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U.S. Department of State

Diplomacy in Action

The Economics of the Healthcare Reform

Dr. Jonathan Gruber, Professor of Economics, Massachusetts Institute of Technology
New York, NY
November 26, 2012

10:00 A.M. EST


MODERATOR: Good morning, everybody. Sorry we’re a little late. Welcome to the New York Foreign Press Center’s teleconference on the economics of U.S. healthcare reform. We’re very lucky to be joined by Dr. Jonathan Gruber, a leading expert on this topic. And those of you who have read his bio know that that’s an understatement. Dr. Gruber was a key architect of Massachusetts’ ambitious healthcare reform effort and an inaugural member of the Health Connector Board, which was the main implementing body for that effort. And from 2009 to 2010 he served as a technical consultant to the Obama Administration and worked with both the Administration and Congress to help craft the Patient Protection and Affordable Care Act, more commonly referred to Obamacare. You’ve all received his bio, so I won’t go into the many other achievements listed there.

Before we begin, a few words on format. Dr. Gruber will begin the call with remarks on the economic impact of healthcare reform in the U.S. and implementation of the Affordable Care Act at the state level and we’ll then open the lines for questions. As always, please note that the speaker’s views are his own and do not necessarily reflect those of the U.S. Government. Dr. Gruber, I’ll turn the call over to you now.

MR. GRUBER: Thank you. Thank you, Ariel. It’s good to be here. We don’t have a lot of time. I know folks want to ask questions. I’m going to spend just two or three minutes just by way of introductory remarks and leave the time for questions.

As you know, with the outcome of the election, the federal government’s support for the Affordable Care Act, or at least the executive branch support for the Affordable Care Act, is indisputable. The Obama Administration understands that this is his big legacy issue and that they’re going to be pushing hard to make it successful.

Really the action now with the Affordable Care Act moves to the state level. It moves to the state level in two senses. One is states have a choice about whether or not to adopt their Medicaid expansion. This is a key element of the Affordable Care Act which expands Medicaid to 133 percent of our poverty line, or about $1,500 for an individual. The states have the option of doing that but with the feds basically footing the bill. So a lot of states – there’s really no rational economic reason for states not to do this, because the feds are paying 95 percent of the cost, but states are playing politics with this topic, and there will be – there’s going to be some delay at least. I anticipate within the next five or six years, all states will take this up, but there’s going to be some delay on that front.

The other big state issue is exchanges. A key element of this law is setting up these exchanges or marketplaces to buy health insurance. If you’re interested in seeing what these can be, I urge you to go on the Massachusetts Connector website. That’s our exchange. It’s – one word, – and it sort of shows you what the exchanges can be. They’re a terrific device for shopping in what’s been a broken non-group insurance market. States were given the right to set these up, but once again, for political reasons many are not. So what happens then is that the federal government comes in and takes over the exchanges. In practice, (inaudible) I think states – a lot of states are resisting that takeover, so we’re going to have to see where that goes. That’s going to be sort of the key issue to follow over the next several months, sort of the interaction between the federal government and the state governments on these exchanges.

I think that if I could leave you with sort of one message to really emphasize to readers around the world, it’s to understand why the proper implementation and success of this law is so important in the U.S., because I think many of your readers will still be stunned – readers and listeners and others will be stunned to understand how messed up our insurance markets are. Basically we exist in a country today where if you don’t get insurance from your employer or from the government, you effectively aren’t insured in America, because we have a broken market outside the employer or government setting, a market where you can be excluded from coverage because you’re sick or denied coverage because you’re sick or charged 10 times what a healthy person is charged.

We don’t really have insurance in a meaningful sense in America for people who don’t get it from their employer or the government. And this law changes that, fixes that, moves us into the place where all – many of your countries are, where there’s universal coverage and where people are treated fairly regardless of whether they’re sick or healthy. And I think it’s just important to emphasize the sort of failed position we start from in the U.S. in getting there. You can’t do enough to emphasize that to your readers so maybe they’ll understand that.

The other last point I want to make is about cost control. That’s obviously the big next step. The law takes a number of steps towards trying to deal with cost control, one of which is these exchanges. We’ve taken some good steps in that direction. There’s a lot of experiments, some alternative ways to organize medical care, that are sort of motivated under the Affordable Care Act, and those have already sort of taken place. But there’s a lot more work to be done in cost control, which is a topic that all of your countries struggle with as well.

So rather than rattle on, I’d rather just go ahead and answer questions.

MODERATOR: Scott, we can announce instructions for questions.

