Economics

Is Obamacare Responsible For the Recent Slowdown in Health Care Costs?

That is what we have been told the Obama administration will claim today as they begin the job of reselling Obamacare.

Is Obamacare even partly responsible for the slowdown in health care costs?

That is silly.

First, Obamacare is not a health care reform law; it is a health insurance reform law. No one on either side of the debate has ever argued anything different.

Does the law have some limited cost containment features in it?

Yes. But these are either pilot projects or are years from being fully implemented.

I have heard the argument that the Medicare cuts that were made to help pay for the program are examples of cost containment efforts that are having a short-term impact on controlling costs. The Democrats need to be careful with this one. I recall their countering Republican “Mediscare” claims by saying the Medicare cuts were not significant.

In a letter last year accompanying the Medicare Trustee’s report, the Medicare actuary said, “The [Obamacare Medicare cuts] will affect Medicare price levels more gradually, but a strong likelihood exists that, without very substantial transformational changes in health care practices, payment rates would become inadequate in the long range.”

Translated: The Obama Medicare provider cuts are not having a big impact in the short-run but will be unsustainable over the longer-term.

Obamacare cuts Medicare Advantage payments. But those cuts have either so far been put off or are just beginning to bite. The first real cuts hit in 2014 and the first big cuts come in 2015.

These provider cuts in their totality are a tiny percentage of health care spending in the first few years and have had almost no impact so far. The 2% across the board sequester cuts that have already hit provider payments and Medicare Advantage plans have been far more significant.

Some have argued the new Medicare Accountable Care Organization (ACO) program, that reorganizes provider payment away from fee-for-service, is having a big impact. First, private ACOs were around long before the Obamacare architects had the idea. Second, the Medicare ACO program is only a pilot program just getting off the ground. Recent reports regarding the first 32 advanced “Pioneer” ACOs only showed very limited and mixed results for the first year.

Then there is the high cost health plan “Cadillac” tax designed to discourage overly generous employer plans. It begins in 2018. We are getting indications that many employers are beginning to pare their health plans back so as not to hit the tax threshold four years down the road––but this is something that is only just beginning to happen particularly as employers announce their plan changes for 2014.

Perhaps the biggest, and most controversial, cost containment element of the Affordable Care Act is the Independent Payment Advisory Board (IPAB), which has the power to change Medicare reimbursement if costs are escalating at an unsustainable rate. But the IPAB doesn’t even begin until 2015––the board members haven’t been appointed yet. More, it appears that health care cost trend is now so low the board may not even be triggered come 2015.

Why are health care costs escalating at historically low levels?

That is a question health care economists have been debating. No one is really sure. But at least three reasons are commonly listed:

  1. The economic slowdown that has persisted. Health care cost trend has long tracked the overall economy.
  2. Health insurance plans, particularly employer plans, have been going through a multi-year push to increase deductibles and co-pays as well as put consumers in a position to be more accountable for their health care spending choices. Health savings accounts have grown markedly in recent years.
  3. Managed care companies and their provider partners have made a marked improvement in changing the way care is delivered and paid for––today’s health care delivery system, while still largely a fee-for-service system, is not the same one we had ten years ago.

Clearly, there is a lot of debate over just what is causing the slowdown in health care costs.

I guess that just creates an opportunity for eager politicians to find another thing to spin.

Robert Laszewski has been a fixture in Washington health policy circles for the better part of three decades. He currently serves as the president of Health Policy and Strategy Associates of Alexandria, Virginia. You can read more of his thoughtful analysis of healthcare industry trends at The Health Policy and Marketplace Blog, where this post first appeared.

 

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AurthurBilly WynnespikeMichael TurpinMichael Turpin Recent comment authors
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Billy Wynne
Guest

A great exchange indeed. Impressive depth here. I’m struck though, by Mr. Laszweski’s casual recitation of the most demonstrably false myth about the ACA – that it “is not a health care reform law; it is a health insurance reform law.” The added blow – “No one on either side of the debate has ever argued anything different” – is simply deceptive. Mr. Laszewski is clearly engaged enough in the debate about the ACA to know otherwise. Let’s go back to first principles. There are nine titles of the ACA. Only one of them deals with reforming insurance markets. The… Read more »

