President Obama's New Health Policy Road

Newly re-elected President Barack Obama may now have a new road to health policy-making after three years of defending the Affordable Care Act.  And even if the Congress does nothing to help in the months to come, his road may be a whole lot easier than it has been.

Even with the Affordable Care Act in place, our health policy debate has been dominated by the belief that health care Armageddon is just around the corner.

But some recent data suggest that Armageddon may still be down the road.

Just how far may well determine how our health policy debate shakes out over the next two years.

First, let's look at the Armageddon scenario.

The candidates accepted the scenario that health care costs are out of control when they made the future of Medicare and Medicaid a centerpiece of the campaign.  Governor Romney’s proposed solution was to clamp down on federal funding for these programs.  President Obama advocated managing state and local costs by expanding the federal role in both programs.

But neither strategy leads to lower projected Medicare and Medicaid spending in the near future.  Both will become trillion dollar programs in the next few years.  There’s no turning back; this is already written in stone as the baby boomers age.

The $716 billion Medicare rate cut in both the Affordable Care Act and the Ryan Budget will help.  But it won’t be enough to stop Medicare from growing to 6% of GDP over the next generation.  And at least part of that cut – the physician payment cut – is likely to be overturned by the new Congress. 

So if policy leaders want to save Medicare, they will have to do more.  But there is no consensus about what this should be.

Medicaid spending is even more contentious, because the program is so expensive for the states. 

Romney’s solution – to change it to a block grant – only addressed this problem on the surface.  This is because the increase in projected Medicaid costs represents the actual projected costs of the actual projected Medicaid-eligible people using today’s eligibility standards. 

To put this more simply, there will be a trillion dollar bill to pay, no matter what.  Block grants will only change who pays that bill. 

Obama’s choice – to have this burden shouldered equally by everyone through the federal government – will help states immensely, but won’t make the program any cheaper.

The cost of healthcare for returning veterans will also drive health care costs upward during the next few years. 

In 2010, the CBO estimated that this could mean another $30 billion in VA spending over what we are paying today.

In this Armageddon scenario, all the pressure on governmental health care spending pushes upward.  And we have no clear policy solutions.

Limiting the growth in Medicare spending to 5% per year, instead of 5.7% is something for which most of the members of both parties have voted during the last two years.  That is already in place through the Affordable Care Act, and one potentially bipartisan option. 

But we need to go much lower than this to reduce the GDP burden of health care, and more aggressive rate-setting and regulation may do irreparable harm to certain safety net providers.

So President Obama’s hands may be tied – unless our healthcare future is tied to the second scenario.

In this scenario, healthcare inflationary growth declines rapidly.  And the information from 2010 and 2011 suggests that this is exactly what is happening.

Health care inflation was under 4% per year for two straight years in 2010 and 2011 for the first time in fifty years.  This may well have been recession-related.  But if health inflation stays low for even a little while longer, this will change the trajectory of health spending projections for years to come.

That may be why President Obama and Vice-President Biden made this a centerpiece of their campaign message in the closing weeks of the campaign. 

Even if the new Congress does nothing, low inflation changes the health policy picture dramatically.

Low health care inflation will add years of life to Medicare, absorb the 2.8% projected increase in state Medicaid spending attributable to the Medicaid expansion, and eventually drive down the price of health insurance even as Affordable Care Act consumer protections remain in place.

That puts the President in a position of strength for the next two years.  President Obama just won a tightly contested re-election.  The next few months will decide with just how easily his health policy agenda moves forward now.