Health Care Reform in the U.S
Professor Kate Bundorf
Stanford University School of Medicine
Fudan University School of Public Health
U.S. Health Care System: Coverage Problems
• Many people are uninsured and many of the insured
worry about the stability of their coverage.
– About 15% of the population and 20% of working age adults are
uninsured at a given point in time.
• Health care costs are high and growth in health care
spending consistently exceeds that of the economy as a
– Health care spending per capita in the U.S. was $7,680 in 2008
representing 16.2% of GDP.
Sources of Insurance Coverage: Public Programs
• The major public programs in the U.S. (Medicare and
Medicaid) cover most older adults (94%), a large portion
of children (33%), and relatively few working-age adults
• Both are tax-financed, government-run, single payer
insurance programs which contract with private
• Public programs cover less than one-third of the U.S.
population but finance about one-half of U.S health
Sources of Insurance Coverage: Private Market
• The majority of workers and their dependents have
private, employer-sponsored coverage.
• It is voluntary, not mandatory for employers to offer
workers health insurance, although tax law creates
strong incentives for employers to do so.
– Employer-sponsored health insurance is not universal among the
• An important weakness of employer-sponsored coverage
is that it is not transportable across jobs and periods of
• Individual primary coverage is currently a residual
Source of Insurance Coverage: Uninsured
• Public programs currently cover only a subset of low-
– 45% of families with income below the poverty level and 27% of
families with income of 1 to <2 times poverty level had public
coverage in 2007.
• People at all levels of income are uninsured.
– 37% of the uninsured are in families with income below poverty
– 53% of the uninsured are in families with income 1 to <4 times
– 10% of the uninsured are in families with income 4 times poverty
Reform Challenges: Insurance Coverage
• The majority of the population has insurance which they
– 90% of insured Americans rate their coverage as “excellent”
(36%) or good (54%).
– Any dramatic change to that coverage generates opposition to
reform among the public.
• Because the uninsured are heterogeneous, achieving
universal coverage requires:
– Redistributive policies to make health insurance accessible for
those who cannot afford it;
– Compulsory policies to expand coverage among those who can
afford it; and
– Normative judgments to distinguish between the two.
Polling data from Kaiser Family Foundation, Kaiser Public Opinion Data Note: Americans’ Satisfaction
with Insurance coverage, September 2009, http://www.kff.org/kaiserpolls/upload/7979.pdf
• Per capita spending has risen more quickly than inflation
for both public and private payers.
• Increased utilization is the primary driver of cost growth
for both public and private insurance (not aging of the
population or prices of services).
Percentage point difference
between growth in per capita health
expenditures and GDP
Overall and by Payer, 1975-2005
All Other 2.0
Source: U.S. Congressional Budget Office, The Long Term Outlook for Health
Care Spending, November 2007.
Health Care Spending: Cost versus Value
• For certain clinical conditions, increases in aggregate
spending have resulted in dramatic improvements in
mortality and quality of life (Cutler 2004).
– Examples include care for heart attack patients, low birth weight
infants, and people with mental health conditions.
• However, research has also demonstrated significant
waste in spending on the margin.
– Per capita spending varies significantly across geographic areas
and there is no evidence that higher spending areas achieve
– If high spending areas reduced their utilization to the level of low
spending areas, we could reduce health care spending in the U.S.
by about 30%.
Reform Challenges: Cost Growth
• Determining how to control spending in ways that
maintain or increase spending in areas in which it is
beneficial, and reduce spending in areas in which it is
• One person’s wasteful spending is another person’s
U.S. Health Care Reform
• President Obama sign the Patient Protection and
Affordable Care Act on March 23, 2010 and the Health
Care and Education Affordability Act on March 30, 2010.
• The process used to pass the legislation, called “budget
reconciliation”, required that the proposed legislation
reduce the U.S. government budget deficit.
– Any increases in government spending had to be offset by
reductions in government spending or increases in taxes.
Main Features of U.S. Health Care Reform
• Requirement that people have health insurance
• Insurance market restructuring and regulation intended
to make it easier to obtain health insurance.
• Subsidized coverage for low- and middle-income families
to make health insurance more affordable.
• Subsidies and penalties for employers to promote
• Mechanisms to promote and evaluate new ways of paying
health care providers.
