Health Care Reform 2.0

From 2-20-13, By Paul Howard and Yevgeniy Feyman

Three years have passed since President Obama's signature domestic achievement - Obamacare - was signed into law. The law passed with critical support from moderate Democrats in the House and Senate, who were convinced by the president's argument that "the system we have right now is unsustainable and hugely inefficient and uncompetitive," and that Obamacare would go a long way toward fixing our health care system.

The reality, however, is far different: Obamacare will likely do very little to reduce health care spending, and in fact, will probably increase it. But its central feature - means-tested subsidies on competitive health insurance exchanges - could still be the vehicle for the health reform we need. Call it health reform 2.0. Even now, the full cost of the law - in terms of government spending and broader national health-care spending - remains unclear, because implementation of its key components will only begin next year. What we do know is that we are slated to spend $1.8 trillion over the next 11 years on new government subsidies for the poor and middle-class uninsured to purchase health insurance and to expand Medicaid. Left unchecked, by 2050, the costs of Medicare, Medicaid, new insurance subsidies, and Social Security could consume every dollar of federal revenues.

Independent analysts have painted a murky picture of the law's impact on U.S. health care spending. The non-partisan Congressional Budget Office (CBO) has repeatedly scored the law as reducing the deficit. That sounds encouraging, but there's less here than meets the eye. All the CBO score means is that, after accounting for new revenue (around $1.9 trillion in new taxes, fees, penalties, and double-counted Medicare savings) and increased spending, the government's checkbook comes out slightly ahead. But all that new revenue only shifts money from other priorities and industries into the health care sector, an industry that both Democrats and Republicans recognize is deeply dysfunctional.

The fiscal picture also worsens considerably when you understand that it is current policy - like repeatedly postponing the reduced reimbursements for Medicare physicians - rather than current law that is dictating spending trends. For instance (as Medicare's actuaries have repeatedly pointed out), the structure of the Medicare cuts in the law are probably unworkable and Congress will have to walk them back at some point.

In a recently released report for the Manhattan Institute, we attempt to cut through the clutter and aggregate the best data available on how Obamacare is likely to impact health care spending. The results clearly show that Congress will have to "reform the reforms" sooner rather than later.

In 2011, for instance, the Centers for Medicare and Medicaid Services estimated that under Obamacare, America will spend $36.8 trillion over 10 years on health care. Without the law, the nation's projected spending would be $500 billion less over 10 years.

Families and employers also continue to face rising costs. Since Obamacare passed, American families' insurance premiums have increased by 11.3 percent, faster even than the rate of inflation for medical services (6.8 percent over three years). In 2012, both the CBO and Congress's Joint Committee on Taxation estimated that by 2016, employer-based family coverage will cost $20,000. Depending on family size, employees will have to kick in more on their end, too - 27 percent more than in 2012.

Family premiums are projected to rise steadily in coming years (2013-2021) after a brief dip next year, as Obamacare's subsidies kick in and create a one-time shift in costs from families to taxpayers. Obamacare also requires insurance companies to offer richer benefits, and taxes drug companies, medical-device companies, and insurance companies - all costs that are likely to be passed along to consumers, employers, and taxpayers.

Ironically, by reducing even modest out-of-pocket costs for consumers, Obamacare's subsidies will reduce incentives for consumers to moderate their consumption of new health care services. Today, the U.S. has the fifth-lowest rate of out-of-pocket spending among OECD countries (around 11 percent, and projected to fall to about 9.3 percent in 2021). Research from the RAND Corporation and evidence from high-deductible health plans strongly suggests that when out-of-pocket spending is lower, health care spending rises, because consumers are less price sensitive. In countries like Switzerland, which has a similar subsidized system of private insurance, out-of-pocket spending is much higher - about 25 percent in 2010 - because of minimum out-of-pocket payments required by law.

Ultimately, then, all the existing evidence suggests that Obamacare will not reduce health care costs, although it will certainly shift the cost burden to the government (i.e., taxpayers) as well as other, non-health-related industries. Though the law admirably makes some important attempts at Medicare payment reforms by incentivizing Accountable Care Organizations - essentially large hospital or physician groups that are paid based on quality and efficiency of care - existing evidence indicates that savings, if any, are likely to be modest.

This brings us back to health care reform 2.0. One place to start is by encouraging most non-poor Americans to purchase high-deductible health plans associated with health savings accounts. Policymakers should also reduce Obamacare's subsidies from 400 percent of the federal poverty level (or $94,000 for a family of four) down to 300 percent (or $70,000), which would still cover the vast majority of uninsured. In tandem with reforms to employer-provided health insurance (like capping the deductibility of coverage and indexing it to CPI), policymakers could offer more protection to low-income Americans while encouraging smarter health care spending overall.

The bottom-line is this: Whatever your view of Obamacare in principle (or in practice), the law does not significantly address or control the explosion of health care costs. Health care reform 2.0 will be needed to finally put our health care programs on a sustainable trajectory without crippling the rest of the economy. Whether the president and Democrats are ready to face the deep cognitive dissonance at the root of the law is a different matter entirely.

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Our Research

Rhetoric and Reality—The Obamacare Evaluation Project: Cost
by Paul Howard, Yevgeniy Feyman, March 2013

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