On March 11, President Biden signed the $1.9 trillion American Rescue Plan, sending much-needed economic relief to individuals, businesses, states, and local governments—as well as resources for COVID containment and to support the national vaccination effort. This legislation also includes billions of dollars to increase the size and the scope of the public subsidies in the Affordable Care Act (ACA) market, thus fulfilling a central element of the health policy agenda the president laid out in his campaign. This represents the largest expansion of coverage since 2010—an incredibly important accomplishment, especially at this point in time. In addition to expanding the size and scope of the public subsidies in the ACA insurance exchanges, the legislation eliminates the income cap on these subsidies. This means that regardless of income, age, or location, no one will be required to pay more than 8.5 percent of their income for insurance on the exchanges. In other words, individuals are no longer at the mercy of the market—which is a good thing.
The problem is that the American Rescue Plan did nothing to constrain the market itself, and there is nothing to suggest that unfettered market forces will solve this problem—on the contrary, they are fueling it. This past year alone—in the midst of the pandemic and a terrible economic downturn, when millions of Americans were losing their health insurance, when one in six people were going to bed hungry and millions faced unstable housing—health care IPOs raised more money during the first three quarters, than during each year from 2015-2019—almost $30 billion.
There is nothing wrong with making a profit, but we are talking about public resources here. Remember that every public dollar that goes to feed a Wall Street investor or pad a hospital margin, is a public dollar not available to expand coverage or lower premiums. Every public dollar that goes to pay for unnecessary, low-value, or overpriced care, is a public dollar not available to invest in education, food security, and affordable housing. In short, we must demand value from our health care system—we should not be spending our public resources on overtreatment, unnecessary care, inflated prices, or care that is inefficient, uncoordinated, or ineffective.
Making health care more affordable to individuals by increasing public subsidies is not the same as reducing the total cost of care. It simply uses the public treasury to subsidize a business model, in which the incentives are aligned to maximize revenue rather than to maximize health, and wastes up to thirty percent of every dollar it spends. The cost of our unconstrained health care system—now further underwritten by taxpayer dollars—will continue to escalate, forcing us to spend or borrow ever more money to pay for it—while other important social investments critical to our health, remain woefully underfunded.
The World Health Organization defines health as “a state of complete physical, mental and social well-being, and not merely the absence of disease or infirmity.” If we could write a prescription for America that would surely be it. And if we could fill that prescription by spending more money on the U.S. health care system, we would already be there. Yet, fifty years of evidence tells us that the promise of health care for all Americans is not the same as a healthy America. In 1968 the U.S. was spending 6.2% of its GDP on health care. Today we are spending almost 18%, yet life expectancy has declined three years in a row, driven largely by inequality and economic hardship, particularly in working-class America.
We know that among the factors that contribute most to lifetime health status, our medical system is a relatively minor contributor. Far more important are healthy pregnancies, affordable housing, good nutrition, safe communities, education, and living-wage jobs. These are the pillars of family stability, success—and of health. Our failure to adequately invest in these “social determinants of health” is a central cause, not only of the declining health of our population but also of the growing social unrest and political polarization that is undermining the effectiveness of our public institutions.
Since the enactment of Medicare and Medicaid in 1965, the central strategy to expand coverage in the U.S. has been to increase public subsidies—the same strategy used in both the ACA and the American Rescue Plan. And this strategy has unquestionably benefited millions of Americans. The problem is that neither Democrats nor Republicans have assumed any change in the underlying health care business model—we either pay for it or we don’t, creating a false choice between cost and access.
The cost of this business model—driven by fee-for-service reimbursement, inefficacy, and excess profit-taking—is approaching $4 trillion a year. It grew from $2.6 trillion in 2010 to $3.9 trillion in 2020 and is projected to grow another to sixty percent to $6.2 trillion by 2028. This relentless drain on public budgets undermines the social investments necessary to improve the health of the population and to address the long-standing racial and ethnic inequities, reflected in growing health disparities and diminishing economic and educational opportunities, disproportionally afflicting communities of color.