• Requirement that all U.S citizens and legal residents
have qualifying health care coverage.
• Creates a financial penalty for those without coverage.
– Magnitude of the penalty linked to income
– Exemption for those for whom the lowest cost plan exceeds 8% of
Insurance Market Restructuring and Regulation
• Create state-based health insurance exchanges where
individuals and small businesses can purchase health
• Greater regulation of private health insurance sold both
in and out of the exchange.
– Require guaranteed issue (insurers must offer a plan to everyone
who wants to buy one) and guaranteed renewability (an insurer
must be willing to renew the coverage of everyone who has it at
class average rates) of insurance coverage.
– Require coverage of preexisting conditions.
– Allow rating variation based only on age (limited to a 3:1 ratio),
geographic area, family composition and tobacco use (1.5:1).
– Prohibit lifetime limits on the dollar value of coverage.
– Minimum loss ratio requirements.
Subsidized Coverage for Individuals
• Extend state-based Medicaid coverage to all low-income
– All people with incomes up to 133% of federal poverty level will
be eligible for Medicaid with expanded role of federal financing
for the newly eligible.
• Provide premium and cost-sharing subsidies for coverage
purchased through the exchange for low and middle
– Refundable and advanceable premium credits for eligible families
with income between133% to 400% of FPL.
– Limited to employees who are not offered coverage from an
employer unless the employer’s plan is insufficiently generous or
the employee contribution is too high relative to income.
Promote Employment-based Coverage
• Employer subsidies
– Provide a tax credit for small employers (<25 employees) with
low wage workers (<$50,000 average annual wages) who purchase
health insurance for employees.
– Create a temporary reinsurnace program for employers providing
health insurance coverage to retirees over age 55 who are not
eligible for Medicare.
• Employer penalties
– Require medium to large employers (> 50 employees) to pay fines
if employees receive tax credits.
– Require employers to contribute to coverage purchased by
employees in the exchange if the employer contribution is
Increase Efficiency of Health Care Delivery:
• Create an innovation center to test, evaluate and expand
different payment structures and methodologies to
reduce program expenditures while maintaining or
improving quality of care.
• Promote “Accountable Care Organizations” (ACOs) by
allowing them to share in any cost savings they generate.
• Establish a pilot program for Medicare bundled
• Establish an advisory board to submit legislative
proposals containing recommendations to reduce the per
capita rate of growth in Medicare spending if it exceeds a
target growth rate.
Increasing the Efficiency of Health Care Delivery
• Support comparative effectiveness research by
establishing a non-profit patient-centered outcomes
research institute to identify research priorities and
conduct research that compares the clinical
effectiveness of medical treatments.
Financing: Tax Increases
• Tax increases for high income families
– Increase Medicare Part A tax rate on wages from 1.45% to 2.34%
on earnings over $200,000 for individual taxpayers and $250,000
for married couples.
– Impose a 3.8% tax on unearned income for high income tax
• Tax on “Cadillac coverage”
– Excise tax on insurers of employer-sponsored plans with
aggregate value that exceed $10,200 for individual coverage and
$27,500 for family coverage. Amount of the tax is 40% of the
value of the plan that exceeds the threshold.
• Annual fees on pharmaceutical manufacturing and health
Financing: Reducing Medicare Provider Payment
• Reduce annual market basket update for Medicare
– But increase payment rates to primary care providers.
• Reduce payments to private plans participating in
– But increase payments rates for high quality plans.
• Also increase payments by high income beneficiaries
for Medicare coverage.
Likely Effects of Reform
• Insured share of the population expected to increase
from 81% to 92% in 2018.
• Coverage expansions estimated to cost about $900 billion
over ten years.
– Public insurance expansion: $434 billion
– Subsidized coverage through exchanges: $358 billion
– Employer reinsurance and other: $106 billion
• Primary sources of financing include:
– Reductions in Medicare provider fees: $455 billion
– New revenues (taxes): $525 billion
Source: U.S Congressional Budget Office, March 20, 2010
Implications of Reform
• Current proposals significantly expand insurance
coverage but do not address the underlying cost
• Because expanded coverage relies heavily on government
financing, it will ultimately strain government budgets.
• Future administrations will be faced with a choice of
– Scaling back government subsidized coverage,
– Increasing taxes, or
– Finding ways to reduce health care spending.