Why Democrats should stop talking about medical inflation.

How to fix health policy.
Dec. 2 2009 6:36 PM

Forget the Cost Curve

Curbing medical inflation is no longer a plausible reason to pass health reform.

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Max Baucus. Click image to expand.
Sen. Max Baucus 

For more than a year, Democrats have been saying that health care reform is all about "bending the cost curve." This was a plausible claim while a strong public option remained possible. Now, however, evidence is mounting that without one—the straightjacketed public option in the Senate bill will be weakened still further if not discarded altogether (as seems more likely) to win a filibuster-proof majority—health reform won't curb medical inflation. It's time to stop saying it will.

According to the Congressional Budget Office, there isn't one single cost curve, but four. Really, though, there are only two: private health care spending and government health care spending. Health reform, the CBO has concluded, won't really bend either one.

Private spending. On Nov. 30, the CBO released an analysis of the "blended" Senate health reform bill's likely impact on private-sector premiums. For most of us—that is, for the 59 percent of Americans who receive health insurance through their employers—the bill's impact on premiums would be virtually nil. That isn't surprising, since almost nothing in the bill would change the way employer-based health insurers do business.

The chief exception is a 40 percent excise tax on "Cadillac" health plans valued at $23,000 or more for families. The Cadillac tax was excluded from the CBO's calculations because its full money-saving effects wouldn't be felt in 2016, the year for which the CBO made its calculations. For the 19 percent of employer-insured workers affected by the tax, the CBO estimates that premiums would be lowered 9 percent to 12 percent. The tax would lower rather than raise premium costs because it's assumed employers would reduce the value of their plans to avoid the tax. In this instance, then, lower premiums would also mean less coverage.

Health reform's major provisions concern the "nongroup" market in which individuals purchase insurance on their own. This is where insurers typically commit their worst abuses (like rescission), which the legislation would outlaw, and it's where those who are currently uninsured would in nearly every case satisfy the bill's "individual mandate" to acquire health insurance. According to the CBO, health reform would, by 2016, drive the average per-person premium up 10 percent to 13 percent.

There are good policy-based reasons not to get too bent out of shape about this. For one thing, the price would be driven up mainly because new regulations would improve the quality of coverage offered. Nearly 60 percent of all people purchasing nongroup insurance in the newly established exchanges would qualify for an income-based subsidy. For this group, the subsidies would reduce average premiums 56 percent to 59 percent below current levels. A further consideration is that individuals receiving subsidies would have the option of purchasing a less-expensive (and less-generous) policy, but because of the way the subsidies are structured, the CBO calculates most of them would instead opt for a slightly more expensive (and more generous) policy. According to the CBO, most unsubsidized customers would bypass the rock-bottom policy, too.

(In a Nov. 27 analysis, MIT health economist Jonathan Gruber concluded the Senate bill would drive nongroup premiums down, not up. I asked him via e-mail why his findings were at odds with the CBO's findings. He cited the CBO's "buying up" assumption as the reason. The rock-bottom policies that the CBO assumes most customers would pass up are, Gruber explained, 14 percent to 20 percent cheaper than comparable policies available today. (The White House says the same thing.)

There are, in sum, many reasonable explanations for why health reform would drive average nongroup premiums up, in the CBO's estimation, 10 percent to 13 percent. But to the extent this constitutes bending the cost curve, it's upward, not downward. Government subsidies to lower-income policyholders don't alter the cost; rather, they shift it to taxpayers.

The CBO has not, to my knowledge, estimated the effect health reform would have on nongroup insurance premiums if it contained a robust public option able to tie its hospital and doctor payments to Medicare rates. But a July 14 CBO analysis of the House bill as introduced, with a public plan whose rates matched Medicare's for hospitals and exceeded them by 5 percent for doctors, concluded that public-option (nongroup) premiums would be 10 percent cheaper than private nongroup premiums. I'm no economist, but surely this degree of competitive pressure would result in private nongroup premiums considerably lower than would exist in the absence of health reform. Alas, "Medicare plus five" had to be dealt away to win sufficient votes for House passage. It wouldn't stand a chance in the Senate.

Employer-based health insurance, as I noted before, is almost completely untouched by health reform. But back when there was some promise that health reform might contain a strong public option, it was possible to imagine that over time eligibility to participate in the nongroup exchanges might be broadened to let in those already eligible to receive health insurance through their employer, and that many in this group might seek relief from rapidly rising premiums by buying into the less-expensive public option.

