Here we go again on the Affordable Care Act

Vijay K. Mathur

Published in Standard-Examiner, July 21, 2012, Ogden, Utah

The decision by the Supreme Court on the Affordable Care Act has not satisfied the right wing of the Republican Party in the Congress and their sympathizers. The congressional attempt to repeal ACA is a fruitless and unproductive exercise. If there is any iota of common sense left in this Congress, it is advisable to make constructive changes in the law that will benefit all Americans.

Professors John F. Cogan, Glen Hubbard (Mitt Romney’s adviser) and Daniel Kessler (CHK) in their op-ed in The Wall Street Journal, June 6, present the usual conservative point of view about ACA while lacking some facts, and espousing blind faith in market forces to fix the health care problem. Let me briefly summarize some of their arguments against the ACA below.

CHK claim that ACA will stifle innovations and increase health care cost without creating more value, and the mandate to buy insurance will not result in better health outcomes. CHK cite the 2008 study by Prof. Jack Hadley, et al in Health Affairs, to support their contention of weak evidence of cost-shifting by uninsured onto insured. They blame government policies for preventing market forces from reducing cost and improving access to health care. However, arguments for fixing the tax code, redesigning Medicare and Medicaid and changing states’ insurance regulations to improve the health care system have some merit.

CHK are unaware that ACA creates the Patient-Centered Outcomes Research Institute to promote innovations. Bloomberg Business Week, Spring 2012, reports that this institute, funded by $3 billion over 10 years, will provide grants to medical researchers to test drugs and a host of other treatments. In addition, $1 billion has been distributed as grants to approximately 3,000 small biotechnology companies, and funds are allocated for research in public health. The ACA also creates the Center for Medicare and Medicaid Innovation, which works with the private sector to promote innovations to lower cost and improve quality of care. This public-private partnership is the hallmark of R&D in many other industries, and hence health care is no exception.

On the cost side, Ezra Klein (www.washingtonpost.com/blogs) reports that CBO estimates show that the insurance coverage provisions of the ACA will have a net cost of just under $1.1 trillion during 2012-2021 period — about $50 billion less than its March 2011 estimate. Furthermore, this is only the outlay side and not the revenue side of the ACA.

CHK ignore the adverse selection problem, when insurance companies are saddled mainly with high cost users of medical care. This is part of the reason for the mandate. The 2012 Rand Corporation study (www.rand.org) estimates that by 2016 ACA with mandates will result "in coverage for 91 percent of the nonelderly population" as opposed to only 81 percent without mandates. Rand study also shows that under individual exchange plans, average premium per enrollee will increase 9.3 percent without the mandate in the ACA by 2016. However, the estimated premium increases, generated by the CBO, range from 15 percent to 27 percent without the mandate.

Cost-shifting by the uninsured could take many different forms. For example, it may cause premiums of insured to rise, may lead to absorption of losses by hospitals and/or doctors, may affect the quality of care, and may increase the cost of Medicaid and Medicare. There are numerous studies on cost-shifting with varied conclusions and estimates. Most studies, however, conclude that there is cost-shifting and hence an increase in premiums of insured persons.

The 2005 study by Families USA found that nationally uncompensated health care costs exceeded $43 billion. Two thirds of that was shifted to the privately insured (close to $922 for family and $314 for individuals). The study in Health Affairs, January/February 2006, by Allen Dobson, Joan DaVanzo and Namrata Sen, comes to the conclusion that, "states with low public payments relative to costs and high degree of charity care are associated with higher private payment-to-cost ratio." Their data show that aggregate hospital payment-to-cost ratio for Medicare and Medicaid are declining and for private payers increasing since early 2000.

CHK’s reliance on market forces to solve health care problems ignores market failure problems associated with asymmetric information, adverse selection, moral hazard, and spillovers across medical care services and across insurers over time. In addition, studies by R. Cebul. J. Rebitzer. L. Taylor and M. Votruba, in The American Economic Review, August 2011, and by L. Dafny in The American Economic Review, September 2010, found that medical insurance markets are monopolistic. In fact, CRTV present a very cogent argument for including public option in the ACA.

It seems CHK are espousing the usual conservative viewpoint, with some meritorious arguments for simplifying rules, regulations and tax laws, without recognizing fundamental features of ACA and issues in the provision of medical care and health insurance to all Americans. As surgeon and researcher Atul Gawande comments in his New Yorker article on ACA, "The rhetoric of intransigence favors extreme predictions, which are seldom borne out."

Mathur is former chair and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He also blogs for the Standard-Examiner at http://blogs.standard.net/economics, etc.