US Healthcare Demand Part 3: Reform Effects – ACA Looks Like a Headwind


We expect Affordable Care Act (ACA) health insurance and pricing effects to reduce real demand growth by roughly 30bp over the period from 2012 – 2021

Medicaid should expand to 100 FPL in most states; this translates to enrollment gains of 16% (8.4M persons), Medicaid spending gains of 10%, and 1.3% gains in national health spending. Because Medicaid prices are roughly 29% below commercial prices, Medicaid’s expanded share of third party payments reduces real price growth by just less than 10bp annually over the coming decade

Persons ineligible for Medicaid and with no offer of employer sponsored insurance (ESI) – whom we term the ‘middle market’ – see enrollment gains as high as 135.5% (19.5M persons), and spending gains of just less than 50% once the health insurance exchanges (HIEs) begin operating; the effect is to increase national spending by as much as 2.6%

Policies purchased on the HIEs will almost certainly be less generous than those offered under ESI. The prevailing ESI actuarial value (AV) is 0.82; we expect a 0.65 AV average on the HIEs. A likely outcome is that cheaper HIE plans catalyze shifting of employees out of ESI and onto the HIEs; and/or a downdraft in the average generosity of ESI plans to or toward the HIE average. If the ESI plans’ average actuarial values fell from 0.82 to 0.65, we would expect a nearly 17% drop in spending by ESI beneficiaries; such a drop would reduce national health spending by nearly 7%

Combining these three coverage effects — Medicaid expansion, HIE operations, and HIE effects on ESI – we see the potential for a 3% reduction to the baseline rate of healthcare demand growth. Our expectation is for a more moderate 1.5% reduction, which spread across the 2012 – 2021 period translates into an average annual headwind to real demand of roughly 20bp. We estimate the total of ACA effects on real pricing to be an average annual headwind of roughly 10bp across this same period; thus in total we expect the ACA to reduce real demand growth by roughly 30bp

We are bullish on Hospitals and (particularly commercial) HMOs ahead of the HIEs (which we expect in 2015 rather than 2014); Hospitals have more pre-reform pricing power than is generally believed, and we expect stable commercial MLRs where the market appears to anticipate rising MLRs. After the HIEs begin operating our view begins to reverse; we see less potential for longer-term volume growth in Hospitals (believing consensus expects a large tailwind from ACA), and steady declines in average contract values (plus rising per-member OPEX) for commercial HMOs

One of the largest and perhaps least appreciated effects of ACA is on pricing of innovative products (e.g. devices, drugs) to Medicare Parts A & B; beginning in 2015 we expect rebates on sales to Medicare of +/- 25%.  DNDN, CBST, AMGN, MDCO, THOR are most susceptible; each relies on Medicare for 40% or more of sales

For more information, please see our published research archive

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