Healthcare reform and healthcare costs

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By Christopher S. Girod, Lorraine W. Mayne, Scott A. Weltz | 23 May 2012

The Milliman Medical Index (MMI), which measures the total cost of healthcare for a typical family of four insured by an employer-sponsored PPO plan, surpassed $20,000 for the first time in 2012. The MMI includes out-of-pocket costs such as copays and deductibles, as well as premiums paid jointly by the employer and by the employee via payroll deductions.

The cost dynamics measured in the 2012 MMI are consistent with prior years. So far, healthcare reform has not significantly affected the cost of services or the volume of services used. The main focus of PPACA is on expanding coverage and on who should pay for these services. PPACA contains limited direct focus on reducing overall healthcare spending for a family of four covered by an employer-sponsored preferred provider organization (PPO) plan.

But clearly there is great uncertainty ahead. With the constitutionality of the Patient Protection and Affordable Care Act (PPACA) currently under scrutiny by the U.S. Supreme Court, there are several scenarios for the future of American healthcare. PPACA may be upheld entirely, it may be only partially upheld, or it may be struck down entirely. There are implications for consumers, employers, providers, and the federal government. We will examine those implications below.


Employees receiving healthcare coverage as a benefit of employment may have already noticed changes in response to PPACA. Those include benefit eligibility for adult dependents up to age 26, coverage of preventive care without any out-of-pocket cost sharing, and elimination of maximum benefit limits. What will they see in the coming years?

With PPACA fully intact

If PPACA proceeds fully intact, then the changes for employees will depend on what strategy their employer decides to utilize. Some employers will retain the same basic benefit structure but may implement larger-than-average increases in out-of-pocket cost sharing or payroll contributions toward premiums in order to offset the increased employer obligations required by PPACA.

Some employees may decide that they prefer the healthcare coverage provided through the exchange. Other employees may be forced to pursue alternatives if their employers terminate healthcare coverage and possibly replace it with cash compensation. In either case, if employees become responsible for purchasing their own healthcare coverage then they would likely find more coverage options than were previously available to them when their employers preselected a menu of options. They might be surprised, however, to see the total premium cost because they have potentially been insulated from the total cost of care.

With no individual mandate

Employees with coverage available through their employer-sponsored health plans currently make a decision about whether participation is right for them. Without the individual mandate, they would continue to make a similar decision based on the plan options offered, their personal financial situation, and perceived potential need for healthcare.


If all provisions of PPACA were struck down or repealed then consumers would be in a situation similar to where they are now. Furthermore, their employers may decide to roll back some of the changes already implemented, such as covering dependents up to age 26.


Employers have been implementing changes to comply with PPACA over the last two years, including extending eligibility to adult dependents up to age 26, covering preventive care with no out-of-pocket cost sharing, providing unlimited lifetime benefit maximums, and other coverage requirement provisions.1

Employers that wanted to delay some of the early requirements of PPACA could do so by maintaining grandfathered status.2

With PPACA fully intact

Proactive employers have been planning their benefit strategies to be in compliance with PPACA. Depending on the particulars of their workforces and existing benefit plans, they may expect increased costs that are due to more employees being eligible for and participating in the plan. Other cost drivers include selection risk, fees and potential penalties, an excise tax for very expensive plans, and the possibility that automatic enrollment materially impacts plan enrollment. For the most part, employers are planning to adjust their plans to offset these costs. In other words, PPACA’s required changes that shift more of the financial burden to the employer are being offset by other changes that either reduce the overall cost of care and/or pass a similar portion of costs back to the employee. In some cases, the possibility of eliminating or substantially reducing coverage is one of the options under consideration, even though there are penalties that offset some of the savings. Small employers may have additional options, including the Small Business Health Options Program (SHOP) exchange or dropping coverage without the same penalties facing large employers.

With no individual mandate

The presence of an individual mandate has little effect on employers unless other provisions, such as automatic enrollment into the employer’s plan, would also be eliminated. For a fully insured employer, such as small groups, there could be an effect on insurance premiums if guaranteed issue remains, since the average health status of employees covered in this scenario may change. This does not, however, substantially change the underlying cost of care for the typical family of four.


If all of PPACA were eliminated, each employer would face the decision of whether to roll back plan changes that have already been made and in some cases have already become valued benefits for employees.


