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The Patient Protection and Affordable Care Act (ACA): The Essentials

The Patient Protection and Affordable Care Act has been labeled the most important piece of health-related legislation in U.S. history.

Nearly 500 provisions contained in the ACA legislation

On March 23, 2010, President Barack Obama signed into law a sweeping reform of the nation’s healthcare system.

Lawsuits mounted by 26 state governments led to a review before the Supreme Court of the United States in June 2012. The decision by the court favored the act on nearly all the legal points of contention, most important of all upheld the so-called “individual mandate” provision, which compels every American to obtain health insurance or pay a fine.

However the court weakened the power of the government as expressed in the mandate by not being able to force states to expand Medicaid coverage.

The federal government currently pays on average 57 percent of the cost of current Medicaid enrollees in each state. To entice states to expand their Medicaid enrollees under the ACA the federal government would pay much more of the cost for those “newly eligible” under the plan. The state will have about 93 percent of the cost of these “new eligibles” covered by the federal government from 2014 to 2020.

Some states, including Texas, wonder what will happen to the federal contribution after 2020.

Viewed from a historical perspective as was seen in the rollout of Medicaid, there is good reason to believe that resistant states will eventually get on board with the program. When Medicaid was signed into law in 1965 only six states agreed to participate, but by 1982 every state had joined.

According to a survey conducted by the Kaiser Family Foundation, 53 percent of Americans said they were “confused” by the ACA provisions.

The ACA attempts to fix big problems

Four Main Goals

1. Give Americans greater access to healthcare. About 37 million American citizens have no health insurance at all, in many cases because it’s simply too expensive for them to buy. The ACA opens the healthcare system for these citizens, either through Medicaid or subsidized health insurance via exchanges in the state.

2. Rein in and reduce out of control healthcare costs. By encouraging a movement away from the current fee-for-service system, which drives up costs because it rewards doctors and hospitals for the quantity of their care rather than quality.

3. Add more consumer benefits and protections. Removes glaring inequities from the current system by creating a broad range of new consumer safeguards and benefits. It presents insurance companies from dropping your coverage after you get sick because you made a minor error when you filled out your application. The carrier can no longer refuse to extend you coverage because you have a pre-existing health condition or charge you a higher premium because you’re older or have a chronic disease. Coverage can no longer have annual or lifetime limits.

4. Address a variety of other troublesome issues. Striving to make American healthier by emphasizing prevention and wellness programs. Another portion, now removed, would have provided more help for those needing assisted-living, long-term care.

What the ACA means for you

For a person who currently has health insurance the ACA is a “mixed bag”. The law adds new consumer benefits and protections. On the negative side it remains to be seen if employers will drop insurance coverage because of rising cost.

For the person who is uninsured, the ACA is good news. If you have a low income, you will either be able to enroll in Medicaid or qualify for a subsidized insurance plan through your state’s healthcare exchange. If you have a high income, you will also be able to buy a plan through an exchange, and its price will probably be better than what you would have to pay on the private insurance market today.

For those who have a high income the ACA represents an increase in taxes. There is a 3.8 percent ACA surtax on capital gains above $250,000 (married couples). Single Americans who earn above $200,000 per year (or $250,000 for couples) will see the amount they pay in taxes for Medicare increase from the current 1.45 percent level to 2.35 percent above those income thresholds. Medicare beneficiaries with higher income will also be required to pay higher Part D premiums. A 40% tax will also be imposed above a specific threshold level for premiums on so-called “Cadillac” health insurance plans that some big earners now enjoy.

For working families the consumer protections and benefits provided by the ACA will help families.

The poor in America are greatly assisted by the ACA. Under the new law the income requirement to get into Medicaid is raised to 133 percent of the federal poverty line. An estimated 15 million more people will be able to get coverage as a result of the ACA, and low-income earners will still can’t get into Medicaid will qualify for government subsidies offered on the new state exchanges.

Those residing in the United States without proper documentation proving they are here legally will not be able to access any of the new benefits that come with the ACA. They will not be able to buy health insurance nor will they be allowed into the Medicaid or Medicare program.

For those who work for a large business there is a legitimate fear that their employer may drop their insurance. If you work for a large business like McDonald’s, which does not pay well and which does not need a health insurance carrot to attract workers, you are in danger of losing coverage, however most large employers who see health insurance benefits as of vital importance to compete effectively in the labor market it is unlikely to drop that coverage.

