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Medica

lProgress

rePort

No.14March2013

RhetoRic and Realityt obmr

evu Prj: cs

Pu

blishedbyManhattanInstitute

CC E N T E R F O R M E D I C A L P R O G R E S S

A T T H E M A N H A T T A N I N S T I T U T E

M P

Pu hwrSenior Fellow, Manhattan Institute

yv Fm

Research Associate, Manhattan Institute

Embargoed until Tuesday

March 19, 12:00 p.m. ET

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RhetoRic and Realityt obmr evu Prj: cs

executive suMMary

President Barack Obamas rst term was dened by the battle over, and the passage o, the Patient Protection and

Aordable Care Act, the landmark health-reorm legislation known popularly as Obamacare. Along the way, Obama,

the laws supporters, and independent analysts such as the Congressional Budget Oce (CBO) made specic claimsor projections about how the law would aect consumers, patients, and businesses.

Now, three years ater Obamacares passage, many key provisions o the legislation are beginning to be implemented.

Whether implementation succeeds or ails will be strongly infuenced by the reactions o states, providers, insurers,

businesses, and consumers to the laws provisions and to the thousands o pages o new health-care regulations.

Rr R is a project o the Manhattan Institutes Center or Medical Progress designed to oer an ongo-

ing, objective, and accessible perspective on the laws perormance in light o key claims or projections made about it.

Our project will examine the laws eect on Americans in ve overarching areas: health-care costs, insurance coverage,

employment, access to care, and consumer-driven health plans. Additional topics may be added.

Each evaluation will be based on the best available data and will be revised as new or more authoritative data becomeavailable. Each evaluation will come with a letter grade on the laws perormance, using the ollowing scale:

a = Vr sr k rrms w v r s

B = Mr v rrms w v r s bu r uur ss

c = Wk v rrms w v r s r rw v u

squs

d = l r v rrms w v r s sf v

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F = Ub v rrms w pru s rr r s

i (imp) = isuf v suppr f jum s rrms

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MedicalProgressReport14

Mr 2013

aboutthe authors

PaUl hoWaRd is a Manhattan Institute senior ellow and director o the Institutes Center or Medical Progress. He is

also the managing editor o Medical Progress Today, a web magazine devoted to chronicling the relationship between

private sector investment, biomedical innovation, market-riendly public policies, and improved health. Howard writes

on a wide variety o health policy issues, including medical malpractice, reorm o the Food and Drug Administration, and

Medicare initiatives. He is oten quoted on health-care issues, and his columns have appeared in national publications,

including the New York Post, Dallas Morning News, Investors Business Daily, and WashingtonPost.com. He is also a member

o the Manhattan Institutes Project FDA, a committee o physician-scientists, economists, medical ethicists, and policy

experts whose purpose is to show how twenty-rst century technologies can help improve FDA regulations and accelerate

the drug-development and drug-approval process without sacricing saety. Howard received a Ph.D. in political science

rom Fordham University in New York City in 2003, and holds a bachelors degree rom the College o the Holy Cross

in Worcester, Massachusetts.

yeVgeniy FeyMan is a Manhattan Institute research associate providing research and analysis on health care and

energy policy. He blogs on health care and entitlement reorm at MedicalProgressToday.com, and has written or

National Review Online, The Washington Times, and FOXNews.com. Feyman holds a degree in economics and political

science rom Hunter College.

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h-cr Prmums

Figure 1. Average Employee Contribution or Family Coverage

Figure 2. Projected Increase in Private Health-Insurance Premiums

h-cr Sp

Figure 3. National Health-Care-Spending Projections

Figure 4. Out-o-Pocket Spending Is a Strong Predictor o Per-Capita Spending

Figure 5. Share o Out-o-Pocket Spending Is a Strong Predictor o Health-Cares

Burden on Economy

Figure 6. Medical CPI vs. Overall CPI

obmrs gr cr h-cr css: c

es

CONTENTS2

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Mr 2013

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RhetoRic and Realityt obmr evu Prj: csRhetoRic and Realityt obmr evu Prj: cs

