How U.S. Health Care Reform Works

In the 1940s, the government implemented price controls and froze wages in an effort to curb wartime inflation. What remained unfrozen and untaxed were fringe benefits that a worker received, so employers, desperate for decent labor, offered health insurance as a workplace perk. As a result, the United States ended up with a system in which most citizens receive their health insurance through their employer. No other country relies on an employer-based system to the extent that the U.S. does.

This system works for many with full-time jobs; a 2009 CNN poll found that approximately eight in 10 Americans were satisfied with their health insurance [source: Steinhauser]. However, critics of the system would say that such an opinion is akin to "ignorance is bliss." Most workers likely have no idea of the full cost of their company's plan, and they may be unaware how much the cost of health insurance has been rising in the last few years. The money disappears before workers can even know it's gone, perhaps in the form of an increased premium withheld from a paycheck or by employers skimping on raises in order to make insurance payments.

The unemployed, self-employed, part-time workers and those who work for companies that don't offer benefits probably have a better sense of how much health insurance truly costs. It's far more expensive for individuals and small groups to get health insurance because they constitute a small risk pool; a large company provides a large risk pool for the insurance company, which allows the company to charge smaller premiums. Liberal politicians since the time of Harry S. Truman have wanted to change the health care system in order to provide coverage to more people. These efforts have largely failed, with the notable exception of Lyndon B. Johnson's passage of Medicare and Medicaid, which provide health insurance for seniors and for those with low incomes, respectively. In 2009, about 47 million Americans lacked health insurance [source: Tumulty].

Liberals and conservatives could argue all day about whether it's the government's responsibility to provide health care for its citizens. But beyond the question of whether there's a mandate for health care, there's evidence that the system wasn't working as well as it should. In the U.S., we spend approximately $6,000 per person each year on health care, which is $2,797 more than any other industrialized country spends [source: Clifton]. While we do have state-of-the-art hospitals and the highest quality equipment, the United States also has higher rates of infant mortality and lower life expectancies than other countries that spend but a fraction of what we do.

Moreover, citizens with health insurance may find out just how little bang for the buck they receive when they get sick. In presenting the case for health care reform to the American people, President Barack Obama often used examples of people whose insurance was cut when they became terribly sick, such as a woman who was denied a double mastectomy because she had omitted declaring a pre-existing condition of acne [source: White House]. So what was his proposal for addressing such problems?

Though the health care reform proposals were frequently termed "Obamacare," the president took a hands-off approach in the initial creation of this legislation. As opposed to 1993, when the Clinton administration drafted much of its health care plan in isolation without input from Congress, Obama laid out his eight requirements for health care reform and then left it to Congress to write the bills.

Obama's eight principles for health care reform are:

[sources: White House, Kaiser Family Foundation]

The House of Representatives and the Senate Health, Labor and Pensions (HELP) Committee released bills in the summer of 2009, both of which featured a public option in which the government would sponsor a health care plan (the Senate Finance Committee released its bill without this option in the fall). During the summer recess, lawmakers faced protests and harsh words at town hall meetings in their districts, as conservatives decried the proposals as socialist. Though President Obama delivered a speech in September to address criticisms and clear up misunderstandings about the proposals, pundits wondered whether the bills were dead in the water.

The House of Representatives passed its bill in November, but with a major concession deemed necessary to get the adequate votes: The bill carried with it an amendment that public funds could not be used to pay for abortions. The Senate passed its bill in December, with another major concession: Democrats agreed to drop a public insurance option. With the two votes completed, the process of reconciling the two bills into one began.

When Republican Scott Brown was elected to fill Democrat Ted Kennedy's senate seat in Massachusetts, the pundits again wondered if health care reform was dead. The Democrats had lost their filibuster-proof majority, which would have allowed them to pass health care without Republican assistance, something the Republicans had made quite clear they wouldn't provide. Obama made one final reach to the party on Feb. 25, 2010, when he hosted a bipartisan health care summit, which many conservatives considered a publicity stunt.

To avoid a filibuster in the Senate, the House elected to adopt the Senate's bill, and that's what they passed on March 21, along with a separate bill of changes. By voting this way, the bill of amendments would only require a simple majority of 51 votes. When the dust had settled on the political wrangling, the Patient Protection and Affordable Care Act was signed into law. But what does it actually say?

