Thursday, December 15, 2016

The health care law was supposed to bend the cost curve. It didn't.

See How the Affordable Care Act Failed by Mark Warshawsky of Mercatus.
"The main motivation for the Affordable Care Act initially stated by President Barack Obama was to "bend the curve": to slow the rapid growth in health care spending that the United States has experienced for the last several decades. Subsequently, the stated primary motivation for the law has shifted to increasing insurance coverage, but the White House (mainly through its Council of Economic Advisers) has still tried to claim in the last couple of years that it has been having a favorable effect on slowing the growth of health care spending and prices. Indeed, this latter policy reason has always been the more sensible one for health reform on political and economic grounds.
The vast majority of Americans have always been well covered by health insurance – either through their employer or the government – and those who were not covered were either eligible for coverage (e.g., through Medicaid or individual insurance) but opted out, or got medical treatment through out-of-pocket payment, charity care or other means. But the rapidly rising cost of health insurance and health care has increasingly and severely impinged upon all working households, retirees, businesses and governments – lowering labor earnings, hitting middle-class workers particularly hard, increasing inequality, reducing spendable resources, increasing government deficits, and crowding out other government spending, while having uncertain benefits, at the margin, of improving health outcomes.

Therefore it is worth examining whether the Affordable Care Act is succeeding according to the original and still relevant assertions of its designers and advocates. Recent data gives a strongly negative answer.

Consider in the first instance the just released annual report from the Centers for Medicare and Medicaid Services on national health spending. In 2015, total health spending increased 5.8 percent; on a per-person basis, it increased 5 percent, reaching $9,990. This follows five years of historically low growth (2009 through 2013), likely caused by the recession, but 2014 also saw a pick-up in spending growth, at 5.3 percent. These recent rates of increase have outpaced economic growth; whereas health spending as a share of GDP had stabilized at an average of 17.3 percent in the early part of the decade, it rose to 17.4 percent in 2014 and jumped to an all-time high of 17.8 percent in 2015.

Stated another way, we are now spending nearly one out of every five dollars of our national income on health care, far in excess of other developed countries. Although increased spending by the federal government is largely explained by the expansion of Medicaid and exchange subsidies coming directly out of the health care law, spending on health care also increased rapidly in 2015 in the household and private business sectors, with negative implications for take-home pay and spendable resources. Household spending, including out-of-pocket spending, contributions to private health insurance premiums and to Medicare through payroll taxes and premiums, increased 6.9 percent in 2015, after declining in 2014. Growth in spending by businesses (mainly contributions to employer-sponsored private health insurance premiums) increased 5.3 percent in 2015, up from 4.7 percent in 2014. In summary, we see here strong evidence for an unbending of the curve.

Another recent report, focusing on employer-sponsored insurance for Americans younger than age 65, also shows that health care spending and prices are increasing again. The Health Care Cost Institute gets its data directly from the four largest health insurers in the nation. It finds that in 2015 spending per capita increased by 4.6 percent, much faster than the prior year's growth of 2.6 percent. The increases were widespread across different demographic groups, regions and service categories, but were higher for younger people, in the Northeast, for outpatient visits and, especially, prescription drugs.

Health care cost growth can be decomposed into changes in the number of services provided ("utilization") and prices paid for services. Utilization of health care services actually decreased or increased modestly across categories of health care services in 2015, but prices increased by 3.5 percent for outpatient and professional services, by 6.6 percent for acute inpatient and by 9 percent for prescriptions. Even adjusting for intensity – that is, more complexity of services – prices increased by 2 to 4.5 percent, much in excess of general price inflation. Again, we gain an impression of health care spending and prices rising beyond our national and personal means, despite, or even because of, the Affordable Care Act.
Finally, let's look at increases in medical care prices, compared to general consumer price inflation, as measured by the Bureau of Labor Statistics. The graph below charts out the 12-month percentage change in medical care prices (blue) and general consumer prices (red) over the last 10 years. We see the big drop in general inflation owing to the Great Recession in 2009, and again in 2015, owing to the decline in the price of gasoline. Medical care price inflation, although showing some slow-down in 2013, has picked up noticeably in 2015 and 2016, and is now running at about 5 percent, even as general price inflation is about 1.5 percent.

Mercatus Center at George Mason University

These recent statistics are highly damaging to the original and reasonable motivation for the Affordable Care Act – to bend the health care spending and cost curve downwards. In fact, we now seem to be going in the opposite direction, perhaps because the extra tens of billions of dollars being expended by the federal government on health care are adding fuel to the fire. The incoming Trump administration, in addition to repealing the health care law, would be wise to design health policies that will slow the growth in health insurance premiums and health care costs, thereby increasing worker take-home pay and spendable resources for all Americans and reducing government spending and deficits."

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