[Economic Report of the President (2010)]
[Administration of Barack H. Obama]
[Online through the Government Printing Office, www.gpo.gov]

 
CHAPTER 7


REFORMING HEALTH CARE

In recent years, rising health care costs in the United States have
imposed tremendous economic burdens on families, employers, and
governments at every level. The number of people without health
insurance has also risen steadily, with recent estimates from the
Census Bureau indicating that more than 46 million were uninsured in
2008.
With the severe recession exacerbating these problems, Congress
and the President worked together during the past year to enact
several health care policies to cushion the impact of the economic
downturn on individuals and families. For example, just two weeks
after taking office, the President signed into law an expansion of the
Children's Health Insurance Program (CHIP), which will extend health
insurance to nearly 4 million low-and middle-income uninsured children
by 2013. Additionally, legislation that increased funding for COBRA
(Consolidated Omnibus Budget Reconciliation Act) health insurance
coverage allowed many working Americans who lost their jobs to receive
subsidized health insurance for themselves and their families, helping
to reduce the number of uninsured below what it otherwise would have
been.
In late 2009, both the House and the Senate passed major health
reform bills, bringing the United States closer to comprehensive
health insurance reform than ever before. The legislation would expand
insurance coverage to more than 30 million Americans, improve the
quality of care and the security of insurance coverage for individuals
with insurance, and reduce the growth rate of costs in both the
private and public sectors. These reforms would improve the health and
economic well-being of tens of millions of Americans, allow employers
to pay higher wages to their employees and to hire more workers, and
reduce the burden of rising health care costs on Federal, state, and
local governments.

The Current State of the
U.S. Health Care Sector

Although health outcomes in the United States have improved steadily
in recent decades, the U.S. health care sector is beset by rising
spending, declining rates of health insurance coverage, and
inefficiencies in the delivery of care. In the United States, as in
most other developed countries, advances in medical care have
contributed to increases in life expectancy and reductions in infant
mortality. Yet the unrelenting rise in health care costs in both the
private and public sectors has placed a steadily increasing burden on
American families, businesses, and governments at all levels.

Rising Health Spending in the United States

For the past several decades, health care spending in the United
States has consistently risen more rapidly than gross domestic product
(GDP). Recent projections suggest that total spending in the U.S.
health care sector exceeded $2.5 trillion in 2009, representing 17.6
percent of GDP (Sisko et al. 2009)-approximately twice its share in
1980 and a substantially greater portion of GDP than that of any other
member of the Organisation for Economic Co-Operation and Development
(OECD). As shown in Figure 7-1, estimates from the Congressional
Budget Office (CBO) in June 2009 projected that this trend would
continue in the absence of significant health insurance reform. More
specifically, CBO estimated that health care spending would account
for one-fourth of GDP by 2025 and one-third by 2040 (Congressional
Budget Office 2009d).
The steady growth in health care spending has placed an increasingly
heavy financial burden on individuals and families, with a steadily
growing share of workers' total compensation going to health care
costs. According to the most recent data from the U.S. Census Bureau,
inflation-adjusted median household income in the United States
declined 4.3 percent from 1999 to 2008 (from $52,587 to $50,303), and
real weekly median earnings for full-time workers increased just 1.8
percent. During that same period, the real average total cost of
employer-sponsored health insurance for a family policy rose by more
than 69 percent (Kaiser Family Foundation and Health Research and
Educational Trust 2009).
Because firms choose to compensate workers with either wages or
benefits such as employer-sponsored health insurance, increasing
health care costs tend to "crowd out" increases in wages. Therefore,
these rapid




increases in employer-sponsored health insurance premiums have
resulted in much lower wage growth for workers.
When considering these divergent trends, it is also important to
remember that workers typically pay a significant share of their
health insurance premiums out of earnings. According to data from the
Kaiser Family Foundation, the average employee share for an employer-
sponsored family policy was 27 percent in both 1999 and 2008. In real
dollars, the average total family premium increased by $5,200 during
this nine-year period. Thus,the amount paid by the typical worker with
employer-sponsored health insurance increased by more than $1,400 from
1999 to 2008. Subtracting these average employee contributions from
median household income in each year gives a rough measure of "post-
premium" median household income. By that measure, the decline in
household income swells from 4.3 percent to 7.3 percent (that is,
post-premium income fell from $50,566 to $46,879).
This point is further reinforced when one considers the implications
of rapidly rising health care costs for the wage growth of workers in
the years ahead. As Figure 7-2 shows, compensation net of health
insurance premiums is projected to grow much less rapidly than total
compensation, with the growth eventually turning negative by 2037.\1\
Put simply, if health care costs continue to increase at the rate that
they have in recent years, workers' take-home wages are likely to grow
slowly and eventually decline.
_____________________
\1\The upper curve of Figure 7-2 displays historical annual
compensation per worker in the nonfarm business sector in constant
2008 dollars from 1999 through 2009, deflated with the CPI-U-RS. Real
compensation per worker is projected using the Administration's
forecast from 2009 through 2020 and at a 1.8 percent annual rate in
the subsequent years. The lower curve plots historical real annual
compensation per person net of average total premiums for employer-
sponsored health insurance during the same period. The assumed growth
rate of employer-sponsored premiums is 5 percent, which is slightly
lower than the average annual rate as reported by the Kaiser Family
Foundation during the 1999 to 2009 period.






Rising health care spending has placed similar burdens on the 45
million aged and disabled beneficiaries of the Medicare program, whose
inflation-adjusted premiums for Medicare Part B coverage-which covers
outpatient costs including physician fees-rose 64 percent (from $1,411
to $2,314 per couple per year) between 1999 and 2008. During that same
period, average inflation-adjusted Social Security benefits for
retired workers grew less than 10 percent. Rising health insurance
premiums are thus consuming larger shares of workers' total
compensation and Medicare recipients' Social Security benefits alike.


The corrosive effects of rising health insurance premiums have not
been limited to businesses and individuals. Increases in outlays for
programs such as Medicare and Medicaid and rising expenditures for
uncompensated care caused by increasing numbers of uninsured Americans
have also strained the budgets of Federal, state, and local
governments. The fraction of Federal spending devoted to health care
rose from 11.1 percent in 1980 to 25.2 percent in 2008. In the absence
of reform, this trend is projected to continue, resulting in lower
spending on other programs, higher taxes, or increases in the Federal
deficit.
The upward trend in health care spending has also posed problems for
state governments, with spending on the means-tested Medicaid program
now the second largest category of outlays in their budgets, just
behind elementary and secondary education. Because virtually all state
governments must balance their budgets each year, the rapid increases
in Medicaid spending have forced lawmakers to decide whether to cut
spending in areas such as public safety and education or to increase
taxes.
If health care costs continue rising, the consequences for
government budgets at the local, state, and Federal level could be
dire. And as discussed in Chapter 5, projected increases in the costs
of the Medicare and Medicaid programs are a key source of the Federal
Government's long-term fiscal challenges.

