The Cost of U.S. Health Care Reform

March 28, 2010

At 16.5 percent of GDP and rising, America’s health care spending is the highest in the industrial world. By most measures, this spending has not produced superior health care outcomes.  The health care reform billed passed by Congress will drive these costs even higher. 

When Mr. Obama first introduced health care reform, he said that the weight of health care spending was a burden on U.S. business and needed to be restrained.  He was correct.  Unfortunately, the burden is likely to rise further.

What will cause these costs to continue to rise? 

First and most fundamentally, the bill increases demand without immediate measures to increase the supply of health care providers. Even excluding the time it takes to increase supply, most U.S. state governments do not have resources to do so without federal government support. Whether that support will or can be provided is an open question.

Second, this complex bill further increases the administrative burden on the system, especially since the federal government is also adding new regulations and a bureaucratic apparatus to enforce them.  One of the reasons that America’s health care is so relatively expensive is that the administrative cost adds several percentage points of cost that no other country faces. That cost now increases.

For example, the bill requires almost all Americans to carry health insurance, with public subsidies if necessary.  Enforcing that provision in a country so large and generally hostile to government will be extraordinarily difficult. 

Third, there are few meaningful constraints on the key determinants of cost: drug expense and physician compensation. And such constraints as exist will need to be enforced. But the complexity of the rules and procedures make enforcement always costly and often ineffective.

 It was therefore not surprising that after the bill passed, the stocks of most health care providers rose.  They had, after all, dodged the bullet.

Fourth, since insurance companies are now required to increase coverage for high-risk customers, their profits will be adversely affected.  They will then increase premiums.  The bill does no more than demand that they “justify” the increases. What for-profit company could fail to justify a price increase based on rising costs?  So premiums will rise and the burden on employers will increase.

It might be noted that the bill offers access to health insurance, not actual access to health care.  There is a difference.

Fifth, a large part of the savings anticipated by the bill is a dramatic reduction in spending on Medicare for the elderly. In the contentious political environment of America, where elections are hard-fought and often close, few expect Congress to actually implement such constraints.

Sixth, there is no single institution or point of authority responsible for restraining health care costs.  In every domain of endeavour, costs rise inevitably unless there is a determined effort by someone mandated to restrain them. Even in other countries with ministers of health or finance who try to control costs, the battle to do so is endless. In the U.S. cost-control is apparently going to be on auto-pilot.

It must be granted that the passage of the health care bill was a significant and symbolic victory.  However, informed opinion in Washington [including, one presumes, Mr. Obama] understands that the struggle for accessible health care in America has only begun. And they know that the battle to restrain costs will be long and brutal.

Notwithstanding the unsustainable aspects of the present bill, its most alert proponents believe that it was essential to extend this promise of access. Then when the inevitable cost pressures build, Congress will be forced to tackle costs and improve the efficiency of health care delivery. In other words, once the entitlement to health care has been provided, no Congress will be able to reverse it.  

But this is a very dangerous strategy.  It might work; it could as easily backfire.

There are several reasons to be concerned.  First, it will take several years to implement the bill and the sense of entitlement might not be locked in fast enough. Moreover, the majority of Americans who already have health care coverage are not sure if the bill benefits them. This perception interferes with creating that desired sense of entitlement. [The bill does provide benefits to almost all Americans, but the bill’s complexity interferes with making that message.]

Second, the appearance “entitlement” might stay in place, but it could be effectively gutted.  Indeed, Congress could easily react to subsequently soaring costs by just reducing the coverage of the insurance. Of course, that response might be affected by which party was in power at the time.

Third, by failing to both pre-empt and attack his opponents, Mr. Obama leaves himself, his administration and the Democratic Party vulnerable to losing power. Unfortunately, by offering an implausible estimate of cost, he has handed his enemies a persuasive weapon, just as the recession and its continuing effects leave many Americans feeling angry and anxious.   


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