The President's Reforms and the New Politics of Health Care Costs

The health care reforms enacted this week are an unequivocal political triumph for President Obama. He turned back the most intense and dogged partisan campaign to stop a piece of legislation seen in this era, enhancing his own popularity and power until at least the next setback. More important, the reforms as passed constitute the most serious social-policy achievement in two generations. They not only provide a clear and secure route to insurance coverage for two-thirds of the Americans who don’t have it. The President’s reforms also end a sheaf of abhorrent insurance practices – most notably, preexisting condition clauses and lifetime coverage caps – which withhold payment for care when, as it happens, people actually need it most. The open question, however, is whether the reforms also will make the country’s health care system more sustainable by slowing its trajectory of cost increases. 

Without reforms to do so, those prospects are at once scary and unsustainable. A few months ago, I calculated how much an average, middle-class family should expect to spend on health care in 2016: The answer is fully one-third of the family’s real annual income – a level that’s unsustainable both economically and politically. 

Here’s how I figured it out. The Congressional Budget Office tells us that an average family will earn $54,000 per-year in 2016, when moderately-priced family insurance coverage will cost $14,700. Most people’s employers will pay much of that bill; but those payments come out of people’s wages, not the company’s profits. Taking this into account, a middle class family’s earnings in 2016 should come to $68,700 ($54,000 + $14,700), of which $14,700 or 21.4 percent will go for health insurance. That’s not all. Experts figure that their co-payments and other uninsured expenses, on average, will come to another $5,100 in 2016. They’ll also pay taxes to help cover other people’s health care – 2.9 percent of their cash wages for Medicare ($1,566), plus perhaps $1,500 more in federal and state income taxes for Medicaid and for Medicare costs not covered by the 2.9 percent payroll tax and for the subsidies for the uninsured under the new reforms. Add up all of that, and it comes to $22,766 or 33.3 percent of the middle-class family’s adjusted income of $68,700.

As Harvard health care expert David Cutler and others have concluded as well, the new reforms provide a credible beginning for what will still be a long and arduous process to control cost increases. Here’s how. To begin, the insurance exchanges should reduce costs in the individual and small-group insurance market, while the investments in IT should help slow costs across the system. In the largest and fastest-growing part of health care, treating the fast-rising numbers of older Americans, the reforms also include significant cost reductions in Medicare.  Perhaps most important, Medicare will move from volume-based payments to reimbursements based on the value of the treatments. In addition, the reforms create a new Medicare advisory board to propose new ways to cut costs or save expenses, tied to a process for fast-tracking the recommendations through Congress; and there are also cuts in overpayments for Medicare Advantage and other supplemental Medicare plans, as well as new measures to reduce Medicare fraud and abuse. Finally, there’s a new emphasis on prevention programs, which could significantly reduce future costs. 

All of this will help, but it won’t reduce the share of our average family’s income going to health care by more than a percentage-point or two. To make a bigger difference, each party will have to accept much more difficult changes advanced by its rival.  So, Democrats will have to live with taxing a good share of the value of employer-provided coverage – the only tax increase conservatives will swallow these days – along with malpractice reforms more far-reaching than the limited state-based experiments enacted this week. For their part, Republicans will have to accept a public option, the only way to introduce real competition for insurers in areas where one or two of them now constitute an effective monopoly or duopoly.

Happily, the passage of the President’s reforms this week will make such hard steps much more likely politically, if not any easier. The reason is that with these reforms, the federal government, for the first time, has accepted overall responsibility, and ultimate accountability, for the nation’s health care system. When costs continue to rise sharply, as they will, voters across the country will have Washington as a focus for their displeasure, and the next election as an effective way to express it. That political prospect will drive much more stringent steps to contain costs, as it has in every other advanced country in the world. Only it’s coming later here, which is why we now spend so much more than other countries on health care.