Health care spending and results

Chapter 8 Health Care Policy


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Health care spending and results. The United States spends twice as much per person on health care as does any other developed country, yet on average gets worse results. The disparity has led many elected officials to call for major changes in public policy. The photo shows Sen. Debbie Stabenow, D-Mich. (right), and Sen. Tammy Baldwin, D-Wis., participating in a news conference to announce legislation giving people between the ages of fifty and sixty-four the option of buying into Medicare on February 13, 2019, in Washington, D.C.

U.S. spending on health care has been of great concern in recent years, and regularly is at the center of political debate. Yet from 2008 through 2013, health care spending grew by less than 4 percent annually, one of the lowest rates in more than fifty years, and well down from the annual average of more than 7 percent that prevailed from 2000 through 2008 and even higher rates of increase during the 1990s. From 2014 through 2017, the rates of increase also were relatively stable. They rose to over 5 percent after adoption of the Affordable Care Act, primarily because an additional twenty million people gained health insurance coverage and many more enrolled in the federal Medicaid program as states expanded their coverage under the act. But then the rate dropped back to 3.9 percent for 2017.




The Centers for Medicare and Medicaid Services (CMS) reported in early 2019 that even with this reduced rate of increasing expenditures, overall spending on health care rose to a record high of $3.5 trillion in 2017, or nearly 18 percent of the nation’s gross domestic product (GDP). The United States spent $10,739 per person for health care in 2017, a figure certain to grow substantially over the next decade. Indeed, CMS projects that per capita spending on health care by 2027 will be an astonishing $16,907 and that overall health care spending will rise to $6.0 trillion, or 19.4 percent of GDP. Given these costs, and the continuing challenge of ensuring broad access to vital health care services, it is no wonder that President Barack Obama spent so much of his first year in office championing his proposed policy changes that eventually became the Patient Protection and Affordable Care Act of 2010, also known as Obamacare. It is equally unsurprising that the president’s detractors saw the new act as another costly expansion of governmental authority they believed was unjustified.1




It is likely, however, that the high cost of health care in the United States will remain a difficult challenge for the president and Congress, and for the states, regardless of which party is in control. This is particularly so as the nation’s population ages, driving up health care costs, and it continues to struggle with increasing federal deficits and a growing national debt.




Simply spending more money on health care, of course, is not necessarily the best way to deal with the nation’s health care problems. The United States already spends twice as much per person on health care as most other industrialized nations, and achieves less for it. As the chief executive of the Mayo Clinic has stated: “We’re not getting what we pay for. It’s just that simple.” The implication is that whether the money is spent through governmental programs or entirely in the private sector, fundamental changes are needed in the way the nation handles health and disease—that is, in the way we choose to structure and operate the health care system. As just one example, if morespending were shifted to preventive health care and wellness activities, the outcomes could be far better. This is because a very large percentage of health care costs go to treatment of chronic and preventable illnesses, such as diabetes, heart disease, and back and neck pain.2 Would you favor such a change in spending priorities that put more emphasis on wellness and disease prevention? Are there any reasons not to make such a seemingly sensible change? This chapter should help in answering such questions.




The long-recognized gap between health care spending and results remains as striking today as when it was first noticed. In a 2018 report, for example, the Commonwealth Fund found that the United States ranks poorly in terms of health care cost, access, and affordability compared to other high-income countries based on a series of measures of health system performance.3 One reason for these findings is that prior to passage of the Affordable Care Act, some eighty-four million people in the United States either lacked health insurance or were underinsured, and therefore had limited access to health care services. Another is that the quality of health care people receive and what they pay for it depend on where they live and personal characteristics such as race, income, and education.4 What, if anything, should the nation do to correct such an important inequity? And who should pay for the added cost of doing so?




The combination of the high cost of and unequal access to quality health care has long been a major concern in public policy. In 2018, the average health insurance premium for a family of four under employer-provided health plans reached $19,616. Increasingly, workers also are forced to pay a higher percentage of these costs and to cope with higher deductibles and co-payments.5 It is little wonder, then, that reform of health care policy has regularly appeared at the top of issues that voters consider important.




Most people rely on employer-provided health care insurance, for which they pay a portion of the cost, or on government programs to meet essential health care needs. Federal and state health care policies also affect the uninsured and those who pay for their own insurance. Government policies influence not only access to and quality of health care services across the country but also the pace of development and approval of new drugs and medical technologies and the extent of health care research that could lead to new lifesaving treatments. Whether the concern is periodic medical examinations, screening for major diseases, or coping with life-threatening illnesses, health care policy decisions eventually affect everyone.




