OFFICE OF THE ACTUARY

OFFICE OF THE ACTUARY The Impact of the Affordable Care Act on Health Care Spending John D. Shatto, FSA October 8, 2010

Health Reform Legislation Patient Care and Affordable Care Act (PPACA) signed into law on March 23, 2010 Health Care and Education Reconciliation Act of 2010 (HCERA) signed March 30, 2010 Coverage expansion for the uninsured largely taking effect in 2014 Significant Medicare savings used to offset cost of the coverage expansion

Agenda • Estimates from the OACT Health Reform Model • Medicaid Expansion • Employer-Sponsored Insurance • Health Insurance Exchange • Medicare Savings Proposals • Productivity Adjustments • Medicare Income Provisions • Independent Payment Advisory Board • National Health Care Expenditures • Health Care Costs as a Percentage of GDP • Impact on Trends

OACT Health Reform Model (OHRM) Household/Family Data Source: 2003-2005 MEPS-HC; premiums from 2006 MEPS-IC (controlled to 2010 NHE) Yes Medicaid expansion • 2010 Impacts on: • Spending by payer • Federal Govt. Revenue • Penalties • Subsidies • Coverage No Individual provisions Employer Data Source: 2008 Kaiser/HRET Employer Survey (linked to household by workers by industry by firm size) Employer provisions • 2010-2019 Impacts on: • NHE by payer • Federal Govt. Revenue • Penalties • Subsidies • Coverage “Trend” Proposals Transition assumptions Medicare/Medicaid provisions

Expansion of Medicaid Program • Affordable Care Act • Cover all legal resident adults up to 133-1/3% of federal poverty level (FPL) • 5 percent income disregard • Different FMAP for those newly eligible • Methodology • Determine current participation rates for eligible group by age and user/non-user status • Develop assumptions on new participation rates by prior insurance status, user/non-user, and age • Take into account employer offer rate changes based on other provisions of the ACA • Induce spending for those who change coverage; assign spending to source of funds (OOP, Medicaid, etc.)

Induction Assumptions • OHRM based on two studies: • Hadley, et al., “Covering the Uninsured in 2008: Current Costs, Sources of Payment, and Incremental Costs,” Heath Affairs, August 25, 2008 • CBO, “Behavioral Assumptions for Estimating the Effects of Health Care Proposals”, November 1993 • Tables below represent the % increase in spending when coverage changes from uninsured (100% out-of-pocket) to various coinsurance rates: Uninsured to Medicaid Uninsured to Private Insurance

Employer Coverage • Affordable Care Act • Large employers (>50 employees) • “Pay or Play”: penalty of $2,000 per employee • Automatic enrollment for employers with >200 employees • Small employers • Subsidies of 50% of ER premium for <10 workers and average wage <$25K • Partial subsidy for <25 workers and average wage <$50K • All can purchase off Exchange by 2014 • Can only receive credit for 2 years once Exchange begins • Employees • Only P/T or those not offered can purchase off the Exchange and receive a subsidy • Those offered ESI can purchase off the Exchange, but will not receive a subsidy

Employer Coverage • Methodology • Employer Offer Rates • Use 2008 Kaiser/HRET survey to segment current offer & take-up rates into 3 industry groupings by 4 firm size groupings • Develop assumptions on offer rates given “pay or play” • Applies only to large employers • Estimated offer rate depends on size of penalty and firm size • Assume employer decisions remain in place for balance of 10-year period (halts downward trend in employer coverage) • Develop assumptions on offer rates given subsidies and options for employees • Assume some large employers with low wage workers would drop offer • Employee Take-up Rates • Develop assumptions on take-up rates of employer coverage given an individual mandate • Based on penalty, income, spending, and family type • Assumptions reflect consideration of tax effects • Apply new take-up rates to Household model • Assume a 3-yr transition with most of the impact in 2014

Estimating Change in Offer Rates proportion of employees currently in plans without offer that would have offer under proposal x(t)= (-a+Lke(a+bL)t) / (b+ke(a+bL)t) where k = (a+bx0)/(L-x0) = x'(0)

Employer Assumptions • Overall Offer Assumptions with “Pay or Play” and Exchange • Individual industry/firm size groupings differ in impact • Impact of large employers dropping offer assumed to slowly transition to full effect in 2017 • Overall Employee Take-up Assumptions • Formula based on size of penalty, income, health spending, and family type *Change is net effect of increase due to employer penalty and decrease due to low wage, large employers drop