Certainly, universal coverage for affordable medical care is essential to the health of our nation and is a basic measure of a just society. But so too are the social investments, that can help struggling families succeed, thus sparing children the toxic stress that fuels a cycle of generational poverty, condemning them to lives of economic struggle and early death. These investments weave the very fabric of social justice.
The American Rescue Plan was enacted through the reconciliation process with no Republican votes. The same process will be required to make the new health care subsidies permanent, but the structural changes to the underlying health care system necessary to reduce the total cost of care, including a public option, are unlikely to fit under the rules of reconciliation. It is clear that while this congress can increase public subsidies for health care, it is not politically possible to take the steps needed to reduce the total cost of care itself. The Democratic margins are too thin and the partisanship too deep. What is also clear, is that without changing the payment model, the total cost of care will continue to increase, and the subsidies will eventually have to be increased once again, adding to the national debt and further constraining our ability to invest upstream in the community.
We cannot afford to simply wait another two years, hoping that the 2022 midterm elections will change the political dynamics in Congress. Nor can we solve this problem by continuing to go further into debt to fund the current system. Our nation needs definitive action that will pave the way toward universal coverage—but coverage that is financially sustainable and creates space in our public budgets for the social investments that can keep people out of the medical system in the first place—investments in health and equity.
The way beyond congressional gridlock is to unleash state innovation around delivery system reform. By using facilitated 1115 and 1332 waivers—in a coordinated and well thought out strategy—the Biden Administration can encourage six or seven carefully selected states to demonstrate models that redefine competition within the boundaries of sustainable fiscal constraints while maintaining access and quality. I know from my direct experience with both the original Oregon Health Plan waiver in 1993 (President Clinton), and the waiver for Oregon’s Coordinated Care Organizations in 2012 (President Obama), that the ultimate decision on bold waiver proposals such as the ones described below, is a political decision driven from the White House, rather than an administrative decision driven by CMS.
So, even as the Biden Administration pursues health policy reform through the congressional reconciliation process, here are a few thoughts on how to move the national health policy agenda forward administratively —including a “public option”— through 1115 and 1332 waivers.
Universal Coverage / Reducing the Total Cost of Care
Let’s start by looking at the health care system in terms of three “pools” organized by the nature of the public subsidies involved. Medicaid (Pool 1) and Medicare (Pool 2) are financed with direct public subsidies, while Pool 3 is financed with indirect public subsidies—the ACA market is indirectly subsidized with premium tax credits and cost-sharing reduction subsidies, while the large group and self-insured markets are indirectly subsidized through the tax exclusion for employment-based coverage.
Pool 1 is where the coverage problem is most acute, primarily because of the total cost of care. Those most at risk are those earning more than 138% of the federal poverty level (FPL), who are not eligible for Medicaid but cannot afford the growing cost of premiums, copayments, and deductibles in the individual market. Furthermore, twelve states have not yet expanded Medicaid. Certainly, there are legitimate challenges/problems in Pools 2 and 3— but they are not primarily coverage problems. Everyone on Medicare has coverage and, notwithstanding the rise in unemployment, the majority of Americans are still receiving coverage through their employer.
As incoming CMS Administrator Chiquita Brooks-Lasure has pointed out: “coverage for the lowest-income Americans remains the most significant unfinished business of the ACA.”[2] So, given the deeply partisan landscape of Congress, the place to start beginning to fundamentally change the delivery model across the system is with Pool 1. Let me use Oregon as an example.
We know that if even 80% of those in Oregon who are currently eligible for Medicaid, or for subsidies in the ACA market, were actually to enroll, we could reduce the number of Oregonians without coverage to less than 1%.[3] To do so, we must reduce the total cost of care by:
- Ensuring that the Oregon “Coordinated Care Organizations” (CCOs)[4] continue to operate on a true global budget (1115 waiver).