The Patient Protection and Aordable Care Act (akaObamacare) was described to the American public notonly as a means o expanding coverage but as a way o

holding down spending on health care. As PresidentObama told the Washington Postin 2009, I think its importantor us to make sure that 46 million people who dont have healthinsurance get it. And I think its important or us to bend the costcurve, separate and apart rom coverage issues, just because thesystem we have right now is unsustainable and hugely inecientand uncompetitive.1

As o this writing, important parts o the law have not gone intoeect (in particular, the coverage provision). The administrationhas nonetheless remained adamant (based on CBO estimatesdating back to 2009) that the law will create substantial savingsin the health-care system. Examining some preliminary data thatinclude projections by independent, nonpartisan experts allowsus to test the presidents claims that Obamacare will lower U.S.health-care costs. Based on analysis o the available data, we projectthat Obamacare will increase U.S. health-care spending and willnot lower health-care costs.

the obaMacareevaluation Project: cost

P How n Yeveny Feymn

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Mr 2013

2

HEalTH-CarE PrEMiuMS

Monthly health-insurance premiums are calculatedbased on actuarial predictions o an individuals risko requiring medical care. For instance, all otherthings being equal, premiumsthe amounts chargedor insurance coveragewill be higher or the elderlythan or the young, as the elderly tend to have morehealth problems than do the young. Premiums areeectively the canary in the health-care coal minebecause they take into account not just the actualcost o care but also state and ederal taxes, politicallymandated coverage requirements, and how manysick or healthy people purchase insurance. As theseunderlying costs change, insurance premiums changewith them.

The American health-care system is dominated byso-called third-party payers (i.e., an organizationother than the patient or a health-care provider thatactually pays or health-care services when they arerendered). Usually, the third party is an insurancecompany or the government. As a result, individualsoten confate the cost o their insurance premiumswith the cost o their health carethat is, as a personspremiums rise, so will his perception that his health

care is becoming more expensive and vice versa (re-gardless o whether that is true). Because o this, weocus rst on premiums paid directlyby households,not on premiums paid by either an employer or bythe government.

As it turns out, since the passage o Obamacare,household premiums have increased by a ull 11.3percent. Moreover, this increase even outpaced therate o the medical services consumer price index(CPI), which netted a mere 6.8 percent increase overthe three years that we measure.3 The CPI is the com-monly used measure o infation; the medical servicesCPI measures the growth in prices o medical services.

Independent analysis also suggests that this trend will

not slow down anytime soon. In 2012, the CBO andJoint Committee on Taxation estimated that by 2016,employer-based amily coverage will cost $20,000,with varying amounts o minimum required contri-bution based on amily size and income.4 This willbe an increase o $4,255 rom 2012s total amilypremium o roughly $15,745a 27 percent jump.5

Looking urther down the road, per-enrollee house-hold private health-insurance premiums are projected

Fe 1. avee Empoyee Contbton fo Fmy Covee

Source: Source: Agency or Healthcare Research and Quality, Medical Expenditure Panel Survey;http://meps.ahrq.gov/mepsweb/data_stats/summ_tables/insr/state/series_2/2011/ic11_iia_.pd (2010 and 2011); andKaiser Family Foundation and Health Research & Educational Trust, Employer Health Benets, 2012 Annual Survey(EHBS), http://ehbs.k.org/pd/2012/8345.pd; year 2012 estimated using methodology in n. 2 below.2

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to rise steadily through the rest o Obamacares imple-mentation (201321), with the exception o a briedip in 2014. (The dip is related to a one-time shitin costs rom individuals to the government becausepeople purchasing insurance on insurance exchangeswill, on average, pay less o the cost because o ederalpremium subsidies. This drags down the averagepremium increase or households, but the costs willbe borne by the ederal government, i.e., taxpayers.)

