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A Project of The Annenberg Public Policy Center

ACA Impact on Per Capita Cost of Health Care

Rep. Chris Van Hollen claims the Affordable Care Act “has resulted in significantly reducing the per capita cost of health care.” To be clear, the per capita cost of health care is rising. Van Hollen’s office says he meant that the ACA has significantly reduced the growth in health care costs. That’s different.

Per capita health care costs have been rising at just under 3 percent a year over the last four years, but that’s less than  half the average annual growth in the preceding eight years. Economists say the recession is the biggest reason for the dip — though many also credit the ACA for a bit of the decline.

Van Hollen based his claim largely on a report from the White House Council of Economic Advisers, which claims health care costs would be 0.5 percent higher per year if not for the ACA. That’s a matter of some debate in the economic community. But if accurate, the CEA says that translates to $135 per person in the U.S. in 2013. CEA and Van Hollen say that’s “significant.” The Centers for Medicare & Medicaid Services calls the effect of the ACA on the slowdown “minimal.”

Ultimately, though, that’s a subjective call, and not one on which we take a position. But with the Affordable Care Act, also known as Obamacare, shaping up as a focus of the 2014 elections, the law’s effect on health care costs is a critical political issue, and we recommend readers seek some perspective when judging comments like Van Hollen’s.

Van Hollen, the ranking Democrat on the Budget Committee, made his comment about the per capita cost of health care in an interview with Chuck Todd on MSNBC on Feb. 12 (at the 3:14 mark).

Van Hollen, Feb. 12: In fact, the Affordable Care Act, as you know, has resulted in significantly reducing the per capita cost of health care.

The per capita cost of health care expenditures in 2012 was $8,915, according to the Centers for Medicare & Medicaid Services. It was $8,170 in 2009, $8,411 in 2010 and $8,658 in 2011. In other words, it’s rising year after year.

However, when broken down by the percentage increase, it is also clear that the growth in the per capita cost of health care has dramatically slowed in recent years.

The slowing started before the implementation of the health care law and has remained steady at just under 3 percent in each of the last four years.  It was growing much more quickly — at a rate of more than 6 percent a year on average — in the eight years prior to that. In fact, the per capita cost of health care is now growing at the slowest rate in 50 years. The question then is: How much is the ACA responsible for that slowing? On that point, there is much speculation and debate.

In a Jan. 6 article in the journal Health Affairs, CMS — whose nonpartisan economists and statisticians have tracked health care spending since 1960 — noted that health care spending in the U.S. (which generally tracks the trend in per capita health care costs) rose 3.7 percent in 2012, and stood 15.8 percent higher than it did in 2008, the year before Obama took office. That’s moderate growth by historical standards. But when the White House quickly claimed credit, we cautioned that CMS said that the ACA had only a “minimal” impact on the slowdown in spending. The reasons CMS economists cited instead were:

  • The economic slowdown and subsequent sluggish recovery
  • Drops in some prescription drug costs brought about by the expiration of patents on several costly medications including Lipitor, Plavix and Singulair, which are now available in low-cost generic versions, and
  • A one-time reduction in Medicare payment levels to skilled nursing facilities.

The authors of the Health Affairs article suggested the slowdown in health spending may only be temporary, as has been the case after past recessions.

“[T]his pattern is consistent with historical experience when health spending as a share of GDP often stabilizes approximately two to three years after the end of a recession and then increases when the economy significantly improves,” the authors said.

To conclude that the slowdown is permanent, they said, would require “more historical evidence.”

Meanwhile, the White House Council of Economic Advisers issued a report in November 2013 acknowledging that while the ACA is not the sole — or even most important — driver of the slowdown, it is a “meaningful” contributor.

CEA, November 2013: The slowdown in health care cost growth is more than just an artifact of the 2007-2009 recession: something has changed. The fact that the health cost slowdown has persisted so long even as the economy is recovering, the fact that it is reflected in health care prices – not just utilization or coverage, and the fact that it has also shown up in Medicare – which is more insulated from economic trends, all imply that the current slowdown is the result of more than just the recession and its aftermath. Rather, the slowdown appears to reflect “structural” changes in the United States health care system, a conclusion consistent with a substantial body of recent research. …

To be sure, the ACA is not the sole cause of the slowdown. Health care spending growth had slowed somewhat even before the ACA was passed … the recession and other changes in the health system have certainly played contributing roles … and, in any case, many of the ACA’s reforms are still coming online.

Nevertheless, the ACA’s reforms aimed at driving out waste and improving quality are contributing to these trends in a meaningful way.