- Moving the ACA individual market from fee-for-service to a capitated model (1332 waiver).
- Using the restructured ACA individual market as the public option, open first to people enrolled in the small group market.
Move the ACA Individual Market from FFS to Capitation
Unlike every other public health care program that is heavily subsidized with taxpayer dollars (including Medicaid, Medicare, the VA, and Tricare) the ACA market has no uniform fee schedule. It is a wide-open fee-for-service payment model with no constraints on the total cost of care. Fees are negotiated annually between insurers and providers and those fees mirror rates in the rest of the commercial market and can be 300 to 400% higher than Medicaid rates. This means, for example, that a provider giving care to someone earning 138% of the FPL will get paid the Medicaid FFS rate, but will receive three or four times as much reimbursement for someone earning 140% of the FPL, who is getting care through an ACA policy in the individual market. This is very difficult to justify in our current fiscal environment.
The solution is to use a 1332 waiver to move the ACA individual market from fee-for-service to capitation, with the global budget indexed to a sustainable growth rate, and integrated delivery systems accountable for meeting rigorous metrics around quality, outcomes, and patient satisfaction.
Use this Restructured Individual Market as the Public Option
To date, most public option proposals, including those in Colorado and Washington—as well as the Biden proposal—maintain FFS payment and seek to control cost through rate caps. This approach does not realign the incentives in the payment model and can result in an increase in utilization. However, two recent papers, published in Health Affairs and the Milbank Quarterly, recommend a risk-adjusted, capitated public option.
I am not proposing simple rate caps here, but rather a capitation rate built on some assumptions around the fee schedule, utilization, and benefit. Integrated delivery systems could earn more than the fee assumed in developing the capitation rate through good utilization management. I would suggest using the ACA essential benefits package and assuming moderately well-managed utilization. What we learned from the CCOs in Oregon is that the real cost savings are not in the rates but in reducing trend. Even starting with a fairly generous fee assumption, say 200% Medicare plus, as long as the resulting global budget is tied to a growth rate of 2.5 to 3% per member per year, there will be substantial savings, which will increase over time.
This delta of savings, in turn, not only helps finance the cost of the expanded ACA market subsidies in the American Rescue Plan but creates room in the budget to invest upstream in the community to improve population health and address long-standing racial and ethnic inequities.
This approach eliminates the need to create an entirely new entity. The ACA market is already heavily subsidized with public resources and commercial insurers are already involved. Initially, this market should be opened to employers in the small-group market. There are a number of reasons to recommend this.
- Under current law, small group employers can receive tax credits for enrolling their employees in a plan through the exchange.
- Both the individual and small group markets come under state regulatory authority.
- The vast majority of employers in the United States are in the small group market. It is these employers and their employees, often at the lower end of the income scale, who have suffered the most during the pandemic. Giving them the ability to purchase affordable, high-quality health care with a predictable rate of inflation, would give them a huge boost as we pull out of the current economic crisis.
To illustrate, let’s look at the enrollment numbers in Oregon:
- Medicaid 1,180,000
- Uninsured 300,000
- Individual 220,000
- Small Group 175,000
- Total 1,875,000
Taken together, Medicaid, the uninsured, the individual market, and the small group market includes 1,875,000 lives or 44% of the population— and would include 95% of all Oregon employers and 39% of the workforce.
This approach would require a new risk relationship between payers and providers, so that risk would not be held at the plan level with cost managed through denials and prior authorization. Instead, the risk would flow downstream to integrated delivery systems, which would manage utilization risk, while the health plans would manage true insurance risk (e.g. catastrophic care, exceptionally high-cost individuals).
Another significant difference between this approach and other public options is that this public option is not set up to compete with private commercial insurers but, rather, to force private commercial insurers to compete with each other in a restructured market.