This chapter examines some of the problems associated with health care services and the public policies designed to ensure that citizens have access to them at a reasonable cost. The chapter begins with background information about the evolution of major public policies, such as Medicare, Medicaid, and the veterans’ health care system, and then turns to some of the leading policy disputes, including the rising costs of health care, the role of managed care, the regulation of prescription drugs, and the potential of preventive health care and other strategies to keep people healthy and save money. In this chapter, we focus on the effectiveness of current public policies, and we use the criteria of economic efficiency and equity to examine these disputes and recommendations for improving health care policy.





Health care policy includes all the actions that governments take to influence the provision of health care services and the various government activities that affect or attempt to affect public health and well-being. Health care policy can be viewed narrowly to mean the design and implementation of the range of federal and state programs that affect the provision of health care services, such as Medicare and Medicaid. It also can be defined more broadly and more meaningfully by recognizing that government engages in many other activities that influence both public and private health care decision making. For example, the government funds health science research and public health departments and agencies; subsidizes medical education and hospital construction; regulates food, drugs, and medical devices; regulates health-damaging environmental pollution; and allows tax deductions for some health care expenditures (which makes them more affordable). The box “Working with Sources: Health Care Policy Information” lists some useful websites to begin a policy investigation.




As a government activity, health care policymaking is relatively recent, even though governments at every level long ago established what we call public health agencies to counter the threat of infectious diseases or unsafe food and to support medical research. The work of these agencies should be clearly differentiated from what we recognize today as health care policymaking, which involves how we decide to deal with concerns such as access to health insurance and the provision and cost of health care services. These agencies dealt with such seemingly mundane but critical functions as providing safe drinking water supplies, sanitation, and waste removal. Many of the oldest of these public health agencies continue such work today, largely without much public notice. These include the Food and Drug Administration (FDA), the National Institutes of Health (NIH), and the Centers for Disease Control and Prevention (CDC).

Evolution of Health Care Policy




What we consider the core of health care policy developed in the United States only after the 1930s, with the idea of health insurance. Individuals could take out an insurance policy, much as they did for their lives, houses, or cars, that would defray the cost of health care should an illness develop or an injury occur. Most of those early policies covered only catastrophic losses. Health insurance works much the same way now, although instead of individual policies, most people are insured through their jobs, and the insurance policies cover routine medical services as well as preventive health care. Employer-sponsored health insurance became popular in the 1950s after the Internal Revenue Service ruled that its cost was a tax-deductible business expense. By the early 1960s, the push was on for federal health insurance policies, primarily to aid the poor and the elderly, two segments of the population that normally would not benefit from employer-provided health plans. It is clear that equity concerns in access to health care services were important as health care policy developed. Those efforts culminated in the enactment of the Social Security Act Amendments of 1965 that formally created the Medicare and Medicaid programs (Marmor 2000). These policies are discussed in detail later in the chapter.




Even with adoption of these two programs, the U.S. health care system remains distinctive in comparison to those of other industrialized nations, where national health insurance, also known as single-payer insurance (the government pays), is the norm; the Medicare program is one example of this in the United States. Campaigns to adopt national health insurance in the United States date back to 1948, when the Democratic Party platform endorsed the idea. Members of Congress began to introduce bills to create such a program, but they were unsuccessful until the decision in 1965 to establish insurance programs for the poor and the elderly through Medicaid and Medicare, respectively.




In 1993, President Bill Clinton submitted the Health Security Act to Congress after extensive analysis by a presidential health care task force headed by his wife, First Lady Hillary Rodham Clinton. The plan would have guaranteed health insurance to every American, including the thirty-four million who were uninsured at the time. Republicans in Congress criticized the Clinton plan as too expensive, bureaucratic, and intrusive, and the health insurance industry opposed it as well, and lobbied intensely against it. In the end, the Clinton recommendations failed to win congressional approval, as did the many alternatives members of Congress proposed (Hacker 1997; Patel and Rushefsky 2015).




With the election of Barack Obama and gains in Democratic seats in the House and Senate in the 2008 elections, national health care policy reform once again was in the spotlight, although with competing proposals that reflected deep differences between the two parties. President Obama had offered detailed proposals on his preferred approach to health care reform during the 2008 campaign, which he modified in 2009 in the face of Republican opposition and objections by the health insurance and pharmaceutical industries. In particular, the president abandoned what had been strong Democratic preference for a so-called public option, where the federal government would compete with private insurance companies in offering health care insurance. In 2009 and early 2010, Congress considered and eventually approvedsweeping health care reforms, although on strict party-line votes. No Republican in either the Senate or the House voted for what became the Patient Protection and Affordable Care Act of 2010, and party members since then have vowed to repeal the act and replace it with an alternative policy.6