Market Failures in the Current U.S. Health Care System: Theoretical
Background

As described by Nobel Laureate Kenneth Arrow in a seminal 1963 paper,
an individual's choice to purchase health insurance is rooted in the
economics of risk and uncertainty. Over their lifetimes, people face
substantial risks from events that are largely beyond their control.
When possible, those who are risk-averse prefer to hedge against these
risks by purchasing insurance (Arrow 1963).
Health care is no exception. When people become sick, they face
potentially debilitating medical bills and often must stop working and
forgo earnings. Moreover, medical expenses are not equally
distributed: annual medical costs for most people are relatively
small, but some people face ruinously large costs. Although total
health care costs for the median respondent in the 2007 Medical
Expenditure Panel Survey were less than $1,100,costs for those at the
90th percentile of the distribution were almost 14 times higher
(Department of Health and Human Services 2009). As a result, risk-
averse people prefer to trade an uncertain stream of expenses for
medical care for the certainty of a regular insurance payment, which
buys a policy that pays for the high cost of treatment during illness
or injury. Economic theory and common sense suggest that purchasing
health insurance to hedge the risk associated with the economic costs
of poor health makes people better off.
Health insurance markets, however, do not function perfectly. The
economics literature documents four primary impediments: adverse
selection, moral hazard, the Samaritan's dilemma, and problems
arising from incomplete insurance contracts. In a health insurance
market characterized by these and other sources of inefficiency,
well-designed government policy has the potential to reduce costs,
improve efficiency, and benefit patients by stabilizing risk pools
for insurance coverage and providing needed coverage to those who
otherwise could not afford it.
Adverse Selection. In the case of adverse selection, buyers and
sellers have asymmetric information about the characteristics of
market participants. People with larger health risks want to buy more
generous insurance, while those with smaller health risks want lower
premiums for coverage. Insurers cannot perfectly determine whether a
potential purchaser is a large or small health risk.
To understand how adverse selection can harm insurance markets,
suppose that a group of individuals is given a choice to buy health
insurance or pay for medical costs out-of-pocket. The insurance rates
for the group will depend on the average cost of health care for those
who elect to purchase insurance. The healthiest members of the group
may decide that the insurance is too expensive, given their expected
costs. If they choose not to get insurance, the average cost of care
for those who purchase insurance will increase. As premiums increase,
more and more healthy individuals may choose to leave the insurance
market, further increasing average health care costs for those who
purchase insurance. Over time, this winnowing process can lead to
declining insurance rates and even an unraveling of health insurance
markets. Without changes to the structure of insurance markets, the
markets can break down, and fewer people can receive insurance than
would be optimal. Subsidies to encourage individuals to purchase
health insurance can help combat adverse selection, as can regulations
requiring that individuals purchase insurance, because both ensure
that healthier people enter the risk pool along with their less
healthy counterparts.
Under current institutional arrangements, adverse selection is likely
to be an especially large problem for small businesses and for people
purchasing insurance in the individual market. In large firms, where
employees are generally hired for reasons unrelated to their health,
high-and low-risk employees are automatically pooled together,
reducing the probability of low-risk employees opting out of coverage
or high-risk workers facing extremely high premiums. In contrast,
small employers cannot pool risk across a large group of workers, and
thus the average risk of a given small firm's employee pool can be
significantly above or below the population average. As such, similar
to the market for individual insurance described above, firms with
low-risk worker pools will tend to opt out of insurance coverage,
leaving firms with high-risk pools to pay much higher premiums.
Moral Hazard. A second problem with health insurance is moral hazard:
the tendency for some people to use more health care because they are
insulated from its price. When individuals purchase insurance, they no
longer pay the full cost of their medical care. As a result, insurance
may induce some people to consume health care on which they place much
less value than the actual cost of this care or discourage patients
and their doctors from choosing the most efficient treatment.
This extra consumption could increase average medical costs and,
ultimately, insurance premiums. The presence of moral hazard suggests
that research into which treatments deliver the greatest health
benefits could encourage doctors and patients to adopt best practices.
Samaritan's Dilemma. A third source of inefficiency in the insurance
market is that society's desire to treat all patients, even those who
do not have insurance and cannot pay for their care, gives rise to the
Samaritan's dilemma. Because governments and their citizens naturally
wish to provide care for those who need it, people who lack insurance
and cannot pay for medical care can still receive some care when they
fall ill. Some people may even choose not to purchase insurance
because they understand that emergency care may still be available to
them. In the context of adverse selection, a low insurance rate is a
symptom of underlying inefficiencies. Viewed through the lens of the
Samaritan's dilemma, in contrast, the millions of uninsured Americans
are one source of health care inefficiencies.
The burden of paying for some of this uncompensated care is passed on
to people who do purchase insurance. The result is a "hidden tax" on
health insurance premiums, which in turn exacerbates adverse selection
by raising premiums for individuals who do not opt out of coverage.
One estimate suggests that the total amount of uncompensated care for
the uninsured was approximately $56 billion in 2008 (Hadley et al.
2008).
Incomplete Insurance Contracts. Many economic transactions involve a
single, straightforward interaction between a buyer and a seller. In
many purchases of goods, for example, the prospective buyer can look
the good over carefully, decide whether or not to purchase it, and
never interact with the seller again. Health insurance, in contrast,
involves a complex relationship between an insurance company and a
patient that can last years or even decades. It is not possible to
foresee and spell out in detail every contingency that may arise and
what is and is not covered.
When individuals are healthy, their medical costs are typically lower
than their premiums, and these patients are profitable for insurance
companies. When patients become ill, however, they may no longer be
profitable. Insurance companies therefore have a financial incentive
to find ways to deny care or drop coverage when individuals become
sick, undermining the central purpose of insurance. For example, in
most states, insurance companies can rescind coverage if individuals
fail to list any medical conditions-even those they know nothing
about-on their initial health status questionnaire. Entire families
can lose vital health insurance coverage in this manner. A House
committee investigation found that three large insurers rescinded
nearly 20,000 policies over a five-year period, saving these
companies $300 million that would otherwise have been paid out as
claims (Waxman and Barton 2009).
A closely related problem is that insurance companies are reluctant to
accept patients who may have high costs in the future. As a result,
individuals with preexisting conditions find obtaining health
insurance extremely expensive, regardless of whether the conditions
are costly today. This is a major problem in the individual market for
health insurance. Forty-four states now permit insurance companies to
deny coverage, charge inflated premiums, or refuse to cover whole
categories of illnesses because of preexisting medical conditions. A
recent survey found that 36 percent of non-elderly adults attempting
to purchase insurance in the individual market in the previous three
years faced higher premiums or denial of coverage because of
preexisting conditions (Doty et al. 2009). In another
survey, 1 in 10 people with cancer said they could not obtain health
coverage, and 6 percent said they lost their coverage because of being
diagnosed with the disease (USA Today, Kaiser Family Foundation, and
Harvard School of Public Health 2006). And the problem affects not
only people with serious medical conditions, but also young and
healthy people with relatively minor conditions such as allergies or
asthma.

