Here’s How Obamacare Is (and Isn’t) Lowering Health Care Spending

Source: Joe Raedle /Getty Images

Source: Joe Raedle /Getty Images

Since 2009, swollen American health care spending has been equal to a 17.4% share of the country’s gross domestic product, totaling of $2.9 trillion last year, according to research conducted by the Department of Health and Human Services’ Centers for Medicare & Medicaid Services. In 2013, that health care spending figure translated to $9,255 per person in the United States. While overall spending has remained roughly constant as a share of GDP over the five-year period between 2009 and 2013, much has been made of the fact that the 3.6% increase health care spending last year was half a percentage point lower than 2012’s hike and matched the pace of GDP growth. In fact, 2013 saw the lowest annual increase since 1960, when CMS first began tracking the statistic. Slowing growth over those five years has become a point of contention for lawmakers mired in post-Obamacare politics.


Source: Centers for Medicare & Medicaid Services

What’s different?

For much of last year — amid the shaky rollout of the Affordable Care Act’s cornerstone provision, the insurance marketplaces — the narrative woven by the Obama administration was that health care reform had already begun to bend the spending curve, just as intended. In his 2013 State of the Union Address, the president proclaimed that “already, the Affordable Care Act is helping to slow the growth of health care costs” in the United States. The counterpoint spun by some economists and the Obamacare critics was that the aftermath of the financial crisis and subsequent recession had much to do with slowing growth; high unemployment and stagnant wage growth inherently meant that Americans spent less money on health care. The statistics do reflect that reality. CMS data shows that in 2011, 2012, and 2013 the health care spending grew at a rate half that experienced in the years immediately preceding the Great Recession.

Taken alone, 2013 data does not mean much. Whether 2014 data continues this trend is more important; this year was the first in which the Affordable Care Act’s individual insurance mandate (arguably the most disruptive feature of the reform) was in effect. But the past year has given researchers some evidence that the cost-control features of President Obama’s reform has indeed pushed health care spending lower. And the fact lower spending has continued for such a stretch cannot be discounted. So even though overall health care spending will increase in coming years as more Americans become insured and the economic recovery continues, structural changes in the health care sector will act as a counterweight. And this is an indication that the decades-long American health care trend of “pay more, get less” has begun to change as a result of the Affordable Care Act.

Between 1990 and 2012, in the era of “pay more, get less,” the insured rate dropped two percentage points, from 86.6 to 84.6%. Through that same period, spending on health care rose from 12% of GDP in 1990 to 17.2% in 2012, meaning that adjusted for inflation, health-care spending increased by $1.7 trillion. But since 2012, new trends have emerged: More Americans have insurance and the cost of health care services has grown and will continue to grow at a much slower rate than in the 1990s and 2000s. The higher insured rate is a direct result of the Affordable Care Act. In 2014, approximately 5.4 million Americans gained coverage, and by 2024 as many as 26 million people will have coverage.

The role of the Affordable Care Act

Marilyn B. Tavenner, the CMS administrator, may have termed the report as “another piece of evidence that our efforts to reform the health care delivery system are working.” But with Obamacare’s insurance exchanges so new a feature in the American health care landscape, the debate over the effectiveness of the reform and in particular its cost-saving measures is still hot. CMS actuaries concluded that “the key question is whether health spending growth will accelerate once economic conditions improve significantly,” and “historical evidence suggests that it will.” The most recent projections suggest that health spending will almost double to $5.3 trillion in 2023, and the role played by the health care reform is nuanced. President Obama’s Affordable Care Act rhetoric has always been fairly one note, but it was never a secret that the some provisions of health care reform would exert downward pressures on spending while others would exert upward pressures.

The expansion of health insurance to millions of Americans, the reform’s provisions for subsidized coverage, and the expansion of Medicaid serve as new pressures driving up spending. At the same time, provisions of the Affordable Care Act, like the medical loss ratio that requires insurance companies spend at least 80% or 85% of premium dollars on patient medical care and insurance rate reviews are slowing premium growth. Medicare spending — which is generally immune to economic cycles because its beneficiaries are largely retires, many of whom live on fixed incomes — has dropped. The prices of medical services are growing more slowly than overall inflation, the volume of hospitalizations has dropped, and spending on both private health insurance and out-of-pocket expenses declined. “The balance of these and many other factors over the next few years will determine how historically low health spending growth from 2009-2013 is viewed: as the temporary aftermath of the great recession or the beginning of a new era,” concluded the CMS report.

Last year’s slowdown in Medicare spending is especially noteworthy. “Fee-for-service per enrollee growth also remained low (an increase of 0.7 percent in 2013, after a decline of 0.3 percent in 2012), as a result of slower increases in outpatient hospital utilization, a decline in the volume and intensity of physician services, the budget sequestration, and the continued impacts of the ACA-mandated payment update reductions,” stated the report. And that means that in the Medicare program the amount of services that doctors provided outside of hospitals decreased in 2013.

Of course, a great deal of money is still being spent on hospital care, physicians and clinical services and prescription drugs, which accounted for $936.9 billion, $586.7 billion, and $271.1 billion, respectively.