The Affordable Care Act is a highly complex and multifaceted policy in addition to being politically controversial. In recent years, most Republicans continued to call for its repeal, although with few concrete proposals for how they would replace it. Following their 2016 election success, both President Donald Trump and congressional Republicans vowed again to repeal the act, while also acknowledging that doing so might take several years. In an intriguing 2015 analysis, the Congressional Budget Office concluded that repealing the law would cost more than keeping it. Eliminating it entirely would add $137 billion to the federal deficit over the next decade.7




The original 1,200-page law affects virtually every component of the U.S. health care system, and it survived a major legal challenge when the Supreme Court in 2012 upheld its constitutionality in a close vote.8 Other legal challenges, however, continue. The major purpose of the law was to increase health insurance coverage and access to health care services, and it does so through a number of key actions: (1) expanding Medicaid and the Children’s Health Insurance Program (CHIP) and making eligibility and benefits more uniform across the states (although the Court allowed for states to opt out of the Medicaid expansion part of the law); (2) mandating that individuals who are not covered through their employers or by public programs purchase a minimal level of health insurance, with tiered plans that must offer standard packages of benefits, or pay a penalty for failing to do so (a requirement that a Republican Congress repealed in 2017); (3) subsidizing the costs of such insurance for low- to moderate-income families; (4) offering tax credits to encourage small businesses to provide health insurance to their employees and instituting a penalty for larger employers (with fifty or more employees) who do not offer health insurance benefits; and (5) creating new regulations for health insurers to deal with several long-standing concerns, such as prohibiting insurers from excluding children and eventually all individuals with preexisting medical conditions, preventing them from setting annual and lifetime limits on coverage, and requiring them to cover family members (such as college students) up to age twenty-six. Other provisions in the act set new limits on allowable administrative costs to encourage insurers to improve efficiencies in billing and health care management. The various components of the act were to take effect over a seven-year period between 2011 and 2018. A summary of them and how they apply to individuals can be found on the federal government’s web page (, where the full text of the act is posted.9

Major Features of the Affordable Care Act




Mandates that individuals not covered through their employers or by public programs purchase a minimal level of health insurance through state health insurance marketplaces (eliminated by Congress in late 2017)


Subsidizes the costs of health insurance for low- to moderate-income families


Offers tax credits for small businesses to provide health insurance to their employees


Removes annual and lifetime limits or caps on health insurance coverage


Requires insurers to cover family members (such as college students) up to age twenty-six


Expands Medicaid and the Children’s Health Insurance Program


Mandates free preventive services for those on Medicare and offers seniors savings on prescription drugs


Creates accountable care organizations to help doctors and health care providers cooperate to deliver better care at lower cost


Prohibits insurers from refusing coverage or charging higher rates due to gender or preexisting medical conditions


Mandates that at least 80 to 85 percent of insurance premium dollars (depending on the plan) be spent on health care to reduce administrative costs


Creates a new Patient’s Bill of Rights to protect consumers from insurance industry abuses


Establishes a new Center for Medicare and Medicaid Innovation to study improved ways to care for patients




Source: Henry J. Kaiser Family Foundation, “Summary of the Affordable Care Act,” at

Among the act’s more intriguing and promising elements are requirements to study ways to improve the efficiency of health care service delivery and to reduce costs. A new CMS Innovation Center is to oversee such studies and to devise ways to reward health care providers for improved quality and gains in efficiency. Similarly, a new independent federal advisory board is to identify cost savings in the Medicare program, and the new Patient-Centered Outcomes Research Institute is to conduct research on the comparative effectiveness of health care services—that is, to determine which procedures and drugs work best and at the least cost, a widely endorsed but still controversial proposal.10 Other provisions in the act seek ways to reduce costly medical errors and hospital-acquired infections by rewarding hospitals with better patient outcomes, and to promote the use of disease management programs and preventive health care. Despite the partisan rancor over the bill, the two parties were largely in agreement on the need to increase emphasis on preventive health care through both governmental and private insurance programs.11




The costs of the Affordable Care Act are sizeable, and yet they are expected to be offset in part by a variety of new revenues, including a 0.9 percent increase in the Medicare payroll tax for high earners (household income of greater than $250,000 a year) and a 3.8 percent tax on so-called passive income such as dividends and capital gains that took effect in 2013, also only for high-earning households. The act’s critics, however, argue that net costs nonetheless are likely to rise because they believe that Congress may not agree to all the new taxes and fees or make the expected reductions in some health care spending, and that younger people might not sign up for insurance plans in sufficient numbers to balance older and less healthy segments of the population. In the past several years, many critics also anticipated that prices some will pay for insurance coverage might well increase substantially, at least in the short term. The longer-term impacts are less clear, particularly in comparison to what might prevail without the act.12




