Why Health Care Spending Will Explode Under ObamaCare: Evidence From Medicare


President Obama and the Democrats repeatedly claimed that getting every American insured would lower health care spending.  However, every indication is that health care spending will explode.

To see why look at Massachusetts Institute of Technology economist Amy Finkelstein’s groundbreaking 2005 work on the introduction of Medicare.

The Medicare program provides a good case study because a large number of uninsured people, about 7.5 percent of the population, got health insurance almost immediately.  Government estimates suggest that ObamaCare will provide coverage for about 32 million uninsured Americans, roughly 10 percent of the U.S. population.  But given that not all of them will get coverage immediately, the percentage of newly covered Americans will likely be similar to Medicare’s introduction.

Finkelstein wrote in 2007, “By 1970, the program caused a 37% increase in hospital spending.  This is an enormous number.”  That 37 percent is over and above what hospital spending would have been, even after providing the additional care to millions of newly covered seniors.

Analysts at the time completely missed how the coverage expansion would increase total spending.  As Forbes contributor and health analyst Avik Roy has pointed out:

“When Medicare was enacted, the staff of the House Ways and Means Committee (which was responsible for estimating the program’s costs and effects, since the Congressional Budget Office had yet to be created) projected that its cost would grow from under $5 billion in its first year to $12 billion in 1990 — accounting for inflation — because they expected that hospital-cost growth would not exceed wage growth from 1975 onward.  Instead, Medicare expenditures grew at roughly 2.4 times the rate of inflation over that period, and in 1990 reached not $12 billion but $110 billion.”

The reason?  Health insurance in the U.S. has at least two effects on health care spending.  The first is the additional spending that results from people getting care they might not have received without coverage.

For example, if an uninsured man with a hernia decides to have the hernia surgically repaired once he has health coverage, the surgery will increase total health care spending.  But that increase is appropriate; the surgery is addressing a serious medical condition.

However, the type of insurance also has an impact on health spending.  We rely on a third-party payment system that dramatically reduces any incentive for the patient to be a value-conscious shopper in the health care marketplace.

If, for example, the insurer just wrote the patient a check for, say, 80 percent of the cost of the surgery, patients would be much more sensitive to the cost of care.  Incidentally, that’s the way most other insurance markets (e.g., auto, homeowners, etc.) work.

But since our health insurance system usually pays the providers themselves, there is not much reason to be a value-conscious shopper.  Indeed, it’s almost impossible to be, because patients can’t easily access prices or make comparisons as we can in every other sector of the economy.  The result is we overutilize care and higher total spending than is necessary to treat the conditions.

And ObamaCare doubles down on that system by increasing the price insulation.  Just think of the contraception issue.  ObamaCare requires all contraceptives to be free to the patient.  There are birth control pills that cost in the $10-a-month range and there are new products that cost in the $150-a-month range.  If both are free, the patient has no economic reason to choose a less-expensive option.

Government number crunchers incorporate the spending increases from increased care, but they seldom factor in the spending increases that result from price insulation — which is why they always underestimate the spending explosion.

Of course, government-run health care systems also insulate the patient from the cost of care, but they control costs by imposing a fixed budget, which eventually leads to the rationing of care.

So how much more might hospital care cost under ObamaCare?

Spending on hospital care had been growing between $30 billion and $40 billion a year between 2006 and 2013.  But with ObamaCare cranking up in 2014, the government estimates jump to an annual increase of between $60 billion and $70 billion over the next five years.

But those estimates are primarily calculating the increased utilization that comes from covering an estimated 32 million more people, not the inflationary bump that comes when people are insulated from the price of care.

If we were to include Finkelstein’s insurance inflation factor, hospital spending might be closer to $1.8 trillion in 2019 instead of the estimated $1.3 trillion.  Of course, spending in other areas covered by ObamaCare will also go up by some percentage.

But at least we’re getting better health outcomes, right?  Finkelstein could find no difference in senior mortality rates before and after the introduction of Medicare.

Department of Health and Human Services Secretary Kathleen Sebelius recently opined, “What we’re seeing is costs really come down for the first time in a very long time.”  This is utter nonsense because (1) costs are rising and (2) most of ObamaCare has yet to take effect.

On the eve of ObamaCare’s third anniversary there is one thing we can say for sure: there have been a lot of surprises in the last three years — most of them bad.  And none have been more surprised than the White House and Democrats, who are about to get their next big surprise when health care spending explodes.

Merrill Matthews, Contributor

Leave a Reply