OPERATOR: Ladies and gentlemen, if you wish to ask a question, press *1 on your touchtone phone. You will hear an acknowledgement tone. If you’re using a speakerphone, pick up the handset before pressing the numbers. Once again, if you have a question, press *1 at this time.

MODERATOR: And while we’re waiting for questions to come in, because it may take a little time – actually, we have one already.

OPERATOR: Alexey Osipov of Novosty, please go ahead.

QUESTION: Thank you very much, Professor. Professor, cost control, first of all, it’s the transparency. And what do you think about the transitional implementation of eHealth, electronic or mobile health, and especially electronic health’s record, EHR, that’s very popular in some European countries and in Russia and Israel, too, doing my research? And it provides very high level of transparency of the costs and paperless documentation. And in some countries electronic health (inaudible) electronic health record, the key of the healthcare reform.

MR. GRUBER: Yeah, I think that’s a great question. I think you really raised two separate issues. So one is electronic health records, which are basically a way of organizing patient care so that all providers are on the same page with respect to patient history and treatment. That by itself is not going to save any money, but it’s a necessary predicate for all the other cost controls we want to do. You can’t effectively control patient costs until you have an effective patient electronic health record, and we’re moving rapidly in that direction, a lot of infrastructure being built, a lot of money being thrown at that.

A separate issue is transparency, which is more on the patient side, which is, do patients understand the cost of care and do they shop effectively for care? That’s a key challenge we need to move forward on in the U.S. both in terms of getting patients more financial incentives, or what we call in the U.S. more skin in the game, in terms of their choices across treatments and also more understanding of what different treatments cost. And I think that’s a key part of moving forward on cost control as well.

QUESTION: Okay. Thank you very much.

OPERATOR: We have a question from Louise With with Borsen. Please go ahead.

QUESTION: Yes, hello. Thank you so much for your time. I write for a business daily in Denmark, so my readers are business people. So I wanted to ask you – or I think they would like to know what type of business in what sectors will do well as the reform is rolled out and fully implemented over the next two years. So who would be the sort of winners and losers, if you can talk about that, as this changes the healthcare marketplace? Thank you.

MR. GRUBER: Sure. I’m especially happy to help out because my daughter’s best friends at private school are visitors from Denmark, so she’s very excited to learn Danish and talk with them. So I’m excited to help out.

I think that the businesses that are going to really gain – what’s interesting about the Affordable Care Act is it’s a very balanced approach in the sense that on the one hand, take hospitals. On the one hand, they are going to gain, because they get many more insured customers to pay higher rates and pay their bills, unlike the uninsured customers, who often don’t pay their bills. On the other hand, part of what finances this law is a reduction in the rate of growth of Medicare reimbursements to the hospitals.

Likewise, you take the insurance companies. On the one hand, they’re going to get 32 million new customers and then the individual mandate which forces people to buy health insurance. On the other hand, the insurance companies are giving up a practice which has been their lifeblood for 50 years, which is discriminating against the sick and using pricing to basically keep the sick people out of the market. So I think that overall the health sectors will win in the near term. I think in the near term, you’re going to see an improvement for hospitals, for pharmaceuticals, for the insurance industry. This is basically a big win on net for the medical sectors in the near term.

I think over the longer term, there’s going to be more of a shakeout. For example, insurers which have – which are sort of lazy and pricing high because they have a good name that people know, suddenly they’ll face themselves on a competitive insurance exchange and have to really deliver a better product if they want to keep that high market share.

So I think the short run, there’s going to be a lot of winners in the medical sector. I think in the longer run, you’re going to see more of a shakeout with a more efficient and more – the options more demanded by consumers surviving and others not.

OPERATOR: Stephane Bussard with Les Temps newspaper. Please go ahead.

QUESTION: Yes. Thank you, Mr. Gruber. I have a question about the deficit reduction debate. Actually Speaker [John] Boehner said that at a certain time they would have to tackle the issue of the Affordable Care Act. What’s your take on that? Do you think that’s going to be an issue within the debate about deficit reduction? That’s my first question.

And the second, you were talking about Medicaid. How many people will be affected by a non-extension of Medicaid by the states? Thank you.

