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Financial Impact of Health Care Reform: Making Sense of Conflicting Reports

As soon as President Obama signed the Patient Protection and Affordable Care Act, the administration, members of Congress who voted for the legislation, and key interest group began the campaign to “sell” the new health care reform law to a skeptical public.

Arguably, these efforts were made a bit more difficult when, on April 22, the Office of the Actuary for the Center for Medicare and Medicaid Services (CMS) issued a report concluding that the new law would increase national health expenditures $311 billion between 2010 through 2019, an increase of about one percent. On May 11, the Congressional Budget Office (CBO) followed this with a report that the health reform law would cost the federal government $115 billion more than originally projected. Both reports, however, conclude that the new law is still expected to reduce the federal deficit and extend the life of the Medicare Trust Fund by an additional 12 years.

Understandably, the new reports have generated confusion because people wonder how the law is able to reduce the deficit and extend the life of the Medicare Trust Fund while increasing health spending. The answer to this apparent contradiction is that CBO projections focus only on the direct implications for the federal budget, and revenue and expenditure projections under the new law would reduce the deficit. The CMS Actuary, in contrast, examined total national health expenditures, including spending that are not reflected in the federal budget. Furthermore, unlike the CBO, the CMS Actuary did not consider revenue estimates, nor did he focus on the implications of the law for the federal budget. As Drew Altman, president and CEO of the Kaiser Family Foundation, explains, they were asking different questions.

As expected, opponents and proponents of the new law used these reports to bolster their case, each emphasizing some of the conclusions while ignoring others. Republicans argued that these projections are evidence that the new law will lead to fiscal doom and threaten access for Medicare beneficiaries and people who currently have health insurance coverage. The administration and its allies emphasized the implications for the Medicare Trust Fund, projected decreases in Medicare premiums, and the expansion of health insurance coverage to more than 30 million Americans.

Because the law includes a host of new taxes, reduces payments to Medicare Advantage plans, reduces the update factor for Medicare hospital reimbursement rates (a formula used to adjust these rates based on factors that affect the cost per discharge for Medicare beneficiaries), and delays implementation of coverage expansions for several years, the law would reduce the deficit and extend the Medicare Trust Fund. Are these provisions likely to be implemented as written? On the one hand, despite the assumption that it is politically impossible to cut the Medicare program, the Congress has actually done so frequently. On the other hand, history suggests some of the cuts may be politically vulnerable.

Rates paid to Medicare Advantage, for example, represent a significant source of savings and have been cut before, when the government found that the rates were not sufficiently “risk adjusted” and plans were making a profit by enrolling beneficiaries that were, on average, healthier than those in the traditional Medicare program. Proponents of rate cuts say that they would not reduce service to Medicare beneficiaries, but merely eliminate profit taking by insurance companies (and no one likes insurance companies).

If the rates are cut, plans may decide (once again) to stop participating in the program. In the past, this produced pressure to increase the rates. Since one quarter of Medicare beneficiaries are now enrolled in Medicare Advantage plans — and there is an ideological commitment among several members of Congress to maintain “choice” in the Medicare program — it seems likely history will repeat itself.

Although there are questions about whether the law, as implemented, will reduce the deficit, most agree that it does little to restrain the growth of medical technology and the health care inflation rate. Jonathan Gruber, of MIT, argues that the so-called “Cadillac tax” on high cost insurance plans will encourage people to “shift into lower-cost insurance options in order to avoid paying the tax, thus reducing national health care expenditures.” The claim that the tax will create a powerful incentive for employers to shift costs to employees, and for employees to buy less health insurance coverage, is correct. The assertion that this will lower costs is not. Cost-shifting to employees will not help us “bend the cost curve.”

None of the other aspects of the law are likely to reduce costs either. Investments in comparative effectiveness research, the expanded use of electronic medical records, and better coverage for preventive services may all improve the health care system and produce good “value for money,” but these efforts are unlikely to reduce the price of health care or restrain its use.

Why does the new law do so little to reduce spending? In part because President Obama did an admirable job of learning lessons from past defeats, particularly the Clinton health reform failure. A variety of forces led to the defeat of the Clinton plan, but a contributing factor was the proposal for a “backstop cost-control mechanism” that could cap total expenditures within a given year. This feature helped to generate a favorable “score” by the CBO and was consistent with the Clinton administration’s focus on reducing the deficit, but it generated opposition from many groups who felt threatened by enforceable cost control measures.

In contrast, the Obama administration limited opposition from powerful groups by endorsing a plan that minimized threats to the incomes of those who benefit from the existing system. Compared with the Clintons, the Obama administration moved quickly, involved members of Congress in the process, and co-opted as many potential opponents as they could. The price of co-opting these opponents was limiting serious cost control.

Would it have been possible to enact a law that did more to constrain costs? Perhaps, but the administration clearly did not believe so. As Gruber argues, “the increases [in spending] are quite small relative to the gains in coverage under the new law.” He is right — but the health care inflation rate is a real problem and this law does not address it. Unfortunately, the strategy that helped overcome a century of legislative failure and frustration raises questions about the long-term success of health reform. Without creditable efforts to control the health care inflation rate, premiums for decent health insurance will not be affordable for many Americans.

During the next several years, the country will face difficult choices. Will we finally act to restrain the growth of medical technology (most of which cannot be eliminated by cutting “waste” and “ineffective” care)? Will we continue to spend an ever growing percentage of resources on health care (eventually at the expense of other national priorities)? Or will we reverse the historic gains in access to health insurance reflected in the new law?

Michael Gusmano is a research scholar at The Hastings Center who specializes in health policy.

Published on: May 17, 2010
Published in: Health Care Reform & Policy

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