Healthcare Business News

Reform Update: Healthcare reform will raise income for lowest earners, economists say

By Melanie Evans
Posted: January 29, 2014 - 4:15 pm ET

(This article has been updated with a correction.)

The expansion of health insurance underway under the Affordable Care Act is aimed at lessening the financial risk of getting sick that deters so many from trips to the doctor, hospital or pharmacy. Less obvious is the potential for the law's subsidized health plans and mandated coverage to change household income for better or worse.

Economists with the Brookings Institution issued a report this week exploring the matter, which is more than academic for hospitals.

Households increasingly struggle with patients who are much more cost conscious, even if they have health insurance, and recent trends in demand for hospital care suggest that many find the price too high.

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Henry Aaron and Gary Burtless at Brookings tried to answer how the law will affect household income. One measure they devised captures the change in household cash. An alternative, broader measure also includes the contributions and subsidies for health benefits. The economists looked at changes across income deciles and the estimates show the greatest benefit among the poorest Americans, but only when health insurance is counted toward income.

The economists stress that households receive a pretty hefty benefit from $600 billion in employer contributions to private insurance and $900 billion from publicly subsidized health programs.

Taking into account income from health insurance, households in the bottom decile will see income increase 7.2%. The second-lowest decile will see an increase of 5.3%.

For all others, income will decline by roughly 1% or less. Among the wealthiest, the decline is attributable to new payroll and investment taxes and larger Medicare copayments. Among the remaining middle-income brackets, Medicare Advantage enrollees (15% of those in Medicare) will see lower subsides under the law and some will forgo coverage and pay penalties, reducing their income.

Discounting the income from health insurance, nearly every income bracket will see a drop in cash income. One decile—the second-lowest—will see an income gain of 2.1%. That's because workers will drop employer-sponsored coverage for less-costly plans sold in the health insurance exchanges, explained Burtless, a senior fellow in economic studies at Brookings.

Some households will see salaries climb as workers exit employer-sponsored health plans for Medicaid or plans sold to individuals through newly created state health insurance exchanges, the economists estimate. The top 20% will see wages climb a marginal 0.1% for the same reason.

Others that gain health benefits from an employer in response to the individual mandate will see wages decline as employers offset higher benefit costs with a decrease in salary. That will drag down cash compensation for middle-income households and the poorest decile.

Burtless cautioned against using the cash-only measure, however. “The whole point of the Affordable Care Act is to influence the distribution of insurance in the population and make it more affordable to a cross-section of the public,” he said. “If you don't include the value of the insurance benefits in any way, you're missing almost all of that effect.”

Too much is uncertain to calculate the revenue implications for the law's coverage expansion, but household financial exposure to healthcare costs has been a factor in a recent decline in use of hospital care, said Lisa Martin, a hospital analyst for Moody's Investors Service.

The impact on healthcare spending depends on how employers and businesses respond to the new environment. Consumers who switch to exchange plans from employer-sponsored plans may be enticed by lower premiums with higher deductibles. Some companies have canceled plans for some employees (Target did for part-time workers last week) and instead offered to help them buy coverage in the exchanges.

“All of the sudden, a consumer is much more of a consumer because they're much more sensitive to the cost of healthcare,” Martin said.

ACO push goes country as long road lies ahead

As the marketplace continues to adopt new payment models that edge away from fee-for-service, a new American Medical Association survey underscores just how far the industry has to go. Private-market attempts to shift payment toward performance and away from fee-for-service continue to sprout up across the United States. Nine new rural accountable care organizations in Indiana, Michigan and California launched this week as part of the National Rural ACO effort, Modern Healthcare's Beth Kutscher reported.

The Affordable Care Act includes tests of accountable care under Medicare and private health plans have followed suit. Accountable care seeks to promote quality and cost-effective care by linking potential financial gains and losses to performance on quality measures and cost control. Despite the interest, doctors continue to be paid by volume, the AMA reported this week. For one-third of doctors, productivity is the most important factor in compensation, Modern Healthcare's Andis Robeznieks reported.

(This article has been updated to correct Lisa Martin's name.)

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