Some Affordability Data

A few days ago I wrote about Congressional Budget Office Director Peter Orszag’s warning to policy makers concerning the need to focus on health care costs. As California lawmakers struggle to fashion a reform plan that the Legislature can pass, the Governor will sign, and voters will finance, there’s not a lot of talk about cost controls. Yet focusing on this issue is a public policy imperative and a, potentially, a political lifeboat.

Because without somehow constraining skyrocketing medical costs it’s hard to see how universal coverage becomes an affordable reality for the state — or the nation. At the end of the day, access is about affordability. If families can’t afford coverage it doesn’t matter what’s available to them. If the state can’t afford it’s health care programs, all the public proclamations mean nothing. It’s about cost.

Granted, increased access helps lower costs, but only temporarily. Once the benefits of broader coverage is achieved, it’s built into the system. Even the stated goal of single-payer advocates, eliminating the cost of the insurance industry, achieves a one-time benefit. Once carriers, agents and the rest disappear, that’s it. If there’s any savings (a far from certain assumption) once they’re captured that’s it. And medical cost inflation will continue to increase costs to consumers, taxpayers and governments.

The Henry J. Kaiser Family Foundation provides some interesting statistics to show the central role health care costs in the reform debate. The Foundation published Health Care Costs: A Primer back in August which breaks down the impact and the elements of health care costs. For example, that the aging of America increases costs is a part of conventional wisdom. The Kaiser Family primer shows why. Consumers age 25-44 spend on average $2,277 per year on health care, while those 45-64 spend twice as much, $4,647. Americans over 65 spend nearly twice that amount again, $8,647 again (380 percent more than the younger cohort, to be precise). 

Most significant for those who would reinvent the health care system is the reality that the rate of health care cost increases has outpaced the growth rate of the economy as a whole since at least the 1970s. Without exception (not necessarily every year, but every decade). The cumulative effect is substantial: from 1970 through 2005, the nation’s Gross Domestic Product grew by 7.4 percent; nominal national health expenditures grew by 9.8 percent. Perhaps 2.4 percent doesn’t look like much, but over 30 years it means health care costs doubled compared to the economy’s growth. That this trend is unsustainable is indisputable. That there’s no clarion call for change is disappointing.

Then there’s the element in the leading Democratic health care proposal moving through the legislature, Assembly Bill X1-1 (Nunez), concerning requiring all Californians to obtain at least minimum health care coverage. This mandate to buy is critical to making the mandate on carriers to sell coverage work (something I’ve written about several times, including yesterday). ABX1-1, however, exempts from the mandate to buy those for whom health care expenses (premiums and out-of-pocket expenses) exceeds 6.5 percent of their family’s income.

The Kaiser Foundation study seems to indicate that this exemption, as designed, would undermine the mandate. The primer found that 10 percent of Americans households earning 400 percent of the Federal Poverty Level in 2003 spent in excess of 10 percent of their gross income on health care costs. The report doesn’t provide a means of determining what the impact of lowering the threshold to 6.5 percent would be, nor what four years of inflation have done to this data, but it should be setting off alarm bills loud enough to penetrate even the state capitol. At the very least it’s a call for further study.

The primer offers some suggestions as to why health expenses are increasing faster than wages and general inflation. An aging population is the “gimme” in these discussions. The Kaiser Foundation suggests three drivers which are less frequently discussed:

  • Wealthier countries spend more on health care because they can– and the United States is a very wealthy country.
  • Insurance coverage has increased, encouraging more people to incur more health care.
  • Americans pay a lower percent of medical care than they used to, encouraging consumers to use more health care.

This last item is especially interesting. Between 1970 and 2005, the percent of “personal health expenditures paid directly out-of-pocket by consumers fell from about 40 percent to 15 percent.” This is a statistic those who claim the current system is broken — which is virtually everyone in Sacramento — somehow neglects to mention.

Health care reform is a complicated matter. It’s driven by politics as much as public policy, which is why the focus has been on market reforms rather than tackling the much harder task of constraining health care costs. Yet as the CBO and Kaiser Family reports indicate, that’s where the real challenges lies. Unfortunately, neither offers a magic formula to address the issue. But that is just testimony to how tough an problem it will be to resolve. Yet if we fail to find a solution to this core problem, the reforms causing so much pain today, won’t solve much of anything.

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