost curve back, as supporters of the program contended. This is a critical issue for the nation considering rising healthcare costs along with an aging population are the principal reasons entitlement programs such as Medicare and Medicaid are on unsustainable trajectories.
While investors largely ignored Obamacare following its passage, the wrangling over the U.S. debt ceiling and ensuing glitches in the government's healthcare website have brought it back to the fore. Accordingly, I have tried to get up to speed on Obamacare, so I can make informed investment decisions about its likely impact on the healthcare sector and economy.
Unfortunately, the process has proved to be very trying to say the least. Part of the reason is that the U.S. healthcare system is very complex as is the legislation to reform it. While the core of the political dispute over Obamacare involves a fundamental philosophical difference over the size and role of government, both sides often wind up making assertions that confuse the issue. Also, within the healthcare industry providers view Obamacare differently, depending on whether they are doctors (who typically oppose it) or hospital administrators (who support it).
The views that individuals express, moreover, often reflect their particular situations – e.g., whether they have existing coverage and are happy with it, or whether they lack coverage or have pre-existing conditions. In this regard, one the most contentious provisions included in the Affordable Care Act has to do with the individual mandate, which creates a tax penalty for individuals who are uninsured. The purpose of the mandate is to coerce younger, healthy individuals to sign up for insurance coverage so that premiums are more affordable for all who are covered by the system. Without the mandate, healthy people might choose not to buy expensive insurance. As Professor Jonathan Gruber of MIT notes: "If individuals are guaranteed insurance access at prices that are independent of health status, then many may - free ride' by remaining uninsured until they are sick and then buying insurance at average prices." (See "The Impact of the Affordable Care Act: How Reasonable are the Projections," NBER Working Paper No. 17168, June 2011).
When Obamacare was reviewed by the Supreme Court, it upheld the right to impose a tax (or penalty) on those who choose not to be insured. Opponents, nonetheless, are still seeking to eliminate the mandate, which is scheduled to become effective in 2014. Recognizing these challenges, I decided to focus on two issues that are of paramount importance: (1) will Obamacare improve the efficiency of the U.S. healthcare sector? And (2) will it encourage employers to increase the share of part-time workers they employ in order to control healthcare premiums?
One of the key economic issues is whether the new regulatory structure under the Affordable Care Act will make the U.S. healthcare system more efficient. The criticisms of the current system are well known: U.S. healthcare spending has doubled over the past three decades and now approaches 18% of GDP, which is nearly twice the share of other industrial countries. Despite this, the United States is below the median of 21 other advanced economies in terms of key metrics such as life expectancy at birth, infant mortality and adult deaths due to cancer, heart disease/diabetes and respiratory illnesses. Also, the majority of medical expenses individuals incur over their lifetimes are concentrated in the last year. Recognizing these issues, some observers contend the U.S. healthcare system must be reformed.
A report by Dr. Scott Gottlieb, a practicing physician who has served at the F.D.A. and was a senior advisor at the Centers for Medicare and Medicaid Services, helps to frame the issue. (See "How Obamacare Will Reshape the Practice of Medicine," Networks Financial Brief 2013-PB-06, October 2013). According to Dr. Gottlieb, the primary motivation for the Affordable Care Act was President Obama's belief that the existing medical system was highly inefficient. He contends the President was influenced by findings at the Dartmouth School of Medicine, which showed there was no correlation between high medical spending in regions of the country and better outcomes. The logic of Obamacare was that the money saved by eliminating waste in the existing medical system could be used to fund expanded coverage to the uninsured.
Dr. Gottlieb contends the Affordable Care Act fundamentally restructures the practice of medicine by shifting medical risk away from insurers (and patients) onto healthcare providers: "By putting all the providers on the same economic footing, the belief is the measures will reduce the variation and waste observed by the Dartmouth researchers." He notes that this was the same logic private managed care companies adopted in the 1990s, mostly with failed results.
To accomplish its goals, the ACA legislation contains three primary constructs. The first is creation of "accountable care organizations" (ACO) in which hospitals purchase local medical practices, form large outpatient networks, and turn doctors into salaried employees. The second is various forms of captivated payment arrangements, which give providers lump sums of money for common medical problems (such as setting the length of hospital admission for heart failure or pneumonia.) The third is the power conferred on the Centers for Medicare and Medicaid Services (CMS), which assigns sweeping authority to change what is paid to providers.
What's wrong with these changes? Dr. Gottlieb argues that the basic construct of Obamacare – consolidating providers into large, integrated delivery systems simply won't work. He contends that two-thirds of American physicians are working as employees of large groups and hospitals, and that "it is well documented that clinical productivity declines once doctors become salaried employees." Another assertion is that turning medical practice into shift work limits continuity of care, and the covering doctor often doesn't know the patient. He also believes the new arrangement will hamper entrepreneurship in medicine and likely lead to a shortage of qualified physicians.