A recent survey o insurance companies by theAmerican Action Forum, a think tank, ound that keyObamacare reorms will likely cause signicant pre-mium increases, particularly or young and healthypolicyholders, and that much o these increases willbe unrelated to the expansion o benets under thelaw. Other elements in the law, including smallerrating bands (limits to how much more insurancecompanies can charge older enrollees than youngerones) and prohibitions on gender and health-statusrating (sicker enrollees also cannot be charged more)contribute signicantly to uture projected premium

increases.7 The projected increase in private health-insurance premiums is likely even to outstrip increasesin medical infation over ten years, urther indicatingthat Obamacare is driving up insurance premiums be-yond the price o individual health-care services. Forinstance, because Obamacare requires a richer benetpackage in the individual and small-group markets

and adds new taxes on drugs, insurance companies,and medical devices, along with new subsidies orbuying health insurance, Obamacare will, on average,place upward pressures on premium prices.8

HEalTH-CarE SPENdiNg

It is oten remarked that health-care spending in theUnited States is out o line with countries that have

similar, advanced economies. This, coupled with re-ports o hundreds o billions o dollars in estimatedannual waste, means that careul attention shouldbe given to reorming the U.S.s level o health-carespending and bending the curve o its growth rate.

Today, Americans spend well over $2 trillioncloseto 18 percent o GDPon health care, and U.S.health-care costs have grown much aster than eitherincome or GDP growth over the last several decades.However, despite the best intentions o its supporters,Obamacare will not make much o a dent in these

trends. The Centers or Medicare and Medicaid Ser-vices (CMS) projects that between 2012 and 2021,America will spend $36.8 trillion on health care. Ab-sent Obamacare, CMS estimates that spending wouldbe $36.3 trilliona dierence o just $500 billionover ten years. In other words, without Obamacare,Americans would spend lesson health care.

Fe 2. Pojecte incese n Pvte Heth-insnce Pemms

Source: Center or Medicare and Medicaid Services National Health Expenditures Projections6

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Mr 2013

4

Obamacare does little to actually stem spendinggrowth, aside rom some relatively small pilot projectson reimbursement reorm that have had disappoint-ing results thus ar, either producing some savingsbut also some cost increases, or increasing outrighthealth-care spending. For instance, the implementa-

tion o electronic health records has, thus ar, not onlyailed to decrease health-care spending but seems tohave increased it by making it easier or providers tobill or additional services.

In act, the largest components o estimated decitsavings in CBO projections related to Obamacarecome rom revenue increasesrather than actual de-creases in U.S. health-care spending. As noted earlier,the law shits health-care costs rom individuals togovernment, with the overarching goal o reducingthe share o health-care spending borne by low- and

middle-income uninsured consumers. The problemis that evidence strongly suggests that when out-o-pocket spending is lower, health-care spending actu-ally rises.9 In act, American consumers spend lesson out-o-pocket costs than most o their advancedOrganisation or Economic Co-operation and De-velopment (OECD) competitors.

I we examine per-capita health-care spending across anumber o OECD countries, we see a signicant cor-relation between out-o-pocket spending as a share ototal health-care spending and the level o per-capitahealth-care spending. This explains about 30 percento cross-country variation in 2010, suggesting that in

order to bend the cost curve o health-care spend-ing, more out-o-pocket spending may be needed inthe orm o deductibles, co-pays, and cost-sharing orroutine expenses. In other words, consumers mustbecome more cost-conscious.

Critics may rightully point out that Figure 4 isincomplete: i we compare actualout-o-pocketspending per capita (rather than the share o total)with total spending per capita (including the sharecovered by government and insurance companies),it appears as i more out-o-pocket spending is as-

sociated with higher, not lower, health-care costs.The issue with this approach is that the causal direc-tion is not clearthat is, we already know that theU.S. spends more both overall and on a per-capitabasis. Thereore, it is likely that an increase in actualper-capita spending will also increase actual out-o-pocket per-capita spending. The reverse is certainly

Fe 3. Nton Heth-Ce-Spenn Pojectons

Source: CMSs 2011 Projections o National Health Expenditures. As o this writing, CMS has not released ocial NationalHealth Expenditure Accounts or 2012; only predicted values rom 2011 are available.

