No matter who wins, there’s still a healthcare cost crisis
One of the strangest aspects of the 2012 presidential campaign is that President Obama has barely bothered to make the case for the Affordable Care Act (ACA) and Mitt Romney has only rarely summoned the will to make the case against it. This is despite the fact that ACA is arguably the most consequential domestic policy legislation since 1965, when President Johnson presided over the creation of Medicare and Medicaid.
The usual explanation for why we haven’t had a serious debate over ACA is that Democrats recognize that the law is not wildly popular and that Romney is boxed in by his continued support for the universal coverage law he backed as governor of Massachusetts. All of this may well be true. But the foundations of America’s patchwork health system are unraveling before our eyes, and conservatives need to make the case for a more cost-effective reform sooner rather than later.
It is commonly understood that the United States spends an incredibly large amount of money on personal healthcare – the number was $2.19 trillion in 2010 – and that health spending is increasing rapidly as a share of GDP. A high level of health spending isn’t necessarily a bad thing. It makes perfect sense that an affluent country will spend a great deal of money to keep its citizens healthy, and medical care is a complex service that demands a lot of skilled labor.
What is worrisome is that the cost of medical care seems to be outstripping our ability, and more to the point our willingness, to pay for it. We tend to think about this in the context of the dramatic growth of Medicare and Medicaid spending, and understandably so. There is virtually no elected official, Democrat or Republican, willing to support the tax increases we would need to pay for these programs at their current growth rates, which is why the Obama White House and congressional Republicans alike have called for aggressive, and some would say unrealistic, cost controls.
Yet the clearest indication of our unwillingness to pay for rising health costs is the slow-motion collapse of employer-sponsored health insurance (ESI).
Though we tend to think of ESI as “private” coverage, the chief reason it is so prevalent is that it is subsidized by a tax exclusion that was worth $260 billion in 2010 – a tax exclusion that individuals buying their own health insurance do not enjoy. Even with this tax subsidy, however, a growing number of employers are deciding that sponsoring health insurance coverage is a bad bet.
In 2000, 69.2 percent of Americans under 65 were covered by ESI. By 2010, that number had fallen to 58.6 percent. To put that in raw numbers, we went from 169 million Americans with ESI to 157 million. The decline of ESI has been particularly pronounced among low-income workers, for whom the tax exclusion is not nearly as valuable as it is for high-income workers.
One of the main reasons for ESI’s decline is that the rising cost to employers of sponsoring health insurance coverage is crowding out wages and other benefits. Some big companies, like Sears and Darden Restaurants, are trying to salvage ESI by shifting to a strategy of offering workers a fixed sum of money to purchase insurance on an exchange, and this might make a difference.
But ESI is clearly in trouble, and an increasing number of Americans have been forced to seek health insurance from outside its protective umbrella. Some low-income workers have turned to Medicaid, which has seen enrollment increase from 33.3 million in 2000 to 54.6 million in 2010. This expansion may in turn have encouraged at least some low-wage employers to drop coverage. A small but growing number of non-elderly Americans have turned to Medicare. While Medicare is generally understood to be a program for the old, it also provides medical care for the disabled. In 2010, Medicare spent $59 billion – well over a tenth of its total budget of $525 billion – to provide medical care for Social Security Disability Insurance (SSDI) beneficiaries. SSDI enrollment has skyrocketed, going from 5 million in 2000 to 8.2 million in 2010. As the MIT economist David Autor has argued, at least some of this increase can be attributed to the shriveling up of labor market opportunities for less-skilled workers.
The many Americans who don’t qualify for Medicaid or Medicare, meanwhile, have been forced to navigate the often confusing and intimidating individual insurance market, where subsidies are scarce and people with pre-existing conditions can face frighteningly high insurance premiums. And so ESI’s decline has created a tremendous demand for health insurance options that offer all the benefits of job-based coverage, like the low premiums that come from being part of a big risk pool, without keeping workers shackled to a particular job.