MR. GRUBER: Sure. So in terms of your first question, so let’s be clear. I mean, we have – one thing that’s very important to understand as journalists covering the U.S. is we have one last firewall between the U.S. becoming a totally dysfunctional third-world country, and that’s called the Congressional Budget Office. I mean, I’m exaggerating somewhat, but basically the fact we have this nonpartisan institution which provides nonpartisan scores of our bills, really keeps the politicians honest. And the nonpartisan Congressional Budget Office has said that this law reduces the deficit. So opponents of the law, such as Boehner and [Mitt] Romney, want to pretend it doesn’t, but the law reduces the deficit. So anything you do to scale back the ACA is going to increase the deficit.

Now that said, the ACA has revenue increasing parts and spending parts. And you could say, look, we’re just going to try to cut the spending parts while leaving the revenue increasing parts in place. That would harm the function of the ACA. For example, there’s subsidies to low-income populations to make insurance affordable. If you scale back those subsidies, insurance is less affordable and the law is less effective. So I’m hoping that those won’t be on the chopping block, but they certainly could be and that’s a worry for myself and other advocates of the ACA.

So I think it’s important to recognize that (A) the ACA in the main is a deficit reducer, not a deficit increaser, especially over time; but (B) that doesn’t mean they won’t try to go after [inaudible] and make it even more of a deficit reducer, and I think that’d be a big mistake, because I think already is asking people to be able to contribute quite a decent amount towards their healthcare costs.

In terms of what happens with the Medicaid expansions, obviously if the states don’t expand Medicaid, that saves the federal government a lot of money because the federal government is picking up the whole cost, but it also is going to cause a large increase in the number of uninsured. The Congressional Budget Office estimates that the Affordable Care Act will lower the number of uninsured by 32 million if Medicaid fully expands, but about half of that is through Medicaid expansions. So if states don’t expand Medicaid and limit, you could cut in half the number of uninsured covered. I think if you end up – obviously many states who say they’ll extend anyway, but you could see many, many millions fewer covered if the states don’t expand Medicaid.

QUESTION: Thank you very much.

OPERATOR: Once again, if you wish to ask a question, press *1 on your touchtone phone at this time. *1 for questions.

MODERATOR: Dr. Gruber, while we’re waiting for the last couple of questions to come in I have a question: There are still some critics of the ACA who maintain that the cost of healthcare for individuals, families will actually go up. How do you address that?

MR. GRUBER: I think it’s very important to separate two populations. So one population is the primary population covered by insurance in the U.S., which is those with employer-sponsored insurance. And for that group in the near term, there’s basically no effect, and that’s sort of by design. This was designed to be a reform which essentially left people alone who liked their health insurance. And most people with employer-sponsored insurance do. So by design, this law really has very little effect in the near term on the cost of employer-sponsored insurance. Hopefully, in the long term, the cost controls put in place by the law will lower costs and that will be a benefit to employer-sponsored insurance. But in the near term, there’s just not really much effects.

On the other hand, you have the non-employer market, which is very small now but which will grow substantially, which will almost double in size over time. In that market, what you’ll see is a variety of pricing effects. For those who are older or sicker, prices will fall a lot. For those who are poor, they’ll get new tax credits which will offset the costs and therefore price will fall off for them. For those who are younger and healthier and who aren’t poor, prices could increase and will increase, because we’re moving towards a more community rated market where everyone pays the same price. Essentially in the U.S. we’ve had a market where if you’re young and healthy, you get to benefit from this discriminatory pricing in the insurance market. That’s going to end; we’re going to price fairly so everyone pays the same price. That means if you’re young and healthy, your price goes up. And if you’re poor and young and healthy that’s offset by these tax credits. But if you’re not poor and young and healthy, there’ll be price increases.

So in the non-group market there’ll be differential effects by different groups. In the group market, I think there’s not going to be much effect.

MODERATOR: Thanks. I think we have a couple more questions.

MR. GRUBER: Actually, I’m about to enter a parking garage, so I’m going to hop off for just two minutes, and then I will – if you hold the questions, in about three minutes I’ll call back in.

MODERATOR: Okay. Great. If our callers – our questioners on the line can just hold for a few minutes, Dr. Gruber will return.

OPERATOR: Dr. Gruber has rejoined the conference.

MODERATOR: Great. We’ll continue with questions now.

MR. GRUBER: Thanks.

OPERATOR: Alf Ask with Aftenposten, please go ahead.

QUESTION: Yes, thank you. You touched it in your opening remarks, could you be more specific, what kind of problems the states and the Republican majority in the House make for the implementation of Obamacare?

MR. GRUBER: So, the Republican majority in the House can’t make a huge problem. I mean, basically, since the Presidency and the Senate are Democratic, I mean, they can basically try to make it difficult to get the money to finance the federal side of Obamacare. But by and large, that’s not really the issue at this point. I think at the federal level, the election really resolved things.