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possiblethat increasing per-capita out-o-pocketspending will increase total per-capita spendingbutintuitively, it seems unlikely. Many other studies, orinstance, have ound that increasing out-o-pocketcosts reduces the use o health-care goods and ser-

vices, serving as a check on spending.10

What we do knowagain, rom cross-country com-parison (and this casts some doubt on the potentialcriticism earlier)is that the out-o-pocket spendingshare o total health-care spending is strongly, andnegatively, correlated with health-care spending as ashare o GDP, a measure that is, in essence, the burdeno health-care spending on the economy.

One may, however, criticize this approach on moralgrounds by claiming that the poor and indigentshould be protected rom rising health-care costs.O course, some means-tested subsidies, such asObamacares premium subsidies, are desirable (andindeed, are used in countries such as Switzerland),but Obamacare provides these subsidies ar above thepoverty lineor amilies who make up to 400 per-cent o the Federal Poverty Level, or about $94,000

or a amily o our in 2014.11 This means that thesubsidies will be going to people who may not actu-ally need them because they could easily aord tobuy their own coverage.

When consumers are less cost-conscious (in thiscase, because they pay ewer direct medical costs),producers have greater reedom to raise prices whileconsumers have an incentive to utilize additionalhealth-care services.

Consequently, increases in the costs o medical serviceshave consistently been greater than cost increases in therest o the economy. To combat this trend, policymak-ers should ocus on nding ways o making most non-poor consumers more cost-conscious rather than lesscost-conscious. By ocusing on cutting out-o-pocketspendingwhich is projected to all rom around 11percent o total health-care spending today, to 9.3percent by 202112Obamacare does little to stem thegrowth in medical prices and may, in act, acceleratesome price increases by reducing price sensitivity andincreasing demand or health services by bringing thenewly insured population into the market.

Fe 4. Ot-of-Pocket Spenn is Ston Pecto of Pe-Cpt Spenn

Source: OECD Frequently Requested Health Data, updated October 2012. Per-capita spending is in American dollars, adjusted orpurchasing-power parity.

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Mr 2013

6

Obamacare will also push about 12 million Americansinto Medicaid. This joint ederal-state health-insuranceprogram or the poor is a huge and growing budgetconcern: it will spend some $638 billion in ederal dol-

lars over 11 years to expand coverage to the 12 millionnew beneciaries. By 2023, the ederal government willbe spending $572 billion annually on the program;state spending will bring the spending to about $1

Fe 5. She of Ot-of-Pocket Spenn is Ston Pecto ofHeth-Ces Ben on Economy

Source: OECD Frequently Requested Health Data, updated October 2012

Fe 6. Mec CPi vs. Ove CPi

Source: U.S. Department o Labor: Bureau o Labor Statistics/FRED; CPI is indexed to 198284.

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trillion. Because access to care in the program is spotty,it is questionable whether expanding it is worth themassive investment, given the growing share o thebudget that the program makes up.13

Ultimately, all the existing evidence suggests thatObamacare will not reduce health-care costs, al-though it will certainly shit the cost burden to thegovernment (which is ultimately the responsibilityo taxpayers) as well as other, non-health-relatedindustries. And while we dont address the costs oMedicaid spending in this report, the cost o expand-ing Medicaidor state and ederal budgetsisanother important concern that policymakers shouldbear in mind.

Obmces ge on Conton Heth-Ce Costs: C

Since the mid-1980s, medical infation has outpacedall other infation by an ever-increasing margin.While many actors play into this phenomenon,Obamacare ails to address the drivers o excessiveand continuous price increases or medical goodsand services. By shiting costs to government andtaxpayers and by increasing overall U.S. health-carespending, Obamacare will, by its own standards, ail

to control health-care costs.