But as things stand now, it's hard to see what—apart from the excise tax on Cadillac plans—health reform might do to tackle the problem of ever-more-expensive premiums in employer-based care. Between 1999 and 2008, employer-sponsored health insurance premiums increased six times faster than wages. For many of us, this is where the conversation began. The CBO's finding that health reform won't worsen this already-terrible problem is nothing to brag about.

Public spending. The Obama administration has insisted all along that health reform and deficit reduction are the same thing. The CBO's calculations show that's true only to a limited extent. A more honest assessment would be that the health reform bill would mostly be deficit-neutral.

In health care, the public-sector cost curve is a little less steep than the private-sector cost curve. Between 1970 and 2003, private health insurance spending rose 10.1 percent annually, as compared with 9 percent for Medicare. Why, then, do you hear so much talk about terrible out-of-control Medicare spending? Partly because it's public spending that contributes to a $1.4 trillion deficit; partly because many people expect that an aging population will cause Medicare's growth rate to overtake private health insurance's growth rate in a few years; and partly because an annual inflation rate of 9 percent is still pretty bad.

The Senate health reform bill, the CBO says, would cut $491 billion from government health programs (mostly Medicare) during the next 10 years and redirect it into subsidies to help lower-income people to purchase health insurance and expand enrollment in Medicaid and the Childrens Health Insurance Program. This has the Republicans—especially Sen. John McCain, R-Ariz.—in a swivet. (Never mind that McCain, during his 2008 presidential bid, proposed funding his health reform plan with cuts to Medicare and Medicaid that he refused to quantify but were estimated by the nonpartisan Tax Policy Center to amount to $1.3 trillion.) Overall, the increased coverage is projected to cost $848 billion over 10 years. To help pay for this, the Senate bill raises taxes by $486 billion. When the dust settles, CBO estimates, the net effect would be a $130 billion reduction in the deficit after 10 years.

But that $130 billion, budget experts have been quick to alert me, includes $72 billion that really shouldn't be counted. The $72 billion is savings generated by the Community Living Assistance Services and Supports (CLASS) program, a new voluntary program to insure against nursing-home and other long-term care. Participants must pay in for five years before they can become eligible to collect benefits, so of course the net effect during CLASS's first 10 years will be to build up cash reserves to be spent later. (By law, the program must pay for itself, something the CBO projects it will stop doing after 20 years; but that's another story.) Put CLASS's $72 billion into the proverbial lockbox and the Senate bill's savings dwindle to $58 billion.

Factor in assorted uncertainties and accounting gimmicks (the Senate bill's spending doesn't start to ramp up significantly until 2014), and it seems prudent to conclude only that the Senate bill would pay for itself. Anticipating this likelihood, a much-cited Nov. 17 letter to the president from 20 prominent economists emphasized not that the bill must reduce the deficit but that it must achieve "deficit neutrality."

Mission accomplished. But that's not bending the cost curve.

I haven't taken into account the various "delivery system reforms" in the Senate bill, much-touted by the Atlantic's Ronald Brownstein in a Web column that was quickly embraced by the Obama White House. These are a variety of measures, many of them pilot programs, aimed at making hospitals and doctors more accountable. The consensus is that these are A) worth trying and B) unlikely to deliver tangible savings in the near term. The CBO has accordingly been hesitant to ascribe to them any significant curve-bending properties. It would be rash to say more than that they may bend the curve in the future. For example, a just-released report  by the Medicare Payment Advisory Commission, which the health reform bill aspires to transform into a Fed-like, quasi-independent budget-cutting apparatus, concludes that regional variations in Medicare spending (the subject of a hugely influential Atul Gawande story  in the New Yorker this past June) aren't nearly as great as was previously supposed.

If Democrats can't say health reform would bend the health inflation cost curve, what can they say? More than enough to justify its passage. Most important, it would extend health insurance coverage to 31 million of the 45 million people who currently lack it. It would also curb a variety of abuses by insurers (primarily in the nongroup market) that make health insurance unavailable to those who need it most. The bill would achieve these two goals in a fiscally responsible way (which is a lot more than you can say about the last major health bill in 2003, which extended Medicare coverage to pharmaceuticals without figuring out how to pay for them).

Health reform isn't what it could have been, but it's a good bill. Democrats should praise it. But they should stop saying it will bring health costs down in the private and/or public sectors, because there's precious little evidence that it will.

E-mail Timothy Noah at chatterbox@slate.com.

Timothy Noah is a former Slate staffer. His  book about income inequality is The Great Divergence.