Federal Health Care Law Promises Coverage for All, But at a Price

This is the title of a short note from Jason Saving of Dallas Fed.

He looks at the costs and benefits of the new health care law and says it has some important benefits but is not expected to lower the costs for the government as thought earlier:

While the health care law contained many thousands of provisions, coverage was broadened in four primary areas. First, the Medicaid system was expanded to include households earning less than 133 percent of the federal poverty line, which works out to $29,000 for a family of four. Second, health insurance exchanges will be created beginning in 2014 so individuals and small businesses can pool their purchasing power, with the goal of obtaining better coverage at lower rates. Third, families earning less than 400 percent of the federal poverty line will receive health insurance subsidies on a sliding scale, phasing out entirely for households making $88,000. Finally, certain businesses will receive subsidies for providing or retaining coverage for their workers.

To understand how these provisions would affect coverage patterns, it’s important to first know how things worked before the bill’s passage—and how they change under the new law. Health coverage in the U.S. has been provided through four main sources. The most important of them is employer-based. Pioneered by large retailers such as Montgomery Ward at the dawn of the 20th century and spurred on by World War II-era regulations that exempted fringe benefits from otherwise-strict controls on wages, employer-provided health insurance encompasses just more than half the nation’s population. Other coverage sources include Medicare for the elderly and disabled, Medicaid for the poor and individual plans purchased in the private marketplace. 

Over the next decade, as the law is fully implemented, two significant changes will occur. First, the expansion of Medicaid and the Children’s Health Insurance Program (CHIP) will add 20.4 million people to the nation’s medical welfare system. And second, the health insurance exchanges will enable 15.7 million people who would otherwise lack coverage to find affordable policies. More than 1 million fewer people will be insured through employers, and the aggregate impact of these changes will cut the ranks of the uninsured to 23.1 million from 56.9 million—a 59 percent reduction (Chart 2).

He estimates the costs and benefits of the plan and finds limited gains:

These revenue measures and $100 billion in other smaller enhancements produce a grand total of $1.1 trillion in new receipts over the next 10 years (Chart 4). Subtracting this from the $938 billion in previously mentioned expenditures yields net savings of $143 billion over the next 10 years—the estimate provided by the CBO.

Despite the reform, share of healthcare in GDP will become higher. THis is not bas per se but shows costs are unlikely to decline which was also the objective of the reform.