Proponents o the law have pointed to the CBOsFebruary 2013 budget outlook as evidence that thelaw is already reducing costs, particularly or Medi-care. In the updated outlook, the CBO did revisedownward its estimated spending or Medicare rom2013 to 2022 by $137 billion. However, 75 percento that revision comes rom Medicares prescriptiondrug benet, Part D.14 There is no reason to thinkthat the Part D savings stem rom Obamacare. Forone thing, actual Part D spending has been about30 percent below CBOs original projections. Moreimportant, Obamacare actually expands the PartD benet (and increases spending relative to whatit would be otherwise) by requiring manuacturers

to issue rebates to cover branded drugs through theinamous doughnut hole.

Obamacare does attempt several payment reorms

and initiates a number o pilot programs.15

Forinstance, to deal with the disproportionately largeshare o Medicaid spending by dual-eligibles (thosewho qualiy or both Medicaid and Medicare), CMShas started the Financial Alignment Initiative, whichplaces dual-eligibles into a private managed-careprogram to improve care coordination and outcomes.

Other attempts at cost control include the implemen-tation o payment reorm projects designed to getdoctors and hospitals ocused on delivering health caremore eciently and improving health outcomes or

patients, rather than simply maximizing payments orthe services they provide. Specically, Obamacare seeksto increase outcome-based care in Medicare throughthe use o Accountable Care Organizations (ACOs).ACOs allow providers who can oer better outcomesat lower costs to share in the savings with the ed-eral government. The evidence on ACOs, however,is mixeda CMS pilot project rom 2005 to 2010ailed to consistently show signicant savings.16 ACOsalso present antitrust concerns as well; i they encour-age greater hospital consolidation, which seems to bethe case, then reduced competition may stymie any

downward pressures on costs rom bundled payments.Because we do not yet know how these programs andother initiatives will ultimately play out, there is a pos-sibility that the ACAs eorts may yet result in modestsavings; but at this juncture, that appears unlikely.

As such, we give Obamacares cost-cutting eorts agrade:

C = Weak evidence that reforms will achieve theirintended goals or growing evidence of unintended

consequenceAs these programs and other evidence develop onObamacares eect on health-care costs, we will up-date our ndings appropriately.

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Mr 2013

8

endnotes

1. Washington Post, July 22, 2009.

2. A minor data issue concerns the combined use o MEPS and EHBS data. In recent years, EHBS data have shown

higher absolute numbers or employee contributions but slower rates o increase. MEPS data have shown the

reverse. We consider MEPS to be a more robust data source and one that is more nationally representative,

given the state-by-state breakdowns; thus, where possible, we deer to MEPS data. Year 2012 data were

projected or MEPS by using the ten-year average ratio (MEPS/EHBS) to project MEPS data or 2012 based on

existing 2012 EHBS data.

3. U.S. Department o Labor: Bureau o Labor Statistics, and authors calculations, based on the urban CPI or

medical care.

4. Congressional Budget Oce, CBO and JCTs Estimates o the Eects o the Aordable Care Act on the

Number o People Obtaining Employment-Based Health Insurance, March 2012,

http://www.cbo.gov/sites/deault/les/cboles/attachments/03-15-ACA_and_Insurance_2.pd.

5. Kaiser Family Foundation and Health Research & Educational Trust, Employer Health Benets, 2012 Annual

Survey, http://ehbs.k.org/pd/2012/8345.pd. Using Kaisers numbers gives a smaller potential increase than

the results we would have seen using the estimating methodology rom n. 2 above.

6. These numbers are not completely comparable with the numbers or average employee contributions, but

they still represent an important element o rising health-care costs. They are calculated as household private

health-insurance premiums divided by enrollment in employer-sponsored, other private health insurance, and

exchanges. These numbers include Medicare supplemental coverage (which is less expensive than ull insurance

coverage) and thus may understate increases. Additionally, these numbers do not include out-o-pocket

spending, such as deductibles. The drop in 2014 likely indicates a shit to premium subsidies or the exchanges.

