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Another Broken Promise: Obamacare Is Driving Costs Up, Not Down

3:15 PM, Nov 26, 2013 • By JAMES C. CAPRETTA
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The past two months have laid bare the emptiness of the president’s most prominent Obamacare promises.  Millions are losing the plans they have and like against their wishes, contrary to the president’s oft-repeated pledge.  And those being forced into Obamacare could lose access to the doctors and hospitals they trust, also contrary to assurances from the president.  The evidence demonstrating that these commitments cannot be met is so overwhelming that even the administration has abandoned defense of the president’s previous statements.

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But there’s still one claim the Obama administration hasn’t yet admitted will not come true, which is that Obamacare will drive overall health costs down, rather than up.  More precisely, the administration continues to insist that the law is responsible for slowing the pace of rapidly rising health costs and will continue to slow the growth of such costs in the future, with great economic benefits for families and the entire country. 

That’s the contention in a just released white paper from the president’s Council of Economic Advisers (CEA).  But the CEA paper is just as misleading and flawed as previous efforts to defend the president’s other discredited promises.  The clear evidence indicates that precisely the opposite of what CEA asserts is true.

The CEA paper attempts to make the case for Obamacare by looking at trends from the most recent release of National Health Expenditure (NHE) projections.  The NHE data, compiled by the independent Office of the Actuary in the Department of Health and Human Services (HHS), does show a slowdown in health spending in recent years.  NHE spending growth per capita has averaged 3.1 percent since 2010, down from 5.9 percent in the previous decade. 

But the slowdown did not start abruptly in 2010.  In 2002, NHE spending per capita rose 8.5 percent and then began to slow over the ensuring years.  In 2008, NHE spending per capita rose just 3.7 percent – two years before Obamacare was enacted.

Though the CEA paper fails to mention it, the HHS actuaries recently published their own paper explaining in detail why their estimates of health costs over the coming decade are lower now than they were a few years ago. They pointed to economic conditions, fiscal policy changes (such as the 2 percent sequester of Medicare payments), and a slowdown in growth in Medicaid, Medicare, and other government programs due to factors unrelated to Obamacare.

Moreover, the actuaries noted that the effects of Obamacare itself increased their expectation of higher health costs.  This shouldn’t be surprising. The law’s Medicaid expansion and new subsidies for insurance offered in the exchanges will greatly increase the demand for health services, and soaring demand always increases prices and costs.  The actuaries forecast that Obamacare will increase overall national health spending over the period 2012 to 2022 by $621 billion.  In 2014 alone, Obamacare will increase NHE growth from 4.5 percent to 6.1 percent.  Over the full decade, the law will add an average of 0.1 percentage point to cost growth every year.  By 2022, the actuaries expect NHE spending to reach 19.9 percent of GDP, up from 17.9 percent in 2012.  None of this is mentioned in the CEA white paper. 

The CEA argues that new academic assessments rule out the recession as the full explanation for the slowdown.  But the actuaries make it clear that recent trends are well within the historical relationship between economic performance and health spending growth rates. If anything is happening to explain the decade-long downward trend, it’s the 2003 liberalization of high-deductible insurance plans, in combination with Health Savings Accounts.  Enrollment in these consumer-driven plans has soared from 1 million in 2005 to over 15 million people this year.

The CEA paper also touts Obamacare’s changes to Medicare, claiming that these cuts will lead to system-wide efficiency gains.  But, again, exactly the opposite result is likely to occur. One of the most significant changes targets the private sector component of the program, called Medicare Advantage, with $200 billion in cuts over ten years.  These cuts will force millions of seniors out of the Medicare plans they like and want to keep and back into the fragmented and inefficient fee-for-service component of Medicare.  The CEA paper claims that changes in Medicare can lead to spillover effects in the rest of the health system. That is true.  But there’s also abundant research showing that high enrollment in Medicare Advantage leads to cost reductions in fee-for-service and the commercial market too. That’s because hospitals and physician participating in more efficient Medicare Advantage plans tend to practice in a similar fashion for their non-Medicare Advantage patients too.  Cutting Medicare Advantage simply puts more people into costly and inefficient fee-for-service medicine, with no real prospect of improved cost performance anytime soon.

The other big Medicare cut is a 1.1 percentage point reduction in the payment increases given to hospitals and other providers every year.  The claims of long-term deficit reduction from Obamacare are based entirely on this blunt, across-the-board reduction that makes no distinction among the high and low value providers of care.  The cumulative effect of this cut would be devastating for seniors enrolled in Medicare.  By 2019, Medicare’s actuaries expect it to leave 15 percent of hospitals and other facilities with negative total margins, and thus little choice but to limit their Medicare admissions.  By 2030, the percentage of facilities in this position would reach 25 percent.  The actuaries are so dubious that these cuts can be sustained that they, as well as the Congressional Budget Office, have issued alternative Medicare projections that assume the cuts will be overturned.  If they are, the supposed deficit reduction from Obamacare that CEA touts would vanish altogether.

Most Americans have been skeptical from day one about the president’s cost claims for Obamacare.  Commonsense indicates that a program entitling millions of people to new health benefits is likely to increase cost pressures, not reduce them. Nothing in the CEA paper should convince anyone to abandon their skepticism.

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

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