FINANCIAL MANAGEMENT OF HEALTH CARE ORGANIZATIONS

FINANCIAL MANAGEMENT OF

HEALTH CARE ORGANIZATIONS

AN INTRODUCTION TO FUNDAMENTAL TOOLS, CONCEPTS, AND APPLICATIONS

Fourth Edition

William N. Zelman, Michael J. McCue, Noah D. Glick, and Marci S. Thomas

Cover design by Jeff Puda Cover image : © imagewerks | Getty Copyright © 2014 by William N. Zelman, Michael J. McCue, Noah D. Glick, and Marci S. Thomas. All rights reserved.

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Library of Congress Cataloging-In-Publication Data Zelman, William N., author. Financial management of health care organizations : an introduction to fundamental tools, concepts, and applications / William N. Zelman, Michael J. McCue, Noah D. Glick, and Marci S. Thomas. – Fourth edition. p. ; cm. Includes bibliographical references and index. ISBN 978-1-118-46656-8 (cloth) – ISBN 978-1-118-46659-9 (pdf) – ISBN 978-1-118-46658-2 (epub) I. McCue, Michael J. (Michael Joseph), 1954- author. II. Glick, Noah D., author. III. Thomas, Marci S., 1953- author. IV. Title. [DNLM: 1. Health Facility Administration–economics. 2. Financial Management, Hospital– methods. 3. Practice Management, Medical–economics. WX 157] RA971.3 362.1068'1–dc23 2013025598

Printed in the United States of America

fourth edition

HB Printing 10 9 8 7 6 5 4 3 2 1

CONTENTS

Preface xiii Acknowledgments xix The Authors xxi

Chapter 1 The Context of Health Care Financial Management 1

Changing Methods of Health Care Financing and Delivery 3 Addressing the High Cost of Care 9 Establishing Value-Based Purchasing 21 Summary 23 Key Terms 24 Review Questions 24

Chapter 2 Health Care Financial Statements 27

The Balance Sheet 28 The Statement of Operations 51 The Statement of Changes in Net Assets 65 The Statement of Cash Flows 68 Summary 73 Key Terms 75 Key Equations 75 Review Questions and Problems 76 Appendix A: Financial Statements for Sample

Not-for-Profit and For-Profit Hospitals, and Notes to Financial Statements 86

Chapter 3 Principles and Practices of Health Care Accounting 103

The Books 103 An Example of the Effects of Cash Flows on Profit Reporting

under Cash and Accrual Accounting 106 Recording Transactions 110 Developing the Financial Statements 120 Summary 126

Contentsvi

Key Terms 127 Review Questions and Problems 127

Chapter 4 Financial Statement Analysis 137

Horizontal Analysis 138 Trend Analysis 143 Vertical (Common-Size) Analysis 144 Ratio Analysis 146 Liquidity Ratios 151 Revenue, Expense, and Profitability Ratios 161 Activity Ratios 172 Capital Structure Ratios 175 Summary 183 Key Equations 186 Key Terms 187 Review Questions and Problems 187

Chapter 5 Working Capital Management 209

Working Capital Cycle 209 Working Capital Management Strategies 211 Cash Management 215 Sources of Temporary Cash 216 Revenue Cycle Management 222 Collecting Cash Payments 225 Investing Cash on a Short-Term Basis 228 Forecasting Cash Surpluses and Deficits: The Cash Budget 230 Accounts Receivable Management 233 Methods to Monitor Revenue Cycle Performance 237 Fraud and Abuse 239 Summary 243 Key Terms 246 Key Equations 246 Review Questions and Problems 246

Chapter 6 The Time Value of Money 259

Future Value of a Dollar Invested Today 259 Present Value of an Amount to Be Received in the Future 266 Future and Present Values of Annuities 270 Future and Present Value Calculations and Excel Functions

for Special Situations 275 Summary 283

Contents vii

Key Terms 284 Key Equations 284 Review Questions and Problems 286 Appendix B: Future and Present Value Tables 291

Chapter 7 The Investment Decision 301

Objectives of Capital Investment Analysis 302 Analytical Methods 306 Using an NPV Analysis for a Replacement Decision 320 Summary 325 Key Terms 327 Key Equation 327 Review Questions and Problems 327 Appendix C: Technical Concerns in Calculating

