Will Health Reform Save Money?

By guest blogger Robert Field:

The nonpartisan Congressional Budget Office predicts that, despite the almost $1 trillion price tag, health reform will actually save the government money in the long run. How can that be? The answer, according to CBO, is that the spending is offset by cutbacks in other areas and by a number of new taxes. How accurate is the CBO’s prediction, and what effect will health reform really have on costs?

In terms of cost to the government, the CBO’s prediction is the best we have, but there is still a lot of room for error. In costing out, or “scoring”, legislation, the agency makes its best guess as to spending and savings over the next ten years. Needless to say, predictions about anything ten years from now are difficult, let alone one of the most dynamic sectors of the economy.

Critics charge that health reform, like many government programs, will end up costing more than advocates claim. This was certainly true for Medicare, which vastly exceeded initial cost estimates. Supporters of reform counter that while CBO may have underestimated costs, it also underestimated savings. Most notably, health reform contains numerous provisions to encourage prevention, which can reduce the use of health care services. CBO excluded this factor from its calculations because it is too difficult to quantify, but it did not opine on how large a factor it may actually turn out to be.

As a result, it is difficult to predict whether health reform will be a net cost or net saving to the federal budget as measured ten years from now. When everything is taken into consideration, the final calculation is likely to be close. In other words, the direct effect on the federal deficit will probably be relatively minor.

However, health reform will affect other kinds of costs, beyond government spending. Most directly, it may cause private insurance premiums to rise. Reform retains the present system of private coverage but adds new regulations and consumer protections. In Massachusetts, which enacted a similar plan four years ago, reform is estimated to have added about 6 percent to the cost of employer-sponsored coverage. (However, there is also evidence that it has significantly lowered the cost of individual coverage. See this item from The Washington Post in November 2009. The first consumer protections under national reform went into effect last week and are expected to add about 2 percent to premiums overall. This figure may rise in 2014, when law’s major provisions take effect.

This effect is noteworthy, but it seems a small price to pay for stronger coverage that is no longer subject to lifetime benefit caps, preexisting condition restrictions, policy rescission, and various other limitations. There are also new regulatory safeguards to control premium increases. While insurance will continue to rise in price, medical costs will likely be a much more significant cause than health reform.

The biggest cost concern is the indirect effect of reform on overall health care spending. With more people insured, more will obtain services, so more money will inevitably be spent nationwide. The reform law contains numerous provisions aimed at starting the process of cost control, but their effect is likely to be limited.

It is important to remember that while reform will undoubtedly add to the nation’s health care tab, spending would have gone up dramatically anyway. The United States has had the fastest rate of medical cost inflation in the developed world for several decades, and there are no indications of slowing. The causes are complex and deep-rooted, and reform won’t significantly change them.

If reform adds to this growth, this is no reason to abandon it. The important question is not whether reform will incur costs but whether this is money well spent. Can we really continue to have some of the best medical care in the world while denying access to almost a sixth of the population? It is hard to imagine a more worthy focus of health care spending than expanding access. Cost control should be at the top of the health policy agenda, but it should not be achieved by telling fifty million people that they can’t get care.

Find earlier items by Robert Field here, including this examination of the health reform in Massachusetts and this analysis of the legal challenges to the Affordable Care Act (Obamacare).

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