Small businesses benefit more from the ACA because of significant tax breaks they will receive against the amount they pay in health insurance premiums for their workers. Small businesses have historically had to pay significantly more than large businesses to insure their workers, not only in premiums, but also in administrative costs. The new ACA health exchanges create more of a level playing field and small businesses could realize large financial benefits.

Breaking down the current healthcare system.

In 2010 roughly 150 million Americans (48% of the population) received their health insurance with a helping hand from their employer, which on average contributed the lion’s share (about 70%) of their employee’s premiums.

A sizeable portion of the remaining population (28%) also get help obtaining healthcare. These are needy Americans-the elderly, poor and disabled-who receive government financial assistance for coverage in the form of Medicare (15%) or Medicaid (13%).

Added together, those with employer-based insurance and those in government programs like Medicare and Medicaid amount to 78% of Americans. Most of the remaining 24% of the population are uninsured or buy individual healthcare coverage on the insurance market. Americans in this group are at a distinct disadvantage compared to the rest of the country.

While the ACA will affect all Americans to some degree it is mainly targeted at the one in four Americans who today receive no financial help if they try to obtain health insurance. The two largest sub-groups in this population are

1. Those in the private insurance market. Making up about 9% of the population, these are people who are financially able to buy insurance on their own but typically have to pay significantly higher insurance premiums, co-pays and deductibles than everyone else. That’s because they must use after-tax dollars to make their purchase and are not able to leverage the purchasing power of a larger group such as a big corporation.

2. The uninsured-as of 2010 the uninsured represent about 16% of the population (about 50 million people). A big chunk of this group are illegal aliens (about 13 million) leaving about 37 million Americans who fall through the cracks of the current system. This includes young adults who enjoy robust health, while others are low-income people under 65 whose work circumstances don’t give them easy access to employer-based healthcare and who simultaneously make too much money to qualify for Medicaid. Another group within the uninsured that will benefit from the ACA are those individuals who could not purchase health insurance due to significant illness histories or pre-existing conditions.

By 2019 the ACA is expected to reduce the number of uninsured Americans from 41 million to about 10 million-a 75 percent reduction in the number of uninsured.

Why the ACA was needed.

The one goal of reducing the number of uninsured Americans is critical at this time

This group has grown at an alarming rate in recent years. In 2000 about 38 million Americans were uninsured. With the recent economic downturn that number has spited to 50 million by 2010-a 32% increase compared to a decade ago.

The individual mandate is a central component of the ACA because it forces all citizens to participate.

In states that have attempted universal coverage the program failed because people were free to opt out. Massachusetts was the first to put in an individual mandate in place and it worked like a charm, increasing the number of insured in that state to 97% , the highest level of any state in the country.

By adding as many as 30 million of the uninsured into the healthcare system, the nation’s insurance “risk pool” is dramatically strengthened. A large influx of healthy Americans (The group with the lowest risk) creates a much more balanced system than the current one.

The individual mandate is unquestionably a coercive stick but there are also a few carrots. These carrots come in the form of government financial assistance to help low-income Americans obtain health insurance and tax credits that give small businesses a financial incentive to offer health insurance to their employees.

Millions of Americans will qualify for Medicaid because the income threshold to qualify will be raised in 2014 to 133% of the federal poverty line ($29,327 for a family of four in 2010) in most states in the country. Prior to the new law each state could set its own income threshold for entrance into the program.

The health exchanges under the ACA will begin operating in 2014 will provide subsidized insurance subsidies to all those who fail to qualify for Medicaid and who earn below 400 percent of the federal poverty line ($88,200 for a family of four in2010). The subsidized exchanges are projected to decrease the number of uninsured by 16 million people by 2019.

Those with an income up to 133 percent of the federal poverty line (or $29,327 for a family of four in 2010) will be eligible for Medicaid. Those with an income between 133 percent and 400 percent of the poverty line ($88,200 for a family of four in 2010) will be able to get financial assistance from the government to buy healthcare coverage on their state’s exchange. Those with an income above 400 percent of the poverty line will still be able to buy coverage through their state’s exchange, but they’ll be ineligible for government financial assistance.

