Healthcare Reform Moves Forward; States Face Key Decisions

by Manatt, Phelps & Phillips, LLP

With the results of the election in, the path to implementation of the Affordable Care Act (ACA) now appears clear.  President Obama's re-election guarantees that implementation of national healthcare reform will proceed, and makes it likely that the ACA's expansion of private and public sector coverage will take place on time in 2014. According to the most recent estimates from the Congressional Budget Office (CBO), this means that, starting in 2014, nine million Americans will get their health insurance through health insurance exchanges, with that number growing to 25 million by 2017.  It will also mean that, in 2014, millions of people will join Medicaid and the Children's Health Insurance Program's (CHIP) current 35 million beneficiaries.  In 2014 alone, these changes will add approximately $51 billion to the federal government's healthcare spending to bring it to nearly $950 billion.

Uncertainty caused by the election and Governor Romney's pledge to dismantle the ACA has impeded implementation efforts so far. While some states have already made substantial, visible progress and others have made important strides behind the scenes, many states have delayed their efforts awaiting the election results.  The buildup to the election has also, we believe, slowed the issuance of important implementing regulations by the Center for Medicare & Medicaid Services (CMS), the Center for Consumer Information and Insurance Oversight (CCIIO) and the Internal Revenue Service (IRS) that will help states better understand their roles and options. 

Now, we see these barriers falling as the federal government, states and other players focus on the fast-approaching deadlines that will determine readiness to implement the law's coverage provisions in the fall of 2013.  The first deadline is just days away as states are supposed to decide by November 16 whether they will operate a state-based exchange, as called for in the ACA, partner with the federal government with each providing distinct exchange functions, the so-called state partnership exchange, or rely on the federal exchange.

In 2014, there will be an exchange in each state that will offer coverage options to applicants regardless of preexisting conditions. Coverage will be made affordable through a combination of tax credits and Medicaid expansion, with a continuum of coverage options for consumers from 0-400 percent of the federal poverty level (FPL) for states that participate in the Medicaid expansion.

Five Areas of Action 
The following are five areas of action that we expect to see over the next few months:

State exchange planning and implementation:  For those states that are already leaders in health insurance exchange implementation, the election results will accelerate their momentum.  Thirteen states and the District of Columbia have officially indicated their intent to establish a state-based exchange, and there are another half dozen states that may have made enough progress to make a state-based exchange feasible.  On the other end of the continuum, there are seven states that have made it clear that they will rely on the federal exchange, at least for 2014. 

The majority of states are "in the middle."  Some may apply for state-based exchange certification, but most will be better candidates for state partnership, where they can take on insurer oversight and consumer assistance functions, while relying on the federal exchange for the technically challenging infrastructure necessary to support eligibility, enrollment, and financial management. To date, a few states have indicated a preference for state partnership; we expect that number to grow, given the strong interest that states have in regulating their own insurance marketplaces.

Given the limited time between the election and November 16, we believe that the Administration will be flexible with states that seek some additional time to signal their plans for exchange implementation. That flexibility will be limited by the fact that all exchanges must be ready for open enrollment beginning in October 2013.  States will continue to access federal funds to pay for exchange implementation, including states pursuing state partnership and federal exchange implementation in 2014. The federal government has already distributed more than $2 billion in exchange establishment funds and that number could more than double as states move forward.

With most states in a state partnership or federal exchange in 2014, the readiness and capabilities of the federal exchange will be critical.  CMS has consistently said the federal exchange will be ready to provide a consumer-friendly insurance marketplace and as well as access to subsidies to purchase coverage. Equally important will be the federal exchange's capability to partner with states that want to take the lead on insurance oversight and consumer assistance while continuing to develop the technical capacities for a state-based exchange in 2015 or later.

CMS has held its cards close to the vest with regard to federal exchange implementation, but it will become increasingly important for the Administration to demonstrate that the federal exchange will be ready to qualify insurers, determine consumer eligibility for insurance affordability programs including tax subsidies, and enable consumers to shop and enroll in health plans by the October 2013 open enrollment period.

Medicaid expansion: The Supreme Court, in its decision upholding key elements of the ACA, chose to interpret the law as giving states the option of maintaining their current Medicaid coverage levels or expanding Medicaid eligibility to all individuals with incomes below 138 percent of the FPL.  Currently, 33 states limit Medicaid eligibility to parents earning less than 100 percent of the FPL ($18,530 for a family of three in 2011), with 17 states limiting parent eligibility to less than half the poverty level.

Some states have embraced the expansion, finding that the combination of increased coverage for their citizens and full federal financing through 2016 (and never going below 90 percent) is too good a deal to pass up. A few states have announced that they will not expand their Medicaid programs, while many others continue to study their choices. 

A critical question that has been raised by states is whether the Administration will allow them to expand their Medicaid programs for adults to some level below 138 percent of FPL and still receive the enhanced federal matching dollars.[1]  A leading idea that states have advanced is to expand eligibility up to 100 percent of the FPL, the point above which individuals are eligible for subsidies from the health insurance exchanges.  The Administration faces tricky legal, policy, financial and political issues in resolving this question.  If the Administration allows states to do limited expansions with the enhanced federal funding, it will be an attractive option for many states, including those that currently contemplate the full expansion up to 138% FPL. 

