Another Obamacare Failure: Health-Care Spending on the Rise

A key goal of the Affordable Care Act seems to be in jeopardy. 

One of the central goals of the Affordable Care Act has always been to reduce medical spending. As President Barack Obama said in 2009: "You talk to every health care economist out there and they will tell you that whatever ideas are—whatever ideas exist in terms of bending the cost curve and starting to reduce costs for families, businesses, and government, those elements are in this bill." Lowering the cost of health care is a laudable public-policy goal. Health care expenditures in the United States have escalated rapidly over the past few decades, which is a concern for two reasons. First, it is not clear that all of this money is actually improving health outcomes, as opposed to fattening the wallets of the merchants of waste, fraud, and abuse. Second, the large share of health-care spending borne by the government makes rising costs a major threat to the long-term fiscal health of the nation.

Now let me be clear: announced goals are one thing; actions and results are a quite different phenomena. How was Obamacare intended to address the issue of rising health-care spending? Here are a few things it was designed to do: it was meant to expand health insurance to millions of previously uninsured Americans, by having taxpayers or other insured citizens pick up (most of) the bill; it forced health insurance companies to spend a larger share of their revenue on health care; it introduced minimum essential benefits and maximum out-of-pocket expenses, effectively making insurance plans more comprehensive and artificially reducing the prices faced by consumers when they make their health care choices; it raised taxes on medical devices; it raised taxes on insurance policies. “Hold on, wait a second,” I can hear you whisper in disbelief, “won’t those things increase health care spending?”

Well, we now have the first quarter of 2014 to judge the spending effects of the law, albeit provisionally. According to the Bureau of Economic Analysis, real health-care spending during the first three months of the year jumped by an annualized 9.9 percent.

That is a staggering number.

It is also not a good indicator of how spending will evolve in the long run. The BEA’s quarterly estimate is not definitive: results from the main survey it uses to track these numbers will not be available until later this year. On top of that, this annualized number is based on the rise in spending between the last quarter of 2013 and the first quarter of 2014. The first quarter of 2014 saw a big jump in insurance coverage, and that increase is a central driver of the BEA’s projections, which are not driven by price increases. It is highly unlikely that the remaining three quarters of the year will see similar jumps in enrollment. As a consequence, this one-quarter annualized increase will almost certainly not turn into a 10 percent overall increase for the full year.

What this number is a good indicator of is that in terms of controlling spending, the ACA is a mixed bag at best. Having people consume things at highly subsidized rates is not a way to get them to consume fewer of those things. Forcing people to buy insurance for minor or routine expenses introduces an unhelpful layer of bureaucracy and effectively lowers prices when people reach their decision. These are bad elements of the law, and moving toward a system of catastrophic insurance would be a big improvement. Constructing a system in which payments are based on quality, not quantity, on the other hand, is laudable, and some elements of the law attempt to steer providers and insurers in that direction.

If your goal really is to lower spending while expanding access to insurance where it is valuable, then keeping the latter elements while repealing and replacing the former is the way to go. At the same time, if your goal is to micromanage people’s everyday lives, it is precisely the first group of elements you want to keep, to establish controllable comprehensive coverage with centralized price setting.

The Obama administration has paid a lot of lip service to the first goal. We will soon be able to tell what their level of sincerity was then. If they decide to stick with the unproductive, cost-increasing features of the law, their proclaimed dedication to fiscal sanity and health care that produces value for money will have turned out to be yet another series of lies designed to force a centralized, bloated scheme down the country’s throat. The fact that the administration cunningly claimed credit for cost growth reductions that occurred even before the law was in place, and that were mostly driven by the recession, certainly doesn’t bode well.

Stan Veuger is a resident scholar at AEI. His academic research focuses on political economy and applied microeconomics.