Although it seems unprecedented for the government to force Americans to buy a particular service or product, there are many examples of government compelling its citizens to behave in certain ways for their own health and safety. The law requiring drivers to wear seat belts is just one example.

If you’re worried about being criminally prosecuted and put in jail for not getting health insurance under the ACA, don’t be.

If you do not obtain health insurance you will pay a fine. The amount of the fee will depend on the year it’s incurred. The individual mandate takes effect in 2014 and you will have to pay either a flat fee of $95 or 1 percent of your income up to a maximum of $285. You will have to pay whichever amount is higher in your case.

After this launch the penalty will grow until it reaches a ceiling I n2016-a flat fee of $695 or 2.5 percent of your income up to a maximum of $2085. As in previous years, you will have to pay whichever amount is higher for you.

Keep in mind that only a small fraction of Americans will have to worry about the individual mandate and the penalty that comes with it. If you already have health insurance (that’s 84 out of every 100 of us) you won’t have to pay any penalty since your existing coverage means that you comply with the law.

Of the 37 million who are uninsured in 2010 (not counting 13 million illegal aliens), about 14 million will be able to obtain healthcare coverage without paying anything out of their own pocket by enrolling in Medicaid after its expansion. Another 14 million currently uninsured Americans wil be able to receive government financial assistance when they buy coverage through their state’s exchange. The remaining group of uninsured (about 9 million Americans or 3 percent of the population in 2010) will also be able to buy coverage through the exchanges, but they will have to do so without a subsidy.

Under the ACA, the confusing, inconsistent, and arguably unfair mishmash of Medicaid income eligibility levels across the nation disappears and is replaced by a single standard, at least for those states that agree to participate in the planned expansion of the program.

A working parent in Alabama had to make less than $5,515 (25 percent of the poverty level) to qualify for Medicaid. When expanded in 2014, the same working parent could make as much as $29,327 (133 percent of the poverty line for a family of four) and still get in.

In the first three years of the ACA, the federal government will pay for 100 percent of all the “newly eligible” people in Medicaid, with the level reduced to 90 percent by 2020.

The future of the ACA will depend very much on the exchanges.

What is a health insurance exchange?

It is a marketplace very much like your neighborhood supermarket. When you need groceries, you visit your store to buy the products you need based on the benefits they offer you relative to their price. A health insurance exchange works the same way except the product isn’t mike or cereal, but health insurance.

There are some important differences however. For one thing, they’re government regulated, meaning that the insurance sold to consumers has to meet specific quality standards. For another, some of the people who shop at the exchange will be provided money by the government to reduce the price they pay for insurance. At this time it looks like 10 states are going to opt out of creating their own exchanges (including Texas) and so the federal government will take over that responsibility.

The exchanges are expected to improve the current systems in a number of ways:

1. Increased Choice: consumers will be able to easily compare plans to one another based on their price and quality.

2. Standardization: Plans offered by different insurance companies must contain identical levels of benefits at specific tiers of coverage so consumer can make “apples-to-apples” comparisons between the plans.

3. Consumer Protection: Consumers will have confidence that they are not being sold an inferior policy because each plan must cover “essential health benefits”

4. Economies of Scale-Because the exchanges will be places where millions of consumers shop, they will foster healthy competition among insurance companies.

You will be able to shop for health insurance in your state’s exchange by visiting the government office that manages it. If you prefer, you can buy an insurance plan over the phone or through the exchange’s website.

Four standardized plans: Bronze, Silver, Gold, and Platinum

One of the biggest benefits of the exchanges is that they cut through this complexity and simplify the decision-making process for those who go to buy health insurance.

The quality of these plans should also be high as each one, regardless of the amount of coverage it offers, will be required to include so-called “essential health benefits”. Generally speaking, these benefits will be comparable to what can be found in a typical employer-based plan today. In each of these plans insurers must provide benefits in 10 broad categories as follows:

1. Ambulatory patient services

2. Emergency services

3. Hospitalization

4. Maternity and newborn care

5. Mental health and substance use disorder services

6. Prescription drugs

7. Rehabilitative and habilitative services and devices

8. Laboratory services preventive and wellness services and chronic disease management

9. Pediatric services, including oral and vision care

After this minimum level of benefits is met, the tiers of insurance coverage will differ based on their “actuarial value.” This is the amount of financial coverage that the plan offers, on average, to its participants. The Bronze plan will offer the lowest amount of coverage, with 60 percent of medical costs covered on average, followed by the Silver plan at 70 percent, the Gold plan at 80 percent, and the Platinum plan at 90 percent. The price of the plan premiums will follow this escalating hierarchy with the Silver plan costing more than the Bronze plan and so forth.