However, even if the Administration takes an "all or nothing" approach, we believe that most states will choose to accept the expansion rather than turn away federal funds and the prospect of significant help for their citizens. Certainly this has been the choice states have made in the past.  Hospitals and others that provide significant uncompensated care to uninsured individuals will also advocate strongly for expanding the reach of Medicaid.  

Rulemaking:  We expect federal agencies to issue a series of rules necessary to guide states and others in implementing the ACA.  These rules include:

  • Insurance market rules regarding the definition of essential health benefits and rules related to guaranteed issue and modified community rating of insurance products;
  • Employer rules on the ability to provide discounts to employees on health insurance premiums related to wellness program participation;
  • Health insurance exchange rules including those that will define actuarial value for purposes of classifying exchange health plans by metal level and rules for risk adjustment and reinsurance;
  • Implementing parameters for the optional Medicaid expansion, including benefits for new adults; and
  • Federal exchange rules addressing the operations of the exchange and its interface with state insurance and Medicaid agencies.

We also expect to see ACA rules from the Internal Revenue Service, including:

  • Employer rules defining when they will be required to make payments under the employer responsibility provisions of the ACA, and
  • Rules related to taxes and fees that will be paid by health insurers, device makers, and others that will be critical to determining when individuals may have to pay the fee known as the individual mandate.

Legislative action:  With the election over, the President and Congress will again turn their attention to fiscal issues that are closely entwined with healthcare and the ACA. There are three main actions forcing events. On January 1, physician payment rates for Medicare are scheduled to drop an estimated 27.4 percent unless Congress acts, once again, to delay these cuts that are a result of a 1997 law provision known as the Sustainable Growth Rate or SGR. 

Also on January 1, the tax cuts first enacted under President Bush and extended for two years in 2010 will expire and many more taxpayers will be exposed to the Alternative Minimum Tax (AMT).  Finally, on January 2, the automatic, across-the-board spending cuts (known as sequestration) mandated by the 2011 budget agreement will take effect.  These events along with other changes triggered at the start of the year are collectively known as the fiscal cliff.

President Obama has pledged to work with the congressional leaders of both parties to modify the sequester and enact a compromise on the expiring tax provisions.  Also, we agree with most observers that Congress will not allow the physician cuts to take effect. 

It is possible that some action could occur in the so-called lame duck Congress at the end of this year, perhaps involving a temporary delay in reaching the fiscal cliff, including short-term relief from physician pay cuts.  It is more likely that all of these issues will be resolved in the first two or three months of next year through a large budget negotiation.  Congress could then make changes that are retroactive to the start of the year. 

For healthcare and the ACA, fiscal action means that healthcare spending - which makes up a large and ever-increasing factor in federal spending growth - will be on the table including both old and new ideas for raising money from the healthcare sector.  This could mean changes to the ACA to reduce its cost or to increase revenues from its provisions. 

Healthcare system reform: With the clear signal that the healthcare delivery and payment reforms of the ACA will now be implemented, the pace of system reform - within federal programs and in the private sector - will continue to accelerate.  The impetus behind these efforts is the increasing recognition that the issues of quality and cost of healthcare can only be addressed through fundamental reform in how we deliver and pay for care.

Nevertheless, the ACA has the ability to encourage the testing, evaluation, and adoption of health system reforms.  In particular, the ACA's payment reforms in Medicare and Medicaid, especially those related to bundled payment, pay for performance, accountable care, and dual eligible delivery and payment demonstrations, have the potential to catalyze change. These reforms supplement those already in place in the area of health information technology, which were created by the financial incentives in the Health Information Technology for Economic and Clinical Health (HITECH) Act.

Implementation of the ACA will have substantial impacts on those who pay for, deliver, and receive healthcare in the U.S.  For most Americans who get their health insurance through their employer, Medicare, or Medicaid today, there will be few significant changes.  However, for those who today cannot afford to purchase insurance because of limited incomes or preexisting health conditions, the ACA holds the promise of the security of coverage. 

For hospitals, physicians, and other providers, the ACA has the promise of increasing utilization and decreasing uncompensated care.  For medical product suppliers, including drug and device companies, the ACA brings new fees and, perhaps, new customers.  And for insurers, the ACA creates a new marketplace where they will need to follow new rules in a competition for new enrollees. 

Much remains unknown about how the implementation of the ACA will actually play out for states, those who will gain insurance through the exchanges, and, of course, the many players in the healthcare system who are impacted by these changes.  While the CBO and others can make projections, it is only in the actual implementation that we will learn whether the law's penalty for not gaining coverage will motivate healthy Americans to purchase insurance and what the premiums for exchange plans will be, given the law's requirements for guaranteed issue and modified community rating.  For insurers, providers of care, and suppliers of products, it is only implementation that will reveal whether the projected influx of new patients and reduction in uncompensated care costs will materialize. 

We look forward to working with you in the days and months ahead in each of these areas.  We welcome your reactions to our projections as well as your questions and comments. 

[1] Governor McDonnell letter to President Barack Obama, July 10, 2012


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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