Net Present Value 335 Appendix D: Adjustments for Net Working Capital 342 Appendix E: Tax Implications for For-Profit Entities

in a Capital Budgeting Decision and the Adjustment for Interest Expense 344

Appendix F: Comprehensive Capital Budgeting Replacement Cost Example 348

Chapter 8 Capital Financing for Health Care Providers 359

Equity Financing 362 Debt Financing 364 Bond Issuance Process 375 Lease Financing 387 Summary 392 Key Terms 393 Key Equations 394 Review Questions and Problems 394 Appendix G: Bond Valuation, Loan Amortization,

and Debt (Borrowing) Capacity 399

Chapter 9 Using Cost Information to Make Special Decisions 409

Break-Even Analysis 410 Product Margin 433 Applying the Product Margin Paradigm to Making

Special Decisions 438 Summary 445 Key Terms 446

Contentsviii

Key Equations 447 Review Questions and Problems 447 Appendix H: Break-even Analysis for Practice Acquisition 458

Chapter 10 Budgeting 465

The Planning-and-Control Cycle 465 Organizational Approaches to Budgeting 470 Types of Budgets 481 Monitoring Variances to Budget 489 Group Purchasing Organizations 491 Summary 493 Key Terms 495 Key Equation 496 Review Questions and Problems 496 Appendix I: An Extended Example of How

to Develop a Budget 498

Chapter 11 Responsibility Accounting 521

Decentralization 521 Types of Responsibility Centers 524 Measuring the Performance of Responsibility Centers 529 Budget Variances 532 Summary 544 Key Terms 546 Key Equations 546 Review Questions and Problems 547

Chapter 12 Provider Cost-Finding Methods 551

Cost-to-Charge Ratio 551 Step-Down Method 552 Activity-Based Costing 559 Summary 571 Key Terms 572 Review Questions and Problems 572

Chapter 13 Provider Payment Systems 579

Evolution of the Payment System 583 Risk Sharing and the Principles of Insurance 608 Evolving Issues 614 Technology 614 Summary 616

Contents ix

Key Terms 617 Review Questions and Problems 618 Appendix J: Cost-Based Payment Systems 619

Glossary 627 Useful Websites and Apps 653

Index 659

To our families, for their love and patience

To our students and colleagues, for their invaluable

insights and feedback

PREFACE

This book offers an introduction to the most used tools and techniques of health care financial management. It contains numerous examples from a variety of providers, including health maintenance organizations, hospitals, physician practices, home health agencies, nursing units, surgi- cal centers, and integrated health care systems. The book avoids complicated formulas and uses numerous spreadsheet examples so that these examples can be adapted to problems in the workplace. For those desiring to go beyond the fundamentals, many chapters offer additional information in appendices. Each chapter begins with a detailed outline and concludes with a detailed summary, followed by a set of questions and problems. Answers to the questions and problems are available for download to instructors at www.josseybass.com/go/zelman4e. Finally, a number of perspectives are included in every chapter. Perspectives—examples from the real world— are intended to provide additional insight into a topic. In some cases these are abstracted from professional journals and in other cases they are state- ments from practitioners—in their own words.

The book begins with an overview in Chapter One of some of the key factors affecting the financial management of health care organizations in today’s environment. Chapters Two, Three, and Four focus on the financial statements of health care organizations. Chapter Two presents an intro- duction to these financial statements. Financial statements are (perhaps along with the budget) the most important financial documents of a health care organization, and the bulk of this chapter is designed to help readers understand these statements, how they are created, and how they link together.

Chapter Three provides an introduction to health care financial accounting. This chapter focuses on the relationship between the actions of health care providers and administrators and the financial condition of the organization, examining how the numbers on the financial statements are derived, the distinction between cash and accrual bases of account- ing—and the importance of defining what is actually meant by cost. By the time students complete Chapters Two and Three, they will have been introduced to a large portion of the terms used in health care financial management.

Prefacexiv

Building on Chapters Two and Three, Chapter Four focuses on inter- preting the financial statements of health care organizations. Three approaches to analyzing statements are presented: horizontal, vertical, and ratio analysis. Great care has been taken to show how the ratios are com- puted and how to summarize the results.

Chapter Five focuses on the management of working capital: current assets and current liabilities. This chapter emphasizes the importance of cash management and provides many practical techniques for managing the inflows and outflows of funds through an organization, including managing the billing and collections cycle and paying off short-term liabilities.

