The Affordable Care Act (ACA) was passed in March 2010 with the goals of increasing health coverage, slowing the growth of rising healthcare costs, and improving the quality of care. The law has had profound effects on the healthcare industry in the decade since its inception. The ACA eliminated annual and lifetime limits on coverage, ensured people with "pre-existing conditions" -- such as having survived cancer or even being a woman -- can't be charged more or denied coverage, and spurred consumer-focused information like data-based star ratings for hospitals and calorie counts on restaurant menus. These changes had significant implications for healthcare providers and insurers. While many believe the future of healthcare rests on Tuesday, Nov. 3, some things may change while others are likely to stay the same.
UnitedHealth Group (NYSE:UNH) and HCA Healthcare (NYSE:HCA) are the largest insurer and healthcare system in the U.S., respectively. Changes in the number of patients with insurance, what patients are allowed to be charged, and how many people seek treatment, preventative care, and routine checkups have a tremendous impact on both companies' revenues and profits. Let's take a look at what the impact of the ACA has been on the healthcare industry, and what that may mean for 2021 and beyond.
By the numbers
The rate of uninsured Americans dropped from 16.8% in 2013 -- the year before major provisions of the law went into effect -- to 10% in 2016. That translated to nearly 18 million fewer uninsured Americans. In the years since, the rate of uninsured Americans has crept up to 10.4%, resulting in an extra 1.3 million without insurance. As these numbers would imply, the percent of people having skipped a medical test or treatment due to cost fell by 24%. This shift in coverage has been especially impactful to hospital systems and insurers. Overturning the ACA would have similar, though opposite, effects.
If the ACA were overturned, 135 million Americans with pre-existing conditions could lose coverage or have their insurance premiums skyrocket. States would lose $135 billion in funding and patients would no longer be entitled to refunds when an insurance company overcharged. Those rebates to policyholders totaled $1.37 billion last year. Taxes would be reduced on the wealthiest households, with the bulk of reductions for those making over $1 million per year, an average of $46,000 per household.
The bottom line is that the ACA added a lot of new customers to the market, especially for preventive and routine care, while limiting what insurers could charge them and why they could deny them coverage. The difference between what insurers could charge and the cost of the program was made up with taxes from the most well-off Americans. The law also capped the profit margins of insurers by mandating they put a set percentage of premiums toward paying claims or improving quality.
What it means for the healthcare industry
In addition to increasing the number of patients seeking care each year, one of the most drastic changes under the ACA has been the shift in how providers get paid. This change from a pay-for-service model (providers get paid based on how many patients they see) to a pay-for-value model (payment from an insurer or government program is also dependent on the quality of the outcomes) has transformed the way healthcare systems care for patients. By tying payment to things like preventing infections and hospital readmissions, resources have been shifted to follow patients through the entire care journey before, during, and after hospital visits. This focus on controlling costs and improving outcomes has made the cost of services such as health monitoring technology and remote visits worthwhile. The desire to manage outcomes is at the heart of business models like those of Teladoc (NYSE:TDOC), Amwell (NYSE:AMWL), and Livongo (NASDAQ:LVGO).
The impact on insurers has been less pronounced, as these companies already control several levers that drive industry economics. First, insurers aligned their contracts to include the new, value-based focus. By setting aggressive targets across a basket of healthcare systems, insurers were able to guarantee a level of profitability for themselves while letting the providers assume financial risk associated with quality of care. For instance, if every hospital system improved, their performances relative to each other would stay the same, as would the reimbursement rates from the insurance company. It is only by improving faster than their peers that hospital systems could earn higher rates of reimbursement.
Additionally, although insurers had their profit margins capped and were forced to take on patients who would have previously been denied, they adapted by letting medical claims rise. Getting more claims approved is good news for patients, but it isn't the result that most lawmakers anticipated: lower premium costs.
The truth and the misconception
One truth about how the election will change healthcare ties directly back to what the ACA changed. If the ACA is overturned, there will be fewer patients, hurting healthcare systems. The remaining patients will be more profitable for insurers. Each of these predictions has been affirmed by ratings agency Fitch in recent credit outlooks for the industry. What may surprise people is that the increases in coverage associated with the ACA have translated to higher rates of early cancer diagnosis, treatment rates of chronic conditions, and possibly a higher rate of people seeking treatment to stop tobacco and opioid use.
This leads to a misconception about how the election will change the healthcare industry. Regardless of who wins the presidency, insurers will be able to modify their rate of claim approvals and contracts with healthcare systems to ensure a profitable business. They control the most important determinants of who makes money. Further, healthcare providers will adapt to the number of patients they see by adjusting staff and shifting care to wherever insurers pay them the most. As an example, hip and knee replacements have increasingly moved to outpatient settings as incentives have changed, despite historically being an inpatient procedure.
The world turned upside down?
There will not be the same incentive for health systems and insurers to spend money helping patients manage chronic conditions if the ACA is overturned. Many patients will lose insurance, limiting access to cost-reducing programs. For those who retain insurance through employers, insurance companies will be able to raise rates without being required to put the money back into managing the quality of care.
In a world of noise, it's important for investors in companies that increase access to care (especially for those with chronic conditions) to pay special attention to election results. The outcome could undermine the foundational assumptions those companies are built on.