Over the past couple of weeks, the Supreme Court’s hearings on President Obama’s health care reform have dominated the headlines. The case is big news, of course, with huge legal and political implications. Meanwhile, the economic consequences of the health care debate have largely been pushed to the sidelines. In the long run, though, they may prove to be the most important part of the story.
The goal of the President’s plan is to extend health care coverage over 10 years to 95% of the legal, nonelderly population, compared with about 83% today. More than 32 million people would gain coverage. The total cost over the decade would be $1.4 trillion, according to the Congressional Budget Office. A bit more than half of that would be paid for by a variety of taxes, fees, penalties and other charges. The rest is supposed to come from $732 billion in savings on federal health care programs, partly by reducing the amount the government pays for treatments covered by Medicare and Medicaid.
If the Obama plan hits all its spending targets and realizes all its projected revenues and savings, it would have a minimal impact on the federal budget deficit through 2018. But in later years, the plan would begin running a deficit that would grow to nearly $50 billion annually, according to CBO projections that were revised last month. In addition, there are good reasons to believe the Obama plan will run much larger deficits starting well before 2018. Historically, health care systems have experienced substantial cost overruns and have proven unable to implement all the hoped-for savings. Moreover, there are three specific reasons the plan is likely to miss its targets:
It will be difficult to realize all the projected savings. There is certainly room to reduce spending somewhat without hurting the quality of patient care. Costs in the U.S. are as much as 50% higher than in other developed countries. But greater efficiency seems unlikely to make up for spending cuts on the scale proposed by the Obama plan. At a certain point, the easy gains will have been made and further reductions will amount to cost-shifting rather than true savings. Over time, for example, the Obama plan would significantly reduce Medicare and Medicaid payments to doctors, some of whom are already trying to avoid taking on new Medicare patients. If patients end up getting to spend less time with their doctors or having to wait longer for appointments, Congress will feel political pressure to decrease or postpone scheduled spending cuts.
Even moderate cost overruns could be horrifically expensive. The health care plan Mitt Romney signed into law in Massachusetts is the closest parallel to the Obama plan. Since 2006, costs in Massachusetts have outpaced the original projections by more than 8%. If the Obama plan experiences similar overruns, the shortfall would be greater than $110 billion a year. Add in the deficit projected after 2018 and the Obama plan could eventually increase the annual budget deficit by as much as $150 billion in today’s dollars. Just as a benchmark, that’s about twice the amount that would be raised by ending the Bush tax cuts for people earning over $250,000 a year.
People will find out ways to game the system. In Massachusetts, for example, despite a mandate to buy health insurance, some people still managed to adjust their coverage right before they knew they would need expensive medical treatments, on average receiving medical care costing $2,200 a month, while paying only $400 a month extra. Another possible loophole is what’s called employer dumping: companies could terminate their own health-insurance plans and force employees into government-subsidized plans. Depending on the assumptions used, some analysts think the cost to the government of such dumping would be negligible, while others foresee costs of tens of billions of dollars. Such loopholes can always be plugged, but in any plan there will inevitably be weak points.
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Certainly, there is an ethical case that everyone who needs health care should have some way of obtaining it. And it’s true that emergency rooms are costly ways of treating the uninsured, and that much money is lost because of other inefficiencies in the system. Nonetheless, the Obama plan — however beneficial it may be in terms of improving coverage — is unlikely to solve the financial problems of health care. But then, of course, neither did the previous system. A straight-line extrapolation of recent growth in health care costs would have them reach half of U.S. GDP in 70 years, which is obviously not a viable trajectory. And nothing the Supreme Court does over the next few months — whether it sustains the Obama plan or overturns it — seems likely to change that course.