Chapter Six introduces one of the most important concepts in long- term decision making—the time value of money. Chapter Seven builds on this concept, incorporating it into the investment decision by presenting several techniques for analyzing investment decisions: the payback method, net present value, and internal rate of return. Examples are given for both not-for-profit and for-profit organizations.

Once an investment has been decided on, it is important to determine how this asset will be financed, and this is the focus of Chapter Eight. Whereas Chapter Five deals with issues of short-term financing, Chapter Eight focuses on long-term financing, with a particular emphasis on issuing bonds.

Chapters Nine through Twelve introduce topics typically covered in a managerial accounting course. Chapter Nine focuses on the concept of cost and on using cost information—including fixed cost, variable cost, and break-even analysis—for short-term decision making. In addition to cover- ing the key concepts, this chapter offers a set of rules to guide decision makers in making financial decisions. Chapter Ten explores budget models and the budgeting process. Several budget models are introduced, includ- ing program, performance, and zero-based budgeting. The chapter ends with an example of how to prepare each of the five main budgets: statistics budget, revenue budget, expense budget, cash budget, and capital budget. It also includes examples for various types of payors, including those with flat fee and capitation plans.

Chapter Eleven deals with responsibility accounting. It discusses the different types of responsibility centers and focuses on performance mea- surement in general and budget variance analysis in particular. Chapter Twelve discusses methods used by health care providers to determine their costs, primarily focusing on the step-down method and activity- based costing. This book concludes with Chapter Thirteen, “Provider Payment Systems.” This chapter, parts of which were combined with

Preface xv

Chapter Twelve in the first edition, describes the evolution of the payment system in the United States, especially under health reform, as well as the specifics of various approaches to managing care and paying providers.

Major Changes in the Fourth Edition As noted below, the major changes from the third edition involve

• New sections to reflect changes in the health care environment

• Updated data used in examples

• Updated data used in problems

• New problems

• New perspectives

Chapter One: The Context of Health Care Financial Management Changes to Chapter One, the introductory chapter, provide an updated and current view of today’s health care setting. Much has happened in the industry with the advent of value-based payment systems, population- based approaches to care, and the Patient Protection and Affordable Care Act (ACA). Other new concepts include patient-centered medical homes and accountable care organizations (ACOs).

Enhancements include updated statistics in the chapter text and all the pertinent exhibits. All perspectives have been replaced with ones that look at more recent events.

Chapter Two: Health Care Financial Statements Chapter Two has been updated to include recent changes in the literature issued by the Financial Accounting Standards Board (FASB). These changes address revenue recognition presentation of bad debt for many hospitals, increases in the level of charity care disclosure, and the guidance for self- insured risks. All perspectives and problems have been updated. There are also new key terms.

Chapter Three: Principles and Practices of Health Care Accounting In Chapter Three, the perspectives have been replaced with four updated versions. Problems 11 through 20 have been changed and updated.

Prefacexvi

Chapter Four: Financial Statement Analysis Chapter Four has been updated to include the latest hospital benchmark ratios from the 2013 Almanac of Hospital Financial and Operating Indica- tors (a reference work from Optum Inc.).

This chapter also addresses the change mentioned previously to the reporting of bad debt expense. All chapter problems have been updated as well. In addition, ratio problems 11 through 25 have been revised to provide a better picture of what each ratio analyzed means, beyond its being above or below the relevant benchmark.

Chapter Five: Working Capital Management Chapter Five has new sections on improving the revenue cycle manage- ment process and on fraud and abuse. All perspectives and problems have been revised and updated.

Chapter Six: The Time Value of Money Chapter Six now includes perspectives illustrating time value of money concepts in use, as well as a new section that explains the effective rate function. In addition, all the problem sets have been updated.

Chapter Seven: The Investment Decision Chapter Seven now offers an expanded discussion of how organizations measure the discount rate or cost of capital. This discussion also explains the weighted average cost of capital, which includes the cost of debt and the cost of equity. The key components of the capital asset pricing model, which is used to measure cost of equity, are presented as well. In addition, all perspectives have been updated, and problems have been changed and updated.

Chapter Eight: Capital Financing for Health Care Providers Chapter Eight now includes revisions to the explanation of interest rate swaps and a new section on bank qualified private placement loans. All the problems on lease financing and bond valuation have been revised and updated.

