Healthcare Law: Controlling Costs an Ongoing Challenge

Milwaukee Journal Sentinel

May 14, 2014

The typical American family of four under age 65 spends about 40% of its household income on healthcare.

It prompts disbelief. How can that possibly be? But the Milliman Medical Index estimated that a family of four spent on average $20,030 on healthcare, including the cost of health benefits and out-of-pocket spending, in 2013. At the same time, median household income has been estimated at $52,100.

While Uwe Reinhardt, a health economist at Princeton University, has contrasted the two figures and noted they are not necessarily comparable, the contrast shows the real challenge in healthcare reform.

The Affordable Care Act ended its first enrollment period with a surprising surge in the number of people signing up for coverage. Yet expanding coverage was always the easy part, despite the disastrous launch of the online marketplaces. The hard part will be making the healthcare system more efficient—and, potentially, more affordable.

"It's far easier to expand coverage than it is to control the market forces within healthcare to bring down spending," said Craig Garthwaite, an assistant professor at the Kellogg School of Management at Northwestern University.

The Affordable Care Act contains a number of provisions designed to do that. Some have shown promise, such as linking certain Medicare payments to the quality of care. But no one knows for sure how successful the provisions will be.

"In the aggregate, we really haven't transformed the system or really made it much better," said Thomas Miller, a resident fellow at the American Enterprise Institute. "But we have a lot of redistributing of the costs and the burdens and the benefits."

The growth in healthcare spending has been at historic lows in recent years, and has dropped sharply since 2005. Economists debate the reasons. But most still expect healthcare spending to continue to outpace the growth in the economy.

Spending is projected to reach $3.1 trillion and to account for 18% of the national economy this year, according to the Office of the Actuary of the Centers for Medicare and Medicaid Services. Its share of the economy is projected to increase to almost 20%, or $5 trillion, by 2022.

The cost of expanding coverage under the Affordable Care Act is projected to account for only a small fraction of future healthcare spending. The Congressional Budget Office last month estimated the law's coverage provisions will cost $218 billion in 2022, which works out to 4.3% of projected healthcare spending that year.

The cost will be offset—if the projections are right—primarily by various taxes and penalties, slower growth in Medicare payments to hospitals and some other healthcare providers, and lower payments to insurance companies for Medicare Advantage plans.

By 2022, the number of people without health insurance is projected to be 26 million lower than if the law had not been passed, according to the Congressional Budget Office.

Already, an estimated 8 million people nationally and nearly 140, 000 in Wisconsin have bought health insurance through the online marketplaces, with the vast majority of them—85% nationally and 91% in Wisconsin—qualifying for subsidies that reduce the costs of the plans. Also, under provisions of the law, many states are expanding their Medicaid programs, with the federal government initially picking up all of the cost. Wisconsin chose to expand its program for very low-income people but opted out of the additional federal money.

'Employers are adjusting'

Supporters of the law hailed the end of the first enrollment period as a milestone.

"There has never been as big an effort to make sure there is some kind of decent healthcare coverage available to almost if not all Americans," said Thomas Oliver, a professor at the University of Wisconsin School of Medicine and Public Health. Even with the federal subsidies, though, the plans available through the online marketplaces remain expensive and often have relatively high deductibles for people with limited incomes. Some people opted not to enroll because of the cost, and that could undercut efforts to expand coverage in future years.

For certain, the Affordable Care Act also has produced winners and losers. The law also remains divisive, with public opinion little changed since its passage four years ago, and it will be an issue in this year's elections.

But opponents and supporters alike have known that once people got coverage, the law would be difficult to repeal. "We finally are to the point where there is no retreat," Oliver said.

Hundreds of thousands of people signed up for health plans even in states with strong political opposition to the law. Almost 1 million people in Florida and 733, 815 people in Texas, for instance, enrolled in plans sold on the marketplace.

That will mean additional revenue for health insurers and for hospitals, doctors and other healthcare providers.

Parts of the law also have broad support, such as requiring health insurers to cover people with pre-existing medical problems and allowing adult children to remain on a parent's health plan until they are 26. Undoing both provisions would be difficult politically.

Opponents also would have to come up with a plan to replace the law.

"Permanent law has a lot of power to it," said Miller of the American Enterprise Institute. "You may not like it, but you adjust to it. Industry is adjusting to it. Employers are adjusting to it."

Confronting the cost

As a result, the focus may move to how to make the law better. And still, the bigger question looms: Will the growth in healthcare spending continue to slow?

That won't be known for years, and economists seem split on what could happen.

The marketplaces could increase competition among insurers and, in turn, health systems. New health plans are emerging that provide incentives for people to get care from hospitals and doctors that provide quality care at the lowest cost. Electronic health records could improve the standardization and coordination of care, particularly for high-cost patients.

"There is some emerging evidence that there are some real structural changes," said Donald Taylor, an associate professor of public policy at Duke University. Signs suggest that health systems and doctors are getting serious about controlling costs and being good stewards of healthcare resources.

"There's a very broad culture shift going on," Oliver said.

A growing consensus across the political spectrum also agrees that changing the way hospitals, doctors and other healthcare providers are paid will be critical to controlling costs. Bringing about those changes, however, could take a decade or longer—if they happen at all.

There also is little evidence that healthcare employment growth is slowing, or of a slowdown in new technology, which often comes with high costs but modest benefits.

Garthwaite, of Northwestern, is among the skeptics. Paying for the broader coverage provided by the Affordable Care Act, he said, could require higher premiums and cost-sharing, reduced benefits or higher taxes.

"This is the hard question: How do we choose what we as country want to spend on healthcare as opposed to how many people are covered," he said.

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