Bob Hertz
Guest
Bob Hertz

This has been a good exchange. Thanks Michael Turpin for the detail you have given. I am like Archon 41 in that I thought that the savings for self insurance would be higher. Probably I go back to that case in Texas about 12 years ago, where a music company had a patient who got AIDS and they just rewrote their plan to deny his claim. You can look at the whole history of health insurance since 1950 as the effort of healthy groups to escape from community rating. First it was commercial insurers who discovered the healthy groups and… Read more »

Michael Turpin
Guest

As Barry knows, self insurance is not a panacea, it is merely a financing mechanism that creates transparency which is a key ingredient to achieving market reform and lower margin cost of care. BTW, the 6% you trivialize is $600k for an employer that spends $10M a year on healthcare. $10,000 is about the average for a 1000 employee company. Let’s assume $200k a head in revenues for this $200M company. Let’s further assume EBITDA margins of 15% or $30M. This equates to $30,000 ( $30M/1000 lives) per capita profit per employee. $10,000 of gross per capita healthcare cost is… Read more »

archon41
Guest

Let’s see how simple I can make this: You have broadly implied that the high cost of medical care can largely be attributed to the excessive profit seeking and self-dealing of insurers. The fallacy of this notion is demonstrated by, among other things, the modest savings of self-insured employers.

Claiming, in your apparent confusion, that insurers can and will “game the system” by overpaying medical claims is really a bit much.

archon41
Guest

With specific respect to group policies issued to employers, and to individual policies written through the exchanges, I really have no idea what you’re talking about. You seem to suppose that expenses such as claims administration, when performed through a “subsidiary,” can be included within the 85% medical loss ratio. This is not correct–such expenses come from the insurers 15% “cut.” Let me further point out that this “cut” is not calculated as a percentage of payments to medical providers. Both the 15% and the 85% are calculated on the basis of the premium dollar, leaving the insurer no conceivable… Read more »

Barry Carol
Guest
Barry Carol

archon41 – Your question about the potential savings from self-insuring came up at the UnitedHealth Group Investor Day meeting last Tuesday. United’s answer was 6%-10% depending on the state. Most of the savings, as you noted, comes from being exempt from state benefit mandates. There are additional savings from not having to pay state insurance premium taxes. The employer also maintains control over its insurance reserves which isn’t a big deal now in this time of near zero interest rates but was more material when interest rates were higher. Also, as Michael said, access to its claims data helps the… Read more »

archon41
Guest

As I’m sure you’re well aware, it has often been alleged, on these pages, that the costs of health care might be dramatically reduced by elimination “extortionate” insurer profits and self-dealing. There is no doubt in my mind that these vitriolic outbursts led many people to suppose that the costs of funding medical care for “uninsurables” would be borne, not by themselves, but by “greedy insurers.” Little wonder so many of them now feel that they were manipulated. If UnitedHealth was endeavoring to show how much they could save an employer by setting up a self-insurance program for him, their… Read more »

Michael Turpin
Guest

Yes, Medicare has been serially underpaying physicians for years but so has commercial insurance — which has probably done more to drive the primary care doctor into extinction than Medicare. Remember Medicare is unmanaged fee for service medicine which allows many providers to make up in volume what they lose in unit cost. Under commercial insurance, providers cannot do either — unless they are big and well organized. Insurers pay higher rates to larger institutions because they have to, not because they believe they are 300% more clinically effective. Employers want broad, open access PPO plans and insurers know it.… Read more »

Barry Carol
Guest
Barry Carol

Michael – I assume you are referring mainly to the Optum segment of UnitedHealth Group in your discussion of high transfer prices for health services within the same company to drive overall profits. Regarding PBM’s, my understanding is that they have four different ways to make money. They are (1) administrative fees, (2) rebates from drug companies for moving market share, (3) the spread between what they pay for a drug and how much they bill the employer for it and (4) filling generic prescriptions through their mail order pharmacy. They’re perfectly willing to sign contracts with employers that pass… Read more »