System-Wide Evidence of Inefficient Spending

While an extensive literature in economic theory makes the case for
market failure in the provision of health insurance, a substantial
body of evidence documents the pervasiveness of inefficient allocation
of spending and resources throughout the health care system. Evidence
that health care spending may be inefficient comes from analyses of
the relationship between health care spending and health outcomes,
both across states in our own Nation and across countries around the
world.
Within the United States, research suggests that the substantially
higher rates of health care utilization in some geographic areas are
not associated with better health outcomes, even after accounting for
differences in medical care prices, patient demographics, and regional
rates of illness (Wennberg, Fisher, and Skinner 2002). Evidence from
Medicare reveals that spending per enrollee varies widely
across regions, without being clearly linked to differences in either
medical needs or outcomes. One comparison of composite quality scores
for medical centers and average spending per Medicare beneficiary
found that facilities in states with low average costs are as likely
or even more likely to provide recommended care for some common health
problems than are similar facilities in states with high costs
(Congressional Budget Office 2008). One study suggests that nearly
30 percent of Medicare's costs could be saved if Medicare per capita
spending in all regions were equal to that in the lowest-cost areas
(Wennberg, Fisher, and Skinner 2002).
Variations in spending tend to be more dramatic in cases where
medical experts are uncertain about the best kind of treatment to
administer. For instance, in the absence of medical consensus over
the best use of imaging and diagnostic testing for heart attacks, use
rates vary widely geographically, leading to corresponding variation
in health spending. Research that helps medical providers understand
and use the most effective treatment can help reduce this
uncertainty, lower costs, and improve health outcomes.
Overuse of "supply-sensitive services," such as specialist care,
diagnostic tests, and admissions to intensive care facilities among
patients with chronic illnesses, as well as differences in social
norms among local physicians, seems to drive up per capita spending in
high-cost areas (Congressional Budget Office 2008). Moral hazard may
help to explain some of the overuse of services that do not improve
people's health status.
Health care spending also differs as a share of GDP  across countries,
without corresponding systematic differences in outcomes. For example,
according to the United Nations, the estimated U.S. infant mortality
rate of 6.3 per 1,000 infants for the 2005 to 2010 period is projected
to be substantially higher than that in any other Group of Seven (G-7)
country, as is the mortality rate among children under the age of
five, as shown in Figure 7-3 (United Nations 2007). This variation is
especially striking when one considers that the United States has the
highest GDP per capita of any G-7 country. Although drawing direct
conclusions from cross-country comparisons is difficult because of
underlying health differences, this comparison further suggests that
the United States could lower health care spending without sacrificing
quality. Similarly, life expectancy is much lower in the United States
than in other advanced economies. The OECD estimated life expectancy
at birth in 2006 to be 78.1 years in the United States compared with
an average of 80.7 in other G-7 countries (Organisation for Economic
Co-operation and Development 2009).





Recent research suggests that differences in health care systems
account for at least part of these cross-country differences in life
expectancy. For example, one study (Nolte and McKee 2008) analyzed
mortality from causes that could be prevented by effective health
care, which the authors term "amenable mortality." They found that the
amenable mortality rate among men in the United States in 1997-98 was
8 percent higher than the average rate in 18 other industrialized
countries. The corresponding rate among U.S. women was 17 percent
higher than the average among these other 18 countries. Moreover, of
all 19 countries considered, the United States had the smallest
decline during the subsequent five years, with a decline of just 4
percent compared with an average decline of 16 percent across the
remaining 18. The authors further estimated that if the U.S.
improvement had been equal to the average improvement for the other
countries, the number of preventable deaths in the United States would
have been 75,000 lower in 2002. This finding suggests that the U.S.
health care system has been improving much less rapidly than the
systems in other industrialized countries in recent years.
A further indication that our health care system is in need of reform
is that satisfaction with care has, if anything, been declining
despite the substantial increases in spending. Not surprisingly, this
decline in satisfaction has been concentrated among people without
health insurance, whose ranks have swelled considerably during the
past decade. For example, from 2000 to 2009, the fraction of uninsured
U.S. residents reporting that they were satisfied with their health
care fell from 36 to 26 percent. And not only has dissatisfaction with
our health care system increased over time, it is also
noticeably greater than dissatisfaction with systems in many other
developed nations (Commonwealth Fund 2008).

Declining Coverage and Strains on Particular Groups and Sectors

The preceding analysis shows that at an aggregate level, there are
major inefficiencies in the current health care system. But, because
of the nature of the market failures in health care, the current
system works particularly poorly in certain parts of the economy and
places disproportionate burdens on certain groups. Moreover, because
of rising costs, many of the strains are increasing over time.
Declining Coverage among Non-Elderly Adults. The rapid increase in
health insurance premiums in recent years has caused many firms to
stop offering health insurance to their workers, forcing employees
either to pay higher prices for coverage in the individual market
(which is often much less generous than coverage in the group market)
or to go without health insurance entirely. According to the Kaiser
Family Foundation, between 2000 and 2009, the share of firms offering
health insurance to their workers fell from 69 to 60 percent.
Furthermore, 8 percent of firms offering coverage in 2009 reported
that they were somewhat or very likely to drop coverage in 2010.
Largely because of these falling offer rates, private health insurance
coverage declined substantially during this same period. As shown in
Figure 7-4, the fraction of non-elderly adults in the United States
with private health insurance coverage fell from 75.5 percent in 2000
to 69.5 percent in 2008.
These numbers, however, provide just a snapshot of health insurance
coverage in the United States because they measure the fraction of
people who are uninsured at a point in time and thus obscure the fact
that a large fraction of the population has been uninsured at some
point in the past. According to recent research, at least 48 percent
of non-elderly Americans were uninsured at some point between 1996 and
2006 (Department of the Treasury 2009).




