Economics, Pethokoukis

Will Obama’s health care reform accelerate the rise in health care spending?


For the third consecutive year — 2009-2011 — US health care spending rose at the historically low rate of 3.9%, according to the Centers for Medicare and Medicaid Services. That’s good news given the way rising health care costs have inflated government spending and subtracted from wage growth.

But most of the media stories about the data have been pretty cautious. They suggest the slowdown is temporary, attributing much of it to the weak economy. As growth picks up, so will the consumption of health care services. And once the new health care reform law is fully in place, more demand might also equal rising costs. Reuters:

“The more coverage you have, the more services you use … when you get as many as 30 million more people with coverage, you would expect them to use many more services and you would expect a higher cost,” said Richard Foster, chief actuary at CMS, part of the U.S. Department of Health and Human Services.

“There is a growing amount of evidence that healthcare providers are getting it – getting that the future can’t be the same way as the past,” he added.

According to official administration projections, healthcare spending will surge by 7.4 percent to represent 18.2 percent of GDP in 2014, as millions of people acquire coverage through new subsidized online marketplaces and an expansion of Medicaid under the Patient Protection and Affordable Care Act.

But the decline hasn’t just been a cyclical one due to the economic slowdown. The rate of health care spending has been falling since 2002. And there are a number of factors likely responsible: a) lots of breakthrough drugs from the 1980s and 1990s became widely available in generic form in the 2000s; b) health insurance plans became more diverse, giving consumers more choice, such as health savings accounts; c) the IT and networking revolution has improved disease management.

Will the PPACA, over the long term, reinforce this trend or counter it? In addition to increasing in demand, the law increases regulation on insurance plans. Take the treatment of HSAs, for instance. As one analysis from International Society of Certified Employee Benefit Specialists warns:

 The health care reform law contains only two direct changes to health savings accounts (HSAs): eliminating the ability to use the HSA for over-the-counter drugs and increasing the early withdrawal penalty from 10% to 20%. The indirect changes, however, could drastically curtail the growth of HSAs or even result in the end of HSAs.

The health care system still needs reform, but of the sort that increases consumer choice and competition, not restricts it.

2 thoughts on “Will Obama’s health care reform accelerate the rise in health care spending?

  1. Direct numbers are sparse but the BLS reported that 39 percent of Americans had access to HSAs in 2010. Mercer reported that 37 percent of workers with access participated in 2009. Roughly 44 percent of Americans are insured through employer plans. So, .39x.37x.44=6.3 percent. To say that HSAs are controlling health care costs is kinda like the saying the flea on the tail can wag the dog.

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