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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Obamacare Was Always Going to Drive Up Health-Care Spending



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The federal government released its preliminary data about the U.S. economy in the first quarter of this year yesterday, and besides the atrocious headline number of 0.1 percent growth, another shocking number stood out: Health-care expenditures grew in the first quarter of 2014 by almost 10 percent on an annualized basis. That number will be revised, but spending rose rapidly in the fourth quarter, too, so expect this to be a durable result.

It’s fairly obvious why: It’s partly because wages are rising and people are getting care they deferred, but it’s also because of Obamacare. While the Affordable Care Act doesn’t appear to have covered nearly as many previously uninsured people as it was supposed to, it’s covered some new people, and it’s forced millions more to buy more-comprehensive insurance plans than they used to have. That’s a good bit of why health-care spending jumped this quarter.

The more ridiculous sycophants are trying to suggest this isn’t just a good thing because people are getting care, it’s good because that jump in health-care economic activity pushed first quarter GDP growth into positive territory. This is nonsense: While it’s nice that GDP growth is in positive territory, getting there by having the government subsidize a particular kind of economic activity that uses scarce real resources that we want efficiently allocated is a terrible idea, and liberals know it.

They know it because they used to make an argument in favor of Obamacare on the grounds that it would reduce the prominence of health-care spending in our economy. Sean Davis lays out this issue at the Federalist quite well. Here’s a chart he got from a June 2009 White House report touting the economic benefits of having health care consume a smaller share of the economy:

The thing, though, is that if we want Americans to have universal health coverage, which some conservatives (and most every liberal) have decided is a worthy goal, the effect Obamacare had this month might be necessary. It certainly was predicted by the Centers for Medicare and Medicaid Services, the federal government’s health-care bureaucracy. Here’s their projection, chartified by Yuval Levin, of the rate of growth in what the U.S. spends on health care:

As you can see, that is obviously much, much faster than the growth of the economy overall — and CMS expects that to pick back up and remain the case under Obamacare.

In part, this is acceptable: People getting health coverage (and getting health care) is a good thing, and it may mean a bigger chunk of the economy going to health care. But not necessarily, or not necessarily to the extent Obamacare does it: A conservative expansion of coverage should involve substantially less of an increase in national health-care spending, since it would focus on catastrophic coverage rather than comprehensive coverage and include more cost-sharing measures to encourage people not to use care they don’t need.

In other words, it would get people access to care, but encourage them to get it only if they need it and to look for a good deal on the services. So this rise in spending isn’t entirely inevitable — and CMS only thinks it’s not going to spiral out of control because Obamacare eventually implements centralized cost-savings measures. That wouldn’t be necessary with a consumer-driven reform, which might well accelerate cost growth when expanding access, but not as much as Obamacare is doing.

Almost everyone agrees that it’s a key federal priority to slow the growth in these costs to some extent: We want people to get health care, but we want it to come as cheap as possible and we don’t want them to use excessive amounts of it. The American health-care system does a pretty bad job of that at present. And while there are some things in Obamacare that should push us toward more-efficient and cheaper care, the law’s huge subsidies for premiums, expansion of a totally free health-care program (Medicaid), and tightly regulated insurance models can be expected, as a first-order matter, to push us back toward faster health-care spending growth.

You’ll notice that the above issues with Obamacare are partly about getting people not just to find cheaper kinds of care, but to consider whether they need the care altogether (this, by the way, either happens in single-payer systems that populate the rest of the world, too, or the government decides it for you). The question of controlling the growth of health-care costs is not only about “inflation” per se, as in changes in consumer prices for health care, partly because we have a hard time measuring the rate at which that’s happening. We can look at that, but we also care about utilization, which means trying to restrain total national heath spending.

In the short term, Obamacare is going to push up a partially controllable component of that — how much care people are using — and it’s not clear it’s doing anything at all now to slow price inflation. Yet price inflation and overall cost growth reached remarkable lows during the last few years of the recession — which happened to coincide with the passage of Obamacare, leading lots of liberals to claim that the ACA had something to do with this.

Now, it’s obvious that this was confused: If you use total health spending as an indicator of whether costs were growing out of control, Obamacare was almost surely going to betray you at some point, since it expands coverage and moves people onto subsidized, more expensive, and more comprehensive insurance plans. Health-reform advocates once liked to think that expanding access to care in some ways saves money, because people get preventive care and don’t show up sick to the emergency room. This was part of the case for Romneycare and for Obamacare, but it has never really worked out, and can’t reliably be expected to help in the long term.

So why did liberals ever claim the ACA was going to slow cost growth? Well, in part just because it was politically advantageous to, and growth indeed has been slower since the ACA passed, as Yuval’s chart shows. But overall costs haven’t grown nearly as quickly over the past decade or so as it did in the 1980s and 1990s, which means it’s nearly impossible to attribute much of this to the ACA. People are using fewer health services, relatively speaking — partly because they’re being asked to pay for more of their care out of pocket, partly because the economy is bad — and those services are not growing in price as quickly as they once did (in part because inflation is lower, period, but also because health inflation has moved much closer to overall consumer inflation).

Liberals do have an explanation for why the ACA has something to do with lower overall health-spending growth (the administration boasts about it here). There are a lot of provisions in the law intended to encourage hospitals and doctors to provide higher quality care, to economize, etc., and ACA advocates would like to think they are already working — this is pretty suspect, since the law has been around for so little time, but it’s possible they’re right in the long term.

For now, we don’t know, and in the short term, spending is up. This isn’t clear evidence that the ACA has put us back on a permanently higher growth rate, but it seems that Obamacare is pushing up health-care spending at the same time the economy is going to start to.

So this should be a more durable matter, after the Obamacare bump: The economy will keep improving and the ACA is going to keep encouraging and subsidizing access. ACA defenders hope that cost growth won’t return to historical norms, but now they have to admit that it’s going to rise some, when they often claimed otherwise (the idea that premiums would drop $2,500 for the average family was entirely based on projections of lower national health spending under the ACA). We simply don’t know if it will return to the problematic inflation rates from which we got a brief reprieve, but there’s at least one reason to think we will: CMS’s projections assume that Obamacare’s cost controls happen, and some of them almost certainly will not.

The growth of health spending matters a great deal not just because, as the White House correctly argued, we want to avoid health care consuming more and more of our economy — though again, to some extent that is inevitable and acceptable — but also because the federal government spends an incredible amount on health care, and Americans don’t want to pay for that. Thus, the trends discussed here are absolutely crucial to our fiscal future, and even taking into account that Obamacare expands coverage, it isn’t helping to push them in the right direction, for now.



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