To get a hospital executive's perspective, I asked John Prout, President and CEO for TriHealth, which oversees Bethesda and Good Samaritan hospitals in Cincinnati, for his views. (I have known John for the past ten years while serving on the Good Samaritan Hospital Foundation Board and find him extremely knowledgeable and objective on U.S. healthcare). His take is the hospital industry has supported the Affordable Care Act both for moral and financial reasons. For example, he notes that hospitals are obliged to treat those who show up at emergency rooms without insurance, and that they ultimately cover these expenses via "burden sharing" by those who can pay. Prout also acknowledges the vast regional differences in medical expenses for similar treatments, and he believes the shift from a system that rewards volume of service to one that rewards efficient, effective care and which better aligns reimbursement rates with provider costs is welcome.
After weighing these considerations, however, I still have not found any compelling reasons to believe Obamacare will bend the supply curve for medical services. In the NBER working paper cited earlier, Professor Gruber of MIT, who was an architect of the Affordable Care Act, lists several provisions in it that are designed to address problems of rapidly rising healthcare costs. At the same time, he acknowledges the inherent difficulty of projecting the impacts of such a fundamental reform. The remainder of the paper goes on to discuss findings from the Massachusetts experiment, which served as the model for both Romneycare and Obamacare.
Professor Gruber concludes with the following assessment:
"The real question is how the ACA will go in slowing cost growth. Here, there is great uncertainty…In the face of such uncertainty, the ACA pursued the path of considering a range of different approaches to controlling healthcare costs, from those that work on the demand side (the Cadillac tax), to those that work on the supply side (innovative provider payment models), and to those that promote the type of evidence-based medicine that is key to ensuring cost effectiveness. Whether these policies by themselves can fully solve the long-run health care cost problem with the United States is doubtful. They may, however, provide a first step towards controlling costs – and understanding what does and does not work to do so broadly."
Another provision of Obamacare that has garnered considerable attention is the employer mandate, which requires employers with over 50 full-time equivalent employees to offer health insurance coverage. If such employers do not offer coverage, they face a penalty of up to $2,000 per year for each full-time worker. Even if the employer offers coverage, they face other potential penalties if the insurance doesn't meet certain standards for affordability or adequacy. This mandate becomes effective in 2015.
Critics of the program contend this mandate will encourage small businesses to hire more part-time workers so they do not have to meet this requirement. In fact, some assert it is already happening.
In this regard, I found an article by Michael Feroli of JPMorgan (See "Global Data Watch" October 25, 2013) noteworthy, as it examines whether there is any evidence that the Affordable Care Act has caused this to happen. If so, we should expect to see (1) an increase in part-time employment as a share of overall employment and (2) a decrease in the average workweek. While this occurred during the period immediately following the 2008-09 financial crisis, Feroli concludes there is little evidence that Obamacare has been a factor. He points out that businesses with between 50 and 74 workers employ just over 4% of the workforce, and that 94% of the businesses with 50 to 199 workers already offer health benefits to employees. This suggests that only a small share of the workforce – on the order of one quarter of one per cent – is employed by firms that don't offer health benefits and are close to the 50 employee "cliff."
Feroli also points out other aspects of the ACA could impact the labor market over the long-run. One possibility, for example, is that businesses with more than 50 employees that do not already offer coverage may lower wages to compensate for higher insurance premiums. However, he notes that the impact on wages is uncertain, because some small businesses may choose to drop coverage if their lower-paid employees are eligible for subsidized coverage.
Feroli concludes that there is little evidence that healthcare reform is having any impact on the labor market thus far. But he acknowledges there could be an effect once the employer mandate comes into play in 2015.
When the Affordable Care Act was passed in 2010 it was considered to be a landmark achievement by its supporters and the beginning of socialized medicine by its detractors. Three years later, Obamacare is even more politically charged, as Tea Party supporters have tried to de-fund it and critics have blasted the program's rocky start.
Lost in all the fury is a key issue investors should be concerned about – namely, will Obamacare improve the productivity of the U.S. healthcare system; or will it make the system more rigid and opaque? After reading a number of articles on the topic, my conclusion is there are no easy answers, because the legislation is extremely complex and far reaching. While I remain skeptical that Obamacare will bend back the cost curve, I withhold making a definitive conclusion until there are sufficient data. Meanwhile, however, the evidence does not support the assertions of critics that Obamacare will significantly boost the share of part-time workers.