The amount of money spent on prescription drugs has yet to show conclusive evidence that reform is uniformly bending down the cost curve, and the cost of pharmaceuticals is one reason why health care in America is so expensive. In total, retail sales of prescription accounted for 9.3% of all spending. As a share of overall expenses, prescription drug spending has remained relatively constant thanks to two divergent trends. As pricier specialty drug use has grown, generic medicines — which typically cost 80 to 85% less than their brand-name counterparts — have become more popular. The share of prescriptions being filled by generics stood at 80% last year, up from 73% in 2011. Part of the reason generic medications are growing in usage is due to patenting and medical research trends, not reform. In 2012, blockbuster drugs worth $35 billion in annual sales lost patent protection, allowing for generic versions to be released. Still, new expensive medicines for treating multiple sclerosis and cancer, which lack low-cost alternatives, as well as rapid price hikes for existing specialty drugs, did greatly impact spending. And 2013 saw the most new prescription drugs related than in any of previous 10 years. As a result, even though specialty drugs accounted for less than 1% of all prescriptions dispensed, they represented 28% of all pharmaceutical spending.

Why is U.S. health care so expensive?

“We’ve got to reform health care to help you and your budget,” Obama pledged as a candidate in 2008. “So one of the things that I have said from the start of this campaign is that we have a moral commitment as well as an economic imperative to do something about the health care crisis that so many families are facing.”

United States health costs — both on a per-person basis and as a percentage of GDP — are much higher than any other so-called “rich” country because of a variety of factors. Primarily the reason for this disparity is the U.S. health care system provides a more expensive mix of services than any other country of the Organization for Economic Co-operation and Development. In practice, that means doctors tend to utilize more more technology-intensive treatments (like mammograms and MRIs) instead of basic care. A much larger share of doctor visits in the U.S. are to specialists, who charge more expensive fees and order more high-tech (and therefore expensive) diagnostic and therapeutic procedures than primary care doctors. For example, compared with the average OECD country but adjusted for population, patients in the United States have 31% more C-sections, three times as many mammograms, and two-and-a-half times more MRI scans. And branded pharmaceuticals are twice as expensive in the United States as in other OECD countries.

That disparity is exacerbated by the fact that the U.S. government plays a much small role in health care regulation than these other nations like the Netherlands, Japan, and others. The federal government only funds 46% of services, as compared to the 75% average of OECD countries. And while it may seem that fact is an incidental, the role governments play has a lot to do with overall health care costs. Because government funding in most OECD countries is through a tax-supported system, administrative costs are much lower than in the United States, according to the Journal of the American Medical Association. Governments are able to negotiate with drug companies and doctors and control investments in hospitals and equipment. In the United States, hospitals tend to have better amenities, like more space and more privacy, but that adds to the cost of care. Patients in OECD countries do see doctors more and spend more time in the hospital, but still costs are lower because of the services provided are less expensive overall.

Explaining why U.S. health care is more expensive is difficult to answer, but one reason is simple: It benefits drug manufacturers, the insurance industry, and other players with powerful lobbies that influence government policy. Of course, it is also impossible to ignore the influence that United States history has had on the restricting the government’s role in health care, noted the JAMA. The United States has a long tradition of distrusting big government, and even today many Americans do not trust Washington to run health care. When President Harry S. Truman attempted to created a national health care program in 1945, he was branded a communist by the news media, and President Richard Nixon’s plan to “guarantee adequate financing of health care on a nationwide basis” also failed.

What was the goal of Obamacare?

Some argue because of the lack of involvement of the government (at least until this point) there has developed a system with two types of health care — very good but expensive health care for people that can afford it and mediocre care for those with low incomes. And the Affordable Care Act was designed to end that duality. “The ACA starts from a place of wanting to make sure that all individuals can obtain affordable insurance, even if they have a prior medical condition,” Aaron Carroll MD, MS, — director of Indiana University’s Center for Health Policy and Professionalism Research — wrote in a 2012 blog post for the JAMA. And, ultimately, increasing access to health care was the primary goal of the reform. Theoretically, at least, it would seem that ensuring more Americans had access to health insurance coverage would mean that more people would forgo expensive emergency room visits in favor of less-expensive appointments with doctors and nurse practitioners. This logic was often employed by those defending the health care reform while the legislation was being debated in 2009. But that reasoning was “sometimes a misleading motivator for the Affordable Care Act,” infamous Obamacare architect Jonathan Gruber, a health economist at the Massachusetts Institute of Technology, told the Washington Post. “The law isn’t designed to save money. It’s designed to improve health, and that’s going to cost money.”

Serving as a backdrop to this recent CMS report is survey data from Gallup that shows that one in three Americans decide against medical care because it is too expensive. “Despite a drop in the uninsured rate, a slightly higher percentage of Americans than in previous years report having put off medical treatment, suggesting that the Affordable Care Act has not immediately affected this measure,” explained the report.


Source: Gallup

Follow Meghan on Twitter @MFoley_WSCS

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