Michael Turpin
Guest

Providers don’t want to be compared and contracts make it harder to disclose fee negotiations. Insurers would like to dsclose more and actually grade provider performance to tier networks based on episode based performance. However bigger high costvsystems seem to have been successful so far in notvallowing themselves to be relegated to tier two reimbursement. With the of the ACO, many systems ( mostly higher cost advent, high quality mega regional systems ) have launched their own products. So far, they are closed panel, narrow network fee for service products. Since they are among the highest unit cost providers out… Read more »

archon41
Guest

“they [insurers] have a perverse incentive to keep costs up as they can only keep 15% for risk and profit.” You’re not suggesting that expenses associated with marketing, underwriting, claims administration, regulatory compliance, legal expenses, liability insurance, and brick-and-mortar infrastructure don’t come out of that 15%, are you? Are you suggesting that insurers are deliberately overpaying medical providers, to enhance their 15% “cut”? If so, why are so many providers squealing with indignation about the fees they are receiving for their services? You have read, have you not, the complaints about the inadequacy of ACA compensation being voiced by physicians… Read more »

Michael Turpin
Guest

While I find the imperfection of Obamacare as well thought out as an episode of Honey Boo Boo, I have to disagree that Obamacare has not set in motion changes that have contributed to lower costs. First of all, consumption is down while unit costs in the commerial side co he to rise. RX costs, as much as 20% of costs have dropped temporarily as brand named drugs lose patent protection and get hit with generic competition. Employers are more engaged — especially larger employers over 500 employees who tend to be self insured. It really depends on what segment… Read more »

State Farm
Guest

the bottom line is health care costs have slowed down and that is a good thing which ever way you turn it around

archon41
Guest

Perhaps it would be more effective to put physicians on straight salary, and assign them quotas of “throughputs.”

archon41
Guest

Given the constants of human nature, it’s not immediately apparent how you can retain a fee-for-service plan (as in Canada), without attempts to “game the system.” According to the Canadian Health Care Anti-fraud Association, health care fraud is alive and well in Canada, even “rampant.”

Peter1
Guest
Peter1

“According to the Canadian Health Care Anti-fraud Association, health care fraud is alive and well in Canada, even “rampant.” And that would mean? Don’t know where you got the “rampant” word from but under the heading: “The Problem of Health Care Fraud” was this; “While estimates vary, it can be safely stated that health care fraud costs Canadians billions of dollars each year. Like other types of fraud, it is a complex problem, as it comes in a variety of forms that can be difficult to detect. What makes health care fraud so pervasive is the fact that it can… Read more »

archon41
Guest

I’m simply pointing out, in response to a comment made above, that incorporating fee-for-service plans in a single-payer collectivized health care scheme (as in Canada) does not remove the need for “paper pushing” and “claims contesting.” Otherwise, you are giving providers draft authority on your bank account. As for “evidence,” just what do you require, in the wake of the findings of Dr. Gawande?

Peter1
Guest
Peter1

#41, since we’re on to Canada you might want to get some info from this site: http://www.cihi.ca/CIHI-ext-portal/internet/EN/Home/home/cihi000001

You can look at all sorts of cost data. One section gives cost of hospital stays in all regions of the country. Look in “Health System Performance – Our Health System” I can’t link because this site restricts double links.

Average Cost of hospital stay – $5300. How does that compare to U.S.?

Barry Carol
Guest
Barry Carol

There are companies called Recovery Audit Contractors (RAC’s) that can audit provider charges billed to Medicare up to three years after the date of service. The RAC’s earn a 9% commission on any money recovered from providers due to errors that can be caused by anything from outright fraud to innocent mistakes regarding missing or improper billing modifiers. As a taxpayer, I certainly don’t want Medicare to be a big dumb payer that promptly pays provider bills without question. Indeed, I wish CMS made more aggressive use of data analytics and other techniques to identify suspicious bills before they are… Read more »

Bob Hertz
Guest
Bob Hertz

Some of the decline in Medicare costs may come from classifying more and more hospital visits as “observation only.” This means that Medicare Part A does not have to pay for them. Of course some of the bills are shuffled off to Part B. As to Peter’s defense of single payer leading to less paper-pushing and exhaustive claim contests — I wish he were right but in the American context he may not be right. Medicare right now is our closest thing to single payer, and it has millions of denied and challenged claims every year. If Medicare really cracked… Read more »

David Auerbach
Guest
David Auerbach

Robert, as Barry notes, the slowdown in Medicare has been even more dramatic than in the under-65 sector, which seems to rule out #2 of your 3 explanations and to take a huge dent out of #1 as well (elderly incomes are less affected, and as the stock market has reached new highs, the slowdown in Medicare costs seems to accelerate). Most evidence seems to point to the supply side. If you talk to hospitals and physicians these days, many truly feel that fee for service, or the old way of doing business, is gradually going away (and the ACA… Read more »

archon41
Guest

This sucka’s goin’ down. Revolutions require present, not future, support. Read the polls. Obamacare was hawked to the middle class on the fallacy that the insurers would be forced to fund it from their vast profits. Said middle class is now bleating loudly, finally aware that it is they who are to be shorn. Most of them do not share your resentment that some can afford better health care than others. We should have focused on improving the quality of care of the indigent and uninsurable. But that would have required an upfront disclosure of the costs, wouldn’t it?

