The Obama administration’s remake of the U.S. health care system stands on three legs. One, it makes the purchase of insurance compulsory. Two, it doles out new entitlements via expanded Medicaid, subsidies, and certain coverage requirements.
And three, it promises to control the growth of medical costs. These three parts differ in their implications and prospects. The first leg may give way altogether; the second is partially already in place; the third provides the rationale for centralized allocation of resources in health care.
This summer the Supreme Court is to decide on the constitutionality of the 2010 Patient Protection and Affordable Care Act, which faces various challenges to its thousands of sections. Moreover the centerpiece challenge to the individual insurance mandate may invalidate other provisions as well. In fact the uncertainties extend well beyond the Supreme Court decision and its consequences. Not only the results of the 2012 presidential election but also congressional and state elections may result in changes to the law or to the way it is applied.
The individual mandate is interlinked with the state insurance purchase exchanges required by the law. If the Supreme Court finds the individual insurance mandate unconstitutional, the exchanges will have fewer customers and higher costs. Conceivably some form of exchange could survive as an insurance market for small businesses. Firms are required to make a contribution toward employee insurance if they have 11 or more employees—this employer mandate could endure even if the individual mandate does not.
By comparison there is greater certainty about the second leg of the restructuring. For instance the requirement that parents’ insurance cover young adults until age 26 has already been put in practice and is unlikely to be reversed. That is, health care entitlements are expanding regardless of the Supreme Court decision and election outcomes. It was obvious from the start that this expansion necessitated and yet clashed with the goal of cost containment.
The title of the 2010 law proclaims affordable care as its aim, and commentators such as New York Times columnist Paul Krugman have cited a Congressional Budget Office prediction that the act will keep down costs and thereby help reduce the federal budget deficit. This claim, not very credible to begin with, looks even dodgier now that we start to see the initial impact of the coverage requirements.
Immediate Cost Increases
Much of the law will not go into effect until 2014. The insurance coverage requirements that have been put in place already, though, have increased its cost. A Kaiser Family Foundation survey shows that family premiums went up by 9 percent from 2010 to 2011, compared to a significantly lower 3 percent increase from 2009 to 2010.
To be sure, Obamacare requirements such as the enrollment of millions of adults in their parents’ plans account for a fraction of the recent increase. But this is only the beginning of the law’s implementation. Higher premiums inflate business costs and at least in part are passed on to workers. The government attempted to limit the growth of insurance premiums through regulatory measures, such as requiring insurance companies to spend less on administration. But those measures will be exhausted as growing demand pushes up medical costs and hence the price of insurance.
While insurance coverage requirements show up as premium increases for individuals and businesses, the other major new entitlement, wider Medicaid eligibility, puts an added burden on taxpayers. This expansion will require many states to spend significantly more on Medicaid at a time when government finances are precarious. In 2014 general revenue Medicaid expenditures will be 22 percent higher in Illinois, 13.5 percent higher in Texas, and 9 percent higher in Florida, according to estimates by Jagadeesh Gokhale of the Cato Institute. The increases are in addition to already expected increases.
The federal government is supposed to pay the full cost of the Medicaid expansion the first three years but this support may falter given large and persistent federal budget deficits. The states understandably don’t want to be left holding the bag for the Affordable Care Act—and so the Supreme Court will hear their challenge to the Medicaid expansion.
Cost Containment and Rationing
Who is to pay is one big question; the other is how much. Liabilities have been created, with some entitlements already effective and others to come. If the cost turns out to be unexpectedly large, American health care will be in worse shape. Without effective cost containment, in time the expense of the entitlements, including insurance coverage requirements, will put a growing burden on insurance buyers and taxpayers. State and federal budgets will be squeezed even more than they already are by Medicaid and Medicare. Hence the third aspect of the new system, cost containment, is key to its viability.
The law entrusts this mission largely to federal bureaucrats. To control the long-term growth of costs, health care use is to be subject to central direction. The Department of Health and Human Services (HHS) has started to define “essential” medical goods and services to be covered by the insurance exchanges run by states. However, recently the administration modified the plan, as we will see below.
To understand the full implication of rationing, consider Britain’s National Health Service (NHS), the government system through which most health care is provided in that country. The NHS keeps down costs by limiting access to certain resources such as specialist physicians. Health care is rationed in this sense within the national system. People can go outside the system and purchase what they wish in private transactions, but very few do since they already pay for the NHS via taxes. And of course modern medical technology is expensive. If the NHS does not allow for a test or a visit to a specialist, then most people do without.
The United States is moving in a similar direction by determining what insurance should and should not cover. While outside the exchanges private insurers will presumably be free to diverge from the defined package, to offer less coverage would be to invite legal challenge. Most insurers will likely gravitate to the package, so its effect will go well beyond the exchanges.
Advocates of expanding the government’s role in health care, such as Donald Berwick, head of the Centers for Medicare and Medicaid Services through 2011, say private insurance companies ration access already and it is better for the government to do this. Markets in effect ration goods and services by making them available only to those able and willing to pay. What Obamacare facilitates is political rationing.
