Bending the Medical-Cost Curve

Health-care reformers say it can be done. Girard Miller doubts it.
by | October 21, 2010

President Obama ran for office on the premise that his proposals for health-care reform would "bend the cost curve" in the health-care industry. Indeed, a key premise in the Affordable Care Act (ACA) and the latest Medicare trustees' report was that the President's health-care reforms will drive costs lower.

As much as I admire the President as a person and as a transformational, historical figure, I'm skeptical. You should be, too.

Freshman Economics 101 tells us that when you massively increase the demand for a service without increasing supply, the price will go up. We've added millions of new subsidized customers into the system, and I'm all for that effort to move our nation toward more universal coverage over a prudent time period. But we're just kidding ourselves if we actually think that a panel of bureaucrats in Washington, D.C., is going to have any real leverage to contain medical costs by jawboning doctors' fees — as the Medicare system's chief actuary even reported in his own "adverse opinion" in their latest annual Medicare report. (See my column from last week on the actuarial autopilot for Social Security and Medicare.)

The only budget-balancer in the ACA was a new Medicare tax on investors' income. I defy anybody in Washington to show us genuine cost savings that even come close to the increase in taxes that were imposed to get the bill through Congress with a $1 trillion price tag.

Meanwhile, here's the latest report from the real world: Hewitt Associates says health-care costs will spiral upward another 8.8 percent in 2011. Public employers face another year of rising health-care costs, and next year's increase is the largest in five years. Employees in the private sector will pay 22 percent of the premiums — an all-time high. So much for bending the cost curve any time soon.

For public employers, there are two issues: (1) Costs to taxpayers will again outstrip revenues, and they will need to ask employees to "buck up" even more. (2) Further, their retiree medical expenses (called OPEB for "other post-employment benefits") will grow once again — for which the vast majority have still made no financial provision. This means the unfunded liabilities for these benefits will grow yet again and will likely cross the $2 trillion level nationally next year.

To contain costs for active employees, public employers and their senior managers must once again return to their cost-mitigation tool kits and look for new ways to rein in these spiraling costs. For their OPEB plans, it is even more important to start installing cost controls now. This may include raising the eligibility age to 65 when Medicare benefits begin, and installing a CPI cap on the OPEB benefit instead of absorbing the entire increase at employers' expense. Unions will instinctively fight these measures, but a federal court in Rhode Island has opened the door to such reforms in states and localities where incumbent employees' retirement medical benefits do not enjoy state-constitutional irrevocability.

Remember Miller's Rule #1: Hope is not a strategy. Public officials must take decisive action to control health-care and retiree medical costs and not rely naively on the "Audacity of Hope" to deliver magic in an industry that has consistently and stubbornly resisted magical thinking. State and local leaders who wait for the good fairy to bail them out will ultimately face the wrath of taxpayers and voters. Let's get real, folks.

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