As noted in chapter 6, implementation of the new act did not go as smoothly as the government had hoped. In addition, it soon became clear that each state would choose whether to offer a state insurance exchange or to defer to the federal government. Many states controlled by Republican legislators and governors chose not to offer their own exchanges as one expression of their dislike of the federal program.13 In addition, following the Supreme Court’s 2012 decision, many states chose not to expand Medicaid services under the Affordable Care Act even though the federal government was covering nearly all the costs of doing so. These choices will affect the law’s implementation, its success in persuading large numbers of people to sign up for insurance, and the anticipated cost savings.




The Trump administration also sought to use executive authority to weaken implementation of the law when it was unsuccessful in seeking its repeal from Congress. For example, it largely defunded programs to educate the public about enrollment in Affordable Care Act insurance programs, and one executive order instructed federal agencies “to waive, defer, grant exemptions from, or delay the implementation of” the parts of the act that they could.14 Critics of the administration’s actions argue that in effect it sought to sabotage the law through its rules and regulations as well as spending priorities.15


A Hybrid System of Public and Private Health Care




Another way to consider the history of health care in the United States and the nation’s present health care system is to emphasize that it relies largely on the private market and individual choice to reach health care goals, as we indicated in the chapter’s opening paragraphs. Even following enactment of the Affordable Care Act, the U.S. government plays a smaller role in health care than, for example, the governments of Great Britain or Canada, nations with national health insurance programs that provide comprehensive health services. Their systems have been criticized for delays in providing health services for some patients as well as the quality of care, although these weaknesses appear to be less important today than previously, and most citizens in these and other developed nations appear to be well served by such health care systems.18




In contrast to such government-run systems, most health care services in the United States are provided by doctors and other medical staff who work in clinics and hospitals that are privately run, even if many are not-for-profit operations. Indeed, the United States has long had the smallest amount of public insurance or provision of public health services of any developed nation in the world (Patel and Rushefsky 2015). The result is a health care system that is something of a hybrid. It is neither completely private nor fully public. It does, however, reflect the unique political culture of the nation, as first discussed in chapter 1. Americans place great emphasis on individual rights, limited government authority, and a relatively unrestrained market system. Those who favor a larger government role to reduce the current inequities in access to health care services are in effect suggesting that health care be considered a so-called merit good to which people are entitled. In short, they tend to believe that normal market forces should not be the determining factor in the way society allocates such a good.




Most nonelderly U.S. adults have employer-sponsored, private health insurance, and others purchase similar insurance through individual policies. Those over age sixty-five are covered through Medicare, discussed later in the chapter. But with rising costs and a slow-growing economy, employer coverage is likely to be less widely available in the future. About 56 percent of small firms and 98 percent of large companies offered health benefits to at least some of their employees in 2018.19 The annual premium for covered workers averaged $19,616 for family coverage, with employees paying $5,547 of that amount; single premiums averaged $6,896.20 These premiums have been rising at about 3 to 5 percent for the past several years, leading employers to cut back on some benefits and to shift more of the cost to employees. That trend will likely continue.




Employer and other private health insurance policies generally cover a substantial portion of health care costs, but not all. Some services, such as elective cosmetic surgery, generally are not covered, and only partial payment may apply to others. The federal government can specify services that must be included in private insurance plans, but there are major gaps in coverage, such as assistance with expensive prescription drugs and provision of long-term care in nursing homes and similar facilities that may follow a disabling injury or illness, or simple aging. People are living longer, and the demand for these services is expected to rise dramatically in the future as the U.S. population ages. Most policies historically also have had a lifetime cap on covered expenses that could be exceeded in the event of serious medical conditions, but the Affordable Care Act eliminated such caps.


The Perils of Being Uninsured




The number of individuals and families without any insurance coverage rose significantly between 1990 and 2010, and this was a major driver in congressional approval of the Affordable Care Act. The number of nonelderly Americans without insurance (that is, those not eligible for Medicare) fell from forty-four million in 2013, before the act took effect, to twenty-seven million by 2016, and then rose somewhat. Continued uncertainty over the Affordable Care Act may further increase the population of uninsured citizens. That percentage varies widely around the nation and from state to state. In some states (e.g., Georgia, Florida, and Texas), more than 15 percent of the nonelderly population was uninsured in recent years, but in several states (Connecticut, Vermont, Hawaii, and Massachusetts), the rate was 7 percent or

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