Providers face a number of new obligations under PPACA, and they have already begun to take on increased financial risk in ways that alter the fee-for-service dynamic that has created a perverse incentive to utilize care. While PPACA’s primary focus is on health insurance reform, it may lead to changes in the way that providers work and are paid. Providers may move toward more accountable care, and provider risk sharing may lead to an improved healthcare cost environment.

With PPACA fully intact

PPACA introduces the possibility for providers to offer new arrangements such as ACOs. These concepts are already being explored by physicians and hospitals with employers and insurers. Over the long term, the typical family of four may find these options available through its employers or on insurance exchanges.

With fewer people uninsured, providers will see less uncompensated care. However, they may face capacity issues, and an influx of patients covered by Medicaid may also have compensation implications.3

With no individual mandate

Upward cost pressures are more probable. Without the individual mandate, there will be fewer incentives for uninsured individuals to purchase insurance unless they have significant healthcare needs.4 Over time, this may create adverse selection and drive up insurance premiums, resulting in more uninsured patients.5


PPACA is just one force already motivating changes by providers in how they deliver care to a family of four and how they are compensated for that care. Many initiatives that providers are exploring to improve care delivery, such as patient-centered medical homes (PCMH), may continue even without PPACA. The pressures to lower healthcare costs, including a focus on provider reimbursement, coordination of care, and narrower networks, will not go away.


The government is by far the largest purchaser of healthcare services, so its actions as a healthcare purchaser affect the rest of the market. In addition, government regulations strongly influence the nature of employer-sponsored healthcare benefits, and can influence plans via mandates and taxes.

With PPACA fully intact

When fully implemented, PPACA would reduce the number of the uninsured and, in turn, the amount of uncompensated care. In theory, this would reduce cost shifting by providers and reduce the charge for healthcare services that is paid by insured plans. Offsetting this effect is the increase in Medicaid enrollees. Because Medicaid typically reimburses substantially less than other payors, providers with substantial Medicaid patients typically subsidize the Medicaid care they provide through charges to other payors such as commercial insurers.

With no individual mandate

Even without the individual mandate, there are other incentives such as subsidies that could entice some previously uninsured individuals to obtain coverage. If these efforts were unsuccessful in substantially increasing the number of citizens with coverage, the government might still face pressure to reduce the number of uninsureds.


Although opinions about what solutions the country should pursue are diverse, government leaders across the political spectrum agree that the current access and cost dynamics are not sustainable. If PPACA is overturned, these dynamics will continue to be problems in search of solutions.

Impact on the average American family

While several aspects of healthcare reform would have meaningful impact on the cost of insurance coverage, the effect on the total cost of care is very limited for a family of four covered by an employer-sponsored preferred provider organization (PPO) plan.

For example, medical loss ratio rules and stringent review of health insurance increases may reduce insurer profits and also put pressure on insurers to be as efficient and low-cost as possible. But the cost of care for this family of four is still $20,728, which excludes insurer profits and administrative expenses.

While efforts to be more administratively efficient may lead to lower premiums, they do not directly affect the cost of delivering healthcare.

What will it take to significantly affect the cost of care? Some of the movements already under way may help. Examples include better care coordination, a focus on outcomes and efficiency, increased patient accountability, and healthier lifestyle choices.

Whether the nation is next debating new legislation from scratch or next steps to take us beyond the financing issues of PPACA to meaningful cost reforms, the amounts at stake will not go unnoticed.


1Haynes, R., Chanin, J., & Bonsee, P. Healthcare reform and employers: Next steps. Milliman Insight. (2010, October 21). Accessed May 8, 2012 at

2O’Connor, J. Patient Protection and Affordable Care Act: Implications of Status as a Grandfathered Plan. Benefits Quarterly. (2011, First Quarter). Accessed May 8, 2012, at

3Proebsting, D. Why hospital cost shifting is no longer a viable strategy. Milliman
Insight. (2010, June 24). Accessed May 8, 2012, at

4Houchens, P. Measuring the strength of the individual mandate. Milliman Insight. (2012, March
6). Accessed May 8, 2012, at

5Snook, T. & Harris, R. Adverse selection and the individual mandate. Milliman Insight.
(2009, October 19). Accessed May 8, 2012, at