7. Douglas Holtz-Eakin, Insurance Premiums in 2014 and the Aordable Care Act: Survey Evidence, American

Action Forum, January 2013,

http://americanactionorum.org/sites/deault/les/AAF_Premiums_and_ACA_Survey.pd.

8. The ten-year (200312) historical dierence between overall infation (CPI) and medical infation (Medical Care

CPI) is 1.4 percentage points. The 2012 Medicare Trustees report assumes an average 2.8 percent CPI increase

over ten years. CMSs projection or ten-year per-enrollee private health-insurance premiums is an average

increase o 4.7 percent. I the historical dierence holds, this means that medical infation should increase at

an annual average o 4.2 percent (over ten years). Thus, private insurance premiums should increase at an

average o 0.5 percentage points greater than medical infation (4.7 4.2 = 0.5). Note that this assumes that

medical infation will be greater than its ten-year historical average (200312) o 3.9 percent. Last, the CBOs

latest projections estimate an annual CPI increase signicantly less than 2.8 percent. By using a greater number

or CPI (rom Medicares Trustees), we may understate the dierence between medical infation and insurance-

premium-cost growth.

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9. A recent study by the RAND Corporation looked at the impact o high-deductible health plans (HDHPs) on

health-care spending. HDHPs increase the out-o-pocket share borne by consumersthe ndings indicate that

use o HDHPs results in lower health-care spending; seeAmerican Journal of Managed Care 17, no. 3 (March

2011): 22230. Previous studies also conrmed that consumers are very price-sensitive when choosing health-

insurance plans; see http://www.nber.org/reporter/summer06/buchmueller.html.

10. Gary Robbins, Aldona Robbins, and John Goodman, Ineciency in the U.S. Health-Care System: What Can

We Do?, April 1994, http://www.ncpa.org/pds/st182.pd; and Rand Health Insurance Experiment,

http://www.rand.org/pubs/research_bries/RB9174/index1.html.

11. See http://aspe.hhs.gov/poverty/13poverty.cm.

12. CMSs National Health Expenditure Projections, Table 16, Household Out-o-Pocket Expenditures,

http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/

NationalHealthExpendData/Downloads/Proj2011PDF.pd.

13. Future Medicaid spending is somewhat dicult to gauge; according to CMS, the programs per-enrollee costs

are greater than those o private insurance. However, this includes the elderly and disabled, who utilize health

services at a greater rate. Comparing per-enrollee costs or Medicaid with private insurance may indicate that

Medicaid is more ecient; however, this eciency comes at the cost o access to care, due to reduced

reimbursements to providers.

14. See CBO, March 2012 Medicare Baseline, http://www.cbo.gov/sites/deault/les/cboles/

attachments/43060_Medicare.pd; February 2013 Medicare Baseline, http://www.cbo.gov/sites/deault/les/

cboles/attachments/43894_Medicare2.pd; and The Budget and Economic Outlook: Fiscal Years 2013

2023, http://www.cbo.gov/sites/deault/les/cboles/attachments/43907-BudgetOutlook.pd.

15. Some pilot programs, such as the eort to increase eciency by adopting electronic health records, have not

been very successul.

16. Cola et al., Spending Dierences Associated with the Medicare Physician Group Practice Demonstration,

Journal of the American Medical Association (September 2012): 101523.

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director

Paul Howard

Fellows

Peter W. Huber

Avik Roy

The cr r M Prrss(cMP) is dedicated to articulating the importance o medical progress

and the connection between ree-market institutions and medical innovation. Through the research and

writing o CMP ellows, we encourage the development o market-based policy alternatives. The Center or

Medical Progress also publishes www.MedicalProgressToday.com, a web magazine devoted to chronicling theconnections between private sector investment, biomedical innovation, market riendly public policies, and

medical progress.

http://www.manhattan-institute.org/html/medical_progress.htm

The Manhattan Institute is a 501(c)(3) nonprot organization. Contributions are tax-deductible to the ullest

extent o the law. EIN#13-2912529

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