The Health of Obamacare

By Daniel P. Kessler | December 11, 2015

More than five years ago, the Affordable Care Act—what most of us call Obamacare—was passed into law with two big declared goals: to reduce the number of Americans who lack health insurance and to cut health spending that doesn’t give good value for money. Has the law been a success? The country is sharply divided. The most recent Gallup and Kaiser Family Foundation tracking polls show public opinion almost evenly split, with Democrats largely supporting the law and Republicans opposing it. This partisan divide in public opinion has changed little since 2009, when President Barack Obama won a narrow victory in Congress for his signature domestic legislation.

What is different now is that we have a few years of direct experience of Obamacare. The most recent research on the law’s real consequences is more ambiguous than either side usually lets on.

Obamacare has indeed reduced the number of Americans without insurance. According to a recent study in the journal Health Affairs, around 10 million previously uninsured people gained coverage in 2014—when most of the key provisions took effect—through expansions of Medicaid or the new “marketplaces” (subsidized insurance exchanges) created under Obamacare. The law thus reduced the number of uninsured people in the country from around 45 million (or 14% of the population) to 35 million (or 11%).

Was this reduction in the number of uninsured worth the cost? A recent National Bureau of Economic Research study estimated the value of Medicaid to its recipients at between 20¢ and 40¢ per dollar of expenditure, with the majority of the value going to health-care providers like doctors and hospitals. By comparison, the Earned Income Tax Credit—a cash transfer program designed to enhance the incomes of the working poor—delivers around 90¢ of value to its recipients per dollar of expenditure. Given that more than half of Obamacare’s reduction in the numbers of the uninsured has been from its expansion of Medicaid, this makes the law look more like welfare for the medical-industrial complex than support for the needy.

The other key goal of Obamacare was to bend the cost curve downward. From 2010 to 2012, the period right after the law’s passage, overall health spending growth slowed significantly. Supporters attributed the slowdown to the law, claiming it was working as intended. Other analysts attributed the slowdown to the recession and other factors.

Who was right? It is hard to say, given the many things that were happening in health policy and the economy as a whole. But the most enthusiastic supporters of Obamacare seem to have jumped the gun. A recent study in Health Affairs concluded that health-care spending has started to rebound from its recent slow rate—although not to the rates seen in the prior decade—along with the improving economy.

Still, there are signs that an obscure aspect of Obamacare is having an effect. The “Cadillac tax” on high-cost plans effectively caps the exclusion of employer-sponsored health insurance from taxation. Health economists agree that the exclusion has encouraged employers and workers to choose plans with weak incentives to control low-value spending. (By giving health spending preferential tax treatment, the exclusion makes health services seem cheaper than everything else.) Although it won’t go into effect until 2018, the Cadillac tax has already induced some employers to improve their plans’ incentives in anticipation.

Obamacare also may have laid a foundation for future reform. To appeal to price-sensitive prospective enrollees, the insurance offered in the marketplaces has turned out to be significantly more cost-conscious than its employer-sponsored cousins. With high deductibles and networks of doctors and hospitals chosen for their willingness to offer a good deal, marketplace insurance offers a possible blueprint for a path forward.

Obamacare, in short, is neither the triumph touted by supporters nor the disaster trumpeted by opponents. What is needed now is an honest discussion of the fundamental trade-offs that we still face: between cost and coverage, incentives and generosity, markets and government.

Unfortunately, the way Obamacare was promoted to the American people has made this discussion difficult to have. The law was oversold in several ways.

Premiums haven’t gone down. Many people who liked their old health plans haven’t been able to keep them. The health benefits from expanding coverage have been elusive. And the macroeconomic consequences of the law have been negative: According to the Congressional Budget Office, the disincentives created by Obamacare—subsidies are phased out as beneficiaries’ incomes rise—will reduce the number of hours worked by 1.5% to 2% from 2017 to 2024.

The misleading way in which Obamacare was promoted culminated in the claim that it would pay for itself. Giving people insurance might be the right thing to do, but it isn’t budget-neutral. Although it might have been good politics, exaggerating the likely benefits of health reform has reduced the scope for good-faith efforts to compromise on points where reasonable people might disagree.

We see this on both sides of the aisle. Some of the law’s opponents need to acknowledge that for many Americans, modern health care is unaffordable without significant public assistance. Simply criticizing Medicaid is not enough. We need to envision alternatives to conventional insurance that deliver a basic basket of health services at a cost we can afford.

Both sides also need to recognize that the changes in incentives necessary to bend the cost curve will be highly unwelcome to many Americans. Markets for health care are the perfect example of the old saying that “every dollar of waste is someone’s income.” Changes in incentives will be resisted by a broad coalition that includes not only health-care providers but also other groups with an ideological or financial interest in the status quo, such as labor unions.

The real question at this point is not whether critics or supporters of Obamacare are right. It is, rather, who will have the political courage and tenacity to confront the difficult policy problems that we still face.

— Mr. Kessler is a professor at the law school and the graduate school of business, as well as a senior fellow at the Hoover Institution, at Stanford University.