Share |





Reforming the Reforms: Why the Patient Protection and Affordable Care Act Will Require Substantial Reform
The President’s diagnosis of the problem is accurate; it is the treatment that is fatally flawed.

Paul Howard
Missouri Medicine
March 17, 2011

On September 9, 2009, President Obama spoke to Congress on the topic of health care reform and said that, "I am not the first President to take up this cause, but I am determined to be the last." Although the president was later successful in signing the Patient Protection and Affordable Care Act into law in March 2010, virtually no serious observer of America's medium and long-term fiscal situation believes that the Affordable Care Act (ACA) has solved the nation's health care woes. Many critics argue that it has; in fact, it made them substantially worse. Far from being the "last president" to take up health care reform, reforming the Affordable Care Act will undoubtedly fall into the lap of one of President Obama's successors.

President Obama and his advisors accurately framed the central challenge of health care reform as "bending the curve" of sharply rising health care costs. Without significant reforms, rising employer health insurance premiums will continue to sap business capital and erode employee take home pay. Smaller businesses will drop coverage as insurance becomes unaffordable, leading to an ever growing number of uninsured. Entitlement spending for Medicare and Medicaid will swamp state and federal budgets, threatening economically crippling tax increases or devastating spending cuts. The President's diagnosis of the problem is accurate; it is the treatment that is fatally flawed.

The Affordable Care Act contains what Massachusetts Institute of Technology (MIT) economist Jonathan Gruber calls (approvingly) a "spaghetti approach to cost control."[1] This includes a grab-bag of Medicare pilot projects and payment reforms including Accountable Care Organizations, bundled payment systems, and pay-for-performance initiatives. The strategy, insofar as it can be called a strategy, is to throw "a bunch of stuff at against the wall [to] see what sticks."

The problem with this approach it that ignores the myriad unintended consequences that are sure to follow from rapidly expanding costly insurance regulations and subsidies in a system that is already enormously expensive and riddled with government price controls that distort how physicians and hospitals practice medicine. The Affordable Care Act also left virtually untouched the employer tax deduction for health insurance, which economists broadly agree drives up health care inflation by making health care seem "free" to employees.[2]

The administration made a strategic choice to focus on coverage expansion first, as opposed to implementing systematic and verifiable cost control and quality improvement programs. As a result, the Affordable Care Act has not done nearly enough to address the challenge of "bending the curve." Just two months after the Affordable Care Act passed, the director of the Congressional Budget Office (CBO) noted that: "Rising health care costs will put tremendous pressure on the federal budget during the next few decades and beyond. In the CBO’s judgment, the health legislation enacted earlier this year does not substantially diminish that pressure." [3]

Still, it has been endlessly repeated that the Affordable Care Act will actually reduce the deficit by a small amount in its first ten years and by trillions of dollars thereafter. How is this circle squared? To get some sense of how the Affordable Care Act plays out from a programmatic perspective, see Figure 1, take from CBO Director Douglas Elmendorf's presentation to the Institute of Medicine last May.[4]

The federal government is clearly committed to spending hundreds of billions more on Medicaid, the State Children's Health Insurance Plan (or SCHIP), and new subsidies for middle- and upper income-uninsured to buy health insurance on newly created state health insurance exchanges in 2014.

How then is it possible for the CBO to score the Affordable Care Act as reducing the deficit by about $143 billion in its first decade (including $19 billion from its education related provisions)? The CBO notes that the federal government will spend about $401 billion more on health care programs in the Affordable Care Act's first decade, but also increases federal revenues, through taxes and fees, by an even greater amount, $525 billion.[5]

Consequently, over half-a-trillion dollars will be shifted out of the private economy and directed towards new health care obligations. Not only will this hinder private sector job growth and innovation, but the funds are also lost for any future deficit reduction efforts. Estimates that the Affordable Care Act reduces the deficit by $143 billion seem modestly reassuring, but only if we ignore the fact that we are shifting substantial new revenues from non-health care sources to meet new health care obligations—hardly "bending the curve" by any plausible definition.

The passage of the ACA also set a new low in Washington's perennial fiscal shell games. First of all, the legislation double-counts $53 billion in Social Security payments and $70 billion in premium payments for a new long-term care insurance program as revenues. It also ignores $115 billion in estimated "implementation costs" that the CBO believes will be required to get the program up and running.

Many more problems loom just over the horizon. The infamous "doc fix" for the sustainable growth rate (SGR) formula under Medicare threatens large cuts to physicians fees every year. Congress passed the latest SGR patch in December and deferred cuts for 2011, without offering any permanent resolution. Ultimately the SGR has to be addressed, but the fiscal cost is staggering: estimated at $276 billion over 10 years. The CBO also estimates that costs for the new insurance subsidies and Medicaid expansion under the Affordable Care Act will grow by about 8% annually beginning in 2019.

Defenders of the Affordable Care Act may concede that the near term prospects for the bill to control costs are poor. Instead, they point to the increased savings in the second decade of the legislation, and to the 2010 Medicare Trustees report, which estimates that the Affordable Care Act will extend Medicare's hospital insurance trust fund an additional 12 years (from 2017 to 2029), and cut trillions from Medicare's long-term expenditures.

