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Why Obamacare really does add up for America

Slower growth in healthcare costs has the potential to lower budget deficits and speed up economic growth

Healthcare reform under the Patient Protection and Affordable Care Act (PPACA) has been a contentious issue between the Obama administration and the Republicans during budget negotiations in Congress. Battles over what's dubbed Obamacare led to October's costly two-week shutdown of the US government.

Leading independent forecasters like Standard and Poor's, Moody's Analytics, Macroeconomic Advisers, and Goldman Sachs reckoned the government shutdown shaved between 0.2 and 0.6 of a percentage point from fourth-quarter real GDP, or $2 billion to $6 billion in lost output. In addition to the loss of output from direct flow of spending in the economy, there were other costs from economic disruption, impacts on government programmes and services, budgetary costs from lost revenues, interest on late payments, and pay for furloughed government employees. The total economic cost of the shutdown was estimated at $24 billion.

The administration and Congress reached a short-term agreement, known as Continuing Resolution in US budget parlance, to reopen the government on October 17. The agreement extended funding until January 15. It also set up a committee to reach a budget agreement for the remainder of fiscal year 2014. With neither Republicans nor Democrats in Congress desiring a repeat of the Washington brinkmanship and government shutdown, the budget committee reached an agreement last Wednesday on the federal budget. The proposed deal funds the government for two years and reduces the federal deficit by up to $23 billion.

But the deal did not produce big fiscal changes including major reforms to health and pension programmes such as Medicare, Medicaid, social security. But nor was there a repeal or delay of the implementation of healthcare reform under PPACA as Republicans earlier demanded, or higher taxes on the wealthy and meaningful tax reform as Democrats were calling for.

The budget negotiation was "buried" by news of the disastrous execution of the healthcare exchange component of the PPACA. Republicans seized the opportunity to score political points, resurrecting their dire predictions of Obamacare's effects and pillorying President Obama for his claims.

Why does the US need healthcare reform? A key goal of the PPACA is to address the twin challenges of reining in high and rising healthcare spending and simultaneously increasing the coverage, efficiency and quality of the healthcare delivered. According to the Henry J Kaiser Family Foundation, a reputable private, independent health organisation, America spent nearly 18 per cent of its national income ($2.6 trillion or $8,402 per person) on healthcare in 2010 - substantially more than other developed industrialised countries. And that figure is projected to rise to one-fifth of GDP by 2020. Government spending on its two programmes - Medicare for the elderly and Medicaid for the poor - represented about one-third of total healthcare expenditure and 22 per cent of the budget in 2012. At the same time, an estimated 15 per cent of Americans (or 45 million people) do not have health insurance. Clearly, the status quo is untenable.

Reform under the PPACA comprises five components:

1. Ending discrimination in the health insurance market based on pre-existing health status, gender and lifetime caps.

2. Mandating that individuals have insurance coverage or pay a penalty.

3. Providing government subsidies for insurance premiums based on levels of income.

4. Experimenting with innovative ideas to improve the quality and efficiency of healthcare delivery.

5. Increasing competition in the non-group health insurance market by providing consumers with choices through the government-operated health insurance marketplace.

Experts in health economics and public finance generally consider the first three components interdependent - like a three-legged stool. All three are essential to holding up the health-reform stool. The economics underlying PPACA are sound and logical given the public-good characteristics of healthcare.

Politics, however, is not logical. With the false start of the health insurance marketplace, the HealthCare.gov website, the politics of the reform have taken centre stage over the past three months. The Obama administration is claiming "dramatic progress" for the troubled website. The focus has now shifted to more fundamental concerns over PPACA. In particular, critics point to the cost of healthcare reform. Higher insurance premiums, rising healthcare costs, and a negative impact on jobs are the effects predicted by sceptics.

Concerns over Obamacare's cost and whether it is fiscally responsible are legitimate. After all, among the promises of the reform are not only to increase health insurance coverage but also affordability - not only from government subsidies but also cost savings. This is nothing new. As early as January 2011 hundreds of health, labour and public finance economists signed a letter to Congressman Paul Ryan, chairman of the Committee on the Budget, pointing out that "the Affordable Care Act contains essentially every cost-containment provision policy analysts have considered effective in reducing the rate of medical spending".

Though not all "bending-the-cost-curve" measures have kicked in, the latest figures indicate a slowdown of growth in healthcare spending and healthcare inflation since 2010 when the PPACA was passed. Real healthcare expenditure per capita increased by 1.3 per cent between 2010 and 2013 - noticeably lower than its long-term (1965-2010) average of 4.5 per cent. Private spending growth by insurance was 1.6 per cent from 2010 to 2013 compared to 5.1 per cent from 1965 to 2010. Real spending under government-funded programmes like Medicare did not increase and, in the case of Medicaid, actually fell by 0.5 per cent. Similar patterns appeared in healthcare inflation: 1.8 per cent between 2010-2013 versus 5.7 per cent between 1965-2010. For the same two periods, there were slowdowns of growth in hospital-care spending (1.9 per cent compared to 4.3 per cent), physician and clinical services (1.7 per cent compared to 4.4 per cent), home health and skilled nursing care (1.1 per cent compared to 6.5 per cent), and prescription drugs (a fall of 1.6 per cent from 6.5 per cent). The drop in prescription drug spending was due to the expiration of patent protection.

What could account for the slowing down of healthcare spending growth and healthcare inflation? A number of empirical studies attributed the slowdown to cost-containment and reform measures in the PPACA, even after factoring in the sluggish economy which in theory lowers healthcare spending. These studies suggested that cost savings were attributed to a number of cost-containment innovations in government-funded entitlement programmes, Medicare and Medicaid. They include reductions in Medicare overpayments, new payment systems, and new rules (disclosure and transparency). According to these studies, there is evidence that the savings in government-funded programmes "spill over" to healthcare provided by private insurance.

Slower growth in healthcare costs has the potential to lower budget deficits and speed up economic growth. According to the non-partisan Congressional Budget Office, the reform will reduce the deficit by about $100 billion over the next decade. It is a fiscally responsible thing to do.

Dr Kiertisak Toh is a former senior Foreign Service officer with the US Agency for International Development. He is currently a member of the economics faculty at Radford University, Virginia, and a senior fellow at Duke Centre for International Development, Sanford School of Public Policy, Duke University, North Carolina.


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