In addition, the baseline out-of-pocket limit for each plan will match the limits or that apply to Health Savings Accounts (5950 for individuals and $11,900 for families in 2010). Those who receive government subsidies will see their out-of-pocket limits lowered from their levels as a consequence of the financial assistance they receive just as their premiums will be lowered.

In addition to establishing different tiers of health insurance offered through each exchange, the government will measure and rate the quality of the insurance plans and the companies that sell them based on key performance metrics such as enrollment levels, the number of people dropping out of the plan and the amount of denied claims.

A range of exchange subsidies including lower premiums and lower out-of-pocket limits

In 2010 dollars that means a family of four will qualify for a subsidy when they buy through an exchange if their income falls between $29,328 and $88,200 with the amount of the subsidy depending on their income level within that range.

A family of four on the high end of the scale will pay a maximum of 9.5 percent of their $88,200 annual income-or $8379 per year for their health insurance premium. On the bottom end of that scale, a family of four withy an income of $29,327 will only have to pay 2 percent of their income- or $587 per year for the same plan that costs the higher income family $8,379.

Lower out-of-pocket limits are the levels that an individual or family must pay before their insurance plan begins to cover their medical expenses. The subsides are given out according to a sliding scale pegged to the federal poverty line, with people in the lowest income range receiving the most help. The baseline out-0of-pocket limit on each exchange is equal to the out-o0f-pocket limit for Health Saving Accounts (currently 5950 for individual sand 11900 for families) and is lowered from that ceiling level according to where an income level falls in that range.

In 2010 dollars this means that a family with an income that falls in the lowest range (100 to 199 percent of the federal poverty level) will reach its out-of-pocket limit at 3967-or 33 percent of the amount for a Health Savings Account (11900) used by a high-income family.

A third big carrot of the ACA is designed to help decrease the number of uninsured by offering tax credits to some small businesses that provide coverage for their employees.

On average, premiums are about 20 percent higher for small businesses compared to large businesses.

The ACA will be good for those businesses with less than 50 employees. Workers benefit because of being able to switch jobs or work on their own without losing coverage.

For those businesses that pay very low wages they may drop coverage and low-wage workers will turn to state exchanges to get health insurance.

To prevent this dropping of coverage the ACA provides a tax credit to encourage small businesses to offer health insurance. Since the tax credit went into effect in 2010 it has had a positive effect as businesses with fewer than 10 employees that offered health insurance to their workers jumped from 46 to 59 percent that first year alone.

Right now, a company that has up to 10 employees, average annual wages under 25,000 and contributes to at least 50 percent of their healthcare premium costs is eligible for a 35 percent tax credit against the amount it pays for its workers’ insurance.

For those businesses with over 50 employees they will pay a fine of 2000 for every full-time employee who receives a government subsidy for purchasing coverage through an exchange, excluding the first 30 employees.

In the short-term sma9ll businesses will have to determine whether or not it’s in their interest to provide health insurance for their workers and receive a generous tax credit (which decreases the cost of the premiums tht3ey pay by as much as 50 percent) or to drop coverage. If they make the latter decision, the pain will be softened considerably because the state based, government-subsidized exchanges will be available for the workers to obtain coverage at an affordable cost.

Controlling Costs: Mixed results in the ACA

The ACA priorities are mostly focused on decreasing the number of the uninsured and the increasing consumer benefits-not on holding down costs.

More benefits mean higher cost

New rules that benefit consumers also raise costs

Insurance carriers are prevented from rejecting people because they have a pre-existing health condition. This is called “guaranteed issue”.

Insurance carriers are also preventing from capping the amount of benefits they have to pay out over a given year or during a beneficiary’s lifetime.

Other new rules also raise costs by preventing insurance companies from canceling insurance policies for frivolous reasons (called “rescissions” in industry jargon) and requiring them to include “essential health benefits” in all their insurance plans.

