Takeover: Government on track to make up 66% of health care spending

The federal takeover of housing mortgage financing has not exactly been a bed of roses. Neither has federal meddling in K-12 education. And now America is witnessing another government "takeover" in the Affordable Care Act (ACA). Though you wouldn't know that by listening to partisan "fact checkers," The New York Times opinion page, or any number of ACA enthusiasts. They contend the law doesn't qualify as a takeover, since it will force millions of Americans to sign up for coverage through private insurers.

Regardless of this spin, ACA represents an unprecedented intrusion of federal control over matters that historically have been retained by states, health insurers, health providers and their patients.

To understand the extent to which government control of healthcare will expand under ACA, consider agriculture. Of all the money spent in this industry, 78 percent comes from households, businesses, and others operating in the private sector.[1] In other industries such as computers and clothing, the government share obviously is even lower.

Compare that to healthcare. In 2009, federal, state, and local governments accounted for more than 60 percent of all healthcare spending. (Note: official government figures underestimated the federal share of health spending in 2009 by nearly a third-a difference of $265 billion. Due to accounting conventions that go back to the 1960s, these estimates fail to include the tax expenditures that subsidize insurance coverage and health spending.[2])

When ACA takes effect, the private sector's share of healthcare spending will be reduced to a mere 33 percent.[3] The only other market where government controls such a large share of resources is education, where its share of spending tops 80 percent. [4] It is not at all unreasonable to wonder whether reliance on politics rather than markets to allocate so much of the pie is a good idea.

For evidence of that concern, look no further than the Independent Payment Advisory Board (IPAB) created by ACA. The IPAB is a presidentially appointed, 15-member board subject to Senate confirmation with the authority to recommend cuts in Medicare if growth in Medicare spending exceeds targeted amounts. The board's recommended cuts will take place automatically unless Congress overrides them (if the president approves IPAB-recommended cuts, then Congress would have to override a presidential veto).

ACA specifically prohibits IPAB from recommending wholesale changes to Medicare. Kaiser Health News explains: "IPAB is prohibited from including any recommendation that would: (1) ration health care; (2) raise revenues or increase Medicare beneficiary premiums or cost sharing; or (3) otherwise restrict benefits or modify eligibility criteria." Regardless, ACA advocates such as former CEA Chair Christina Romer are recommending the board's powers be expanded "to suggest changes in benefits or in how Medicare services are provided" in order to contain healthcare costs.

In this manner, IPAB acts as a political foot in the door-offering federal officials a chance to expand powers beyond the scope of the original law as pressures to contain the exploding costs of ACA mount. This is exactly what happened with Medicare, which was statutorily prohibited with interfering with clinical practice of medicine. Today Medicare's rules intrude on medical practice in ways never envisioned 50 years ago.

This is exactly what happened in Massachusetts too. Federal lawmakers modeled ACA after the Bay State's healthcare law-focusing first on dramatically expanding access and later on trying to contain costs. Now five years into the Massachusetts plan, Governor Deval Patrick is about to sign into law a far-reaching cost containment bill that will create an 11-member Health Policy Commission very similar to IPAB except that it will astonishing power to control the practice and organization of medicine.

For example, no participating provider is allowed to make "any material change to its operations or governance structure" without commission approval. The commission even can rewrite the terms of provider contracts with insurers (including payment levels and methods) if they are "deemed to be excessive." We can only imagine the kinds of powers IPAB might be given five years after ACA is fully implemented, once it is clear to all how miserably it has failed at cost containment.

It's easy to see that part of the concern over a "takeover" is the potential for the continued expansion on federal control. Indeed, because ACA doesn't control spending, the pressures to expand control are virtually inevitable.

Footnotes:

[1] Government spending on agriculture in 2008 was $29.1 billion according to BEA's Table 3.16. Government Current Expenditures by Function ($24.1 billion of this represents federal spending). BEA estimates that the value added by farms that year was $130.5 billion. [GDP is simply the sum of value added by industries across all industries. Agriculture, forestry, fishing and hunting is a major industry group tracked by BEA, consisting of a) farms; and b) forestry, fishing, and related activities. Thus, farms are a reasonable proxy for the agriculture function used to decompose government consumption expenditures.

[2] Specifically, the official estimate of the federal share of national health expenditures was 36.5 percent, but when federal tax expenditures are included, the properly calculated share was 47.1 percent. Thus, the true value was 29 percent (10 percentage points) higher (47.1/36.5=1.29). Exclusion of federal tax expenditures is an accounting convention that goes back to the 1960s when Congress created the national health expenditure accounts. Tax expenditures are not recognized in that framework just as they are not recognized in toting up GDP. Money not collected by IRS is viewed differently than money raised and spent by Treasury. It's probably a bad idea from the standpoint of accountability/transparency, but it's the way things have been done for decades and not unique to this administration.

[3] Official government projections show total health spending will be $4,781 billion in 2021, of which $2,370 consists of government spending (Table 16). To correspond to the national health expenditure accounts framework, we must add to this $332 billion in private payroll taxes and premiums for Medicare. Total federal and state tax expenditures for health care amounted to $297.2 billion in 2009 (as compared to $567 billion in employer payments for private health insurance). By 2021, such employer payments for private health insurance will rise to $946 billion (Table 16). Assuming tax expenditures grow at the same rate as employer premiums, a rough approximation of tax expenditures in 2021 is $496 billion. Thus, when all government spending is accounted for ($2,370B + $332B + $496B), net private spending will amount to only 33.1%. This likely overestimates the private share, since under an alternative fiscal scenario Medicare spending will be even higher than in the official government projections cited above.

[4] In 2008, government spending on education amounted to $742.7 billion (Table 3.16. Government Current Expenditures by Function).The value added to GDP attributable to private educational services was $147.6 billion. Thus, at most, the private sector accounts for 16.6 percent of education services ($147.6/(147.6+742.7). To the degree that the $742.7 billion includes subsidies to purchase the $147.6 in privately produced education services, the private share would be even smaller.

 

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