Although roughly half of the 2000-2008 decline in private coverage
displayed in Figure 7-4 has been offset by an increase in public
health insurance, the share of non-elderly adults without health
insurance nevertheless rose from 17.2 to 20.3 percent. In other words,
approximately 5.9 million more adults were uninsured in 2008 than
would have been had the fraction uninsured remained constant since
2000. The decline in private health insurance coverage was similarly
large among children, although it was more than offset by increases in
public health insurance (most notably Medicaid and CHIP), so that less
than 10 percent of children were uninsured by 2008 (DeNavas-Walt,
Proctor, and Smith 2009).
The generosity of private health insurance coverage has also been
declining in recent years. For example, from 2006 to 2009, the
fraction of covered workers enrolled in an employer-sponsored plan
with a deductible of $1,000 or greater for single coverage more than
doubled, from 10 to 22 percent. The increase in deductibles was also
striking among covered workers with family coverage. For example,
during this same three-year period, the fraction of enrollees in
preferred provider organizations with a deductible of $2,000 or more
increased from 8 to 17 percent. Similar increases in cost-sharing were
apparent for visits with primary care physicians. The fraction of
covered workers with a copayment of $25 or more for an office visit
with a primary care physician increased from 12 to 31 percent from
2004 to 2009. These rising costs in the private market fall
disproportionately on the near-elderly, who have higher medical costs
but are not eligible for Medicare. A recent study found that the
average family premium in the individual market in 2009 for those aged
60-64 was 93 percent higher than the average family premium for
individuals aged 35-39 (America's Health Insurance Plans 2009).

Low Insurance Coverage among Young Adults and Low-Income
Individuals. Figure 7-5 shows the relationship between age and the
fraction of people without health insurance in 2008. One striking
pattern is the sharp and substantial rise in this fraction as
individuals enter adulthood. For example, the share of 20-year-olds
without health insurance is more than twice that of 17-year-olds (28
percent compared with 12 percent).






Adverse selection is clearly a key source of this change. Many
teenagers obtain insurance through their parents' employer-provided
family policies, and so are in large pools. Many young adults, in
contrast, do not have this coverage and are either jobless or work at
jobs that do not offer health insurance; thus, they must either buy
insurance on the individual market or go uninsured. As described
above, health insurance coverage in the individual market can be very
expensive because of adverse selection. Many young adults also have
very low incomes, making the cost of coverage prohibitively high for
them. Furthermore, because they are, on average, in very good health,
young adults may be more tolerant than other groups of the risks
associated with being uninsured.
The burden of rising costs also falls differentially on low-income
individuals, who find it more difficult each year to afford coverage
through employer plans or the individual market. Indeed, as shown in
Figure 7-6, low-income individuals are substantially more likely to be
uninsured than their higher-income counterparts. As the figure shows,
non-elderly individuals below the Federal poverty line ($10,830 a year
in income for an individual and $22,050 for a family of four in 2009)
were five times as likely to be uninsured as their counterparts above
400 percent of the poverty line in 2008. These low rates of insurance
coverage increase insurance premiums for other Americans because of
the "hidden tax" that arises from the financing of uncompensated care.






The Elderly. Even those over the age of 65 are not protected
from high costs, despite almost universal coverage through Medicare.
Consider prescription drug expenses, for which the majority of Medicare
recipients have coverage through Medicare Part D. As shown in Figure
7-7, after the initial deductible of $310, a standard Part D plan in
2010 covers 75 percent of the cost of drugs only up to $2,830 in
annual prescription drug spending. After that, enrollees are
responsible for all expenditures on prescriptions up to $6,440 in
total drug spending (where out-of-pocket costs would be $4,550), at
which point they qualify for catastrophic coverage with a modest
copayment. Millions of beneficiaries fall into this coverage
gap - termed the "donut hole"-every year, and as a result many may
not be able to afford to fill needed prescriptions.




In 2007, one-quarter of Part D enrollees who filled one or more
prescriptions but did not receive low-income subsidies had
prescription drug expenses that were high enough to reach the coverage
gap. For that reason, 3.8 million Medicare recipients reached the
initial coverage limit and were required to pay the full cost of
additional pharmaceutical treatments received while inthe coverage
gap,despite having insurance for prescription drug costs. One study
found that in 2007, 15 percent of Part D enrollees in the coverage gap
using pharmaceuticals in one or more of eight major drug classes
stopped taking their medication (Hoadley et al. 2008).
Small Businesses. As described earlier, adverse selection is a
serious problem for small businesses, which do not have large numbers
of workers to pool risks. This problem manifests itself in two forms.
The first is high costs. Because of high broker fees and
administrative costs as well as adverse selection, small firms pay
up to 18 percent more per worker for the same policy than do large
firms (Gabel et al. 2006). The second is low coverage. Employees at
small businesses are almost three times as likely as their
counterparts at large firms to be uninsured (29 percent versus 11
percent, according to the March 2009 Current Population Survey). And
among small businesses that do offer insurance, only 22 percent of
covered workers are offered a choice of more than one type of plan
(Kaiser Family Foundation and Health Research and Educational
Trust 2009).
In recent years, small businesses and their employees have had an
especially difficult time managing the rapidly rising cost of health
care. Consistent with this,the share of firms with three to nine
employees offering health insurance to their workers fell from 57
to 46 percent between 2000 and 2009.
As discussed in a Council of Economic Advisers report issued in July
2009, high insurance costs in the small-group market discourage
entrepreneurs from launching their own companies, and the low
availability of insurance discourages many people from working at
small firms (Council of Economic Advisers 2009c). As a result, the
current system discourages entrepreneurship and hurts the
competitiveness of existing small businesses. Given the key roleof
small businesses injob creation and growth,this harms the entire
economy.
Taken together, the trends summarized in this section demonstrate that
in recent years the rapid rise in health insurance premiums has
reduced the take-home pay of American workers and eaten into increases
in Medicare recipients' Social Security benefits. Fewer firms are
electing to offer health insurance to their workers, and those that do
are reducing the generosity of that coverage through increased cost-
sharing. Fewer individuals each year can afford to purchase health
insurance coverage. The current system places small businesses at a
competitive disadvantage. And finally, the steady increases in health
care spending strain the budgets of families, businesses, and
governments at every level, and demonstrate the need for health
insurance reform that slows the growth rate of costs.


Health Policies Enacted in 2009

Since taking office, the President has signed into law a series of
provisions aimed at expanding health insurance coverage, improving the
quality of care, and reducing the growth rate of health care spending.
The American Recovery and Reinvestment Act of 2009 provided vital
support to those hit hardest by the economic downturn while helping to
ensure access to doctors, nurses, and hospitals for Americans who lost
jobs and income. At the same time, legislation extended health
insurance coverage to millions of children, and improvements in health
system quality and efficiency benefited the entire health care system.
These necessary first steps have set the stage for a more fundamental
reform of the U.S. health care system, one that will ensure access to
affordable, high-quality coverage and that genuinely slows the growth
rate of health care spending.

