A take on health care reform

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“Health care reform is among the most significant — and controversial — pieces of federal legislation in the last several decades. People continue to debate whether reform will cure much of what ails the American health insurance system or simply trigger new headaches.

Thomas Buchmueller had a front-row seat as reform was being implemented. From 2011 to 2012, he was the senior health economist in the Executive Office of the President’s Council of Economic Advisers.

Buchmueller — who is now the Waldo O. Hildebrand professor of risk management and insurance at the University of Michigan’s Stephen M. Ross School of Business in Ann Arbor, Mich. — believes health reform will be a boon to millions of Americans. He maps out where the American health care system is today and where it likely is going.

How does health care reform affect the average American’s finances?

A primary function of health insurance is to provide protection against the financial risk of catastrophic medical expenses. So the 30 million or more people who gain health insurance coverage as a result of the Affordable Care Act, or ACA, will see not only a reduction in what they have to spend on medical care in an average year, but also a reduction in the possibility that they will be bankrupted by a major health event.

For Americans who are currently insured, the changes will be more subtle. The vast majority of people with private health insurance are covered through the workplace. That will continue to be the case, and workers who remain in the same job should see little or no change in their insurance coverage.

However, for people who don’t have access to health benefits at work or who are changing jobs, the Affordable Care Act creates a new set of affordable insurance options. Many people who are currently purchasing individual insurance coverage will face lower costs, particularly if they qualify for a premium tax credit.

Some people contend that high-risk pools will help many people with pre-existing conditions. Others say the high-risk pools will be too expensive and that they may not have enough government money to stay in business until they are replaced with something better in 2014. What are your thoughts?

The high-risk pools are a temporary fix designed to provide people with costly pre-existing conditions better access to insurance coverage until 2014, when the ACA’s full set of consumer protections go into effect. The premiums for the high-risk pools are subsidized relative to their full actuarial cost, but they are still expensive relative to what most families can afford.

Coverage options for high-cost individuals will improve substantially starting in 2014. They will no longer face higher premiums because of their health status, and if their income is below 400 percent of the federal poverty level, they will qualify for tax credits that will reduce the cost of insurance purchased through an exchange.

Which segments of the population will qualify for subsidies to make health care insurance more affordable?

Individuals and families with incomes up to 138 percent of the federal poverty level will qualify for Medicaid coverage. Since current income eligibility limits for children are already higher than this, the majority of new Medicaid enrollees will be adults. Individuals and families with incomes up to 400 percent of poverty — about $88,000 for a family of four — will qualify for tax credits that can be used to purchase private insurance through a health insurance exchange.

Do you have a suggestion about how to get all states signed on to the health insurance exchange program? What consequences do states face if they do not implement the health care reform law?

States have two main decisions: whether or not to operate their own exchange and whether or not to implement the Medicaid expansion.

For consumers, the first decision won’t matter that much. In states that do not establish their own exchange, consumers will still have access to a federally facilitated exchange offering a choice of health plans.

The Medicaid decision, on the other hand, will have a significant effect on health insurance coverage. Medicaid is a joint federal/state program in which the funding split varies across states depending on state average income. The ACA Medicaid expansion comes with a much more generous “match rate” than states currently receive.

In the first few years, the federal government will pay the entire cost of the expansion. Eventually, states will have to contribute some, but their share will be capped at 10 percent of the cost.

In most states, the people who will gain Medicaid coverage are currently receiving some health care services from state-funded programs. Once the Medicaid expansion goes into effect, the need for these programs will either be eliminated or greatly reduced.

Obviously, the biggest losers in states that choose not to implement the Medicaid expansion are low-income adults who will remain uninsured. In addition, the pain will extend to hospitals and other health care providers. The Affordable Care Act reduces “disproportionate share” payments to hospitals intended to offset some of the costs of uncompensated care. The logic is that when insurance coverage increases, uncompensated care should be less of a problem.

However, in states that do not implement the expansion, uncompensated care costs will not fall as much as anticipated and hospitals will be significantly worse off.

Many thanks to Thomas Buchmueller, Ph.D., Waldo O. Hildebrand professor of risk management and insurance, business economics and public policy as well as the chair of business economics of Stephan M. Ross school of business at the University of Michigan, for his analysis on health care reform.