Obamacare Effect Linked to Lower Medical Cost Estimates

Photographer: Andrew Harrer/Bloomberg

U.S. health spending in 2019 will be $4 trillion, the Centers for Medicare and Medicaid Services said this week, or $500 billion less than the agency projected in 2010 when President Barack Obama’s health-care overhaul became law. Close

U.S. health spending in 2019 will be $4 trillion, the Centers for Medicare and Medicaid... Read More

Close
Open
Photographer: Andrew Harrer/Bloomberg

U.S. health spending in 2019 will be $4 trillion, the Centers for Medicare and Medicaid Services said this week, or $500 billion less than the agency projected in 2010 when President Barack Obama’s health-care overhaul became law.

Estimates of U.S. health-care spending for the next five years have been lowered by two federal agencies, and the Patient Protection and Affordable Care Act is getting much of the credit.

U.S. health spending in 2019 will be $4 trillion, the Centers for Medicare and Medicaid Services said this week, or $500 billion less than the agency projected in 2010 when President Barack Obama’s health-care overhaul became law. That announcement followed by a week a report from the Congressional Budget Office lowering its five-year cost estimates.

Obamacare has been criticized by Republicans as costly and unsustainable. Now, four years after its arrival, the law’s mandated program cuts and the medical practices it encourages -- limiting unneeded procedures, and keeping people out of the hospital longer -- are cited by economists as key ingredients in trimming the nation’s medical bill. While the recession has had an influence on the cost slowdown, it doesn’t explain it all, according to policy analysts and the CBO.

“When the CBO goes back and revises their baseline, historically they’ve adjusted upwards,” said Tricia Neuman, director of the Kaiser Family Foundation’s Program on Medicare Policy. “So the fact that there’s been year-after-year downward adjustments is fairly remarkable since they occurred after the ACA” was signed into law.

Photographer: Joe Raedle/Getty Images

Norma Licciardello sits with an agent from Sunshine Life and Health Advisors at a store setup in Miami, Florida, on March 31, 2014. Close

Norma Licciardello sits with an agent from Sunshine Life and Health Advisors at a store... Read More

Close
Open
Photographer: Joe Raedle/Getty Images

Norma Licciardello sits with an agent from Sunshine Life and Health Advisors at a store setup in Miami, Florida, on March 31, 2014.

While total health spending will still rise over the long run, the slower-than-expected growth predicted within the next five years has “sharply improved the nation’s fiscal outlook,” Jason Furman, chairman of the Council of Economic Advisers, wrote on the White House blog.

GDP Effect

National health-care expenditures will be 18 percent of the gross domestic product in 2019, according to the CMS report. That’s 1.5 percentage points lower than the agency’s projection in 2010 for the same year.

At the same time, the slower growth in spending is credited with prolonging the life of Medicare’s main trust fund to 2030, four years later than was projected by federal officials just a year earlier, according to a July report.

Understanding how the Affordable Care Act is contributing to the downward trend can be important for lawmakers setting health-care policies for the future, Kaiser Foundation’s Neuman said. For instance, if the hospital readmission fines that are part of the law are working to appropriately reduce unneeded procedures and saving money, that’s something they’d want to continue, according to Neuman.

Policymakers may also be encouraged to pursue similar efficiencies elsewhere in the medical system, she said.

Fresh Eye

Supporters of the Affordable Care Act known as Obamacare say that’s what the law was designed to do from the beginning: bring a fresh approach to how medical care is managed in the U.S. The defined funding cuts that offered the most direct cost savings were just one part of the law’s design.

“There’s been a lot of movement away from ‘everything you do earns you more,’” said David Cutler, an economist at Harvard University in Cambridge, Massachusetts, who was previously a senior health-care adviser for the Obama presidential campaign.

“Hospitals are being penalized for readmissions, so readmissions to hospitals are way, way down,” Cutler said in a telephone interview.

Federal payments for hospital admissions will fall $756 million next year as penalties stiffen for incidents when patients contract infections while admitted, and when patients are readmitted within 30 days, CMS said last month.

Detractors “predicted the hospital cuts would put hospitals out of business but they had it all wrong,” Cutler said. “So far we’ve seen the good effects without any of the downsides that people had worried about,” effects that “were not given credit at the time” the law was enacted.

‘Cost Effective’

“People do take the lead from their doctors,” said Paul Van de Water, a senior fellow at the Washington-based Center on Budget and Policy Priorities. “That organized medicine is finally paying more attention to whether procedures are cost-effective is very helpful.”

While many analysts agree the Affordable Care Act has contributed to lowered spending estimates, some question whether the changes can last in the long run.

Consumer discontent that they may not so easily get all the medical services they had in the past may force some services to be reintroduced, said Doug Holtz-Eakin, a former head of the CBO who now leads the American Action Forum, an advocacy group opposed to Obamacare.

“There was $700 billion in Medicare cuts,” he said in a telephone interview, referring to the Affordable Care Act’s estimated savings from 2013 to 2022. “It’s true that’s a big number in spending, but if it’s unsustainable, we’ll end up doing a U-turn.”

Recession’s Role

Another disputed point is the role that the recession played in slowing down health-care costs, as the magnitude of that factor will effect how much spending increases when the economy fully recovers.

‘The great recession had a very substantial impact on the slowdown of the rate of growth of health-care costs,’’ said Steve Bell, senior director of economic policy at the Bipartisan Policy Center in Washington. “As more and more people feel the recovery,” health-care inflation can be expected to rise, he said.

The CBO published a paper last year saying that evidence doesn’t show demand for health care by Medicare beneficiaries was diminished by the economic slump. That suggests spending in that program, at least, will likely not be affected.

Generic Medicines

One other contributing factor to the cost savings has been the increased use of less-costly generic medicines over the past five years as a wide variety of top-selling drugs, such as Pfizer Inc.’s Lipitor for cholesterol control, passed their patent protection periods, according to Bell.

Now, costly new drugs such as Gilead Sciences Inc.’s $1,000-per-pill hepatitis C treatment have appeared in the marketplace, he said.

“We do see drug costs starting to increase again,” Bell said. “It’s going to be hard to deny payment for new highly expensive drugs that are coming out for some types of cancer and hepatitis C.”

About 350,000 Medicare beneficiaries have hepatitis C, according to Neuman of the Kaiser Family Foundation. If 75,000 enrollees were to be treated with Gilead’s drug, this would increase federal spending in Medicare’s outpatient prescription drug program by 8 percent, Neuman wrote in a June blog post for journal Health Affairs.

‘Big Puzzle’

“The specialty drugs are one piece of a really big puzzle,” Brian Collins, a health policy analyst who works with Bell at the Bipartisan Policy Center, said by telephone. “CBO certainly doesn’t know anything more than the rest of the world about how much that’s really going to cost.”

In the long run, the agency still expects health spending to rise significantly, especially as the U.S. population ages, so the lowered estimates in the next few years only buys short-term gains, and should not lead to complacency, the policy analysts said.

“It’s been an environment of big changes in the economy and in the law, and it’s hard to sort out what’s permanent,” Holtz-Eakin said. “Time will tell.”

To contact the reporters on this story: Caroline Chen in New York at cchen509@bloomberg.net; Ian Katz in Washington at ikatz2@bloomberg.net

To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net Andrew Pollack

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.