Household/Individual Coverage • Affordable Care Act • Individual mandate • Penalty is greater of 2.5% of income in excess of minimum taxable income, $695 • Health Insurance Exchange • 4 Levels of Coverage • Platinum – 90% Actuarial Value • Gold – 80% Actuarial Value • Silver – 70% Actuarial Value • Bronze – 60% Actuarial Value • Maximum Out-of-Pocket roughly $6,000 Individual / $12,000 Family • Indexed to Growth in Premium Costs

Household/Individual Coverage • Exchange Subsidies • Families with Income between 100% and 400% of Federal Poverty Level • Premium Subsidy • From 2.0% to 9.5% AGI • Based on Second Lowest Cost Silver Plan • Indexed to Premium Growth • Limited to 0.504% GDP • Reduction in Out-of-Pocket Limit • 100% - 200% FPL – Reduced by two-thirds • 200% - 300% FPL – Reduced by one-half • 300% - 400% FPL – Reduced by one-third • Cost-sharing Subsidy • 100% - 150% FPL – 94% Actuarial Value • 150% - 200% FPL – 87% Actuarial Value • 200% - 250% FPL – 73% Actuarial Value • Must Purchase a Silver Plan to Receive Cost-Sharing Subsidy

Individual Insurance Choice Model • Estimated based on: • Marquis and Long, “Worker Demand for Health Insurance in the Non-Group Market,” Journal of Health Economics, 14 (1995), 47-63 • Calibrated to OHRM household data set for non-public and non-ESI enrollees • Specification • Predict probability that individual chooses coverage based on two approaches: • “Mandate” factor • Assume small proportion of people will take coverage just because it is mandated • Probit Model • Costs (average premiums including public option, subsidy, penalty) • Socioeconomic (poverty level, health status, employed, spouse employed) • Demographics (gender of head of household, age, race, children, marital status) • Insurance Availability and “Moneysworth” factor • Takes into account coverage more accessible • Ensures near full take-up when expected insurance benefit equals or exceeds premium • Assume 3-year transition with 60% taking up in 2013

“Cost Trend” Proposals • Nothing in ACA on: • HIT, Transparency, Malpractice, Fraud & Abuse (beyond Medicare) • Proposals in ACA: • Comparative Effectiveness Research • Provisions establish Center for CER in AHRQ, overseen by independent Commission that prioritizes research and recommends how to distribute findings; explicitly prohibits using CER from mandating coverage, reimbursement or other policies to private or public payers. • Research by CBO, Lewin/Commonwealth, Garber, Dartmouth, and international community suggest little savings if not coupled with coverage and payment. • $8 billion in savings over calendar years 2010-2019 ($4 billion federal) • Prevention & Wellness • Provisions develop trusts, strategies, task forces, grants, and some public health approaches. • Recent research studies, e.g. in Jan/Feb 2009 Issue of Health Affairs,indicate little cost saving potential. • No financial impact over calendar years 2010-2019 • Administrative Simplification • Provisions set forth goals and requirements for standards, and require the Secretary to develop a report on implementation and enforcement. • Research into insurers/providers administrative costs suggest some significant savings if standardization were strict and coupled with IT; research into Canadian system suggests savings are significant. • Provisions in ACA not sufficiently specific for scoring purposes.

Estimated Effect of the Affordable Care Act on Enrollment by Insurance Coverage, 2019 Source: Sisko A et al., “Health Spending Projections Through 2019: the Estimated Impact of Reform” Health Affairs 29, no. 10 (2010) (9 September 2010).

Medicare Impacts Amounts in billions

Productivity and Other Adjustments 40% of Medicare savings or $233B All Part A and Part B providers and suppliers subject to market basket or CPI updates will be reduced by private non-farm mutifactor productivity each year Additional reductions FY 2011-2013 Home Health Agencies: 14% cut due to rebasing phased-in CY 2014-2017, 2.5 percent cut in 2011, 10% cap on outliers 2011+

Other Part A & Part B Cuts Disproportionate Share Hospital payments reduced to 25% of current level (savings $50B) With less uninsured, less need to reimburse for uncompensated care Medicare Improvement Fund, scheduled to be available in FY 2014, eliminated (savings $27B)

MA and Part D MA payment benchmarks frozen in 2011, then reduced over the next 2 to 6 years MA bonuses and rebate levels tied to the plan’s quality ratings MA Enrollment level expected to be about half of it’s projected level under the prior law by 2017 Part D Coverage Gap Filled 50% Discounts on brand-name drugs Phased-in coverage for both brand and generic drugs until cost-sharing reaches 25% Elimination of Tax Deductibility of RDS Payments

