General Pressures on Health Spending

VII. Key Issues: Regulation & Reform >> C. Health Reform >> Affordable Care Act (ACA) >> ACA Overview >> General Pressures on Health Spending (last updated 8.21.16)


A comprehensive analysis by Mark Warshawsky at Towers Watson titled Bending the Cost Curve: Will Health Care Reform Rein in Health Care Spending? (October 2010) sorted the most important provisions of the ACA into their anticipated effects on health utilization and expenditures. The first category were cost containment provisions designed or expected to create pressures for lower health spending. In the second category were provisions leading to higher total spending and price pressures. Although the author reviews and critiques selected estimates made by official government agencies and ACA proponents, he does not attempt to provide his own net assessment of the law’s impact.

Cost Containment Provisions

  • Create a Center for Medicare and Medicaid Innovation (CMI) to test payment and delivery models while preserving or enhancing quality of care under Medicare, Medicaid and the Children’s Health Insurance Program (CHIP). The initial emphasis will be on populations with poor clinical outcomes and high spending, and on improving coordination, quality and efficiency. The secretary of Health and Human Services (HHS) can expand these demonstration projects nationwide if the Centers for Medicare and Medicaid Services (CMS) actuary determines they can reduce spending.
  • Have Medicare recognize groups of providers and suppliers who meet certain quality criteria as accountable care organizations (ACOs). ACOs can share in cost savings they achieve for Medicare, even receiving bonuses if the savings are large enough. This program will also be available to pediatric medical groups under Medicaid.
  • Test an alternative payment methodology for Medicare nationwide in a voluntary pilot program to incent providers to coordinate patient care across the continuum and to manage all care associated with a hospitalization. Similarly, create demonstration projects under Medicaid to pay bundled payments for episodes of care that include hospitalizations.
  • Establish other programs to encourage providers and plans to provide more efficient care for certain chronically ill and high-risk Medicare and Medicaid populations.
  • Establish an Independent Payment Advisory Board to submit proposals to reduce Medicare spending if projected growth rates in Medicare spending per beneficiary exceed target growth rates specified in the law. The board’s proposals take effect automatically unless Congress passes an alternative that achieves the same level of savings. But proposals cannot ration care, raise taxes or Part B premiums, or change benefits, eligibility or cost-sharing standards; and generally they cannot affect inpatient hospital and hospice care or diagnostic lab tests.
  • Reduce Medicare payments to home health providers. More significantly, Medicare payments to all providers (except physicians, who are governed by different payment rules) will be adjusted by the percentage change in the 10-year moving average of annual private nonfarm business multifactor productivity. The Medicare trustees expect a 1.1% annual reduction. The phased-in adjustment varies by type of provider from 2010 through 2019, and will apply fully and equally thereafter.
  • Reduce Medicare Advantage (MA) plan benchmarks for payment to roughly the cost of fee-for-service Medicare services — more for low-cost counties and less for high-cost counties. High-quality MA plans get a bonus in their benchmark, while rebates to plans bidding less than the benchmark are generally lowered and are further modified for plan quality and certain coding practices. Plans with low medical loss ratios must remit partial payments to Medicare, and plans with consistently low ratios will be barred entirely.
  • Shorten the period for submitting Medicare claims. Physicians ordering durable medical equipment (DME) or home health services must be enrolled in Medicare, and face-to-face encounters with patients are required for such orders.
  • Adjust Medicare hospital payments based on performance under a value-based purchasing program. These incentives will be funded from the base operating diagnostic-related group payments. The law also reduces payments to acute care hospitals whose rates of hospital-acquired conditions are in the top quartile and those with high readmission rates. Disproportionate share hospital payments will be reduced significantly, although hospitals dispensing significant amounts of uncompensated care will receive bonuses.
  • Pay Medicare bonuses to physicians who report quality measures and impose penalties on those who do not.
  • Reduce Medicare payments for magnetic resonance imaging and bone density tests and expand competitive bidding for DME.
  • Create an annual wellness visit benefit for Medicare beneficiaries, and eliminate cost-sharing for certain preventive services recommended by the U.S. Preventive Services Task Force (USPSTF). The law blocks payments for preventive services discouraged by the USPSTF, however, and restricts Medicare reimbursement for certain mental health services.
  • Increase the Medicaid drug rebate (to governments from drug manufacturers) percentage for brand-name drugs.
  • Require the disclosure of financial relationships between health entities, such as physicians, hospitals, pharmacists, and manufacturers of drugs and devices.
  • Support comparative effectiveness research by establishing a nonprofit Patient-Centered Outcomes Research Institute to compare the clinical effectiveness of medical treatments. Findings from this research, however, cannot be used to deny coverage or be construed as a guideline.
  • Award demonstration grants to states to develop alternatives to current medical tort litigation.
  • Simplify health insurance administration by adopting a single set of operating rules for eligibility verification and claims status, electronic fund transfers and health care payments, health claims and similar processes.
  • Increase the threshold for itemized deductions for unreimbursed medical expenses from 7.5% to 10% of adjusted gross income. Limit annual contributions to a flexible spending account for medical expenses to $2,500.
  • Structure the new health insurance exchanges established by the states for the individual and small group markets to encourage competition among health plans based on price rather than on risk selection and benefit design. This will presumably occur through standardized plans negotiating lower prices from providers, new approaches to eliminate unnecessary utilization and reductions in administrative costs. The framework here, sometimes called managed competition, assumes participants will choose low-cost plans because their government subsidy (discussed below) is fixed. It also assumes competing insurers will cut costs and therefore lower prices.
  • Impose a 40% excise tax on employer-sponsored health plans to the extent the value exceeds $10,200 for individuals and $27,500 for family coverage, as indexed, effective in 2018. The threshold amounts are somewhat higher for 55- to 64-year-old retirees, and for “high-risk” professions and firms with older workforces. The tax penalty is intended to motivate employers to encourage their employees to choose high-deductible-and-co-pay health plans, such as account-based health plans (ABHPs), perhaps with limited provider choice. These plans, in turn, will encourage participants to make more cost-effective choices of health care goods and services. Alternatively, health maintenance organizations might make a comeback.

