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What’s That Sound? The Monster in the Budget

No one wants to address it, but rising health care costs are draining federal revenues and pumping up deficits

The U.S. Capitol building is seen behind two ambulances in June. (Bill Clark/CQ Roll Call file photo)
The U.S. Capitol building is seen behind two ambulances in June. (Bill Clark/CQ Roll Call file photo)

For all the talk about health care this election season, politicians of both parties are ignoring a giant sucking sound.

The cost of health care continues to soar, vacuuming up a growing share of the nation’s economic output and putting an ever-larger strain on both family incomes and government budgets. Since Medicare and Medicaid were created in 1965, the federal commitment to health care spending has grown from about 3 cents of every taxpayer dollar to nearly 34 cents, not counting interest payments on U.S. debt. And that share is set to keep rising in the coming years as the population ages.

But on the campaign trail, there has been precious little talk of reining in costs. Instead, the focus has been on lowering family premiums and preserving benefits — or expanding them.

“We have a major reckoning coming in this country,” said Dan Mendelson, founder of the Avalere Health consulting firm. “It’s not politically attractive to talk about these large structural cost issues we face. It ultimately involves curtailing benefits that people want.”

Republicans have talked up the need for cheaper insurance coverage through less comprehensive plans, while expanding the use of health savings accounts. The more liberal wing of the Democratic Party is touting a “Medicare for All” plan that could add trillions of dollars in added costs for the government over a decade.

The last major attempt to hold down costs was the 2010 health care law, billed at the time as not only providing new coverage to millions of uninsured Americans but also “bending the cost curve” by changing incentives to consume more and more services.

Watch: All You Ever Wanted to Know About Health Care Ahead of the 2018 Midterms

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However, the 2010 law remains almost as controversial as it was eight years ago — even after providing coverage to an estimated 20 million Americans. Whatever its merits, the law — or the parts of it that remain — has done little to bend the health care cost curve.

The law intended to mandate near-universal coverage, with the help of government subsidies and the expansion of Medicaid in exchange for a guarantee of comprehensive benefits and protection for those with so-called pre-existing conditions. Despite cuts in Medicare reimbursements and other cost-control measures, it’s becoming clear that “bending the curve” took a back seat.

“The goal really wasn’t systemwide cost reduction,” said Niall Brennan, president and CEO of the Health Care Cost Institute, which is funded partly by major insurance companies. “The goal was coverage.”

But former President Barack Obama did promise that cost savings would be a significant byproduct of his landmark health care overhaul. “This legislation will also lower costs for families and for businesses and for the federal government, reducing our deficits by over $1 trillion in the next two decades,” Obama said in signing the law in 2010. “It is paid for, it is fiscally responsible. And it will help lift a decades-long drag on our economy.”

While it is too soon to know for sure whether such a cost target will be met, the “decades-long drag” is projected to continue apace, according to the Centers for Medicare and Medicaid Services, which estimates national public and private health care spending. National health spending is projected to increase by an average of 5.4 percent each year from now through 2020, and 6.1 percent in 2026, the last year for which projections are available.

In the years immediately following the law’s signing, the cost growth did moderate a bit, increasing by an average of 3.4 percent per year from 2011 through 2013. By contrast, national health spending grew by as much as 9.6 percent in 2002, the CMS figures show, averaging 7.6 percent a year between 2000 and 2007.

Healthcost: A Healthy Chunk_of Change

But experts such as Spencer Perlman, a health care analyst at Veda Partners, say the slowdown can be explained by a variety of external factors that have little to do with the 2010 law, such as the impact of the 2008-09 recession, demographic shifts and a move toward managed care. And even supporters of the law acknowledge it likely hasn’t played a major role in curbing costs.

“On cost, there’s a lot of uncertainty,” said Jonathan Gruber, an economics professor at the Massachusetts Institute of Technology and a key architect of the 2010 law. While cost growth has slowed since the early 2000s, he said, the role played by the health law isn’t the main reason.

There’s a good argument that the law’s cost impact is “more than zero,” he said, “but no one thinks it’s a majority.”

Spotlight on Medicare

The law did reap some savings, experts say, mostly because it made significant changes to the Medicare program. It lowered reimbursement rates to Medicare providers and changed payment setups to ensure better quality.

“There were successful efforts, particularly on the Medicare side,” Brennan said.

But critics say the Medicare cuts are likely unsustainable for the long term, because eventually lawmakers will be forced to undo them or risk angry seniors losing access to health care services. Meanwhile, the law’s other attempts at cost savings are either marginal or so unpopular they may never take effect.

A case in point is the so-called Cadillac tax, a 40 percent excise tax on high-cost insurance plans. The tax was designed to help pay for expanded coverage while dissuading employers and consumers from choosing gold-plated plans that would raise costs.

But the tax is so unpopular its enactment has repeatedly been postponed. In January, Congress used a stopgap funding measure to delay the tax from 2020 to 2022.

And the House is already considering a new bill that would delay it again, through 2023. That delay would cost $15.5 billion over the next five years, the Congressional Budget Office estimated.

