How Obamacare May Be Holding Down Costs

This column originally appeared in Politico on September 26.  Dr. Altman’s future Politico columns will be posted on one day after publication. 

The historic slowdown in health-care costs is continuing. Earlier this month, the government’s actuaries found that total national health spending continues to grow at the lowest rate we’ve ever seen. And our annual employer health benefits survey released in August found premiums up just 4 percent on average for family policies this year, while overall health spending is growing at the slowest rate in 50 years (dating back to when the government first started tabulating health expenditures).

Experts debate how much of the slowdown is due to the weak economy, which causes people to use less health care, and how much is due to changes in health insurance and the health-care system, such as higher cost-sharing or new efforts to limit avoidable tests or hospital days. But the consensus – including the actuaries – is that both factors are playing some role.

What is far less clear is how much Obamacare may also be contributing to the slowdown in costs. Proponents of the law say it is helping to control costs because the cost- containment provisions of the law are working as advertised. These include new limits on how much insurance companies can charge for administration and profits (with rebates to consumers if they charge too much), and state review of rates proposed by insurance companies.

There is solid evidence that these provisions are working as intended, but they mainly apply to the individual and small group markets, just a small slice of the overall health care marketplace. Obamacare also reduced the rate of increase in future payments to providers for Medicare. These reductions are projected to take more than $700 billion out of health spending over the next 10 years, but they haven’t had much effect yet. Other provisions of the law, such as the Medicare experiments in payment and delivery, are still just getting started. Critics of Obamacare, of course, dispute that the law is having any effect on costs because, well, there is basically nothing they like about Obamacare.

Even though its direct effects on system-wide costs may be limited so far, I believe Obamacare is having a significant indirect effect, although cause and effect and the magnitude are hard to prove. (As the actuaries rightly point out, insuring more people will boost the rate of spending growth temporarily, but the effect should be small and short-lived.)

Historically, we have always seen the health-care marketplace respond by lowering costs when there is the threat of impending health reform legislation or government action on costs. Now we have not only the threat but the reality.

When President Jimmy Carter threatened aggressive cost-containment legislation in 1977, the industry responded with something called “the voluntary effort,” and for several years cost growth came sharply down. Similarly, cost increases came down when Bill Clinton’s health reform loomed, spurring the so-called managed-care revolution that reached its apex in the mid to late 90s. Costs also have responded to direct government intervention, as they did when President Richard Nixon imposed temporary wage and price controls in the early 1970s, including in health. Health inflation came down but, not surprisingly, rose again when the regulations were lifted.

Obamacare appeared first in the form of the threat of sweeping health-reform legislation and then the reality when the law passed. It is likely that what Obamacare has mainly done so far is accelerate changes already underway in the marketplace as part of a constellation of forces affecting the health-care industry. Already feeling pressure from insurers and employers, providers saw Obamacare coming, with its reductions in the rate of growth in Medicare reimbursement and Medicare payment demonstrations. The old saying in health policy is “when Medicare sneezes, health care catches cold.” The market saw these changes as harbingers of the future.

The bill’s rate review and limits on insurance-company overhead and profits – as well as more intense price competition coming in the new exchanges – put new pressure on insurers to be more innovative and to take on providers more aggressively, even if they only apply to relatively small slices of the marketplace. Public and private payers in general seemed to be aligning behind a new interest in redesigning reimbursement incentives and the delivery of care. Obamacare became part of a larger handwriting on the wall, not just in Medicare but in the private marketplace as well.

The marketplace has also reacted defensively to protect its bottom line, and not all of the changes in the system will lower costs. The raft of mergers and consolidation of market power in the delivery system could raise costs as providers get bigger and drive a harder bargain with insurers. Revenues and profits have not been abandoned as the basic yardstick for CEOs and boards of directors.

The cost slowdown preceded Obamacare, so there is no doubt that other forces have been at play as well. Cost-sharing has been increasing in the market for years, and we know it has a very real impact on the use of health services. The bad economy has had the biggest influence on health care utilization and spending, as our recent study and this month’s actuaries’ report both suggest.

But, history tells us that the health-care market has always responded to the threat (and now, for the first time, also the reality) of health reform. For this reason it is entirely likely that Obamacare has played and will continue to play a role in the slowdown in health-care cost growth and accelerating market change. Ask almost any hospital administrator or insurance CEO, and that’s the answer you’ll get. Just don’t ask me to prove it.

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