Advancing a Free Society

ACA ruling kicks the real challenges down the road

Monday, July 9, 2012

The fundamental challenge for American health policy is to balance three competing goals:  getting better value for our health care dollar, controlling public spending on entitlements, and providing a safety net for those who cannot afford care.  In upholding the (misnamed) Affordable Care Act (ACA), the Supreme Court has allowed the President and Congress to kick this challenge down the road.  The ACA vastly expands the government's future health care liabilities without a coherent plan to pay for them.  It adds layers of regulations, including but not limited to the "individual mandate," that paper over but do not address the hard decisions that we will eventually have to face.  It will make the day of reckoning, when it comes, worse than it otherwise would have been.

The ACA's focus is on expanding the safety net.  Its key parts are a Medicaid expansion, insurance subsidies for low- and middle-income people, and guaranteed issue and community rating of individual and small-group insurance.   In and of itself, the desire to provide care to those in need is laudable.  The problem with the law is its failure to balance this with health policy's other two goals.

It is now clear to all thoughtful observers that the ACA is going to increase health spending and worsen our country's fiscal position.  In a recent article in Health Affairs, researchers from the Office of the Actuary at the Centers for Medicare and Medicaid Services predict that health spending will jump in 2014 and grow at approximately 0.9 percent points faster than GDP thereafter.  They also predict that public health spending, as a share of the total, will continue to grow.  With the exception of politicians, it's hard to find anyone who still believes that the Medicare cuts in the ACA can be counted on to fund the law's coverage expansions in the under-65 population when Medicare itself is going bankrupt.

The ACA attempts to improve value and contain spending with reforms to Medicare's system for paying doctors and hospitals.  Some of these are on the right track, as are some of the "delivery system" reforms that seek to increase productivity in markets for health services.  But because the ACA, on the whole, neglects to address poor patient incentives, these efforts are likely to hit a wall.  Things are the way that they are for a reason, and if we don't change their root causes, all of the Accountable Care Organizations in the world are not going to help.

Some support the ACA's approach of increasing coverage first and dealing with cost later.  They argue that gaps in our existing safety net are unacceptable, and that the system will adjust when it has to.  Maybe so.  The downside risk is that the distortions to the health sector (approximately one-seventh of US economy and growing) and the broader macro-economy of a maze of new regulation, higher taxes, and higher debt will lead us to a new normal of permanently high unemployment, slow growth, and less innovation.  This is the gamble that we are now taking.