(Politically) Essential Health Care
Last October the Institute of Medicine of the National Academies produced a report on how to go about defining “essential” health care. The Institute’s committee recognized that two competing goals are involved: “to provide health insurance coverage for a wide range of health needs and to make it affordable. If it was not affordable, then many people would not be able to obtain it, even with government help, and this would conflict with the purpose of the Affordable Care Act.”
The report uses the metaphor of grocery shopping. The committee recommends starting with “a firm idea of what you can spend and to fill the cart carefully, with only enough food to fit within your budget.” Any new item added to the cart has to be within the budget, keeping in mind what small businesses and their employees can afford, as well as medical necessity. Once the cart is as full as the budget allows, adding a new item requires removing an item.
Recall that the relevant shopper here is not you or me. It is mainly HHS that’s deciding what to put into the health care cart. However, we’ll be paying at the checkout as taxpayers and consumers. Meanwhile the department is expanding to perform additional functions.
The Institute of Medicine puts the veneer of expertise on this health care rationing. You can scream, “Death panel!” but the real eye-opener is how the “essential” package is already being shaped. The law and the administration mandate certain benefits that were not part of a typical insurance plan. These specific requirements are in addition to broad mandated categories like preventive services and hospital care.
Thus HHS Secretary Kathleen Sebelius has decreed that insurers are required to pay for birth control, including contraceptive drugs, devices, and procedures. The administration says this is based on science under the law’s mandate for preventive care. A religious institution—say a Catholic charity—can get an exemption, but not if it employs a number of non-Catholics. In that case it has to finance employees’ birth control pills even if this violates the organization’s religious principles. Catholic groups want greater flexibility in the exemption, but congressional Democrats oppose this.
In other words, coverage is required for some products and services while others are left vulnerable to being removed from the cart. More money for contraception, less money for something else. These are political decisions. Why did politicians prequalify contraception as essential and thus protected while other services have no such status? Women are relatively heavy users of medical services and pay more attention to health care than men do, so politicians can get votes—as well as campaign donations from product suppliers—by appealing to women.
For the makers of contraceptive drugs and devices, the coverage requirement is worth a lot of money because it will encourage people to buy more expensive products rather than use the cheap contraceptives widely available in drugstores. With the insurance coverage requirement, the consumer won’t be paying the price.
But this is also part of an ideological package that favors creating special privileges for groups officially regarded as victims. The law gave women’s health its own bureaucracy within HHS, headed by a deputy assistant secretary with a brief to establish objectives for issues of concern to women and provide advice, information, coordination, and other assistance to the rest of the bureaucracy. I found no corresponding Office of Men’s Health, although in fact men die earlier than women and hence presumably have more urgent need for attention to their health issues. Men’s health problems are evidently not a political and ideological winner.
Last December the Obama administration announced it will let each state determine the essential benefits that insurance policies sold on the state exchange will have to cover. This sounds like a major change but in fact the states remain subject to myriad requirements. The categories specified in the law and by HHS have to be covered. In effect the law and the federal government have decided most of what will go into the shopping cart, but for now the states are to be allowed to adjust around the edges.
This presumably defensive move by Obama as the presidential election approaches makes the situation more fluid and uncertain. The states will bear the brunt of complaints if they do not cover a certain benefit. Conversely states risk spiraling costs if they make their mandates generous. The federal government faces less political fallout and can impose further requirements once the election is over. For the administration the politics work out nicely.
Whether at the state or the federal level, the best guess is that ration-proof status will go to services of interest to suppliers or consumers with strong political influence. Health care companies had the second largest average political spending per million dollars of revenue among S&P 500 corporations in 2010, according to a study by the Investor Responsibility Research Center. Only utilities spent more on lobbying by that standard. Health care is becoming a utility, as was pointed out in the run-up to the act.
What’s being established is a heavy regulatory overlay that covers almost all aspects of health care—the law ranges from general mandates to a specific program of nutrition and exercise planning at community health centers. One could describe the Affordable Care Act as a giant reallocation scheme that will channel resources from other uses to medical industries and within health care to favored areas. Suppliers of goods and services want to maximize their share of the new entitlements on the one hand and, on the other, minimize the impact of cost controls on their businesses. All medical providers lobby to channel more goodies their way—everybody is certain his services and products are essential. But some lobby more effectively or with more resources. By all evidence this mode of operation will continue.
What Obamacare will do to medical costs is at best uncertain, with the expanded coverage and Medicaid eligibility pushing up expenditures while cost containment devolves on the less politically protected. That Obamacare has raised the income of lobbyists is clear, the President’s protests against them notwithstanding.
Some people prefer political rationing to free markets. Perhaps they honestly believe politicians and bureaucrats make better choices than the numerous players that constitute a competitive market. Or perhaps they themselves are likely to do better under government rationing. But do they really want their medical options dictated by the lobbying success of this or that interest group? Because that is what happens in the political allocation of resources, whatever the pretense of science-based decision-making.
Chidem Kurdas is a financial journalist and economist in New York. She writes about investing for HedgeFundSmarts.com and about policy for ThinkMarkets.com.
Copyright © 2012 Foundation for Economic Education. Used with permission.