Chapter Nine: Using Cost Information to Make Special Decisions In Chapter Nine, the conceptual diagram and the related explanation for understanding breakeven have been substantially revised, and all perspec-

Preface xvii

tives have been replaced with updated versions. Most problems have updated figures, and three problems have been replaced with new ones. Also, a discussion of a new topic, physician practice valuation as it relates to the concept of breakeven, has been added as an appendix. This discus- sion also introduces the concepts of joint ventures and the value of downstream referrals.

Chapter Ten: Budgeting Though the organization of Chapter Ten remains essentially the same, the basic model on which this chapter is based has been almost totally revised. The new model is a hospitalist practice that has only two services, a sim- plification from the previous edition. The discussion of supply chain operations and maximizing savings from evaluation of group purchasing organization discounts has been retained, but the supplies budget has been dropped. All perspectives have been replaced with updated versions. The problems have been revised to reflect the new content, though the general format is the same.

Chapter Eleven: Responsibility Accounting The discussion of cost centers in Chapter Eleven has been modified slightly to recognize both service- and product-producing activities, and all per- spectives and problem sets have been updated.

Chapter Twelve: Provider Cost-Finding Methods The previous Chapter Twelve perspectives have been dropped, and two new ones have been added.

Chapter Thirteen: Provider Payment Systems Chapter Thirteen has been updated to provide a discussion of evolving issues in provider payment. Among these issues are value-based purchas- ing, changes in payment for hospital readmissions and never events, and bundled payments. There is a more robust discussion on the mechanisms that Medicare uses to pay for hospital inpatient, hospital outpatient, and physician services. All perspectives have been replaced with updated ver- sions. There are new key terms.

Glossary The glossary has been completely updated, and includes each term defined in a chapter sidebar and each key term.

Prefacexviii

Web Pages and Additional Materials The website for this book, including the instructor’s manual and Excel spreadsheets, is located at www.josseybass.com/go/zelman4e. Com- ments about this book are invited and may be sent to publichealth @wiley.com.

ACKNOWLEDGMENTS

We attempt throughout this book to challenge and enlighten. Quan-titative as well as qualitative issues are presented in an effort to help the reader better understand the wide range of issues considered under the topic health care financial management. We would like to thank the many students who over the past several years have pointed out errors, offered suggestions and improvements, and provided new ways to solve problems.

Our particular thanks go to Wafa Tarazi, Yurita Yakimin, Abdul Talib, Yen-Ju Lin, PhD, Tae Hyun Kim, PhD, and Julie Peterman, CFA, for their review of various chapters and problem sets. We also offer special thanks to Charles Walker, MBA, CPA, for his dedication and tireless efforts in reviewing the key chapters and problem sets of this book.

Proposal reviewers Steven D. Culler, Magdalene Figuccio, John Fuller, Kirk Harlow, Kelli Haynes, Robert Jeppesen, Charles Kachmarik, Eve Layman, David Lee, Cynthia Lerouge, Anne Macy, Michael Nowicki, William J. Oliver, Mustafa Z. Ounis, Theresa Parker, Kyle Peacock, Jen Porter, Patricia Poteat, Howard Rivenson, Judi Schack-Dugre, Robert Shapiro, Karen Shastri, Dean Smith, Sandie Soldwisch, Wendy Tietz, Bill Wakefield, and Steve Zuiderveen provided valuable feedback on the third edition and our fourth edition revision plan.

Most of all, we would like to thank our families for their encourage- ment and support and for their understanding during the countless hours we were not available to them.

The authors apologize for any errors or omissions in the above list and would be grateful for notifications to Michael McCue, at [email protected], of any corrections that should be incorporated in the next edition or reprint of this book and posted on the book’s webpage.

The authors and the publisher gratefully acknowledge the copyright holders for permission to reproduce material in the perspectives through- out the book.

THE AUTHORS

William N. Zelman is a full professor in the Department of Health Policy and Management, Gillings School of Public Health, Univer- sity of North Carolina at Chapel Hill. He specializes in health care financial management, focusing on management-related issues, including organiza- tional performance and cost management. He has served as director of the residential master’s degree programs at UNC and is past chair of the Asso- ciation of University Programs in Health Administration Task Force on Financial Management Education. He has authored or coauthored five books and numerous articles and has been an editorial board member or reviewer, or both, for a number of journals. He has extensive international experience, serving as a consultant to and presenting courses for academic, governmental, and other international organizations, primarily in South Asia and Central Europe.

