On the less-affordable care act

by John Hood, John Locke Foundation and NC SPIN panelist, February 19, 2014.

Could President Obama’s signature program, the Affordable Care Act, be responsible for declining rates of growth in U.S. health care spending? That’s what some Obamacare advocates are claiming. To do so, however, would require that they be either embarrassingly uninformed or shamelessly dishonest. I’ll go with the “uninformed” explanation, because I’m a nice guy.

In 2008, health care spending rose by about 4.7 percent. By 2012, it had dropped to 3.7 percent. But these facts don’t establish that the passage of the Affordable Care Act is responsible for moderating the trend.

For one thing, until this year the only Obamacare provisions to be implemented were modest insurance-market regulations such as requiring companies to sell dependent coverage to young adults until the age of 26. These provisions could only have raised total health spending, however modestly. The main provisions — Medicaid expansion, subsidized exchange plans, Medicare cutbacks, and heavier regulation — are only starting to kick in now.

For another thing, Health care spending rose by 4.7 percent in 2008, 3.9 percent in 2009, 3.9 percent in 2010, 3.9 percent in 2011, and 3.7 percent in 2012. Unless you want to attribute the slowdown in medical inflation to Obama’s election, rather than to the passage of Obamacare, the timing simply doesn’t work.

It’s actually a lot worse than that for Obamacare defenders. You see, health care inflation was dropping before 2008 — much more rapidly, in fact, than it has since. If you follow this link, you’ll see a line graph that tells the story well. A decade ago, the inflation rate was nearly 10 percent. It dropped significantly over the next few years.

One reason was that patents expired on some popular medicines, allowing the substitution of lower-cost generics. Another reason was the growing of consumer-driven health plans that combined higher deductibles with health savings accounts (HSAs) or health reimbursement arrangements (HRAs). Favorable court rulings and the passage of health care legislation in 2003 allowed these alternatives to enter the market for individual and group health plans.

Some 30 million Americans are enrolled in some kind of consumer-driven health plan. In part because these consumers now have financial incentives to consume medical services wisely, providers are responding by posting their prices and investing in lower-cost delivery options such as urgent care and minute clinics. For the first time in decades, there is real price competition and service innovation in the market. As a result, medical inflation has moderated. An application of basic economic principles and some good-old-fashioned common sense is all that is required to understand the dynamics involved. So you can see why some Obamacare boosters are struggling to keep up.

Far from causing the favorable trend on health care spending, the so-called Affordable Care Act is about to reverse it. According to actuaries for the Medicare and Medicaid programs, U.S. health care expenditures are projected to grow by 6.1 percent in 2014 (compared to a projection of 4.5 percent without Obamacare) and then stay somewhat higher than the baseline through 2022. Other analysts who don’t work for the administration believe the effects on future health care spending may be even greater. Perhaps these higher costs will purchase valuable outcomes such as healthier Americans. That’s certainly debatable. What isn’t debatable is that Obamacare will raise the nation’s health care tab, not lower it.

So, to review, Obamacare couldn’t possibly be responsible for the decline in medical inflation since Obama was elected. The rate of health care spending growth was dropping faster before Obama’s election than it has dropped since. And Obamacare will increase that growth rate, not decrease it, in the coming years.

Put that in your hot chocolate and drink it.