If you currently have insurance, you probably won't notice too many changes when the majority of reform measures take effect. If you have children under the age of 26, however, there is one big change that affects you: Individuals are now allowed to stay on their parents' insurance plans until they reach age 26, whereas earlier rules booted some adult children off the roster before they hit 20.

Whether or not you have children there are several measures aimed at reforming insurance company practices that will provide you with a greater degree of protection should you get sick. Insurers will be forced to do away with annual or lifetime limits on care, so that people who get sick don't hit some arbitrary limit quickly and are forced to pay out of pocket. Insurance companies are also banned from canceling your policy once you fall ill.

Additionally, the bill requires private insurers to avoid discriminatory practices toward people with pre-existing conditions. Insurance companies are required to provide coverage to children with pre-existing medical conditions in 2010; everyone else with a pre-existing condition will be covered in 2014. In the meantime, adults with medical conditions are eligible for a new insurance program that offers affordable premiums for "high risk" individuals that will be run by the government.

In 2014, these individuals with existing medical conditions will enter into insurance marketplaces, or exchanges, to comparison shop for coverage. The exchanges will be set up and governed by each individual state. Insurance companies will offer plans within the marketplace, so the goal is to provide a little competition to keep insurance companies honest and premiums low. Each insurance plan must include certain essential benefits, such as preventive care, though there will likely be more expensive plans with more benefits available as well. No matter the plan, the exchange is designed to provide a forum for consumers to see very quickly how much a plan will cost them without reading hundreds of pages of fine print. A public insurance option run by the government won't be included within this marketplace.

Ready to head to that marketplace? Not so fast, there -- only certain people are eligible.

The Patient Protection and Affordable Care Act includes a requirement that all Americans have health insurance. Those who get health insurance from their employer or from the government (in the form of Medicaid and Medicare) are set, but what of those who are unemployed or can't get insurance from their employer? Currently, it's difficult for these people to get coverage because larger groups are better able to negotiate insurance rates than mere individuals.

The insurance marketplace or exchange is designed to group these people together. As we mentioned on the previous page, individual states are charged with setting up their own exchanges, due to open in 2014. The federal government will provide the funds necessary for the exchanges' setup. In the beginning, access to the exchange would be limited to those who have no other form of insurance. These people would be able to choose an insurance plan that fits their needs. All plans in the marketplace will be required to meet certain requirements, a tactic which is designed to ensure that the exchange doesn't become a dumping ground for shoddy plans.

If people don't purchase health insurance, they'll be subject to tax penalties. Beginning in 2014, a person without insurance will pay a penalty of $95 each year or 1 percent of income, whichever is greater. That fee would rise to $695, or 2.5 percent of income by 2016 [source: Miller]. Heads of households will have to pay this fee for every member of the family who isn't covered.

But how will those already struggling find the money to pay? Some citizens will be eligible for subsidies to buy insurance; the plan calls for those with incomes up to 4 times the federal poverty level to receive a subsidy (the current federal poverty level is $10,830 for an individual and $22,050 for a family of four). The amount of subsidy that an individual or family receives will be dependent on their income level; those who make more will receive a smaller subsidy, while those who make less will receive more help. Those who receive subsidies will receive enough so that they don't have to pay more than 9.5 percent of their income on premiums [source: Murray, Montgomery].

Individuals aren't the only ones who might receive subsidies; small businesses are eligible as well. On the next page, we'll examine the employer mandate.

In addition to an individual mandate to carry health insurance, employers have a mandate to provide it. However, in recognition that it's difficult for small businesses to obtain and provide affordable health insurance, the plan exempts companies with fewer than 50 employees from the requirement. Small businesses, with fewer than 25 employees and an average wage of less than $50,000, will be eligible for subsidies for insurance just as individuals are, should they elect to provide it [source: Miller]. If a small business decides not to provide insurance, those individuals can enter the exchange.

As for businesses with more than 50 employees, if they don't provide health insurance for their employees, they'll be subject to an annual fine of $2,000 per worker (though the first 30 workers aren't factored into the fine). Companies with more than 200 employees must automatically enroll employees into their insurance programs. If you're receiving coverage from a spouse, you'll have to take the initiative to opt out yourself.