Jason Furman, chairman of the Council of Economic Advisers, told us in a phone interview that one of the biggest drivers in the ACA affecting per capita cost are reforms that trimmed payments to Medicare. The CEA notes that 2010 Congressional Budget Office cost estimates for the ACA “estimated that its reforms to Medicare would save $17 billion in fiscal year 2013, attributable primarily to reductions in payments to private insurers that provide coverage through Medicare Advantage and adjustments in annual updates to Medicare provider payment rates.” That alone has reduced health care spending by 0.6 percent in 2013, or 0.2 percentage points over the 2010-2013 period, the CEA report states.

The CEA points to several recent studies that concluded reductions in Medicare spending are also having a “spillover effect” on overall health care spending.

CEA, November 2013: Recent research implies that reforms to Medicare will have “spillover effects” that reduce costs and improve quality system-wide. In economic terms, this suggests that efforts to reform Medicare’s payment system are “public goods.” Accounting for “spillovers” implies that the ACA’s effect on health care price inflation may be much larger than previously understood. The direct effect of ACA provisions that reduce Medicare overpayments to private insurers and medical providers has been to reduce health care price inflation by an estimated 0.2 percent per year since 2010. Accounting for the “spillover effects” discussed above raises this estimate to 0.5 percent per year, which represents a substantial fraction of the recent slowdown.

CEA estimates that a 0.5 percent reduction in health care expenses in 2011, 2012 and 2013 would amount to a savings of about $135 per person in the U.S. in 2013 (though the CEA allows that the actual savings may be somewhat smaller because there’s some evidence lower prices may cause people to receive more care).

Whether that’s a “significant” slowing in the growth of per capita health care cost is in the eye of the beholder.

“I think that is significantly slowing it,” Furman told us. “I think significant is a reasonable adjective for it.”

Furman and those on the White House Council of Economic Advisers aren’t the only ones who are convinced the ACA is slowing the growth of health care costs. In an op-ed in Politico, Drew Altman, CEO of the nonpartisan Kaiser Family Foundation, made a case for the ACA helping to reduce the cost of health care, though he acknowledges it would be hard to prove.

Altman, Sept. 26, 2013: What is far less clear is how much Obamacare may also be contributing to the slowdown in costs. Proponents of the law say it is helping to control costs because the cost-containment provisions of the law are working as advertised. These include new limits on how much insurance companies can charge for administration and profits (with rebates to consumers if they charge too much), and state review of rates proposed by insurance companies.

There is solid evidence that these provisions are working as intended, but they mainly apply to the individual and small group markets, just a small slice of the overall health care marketplace. Obamacare also reduced the rate of increase in future payments to providers for Medicare. These reductions are projected to take more than $700 billion out of health spending over the next 10 years, but they haven’t had much effect yet. Other provisions of the law, such as the Medicare experiments in payment and delivery, are still just getting started. Critics of Obamacare, of course, dispute that the law is having any effect on costs because, well, there is basically nothing they like about Obamacare.

Altman said these direct effects on system-wide costs “may be limited so far,” but he believes the ACA may also be having “a significant indirect effect, although cause and effect and the magnitude are hard to prove.” Altman attributes the indirect effect to the fact that “[h]istorically, we have always seen the health-care marketplace respond by lowering costs when there is the threat of impending health reform legislation or government action on costs.” Now, he wrote, “we have not only the threat but the reality.”

Altman, Sept. 26, 2013: The cost slowdown preceded Obamacare, so there is no doubt that other forces have been at play as well. Cost-sharing has been increasing in the market for years, and we know it has a very real impact on the use of health services. The bad economy has had the biggest influence on health care utilization and spending, as our recent study and this month’s actuaries’ report both suggest.

But, history tells us that the health-care market has always responded to the threat (and now, for the first time, also the reality) of health reform. For this reason it is entirely likely that Obamacare has played and will continue to play a role in the slowdown in health-care cost growth and accelerating market change.

So what we have is informed speculation that the ACA may be contributing to the slower growth in health care cost. But comments like Van Hollen’s — that the Affordable Care Act “has resulted in significantly reducing the per capita cost of health care” — would surely lead most viewers to believe that he’s saying Americans are paying less for health care. That’s not the case. Per capita health care costs are climbing, albeit at a historically moderate pace. CMS economists peg the bulk of that slowdown to the recession.

But a reasonable case can be made that the ACA is also a (much smaller) contributing factor. We’ll leave it up to readers to decide whether the ACA’s role in slowing the growth is “minimal” — as the CMS put it — or “significant” — as Van Hollen put it. Or if it’s simply too early to tell.

— Robert Farley