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The Obamacare Test

Three and a half years after the Affordable Care Act (ACA) was enacted, the main provisions are about to take effect. Enrollment in the health insurance exchanges begins October 1, coverage will be effective next January 1, and Medicaid expansions will start at the same time. As befits this flurry of action, the next few months will witness a series of news stories, pro and con. Conservatives will likely harp on every technical glitch or person facing higher premiums, while liberals will showcase the people whose lives are made better.

David Cutler, PhD

Although it is tempting to focus on the daily ups and downs as a guide to Obamacare’s ultimate success, that is not a reliable indicator. After all, the Medicare drug benefit that went into effect in 2006 had a good number of enrollment problems but is now seen as a major victory.

Instead, Obamacare must be judged by a different metric: whether it ensures sufficient coverage and reduces the growth of costs. If Obamacare succeeds on both counts, it will be a major success. If it fails at either one, the law will have great difficulty working as intended.

Do Enough People Get Coverage?

Less healthy people will be particularly attracted to the insurance exchanges. For many, the exchanges are the first place where they will be guaranteed coverage at a rate that is affordable—or that is projected to be affordable.

But the projections of affordable insurance will be accurate only if enough healthy people take up coverage as well. Within the exchanges, insurers will rate the healthy and sick as part of the same group. This means that if sick people buy coverage and healthy people do not, the premiums in the exchanges will need to be very high. But if this happens, it’s no longer a real marketplace; it is a high-risk pool for the very sick.

So here is the first test for Obamacare: does it ensure enough participation by healthy individuals to keep premiums moderate and access near-universal?

As an economist, I would naturally ask how many people need to buy coverage for the exchanges to work as intended. There is no consensus answer to this question. The Congressional Budget Office estimates that 7 million people will be covered by the insurance exchanges in 2014, 13 million in 2015, and 22 million in 2016. At this level of coverage, the exchanges will attract a diverse enough mix of healthy and sick individuals to maintain low rates for essentially everyone. My internal compass tells me that if less than half the projected number of people buy through the exchanges, the risk mix will be such that the exchanges will be in real trouble. If the projected number or even more show up (the projection assumes that only 60% of eligible uninsured people will acquire coverage), the exchanges will be a success. In between, it is touch and go.

To make matters more difficult, the insurance pools are at the state level, not the national level. Thus, there are 50 opportunities for success or failure. Falling short of a complete victory—success in every state—wouldn’t be a death blow for the law as long as the exchanges work well in most states. Rather, it would show which states are underperforming and what models to emulate.

So far, the outlook is good. The first-year premiums in the exchanges are coming in lower than projected when the law was passed. This is a good start, but now people need to show up. Whether they do so is the first test.

Do Cost Increases Slow?

The second hurdle is whether the growth of medical costs slows from trends before the passage of the ACA. The long-term outlook for the federal health care budget post-ACA is much the same as it was pre-ACA, with projected spending exceeding revenues by a significant amount, almost entirely because of the rising cost of health care. On top of this governmental burden are the effects of continued increases in health care costs for businesses and households: fewer people with private coverage and a shortage of jobs for lower-wage workers.

Making health care affordable requires the increase in health care costs not to exceed the increase in our ability to pay for it. Put another way, the cost of health care is 18% of the gross domestic product (GDP) now, and it cannot exceed that rate without major cutbacks in access to care.

The ability to achieve the necessary cost savings is not in doubt. Most analysts agree that about 30% of medical spending is wasted. This includes unnecessary administrative expense, clinical errors, excessive care provision, and prices that are too high. Eliminating such waste would achieve or exceed the GDP target.

In one important way, the Obama Administration got lucky when it enacted the ACA. In the late 2000s, the growth of health care costs fell markedly. The ACA played a part in this, but so did a general slowdown in the number of new technologies and the spread of existing ones.

The ACA has a number of provisions directed at continuing to reduce cost growth. The best known of these provisions is the Accountable Care Organization program for Medicare, but there are (literally) dozens of others. These programs are accompanied by an array of similar experiments occurring in Medicaid programs and private insurance. While each program differs, the spirit of all of them is to remove the reward for providing more care and to reward better, more efficient care.

Because these programs are new and changing behavior takes time, the effect of payment reforms so far is modest. There are indications that the incentives are having the desired effect—for example, hospital-acquired conditions and rehospitalizations are both decreasing, as hospitals are penalized financially for these events—but it is still early days.

These successes need to be replicated many times over for the law to succeed.

The Scorecard

Both challenges—enrolling enough people and controlling costs—are stiff, and failure to achieve either one would put the entire law in jeopardy. Although this makes some analysts pessimistic, the evidence to date is surprisingly favorable. As noted, cost increases are low, and insurers project adequate enrollment.

For both metrics, success or failure will take some time to judge. Three years is probably about right. At that point, the exchanges will have matured into a steady state, and cost trends will be easier to identify. So ignore the headlines of individual cases. Look at the big trends, and success or failure will be readily apparent.

About the author: David M. Cutler, PhD, is the Otto Eckstein Professor of Applied Economics in the Department of Economics and Kennedy School of Government at Harvard University and a member of the Institute of Medicine. He served on the Council of Economic Advisers and the National Economic Council during the Clinton Administration and was senior health care advisor to Barack Obama’s presidential campaign.
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