If the administration were to put its weight behind giving six or seven carefully selected states facilitated 1115 and 1332 waivers, the main elements of the President’s health care agenda could begin to be implemented, notwithstanding the paralysis and deeply partisan debate in Congress. The waivers would allow the selected states to:
- Move their Medicaid programs towards a CCO-like model operating under a true global budget, indexed to a sustainable growth rate, and accountable for meeting quality and outcome metrics.
- Move the ACA individual market from fee-for-service to capitated contracts, indexed to a sustainable growth rate, and accountable for meeting quality and outcome metrics.
- Use that restructured market as the public option.
Moving the Model to Medicare
If the state demonstration projects are successful, it could set the stage not only for a different national debate, but also a window through which to move this model into Medicare. By restructuring Medicare Advantage to look more like the delivery model in Medicaid and the new public option—and by creating incentives to move the rest of Original Medicare from FFS into restructured Medicare Advantage Plans that are linked to a sustainable growth rate, accountable for meeting quality and outcome metrics— we would dramatically increase the percent of the market in capitated, risk-based (value-based) contracts.
Again, using Oregon as an example, we currently have 880,000 Medicare beneficiaries:
- Original Medicare 468,820 (53%)
- Medicare Advantage 411,000 (47%)
With the changes described above in Pool 1, plus our current Medicare Advantage population, we would have 2,286,000 Oregonians in capitated risk-based care or 53% of the population. If we could create incentives to move the rest of Original Medicare into these restructured Medicare Advantage plans, we would have 2,754,800 Oregonians in capitated risk-based care or 64% of the population.
The transition to this restructured Medicare delivery model, now aligned with the accountable models used to organize and deliver care in the other major programs subsidized with public resources—Medicaid and the ACA market—also offers the opportunity to reevaluate and update the Medicare benefit which fails to cover many things important to an aging population. For example, Original Medicare does not cover routine dental care. While it covers corneal transplants and cataract surgery, it does not cover glasses or contact lenses. It covers cochlear implants but not hearing aids. And, outside a skilled nursing facility, Original Medicare does not cover long-term care, whether in a nursing home, an assisted living facility or home-based care to help elderly people with activities of daily life, such as bathing, dressing, eating, and going to the bathroom.
By adding transparency to this new Medicare delivery model to prevent gaming through up-coding and the manipulation of risk score determinations, cost-shifting to Pool 1 and Pool 2 would be dramatically reduced but the cost shift into Pool 3 would go up sharply. This would provide a powerful incentive for employers to become much more engaged purchasers, and perhaps aligning themselves with what is happening in Pools 1 and 2 to create a public/private purchasing consortium. This powerful consolidated purchasing pool could offset the consolidation that is taking place in both the hospital and commercial insurance sectors.
The Biden Administration can move this approach forward without getting caught up in the partisan politics of a deeply divided Congress. Not only would it begin to address the underlying structural problems in our health care system, and help offset the cost of the new health care subsidies in the American Rescue Act, it can free up resources to address both the social determinants of health and long-standing racial and ethnic disparities by investing in chronically under-resourced communities—particularly in very young children, their families, and neighborhoods.
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[1] Modern Healthcare, March 8, 2021, page 17.
[2] https://www.healthaffairs.org/doi/abs/10.1377/hlthaff.2019.01411
[3]https://www.oregon.gov/oha/ERD/Pages/NewReportManyOregoniansWhoLackHealthCoverageEligibleForSubsidiesOregonHealthPlan.aspx
[4] Coordinated Care Organizations (CCOs), created in 2012 through an 1115 waiver, provide care to the 1.3 million people in Oregon’s Medicaid program. CCOs are capitated models, with a global budget that can grow at no more than a 3.4% per member per year, and must meet rigorous metrics around quality, outcomes and patient satisfaction. Between 2012 and 2017, this payment/delivery model stayed within the 3.4% growth cap, enrolled over 385,000 more people, met the required outcome and quality metrics, and realized a cumulative total fund savings of over $1 billion.