Michael J. McCue is the R. Timothy Stack Professor of Health Care Administration in the Department of Health Administration at Virginia Commonwealth University in Richmond, Virginia. His research interests relate to corporate finance in the health care industry and the performance of hospitals, multihospital systems, and health plans. His previous research examines the determinants of hospital capital structure, the factors influ- encing hospitals’ cash flow and cash on hand, and the evaluation of hospital bond ratings. His current research examines the effects of health reform on the financial performance of commercial health plans.

Noah D. Glick is currently a senior health care consultant for FTI Consult- ing in its corporate finance division, where he is engaged in physician strategy and health care analytics. Previously, he was administrative direc- tor for Rehabilitation Medical Associates and the South Shore Hospitalist Group outside Boston. Prior to that, he was a senior consultant for Inte- grated Healthcare Information Services in Waltham, Massachusetts, and a staff member in the Department of Decision Support at the University of North Carolina at Chapel Hill. He also taught simulation modeling in the master’s in health administration program at UNC.

The Authorsxxii

Marci S. Thomas is a clinical assistant professor in the Department of Health Policy and Management at the University of North Carolina at Chapel Hill, where she teaches health care consulting, strategy, and finan- cial leadership. She is also a principal and director of quality control at Metcalf-Davis, CPAs. She consults with health care organizations, educa- tional institutions, and other not-for-profit organizations and their boards on internal control, vulnerability to risk and fraud, strategic planning, and governance issues. She is a nationally recognized speaker on managing accounting issues in health care and related not-for-profit entities and on auditing these organizations. Thomas is a coeditor of and contributor to Essentials of Physician Practice Management (Jossey-Bass). Her book Best of Boards: Sound Governance and Leadership for Nonprofit Organizations, was published by the American Institute of CPAs (AICPA) in June 2011. She is a certified public accountant and a chartered global management accountant (CGMA).

FINANCIAL MANAGEMENT OF HEALTH

CARE ORGANIZATIONS

CHAPTER 1

THE CONTEXT OF HEALTH CARE FINANCIAL MANAGEMENT

Never before have health care professionals faced such complex issues and practical difficulties in trying to keep their organizations competitive and finan- cially viable. With disruptive changes taking place in health care legislation and in payment, delivery, and social systems, health care professionals are faced with trying to meet their organizations’ health-related missions in an environment of uncertainty and extreme cost pressures. These circumstances are stimulating high-performing provider organizations to focus on innovation to help lower costs and find creative ways to deliver services to a population whose members, while aging, are more informed and more demanding of a voice in their care and value for dollars spent than ever before.

The Patient Protection and Affordable Care Act (ACA) is the largest effort toward reform of the health care system since the advent of government entitlement programs in the 1960s. The goal of the ACA is to provide mechanisms to expand access to care, improve quality, and control costs.

But even before the enactment of the ACA in 2010, the Centers for Medicare and Medicaid Services (CMS) had articulated a vision for health care quality: “the right care for every person every time.” CMS’s stated objective is to promote safe, effective, timely, patient-centered, effi- cient, and equitable care.

CMS also needs to control the rising cost of care, which has become unsustainable. To accomplish its objec- tives CMS has been working to replace its old financing system, which basically rewarded the quantity of care, with value-based purchasing (VBP), a system that improves the linkage between payment and the quality of care. The

LEARNING OBJECTIVES

• Identify key elements that are driving changes in health care delivery.

• Identify key approaches to controlling health care costs and resulting ethical issues.

• Identify key changes in reimbursement mechanisms to providers.

Chapter 1 The Context of Health Care Financial Management2

Deficit Reduction Act of 2005 authorized CMS to develop a plan for VBP for Medicare hospital services beginning in fiscal year 2009. The ACA provided the implementation plan.

Many of these changes have been the source of controversy and law- suits. Until President Obama’s reelection in 2012, state governments as well as many providers faced uncertainty about whether the ACA provisions, even though found to be constitutional earlier in 2012, would be repealed. Some hesitated to move forward with implementation plans.

Regardless of whether or not all parties agree about the legislative outcome, the goal of the U.S. health care system remains to finance and deliver the highest possible quality to the most people at the lowest cost (Exhibit 1.1). But responses to today’s challenges have resulted in a new business model that providers are embracing by controlling costs, develop- ing new service offerings, and implementing new information technology, thereby creating added value (see Perspective 1.1 and Exhibit 1.2).

