Code Red: Two Economists Examine the U.S. Healthcare System

October 3, 2014

The President’s Speech at Kellogg: When Fiction Becomes Fact

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 9:57 am

Last Thursday was a watershed day for the Kellogg School of Management and Northwestern University.  For the first time in 60 years, a sitting President spoke at NU, as President Obama spoke before an audience packed largely with Kellogg students and faculty.  As this is election season, it was no surprise that he spoke at length on a variety of issues and defended the Democratic record.  We are not experts on every matter of public policy and therefore will not examine every aspect of the speech.  But we have more than passing knowledge of health policy, and the President did spend some time discussing the ACA. He also mentioned many times that he was simply giving the audience “the facts” and that they could not be disputed. Given this speech occurred at our University, we feel obligated to take a look at what he said and do some basic “fact” checking.

Here is the relevant excerpt from his speech:

“Today, we’ve seen a dramatic slowdown in the rising cost of health care. If your family gets your health care through your employer, premiums are rising at a rate tied for the lowest on record. What this means for the economy is staggering. If we hadn’t taken this on, and premiums had kept growing at the rate they did in the last decade, the average premium for family coverage today would be $1,800 higher than they are. That’s $1,800 you don’t have to pay out of our pocket or see vanish from your paycheck. That’s like a $1,800 tax cut. And because the insurance marketplaces we created encourage insurers to compete for your business, in many of the cities that have announced next year’s premiums, something important is happening – premiums are actually falling. One expert said it’s like ‘defying the law of physics.’ But we’re getting it done. That’s progress we can be proud of.”

There is no reasonable interpretation of this section other than the President is claiming that 100 percent of the recent slowdown in private sector health spending is attributable to the ACA.  Unfortunately, this claim does not stand up to basic scrutiny.  This issue has been extensively researched by both ourselves and a number of other economists. Conclusions drawn from studies of prior recessions suggest that the ACA could be responsible for more than half of the current slowdown in health spending.  More significantly, the most recent published work, which focused on differences across geographic areas during the most recent recession, suggests that the ACA is responsible for at most a small fraction of the slowdown in private health spending.  We happen to know a lot about this research because we (along with colleague Chris Ody) are the authors of the aforementioned study.   We blogged about it last month, and you can find the full study here, in the policy journal Health Affairs.  We have also shared this evidence with staff in several Federal agencies, so our findings are not unknown in DC.

We will be generous to the President and assume that these findings somehow did not make it onto his radar screen, or that of his speechwriters, or even more unlikely even his economic advisers.*  As a result, the President has, at best, grossly exaggerated the impact of the ACA when the best available evidence is that the ACA may not have had any impact at all!  We find it at least a little ironic that the President has (perhaps unknowingly) misrepresented the facts on a subject that was extensively researched by faculty at his host institution.

While we are on the subject of the accomplishments of the ACA, the President has in other venues reminded his audiences that the ACA has reduced the ranks of the uninsured by 10 million.  What he fails to mention is that a very large portion of those individuals (perhaps even a large majority) were simply added to the Medicaid rolls of various states. Considering that roughly half of the states chose to sit out the expansion, this is a remarkable figure.  While it is a good thing that we are able to provide these people with health coverage, the ACA was billed as a way to utilize the marketplace to expand private health insurance coverage by bringing some order to the individual marketplace. This is a policy goal that dates back to Stanford Professor Alain Enthoven’s 1978 Consumer Choice Health Plan, and was shared by President Clinton as well as many Republicans.  We may ultimately get to this point, but we certainly are not there today. Given this fact, why not call the ACA what it is – a massive expansion of the Medicaid entitlement, coupled with an as yet modest program to help some individuals find subsidized private health insurance?   We are rather partial to Professor Enthoven’s plan and hope the exchanges grow, but we are a long way from fulfilling his vision.  Let’s not pretend otherwise.

*We are reminded of an episode of the great British comedy, Yes Minister, where the Minister for Administrative Affairs Jim Hacker learns, to his chagrin, that he would have been better off politically if he had remained unaware of the facts.  Perhaps it is best for the President if he can continue, with conviction, to spin this tale about the ACA.

8 Comments

  1. You guys often come off like angry children who are trying to win an irrelevant argument. Your biases are obvious. The important question here is certainly not arguing about what percentage of the reduction in premiums was due to the ACA, or whether your interpretation of Obama’s comments at NW are correct. The important question is whether the ACA is contributing to a much needed change in direction for our health system in this country (or “health anti-system”). You point out above what you feel the failed to make it onto the President’s radar screen. Has it failed to make it on to your radar screens that: a) our health system is a joke, given the ratio of costs to benefits, b) that congress is comically and extremely polarized in a highly irrational manner, and that the fact that we were able to make ANY progress in that environment is nothing short of a miracle, and c) given that legislative environment, yes – an imperfect law was passed. Well – what a huge shocking surprise! Nevertheless, a law was passed that took some first steps, and was brought into being through admirable courage from a lot of people, primarily the President.

