Starting on the Path to a High Performance Health System: Analysis of the Payment and System Reform Provisions in the Patient Protection and Affordable Care Act of 2010

September 23, 2010

Authors: Karen Davis, Ph.D., Stuart Guterman, Sara R. Collins, Ph.D., Kristof Stremikis, M.P.P., Sheila Rustgi, and Rachel Nuzum, M.P.H.

Contact: Karen Davis, Ph.D., President, The Commonwealth Fund,
Editor: Martha Hostetter and Christopher Hollander



This report, originally published in December 2009 and since updated to reflect the March 2010 passage of the Patient Protection and Affordable Care Act, analyzes the provisions in the new law that will affect providers' financial incentives, the organization and delivery of health care services, investment in prevention and population health, and the capacity to achieve the best health care and health outcomes for all. Major initiatives include establishment of health insurance exchanges and new market rules, creation of an Independent Payment Advisory Board and Center for Medicare and Medicaid Innovation, and introduction of payment policies designed to reward hospitals and physicians for value rather than volume. Recent analysis shows that these provisions have the potential to reduce administrative expenses and lead to significant modernization of the health care system, lowering the rate of cost growth and returning total national savings of $590 billion or more in the coming decade.

Executive Summary

To achieve a high performance health system, health reform must go beyond ensuring affordable coverage to addressing health system changes that will improve outcomes and the quality of care, increase efficiency, and slow the growth in total health system costs. This report analyzes how the new health reform law (The Patient Protection and Affordable Care Act of 2010, or ACA) will affect providers’ financial incentives, the organization and delivery of health care services, investment in prevention and population health, and the capacity to achieve the best health care and outcomes for all.

The ACA will fundamentally change the health care system by increasing value for the money spent on health care. Most of the ideas that have been advanced by policymakers and health care opinion leaders to deal with rising health insurance premiums and health care costs are reflected in the law (Exhibit ES-1).ES-2

Key Provisions Targeting Costs and Quality

The new law will make several key changes to help ensure long-run cost containment and improve the quality of health care:

1. Establishing Health Insurance Exchanges and New Market Rules
The ACA will establish health insurance exchanges that give consumers the ability to compare and choose among health plans. It also sets rules on plans sold inside and outside the exchanges to shift insurers from competing for healthier enrollees to competing on value. While the Congressional Budget Office (CBO) does not credit savings that could be generated from increased competition among plans, it estimates that the insurance exchanges will lower administrative overhead by four to five percentage points. In the authors’ view, the insurance exchanges will be effective over the long term in mitigating the rise in premiums and costs to employers and households. These positive effects will grow if the exchanges are gradually opened to larger firms (an option after 2017). A recent Commonwealth Fund report found that reform will lower administrative costs and encourage more efficient care delivery, reducing premiums by nearly $2,000 per family by 2019. And according to a recent Commonwealth Fund survey of health care opinion leaders, support for establishment of health insurance exchanges is overwhelming (92%).

2. Creating New Nonprofit Plan Choices
The ACA authorizes the secretary of Health and Human Services (HHS) to provide loans and grants to member-governed nonprofit insurance issuers that offer qualified health plans within the new exchanges. Priority will be given to plans associated with integrated delivery systems. Nonprofit issuers will be allowed to enter into collective purchasing agreements with providers. Commonwealth Fund analysis has shown that nonprofit cooperatives with integrated delivery models have transformed health care delivery into mission-driven, patient-centered, and value-enhancing systems that are accountable to patients and consumers.

The federal Office of Personnel Management (OPM) also will contract with health insurers to offer at least two multistate health plans through the exchanges in each state. At least one of the plans must be nonprofit. OPM will negotiate contracts in a manner similar to its negotiations for the Federal Employees Health Benefits Program (FEHBP). The multistate plans must meet standards for medical loss ratios, profit margins, and premiums; cover essential health benefits; and meet the requirements for qualified health plans sold through the exchange.

3. Requiring Qualified Health Plans to Meet Minimum Medical Loss Ratios and Reviewing Insurance Premium Increases
Qualified health plans offered in the state exchanges will be required to spend 80 percent of premiums collected in the individual and small-group markets on medical care for enrollees. Eighty-five percent of premiums in large-group plans are to be spent on medical care. These provisions will encourage health insurance companies to eliminate wasteful administrative spending and increase the value consumers receive for their premium dollars. In addition, as a condition of receiving federal grants for reviewing insurance premium trends, states will make recommendations to the HHS secretary for excluding carriers from insurance exchanges on the grounds of unjustified rate hikes prior to reform implementation. The secretary, in conjunction with the states, will monitor premium increases inside and outside the exchanges beginning in 2014.

4. Incentivizing Primary Care and Prevention
The law includes a number of provisions to increase primary care payment rates under Medicare and Medicaid, cover effective preventive services without patient cost-sharing, and support community and employer prevention and wellness programs. The ACA also increases funding for community health centers and the National Health Service Corps, expanding access to basic health care services to some of the nation's most vulnerable and underserved communities. These provisions could begin to focus our health system on primary care, rather than specialty care; counter the impending shortage of primary care providers; and lay the groundwork for more fundamental payment reforms.

5. Stimulating Innovative Provider Payment Reform
The new law will establish a Center for Medicare and Medicaid Innovation with broad authority for the HHS secretary to test innovative payment methods for medical homes that provide patient-centered coordinated care and for bundled hospital acute and post-acute care. The ACA will reduce Medicare reimbursement rates by 1 percent for hospitals that have high rates of readmissions for certain conditions. The law also allows states to test and evaluate fully integrating Medicare- and Medicaid-covered health services provided to "dual eligibles," and to test and evaluate systems of all-payer payment reform. Nearly all health care opinion leaders (97%) support reforming provider payment to promote quality and efficiency.