Under another ACA rule, insurers must maintain tight “medical loss ratios.” MLR measures the share of their revenues that are devoted to medical benefits for policyholders. In 2012 insurance companies are required to spend at least 80-85 cents of every dollar on healthcare-not tied to such expenditures as administrative expenses, overhead or advertising.

The decision to establish a firm MLR is one of the better aspects of the ACA. Back in 1993, a time when many more non-profit insurers existed, the average MLR stood at 95 percent, meaning that the typical insurer paid out 95 centers of every dollar the company took in from premiums for the claims of policy holders. In the 20 years since that time, that level dropped to about 80 percent as non-profit insurers disappeared and Wall Street demanded more and more profit taking.

The new ACA MLR thresholds are already in place and many Americans may have noticed unexpectedly receiving rebate checks in the mail from their health insurance provider. In total, almost 13 million people have received about 1.1 billion from insurers who generated MLRs that fell below the new thresholds.

The ACA and Medicare: Shifting costs

Closing the “donut hole”

Medicare recipients typically pay a deductible of a few hundred dollars and then 25 percent of the cost of the drugs they need up to a certain point (typically around 2800 in a person’s drug spending). At that point the recipients have to pay 100 percent of the cost of their drugs up until they reach 6400 in drug spending. Beyond that amount, insurance coverage kicks in again to close the hole with the recipient paying only 5 percent of drug costs above 6400.

This is reduced so that by 2020 so that the Medicare recipient will only have to cover 25 percent of the medication cost.

Lower-subsidies for high income recipients

Specifically, individuals with an income of 85000 or higher and couples with an income of 170000 or higher will receive a reduced subsidy that will increase the price they pay for their prescriptions.

Medicare spending cuts

Roughly 42 percent of the total 1 trillion dollar cost of the ACA will come from cuts in Medicare spending over the next decade.

The biggest cuts in Medicare will come in two main areas: a reduction in payment rates to providers and a reduction in payment rates to Medicare Advantage plans.

About one-fifth of the funding for the ACA (about 196 billion) will come from cuts to Medicare’s payment rates to providers other than physicians over the next 10 years. These cuts will impact hospitals, skilled nursing facilities, and home-health agencies.

Medicare Advantage cuts

About one in four enrollees in Medicare are also enrolled in the Medicare Advantage Program. Medicare Advantage programs open up Medicare to private insurers like Cigna and Aetna as managed health care plans. Since their inception however the plans have tended to have unacceptably low “medical loss ratio” which suggested that private insurers were making excessive profits at the expense of taxpayers.

The private insurers that remain in the program will likely cut benefits and/or raise premiums.

Independent Payment Advisory Board (IPAB)

To be established as a means to reduce healthcare costs in Medicare. Modeled on the U.S. Federal Reserve System for banking the OPAB consists of a panel of 15 Appointees handpicked by the president and approved by the Senate. They will be asked to make cost cutting recommendations for Medicare whenever spending per person in the program rises faster than the Consumer Price Index.

It will be able to make binding recommendations starting in 2015 with none implemented until 2018.

Cost Control Experiments.

These programs are a series of non-binding experiments to test new ways to deliver, manage and pay for healthcare in the US

Moves away from the traditional fee-for-service payment model in widespread use today and tests a bundled-payment system for inpatient hospital services and post-discharge treatment

A single lump-sum payment will be delivered to an organization such as a hospital, which will then hire a team of healthcare professionals to provide care to an individual patient for a specific health-related “episode” over a set period of time. An episode timeline could, for example, begin three days before hospitalization and end 30 days after discharge. The team might include professionals from the hospital, doctors in a physician group, members of a skilled nursing facility and caregivers in a home healthcare agency.

By providing for a continuous chain of care the intent is to have “skin in the game” for the hospital which normally can wash their hands of the patient at discharge. Members of a treatment team will receive increased financial rewards if they can help patients recover quickly

“Independence at Home” program

A team of health professionals deliver scare to needy Medicare recipients in their own homes. If the members of the treatment team are able to prevent hospital readmissions, reduce costs and improve outcomes, all while simultaneously achieving patient satisfaction, they will be given financial rewards.