The problem is that these figures all assume that Congress will tolerate large cuts to payments for Medicare providers or that such cuts will have no effect on the services for Medicare beneficiaries. In a first, the office of the Medicare Actuary published what amounted to a dissent from the 2010 Trustees report noting that:

"...the financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations… the statutory reductions in price updates for most categories of Medicare provider services will not be viable."[6]

Medicare actuaries estimate that by 2019, Medicare payment rates would be lower than those currently paid for Medicaid (which already pays providers much less than private insurance). In the long run, Medicare payments would dip to "one-third of the relative current private health insurance prices and half of those for Medicaid," according to the actuaries' memorandum. Under these projections, a full 15% of Medicare providers would be unprofitable by 2019, 25% by 2030, and 40% by 2050.[7] Needless to say, it is unlikely that Congress would actually allow these cuts to go into effect, since they would have dire consequences for Medicare beneficiaries.

Given the sharp and unpredictable fiscal risks that the Affordable Care Act imposes on the federal budget, a second of round of reforms is inevitable. The only question is whether they will be enacted before the U.S. faces a fiscal crisis or in the midst of one. The sooner real reforms are implemented, the less painful they will be.

What approach should a future Congress and President take to put the U.S. health care system on a sustainable path without forcing draconian cuts in patient access or strangling medical innovation?

Tax reform should be the first order of business. Policymakers must replace the current open-ended employer deduction with a fixed individual deduction or a flat tax credit for the purchase of at least catastrophic health insurance. Low income uninsured and Americans with serious pre-existing conditions should receive more help. Policymakers should also focus on fundamental Medicare and Medicaid reforms. A good place to start is the bipartisan Ryan-Rivlin plan proposed by Congressman Paul Ryan and Clinton budget expert Alice Rivlin.[8]

Health insurance markets should also receive a powerful dose of competition: either through pure interstate insurance sales or through an optional federal charter for health insurance.[9] One study commissioned in 2008 by the Department of Health and Human Services found that the number of uninsured Americans could be reduced by eight million simply through effective interstate insurance sales.

Well-funded and well-designed high risk pools could provide a solution for the chronically ill who cannot currently afford insurance at market rates, without distorting the entire market through community rating and guaranteed issue regulations. Finally, the states should be encouraged to experiment with additional innovations. Reforms in Utah, Massachusetts, and elsewhere should be allowed to flower or fail before the entire nation is committed to one state’s work in progress. Finally, we should face the reality that there is no administrative "silver bullet" for fixing health care. Every wealthy country is faced by the triple challenge of aging populations, rapidly advancing health care technology, and a shrinking workforce to pay for it. Individuals will need to assume more responsibility for their own health and plan for long-term health care expenses that will accrue with a substantially lengthened lifespan. As a society, our assumptions about health and work will have to adapt to these new realities.

Longevity is a blessing, but we can no longer assume that programs created in 1965 will meet the new health care realities of the 21st century.

Our current health care arrangements have many flaws, but we should not lose sight of the many blessings that come from the life saving and life lengthening technologies generated by the U.S. health care system. Reforming the reforms is our next task, one that I hope we will approach with more sobriety and less partisanship than has been our recent experience.


This manuscript is based on a talk given to the Metropolitan Medical Society of Greater Kansas City at its Annual Meeting, October 27, 2010.


1. Cost Questions Could Lead to Further Debate on Health Care Reform. California Healthline, April 26, 2010.

2. It does contain a 40 percent excise tax on "Cadillac" health plans. However, after intense lobbying by unions the Obama Administration delayed the implementation of this tax until 2018—long after the president will have left office. Whether any future administration or Congress will allow this tax to actually go into effect is an open question. See Health care reform bill summary: powerful tax bombs, delayed fuses, Christian Science Monitor, March 23, 2010.

3. Douglas Elmendorf, Director, Congressional Budget Office, Presentation to the Institute of Medicine, Health Costs and the Federal Budget, May, 26 2010. Slide 2. Available online at

4. Ibid, slide 5.

5. Congressional Budget Office, The Budget and Economic Outlook: An Update. August 2010 (p. 6).

6. 2010 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. "Statement of Actuarial Opinion", p. 282. Available online at downloads/tr2010.pdf.

7. Projected Medicare Expenditures under an Illustrative Scenario with Alternative Payment Updates to Medicare Providers. Centers for Medicare and Medicaid Services, Office of the Actuary, August 10, 2010 (p. 6). Available online at

8. A Preliminary Analysis of the Rivlin-Ryan Health Care Proposal, Congressional Budget Office, November 17, 2010. Available online at

9. For one cogent view of the problems in this sector, along with a proposal for some reforms, see David A. Hyman, Health Insurance: Market Failure or Government Failure? Connecticut Insurance Law Journal, 2008. Available online at

home   spotlight   commentary   research   events   news   about   contact   links   archives
Copyright Manhattan Institute for Policy Research
52 Vanderbilt Avenue
New York, NY 10017
(212) 599-7000