Everyone knows healthcare costs are rising. ObamaCare was supposed to fix that. But the truth is “it isn’t working.”
Healthcare costs have been rising rapidly for decades. Every business owner recognizes this truth when he or she writes the checks to pay for employee health care. Every patient knows this when they pay the deductibles at their doctor’s office.
Health care costs have been rising faster than inflation for a long time. After a slowdown in the early 1990s, some concluded we finally had healthcare costs under control. But the late 1990s brought back healthcare inflation and annual healthcare spending grew to 9.7 percent by 2002, renewing fears of future bankruptcy if the pattern continued.
But this pattern changed early after the start of the new millennium. In 2002, health care expenditures peaked at a rate of 9.7% according to the Centers for Medicare and Medicaid Services (CMS). The following year, 2003, began a decline in the rate of growth, which has continued thereafter for ten straight years, leveling off at 3.7% in 2012 and then rising again gradually. This downward trend began seven years before passage of ObamaCare and eleven years before implementation of the law beginning in 2014.
Yet, the Obama administration wants to attribute these declines to the Affordable Care Act. This was a major selling point of the new healthcare law in 2010. Peter Orszag, President Obama’s budget director, insisted the new healthcare law entitlement would actually improve America’s long-run fiscal position by revolutionizing the delivery of medical care.
However, the first quarter of 2014 saw an astounding increase of spending to 9.9 percent. That’s the largest percent change in the rate of healthcare spending since 1980. Opponents of ObamaCare want to blame ObamaCare for this increase. John C. Goodman, healthcare economist, says neither conclusion is correct.
Goodman documents the downward trend of health care spending that started long before ObamaCare started (Figure 1), but also acknowledges it is too soon for ObamaCare to be blamed for the upward movement in spending in the first quarter of 2014. Goodman explains:
“It’s too soon for ObamaCare to have resulted in a big boost in spending. And the previous slowdown was underway over a decade. Over the longer period, what does track the slowdown very closely are three other developments: the growth of Health Savings Accounts (HSAs), the growth of Health Reimbursement Accounts (HRAs) and the general trend toward higher deductibles. All three changes mean that patients are paying more medical bills out of their own pockets. And that has produced profound changes – both on the demand and the supply side of the market.”
Figure 1 – Annual Growth Rates for National Healthcare Spending – 2002 – 2013. Source: Center for Medicare and Medicaid Services – CMS.gov
New Spending Data
That was Goodman’s assessment last year. But now we have new data that shows an alarming future. According to CMS, health care spending is projected to grow by 5.8% annually through 2024. Here is their projections shown as a percentage of Gross Domestic Product (GDP):
Figure 2 – U.S. Health Expenditures as a percentage share of GDP
Paul Howard and Yevgeniy Feyman, writing in Forbes, call attention to these alarming statistics. They report health care spending is expected to continue at an average of one percentage point faster than GDP through 2024. That puts it at 20% of GDP by 2024, up from its current level of about 18%.
What is driving these spending increases?
Many media outlets are pushing the rhetoric that rising drug prices are to blame. There are some costly new drugs in the market for cancer and hepatitis C treatment. However, drug spending as a share of the U.S. health care spending is expected to remain largely flat; form 9.9% in 2014 to 10.4% in 2024.
The real culprits are Medicare and Medicaid. Both are growing in enrollment as baby-boomers become eligible at a rate of 10,000 per day and ObamaCare has expanded Medicaid by about 7 million. Spending for Medicare is growing at a 7 % rate and Medicaid is growing at about 6 %. By 2024, the two programs will comprise 39% of total U.S. health care spending, up from 36% in 2014.
The news is not good in the other 60% of America’s healthcare economy, either. Per capita costs in private insurance are expected to grow 4.7% through 2024 on average. Part of the explanation is the Cadillac tax, slated to go into effect in 2018. This places a tax of 40% on all insurance premiums costing more than $10,200 for individuals and $27, 500 for families. (More on the effect of this tax in a future post.)
It was less than a year ago, on October 2, 2014, when President Obama bragged, “Today we’ve seen a dramatic slowdown in the rising cost of healthcare.” The president claimed this as evidence that “ObamaCare is working” on the one year anniversary of the start of ObamaCare open enrollment, at Northwestern University. Once again, his facts are wrong and his rhetoric is delusional, as these CMS projections prove. It’s time we find a better solution to this problem. It’s time to repeal and replace ObamaCare with a conservative plan that really works.
(Next post – some solutions to the rising cost of healthcare spending.)