ObamaCare Answers the Wrong Question on Health Costs

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With the House of Representatives set to vote to fully repeal ObamaCare this week, one of the strongest arguments for repeal relates to the law's effect on health care costs. Despite the rapid growth of medical costs in recent years, the new law does little to restrain that growth or to bend the curve towards decreasing costs. In fact, there is strong evidence, supported by the Congressional Budget Office, that many will see their health insurance premiums increased because of changes in the law.

Yet progressive health policy analysts consistently claim that ObamaCare includes every known proposal to lower health costs. David Leondardt reiterated this point for The New York Times on Friday.

Opponents of the health law sometimes like to suggest that cutting health costs would be easy, if only we’d be willing to try common-sense ideas. But that’s wishful thinking. The law does include most of the common-sense ideas supported by health economists ranging from Mark McClellan (the former Bush administration official) to David Cutler (a former Clinton and Obama adviser). There’s just no getting around the fact that reducing the growth rate of health costs will be difficult.

It's only possible to think ObamaCare included most of the cost reform ideas if one is either incapable of believing that free markets reduce the costs of products and services or believes that ObamaCare's government-run insurance exchanges are examples of free-market competition. A recent post at The Economist analyzed all of the ways in which ObamaCare's structure of mandates, regulations and taxes will not lead to any improvement in medical care.

One of my complaints about this debate is that the left has been committed to a fundamentally dirigiste vision of universal health care for so long that it has difficulty even conceiving of a system that combines relatively laissez faire market institutions with generous social insurance.

The inability of a government-directed system to control cost growth is easily seen by analyzing the failures of the Medicare program. MIT economist Amy Finkelstein’s work has emphasized the importance of institutionalized insurance in driving up costs; in particular the Fee-For-Service (FFS) model of Medicare. One of her studies has found that the introduction of Medicare resulted in a 37% increase in household spending between 1965 and 1970. This increase came not only from increased hospital utilization by newly insured individuals, but also by broader market-wide responses. New hospitals entered the health market, while practitioners also faced incentives to adopt different medical technologies.

This process of cost escalation is made more damaging by the particular mechanisms of FFS by which Medicare operates. As e21's Jim Capretta has emphasized; Medicare pays for procedures, rather than outcomes. As a result, the program encourages medical providers to push for more intensive medicine rather than what might be most cost-efficient. For instance, the real price for physician fees fell 5% between 1997 and 2005; yet total spending still grew 35% due to more treatments. ObamaCare's attempts to reform the Medicare FFS payment system using the same “reforms” which have consistently failed in the past.

In reality, ObamaCare's response to this problem is to double-down on FFS by dramatically restricting the Medicare Advantage program, which allows seniors to opt-out of the FFS system and have their Medicare dollars go to a private health insurance plan. About half of the seniors who would be enrolled in this program will leave, due to huge cuts in the program enacted by ObamaCare.

Given the clear evidence that government control of health care spending creates incentives for wasteful spending, repealing ObamaCare—a massive increase in government control of the health sector—seems to be the obvious choice.