Health reformers on the right and left have spent decades puzzling through how to address this extremely tricky problem. The main advantage of job-sponsored coverage is that a large business enterprise is relatively easy to hold together, and it’s a fair bet that it will include the relatively young and healthy as well as the relatively old and sick. Although some firms vary premiums by age or income, most ESI is community-rated, requiring the younger, healthier and generally poorer employees to subsidize their older, sicker and generally wealthier co-workers. However, healthy employees are unlikely to leave a job just to get a lower health insurance premium.
Holding together a pool that is not united by employment at a single company is much harder, as the young and healthy aren’t likely to want to subsidize the cost of insuring the relatively old and sick. If the government nevertheless wants to hold together such a pool, it must either offer generous subsidies, impose an individual mandate, or both.
And that, in essence, is what the architects of the Affordable Care Act decided to do. As Douglas Holtz-Eakin, president of the right-of-center American Action Forum, explained in an interview, the ACA has in essence created “a second Medicaid-style program” in the form of its state-based insurance exchanges. These exchanges will allow individuals and families who do not have access to job-sponsored coverage to purchase insurance policies that will cost no more than a tenth of their income. As with Medicaid, state governments are meant to set the terms and conditions of the insurance policies offered on the exchanges, subject to various federal mandates and restrictions.
In theory, this new exchange-based system will exist alongside ESI and Medicaid. Indeed, under ACA, Medicaid is meant to expand dramatically, as the federal government has promised to pick up the full cost of expanding state Medicaid programs to cover all households earning less than 133 percent of the poverty level.
But as Eugene Steuerle of the Urban Institute has observed, people who are covered via the exchanges will receive much higher subsidies from the federal government than those with job-sponsored coverage or Medicaid. This will create a strong incentive for employers to drop coverage, even in the face of the employer penalties established under ACA. Thus, the slow-motion collapse of ESI is very likely to pick up speed. And as more non-elderly Americans flood the exchanges, ACA’s commitment to keeping family medical expenditures below a tenth of household income will become cripplingly expensive – far more so, in all likelihood, than the Congressional Budget Office has assumed.
ACA aims to contain healthcare cost growth by encouraging medical providers to consolidate into larger Accountable Care Organizations (ACOs). Given that Medicare’s “fee-for-service” structure has been the main barrier to the emergence of higher-quality, lower-cost networks of medical providers, this should be a very positive development. Yet so far at least, these ACOs are quite unlike successful integrated providers such as Kaiser Permanente and Intermountain Healthcare, which are renowned for offering cost-effective care. Rather, they appear to have increased the market power of local hospitals, which have been shielded from antitrust regulations and from more specialized competitors. Some, including Holtz-Eakin, suggest that the new ACOs are bending the cost curve up instead of down.
There is a more sustainable alternative to the Affordable Care Act. Back in 2008, Senator John McCain’s presidential campaign called for a comprehensive overhaul of the tax treatment of health insurance. The tax exclusion for employer-provided health insurance would be scrapped in favor of a universal tax credit, a move that would, in one fell swoop, curb tax subsidies for the rich while increasing them for low- and middle-income households. All households would receive a stable and predictable amount of premium support that they could then use to purchase coverage. Insurers and medical providers would have a strong financial incentive to contain costs, as they wouldn’t be able to game ACA’s unlimited subsidies. While the McCain plan would not have solved every problem facing America’s health system, it would have allowed for more state-level experimentation with high-risk pools and organized care delivery models.
The political problem with the McCain plan, which the Democrats exploited masterfully, is that it acknowledged that the tax subsidies for high-income and middle-income households had to be curbed to move the country to a fairer and saner health system. That, alas, cut against the instinctive conservatism of voters who liked their job-sponsored coverage, and who much preferred Barack Obama’s wildly unrealistic promise to keep ESI as we know it intact.
But as this promise comes undone, voters will be faced with a choice. We can either embrace something like the McCain plan, which will pave the way toward a more market-oriented health system, or we will wind up with stringent bureaucratic price controls as ACA’s subsidies prove unaffordable. In light of the conservative failure to actually make the case for a market-friendly solution, the latter outcome is looking ever more likely.
PHOTO: Patient Sharon Dawson Coates (L) has her knee examined by Dr. Nikhil Narang at University of Chicago Medicine Urgent Care Clinic in Chicago, June 28, 2012. REUTERS/Jim Young