Additional Resources

Provisions Leading to Higher Total Spending and Price Pressures

  • The law requires most U.S. residents to maintain “essential health benefits.” Those who don’t will be subject to a tax penalty. Employers must pay penalties for full-time employees who receive tax credits (described immediately below) for health insurance through an exchange, with exceptions for small employers. Employers with more than 200 employees must automatically enroll eligible workers in their group health plans, with an opt-out right for employees. The government will provide a tax credit to small employers with low-income workforces that provide health insurance.
  • The federal government will provide premium tax credits on a sliding scale for those with incomes below 400% of the federal poverty level (currently $22,050 for a family of four). The premium credits will be tied to the second-lowest-cost “silver” plan in the geographical area, thereby limiting premium contributions from the insured to certain percentages of income for this level of benefits. (Plans are designated bronze, silver, gold and platinum, in increasing order of generosity of benefits, lower cost-sharing and higher premium costs.) But, beginning in 2019, if aggregate premium credits and cost-sharing subsidies exceed a certain percentage of national income, the change in premium credits is limited to the change in the Consumer Price Index. An employee whose employer offers coverage is eligible for a premium tax credit through an exchange if the group health plan does not pay at least 60% of covered benefit costs or if the employee’s share of the premium exceeds 9.5% of her income. Legal immigrants who are barred from enrolling in Medicaid during their first five years in the United States will be eligible for premium credits. The government will also provide cost-sharing subsidies through the exchange to eligible individuals and families with incomes below 400% of the poverty level.
  • Health care reform expands Medicaid to cover everyone under age 65 with incomes up to 138% of the poverty level.
  • Insured employer plans will become subject to nondiscrimination requirements.
  • All plans must offer coverage to adult children up to age 26, comply with restrictions on annual and lifetime benefit limits, and eliminate pre-existing condition exclusions. Waiting periods for eligibility may not exceed 90 days, and rescission of coverage is not allowed, except in cases of fraud or intentional misrepresentation.
  • All plans, except grandfathered employer-sponsored plans, must provide preventive care services without cost sharing. They must also make “effective” internal and external appeals processes available, eliminate any restrictions or limitations on emergency care, and include guarantee issue and renewability. Most plans must also offer at least the essential benefits package and limit premium ratings.
  • Pharmaceutical, manufacturing and health insurance companies must pay substantial annual fees to the government. In a competitive market, these fees are eventually passed to buyers, according to economic models.
  • The law increases Medicaid payments for primary care physicians, at least temporarily, to Medicare levels, and Medicare will pay a 10% bonus to primary care physicians.