The successful effort from Congress to actually produce a bill approved by both houses designed to repeal Obamacare was naturally vetoed by Obama. It raises the stakes of the upcoming presidential election if the same bill is introduced to a new Republican president. Beyond the immediate reality show drama playing out politically, the repeal debate raises some larger, more fundamental questions about the role of government in healthcare. Any discussion of what good U.S. healthcare reform looks like must first address the proper role of government.
In that regard, both Republicans and Democrats are misguided in their views of the historical impact that Obamacare has had on the public involvement in US healthcare spending. The figure below shows US trends in both overall and government financed health care spending over the last 54 years. Government financed care is mainly driven by Medicare for the old and Medicaid for the poor, as well as some smaller programs such as the health insurance program for children (CHIP). The dark blue bars show total health care spending by year and the light blue bars show the absolute level of publicly financed healthcare spending by year (left-hand axis). The red line shows the share of total healthcare spending that is publicly financed (the dark blue bar divided by the light blue bar; right-hand axis).
The figure illustrates a remarkably steady growth of public spending on healthcare in both absolute terms as well as share of total spending. While Obamacare was passed in 2010, it had large spending measures that kicked in 2014 – its first year of implementation. Although the numbers for the second year figures of the legislation in 2015 are not fully digested, they are unlikely to change the long term trend above. Obamacare increased public spending mainly by expanding Medicaid eligibility as well as providing subsidies for poor individuals on the healthcare exchanges. The key part of the figure is that it conveys that Obamacare is just a continuation of a historical long run trend.
The trend took off with a sharp increase in the mid-60s when Medicaid and Medicare were enacted but even the expansions of Medicaid and CHIP under President Bill Clinton made a bigger dent in public spending growth than Obamacare has to this point. In this sense, the grand-standing on both sides of the aisle is much ado about nothing. Democrats want to claim that Obamacare was a major achievement that finally enabled real public involvement in healthcare and Republicans want to claim we have a new world order that needs to be demolished. Both are wrong in the sense that the growth rate of public funding of healthcare has not yet been significantly altered by Obamacare.
Naturally, there are regulations of Obamacare that may be beneficial or damaging but are not captured by these fiscal impacts. Obamacare continues an important, and perhaps central, role of the government: It is designed to help those who can’t afford health care pay for it.
Obamacare’s fundamental focus on the poor is exhibited through the fiscal impacts from Medicaid expansions and from subsidies to low-income individuals on the exchanges. However, for public policy to be sound, the rich responsible for funding the care of the poor need to be comfortable with the tab as well – hence the need for entitlement reforms.
The key issue to remember with entitlement reform is that there are only two ways in which Medicare and Medicaid spending can be reduced: One is to reduce the number of program participants or eligibility and the other is to reduce per-capita spending. The double whammy motivating entitlement reform is that the number of eligible people is expanding as the baby boomer population ages into Medicare while at the same time growth in per-capita spending is out-pacing the economy. Indeed, the last few decades the annual growth of healthcare spending, including per-capita spending in public programs, has been a couple percentage points higher than the 2-3% annual growth of the rest of the economy.
Of the two factors driving program spending, clearly the government has an exclusive advantage to determine eligibility for demand subsidies as signified by expanding coverage Medicaid through the ACA. However, the private sector likely has a comparative advantage in managing appropriate levels of per-capita spending – whether higher or lower –and balancing it with premium costs. Nevertheless, the implicit strategy to date in curbing entitlements has been to expand eligibility while trying to counteract it with policies that enable bigger reductions in per-capita spending. For example, to get per-capita spending to fall more than eligibility expansions, public measures have been introduced such as pay for performance, accountable care organizations, larger copays, etc. Instead, to help the poor the government should do the exact opposite: Cut eligibility and get out of the way in managing per-capita costs. The cuts in eligibility should be directed towards the rich and the management of per-capita spending should be conducted by the private sector. Put simply, eligibility cuts through means-testing Medicare should be done for the simple reason that if the goal is to finance care for those who cannot afford it, then care should not be financed for those who can. There is no advantage for the government collecting mandatory premiums through taxes from the rich to pay for their own healthcare. Such care is much better delivered through private markets collecting voluntary premiums which, unlike mandatory premiums, are subject to competitive forces.
Much of the management of per-capita costs in the government occurs through two main centralized channels. The first is through “centralized premium pricing,” as we have in Medicare Part C and D where private health or drugs plans compete for subsidized premium revenue from patients. The second is through “centralized provider pricing” by setting prices to doctors, hospitals, nursing homes and medical product manufacturers, as we have in Medicare Part A and B and part of Medicaid.
Hillary Clinton’s recent call to have the government negotiate prices in the drug program (Medicare Part D) essentially aims to make the program go from centralized premium pricing to centralized provider pricing. It seems that the relative advantage of the public sector is in deciding how much to help the poor; that is, it has a role to play in centralized premium pricing. The public sector is not well suited in getting into the business of centralized provider pricing by trying to micro-manage the healthcare economy centrally from DC. Again and again it leads to all kinds of crazy distortions when providers chase the latest reimbursement changes in these Part A and B programs. The Soviet Union and China failed in executing centralized pricing of suppliers overall, but in the U.S. we still have it in Medicare Part A and B and Medicaid. It is an economist’s nightmare to have Congress vote on prices rather than prices being determined by supply and demand forces, where such votes take place yearly for part A and B, e.g. the level of physician pay in Part B (the so called “doc fix”).
However, many people mistrust of the private sector providing efficient care. Of particular focus has been managed care (e.g. HMOs and PPOs), which isn't popular with the American public as it throws red tape in the way of patients and physicians at the time of care in the name of lowering premiums and ultimately keeping customers. But it is also important to separate talk, which is cheap, from actual market behavior, which is a better guide of value. Despite the heated rhetoric and bad reputation of managed care, it essentially overtook the private insurance market in a couple of decades. In that sense, it is perhaps the biggest success story of American healthcare delivery.
The bottom line is that the role government should play in helping the poor receive better care is misunderstood and inadequately articulated in policy. Of course the repeal debate makes for great TV drama, but it misses the point of which general guidelines should actually drive entitlement reform and that the recent fiscal growth of healthcare is just a continuation of past mistakes.
