Takeaway: The ACA has a two phased implementation; increased coverage and utilization which is behind us and payment reform which looms large ahead.

Editor's Note: Below is a complimentary institutional research note written by Health Policy Sector Head Emily Evans on President Obama's Affordable Care Act. To access our institutional research email sales@hedgeye.com.

Obama's Affordable Care Act: Success Or Failure? It Depends What You're Grading It On - aca signing

The Affordable Care Act was not so much a health care law as it was an insurance law. Its primary purpose was to provide access to adequate and affordable health insurance coverage. The law left intact initially the highly inefficient fee-for-services system that dominates the Medicare, employer sponsored and commercial insurance markets. That approach was not without debate within the Obama administration so plans were made to introduce needed reforms when the time was right.

Inefficient is probably too kind a word to describe the American health care system. At the time the ACA was under consideration and ultimately enacted, data from the Organisation for Economic Co-operation and Development (OECD) and published in the Journal of Economic Perspectives by Alan Garber and Jonathan Skinner demonstrated that the United States health system was not cost-effective. Table 1 illustrates some of the utilization and health metrics they examined in their 2008 paper, Is American Health Care Uniquely Inefficient?

Table 1: Utilization and Health Differences across OECD Countries

Obama's Affordable Care Act: Success Or Failure? It Depends What You're Grading It On - evans chart 1

Health care experts the Obama administration has assembled to develop the Affordable Care Act, understandably argued for significant changes to the care delivery system that would limit the growth and gross inefficiencies of the sector. Their arguments were for a better policy but the fact is one person’s inefficiency is another’s job. Virtually every Congressional district has at least one hospital which is often its largest employer. In a majority of congressional districts, health care and social assistance, according to BLS data, provide most jobs.

With unemployment in the U.S. flirting with 10 percent for 2009, the president’s advisers knew that if they did not get the employment situation under control there would not be a second term. As Politico reported couple weeks ago, “Health care experts like [Bob] Kocher and colleague Zeke Emanuel wanted reforms that would increase efficiency and tamp down the sector's growth. But ‘people on the jobs team were saying we need more middle-class jobs and the best place to create them was in health care,’ Kocher says. ‘And after we lost 7 million jobs [in the recession], that argument was winning.’

In the darkest days of the Great Recession, the health care sector was producing year-over-year job growth around 2 percent while the overall economy dipped into negative territory. Table 2 illustrates the year-over-year job growth for health care and all nonfarm payrolls.

Table 2: Annual Employment Growth - All Nonfarm versus Health Care 2007-2016

Obama's Affordable Care Act: Success Or Failure? It Depends What You're Grading It On - evans chart 2

Instead of imposing delivery reforms on the commercial insurers or significantly altering the Medicare fee for service system, the ACA created a laboratory for innovation called the Center for Medicare and Medicaid Innovation and funded experiments like Accountable Care Organizations and the Patient Centered Outcomes Research Institute. Most important, the ACA quietly enabled the imposition of those reforms deemed successful on the entire Medicare system – a tool that would not be used for five years.

In the four years between passage of the ACA and the end of 2014, per capita spending on health care rose to a little over $9,500 in the United States. Health care expenditures in the U.S. accounted for 17.5 percent of gross domestic product in 2014 up from 17.3 percent in 2010. In other words, the effect of the ACA on spending growth turned out much as those who crafted the bill anticipated. It increased utilization without any offsetting cost controls.

By the end of 2014, 10.5 percent or about 14.6 million employed were in the health care sector. Employment in health care exceeded that of the manufacturing sector and was only about 700,000 workers behind retail. By 2016, the health care sector would reduce that distance to 400,000 workers. As a jobs program, the ACA was a soaring success. As a health care reform effort, there was still much work to be done and the tools were there to finish the job. By early 2015, unemployment in the U.S. was finally approaching 5 percent. It was at that point the Obama administration unpacked the CMMI tool and took up the work for which Kocher, Emanuel and others advocated in 2009 and early 2010.

In early 2015, HHS Secretary Sylvia Burwell announced several goals. By the end of 2016, Medicare would make 30 percent of payments through alternative payment models. By 2018 the percentage would rise to 50 percent. Also, HHS pledged to tie 85 percent of Medicare payments to value-based purchasing programs by the end of 2016. By the end of 2018, HHS pledged that figure would be 90 percent. Efforts to extend these goals to commercial and employer-based insurers included the Health Care Payments Learning and Action Network.

Later that year, in the summer of 2015, CMS announced its first mandatory demonstration for bundled payments of hip and knee replacements, finally executing changes to payment and delivery of health care services envisioned by authors of the ACA. A couple of weeks ago, HHS extended the mandatory bundles to include cardiac care - not coincidentally after a June 23 letter from the Center for American Progress asking CMS to speed up the pace of reform.

As Medicare has placed itself decisively on the forefront of change in payment and delivery, it has turned the spotlight on the lack of innovation and slow pace of change in the commercial insurance space. The recent decision by the Department of Justice to intervene in the mergers of AET/HUM and ANTM/CI was based in part on the impact the combinations would have on changes to payment and delivery systems. What was once quiet grumbling about commercial insurers has morphed into a full throated call for change. Peter Orszag, one of the signatories to the CAP letter in June, writes in JAMA:

“In employer-sponsored insurance, the evidence shows substantial variation in prices, and to date, transparency tools have proven relatively ineffective at reducing this variation. Employers have to push for better pricing, and as the president notes in his Special Communication {in the same issue of JAMA], the so-called Cadillac tax on high-cost employer plans should be reformed, not ended.”

As things stand today, the pace of reform has quickened in response to economic and political circumstances that were not present when the bill was enacted back in 2010. This drive toward greater efficiency - which we see as only in its infancy -comes at the same time that the increased utilization brought on by the ACA begins to wane, putting pressure on incumbents. As the Hedgeye Health Care team has discussed (see "Short AHS, Contemplating a Buzzsaw" Aug. 1, 2016) the data is pointing toward a slowdown in health care employment even before payment reform kicks in. As payment and delivery reform ramp up in Medicare and spillover into commercial and employer-based insurance, the door swings wide open for disruptive forces.

And that was the plan all along.