Leading Democrats have contended for several years that controlling overall health costs is paramount because working families are overburdened with medical expenses. They have a point. Rising premiums for employer coverage have crowded out wage hikes, and escalating public insurance spending has diverted government resources from other priorities.
Now with the power to act, however, party leaders are emphasizing a different agenda. Instead of controlling costs, which is politically difficult, their plan -- reflected vividly in President Biden’s most recent version of the Build Back Better initiative -- is to shift more of the financial burden onto the government (and thus taxpayers). The net result will be an escalation of aggregate cost growth rather than a slowing down.
Their emerging plan is consistent with past practice. The path of least resistance for both parties has been to support generous public subsidies to soften the blow on consumers (albeit in different forms) and allow aggregate spending to rise accordingly. Organization for Economic Cooperation and Development (OECD) data shows the U.S. spent the equivalent of 16.8 percent of its GDP on health (defined broadly) in 2019. The next highest-cost countries -- Germany and Switzerland -- were well back, devoting 11.7 and 11.3 percent of GDP, respectively, of their national incomes to health. The average spending among OECD members in 2019 was 8.8 percent of GDP.
More spending on medical care is not per se evidence of misallocated resources. The U.S. has the highest per capita income among large, high-income countries, and it is to be expected that a nation’s financial commitment to health care will increase in conjunction with income. But it is well-documented that not all of the U.S.’s additional spending on medical care is beneficial. Much of it goes toward unnecessarily complex administrative processes and red tape. Further, many interventions add little or no value to the health status of patients, and pricing across the board is inflated by insufficient competition and misguided regulation. Credible studies estimate about 25 percent of total expenditures is waste that could be cut without harming patients.
Build Back Better won’t address the problem. Instead, it doubles down on public subsidization as the way to lower the burden on premium payers and consumers of medical services.
Among the most significant provisions in the president’s latest plan are the following:
- A Medicare Expansion. Although negotiations are ongoing, it is possible the bill will include an expansion of Medicare coverage for hearing services, starting in 2024. The cost will be covered partly with transfers from the general fund of the Treasury to the Part B trust fund. The White House estimates the expansion will add $35 billion to the Medicare budget.
- ACA Subsidies and Filling in the Medicaid Coverage Gap. The COVID-19 response legislation passed in March 2021, dubbed the American Rescue Plan (ARP), expanded premium subsidies for enrollment into ACA coverage. The emerging bill is likely to extend this more generous support, now scheduled to expire after 2022, through 2025. Further, twelve states continue to resist expanding Medicaid under the terms of the Affordable Care Act (ACA), which leaves many of their poorest residents without good options for health coverage. The emerging legislation may allow those who fall into this coverage gap to enroll in fully-subsidized insurance offered through the ACA exchanges, also through 2025. The combined cost of these expansions is expected to be $130 billion, or a little more than $30 billion per year.
- Medicaid Home and Community-Based Services. In Medicaid, states can apply for waivers of the usual program rules (which favor institutional care) to pay for long-term services and supports delivered in the community to persons with significant disabilities. The emerging bill would encourage an expansion of these services by increasing the generosity of federal support. The expected cost was originally $400 billion over ten years, but the latest White House plan calls for $150 billion over the same period.
To limit the total cost of the bill to $1.75 trillion, the administration proposes to limit the duration of many of the program expansions. The actual ten-year cost of keeping all of the health-related provisions fully in place is not currently known (the Congressional Budget Office has yet to provide any official estimates), but it could easily be $1 trillion or more. On annual basis, $100 billion is likely on the low end of what will actually occur.
Many of the plan’s leading sponsors want to cut total health spending by regulating the prices for prescription drugs, but their most aggressive reform ideas are all but certain to get left out of the emerging plan (the latest White House “framework” includes no new prescription drug reforms). It is still possible that smaller adjustments will be included in the bill as it moves forward, but the savings will fall well short of offsetting the higher costs induced by the expanded subsidies.
With more generous federal support, consumers will seek out more medical services, and the added demand will lead, in time, to even higher prices for many services. Indeed, an explicit aim of the Medicaid home and community-based services provision is higher wages for caregivers, which means higher prices for all consumers.
All of this should be kept in mind when candidates for elected office complain in future years, as they surely will, that the U.S spends too much on health care. National leaders have options for lowering the aggregate bill for medical care. They have chosen instead to make the problem worse by promoting more consumption without any waste reduction. This has been true when Republicans control Congress, and when Democrats are in charge. Political expediency is a powerful and unifying force.
James C. Capretta is a Contributor at RealClearPolicy and holds the Milton Friedman Chair at the American Enterprise Institute.