Peter1
Guest
Peter1

“We should have focused on improving the quality of care of the indigent and uninsurable.” First we had to get them actual care as it’s hard for them to assess quality from outside the system. At least the subsidies attempt that. “Most of them do not share your resentment that some can afford better health care than others.” You’ll have to define “better care” in respect to also wanting to “improving the quality of care of the indigent and uninsurable”. I don’t know, would affording better mean fighting cancer with every known tool, while those with “worse care” get the… Read more »

archon41
Guest

I heard an OWS type the other day insisting that everyone has a “right” to “the best legal representation.” (I suspect some of his more boisterous activities had landed him in legal difficulties.) Well, he has a point, no? I mean, preserving one’s liberty to move about is pretty “fundamental.”

archon41
Guest

The only reason Obama, Reid & Co. didn’t ram through “universal single payer” is that they knew they would be summarily tarred and feathered (if not defenestrated.) Outraged providers would have led the charge.

Peter1
Guest
Peter1

I fully agree, but health care needs a revolution and revolutions take time to develop from outrage, you see, premium payers can have outrage as well and they hold the votes. If the ACA facilitates employees being moved to the individual market that will increase their voting strength.

Maybe not in my lifetime (not much time left anyway) but it could happen.

If current cost trends continue patients/premium payers will eventually want something different, not something the same that’s billed as different. Where will all these outraged providers go – to Canada, to Germany, to Briton, to France?

Barry Carol
Guest
Barry Carol

Peter1 – According to recent data from UnitedHealth Group, 64% of commercially insured members who get their insurance through an employer are now in self-funded plans. This percentage has been rising for years. Insurers make as little as $20 per member per month (PMPM) in revenue and a 15%-20% pretax profit margin ($36-$48 per year) on this fee based business. They make far more on fully insured risk based business which is steadily shrinking because it’s becoming less and less affordable for employers. For employers big enough to take the risk, self-funding is 6%-10% cheaper than going the fully insured… Read more »

Peter1
Guest
Peter1

As usual Barry, It’s “not my fault.” Look to the other guy”. “We’re all starving here.” “the Blues are often the insurer of last resort and, I suspect, tend to attract a sicker than average risk pool.” Barry, that is not true in NC. BCBS is a virtual monopoly here. It holds ALL the state employee business. Its cross section of insured covers the whole spectrum. It is no more risk exposed than the other guys. It also does a good job of lobbying state government. We have few independent hospital systems, at least in my area code and surrounding,… Read more »

Barry Carol
Guest
Barry Carol

Peter1 – Yesterday, I was helping someone look up health plans on the healthcare.gov website. This person is 52 and was looking for a policy just for himself. In Monmouth County, NJ the premiums for a 52 year old ranged from $427 to $898 per month. Today, I checked prices for a person of that age in Wake County, NC. The premiums ranged from $300 to $668 per month with all but three of the offerings from BCBS of NC. Comparable coverage appears to be 25%-30% cheaper in NC despite your local Blue’s monopoly power. When powerful hospital systems make… Read more »

Peter1
Guest
Peter1

“Comparable coverage appears to be 25%-30% cheaper in NC despite your local Blue’s monopoly power.” Barry, I have not yet shopped healthcare.gov. Coverage cost is very county sensitive. General reports show NC with some of the highest rates, I believe mostly in rural counties. “Based on a Manhattan Institute analysis of data released by the Department of Health and Human Services, insurance rates for younger men will increase by an average of 97 to 99 percent, while they will increase by an average of 55 to 62 percent for younger women. Worst of all states, North Carolina will see individual… Read more »

Aurthur
Guest
Aurthur

Thank you Mr. Carol. I miss Nate.

Barry Carol
Guest
Barry Carol

I miss Nate too, especially his knowledge about the health insurance business and market.