The Costs of Overturning the President’s Health Care Reforms

Partisan politics and constitutional principles received equal billing in last week’s showdown over health care at the Supreme Court.  Much of the commentary has tried to interpret the questions, gestures and tone of the Justices, in hopes of divining which party and vision of government will likely prevail.  Such divinations are notoriously unreliable in controversial cases.  But whatever the Justices decide, the decision will have enormous long-term economic effects on how much medical care average Americans receive and how much they pay for it.  

It has been clear for some time that without major reforms, the U.S. health care system will soon impose unmanageable burdens on millions of middle-class Americans.  By 2016, the average family is expected to earn about $54,000.  In that year, moderately-priced, family health-care insurance coverage will cost about $14,700.  Employers will pick up much of that tab for most middle-class families.  But all of those employer payments come out of people’s wages and salaries.  So, adding the value of that coverage to the average family’s income in 2012 -- $54,000 + $14,700 = $68,700 – we see that the cost of the health care insurance alone will soon claim more than 21 percent of an average family’s annual resources.

On top of that, by 2016, the average family’s co-payments and other uninsured expenses are expected to come to another $5,100.  Our average family also will pay taxes to help cover other people’s health care – 2.9 percent of their wages for Medicare ($1,566), plus perhaps $1,000 more in federal and state taxes for Medicaid and Medicare costs not covered by the payroll tax.  Add all of that to the cost of their insurance, and health care will claim $22,366 from an average family in 2016, or 32.5 percent of their adjusted income of $68,700.

Why should the average American family have to pay nearly 33 percent of its income for a health care system which by 2016 should claim about 18 percent of GDP?  Part of the answer is that the average worker earning $68,700, a manager making $150,000, and the CEO earning $5 million all pay roughly the same $14,700 for their family coverage.  The result is that middle class families spend a much larger share of their income on health care than wealthier families.  

One of the reasons why health insurance costs middle-class families so much, however, is that their bill includes a good share of the costs of treating those without insurance.  The tab for treating the injuries and illnesses of more than 50 million Americans with no public or private coverage will come to about $68 billion this year.  Government picks up some of those “uncompensated costs,” and doctors and hospitals eat some of their costs.  But most of the rest is passed along in lower payments to insurers, who in turn pass along those losses to their customers in higher premiums or reduced coverage which drives up out-of-pocket costs.  A reasonable estimate of the costs of treating the uninsured which are passed along to average policyholders is about $300 per-person, or some $1,200 for an average family.

The President’s plan to end those pass-along costs by mandating universal coverage was, of course, the central issue in this week’s arguments at the Supreme Court.  And behind the high-minded debates over principle lies the harsh politics of who is to pay for it.  The President’s reforms shift most of the costs of the uninsured to the government by expanding Medicaid and providing subsidies to uninsured people and families mandated to get coverage.  These costs ultimately will be financed through non-payroll taxes – the personal and corporate income tax – which in turn fall disproportionately on higher-income Americans.  That is the choice, and it helps explain the vehemence of the partisan battle over the mandate:  The President’s reforms will shifts tens of billions of dollars in annual costs from middle-class families with private insurance to more affluent taxpayers. 

The good news for the well-to-do if the President prevails is that the new reforms also include measures to contain the future costs of covering those without easy access to insurance.  To begin, covering the uninsured should reduce the cost of their care, at least over the long-term.  Uninsured people are much more likely to suffer strokes, for example, because they are much more likely to have undiagnosed hypertension, diabetes and high cholesterol.  Or, among people with cancer, the uninsured today are much more likely to be diagnosed later, and so require the most expensive interventions.  Uninsured people also are less likely to fully recover from many injuries, making them more likely to suffer subsequent medical problems that require more treatment.   Ensuring that everyone has insurance, therefore, should reduce those costs. 

The reforms also include a package of measures that may begin to slow the health-care inflation which for years has been eating away at everyone’s insurance coverage.  These measures range from the push to establish uniform electronic medical records, to a more results-based reimbursement process for doctors and hospitals, and steps to encourage them to adopt more cost-efficient medical protocols and practices.  To be sure, the reforms do not include the most controversial and partisan cost-saving measures, including tough medical malpractice reforms and an option for public insurance in places where competition among private insurers is weak.  Still, they are a beginning.  

After Bill and Hillary Clinton’s push to reform health care failed in 1994, it was 15 years before another President and Congress took up the issue again.  If the Supreme Court unravels what they did, it almost certainly will be many more years before anyone tries again.  The economic consequences of that scenario would be inescapable.  The number of uninsured people and families will continue to grow.  The costs of their treatment will continue to squeeze coverage and increase the costs of private insurance for most middle-class families.  And without measures to “bend the curve” of medical cost increases, average families will find themselves forced to spend one-third or more of their real incomes on their health care.