January/ February 2014 After Obamacare

A frenzy of hospital mergers could leave the typical American family spending 50 percent of its income on health care within ten years—and blaming the Democrats. The solution requires banning price discrimination by monopolistic hospitals.

By Phillip Longman and Paul S. Hewitt

With Obamacare’s troubles continuing, the economy still underperforming, and yet another battle over the long-term federal debt looming, here’s a thought experiment that reveals much about how we got here.

Imagine if, starting during the early years of George W. Bush’s presidency, the government had imposed a new payroll tax that by now was extracting almost one out of every five dollars earned by middle- and working-class Americans. Does it seem reasonable to suppose that the loss of that much discretionary income would have caused a lot of people to take on a lot of debt? Doesn’t it seem plausible that a new regressive tax of that magnitude would have pushed a whole lot of people out of the middle class—maybe even to the point of having caused a Great Recession?

Well, guess what. Almost all of us are now burdened by something akin to such a payroll tax, and the wonder is that so few people realize how big it is or who is responsible for imposing it on us. According to the Milliman Medical Index, which is a standard measure of health care costs, a typical family of four has seen the amount it pays for health care, including premiums and out-of-pocket costs, rise from about 18 percent of its income in 2002 to 35 percent today.

That’s the equivalent of a 17 percent hike in the payroll tax. If you’ve been buying your own health insurance, you know exactly what we’re talking about. For the majority of Americans who get their health insurance through their employers, the full extent of the tax is not always as obvious, but is no less real.

Workers with employer-provided health insurance have wound up paying this tax largely in the form of foregone wages, pensions, and other benefits. That’s because, in the typical pattern, employers have covered the mounting cost of health care premiums by reducing or holding the line on other forms of compensation. This dynamic almost entirely explains the paradox of how the productivity of American workers can go up year after year but wages no longer do. In effect, all our gains from working longer and smarter have gone to pay for the inflating cost of health care.

Worse is the fact that we get virtually nothing in return for paying this added health care tax. Some 60 to 75 percent of rising health care costs reflects nothing more than higher prices for the same services. As prices rise, many Americans are actually seeing fewer doctors and receiving fewer treatments, even as life expectancy is falling for large segments of the population. Americans consume less of most kinds of health care than Europeans, but pay more for the treatments they get. Meanwhile, a wide range of studies documents that at least 20 to 30 percent of U.S. health services have no benefit to patients. Paying more for unnecessary surgery, redundant tests, and other forms of overtreatment is the ultimate in health care inflation.

Recently there has been a slowdown in the nominal rate at which American health care costs are rising. According to the S&P Healthcare Economic Composite Index, the average per capita cost of health care services covered by commercial insurance and Medicare increased by 3.06 percent over the twelve months ending July 2013. This compares with a rate of 7 to 8 percent that was prevailing as recently as 2009.

It is easy, however, to misinterpret these numbers. One reason is that they lump together Medicare and non-Medicare spending, which are on starkly diverging paths. For example, per capita health care costs for those of us with private insurance have been increasing at an annualized rate of 4.15 percent, compared to a 1.4 percent increase for people covered by Medicare.

Inflation-Adjusted Change in Medicare and Commercial Health Insurance Claims Costs, 2003-2012

It also needs to be remembered that most people are already paying so much for health care that even a small percentage increase comes to big money. In 2013, a typical American family of four paid $22,261 in health care costs, meaning that a “mere” 4.15 percent increase comes to
over $920.

Another reason it is easy to misinterpret these numbers is that they do not take into account what is happening with inflation generally. Relative to other prices in our economy, health care costs for people covered by Medicare have held even in recent years, but they continue to move up as sharply as ever for people covered by private health insurance. (See the above chart.) And with wages stagnant or falling for most people, even small percentage increases in the cost of health care dramatically reduce its affordability.

Meanwhile, the biggest reason behind the slowdown in cost growth is one that everyone hopes will go away, namely the lingering effects of the Great Recession. According to a study by the Henry J. Kaiser Family Foundation, about 77 percent of the slowdown comes from negative economic factors such as persistently high unemployment.

The other 23 percent, the study estimates, comes from factors within the health care system that are holding down utilization. Most prominent of these is the sharp rise of the percentage of Americans who now have high-deductible health insurance plans, and who are accordingly, for better or worse, consuming less health care. Says Kaiser Foundation President and CEO Drew E. Altman, “The problem of health costs is not solved.”

Going forward, the government’s official forecast estimates that national health care spending (including Medicare) will accelerate to 6.1 percent in 2014, fueled largely by the eleven million Americans expected to gain health insurance coverage through the Affordable Care Act. The Centers for Medicare and Medicaid Services’ Office of the Actuary projects that health care spending will grow persistently faster than the economy, averaging 5.8 percent per year between 2012 and 2022.

Let’s take that estimate and see what it would mean for a typical family of four. Assuming that the growth in family income remains at around 2 percent a year, the typical family of four would go from spending 35 percent of their income on health care today to over 50 percent within ten years and more than 63 percent by 2030. That’s the equivalent of a new 28 percent payroll tax!

Adding to the urgency of these numbers is another fact that barely registers in our political debates: were it not for the explosion in health care costs, there would be no long-term federal budget deficit crisis. According to the model used by the Congressional Budget Office, the federal deficit would shrink to essentially zero (one-third of 1 percent of GDP) within eight years if federal health spending just remained at its current, already highly inflated, level.

So the next time you hear people saying how you must accept some “Grand Bargain” under which you retire later and accept cuts in your Social Security and other earned benefits, all while paying more taxes, just bear this fact in mind: the United States doesn’t have a structural budget deficit except for the ever-mounting cost of health care.

Phillip Longman and Paul S. Hewitt are, respectively, a senior editor at the Washington Monthly and the author of Best Care Anywhere: Why VA Healthcare Would Be Better for Everyone; and a former deputy commissioner for policy at the Social Security Administration and current vice president for research at the Council for Affordable Health Coverage. The views expressed in this article do not necessarily reflect those of the CAHC or its members.


(You may use HTML tags for style)

comments powered by Disqus