Now that the Supreme Court has upheld the new health care law, it is time to turn our attention to the looming health care cost crisis. Even before the Affordable Care Act (ACA), America spent 16% of its GDP -- twice that of the average OECD country -- on healthcare. Half that spending was by the government. The ACA expands Medicaid coverage for the poor and provides tax breaks for insurance purchases by families earning up to 400% of the federal poverty level or $92,000. This will add on average $140 billion in federal spending to the nation's health care bill each year beginning in 2014.
Moreover, the Supreme Court decision comes on the heels of grim news about Medicare, the government program that provides health insurance for the elderly and disabled. According to a report this spring by one of the Medicare's financial accountants, that program is almost broke. If the ACA is successful at raising revenue and cutting health care costs, it could save $210 billion over the next decade. If that money were used to finance Medicare, the trust fund that pays for Medicare's hospital expenditures might survive another 10 years. But the ACA earmarks those savings for deficit reduction. As a result, that trust fund will be bankrupt within 5 years. At that point, the next president will have to raise taxes or cut Medicare benefits.
The day of reckoning could be even sooner if the ACA is unsuccessful at cutting health care costs. The health care law uses three basic approaches to cutting costs. None inspires confidence. First, the ACA attempted simply to pay doctors and drug companies less. This tactic failed at the start. Lobbying by physicians reversed cuts to their reimbursement rates. Even if the cuts were implemented, patients would have suffered. If you go to the Mercedes dealer and say you want to pay 30% less than the sticker price, they'll direct you to the Hyundai dealer next door. If the ACA actually cut provider reimbursement, physicians would spend less time with patients, and pharmaceutical companies would invest less in developing the next generation cancer and Alzheimer's treatments.
Second, the ACA created a committee -- the Independent Payment Advisory Board -- to come up with ways to curb Medicare costs without reducing benefits. This is wishful thinking. Medicare is a program that has defied every effort to curb cost growth since its inception in 1965. It was initially expected to cost just $9 billion by 1990. Instead it cost $67 billion that year. Including additional benefits introduced over the years, Medicare now spends over $500 billion annually -- and keeps growing. The program attempted payment reform (paying for completed treatment rather than all the costs of treatment) in the 1980s and delivery reform (Medicare managed care) in the 1990s, with limited success. Government bureaucrats are unlikely to figure out a way to make the private hospitals and drug companies more efficient. And politicians will not attempt cuts in benefits. These constraints will not vanish with the formation of a new government committee.
Third, the ACA includes a series of demonstration projects that explore different ideas for curbing costs. These projects test virtually every theory that health economists and policymakers have come up with for curbing health care costs -- from value-based insurance reimbursement to medical homes to coordinate patient care across providers. Even so, these projects are a long shot. According to the Congressional Budget Office, none of the demonstration projects Medicare has attempted over the past two decades has succeeded at reducing spending. Moreover, even if the there are some good ideas in the new projects, we may not see any benefits. Trying all of them at once is like taking five different medications for the same illness: you are as likely to suffer side effects from the drug interaction as be cured.
Some health care experts take solace in the fact that health spending has slowed during the Great Recession. Historically, health care costs have risen nearly 6% per year, 2.4% faster than GDP growth. In the last 5 years, however, cost growth fell to 4% per year. If this slowdown is permanent, Medicare will get some breathing room. Don't count on it. Health care spending has slowed in the past -- most recently the late 1990s -- but quickly resumed its upward march. When the economy recovers, so will spending. Some may be tempted to credit the ACA with the slow-down. They would be mistaken: none of the ACA's cost cutting measures have been implemented yet. Indeed, when the ACA's coverage expansion begins in 2014, it could accelerate cost growth.
Ultimately the country has to face the fact that there is a tradeoff between the breadth and depth of health insurance coverage. Either the country can provide a lot of people a little bit of insurance coverage or provide a few people very generous coverage for treatment. We cannot have widely-available and generous health insurance. Before the ACA, the government provided some people very generous insurance, and others none at all. The ACA promises to give many more people very generous coverage. But once the bill comes due, we will be forced to either scale back the law to cover fewer people or to reduce the benefits it provides.