A Misleading Debate on Health-Care Costs

Published December 11, 2014

National Review Online

David Leonhardt of the New York Times has offered up a misleading defense of the Affordable Care Act (ACA) — i.e., Obamacare. Like several others, he celebrates the slowdown in health-care-cost escalation and suggests that the ACA is one reason for the deceleration. Specifically, he suggests that keyACA provisions — which he describes as nudging “the health care system away from paying for the quantity of medical care rather than the quality” — have already played a role in making the health system better and more efficient.

It would be an effective argument for the ACA if it were true. Unfortunately, it isn’t.

Leonhardt is responding to the recent government announcement that national health spending rose 3.6 percent in 2013. That’s certainly a low growth rate — well below the long-term trend over the past several decades. But it isn’t a trend that began with passage of the ACA.

In 2001, national health spending rose 8.5 percent. The following year it rose 9.6 percent. But then the annual growth rate began to drop, and by 2008 health spending was rising just 4.8 percent. Put another way, the growth rate of national health spending was cut in half during the time of the Bush presidency. Did the ACA cause this?

In the first two years of the Obama administration, health spending growth remained moderate. In 2009, health spending rose just 3.8 percent, and in 2010 it rose 3.9 percent. The ACA wasn’t enacted until March 2010.

The primary explanation for the slowdown in recent years is the deep recession of 2007 to 2009 and the slow recovery that followed it. The government’s top actuaries and economists have repeatedly made this point when presenting the official data and forecasts. Indeed, the slowdown in health spending in recent years is consistent with the observed relationship between national health spending and the state of the economy over the past half-century.

If there is any discernible long-term trend underway (and it is not yet clear that there is), it predates the ACA by several years, to about 2003. That’s when annual national health-spending escalation began to trend downward. By far the most important development in the health system during that period was the move toward higher-deductible health plans, particularly in the employer context. The 2003 Medicare prescription-drug legislation included a substantial liberalization of health savings accounts (HSAs) that made it much easier for firms to convince their workers to accept more responsibility for upfront medical expenses. According to insurance-industry data, enrollment in high-deductible plans with HSAs rose from just over 1 million people in 2005 to 17 million in 2014.

But what about the ACA’s “delivery-system reforms.” Is it plausible that they are a recent source of systemic cost-cutting, as ACA advocates claim?

Here it is necessary to more precisely explain what ACA defenders mean when they say “delivery-system reform.” The ACA included several provisions aimed at using Medicare’s purchasing power to push doctors and hospitals and those who work with them – the “delivery system” — to reorganize how they take care of patients. Among the most frequently mentioned reforms is the Medicare Accountable Care Organization (ACOs) effort. ACOs are a bit like HMOs, except the insurance component is not required. Doctors and hospitals are supposed to agree to work together to “manage care” for Medicare patients. They get paid just as they normally would under Medicare, but if they are able to cut Medicare costs by reducing use of services by their ACO patients, they get to share in half of the savings from the Medicare program.

CBO examined the ACO concept when the ACA was enacted and concluded that it would save a grand total of $4.9 billion over the period 2010 to 2019 (and that is likely to be too high, given the program’s rough start). To put that into perspective: Medicare will spend about $6.4 trillion over the same ten-year period. So, despite the incessant hype, ACOs are expected by CBO to be a minor event in the nation’s health system, with savings amounting to just 0.07 percent of total Medicare spending. CBO came to similar conclusions about the other heavily touted “delivery system” reforms in the ACA, such as penalizing hospitals for readmitting previously discharged patients and the effort to encourage more “bundling” of payments to cover all of the providers involved in an episode of care.

It is beyond implausible to claim that these provisions — barely out of the gate in 2012 and 2013, and viewed by CBO as modest adjustments at best in an immense and complex health sector — have already begun to fundamentally transform how care is delivered and thus bend the cost curve. But that is the impression that ACA advocates are trying to create by connecting, however vaguely, news about a slowdown in national health spending growth with the ACA’s “reforms.”

Far more consequential are the blunt, across-the-board cuts in Medicare used to finance the ACA’s large spending commitments. Indeed, it is these cuts that the actuaries and economists who produce the national health-spending statistics cite as one reason for slower Medicare spending growth over the past couple of years.

The largest of the Medicare cuts is the “productivity adjustment factor” for hospitals and other facility payments. This provision limits the annual inflation update paid to inpatient institutions by the Medicare program. On average, the cut will amount to just over 1 percent every year. The compounding effect of this reduction will be very significant, driving Medicare payments in coming years far below what private insurers will be paying for the same services. Indeed, the cut is so deep that the actuaries who assess Medicare’s finances believe it will drive large numbers of hospitals out of the Medicare program altogether and thereby impair access to care for the program’s participants. Is that “delivery-system reform”?

Despite what ACA proponents claim, the law has not ushered in a new era of more-efficient American health care. There are longstanding trends underway in the health system that predate the ACA, and these will likely continue even if the ACA is replaced with an alternative reform. Moreover, the ACA’s most important provisions — large new subsidies for third-party insurance — did not become effective until this year. At some point, these subsidies will put upward pressure on health costs and prices. And when they do, it will become clearer to everyone that the ACA’s “delivery-system reforms” did not produce a painless health savings “dividend” that was sufficient to offset the large cost increases associated with the vast expansion of  federal entitlement commitments contained in the ACA.

— James C. Capretta is a senior fellow at the Ethics and Public Policy Centerand a visiting fellow at the American Enterprise Institute.

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