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Commentary By Charles Blahous

Obamacare Is Failing to Contain Healthcare Costs

Economics, Economics Healthcare, Tax & Budget

A primary argument made for passing the Affordable Care Act (ACA, or so-called “Obamacare”) was that only such an expansion of the federal role in healthcare could successfully slow the growth of national health costs and thereby avert fiscal disaster.  During the first few years after the law’s enactment, many of its supporters contended it was already accomplishing this, which other analysts strongly disputed.  But more recently a quiet consensus has overtaken the former controversy: thus far the ACA’s cost-containment mechanisms are failing, and the net effect of the law has been to make our national healthcare affordability problem worse than it was.

The ACA was complex legislation containing on the one hand several elements expected to increase healthcare spending, and on the other hand several it was hoped would reduce costs.  On the cost-increasing side, the law significantly expanded federally-subsidized health insurance coverage, lowering millions of Americans’ out-of-pocket contributions to their own healthcare purchases.  It is well documented that the greater the share of individuals’ healthcare financed by insurance, the more services they tend to use.  The ACA’s coverage expansion, direct benefits, premium assistance and cost-sharing subsidies thus all increased healthcare demand, utilization and costs.[1]    

At the same time, the ACA contained various provisions designed to slow healthcare spending growth.  It established a new excise tax on high-premium employer-sponsored plans, the so-called “Cadillac plan tax,” intended to counter the cost-driving effects of the longstanding federal tax preference for employer-sponsored health insurance.  The ACA also constrained Medicare provider payment growth, which it was hoped would have “spillover” effects of forcing efficiencies and generally lowering costs.  The law also created a new Independent Payment Advisory Board (IPAB) with powerful authority to further constrain Medicare spending growth, while limiting lawmakers’ opportunities to override IPAB’s decisions.   Also included in the ACA were various provisions designed to limit hospital readmissions, promote bundled payments, and move to value-based provider reimbursements.

Importantly, these provisions taken together were not projected to lower spending as much as the ACA’s subsidized coverage expansion would increase it.  Specifically, the Centers for Medicare & Medicaid Services actuaries estimated the ACA would increase total health spending while assuming each of its cost-saving provisions would be fully implemented.

Unfortunately from a fiscal perspective, the ACA’s cost-increasing provisions took effect while many of its cost-saving provisions did not.  The Cadillac plan tax was immediately postponed until 2018 in the reconciliation law amending the original ACA, and was more recently postponed to 2022 in the latest omnibus appropriations act.  Some previously-planned Medicare Advantage cuts were scaled back, while the vast majority of the ACA’s scheduled Medicare payment reductions are only beginning to be implemented.  IPAB was also repealed earlier this year.  These events conformed to previous warnings that the proceeds of the ACA’s various savings provisions could not be safely spent until they had actually accrued.

National healthcare spending growth slowed significantly in the years leading up to and after the ACA was passed, tempting some to assert that the ACA itself was holding down cost growth.  This was never a fully credible claim, not least because the spending slowdown was an international phenomenon and preceded the ACA’s 2010 enactment, but also because it long preceded 2014 when the ACA’s main coverage expansion provisions took effect.  Subsequent evidence is that the ACA’s net effect has been to push healthcare spending higher.

Figure 1 shows historical and projected growth in National Health Expenditures (NHE) per capita.  The graph suggests a trend.  Annual percentage growth in NHE per capita was declining substantially before the ACA was enacted in 2010.  In 2014, however, the ACA’s coverage expansion kicked in, and its effect of increasing national health spending was immediate.  For the past few years NHE growth per capita has been elevated, a trend projected to continue in the near future.

Astute observers will note that these raw per capita growth figures only tell part of the story, because NHE growth tends to rise and fall with broader economic growth.  Figure 2 shows how historical and projected per capita GDP growth looks over the same time period.  The trend in Figure 2 is partially, but not wholly, parallel with Figure 1; it shows faster growth after the ACA was enacted than before.  With respect to GDP growth, this reflects the enactment of the ACA just after the Great Recession, when the economy was in recovery.  

Figure 2 thus provides context for Figure 1, but neither figure tells the whole story.  To reveal the healthcare spending growth trend, the critical factor to isolate is the difference between the two figures – that is, the difference between per capita NHE growth and per capita GDP growth, or in other words, “excess” NHE growth.  Figure 3 shows the evolution of excess NHE growth.

Figure 3 shows that excess NHE growth spiked during the Great Recession: basically, the economy contracted but NHE did not, causing a substantial differential.  During 2010-13 excess NHE growth effectively disappeared, as the economy recovered while health spending moderated.  But then in 2014 the ACA’s coverage expansion began, which meant that despite our continuing economic recovery, the problem of excess NHE growth re-emerged. 

While health economics is too complex for us to blame the ACA alone for the recent adverse trend, the evidence on balance points to the ACA increasing rather than decreasing health spending.  Various experts who have examined the ACA’s net effects are reaching the same conclusion.  In 2015 Bradley Herring and Erin Trish found that the ACA’s insurance expansion would cause a “likely increase in health care spending.”  More recently Janet Weiner, Clifford Marks and Mark Pauly found “little evidence that ACA cost containment provisions produced changes necessary to ‘bend the cost curve’” while its coverage expansions “produced a predictable jump in health care spending.” Joseph Antos and James Capretta similarly concluded that the ACA’s cost-saving provisions “have yet to show a substantial and sustained impact,” while its coverage expansion “has driven up overall health spending.”

The bottom line is that the ACA dramatically expanded federally-subsidized health insurance, which has the predictable effect of increasing not only federal but national health spending.  This is not cost containment and never was.  At the time of the ACA’s enactment, too many yielded to the temptation to argue that the new law would somehow both expand coverage and hold down costs.  With the passage of time it is becoming only too clear that the ACA is pushing our health costs upward.

Charles Blahous, a contributor to E21, holds the J. Fish and Lillian F. Smith Chair at the Mercatus Center and is a visiting fellow at the Hoover Institution. He recently served as a public trustee for Social Security and Medicare.

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[1] In some places I refer to health spending, at other places costs, and there are also multiple places in the text where either term would be correct.  Expanded insurance coverage increases not only total spending but also costs per service because it reduces price sensitivity and increases service demand relative to supply.