I think, really, the issue is the states. And once again, there’s two problems they can cause – really, three problems. The first problem is they can choose not to expand Medicaid. Once again, that would be a financially stupid decision for any state to (inaudible) picking up 95 percent of the costs. So it would be clear what’s that saying is any state who’s willing to put in a nickel, it’s 95 cents for the federal government. That’s a great investment for any state. But for political reasons, some are saying they won’t do it. I believe over time, that’s too good a deal for them to turn it down. But for now, they’re saying they won’t. So that’s one place they can cause trouble.

The second place they can cause trouble is by not implementing the health insurance exchanges that they’re supposed to run under the Affordable Care Act. Now once again, if they don’t, in principle the federal government comes in and runs the exchange. In practice, we don’t know how that’s going to work out, so that’s another challenge.

And then the last challenge is a little more illusory, which is some of the social attitude of states. A lot of reasons that reform was so successful here in Massachusetts was because we had a lot of support behind reform. And it’s not clear in a state without that level of support whether reform can be as successful. And so I think that’s sort of the more elusive (inaudible).

OPERATOR: Louise With with Borsen, please go ahead.

QUESTION: Yes, I had a follow-up. Thanks again. We really appreciate your time. I wanted to ask about the long term. Obviously, the Republicans lost, so there’s not going to be any credible attempt to repeal. But do you see any changes, any major changes to the law as it is? And when and how might that happen? I mean, I think even some Democrats are sad that this is not perfect, and it might need some adjustment over time, et cetera. Thanks.

MR. GRUBER: Yeah. I mean, I think that we will see a lot of adjustment to the law. I mean, we have to. This is such a major law. Look, Medicare, which is the previously most significant healthcare law in the U.S., probably the most important change in its history happened in 2003 when we added a drug benefit, which is 38 years after it was introduced. I mean, so there’s no doubt this law is going to change over time in many, many ways, many foreseen, many unforeseen.

We’re already seeing, just last week, to give one simple example, one provision in the law which really made little sense was a provision limiting the flexibility of small businesses to adjust their benefits package. It limited what deductible they could charge their employees. And the administration and regulations basically sort of waived that provision and said, look, don’t pay attention to that, you can set whatever deductible you want. So I think that there’s going to be a lot of use of regulation to sort of offer flexibility as this law is implemented. I think that’s a major thing to look for over the next few years. Beyond that, I honestly don’t know, I think which hopefully – what I’m hoping as a scientist is we’ll learn. We’ll learn from these states and their experiences, and we’ll make the law better based on what we learn.

QUESTION: Thank you.

OPERATOR: Juliana Ennes of VALOR, please go ahead.

QUESTION: Thank you for the time. I would like to hear a little more about the relation between the private and the public system. What should be this relation? The private companies are broken in United States; they think that the private health insurance could help government to provide health plans. What do you think this should be, this relation?

MR. GRUBER: The relation between the private – I’m sorry, so the question is the relation between the private and the public sectors?

QUESTION: Yes, yes.

MR. GRUBER: So basically, it’s a great question. The U.S. healthcare system is almost exactly 50 percent public and 50 percent private, so there has to be a role for both moving forward on healthcare reform. And I think that that’s what this law tries to do is strike that balance, and that if you look, for example, at the increase in insurance coverage, about 50 percent of it comes through Medicaid, which is a public insurance program, and about 50 percent comes through private – expanding private health insurance. So basically, it really is a – it’s important that both are involved.

I think the big question is sort of what’s the role for employers going forward. And employer-sponsored insurance has been slowly dwindling in the U.S. In this recession alone, we’ve lost about 5 million employer – 5 million – about 5 million people have lost employer-sponsored health insurance. And I think we’re probably going to see a slow dwindling of employers as the nexus for health insurance and a growth in these exchanges as a place where people get their health insurance. Once again, that’s a public-private marriage. It’s publicly organized and mandated, but the exchanges are not publicly – or the insurance that’s sold in these exchanges is private insurance. So it’s sort of a publicly organized market selling private insurance, much like the exchanges we see in Switzerland or the Netherlands for selling health insurance in those countries.

OPERATOR: There are no further questions.

MODERATOR: Okay. Thanks, everybody, for joining the call. Thank you, Dr. Gruber, for taking time to talk to us today about this topic.

MR. GRUBER: Sure, sure. Happy to do it.

MODERATOR: Okay. Take care.

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