The Economics of the Great Healthcare Debate

Health care debate

A year from now, Americans will be preparing for the next presidential election and weighing their priorities as a public. Most experts agree that plans to rein in healthcare spending will have to be an important part of any legitimate candidate’s campaign. Sean Keehan, an economist in the Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS) and affiliate professor who teaches Health Economics and Micro and Macro Economic Principles at the Sellinger School, recently published a report projecting healthcare spending through 2020, assuming current laws remain in place. Here, he discusses some of the implications of his report and the questions he’d raise regarding potential alternatives to 2010’s Affordable Care Act (ACA).

Over the next 13 months, we will be hearing a lot about health care costs and different options for lowering the growth in these costs.  My colleagues and I at CMS projected in our recent Health Affairs article that health care costs will grow at an average rate of 5.8 percent per year for the next 10 years if the ACA remains in effect.  However, health spending growth would spike to 8.3 percent in 2014 when major coverage expansion in the ACA begins. We also concluded that the federal government will take on an even larger role in health care costs over the next 10 years as a result of robust growth in Medicare enrollment from the baby boom generation, expanded Medicaid coverage as specified in ACA, and premium and cost-sharing subsidies for health insurance exchange plans that will begin in 2014.

Our projections assume that there are no changes in law and the ACA is implemented as written.  We all know that laws will change, but these projections still provide a baseline estimate that can be compared against the impact of any proposed bill.

Understandably, the thought of such significant and consistent increases in costs has sparked concern among many Americans, at both ends of the political spectrum.   The major Republican Presidential candidates are opposed to the ACA and are united in their desire to “repeal and replace” this law.  All of these candidates could claim that their plans would result in lower health care costs than if President Obama were re-elected and the ACA remained in effect—because their plans don’t account for the ACA’s 2014 expansion of Medicaid and subsidization of private health insurance through state-based health insurance exchanges.

The “replace” plans are varied among the candidates but most involve giving the states tools to develop innovative solutions to cover the uninsured in their own state, presumably at a lower cost than in the ACA. These state-based solutions would mostly rely on market-based strategies to use competition among insurers to lower the cost of providing health insurance. All of these candidates also claim the desire to reform both Medicare and Medicaid, although no candidate is releasing many details of exactly how he or she plans to change these entitlement programs.  Regarding Medicare, this is probably a shrewd political move because it is unlikely that any candidate could win while promising to cut health care benefits for seniors. The most widely suggested plan by Republican candidates that could save money is converting the Medicaid program into a series of block grants to states which would then have the flexibility of creating state-based Medicaid programs that best suits the states’ specific needs.

So the crucial questions are:

Would any of these policies actually lower costs?

Would society be willing to accept the full consequences of lowering health care costs using these methods?

Recent surveys indicate the majority of Americans do not favor the ACA. However, if the entire bill was about to be repealed, would there be a call to maintain some of the provisions that the majority of people do support, such as the ability to keep adult children on a parent’s health care policy until age 26?

Additional details on all of these “replace” or Medicaid conversion plans are needed to better estimate whether any of them will save money, as well as whether society would be willing to accept giving states new responsibilities that could eliminate some federal government protections.  Some market-based strategies such as consumer-directed health care plans were proposed and implemented during the Bush administration with mixed results; growth in costs slowed with these plans, but this was mostly a result of people being forced to choose a less generous insurance plan with higher deductibles and copayments.  And while specific details remain limited on most of the Republican candidates’ Medicare reform plans. Their cost cutting strategies seem to focus on future generations of Medicare beneficiaries, and therefore would not save significant money in the near term. 

Unfortunately, there is no proven proposal that would reduce health care costs without lowering the health care benefits and quality that society has come to expect. The public should be skeptical of any health care plan by the Obama Administration or the Republican candidates that claims to cut health care costs without sacrificing insurance coverage or the quality of care. Therefore, on this issue, like many others, voters will be left to determine which candidate’s view on health care balances their interests most effectively.