The "Alice in Wonderland" Moment in the Health Care Debate

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Congress continues to argue that the United States must “do something” about health care.  The claim is that absent reform, premiums will rise to levels families cannot afford, Medicare and Medicaid will bankrupt the federal government, and businesses will lose market share to foreign competitors unburdened with health care expenses.  As Senator Dodd has explained, health care reform is “about making health care more affordable for families, businesses, and the federal government.”

Having defined the problem in economic terms, the Democratic Leadership has been mute in responding to government reports that demonstrate the proposed reforms would do nothing to control costs.  First, the Congressional Budget Office (CBO) strongly rebutted the argument that employer-sponsored care puts U.S. firms at a disadvantage.  “The costs of providing health insurance to their workers are not a competitive disadvantage for U.S.-based firms” because wages and other forms of compensation fall by a corresponding amount.  CBO explained that the “growth of health care costs has contributed to slow growth in wages” and that coverage mandates could increase unemployment by 224,000 (page 4) for minimum wage workers unable to trade wage concessions for health care.  Proponents of the legislation responded with new “pay or play” rules that would fine companies whose employee compensation is not sufficiently skewed towards health care.

Second, Democrats celebrated a CBO report issued a couple of weeks ago, which found that under their proposed reforms, premiums on employer-sponsored plans would be unchanged or modestly lower (i.e. continue to grow at more than 5 percent per year).  Yet the report also found that enactment of Democratic policies on individual plans would cause premiums to increase about 10 to 13% more than if current law remained the same.  Even this finding hasn’t stopped the Leadership from touting the study and explaining that most of the increase in premiums comes from more generous coverage. 

But if the problem Congress seeks to address is too much health care spending, how can more generous (and expensive) coverage mandates be part of the solution?  This leads to the third, and most significant, contradiction between the rhetoric and the reality embodied in the proposed legislation: relative to existing law, the bill would cause national health expenditures to increase by nearly $300 billion over the next 10 years, according to a report by the Center for Medicare and Medicaid Services (CMS).  While this report analyzed the House bill, the Senate bill is likely to have the same impact because people with health insurance “use more health services.”  This is why the cost of “uncompensated care” at emergency rooms is but a fraction (page 5) of the cost of coverage expansions, despite pleadings to the contrary.

It’s clear that the path to cost reductions is not paved by expanded coverage.  Research by MIT economist Amy Finkelstein has revealed that the introduction of Medicare not only increased spending because of greater utilization (people with insurance consuming more health care), it also increased health spending by providing a new source of demand for medical services that encouraged hospitals and other health providers to incur the fixed costs associated with entering the market for new treatments.  Expanded budgets also provided support for medical technology innovation, as firms were able to attract discretionary risk capital to invest in research to produce new medical technologies to sell to hospitals and health care practices. 

To see how this trend would be intensified under this legislation, consider the amendment offered by Senator Mikulski to ensure patients are entitled to mammograms and other preventive health screenings without co-payments to providers.  Everyone’s premiums (or taxes) will go up to ensure that patients have access to the mandated diagnostic technology.  But the “latest” technology changes by the day; what was once high-cost experimental imaging technology is now prescribed without qualification at a moment’s notice.  When someone else is footing the bill, a new technology is never too expensive to be justified given its cost.  Over its first 25 years, Medicare grew at an annual rate that was nearly three times as fast as projected – largely because budget analysts could not predict all of the technological advances Medicare was partially responsible for bringing about.

So this is what the debate over health-care reform has come to: Congress believes it can reduce health care premiums by establishing mandates that make them more expensive.  And they believe they can reduce spending on health care by channeling more money towards it.  “Sometimes I’ve believed six impossible things before breakfast,” said the White Queen in Alice in Wonderland.   One suspects she’d feel right at home in the halls of Congress right now.