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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

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.

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. !!!PAGE BREAK!!!

6. Creating Accountable Care Organizations
The ACA creates a national, voluntary shared savings program for accountable care organizations (ACOs). ACOs are collections of health care providers that formally assume responsibility for the cost and quality of health care given to a defined group of patients. Research has shown that ACOs have the potential to reduce growth in health care costs and improve patient outcomes by introducing incentives for efficient use of resources and encouraging greater coordination of care. Fifty-four percent of health care opinion leaders believe that ACOs are an effective model for moving the U.S. health care system toward population-based, accountable care. CBO projects that the ACO shared savings program included in the ACA will save $5 billion over 2010–19.

7. Controlling Spending Growth: Independent Payment Advisory Board
The ACA will establish an Independent Payment Advisory Board (IPAB) within the executive branch that has significant authority to identify areas of waste and opportunities for improving the quality of care for Medicare beneficiaries. The board’s recommendations will take effect in years when Medicare costs are projected to exceed predetermined rate-of-increase targets—unless Congress passes legislation to override those recommendations, in which case it would be responsible for achieving the same level of savings. The IPAB also will make recommendations for improving quality and slowing excess cost growth in the private sector. CBO estimates the board will generate $16 billion in savings over 2010–19, mostly in the out-years. Three-fourths of health care opinion leaders (75%) support creation of an independent advisory council that has the authority to make decisions within parameters established by Congress and subject to review by the president and Congress.

The hospital industry agreed to slow increases in Medicare payment rates in recognition of the increased revenue hospitals will earn from covering more uninsured Americans and the potential for significant productivity improvements. Slowing Medicare payment rate increases for all health care providers (other than physicians, whose payments are considered separately) yields $160 billion federal budget savings over 2010–19, according to CBO, and establishes the principle that rising expenditures cannot continue at projected rates.

8. Promoting Quality Improvement and Public Reporting
Under the ACA, the HHS secretary is tasked with developing a National Strategy to Improve Health Care Quality and establishing an interagency working group to coordinate and streamline federal quality activities. The law requires public reporting of physician quality and patient experience measures through a "Physician Compare" Web site for Medicare beneficiaries. It also makes Medicare data available for pooling with data on provider performance from other payers—an important step toward creation of an all-payer provider performance database. (The law takes steps to ensure beneficiaries’ privacy will be protected.) The American Recovery and Reinvestment Act (ARRA), signed into law by President Obama in February 2009, provides significant financial incentives for providers to adopt and demonstrate meaningful use of health information technology. These investments will facilitate the quality improvement and public reporting activities included in the ACA.

The law also includes a set of quality improvement reporting requirements for health insurance plans offered inside and outside the exchanges. Activities to be reported on include: improving health outcomes through care coordination and medical home models; preventing hospital readmissions through a comprehensive program for hospital discharge; and implementing activities to improve patient safety, reduce medical errors, and promote health and wellness. The secretary will make reports by health plans available to the public.

9. Encouraging Medicare Private Plan Competition
The ACA will level the playing field between Medicare private plans and the traditional Medicare public health insurance plan. This will yield $201 billion in federal budget savings over 2010–19, according to CBO. Moreover, this policy change could provide more impetus for plans to compete on value, creating at least some downward pressure on health care costs. Three-fourths of health care opinion leaders (77%) support such a provision.

10. Encouraging Consumers to Be Cost-Conscious: Introducing a Tax on High-Premium Health Insurance Plans
The new law includes a 40 percent excise tax on health plans with premiums in excess of $10,200 for individual policies and $27,500 for families, to take effect in 2018. Thresholds will be higher for certain high-cost groups and will be adjusted in case of unexpected increases in medical costs prior to 2018. CBO estimates that the tax will yield $32 billion over 2018–19.

Assessing the Law's Potential Impact

Consistent with the president's belief that health reform should be financially sustainable and not add to the federal deficit, the new law offsets the cost of expanding and improving coverage with a mixture of system savings and new revenue sources.