Independent Payment Advisory Board Board submit proposals to the President when projected Medicare growth rate per capita exceeds a target growth rate. Targets based on CPI and CPI-M growth, 2014-2017 Based on GDP+1, 2018 and thereafter Prohibited from making proposals that ration care raise taxes or Part B premiums change Medicare benefits, eligibility, or cost-sharing standards. CMS Chief Actuary to determine target for Medicare per capita growth rate beginning 2013 and thereafter Savings $24B

Income Changes Additional HI payroll tax of 0.9% to be paid by workers with wages over $200K single filers, $250K joint files ($63B additional HI tax income) Threshold income levels for Part B income related premiums frozen at 2010 amounts for 2011-2019 ($8B additional premium income) Income related premiums introduced for Part D using the same income thresholds as Part B Unearned Income Medicare Contribution (“Medicare Tax”) is unrelated to Medicare No effect and not related to benefits Revenue not allocated to trust funds

Illustrative comparison of relative Medicare, Medicaid, and private health insurance prices under current law

Long-range HI income and cost rates, 2009 and 2010 Trustees Reports and alternative scenario

OACT Health Reform Estimate Notes:1) Source: Richard S. Foster’s April 22, 2010 memo http://www.cms.gov/ActuarialStudies/Downloads/PPACA_2010-04-22.pdf 2) Amounts in billions3) Other category includes the CLASS program and items classified as cost trend or immediate reforms4) Amounts do not include federal administrative costs or most fees or taxes

NHE Share of Gross Domestic Product (GDP), 1980-2019 Sept. ’10: 19.6% Feb. ’10: 19.3% Source: Sisko A et al., “Health Spending Projections Through 2019: the Estimated Impact of Reform” Health Affairs 29, no. 10 (2010) (to be published online 9 September 2010).

Growth in National Health Expenditures (NHE), 1980-2019 Sept. ‘10 (blue) Feb. ‘10 (red) Source: Sisko A et al., “Health Spending Projections Through 2019: the Estimated Impact of Reform” Health Affairs 29, no. 10 (2010) (to be published online 9 September 2010).

Growth in Out-of-Pocket Expenditures, 1980-2019 OOP, Sept. ’10 (blue) Source: Sisko A et al., “Health Spending Projections Through 2019: the Estimated Impact of Reform” Health Affairs 29, no. 10 (2010) (to be published online 9 September 2010).

Growth in Medicaid & CHIP Expenditures,1980-2019 Medicaid & CHIP, Sept. ‘10 (blue) Medicaid & CHIP, Feb. ‘10 (red) Source: Sisko A et al., “Health Spending Projections Through 2019: the Estimated Impact of Reform” Health Affairs 29, no. 10 (2010) (to be published online 9 September 2010).

Growth in Medicare Expenditures, 1980-2019 Medicare, Feb. ’10 (red) Source: Sisko A et al., “Health Spending Projections Through 2019: the Estimated Impact of Reform” Health Affairs 29, no. 10 (2010) (to be published online 9 September 2010).

OACT Top Ten List Our favorite uses and misuses of OACT’s health reform estimates

OACT Top Ten List 10. Medicare actuary goes rogue? (Politico)

OACT Top Ten List 9. “Foster works for the Center for Medicare and Medicaid Services, an agency within HHS that would lose funding under health care reform.” (Slate)

OACT Top Ten List 8. “One of the most serious indictments” of Democrats' approach to health care, adding it should “put the dagger in the heart of the Reid bill.” (Senator McCain)

OACT Top Ten List 7. “That assessment was of previous versions of the legislation, so it's completely wrong.” (Senator Dodd)

OACT Top Ten List 6. “This report once again discredits Democrats’ assertions that their $1.3 trillion government takeover of health care will lower costs, and it confirms that this bill violates President Obama’s promise to ‘bend the cost curve.’ It’s now beyond dispute that their bill will raise costs, which is exactly what the American people don’t want.” (Representative Boehner)

OACT Top Ten List 5. “Medicare Report Confirms Health Care Takeover Plan is a Fiscal Disaster” (AOL News headline)

OACT Top Ten List 4. “It’s a long, somewhat dry document…but it is an interesting read (assuming the reader is adequately caffeinated).” (Mike the Actuary’s Musings)

OACT Top Ten List 3. “This is not something they normally do. It is an interesting analysis but it is pretty speculative though of what the impact will be on providers and beneficiaries. Our recent experience would indicate something quite different.” (Nancy-Ann DeParle)

OACT Top Ten List 2. “The CMS report is a blow to the White House and House Democrats who have vowed that healthcare reform would curb the growth of healthcare spending.” (Capitol Hill)

OACT Top Ten List 1. “Actuaries sure know how to ruin a good time” (Capitol Watch Blog headline)

OFFICE OF THE ACTUARY