Health insurance, risk, and responsibility after the Patient Protection and Affordable Care Act.

• Author: Baker, Tom

The Affordable Care Act embodies a new social contract of health care solidarity through private ownership, markets, choice, and individual responsibility, with government as the insurer for the elderly and the poor. The new health care social contract reflects a "fair share" approach to health care financing. This approach largely rejects the actuarial fairness vision of what constitutes a fair share while pointing toward a new responsibility to be as healthy as you can. This new responsibility reflects the influence of health economics and health ethics. There are challenges to achieving the solidarity through individual responsibility envisioned in the Act--most significantly "risk classification by design" and non-compliance with the mandates--but the Act contains regulatory tools that the states, the new Exchanges, and the Department of Health and Human Services can use to address these challenges. This Article provides a high level overview of the distribution of health insurance risk and responsibility after the Affordable Care Act and describes how the Act reforms the key institutions that perform that distribution: Medicare, Medicaid, the large-group health insurance market, and the individual and small-group health insurance market.

INTRODUCTION I. DISTRIBUTING HEALTH CARE RISK: THE FOUR-LEGGED STOOL A. Medicare B. Medicaid C. The Individual and Small-Group Market D. The Large-Group Market II. DISTRIBUTING RISK AND RESPONSIBILITY AFTER THE AFFORDABLE CARE ACT A. The Fair Share Approach to Responsibility for the Cost of Health Care B. The Responsibility to Be as Healthy as You Can III. CHALLENGES TO THE NEW HEALTH CARE SOCIAL CONTRACT A. Risk Classification by Design 1. The Minimum Coverage Requirements 2. The Exchange Certification Requirement 3. The Medical-Loss Ratio Requirements 4. The Risk Adjustments B. Noncompliance with the Mandates 1. The Penalties Are Better Powered than Many People Realize 2. The Exchanges Can Tolerate Noncompliance CONCLUSION: THE MORAL OPPORTUNITY OF INSURANCE INTRODUCTION

With the passage of the Patient Protection and Affordable Care Act (PPACA) (1) and the Health Care and Education Reconciliation Act of 2010 (HCERA), (2) health insurance in the United States is on track to become a form of social insurance. While all insurance is social--so that "the loss lighteth rather easily upon many than heavily upon few" (3)--to be considered social insurance in the traditional sense, the insurance must be compulsory and easily available, and the price must bear some relation to the ability to pay. (4)

Parts of the U.S. health insurance system already meet those requirements: most significantly Medicare (for the elderly and formerly working disabled); Medicaid (for certain categories of the poor, including all children in low income families); and workers' compensation (for employment-related illness and injury). (5) U.S. income tax and employment law strongly encourage the provision of general health benefits through employment, making employment-based health insurance a de facto obligation for most large employers and many small employers. (6) But the legal choice to offer health insurance remains that of the employer, and individuals' only health insurance obligations are to pay Medicare taxes and to participate in the financing of Medicaid through the payment of their ordinary state and federal taxes. The Affordable Care Act will make large employers' obligations de jure starting in 2014, and it will create a legal obligation to obtain health insurance for employees' entire lifetime, not just for old age or in the event of total disability.

The Affordable Care Act embodies a social contract of health care solidarity through private ownership, markets, choice, and individual responsibility. While some might regard this contract as the unnatural union of opposites--solidarity on the one hand and markets, choice, and individual responsibility on the other--those familiar with insurance history will recognize in the Act an effort to realize the dream of America's early insurance evangelists: a "society united on the basis of mutual insurance." (7) Public ownership and pure, tax-based financing are technically easier and almost certainly cheaper routes to health care solidarity, but they come at a cost to the status quo that Congress was not prepared to pay.