According to CBO, the total net impact of the ACA on the federal budget deficit is a reduction of $143 billion over the 10-year period 2010–19. This figure reflects the net federal costs of expanding coverage ($820 billion), offset by reductions in federal health ($511 billion) and education ($19 billion) spending as well as new revenues ($432 billion). 

The new reform law has the potential to produce substantial total health system savings for the nation—well beyond what is reflected in the estimated federal budget impact. The combined effect of these provisions on trends in national health expenditures, however, is difficult to estimate, and CBO has indicated that it does not have the modeling capacity to do so. Estimates released by the Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS) indicate that the law could produce modest increases in national health expenditures, but this estimate gives little credit for savings to measures that will reform provider payment, increase competition among plans in an insurance exchange, encourage public reporting, or apply the results of comparative effectiveness research. Yet these measures are a crucial platform for developing and implementing further policies to contain health care cost growth. As such, they have broad support from health care opinion leaders and business leaders as effective ways to control costs.

For example, an analysis by the Business Roundtable, prepared by Hewitt, found that such legislative reforms could potentially reduce the trend line in employment-based health care spending by $3,000 per employee by 2019. An analysis by The Commonwealth Fund and the Center for American Progress put health system spending savings at $590 billion over the 2010–19 period, slowing the annual growth in health expenditures from 6.3 percent to 5.7 percent (Exhibit ES-3).

CBO's estimates of federal budget impacts are fraught with uncertainty, given the multitude of changes and their potentially synergistic effects. On the last three occasions when CBO has estimated the savings or costs of major health reforms (the 1982–83 Medicare changes in hospital payment, the 1997 Balanced Budget Act, and the 2003 Medicare Modernization Act that established Medicare prescription drug coverage), the estimates were off the mark—with savings more than double those estimated in the first two cases and costs overstated by 40 percent in the third. Estimates of cost and savings under the ACA could similarly be seriously underestimated or overestimated; if so, policy conclusions based on current estimates may have to be reevaluated.

The measures incorporated in the law will stimulate significant changes in the organization and delivery of health services and create powerful incentives to improve efficiency and productivity. Given the uncertainties as to their ultimate impact, however, it will be especially important to establish a system for monitoring progress on agreed-upon health reform goals and provide a mechanism for mid-course corrections and further changes as needed to move the United States toward a high performance health system by 2020. Stronger measures may be required over time to move toward value-based methods of payment.

Even under current estimates, 23 million people will remain uninsured, and many others will still face financial barriers to obtaining needed care or hardship in paying premiums or medical bills. Additional steps may be required to ensure affordability for families as well as stable financing.

Finally, the one major omission from the new reform law is the absence of more significant incentives or levers for private insurers to control health care costs. Private insurers, in opposing a public plan, essentially have argued that they do not have the ability to slow premium growth or achieve economies because of demands for higher prices from a powerful and increasingly consolidated health care provider sector. It is important that the HHS secretary use new discretionary authority to test multipayer provider payment reforms and be responsive to requests from states or local groups to test innovative multipayer approaches. Over time, as experience is gained with new provider payment methods, strategies for harmonizing public and private provider payment and leveraging their joint purchasing power will be needed to avoid having public and private provider incentives working at cross-purposes.

The ACA will usher in a new era in American health care—one in which every American will have access to affordable health insurance coverage and no one is turned away simply because they have a preexisting condition. The new insurance market protections set to take effect in this and subsequent years are designed to work in concert with important payment and system reforms that will improve access and quality, and reduce cost growth for everyone. Reform is a historic victory for all Americans, who deserve the finest health system in the world. It will require the efforts of all stakeholders to make the promise a reality.

Publication Details



K. Davis, S. Guterman, S. R. Collins, K. Stremikis, S. Rustgi, and R. Nuzum, 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, The Commonwealth Fund, September 2010.