If you have insurance from your employer, and you're still spending more than 9.5 percent of your income on premiums, you'll be eligible to enter the marketplace as well [source: Grier]. You'll receive a voucher from your employer and enter the marketplace; the Department of Health and Human Services would determine if you were eligible for any additional subsidies.

Those who qualify for Medicare and Medicaid will continue to qualify. The bill also expands Medicaid coverage, so that individuals and families that make less than 133 percent of the federal poverty level will be eligible. The plan will also eliminate the "doughnut hole," which is a gap in coverage under Medicare Part D. This gap has made it very expensive for some elderly people to fill prescriptions in the past few years.

Medicare Advantage, a private plan within Medicare, will be subject to cuts of $132 billion over 10 years. The plans under Medicare Advantage often provide extra benefits like gym memberships and free eyeglasses. The program is paid for by the government, yet administered by the private insurers, and Obama has said that this amounts to a subsidy for the insurance companies -- one that doesn't do much to make seniors any healthier [source: White House]. While seniors can still sign up for Medicare Advantage, it's possible that some of the more expensive perks may be cut. No other Medicare benefits will be cut.

Just as private insurance spending has skyrocketed in recent years, so too has Medicare spending. The Patient Protection and Affordable Care Act aims to curb these escalating costs by eliminating waste and unnecessary services in the system, all while maintaining quality care. To do this, Medicare will have additional oversight and review on how it treats patients. Most notably, Medicare may begin bundling services so that results are rewarded, rather than the number of procedures. That means that instead of paying for each separate test that a person with migraines receives, payment would be given once for the overall treatment of migraines.

In speeches, President Obama often likened this new payment scheme to taking your car to an auto repair shop. If the original problem flared up again just a few days after your car left the shop, you wouldn't pay the shop again for repairs. Rather, you'd want them to fix the car that they hadn't fixed in the first place. To translate this to Medicare, the current proposals call for incentives for providers who treat patients effectively and efficiently, without multiple hospital admissions or diagnostic tests. In this way, we pay for good patient care, as opposed to mediocre patient care. It's possible that such reforms with Medicare may eventually permeate the entire health care system, but that's not currently part of the bill.

Eliminating waste in the system and curbing the costs of Medicare Advantage are two ways that the bill will be paid for. What are the other options for funding?

The Congressional Budget Office estimates that the reform measures will cost $938 billion over 10 years. The office also estimates that the measures will reduce the federal deficit by $138 billion over 10 years. How is such a thing possible?

If politicians did absolutely nothing about health care, the growing costs would have eventually exceeded the cost of reform [source: Abelson]. The biggest driver of the U.S. deficit is the cost of health care, which means that a lack of action would have hampered overall economic growth. Without any intervention, Medicare will go bankrupt by 2017 [source: Tumulty]. But it's not just government-sponsored care that would have been affected. The rising costs of care would have eventually impacted everyone with insurance, and we would have seen higher premiums paying for fewer services.

As we discussed on the previous pages, part of the reform would be paid for by cutting $132 billion in funding from Medicare Advantage and from collecting fees from those who don't obtain health care coverage. Taxes will also increase for families with incomes above $250,000 and individuals with incomes above $200,000. These people will pay a higher Medicare payroll tax as well as higher taxes on investment income beginning in 2013. In 2018, people with so-called "Cadillac plans" (individual plans that cost more than $10,200 annually or family plans that cost more than $27,500 annually) will also be subject to additional taxation [source: Grier]. Other sources of funding include fees for certain health industries, such as drug manufacturers and medical device manufacturers, as well as a 10 percent tax on indoor tanning services.

When all is said and done, the law will expand health care coverage to 32 million people, and 94 percent of Americans not eligible for Medicare will have insurance [source: Associated Press]. While Democrats are heralding this achievement, Republicans are already calling for the bill to be repealed and replaced. Shortly after Obama signed the bill into law, Republican attorneys general from 13 states filed a suit claiming that the new law is unconstitutional. Their argument is that the bill violates the 10th Amendment because it allows the federal government to claim powers not given it by the Constitution. So far, legal experts have dismissed such a claim as a political ploy, as the government does have the right to impose taxes [source: Schwartz]. Still, such a suit is an indication that the national debate on health care system isn't over yet.