The Affordable Care Act (Obamacare)  resembles the Star Wars Trilogy.

The first episode released in 2010 could be titled “the new hope” where we learn the background of the “death star” of insurance companies with their super-powerful weapon of “preexisting condition exclusions” that disqualified sick people from obtaining insurance for the first time.   (Following the earlier HIPAA act, this exclusion primarily applied to new policies for people who previously were uninsured or who allowed their prior insurance to lapse for a long time.   The pre-existing condition exclusion was meant to encourage insurance coverage while well in order to prevent the free-rider problem: people who wait until they are sick to get immediate benefits from small premium payments.)   In this episode, the pre-existing conditions enters the stage as a tall figure dressed in ominous black robes and having access to a powerful force.  Obamacare 1.0 climax occurred in 2014 when pre-existing condition exclusions in insurance plans were definitively outlawed.

The second episode designated as Obamacare 2.0 by vox could be titled “the empire strikes back”, where the empire is pre-existing condition exclusion.   In this episode, the insurance companies will re-emerge triumphant and the rebels scattered back to oppressive conditions.

The innovation recently announced by Health and Human Services (HHS) will change the way that Medicare will reimburse health care providers and thus present a model for all insurance.  The changes involve moving toward a value-based reimbursement model to replace or redefine the fee-for-service model in favor of a value-based payment model.  As stated in vox;

The federal government now plans to pay Medicare doctors more if they help patients get healthier — and less if their patients just stay sick.

Although the changes are specific to Medicare, these will affect the insurance industry as a whole as stated in the Washington Business Journal (BizJournal) article:

Where Medicare goes, the private sector (typically) goes, too. So you can be sure hospital executives are closely watching what happens next, said Dr. Farzad Mostashari, CEO of the Bethesda-based Aledade…

This value-based reimbursement model for Medicare are compatible with new IT systems by health insurance innovators to move toward value-based cost models.   The providers who will suffer are those who can not adapt out of the fee for service model.  From the same article:

Smaller organizations or physician practices that haven’t invested in or linked with an organization that has an IT infrastructure to better identify and manage the sickest patients will get hit hardest, experts say.

The announcement presents a happy scenario of lower healthcare expenses on Medicare and eventually insurers and this can lead to lower deficits for the government and lower premiums for people.   It is also a happy one where we move away from paying for procedures merely because they are available and they are offered, and instead concentrate on paying for services that specifically cure the sick so that they do not need to return for the same ailment.  From vox:

There are now penalties, for example, if a patient returns to the hospital after something was screwed up the first time. Those seem like they might be working; the number of preventable readmissions has steadily dropped since late 2010.

Preventable readmission is an euphemism for a mistake the first time.   In my mind, an example of a mistake would be if a surgeon forgets a step or does one step wrong so that the patient has to return for a second operation.

Preventable readmission is broader than clumsiness.  A preventable readmission could also occur where the first admission involved an incorrect diagnosis: the procedure itself could be flawless but it did not address the correct problem.    The readmission involves the patient returning for the same complaint and needing a different procedure.

This recent article also identifies improper prescription use by the patient as being another reason for readmission:

Taking medicine incorrectly is a big reason patients return to the hospital, and research has found that as many as 30 percent of prescriptions are never filled.

This is relevant to chronic illness care because a lot of the management of these illnesses require a fairly high load of prescription use.   In ACA, the problem with prescription medication is that the medications covered in insurance formularies vary.  If the medication is not in the formulary, the patient must pay full prices.  Even if it is the formulary the discount may vary.  In short, the patient may not be able to afford continuing the prescriptions or he may have trouble tolerating the prescription (especially for new prescriptions) and as a result will require readmission eventually and this will result in fines:

A hospital could lose as much as 3 percent cut in Medicare funding starting in the fall of 2014, up from 1 percent when the program started in 2012. […] Now, federal regulators are also including readmissions for hip and knee replacement surgery and chronic obstructive pulmonary disease.

Poorer and more isolated patients may be more likely to not follow the prescriptions.  In addition, different ACA-compliant plans may offer formularies that do not cover needed medication or will not provide a discount, forcing the patient to pay out of pocket.  Part of managing a chronic condition involves maintaining exact medication schedules and if that is not met the patient will eventually need to be readmitted.   Chronic conditions with their required perpetual medication schedule greatly increases the likelihood that the patient will need readmission for the same condition.

The government is learning that some readmissions are outside of the hospital’s control and are attempting to revise the policies to take into account factors such as the patient’s socio-economic conditions.  While they are trying to figure this out, they are fining the hospitals for readmission and this is going to force the providers to make up the cost elsewhere especially if the readmission is outside of the hospital’s control.   This is going to have an impact on availability of affordable services for the chronically ill.

Obamacare 2.0 does not change Obamacare 1.0 outlawing of preexisting conditions.   Insurance companies will still have to accept all new applicants during open enrollment and used community-based premium pricing instead of actuarial-based pricing based on the patient’s specific conditions.    To make this happen, Obamacare 1.0 mandated individual coverage with penalties for individuals who failed to obtain coverage.   Under Obamacare 1.0, everyone can have health insurance and everyone must obtain it.

In practice, Obamacare mandates that everyone will pay health insurance premiums.  Some may qualify for subsidies to help with a portion of that expense.  Others can get coverage through Medicaid where the states pay the full premium.  The accomplishment of Obamacare 1.0 is that preexisting conditions is no longer a barrier for the privilege of paying insurance premiums.