Expansion of the CHIP Program

Just two weeks after taking office, the President signed into law the
Children's Health Insurance Program Reauthorization Act, which
provides funding that expands access to nearly 4 million additional
children by 2013. This guarantee of coverage also kept millions of
children from losing insurance in the midst of the recession, when
many workers lost employer sponsored coverage for themselves and
their dependents. An examination of data from recent surveys by the
Centers for Disease Control and Prevention found that private
coverage among children fell by 2.5 percentage points from the first
six months of 2008 to the first six months of 2009. Despite the fall
in private coverage, however, fewer children were uninsured during
that six-month period in 2009, in large part because public coverage
increased by 3 percentage points (Martinez and Cohen 2008, 2009).
Approximately 7 million children (1 in every 10) were uninsured in
2008 (DeNavas-Walt, Proctor, and Smith 2009). Once fully phased in,
the CHIP reauthorization legislation signed by the President will
lower that number by as much as half from the 2008 baseline. In the
future, this new legislation will enhance the quality of medical care
for children and improve their health. Research has convincingly shown
that expanding health insurance to children is very cost-effective,
because it not only increases access to care but also substantially
lowers mortality (Currie and Gruber 1996a, 1996b).

Subsidized COBRA Coverage

In part because of the difficulty of purchasing health insurance on
the individual market (owing to adverse selection), most Americans get
health insurance through their own or a family member's job. And what
is true for dependent children is true for their parents: when
economic conditions deteriorate, the number of people with employer-
sponsored health insurance tends to fall. However, unlike the case
with children, during the current recession public coverage has only
offset part of the reduction in private health insurance coverage
among adults. Thus, the fraction of adults without health insurance
has increased. Figure 7-8 uses survey data from Gallup to show that
from the third quarter of 2008 to the first quarter of 2009, the share
of U.S. adults without health insurance rose by 1.7 percentage points,
from 14.4 to 16.1 percent, representing an estimated increase of 4.0
million uninsured individuals.






When workers at large firms lose their jobs, COBRA provisions give
them the right to continue existing coverage for themselves and their
families. However, they are often required to pay the full premium
cost with no assistance from former employers and without favorable
tax treatment of their insurance benefits. Thus, although a large
fraction of workers who lose their jobs can still purchase health
insurance through COBRA at group rates, many elect not to do so,
likely because the coverage is not affordable to a family with a newly
laid-off wage earner.
One provision of the American Recovery and Reinvestment Act addressed
the recession-induced drop in employer-sponsored health
insurance by subsidizing COBRA coverage so that individuals pay only
35 percent of their premium, with the Federal Government covering the
remaining 65 percent. This large subsidy may partially explain why
the growth in the share of American adults without health insurance
slowed dramatically from the first to the fourth quarter of 2009,
even while the unemployment rate continued to rise. While the
average rate of uninsurance in 2009 was still 1.4 percentage points
higher than the average in 2008, the rate was fairly constant
throughout 2009. Thus, while the CHIP expansion was providing stable
coverage to millions of children who would otherwise have lost it,
the COBRA subsidy was further reinforcing access to coverage for
working parents and families who faced unemployment.

Temporary Federal Medical Assistance Percentage (FMAP) Increase

Historically, declines in employer-sponsored health insurance have led
to increases in the number of people who qualify for public health
insurance through programs such as Medicaid, which insured 45.8
million U.S. residents in December 2007. Because almost half of all
Medicaid spending is typically financed by state governments, state
Medicaid spending tends to rise substantially when economic conditions
deteriorate. Coupled with the recession-induced drop in state tax
revenues, these increases in Medicaid enrollment place a considerable
strain on state budgets. And because virtually every state is required
to balance its budget each year, increases in Medicaid enrollment
often leave states with little choice but to raise taxes, lay off
employees, reduce spending on public safety, education, and other
important priorities, or reduce Medicaid benefits, provider payments,
or eligibility. These policies are especially problematic when the
economy is in severe recession, because they can stifle economic
recovery.
Figure 7-9 uses administrative data from all 50 states and the
District of Columbia to contrast the growth in Medicaid enrollment in
the months leading up to the start of the recession in December 2007
with the corresponding growth during the recession.\2\ An examination of
the data displayed in the figure reveals that, after growing from
45.2 million in September 2006 to 45.8 million in December 2007, the
number of Medicaid recipients increased much more rapidly in the
subsequent 21 months, and stood at 51.1 million in September 2009.
This represents an increase of 253,000 Medicaid recipients per month
during the recession, versus an average increase of just 36,000 per
month in the preceding 15 months.

\2\Data on state Medicaid enrollment were derived from direct
communication between the Council of Economic Advisers and state
health departments in 50 states and the District of Columbia. Monthly
enrollment from September 2006 through September 2009 was reported by
all states with the exception of Vermont in the first 10 months
considered. For each month from September 2006 through June 2007 in
Vermont, the state's July 2007 Medicaid enrollment was used.




To help states pay for an expanding Medicaid program without raising
taxes or cutting key services, one important component of the Recovery
Act was a temporary increase in each state's Federal Medical
Assistance Percentage (FMAP), the share of Medicaid spending paid by
the Federal Government. This fiscal relief allowed states to avoid
cutbacks to their Medicaid programs or other adjustments that would
have exacerbated the effects of the recession. The increased FMAPs
were larger for states where unemployment increased the most, because
their financial strains were greatest. To qualify for the increased
FMAPs, states were required to maintain Medicaid eligibility at pre-
recession levels.
A recent report by the Kaiser Family Foundation confirms that support
from the Recovery Act-as well as the expansion of coverage for
children enacted several weeks earlier in February 2009-was essential
to preserving the ability of states to offer health insurance coverage
to those most in need. In fact, more than half the states expanded
access to health insurance coverage for low-income children, parents,
and pregnant women in Medicaid and CHIP in 2009 (Ross and Jarlenski
2009).

Recovery Act Measures to Improve the Quality and Efficiency of Health
Care

Beyond supporting jobless workers and their families in the midst of
the recession, the Recovery Act addressed structural weaknesses in the
health care system by investing in its infrastructure and its workforce.
These investments will help to build a health care system with lower
costs and better health outcomes for the long term.
For example, the Recovery Act invested $2 billion in health centers
for new construction, renovation of existing facilities, and expansion
of coverage. An additional $500 million was allocated to bolster the
primary care workforce to improve access to primary care in
underserved areas. The Act provided a further $1 billion in funding
for public health activities to improve prevention and to incentivize
wellness initiatives for those with chronic illness; both measures are
aimed at improving the quality of care and ultimately bringing down
costs. The Act also increased spending on comparative effectiveness
research by $1.1 billion, to give doctors and patients access to the
most credible and up-to-date information about which treatments are
likely to work best.
One final component of the Recovery Act was the Health Information
Technology for Economic and Clinical Health Act, which expanded the
adoption and use of health information technology through
infrastructure formation, information security improvements, and
incentives for adoption and meaningful use of certified health
information technology. This investment in developing computerized
medical records will reduce health care spending and improve quality
while securing patients' confidential information.
These investments build a foundation for comprehensive health
insurance reform by adding to the ranks of doctors, nurses, and other
health care providers, especially in critical fields like primary
care, and in areas of the country with the greatest need for a more
robust medical workforce. Moreover, the investments in comparative
effectiveness research and health information technology will make
it much easier for information and quality improvements to spread
rapidly between doctors, medical practices, and hospitals across
the public and private sectors. When combined with the wide range
of delivery system changes included in health insurance reform
legislation, these investments are expected to contain costs
and improve quality over the long run.
In summary, legislation passed in 2009 helped extend or continue
health insurance coverage for the workers, families, and children
affected by the current recession. Rather than focusing solely on
today's crisis, the legislation lays the groundwork for a reformed
health care system that addresses the weaknesses, flaws, and
inefficiencies of the status quo.