This Article explores the contours of the solidarity and individual responsibility embodied in the Act. Part I explains the four main health care financing and risk distribution institutions reflected in the Act--Medicare, Medicaid, the individual and small employer market, and the large-group market--with an emphasis on how the Act changes those institutions and how they are financed. Part II focuses on the distribution of risk and responsibility within and among those institutions. I will argue, first, that the new health care social contract extends the fair-share approach to health care financing while rejecting the actuarial-fairness vision of what constitutes a fair share and, second, that the Act points toward the recognition of a new responsibility to be as healthy as you can. This responsibility reflects the influence of health economics and health ethics, and it is part of the embrace of risk first described in the insurance-as-governance literature. (8) Part III identifies challenges to achieving solidarity through individual responsibility envisioned in the Act--most significantly what I will call "risk classification by design." Part III also explores the regulatory tools the Acts puts into the hands of the states, the exchanges, and the Department of Health and Human Services (HHS) in order to address these challenges.

1. DISTRIBUTING HEALTH CARE RISK: THE FOUR-LEGGED STOOL

   Since the 1970s, the United States has had three relatively well functioning health care risk distribution mechanisms and one poorly functioning one. The three better-functioning mechanisms are Medicare, Medicaid, and the large-group market. (All three have long-term cost problems, but this is an issue that the Affordable Care Act does not address.) The poorly functioning mechanism is the individual and small-group market. We can think of U.S. health care risk distribution as a wobbly stool. Some people spill things while sitting on it. Others fall off.

   Consistent with this metaphor, the Affordable Care Act makes only incremental changes to Medicare, Medicaid, and the large-group insurance market (though the Medicaid change is historic in terms of U.S. social welfare policy). The Affordable Care Act dramatically reforms the individual and small-group insurance market with the aspiration of stabilizing the four-legged stool. Understanding these changes is a necessary first step to understanding the new health care social contract. I will begin with Medicare and Medicaid, which are the easy parts to explain at the general level. I will then turn to the individual and small-group market, and I finish with the large-group market.

   1. Medicare

      The Affordable Care Act made no fundamental changes to Medicare, which is the health insurance component of the Social Security program. Accordingly, health insurance for the eligible disabled (those who paid, or were dependents of someone who paid, Social Security taxes for forty quarters before becoming totally disabled) and seniors (who paid, or were married to someone who paid, Social Security taxes for forty quarters) will continue to consist of four parts:

      * Part A, which covers inpatient care, hospice care, and some home health services (9) and is financed entirely by a flat percentage tax on wages paid over the lifetime; (10)

      * Part B, which covers other medically necessary or preventive services (11) and is funded in part by a flat percentage tax on wages paid over the lifetime (73%) and in part by premiums paid when enrolled (25%), that are based in part on income and are otherwise uniform regardless of age, health status, or any other factors; (12)

      * Part C, Medicare Advantage, which is a private-sector alternative to Parts A and B that allows individuals to obtain their health care benefits, typically including prescription drug benefits, from the health care financing companies active in the large-group market explained below (13) and is funded in much the same way as parts A, B, and D; (14) and

      * Part D, which covers prescription drugs (15) and is funded by premiums that vary according to the type of plan but are otherwise uniform regardless of age, health status, or any other factors. (16)

      The Affordable Care Act changes Medicare financing and risk distribution in three main ways:

      * increasing the progressivity of Medicare financing by raising the wage tax on higher-income taxpayers, (17) adding an income-based component to Part D premiums, (18) and freezing the thresholds for income-based increments to Part B premiums; (19)

      * changing the cost-sharing formula for Part D so that individuals will gradually pay a smaller percentage of the costs of medication at the point of sale (meaning that a greater percentage of the costs will be paid in the form of Part D premiums); (20) and

      * reducing federal payments to Medicare Advantage plans, (21) providing bonuses for quality ratings, (22) and obligating these plans to maintain a medical-loss ratio of at least 85%. (23)

      In addition, the Act expands coverage for preventive health services and eliminates cost sharing for services designated as cost effective by the U.S. Preventive Services Task Force. (24) As I will explain in Part II, this new coverage, if extended along the lines of the parallel aspects of the insurance market reforms in the Act, has the potential to represent a significant change in Medicare's distribution of risk and responsibility. (25)

   2. Medicaid

      In form, the Act changed Medicaid only incrementally, but these changes are very significant in historical terms. The Act, for the first time in U.S. history, explicitly...