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June 28, 2012

Initial reactions to the Supreme Court ruling

Daily Briefing

Chas RoadesChas Roades, Chief Research Officer

The constitutional waiting game is finally over.

Nearly three months to the day after the historic hearings on the constitutionality of the Patient Protection and Affordable Care Act—the Supreme Court has upheld the vast majority of the law’s provisions. This includes the individual mandate, although the penalties for noncompliance were ruled constitutional under Congress’s taxing authority, not its power to regulate interstate commerce.

But in a twist that few expected, the Court also ruled that the ACA’s provisions governing the Medicaid expansion went too far (more on that in a moment). For a detailed look at how the Court reached its decision, I highly recommend taking a look through the individual justices’ concurrences and dissents to Chief Justice John Roberts’s majority opinion.

Overall, the ruling lifts the uncertainty surrounding the strategic questions facing providers: payment reform is here to stay, and the time to focus on transforming patient care across the continuum is now. Although this historic decision is likely to have repercussions that echo well beyond the health care industry, I wanted to share a few quick observations about what today’s ruling means for providers.

Validation of the ACA only underscores the urgency of solving health care’s affordability problem.
Although the ACA promises to extend coverage to millions of previously uninsured Americans, its provisions related to payment innovation—shared savings programs, bundled payments, pay-for-performance initiatives—have sharpened health care purchasers’ focus on reining in health spending. In the commercial insurance world, the wholesale shift away from “defined benefit” health plans toward “defined contribution” approaches continues apace.

Employers increasingly unwilling to shoulder escalating health costs, cash-strapped state governments unable to bear an ever-greater Medicaid burden, and Medicare’s continued rollout of payment reform pilots aimed at bending the spending curve all lean toward placing health care on a defined budget. As we discuss in our ongoing research meeting series for hospital and health system chief executives, providers must continue their efforts to restructure operations to deliver patient care in an affordable way or risk becoming increasingly shut out of purchaser-defined high-value care networks.

Aging and chronic disease are still the biggest drivers of care transformation.
As the Health Care Advisory Board has demonstrated through its Medicare Breakeven Project, the impact of our aging population remains the single biggest threat to hospital finances—with or without the ACA.

Over the next decade, as baby boomers age into Medicare (and out of commercial insurance), providers’ payer mix and case mix will become ever-more weighted toward publicly insured patients, who historically have tended to use a disproportionately large volume of relatively poorly reimbursed services. Coupled with the cuts to growth in Medicare price updates already included in the ACA, these shifts will have by far the greatest impact on hospital and health system margins over the next several years.

As I’ve argued before, cost cutting alone is insufficient to meet these challenges, which will require a sustained focus on both operational excellence inside the four walls of the hospital as well as care transformation across the care continuum.

The ruling generates new uncertainty surrounding the Medicaid expansion.
The one substantive invalidation included in Chief Justice Roberts’ decision—a conclusion reached by seven of the nine justices—regards the law’s provisions for expanding Medicaid eligibility. The Court effectively said that the federal government could not withhold matching funds for states’ existing Medicaid programs if they choose to forgo expanding Medicaid eligibility for citizens up to 133% of the federal poverty level. This essentially makes the Medicaid expansion optional for states, and, for providers in states that have relatively strict eligibility requirements, generates new uncertainty around how many new Medicaid enrollees to expect.

This means hospitals and health systems will have to endure the full impact of the Medicare price cuts included in the ACA, while the total upside of coverage expansion remains in doubt. In effect, the potential loss of this critical pillar of coverage expansion will effectively accelerate providers’ efforts to restructure operations to generate sustainable margins over time.

This challenge lies at the heart of the Medicare Breakeven Project’s research. In the next few days, we will release a detailed analysis of the strategic, financial, and operational challenges presented by the changes in the ACA, and provide updated financial modeling on the impact of the ruling to providers’ long-term margin performance. Starting next Monday, we will host a series of interactive webconferences on the subject in which we will also discuss the likely options ahead for Congress, state governments, payers, and providers in the wake of the Supreme Court’s historic decision. To register for any of these upcoming webconferences, please click here.

In the meantime, if you would like a customized assessment of the long-term margin impact these changes to the ACA will have for your organization, please click here.

The constitutional question has been resolved, but political uncertainty remains.
The Supreme Court may have declared the ACA (mostly) constitutional, but debate over the means by which this legislation seeks to achieve coverage expansion and cost reduction is far from over. Political support and opposition to the law remain intense, and it is likely to figure prominently in future debates surrounding federal spending—not to mention the election-year hopes of President Obama, Mitt Romney, and members of Congress. Later this summer we will announce a series of webconferences that not only examine the health care plans of both presidential candidates, but also outline the political decisions that Congress faces as it wrangles with major fiscal challenges at the end of the year.

As the election-year drama over health care continues over the next several months, we will be here to help our members understand and respond to changing market dynamics. As always, we will continue to focus on the longer-term challenges facing providers and look forward to help you meet them during this extraordinary period in our industry’s history.

Please don’t hesitate to contact me directly if I can be of assistance. You can reach out to me at

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