2009 Health Reform Legislation

As this Report goes to press, Congress has come closer to passing
comprehensive health insurance reform than ever before, with major
bills having passed both the House and the Senate. As of this writing,
whether those bills will lead to enactment of final legislation in the
near future is uncertain. Nonetheless, the bills contain important
features that would expand coverage, slow the growth rate of costs
while improving the quality of care, and benefit individuals,
businesses, and governments at every level. This section discusses the
major features of the two bills-the House's Affordable Health Care for
America Act and the Senate's Patient Protection and Affordable Care
Act.

Insurance Market Reforms: Strengthening and Securing
Coverage

Both the House and the Senate bills contain important features that
would immediately expand coverage and increase access to preventive
care. The legislation would also strengthen regulation of the health
insurance market, improve consumer protections, and secure coverage
for more than 30 million Americans. These regulations would correct
insurance market failures by preventing health insurers from
responding to adverse selection by raising rates and denying coverage,
thus stabilizing risk pools to secure access to affordable coverage.
Both versions of the legislation provide immediate Federal support
for a new program to provide coverage to uninsured Americans with
preexisting conditions. Combined with strong new consumer protections,
these measures would ensure that millions of Americans can immediately
purchase coverage at more affordable prices despite their personal
medical history or health risks. Health insurance reform also makes
immediate investments in community health centers, which would improve
access to coverage among the most vulnerable populations. Both the
House and Senate versions of reform immediately create reinsurance
programs for employer health plans, providing coverage for early
retirees to prevent them from becoming uninsured before they are
covered by Medicare. Additionally, reform legislation would
immediately begin to reform delivery systems for health care and
improve transparency and choice for consumers. For
example, the Senate proposal would create a website that would help
consumers compare coverage options by summarizing important aspects of
each insurance contract in a consistent and easy-to-understand format.
New laws would help cover millions of young adults as they transition
into the workforce by requiring insurers to allow extended family
coverage for dependents through their mid-20s. The CBO and the Joint
Committee on Taxation estimate that this requirement would lower
average premiums per person in the large-group market by increasing
the number of relatively healthy low-cost people in large-group pools
(Congressional Budget Office 2009a).
In the years following reform, legislation would put into place strong
new consumer protections to prevent denials of coverage or excessive
costs for the less healthy. Insurers would be required to renew any
policy for which the premium has been paid in full. Insurers could not
refuse to renew because someone became sick, nor could they drop or
water down insurance coverage for those who are or become ill. To
prevent insurers from charging excessively high rates to the less
healthy, reform legislation would also enact adjusted community rating
rules for premiums.
Banning such treatment of individuals with preexisting conditions
would not only allow insurance markets to better help individuals
hedge against the risk of health care costs, but may also make the
U.S. labor market more efficient.
Without such protections, adults with preexisting conditions may be
reluctant to change insurance providers and expose themselves to
increased premiums. Workers who receive health insurance through their
employers may therefore be less willing to change jobs, creating "job
lock" that discourages desirable adjustments in the labor market.
In both versions of reform legislation, these provisions are linked
with incentives for individuals to obtain coverage and for firms to
insure their workers. While preventing insurance companies from
discriminating based on preexisting conditions will help some of the
neediest members of our society, in isolation these reforms could
increase costs for individuals without preexisting conditions,
potentially aggravating adverse selection. Without a responsibility to
maintain health insurance coverage, individuals could forgo purchasing
coverage until they fell ill, and thus not contribute to a shared
insurance risk pool until their expected costs rose sharply. However,
with restrictions on exclusions for preexisting conditions in place,
high-cost individuals who sign up after falling ill could obtain
coverage at low premiums. Thus, individuals who had contributed toward
coverage would be faced with higher costs, potentially driving even
more individuals out of coverage. To prevent a spiral of increasing
costs and decreasing insurance rates resulting from adverse
selection, both the House and the Senate bills establish a principle
of joint individual and employer responsibility to obtain and provide
insurance, and would provide subsidies and tax credits that would
assist in this process.
The bills would address other features of many health plans that
limit their ability to help individuals insure against financial risk.
Currently, insurers can put yearly and lifetime limits on coverage.
For people with diseases such as cancer, life-saving treatment is
often very costly, and exceeding annual and lifetime benefit limits
can lead to bankruptcy. This problem is especially severe in the
individual and small-group markets, where insurers have more
discretion in designing policies. Insurance plans that allow
individuals to bankrupt themselves may be socially inefficient because
of the Samaritan's dilemma: medical bills that are unpaid when a
patient becomes bankrupt impose a hidden tax on other participants in
the health care market.
In addition to these insurance market reforms, legislation passed by
Congress would require coverage of preventive care and exempt
preventive care benefits from deductibles and other cost-sharing
requirements in Medicare and private insurance. Evidence suggests that
not only are certain preventive care measures cost-effective, but they
can also help to prevent diseases that are responsible for roughly
half of yearly mortality in the United States (Mokdad et al. 2004).
Some measures, such as smoking cessation programs, discussing aspirin
use with high-risk adults, and childhood immunizations, may even lower
total health care spending (Maciosek et al. 2006). Because many
people change insurance companies several times over the course
of their lives, insurance companies may under invest in preventive care
that is cost-effective but does not reduce medical costs until far in
the future. By encouraging all insurance companies to invest in
preventive care, health insurance reform would increase the efficiency
of the health care sector.
Finally, reform legislation takes steps to make prescription drug
coverage more affordable and secure for senior citizens. The
legislation would increase the initial coverage limit under Medicare
Part D by $500 in 2010 and also provide 50 percent price discounts for
brand-name drugs in the "donut hole" discussed earlier. This discount
would allow many Medicare Part D recipients to reduce their out-of-
pocket spending on prescription drugs. Not only would fewer
beneficiaries have to pay the full cost of their prescription drugs
while in the donut hole, but those who do reach this coverage gap
would also benefit from increased coverage before reaching that point.
In summary, within the first few years after passage, reform
legislation in Congress would guarantee coverage for those with
preexisting conditions, reform private insurance markets with strong
consumer protections that would stabilize risk pools and mitigate
adverse selection, and strengthen public coverage under Medicare.

