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The Logic Behind Federal Health Care Reform

July 06, 2010 By Aaron Sinner, Undergraduate Research Fellow
Part One in a Two-Part Series 

While some of you might have gotten free tans this weekend, those who went to a tanning salon were among the first to pay the 10 percent "Tanning Salon Tax," which went into effect July 1st. Like calorie count labeling on menus, breast milk pumping stations, and the question of coverage for illegal immigrants, this is another component of the federal Patient Protection and Affordable Care Act onto which many have latched and talked up at dinner tables and office coolers, while failing to note the broader logic of the law.

Admittedly, health care and health insurance are very complicated and confusing topics. Yes, the law is 2,000+ pages, but no one should expect policymakers to write several generations' worth of health care overhaul in a couple dozen pages. That's why elected officials and their staffs should have worked to guide the media and the public through the substance of the legislation; instead, they cherry-picked initiatives that made the best sound bites and headlines. As Ezra Klein of the Washington Post writes, "the basics of the legislation are not the controversial parts, and so the argument moves on to smaller pieces of the legislation that are controversial."

As a result, citizens remain confused over what exactly the law does. A recent study by Pew Research found that as the debate went on, Americans became more confused about the substance of the bill, not less. And unfortunately, many don't realize the increased access to care they now have-or will, as provisions of the bill come into effect over the next few years.

Certainly, the health care law contains a number of pieces seemingly sprinkled into the mix, but overall, it follows logical policy recommendations to improve access for more people.

Expanding Access

At the core, Congress has barred health insurance companies from denying coverage to people with pre-existing conditions. In Minnesota, this means insurance companies currently denying more than 55,000 residents must now offer them health insurance. Furthermore, it protects the six percent of Minnesotans with diabetes, the 21 percent with high blood pressure, and anyone else with a pre-existing condition from being denied coverage.

But if health insurance companies are suddenly required to cover a slew of people who have serious health issues, then they'd have to raise everyone's premiums, since on average their clients will be sicker. So how did Congress offset that cost?

The obvious solution was to balance out new coverage of the sick with new coverage of the healthy-and luckily, there's a big demographic of young people fresh in the workforce who don't have health insurance and who tend to be pretty healthy, so are lower risks. This is why the government mandate is critical; by requiring everyone to have coverage, insurers can take in revenue from a wider pool of healthy people to offset the payouts for covering those who are ill. In Minnesota, this means 519,000 residents will now have health insurance. Here's a side-benefit of covering the young or formerly uninsured without chronic health problems: back in the old days, if someone had a catastrophic accident-say, a twenty-something got banged up in a car accident-he'd go to the emergency room and rack up a bill in the tens-of-thousands that he couldn't afford. The hospital might recoup some money, but would probably chalk the loss up to uncompensated care and raise everyone else's bills to offset the cost. A recent report by the Minnesota Department of Health found that uncompensated care amounted to $268.4 million in 2008 and averaged a 15 percent annual increase from 2004 to 2008 despite general stability from 2000 to 2003. The report says that 57.4 percent of Minnesota's uncompensated care goes to the uninsured, meaning the Affordable Care Act's expansion of health insurance should significantly reduce this hidden cost.

Of course, the monetary problem with the individual mandate should be apparent: If everyone's required to purchase health insurance, how can Congress guarantee that they can all afford it?  Well, the government is subsidizing health insurance for lower-income people by expanding Medicaid and offering tax rebates and credits to help others buy insurance. These "others" are defined in the law as those making four times the poverty level or less--$88,000 for a family of four, according to the Christian Science Monitor. These subsidies run on a sliding scale, so that those with lower incomes will be given a larger subsidy. All in all, an estimated 260,470 Minnesotans will be added to the Medicaid rolls, and Minnesota will receive $4.1 billion in the first five years to cover them. And 282,000 Minnesotans will be eligible for the tax credits, which amount to an estimated $4.6 billion in the first five years they are granted.

Reshaping the Market

There's another issue Congress addresses. Insurance is really expensive if you're buying as one person, as opposed to a large corporation, which gets the bulk discount for bringing in a tide of new customers (this is another way insurers spread risk among employees). Congress sought to make it easier on the little guy-who might be a person trying to start up a small business, or who's working for a small business that can't afford to give him coverage-through two particular mechanisms.  The law offers small businesses tax credits to encourage more employer-based coverage and sets up health insurance exchanges that allow individuals and small businesses to join together, thus making large groups that can buy health insurance "in bulk" and get cheaper rates. There are currently 356,000 Minnesotans who purchase health insurance on their own and will now be able to do so on an insurance exchange. Furthermore, all 77,186 small businesses in Minnesota will be eligible to buy insurance on these exchanges for projected cheaper rates, which could help the 332,555 employees of these small businesses afford coverage.

Hopefully, this gives you a good idea of how the health care overhaul expands access to care. Tomorrow, we'll take a look at what the new law does to pay for all of this and to lower costs.
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