Accountable Care Organizations (ACO)

Groups of healthcare professionals that deliver team-based care to patients similar to that provided in the bundled-payments pilot programs. ACOs with at least 5000 Medicare recipients will be able to participate.

Hospitals, physicians, and home-care providers will work together to deliver comprehensive and continuous care to each patient that agrees to participate. Each member of the treatment team will e paid by the government on a FFS basis, with bonuses paid out for quality care that is delivered below a given dollar threshold.

ACOs are meant to function as great magnets, pulling in healthcare professionals the same way the exchanges pull in individuals and businesses.

A non-profit Patient Centered Outcomes Research Institute will be used to participate in developing comparative effectiveness research.

Making Americans Healthier

The ACA includes a new initiative called the “National Prevention, Health Promotion and Public Health Council” which will help to manage the government’s efforts to promote personal wellness. This council will review the subject and issue reports on how to improve the overall health of the American people.

Recommendations thus far include:

No co-pays for approved preventive tests including such things as mammograms and colonoscopies

Approval of and support for employer-based programs that reward employees for personal wellness

Nutritional labeling for food served in restaurants

Increases spending in Medicaid for preventive services

Prevention counseling in Medicare

Employer-Based Personal wellness Reward Programs

It lets an employer reduce the premiums, co-pays and deductibles of its employees who meet specific personal wellness thresholds

Capped at 30 percent of the cost of the employee’s total coverage with an increase to 50 percent in 2014

Long term care

About 10 million families in the US now have to deal with the challenges of long-term care and that number will grow as the population ages over the next 50 years.

Community living assistance services and supports (CLASS) was designed to be insurance that would provide financial help for those who cannot complete basic living tasks (*such as feeding, dressing and bathing). Was intended to ease the heavy burden of assisted-living expenses for needy individuals and provide additional money so that they don’t have to rely only on Medicaid, private insurance and their family’s financial resources to make it. It was suspended in 2011 as being too extreme in cost.

Where does the money generated by the ACA go?

Two big pieces are the expansion of Medicaid and the health insurance exchanges. Taken tougher, they constitute an overwhelming 84 percent of the cost of the new law or about 900 billion with the exchanges costing 465 billion and the expansion of Medicaid costing another 434 billion.

Where does the money for the ACA come from?

In order to pay for the ACA the cuts in Medicare are prominent with funding coming from Medicare spending cuts, followed by an assortment of new taxes and fees imposed across the board, particularly among those higher-income earning citizens.

New fees on pharmaceutical and health insurance industries will generate about 9 percent of the ACA revenue over the next decade. Because of the addition of 30 million to their rolls the health insurance carriers financial gains will more than offset the 107 billion they have agreed to pay the government

65 billion will come from fines imposed on Americans who do not get health insurance or employers who do not offer coverage to their employees. This will pay about 5 percent of the ACA cost over the next decade.

Taxes on Cadillac health plans will generate 32 billion or about 3 percent of the ACA funding during its two years of operation in 2019 and 2020

What Should you Do now?

Check your eligibility for Medicaid

If you are living on a low income, the expansion of Medicaid could very well help you.

If you live in Texas the future is uncertain but you should still check to see if you are eligible for services. If you are in one of the 40 or more states that will expand their Medicaid enrollment in 2014 then you might be able to sign up for the program at that time. Under the new law if you earn less than 133 percent of the federal poverty level (that’s $29,327 for a family of four in 2010) you will be able to enroll.

If you presently have insurance coverage (and 84 percent of Americans do) you won’t have to pay any penalty because you comply with the law.

If you are among the much smaller group of Americans who don’t have health insurance (16 percent of the population, including illegal aliens), you could still be eligible for Medicaid or subsidized coverage through your state’s insurance exchange.

Get OTC Prescriptions if you use a Health Savings Account. Under the new law, a doctor’s prescription will be required for all OTC drug purchases in order to use HAS or FSA money to pay for them.

Get Approved Preventative tests without being charged co-pays. Go to to see whether the preventive test you need is recommended. If it is, your insurance plan must pay for it without charging you a co-pay.

Medicare Advantage Enrollees might need to find an alternative.

If you are a high earner, talk to your accountant. If you make more than 200,000 per year and couples who earn at least 250,000 have to pay more.

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