Affordable Care Act Study Shows Billions of Dollars In Hidden Costs
CNBC Senior Talent Producer
The "Patient Protection and Affordable Care Act" has been a lightning rod since its inception. Both sides of the aisle have used a different set of numbers to support stances both for and against the law.
In effort to break through the polarizing politics of this Act, the Mercatus Center at George Mason University conducted a year long study called "Beware the Rush to Presumption." It analyzes the government's own analysis of the program's cost savings and benefits. Dr. Jerry Ellig is a scholar at the Mercatus Center at George Mason University and is the study's co-author.
LL: What is the key finding from your year-long study?
JE: In this study, we looked at the federal government’s analysis for the 8 major “interim final” regulations issued in 2010 to implement key components of the Patient Protection and Affordable Care Act (ACA). The intent of regulatory analysis is to inform decisions by identifying the problem the regulation is supposed to solve, and assessing the pros and cons of alternative solutions. But we found these key ACA analyses to be rushed, seriously incomplete, and rarely used to inform decisions.
These analyses also regularly under-estimated costs, over-estimated benefits, and ignored alternatives that would have had lower costs or greater benefits. Scored according to the Mercatus Center’s Regulatory Report Card criteria, the best analysis received just 25 out of 60 possible points—the equivalent of an ‘F’.
LL: An F? So bottom line, based on your research, the government rushed to implement these regulations and now we citizens are stuck with the results?
JE: The regulations we evaluated were all issued as “interim final” regulations, meaning the agencies wrote them without taking public comments on a proposed rule first. In theory, the agencies could go back and revise the regulations before they produce the final version.
In practice, a lot of interim final regulations never get revised. So yes, we’re stuck with them unless the administration revisits them.
LL: You say the regulatory analyses frequently understate costs of the regulations. How much are we talking about, and how does that affect most people’s health insurance?
JE: Some big types of costs were simply left out. For example, any kind of insurance creates a problem called “moral hazard”—people over-utilize services that don’t do much to improve their health, because someone else is paying. It’s like going to a restaurant with friends when you’ve agreed in advance to divide the bill evenly: everybody orders filet mignon, because your friends are picking up most of the cost of your decision.
Health care economists have estimated that this kind of waste accounts for between 10 and 41 percent of health care spending, depending on the type of insurance plan. Administrative costs add another 7 to 11 percent, but the 8 regulatory analyses we examined usually ignored these too. So, for example, the regulation requiring insurance companies to cover dependent children up to age 26 would probably cost about $1 billion annually, but the government’s analysis says it will cost only $10.4 million.If your insurance company offers coverage for adult dependents, you’re helping pay for that extra billion dollars with your premiums.
LL: So how much in costs were left out total?
JE: We do not know how much cost was left out in total because we did not do our own, comprehensive benefit-cost analysis. What we can say is that the analyses for most of these regulations ignored several large and important types of costs. For two regulations, costs were underestimated by more than $5 billion. For two other regulations, costs were underestimated by $1 billion or more.
LL: How many Americans will truly benefit from The Patient Protection and Affordable Care Act?
JE: Based on the analysis produced for these regulations, we can’t tell—and neither can the federal government.
LL: Do these regulations fulfill the promise that “If you like your current health plan, you can keep it?”
JE: I thought “If you like your current health plan, you can keep it” meant that existing employer-sponsored plans could continue to evolve to meet the needs of employees and employers, but the health care law would create some new options for people dissatisfied with the current system. What the regulations actually did was impose costly new mandates that many employees may not want, then said health plans could avoid some of those mandates for a few years if they virtually freeze their current provisions in stone.
A very prescriptive “grandfathering” regulation lays out the rules health plans must follow if employers and employees want to keep their current plans for a few years. Some of the provisions are downright arbitrary. For example, the rule allows copayments to increase by the rate of medical inflation plus 15 percent, but coinsurance (cost-sharing) cannot rise at all. Instead, the rule could have done what the Massachusetts health reform did: adopt an “actuarial equivalence” standard that said employers can make changes to plans as long as the value of the plan to employees remains the same.
LL: How does the ACA’s regulatory analyses score stack up to other federal regulatory analyses?
JE: We used the Mercatus Center’s Regulatory Report Card evaluation system to compare the quality and use of analysis for these regulations with the quality and use of analysis for major regulations proposed in 2008 and 2009. The quality and use of analysis for these rules falls far short of the normal practice of other agencies, including the Department of Health and Human Services which was involved in all of the ACA analyses we studied. The six “prescriptive” regulations, which tell doctors, health insurers, employers, and employees what they may and may not do, scored 35 to 40 percent lower than major prescriptive regulations proposed by executive branch agencies in 2008 and 2009. (The other two regulations implemented subsidy programs, and they scored about the same as other major budget regulations proposed in prior years.)
LL: Why is the Regulatory Report Card a reliable measure for regulations?
JE: The Regulatory Report Card evaluation criteria are based on Executive Order 12866, which governs regulatory analysis and review, and Office of Management and Budget guidance to agencies.In other words, it assesses how well agencies do what presidents have been telling them to do for at least three decades.
The Report Card is an ongoing project that has evaluated the analysis accompanying major regulations proposed since 2008. During the past several years, we have presented the results for feedback and critique at academic conferences, at several federal agencies, and in testimony before congressional committees. A study explaining the evaluation method and the first year’s results has been accepted for publication in Risk Analysis, a peer-reviewed academic journal published by the Society for Risk Analysis.
LL: Are these problems with the regulatory analysis a failing of the Obama administration, or has this kind of thing happened before?
JE: This problem is systemic. The deficiencies in the analysis are a failure of the federal regulatory process, not of any particular administration or party. The quality of analysis for the ACA’s interim final health care regulations is about the same as the quality of analysis for the Bush administration’s interim final homeland security regulations issued in the years following 9/11. In both cases, administrations rushed to enact regulations they hoped would reflect their legacy in the face of tight legislative deadlines.This fast-track rulemaking meant decisions often got made at high levels before the regulatory analysis even got done. It was “Ready, Fire, Aim!”
To prevent this problem, we need to require agencies to analyze regulatory options before they decide whether or how to regulate.
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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."