Expansions in Health Insurance Coverage Through the Exchange

Central to both the House and the Senate bills is the health
insurance exchange, which would allow individuals and employees of
small businesses to choose among many different insurance plans. The
exchange would provide a centralized marketplace to allow individuals,
families, and small firms to pool together and purchase coverage much
like larger firms do today, improving consumer choice and increasing
pressure on insurers to offer lower prices and more generous benefits
to attract customers. In its first year of operation, the exchange
would be open to qualified individuals and small businesses.
Individuals and small businesses, which might otherwise purchase
health insurance in the individual or small-group markets, would
benefit from the economies of scale and greater buying leverage in the
exchange, which could result in much lower premiums. The exchange
would also provide transparent information on plan quality, out-of-
pocket costs, covered benefits, and premiums for each offered plan,
enabling individuals to select the plan that best fits their and their
family's needs. The availability of easy-to-compare premium
information would provide a powerful incentive for health insurers to
price competitively, thus making coverage more affordable for
participants in the exchange.
The new exchange would be especially beneficial for small business
employees, who, as described earlier, face particularly severe
challenges in the health insurance market. The bills would enable
small businesses that meet certain criteria to purchase insurance
through the exchange, allowing them and their workers to buy better
coverage at lower costs. Moreover, many small businesses that provide
health insurance for their employees would receive a tax credit to
alleviate their disproportionately higher costs and to encourage
coverage. The tax credit would lower the cost of coverage by as much
as 50 percent. Reform would make it easier for small businesses to
recruit talented workers and would also increase workers' incentives
to start their own small businesses. A recent analysis of the Senate
bill by the CBO found that premiums for a given amount of coverage for
the same set of people or small businesses would fall in the
individual and small-group markets as a result of reductions in
administrative costs and increased competition in a centralized
marketplace (Congressional Budget Office 2009a).
Most individuals who select a plan in the exchange would be eligible
for subsidies that reduce the cost of their coverage. In both the
House and Senate bills, subsidies would be available to certain
individuals and families with incomes below 400 percent of the Federal
poverty line. The premium and out-of-pocket spending subsidies for
plans purchased in the exchange would be larger for lower-income
families, many of whom cannot afford the cost of a private plan. In
addition, individuals with incomes below about 133 to 150 percent of
the poverty line would be eligible for health insurance through the
Medicaid program.
In the exchange, Federal subsidies would be tied to premiums for
relatively lower-cost "reference" plans. Beneficiaries would, however,
be able to buy more extensive coverage at an additional, unsubsidized
cost.

Economic and Health Benefits of Expanding Health Insurance
Coverage

CBO analyses of both the House and Senate bills indicate that, in part
because of the creation of the exchanges and the expansion in
Medicaid, more than 30 million Americans who would otherwise be
uninsured would obtain coverage as a result of reform. These coverage
expansions would improve not only the health and the economic well-
being of affected individuals and families, but also the broader
economy.
A comprehensive body of literature demonstrates that being uninsured
leads to poorer medical treatment, worse health status, and higher
mortality rates. Across a range of acute conditions and chronic
diseases, uninsured Americans have worse outcomes, higher rates of
preventable death, and lower-quality care. Additionally, being
uninsured imposes on families a significant financial risk of
bankruptcy caused by medical expenses.
Evidence from the state of Massachusetts - which expanded health
insurance to all but 2.6 percent of its population in a 2006 reform
effort - finds that expanding coverage increased regular medical care
and lowered financial burdens for residents who gained coverage. Only
17.4 percent of adults with family incomes of less than 300 percent of
the Federal poverty line reported forgoing care because of costs in
2008, compared with 27.3 percent in the pre-reform baseline in
2006 (Long and Masi 2009).
Taken together, this evidence strongly suggests that expanding
coverage for Americans through health insurance reform would directly
benefit millions of families by giving them access to the care they
need to maintain their health without substantial financial burdens
and risks. Moreover, because of the fixed costs of developing health
care infrastructure such as trauma centers, increasing the share of
people with health insurance can improve health outcomes for people
with insurance as well.
Beyond the improvements for individuals and families, coverage
expansions would produce benefits that extend throughout the entire
economy. A CEA report in June 2009 estimated that economic gains from
reduced financial risk for the uninsured totaled $40 billion per year
(Council of Economic Advisers 2009a). Moreover, the CEA report found
an economic value of more than $180 billion per year from averting
preventable deaths caused by a lack of insurance. Taken together,
these gains would far exceed the cost of extending coverage to the
currently uninsured population.
The economic benefits of expanding coverage would extend to labor
markets in the form of reduced absenteeism and greater productivity.
According to the 2009 March Current Population Survey, 18.7 million
non-elderly adults report having one or more disabilities that prevent
or limit the work they can perform; of that total, 3.1 million lack
health insurance. Approximately 50 percent of non-elderly adults who
work report having at least one serious medical condition. Previous
research has documented the indirect costs to employers of health-
related productivity losses. Some of the costliest conditions -
depression, migraines, and asthma - can often be effectively
managed with prescription medications made more affordable by health
insurance. This suggests that expanding access to coverage would
improve productivity and labor supply by creating a healthier
workforce that would lose fewer hours to preventable illnesses or
disabilities.

Reducing the Growth Rate of Health Care Costs in the Public and
Private Sectors

The House and Senate bills contain a number of provisions that would
reduce the growth rate of health care spending in both the public and
private sectors. Both bills create pilot programs in Medicare to bundle
provider payments for an episode of care rather than for individual
procedures. Under bundled payments, Medicare would provide a single
reimbursement for an entire episode of care rather than multiple
reimbursements for individual treatments. This payment strategy would
give providers, organized around a hospital or group of physicians, a
stronger incentive to coordinate and provide quality care efficiently
rather than carry out low-value or unnecessary treatments and
procedures. Recent research in the New England Journal of Medicine
suggests that bundled payments could improve quality and substantially
reduce health care spending (Hussey et al. 2009). The Department of
Health and Human Services would be given authority to expand or extend
successful pilot programs without additional legislative action.
Both bills also include measures that directly reduce waste in the
current health care system. One example of such waste is the
substantial overpayment to Medicare Advantage plans, which are
currently paid an average of 14 percent more per recipient than
traditional Medicare. The reform bills would reduce these
overpayments, saving more than $100 billion between 2010 and 2019
(Congressional Budget Office 2009b). Reducing the overpayments would
also lower Medicare recipients' Part B premiums below what they
otherwise would be and would extend the solvency of the Medicare
Trust Fund.
Another component of the legislation that has the potential to slow
the growth rate of health care spending is the Independent Payment
Advisory Board included in the Senate bill. This board would have the
authority to propose changes to the Medicare program both to improve
the quality of care and to reduce the growth rate of program spending.
Absent Congressional action, these recommendations would be
automatically implemented.
Using the the CEA analysis of the House and Senate bills along with
projections from CBO about the level of Federal spending on Medicare,
Medicaid, and CHIP, it is possible to estimate the effect of reform on
the growth rate of Federal health care spending. Recent CEA analyses
of the House and Senate bills find that reform would lower total
Federal spending on Medicare, Medicaid, and CHIP by 2019 below what it
otherwise would have been (Council of Economic Advisers 2009b).
Moreover, between 2016 and 2019, both bills would lower the annual
growth rate of Federal spending on these programs by approximately
1.0 percentage point. State and local governments would also benefit
financially from health insurance reform, as described in Box 7-1.