EXHIBIT 1.1 HEALTH SYSTEM GOALS REMAIN UNCHANGED

AccessCost

Quality

To establish a context for the topics covered in this text, this chapter highlights key issues affecting health care organizations. It is organized into three sections: (1) changing methods of health care financing and delivery, (2) addressing the high cost of care, and (3) establishing value-based payment mechanisms. Without question the health care industry is under-

Changing Methods of Health Care Financing and Delivery 3

PERSPECTIVE 1.1 HEALTH CARE SYSTEM IN REFORM

No matter what their political view is, people generally agree that the financial platform on which the health care system rests cannot be sustained. There is a clear need to reduce the proportion of the gross domestic product (GDP) spent on health care. Since the 1960s, hospitals have experienced increases in utilization, accompanied by increases in payments from govern- ment as well as from commercial payors. Medicare market basket updates have increased an average of 3.2 percent annually since that time. Under Medicare’s new payment model, utiliza- tion and reimbursement are expected to decline over time, limiting market basket and utilization increases to only 1.5 percent to 2 percent a year. In addition, the value-based payment structure will reward those organizations with better quality while penalizing those with poorer scores. Since Medicaid and commercial payors tend to follow Medicare models, this effect will be magnified.

Several disruptive trends are changing the competitive landscape. Where commercial and not- for-profit providers had distinct differences, now they are both heavily focused on cost, quality, market share, and how quickly they can get innovative products to market. For example, Duke University Health System, a not-for-profit health system, and LifePoint Hospitals, Inc., a com- mercial health system, formed a joint venture, Duke LifePoint Healthcare, to provide community hospitals and regional medical centers with innovative means of enhancing services, recruiting and retaining physicians, and developing new service lines. Insurers such as Humana and private equity groups have acquired health systems. Certain integrated health care organiza- tions, such as the Mayo Clinic and Geisinger Health System, are directed by physicians. New technologies like mobile apps provide mid-level providers and consumers with the latest evi- dence-based guidance to aid in diagnosis and management of health issues. And hospitals are consolidating, taking the view that big is good, bigger is better, and biggest is better still.

Source: Adapted from K. Kaufman and M. E. Grube, The transformation of America’s hospitals: economics drives a new business model, in Kaufman, Hall, & Associates, Futurescan 2012: Healthcare Trends and Implications, 2012– 2017 (Health Administration Press, 2011).

going rapid change (Exhibit 1.3). The providers who are open-minded and informed, embrace change, and look for effective solutions will be the ones who thrive in this uncertain environment.

Changing Methods of Health Care Financing and Delivery The push toward health care reform began back in the early 1990s during the Clinton administration. However, it did not make significant inroads

Chapter 1 The Context of Health Care Financial Management4

EXHIBIT 1.2 KEY ELEMENTS OF HEALTH CARE BUSINESS MODEL CHANGE

Old Medicare Business Model

New Post Reform Business Model

Value proposition More market share, more patients, more services, more revenues

Best possible quality at the lowest price

Direction of price Upward—Saks Fifth Avenue Downward—Walmart Cost environment Cost management Cost structure Direction of utilization Always up since 1966,

growth industry Flat/maybe down, mature industry

Relationship between hospital and doctors

Parallel play Highly coordinated and integrated

Payment Fee-for-service Something else System of care Patient services Patient/population management Organizing for value creation

One patient at a time Comprehensive health care for covered population

Importance of scale Small and medium hospitals could survive

Big, bigger, biggest

Source: Kaufman, Hall, & Associates, published in Futurescan 2012: Healthcare Trends and Implications, 2012–2017, Society for Healthcare Strategy and Market Development of the American Hospital Association and the American College of Healthcare Executives.

until President Obama signed the ACA into law in early 2010, though the ACA is complex and has numerous provisions. The provisions that are expected to have the most significant impact on the delivery and financing of care are noted in the following list and discussed in the remainder of this chapter.1

• Requirement that almost all individuals have insurance coverage. This individual mandate lies at the heart of the legislation.

• Requirement that states create insurance exchanges where individuals and small businesses can obtain coverage. The ACA contains require- ments for an essential benefits package and provides for changes to the tax law that include penalties for individuals who choose not to have insurance.