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Growing Pains

ObamaCare won't stop rising health care costs.

Peter Suderman
July 30, 2010

Just days after President Obama first took office, Peter Orszag, in his new role as director of the Office of Management and Budget (OMB), held a fiscal summit in which he urged Washington policymakers to commit themselves to an agenda of fiscal responsibility. And for Orszag, the path to fiscal responsibility was through the nation’s rapidly growing entitlement programs—in particular, Medicare and Medicaid. Following up on an argument he’d made frequently as the director of the Congressional Budget Office (CBO), the nation’s top budgeteer declared that “the single most important thing we can do to improve the long-term fiscal health of our nation is slow the growth rate in health care costs.” Reversing course on those projected costs, he said, “is the key to our fiscal future.”

If that’s so, then the door remains locked. On Wednesday, in his final public appearance as OMB director, Orszag appeared at the Brookings Institute, a center-left think tank in Washington, D.C., to tout the administration’s fiscal successes. Tops on the list was the Patient Protection and Affordable Care Act, the health care reform bill that he played a key role in designing. ”The legislation,” Orszag bragged, “includes the most promising set of changes ever enacted into law to reduce the rate of health care cost growth over the long term.”

But there is now growing agreement that even under the rosiest assumptions, health care costs will continue to expand beyond the bounds of the budget, and that despite—or perhaps because of—the new health care law, the long-term fiscal problem remains. Even Orszag was forced to concede that, at the end of his tenure, “we remain on an unsustainable fiscal course.”

Here’s the problem: Health care costs—and thus Medicare costs—are growing faster than GDP. Between 1998 and 2008, the rate of the program’s growth outpaced GDP by about 2.8 percent. That may not seem like much, but as long as that trend continues, it means that, every year, all else being equal, Medicare eats up a larger share of the budget. In the short term, that’s worrying. In the long term, it’s a huge problem. Somehow, all that excess growth will either have to be contained or paid for.

That leaves policymakers with three basic options: Raise taxes, borrow more, or cut costs. But as Joseph Newhouse pointed out last week in Health Affairs, each presents significant difficulties. Given the dire reports of growing federal debt—the CBO expects the country’s debt-to-GDP ratio to hit 90 percent within a decade—borrowing isn’t much of an option. Tax hikes, meanwhile, are political poison, especially given the president’s promise not to raise taxes on families making less than $250,000 a year. And even if more of the public was open to tax hikes, hikes wouldn’t actually solve the problem, because offsetting the ever-growing costs of Medicare would require ever-growing taxes to match.

In other words, the government can’t tax its way out of the fiscal hole it dug. So cutting health care cost growth is the only option.

Except that ObamaCare just doesn’t contain costs. Not according to the Congressional Budget Office. Not according to Medicare’s chief actuary. Not according to the International Monetary Fund.

In a report released just a month after the passage of ObamaCare, Richard Foster, the chief actuary for Medicare, estimated that the law will result in a $311 billion increase in overall health spending over the next decade in comparison with what would have occurred had the law not passed. The International Monetary Fund, looking at the global fiscal situation, also expressed skepticism that the law’s Medicare cost control measures would work, warning that "the substantial decrease in Medicare payment rates [called for by the Affordable Care Act] to health care providers may prove difficult to implement."

Meanwhile, in a presentation on health care costs at the Institute of Medicine, Congressional Budget Office director Doug Elmendorf stated flatly that the health reform bill “does not substantially diminish” the pressure of rising health costs. And in its most recent report on the country’s long-term budget outlook, the CBO adjusted its “alternative fiscal scenario”—which is based on assumptions about how policies will actually play out rather than what is explicitly called for in current law—to include the assumption that several of the policies designed to restrain Medicare’s growth will fail to work after 2020.

Is any of this a surprise? Hardly. On the contrary, it was the plan from the very beginning. As The New York Times reported in March of 2009, at the start of the Obama presidency, many liberal reform advocates believed that expanding insurance coverage would be possible “only by deferring the big decisions on cost containment.”

Turns out the strategy was a success. ObamaCare passed. As for the big decisions, we’re still waiting.

Peter Suderman is an associate editor at Reason magazine. This column first appeared at Reason.com.


Peter Suderman is Associate Editor


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