_____________________________________________________________________

Box 7-1: The Impact of Health Reform on State and Local Governments
Although slowing the growth in health care costs will help the long-
run fiscal situation of the Federal Government, some observers worry
about how reform will affect state and local governments. To help
ensure that virtually all Americans receive health insurance, both the
Senate and the House bills call for expanding Medicaid eligibility.
Because Medicaid is partly funded by states, some state officials fear
that the state fiscal situation will deteriorate as a consequence of
reform.
As documented by a CEA report published in September (Council of
Economic Advisers 2009d), however, health insurance reform would
improve the fiscal health of state and local governments in at least
three important ways. First, state and local governments are already
spending billions of dollars each year providing coverage to the
uninsured; these costs would fall significantly as a consequence of
health reform. Second, encouraging all individuals to become insured
would reduce the hidden tax paid by providers of health insurance.
Because state and local governments employ more than 19 million
people, the total savings from removing the hidden tax is likely to be
substantial. Third, an excise tax on high-cost
plans would boost workers' wages by billions of dollars each year and
thus increase state income tax revenues.
To understand the net consequences of reform for the fiscal health of
state and local governments, the CEA studied the impact of reform for
16 states that are diverse along many important dimensions:
geographic, economic, and demographic.
For every state studied, health reform would result in substantial
savings for state and local governments.
_____________________________________________________________________


In addition to these public savings, the reform proposals would
reduce the growth of health care costs in the private sector. One
important mechanism through which reform could reduce these costs is
the excise tax on high-cost insurance plans included in the Senate bill.
Under current tax law, employer compensation in the form of wages is
subject to the income tax, while compensation in the form of employer-
provided health care benefits is not. Individuals may therefore have
an incentive to obtain more generous health insurance than they would
if wages and health insurance faced more equal tax treatment. Absent
other incentives for individuals to obtain insurance, the preferential
tax treatment of health insurance may be beneficial, because it
encourages firms to provide health insurance to their workers and
facilitates pooling. Nonetheless, placing no limit on this subsidy
likely leads to health insurance that is more generous than would be
efficient in some cases.
To help contain the growth in the cost of these plans without
jeopardizing the risk-pooling benefits, the Senate bill would impose a
tax on only the most expensive employer-sponsored plans. Although only
a small share of plans would be affected, CEA estimates based on data
from the CBO suggest that the excise tax on high-cost insurance plans
would reduce the growth rate of annual health care costs in the
private sector by 0.5 percentage point per year from 2012 to 2018.
The excise tax would encourage workers and their firms' human
resources departments to be more watchful consumers and would give
insurers a powerful incentive to price competitively. And to the
extent that bundling, accountable care organizations, and other
delivery system reforms in both the House and Senate bills would
spill over to the private sector, it is likely that the rate of
growth of health care spending in the private sector would fall by
considerably more than 0.5 percentage point per year. Lower
increases in private health insurance premiums would lead
to substantially higher take-home earnings for workers.
Reform would also reduce private spending on health care in other
important ways. As noted, encouraging all individuals to obtain health
insurance would likely reduce average costs for people who are
insured. Reducing the hidden tax on health insurance premiums imposed
by uncompensated care for the uninsured, for example, would reduce the
financial burden not only on state and local governments, but also on
individuals. CBO estimates of the Senate legislation find that reform
has the power to reduce small-group premiums by up to 2 percent and
even large-group premiums by up to 3 percent. And according to
research by the Business Roundtable, reforms similar to those included
in both the House and Senate bills could reduce employer-sponsored
health insurance costs for family coverage by as much as $3,000 per
worker by 2019 relative to what those costs otherwise would have been.

The Economic Benefits of Slowing the Growth Rate of Health
Care Costs

Reform as envisioned in both the House and Senate bills passed in late
2009 would substantially lower the growth rate of health care
spending. Of course, spending would increase in the very short run as
coverage was extended to more than 30 million Americans who would
otherwise be uninsured. But, according to the CBO, these temporary
increases would soon be more than offset by the slowdown in the growth
rate of spending, with the net savings increasing over time
(Congressional Budget Office 2009b, 2009c).
A report released by the CEA in June 2009 demonstrated that slowing
the growth rate of health care costs would raise U.S. standards of
living by freeing up resources that could be used to produce other
goods and services. An examination of the cost reduction measures
contained in the Senate bill suggests that the typical family would
see its income increase by thousands of dollars per year by 2030.
Total GDP would be substantially higher as well, driven upward by both
increased efficiency and increased national saving.
Slowing the growth rate of health care costs would also lower the
Federal budget deficit. Projections by the CBO of both the House and
the Senate legislation suggest that the bills would lower the deficit
substantially in the upcoming decade, and even more in the next
decade. These savings would obviate large tax increases or cuts in
other important priority areas. As discussed in Chapter 5, it would
be the single most important step toward addressing the Nation's
long-run fiscal challenges.
Finally, reform that genuinely slows the growth of health care costs
could increase employment for a period of time by lowering the
unemployment rate that is consistent with steady inflation. These
effects could be important, with CEA estimates suggesting an increase
of more than 300,000 jobs for a period of time if health care costs
grew by 1 percentage point less each year.


Conclusion

In recent years, health care costs in the Nation's private and public
sectors have been rising at an unsustainable rate, and the fraction of
Americans who are uninsured has steadily increased. These trends have
imposed tremendous burdens on individuals, employers, and governments
at every level, and the problems have grown yet more severe during the
past two years with the onset of the worst recession since the Great
Depression.
Last year, the President signed in to law several policies that have
cushioned the worst of the economic downturn, including an expansion
in the Children's Health Insurance Program and an extension of COBRA
coverage for displaced workers and their families. Other policies,
such as increased funding for health information technology, will
improve the long-run efficiency and quality of the health care sector.
Legislation passed by both the House and the Senate in late 2009 would
expand health insurance coverage to tens of millions of Americans
while slowing the growth rate of health care costs. These reforms
would improve the health and the economic well-being of individuals
and families, help small businesses, stimulate job creation, and ease
strains on Federal, state, and local governments imposed by rapidly
rising health care costs.