“The most direct thing Congress could do right now would be to bring the Cadillac tax forward,” said James Capretta, an analyst at the conservative-leaning American Enterprise Institute who is critical of the law. “If they’re worried about cost, that’s what they should do. But everybody hates it.”

Another attempt at cost savings was the proposed creation of the Independent Payment Advisory Board, which would have the power to make changes to Medicare to cut costs, although Congress could overrule those changes with a supermajority.

But the board never got off the ground. Critics assailed it as a “death panel” that would threaten the lives of the elderly. In February, as part of a bipartisan budget deal, Congress repealed the board’s creation before it could even begin its work.

And since taking office, President Donald Trump has repeatedly sought to undermine the health care law further. His administration has scaled back advertising aimed at encouraging enrollment in the insurance markets and it refused to pay subsidies to insurance companies designed to reduce out-of- pocket costs for consumers.

Health Cost Curve Bending ... Upwards

Critics say the resulting uncertainty in the insurance marketplaces have led to higher premiums.

“There’s no question the Affordable Care Act has failed to meet its potential because it’s been undercut,” Mendelson said. While officials had projected 20 million consumers gaining coverage through the insurance marketplaces known as exchanges, “We’re barely at 10 [million],” he said.

Intractable trends

Health care costs have risen by less than were initially projected when the 2010 law was passed. Initial projections had forecast an annual national spending increase of 6.6 percent this year, for example, while the rate is now estimated at 5.3 percent. But the modest reduction is largely attributed to broader trends in the health care industry and the economy that have little to do with the health care law, such as the Great Recession of 2007-09, a move toward managed care and patent expirations for costly brand-new drugs.

The fate of the law could be determined as much by the courts as by Congress. The law already survived a major court challenge, when the Supreme Court ruled in 2012 that Congress had the power to require Americans to buy health insurance or pay a penalty. Now, it faces another test. A group of conservative state officials brought a suit challenging the constitutionality of the law because of a provision in last year’s tax overhaul that effectively ended the penalty for not buying health insurance. But no matter what happens to the law, analysts say, health care costs are projected to rise at a steady clip for the indefinite future. Consider:

• Since 2014, national health spending has outpaced the rate of economic growth, resuming a troubling trend after a few years of moderation. In 2016, health spending grew by 4.3 percent, while the economy grew by 2.8 percent, according to the Centers for Medicare and Medicaid Services.

• Health care costs are projected to suck up a larger share of the economy’s resources for the indefinite future. While health care made up 13.2 percent of gross domestic product in 1998, it is projected to consume 18.2 percent this year, a 38 percent increase. By 2026, it would be 19.7 percent.

• The cost to taxpayers is projected to double over the coming decade. The federal government is going to spend about $1.16 trillion on all its major health care programs this year, the Congressional Budget Office projected. By fiscal 2028, the tab could be $2.28 trillion. And those figures don’t even count health care spending run through tax subsidies.

The largest single tax “expenditure,” or preference, in the code is the exclusion from income of employer contributions for health insurance premiums, which the Joint Committee on Taxation estimates will cost nearly $150 billion this fiscal year, rising to almost $200 billion within five years.

Tax credits to purchase insurance on the Obamacare exchanges will add nearly $50 billion more to the tab this year, rising to $71 billion in fiscal 2022.

Upward bound

Driving the growth, analysts say, are costly advances in technology, rising labor costs and basic demographics.

Older people consume more health care than younger people. And the elderly population is mushrooming. The share of the population that is age 65 and older is projected to grow from 16 percent this year to 22 percent by 2048, the CBO has projected.

As much as a third of the increase in federal health care spending projected for the next 30 years is the result of an aging population, the CBO said. The rest of the increase, it said, stems from “excess cost growth” from myriad sources that promise to send per-person health costs upward.

As a result, it said, federal spending on the major health care programs — Medicare, Medicaid, insurance exchanges and the Children’s Health Insurance Program — will consume a growing share of the economy. Those costs will rise from 5.2 percent of gross domestic product this year to 8.7 percent by 2039, the CBO estimated.

But if curbing that growth means scaling back health benefits, political leaders aren’t ready to play ball. Trump ran for office pledging not to cut Medicare benefits, and Republican lawmakers have stressed their support for popular provisions of the 2010 health law they repeatedly sought to repeal.

Just this month, House Rules Chairman Pete Sessions, a Texas Republican facing a tough re-election battle, introduced a resolution suggesting that individuals who have pre-existing conditions should be entitled to affordable health coverage under any replacement to the health law.

“I proudly introduce this resolution to ensure that patients with pre-existing conditions are protected from the erroneously high costs and the limited options they are experiencing now,” he said.

And the most energized forces on the Democratic side are pushing a “Medicare for All” plan that amounts to universal government insurance coverage. The chief author, Vermont independent Sen. Bernie Sanders, has pegged the cost at $1.38 trillion per year, paid for with higher taxes on the wealthy. The conservative-leaning Mercatus Center put the price tag at $32.6 trillion in the first decade.

“True cost controls are really unpopular and not a focus of lawmakers,” Perlman said. “It’s much easier to focus on issues that expand access and offer a free lunch.”

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