Where the problem of preexisting conditions returns is when the patient actually requires health care.   This is where Obamacare 2.0 will be the equivalent of the Empire Strikes Back.  The empire is preexisting conditions.

The preexisting conditions that previously were barriers to obtaining new policies were chronic conditions, not acute ones.   An acute condition is one where a quick visit to the hospital can solve the problem.  An appendectomy is an example of an acute condition.   While there may be cases of health insurance being denied due to a preexisting acute condition, I suspect these were rare for two reasons.   One is the problem is typically too urgent to even start an insurance application process.  The second is that acute care has bounded costs and are generally affordable so that it is less likely to involve an exclusion clause.

The real challenge presented by preexisting condition coverage was for chronic illnesses, functional diseases, or incurable diseases that can only be managed but not cured.   In all of these cases, the treatment costs are unbounded and expensive because they must require repeated visits, often for the remaining life of the patient.    These are patients who are not going to get better, or are highly unlikely to get better.

Fee-for-service payment models appears to me to be ideally suited for managing chronic illnesses.   The illness will never be cured or its cure will take a large number of years.   The chronically ill person will schedule health services based on a number of criteria including recommended follow-up appointments, affordability, and whether the patient is unable to tolerate the conditions outside of care.   Each time the patient requests care, he will receive appropriate services to address his immediate complaints toward a process of managing the condition.   Those specific services are best itemized in the resulting bill.    There are costs associated with providing these services and the services are appropriate for that specific patient visit.

Preexisting conditions usually are chronic conditions.   Although preexisting conditions no longer prevents a patient from paying a premium, treatment for the condition may not be available.

At issue is the move away from fee-for-service models that permits a catalog of services that are well suited for the chronically-ill consumer.   A move toward value-based reimbursement specifically targets replacing the fee-for-service model.  Services involved in solving acute conditions will not be reimbursed directly.  Instead the outcome will be reimbursed: payment is for the successful treatment not the for the application of a service.   As I understand the new rules, the plan will still pay for fee-for-service but at a lower rate in order to finance a higher reimbursement for success in the overall treatment.

Economically, this will drive up the service costs when offered separately from an outcome.  Medicare, and eventually insurance companies, will be paying fees that are below costs of the services.  The providers, or most likely organizations of a wide range of providers, will benefit from additional reimbursements for successful treatments.   This leaves the individual services under-funded.

The individual procedures will always have a recurring expense involving the labor of the providers involved, the expendable material used, and the maintenance of facilities for that treatment.   These costs are not directly reimbursed by value-based models but instead receive some portion of the bonus granted to the collection of all services that resulted in a successful treatment.

The problem occurs for the chronic illness that will not qualify for a bonus for successful treatment.   The treatment available to patient is not effective in the long run.  The treatment does manage the illness to provide temporary comfort to the patient allowing him to tolerate the condition for a short period (months or a few years) before needing some other treatment.    For these patients, the cost of the care is directly tied to the specific services rendered.    These services will need to be financed entirely on a fee-for-service basis without benefit of a bonus for successful outcome.

The problem is that now there is a smaller population to spread the fixed expense of making the service available.   There is no value-based incentive available to finance the delivery of these services.  The value-based incentive benefits for a particular service are insufficient to finance the availability of these services for patients that offer no prospect of a value-based bonus payment.

The patient managing a chronic illness will incur a much higher cost per service to pay for the fixed-cost of providing that service because there will be no offsetting benefits of a value-based bonus.

In particular, services that are common for both those conditions that qualify for value-based bonuses and those that do not would cost more to the latter group compared to a universal fee-for-service model.   In a pure fee-for-service model both sets of patients would share the fixed cost of making the service available.  This is especially a benefit for the chronically ill because he benefits from the lower costs as a result of the larger number of users of the service for non-chronically ill patients.

In value-based reimbursement, the payment is an award to a collection of services that contributed to a successful treatment.   To be cost-effective, the value-based reimbursement must be less than paying for the services individually.  This leaves the individual services underfunded in terms of being offered independent of a prospect of the successful treatment.

In effect, value-based reimbursement results in bundling of services and providers as in the Affordable Care Organizations discussed in the vox article:

The Affordable Care Act also created Accountable Care Organizations: larger groups of doctors that band together and take a lump sum of money to care for a specific group of patients, much like what the White House wants lots of providers to do under this new plan.

One consequence of bundling of providers (and their services) is that the providers and their services are no longer available for individual hire.   The ACO services are offered only in bundles that address specific outcomes.  The individual services can not be purchased separately because they can not be reimbursed outside of an outcome objective.    In effect, the individual services must be removed from the catalog of offerings from these providers.

If services are offered outside of bundles, they must be self-funded through a fee-for-service model.   The patients most in need of fee-for-service services are the chronically ill who need to manage their disease without a prospect of a cure.  Costs for their care will necessarily rise because their needed services can not be bundled in a way that describes a successful outcome.

After Obamacare 1.0, the new hope, all insurance companies must accept all patients, and all individuals must obtain insurance.   The chronically ill will be paying premiums and the insurance companies will be approving their treatments.  With Obamcare 2.0, the empire of preexisting conditions strikes back.  The chronically ill will either find their services are not available or that they must pay more (in uncovered or out-of-network costs) to obtain them.

As noted in the BizJournal article:

There are also questions about whether the idea of value-based could go too far and actually lead to rationing access to care or technology , Williams said. The government will likely have to watch this experiment closely and make tweaks along the way to avoid that problem, he said.

Indeed.  Inevitably there will be a sequel Obamacare 3.0: the return of the Jedi (chronically ill).