    And you want to argue about percentages of impact? And we wonder why this debate can’t make real progress in this country? Please…

    Comment by Robert Strickland — October 3, 2014 @ 10:15 am

    • I think some of our prior 166 blogs speak to your concerns about our troubled health system. The point of our latest post is that the President offered specific “facts” about the impact of the ACA on health spending. This is not “irrelevant,” as you suggest; rather, this is one of the two most important criteria on which the ACA will be judged by voters and by posterity. We agree with the President’s emphasis on the facts. After all, if we are to judge the ACA, we must eventually turn from abstract arguments and examine its actual performance. We are profoundly interested in the same facts, which is why we do research and disseminate our findings as broadly as possible. We make no apologies for that. It turns out that our research shows that, at least so far as we were able to study with our data, the ACA has not yet dramatically lowered costs. Of course it is very early days and many of the changes occurring in the industry, such as the profound reorganization of healthcare delivery, might soon pay off. We hope so, because we agree with you that the system needs major changes. When future research studies shed further light on the impact of the ACA, we will be sure to blog about it. We hope you will still be reading us!

      Comment by David Dranove and (from Oct. 11, 2013) Craig Garthwaite — October 3, 2014 @ 12:29 pm

      • Nice calm response. You could have just quoted his first two sentences back to him. The admirable courage to accept an imperfect law then blindly (or not, in re Yes Minister) praise said law in spite of facts may be another plausible reason why this debate can’t make real progress in this country. Or maybe it’s just the widespread ignoring (or ignorance) of economics applied to HC. I share your hope that system, clinical, and market changes drive long term improvements in our health economy!

        Comment by Giovanni Gallo (@SonycIC) — October 20, 2014 @ 6:27 pm

  2. I support Robert Strickland’s comment. I spent my entire career in and around new product development. It seems that it is a condition of some to find some small defect in a program in an effort to throw out the entire project. I find this small minded and an attitude that Kellogg was NOT fond of during my time there. Frankly, I expect more from people who put Kellogg after their names. The system was so broken that anyone with a bit of compassion can see clearly that the ACA has put us on a positive course.
    We all have biases, of course. Maybe it’s time for David Dranove and Craig Garthwaite to examine theirs?

    Comment by John S Strauss — October 17, 2014 @ 11:14 am

  3. Speaking of facts, (or conversely, deceit, falsehoods, calumny, & subterfuge) is the ACA a tax or isn’t it? It was not written in the legislative code (as the language utlized for taxation purposes is well established in our Legislative branch), nor sold to the public by its’ sponsors, as a tax. Yet, the Supreme Court has declared it is a tax. I’m so confused.

    Comment by Aaron — October 17, 2014 @ 11:17 am

  4. I appreciate your analysis.

    President Obama gave a CAMPAIGN SPEECH at Northwestern attempting to avoid becoming even more irrelevant the remaining two years of his term due to a Republican senate. He treats hope and opinion as fact. I’m sure his trip to Illinois was worthwhile for him – he still has the ability to raise money – and I’m sure he didn’t miss a beat. Has he ever mentioned where the comment on “$1,800 in savings” originated? It will be interesting to hear what he says when next year’s premiums are announced on November 15th – a date conveniently after the midterm elections. His speech at Kellogg was far from a “high point” for the School.

    Comment by Donald G. Allison KGSM '73 — October 17, 2014 @ 12:43 pm

  5. How do you measure growth of healthcare costs? Is it growth of premiums? Do you take into account the effect of cost shifting on premium growth? While consumers and employers may not be paying significantly higher premiums, they may be funding HSAs and HRAs. Having said that there is undoubtedly a significant impact on cost from EMRs, medical homes and ACOs although they may not be functioning perfectly just yet. The ACA calls for increased coverages and coverage for previously uninsured. With this significant increase in coverage, how can cost go down? Regarding competition, there was plenty to begin with. Premiums are driven by claims cost. If we continue the current voracious consumption of healthcare services, premiums cannot decline. The current push on wellness can reduce utilization but even if successful, it’s effect cannot be expected to be realized in the immediate future.

    Comment by Dhun Mehta — October 18, 2014 @ 7:54 pm

  6. Civil disagreement from the University is applauded. Far too often a bias in critical evaluation of sensitive political topics is delivered in a cowardly manner. Obama’s speech was not dissected as one would expect from a community of scholars and critical thinkers. In particular, his economics are generally nonsense without any analytic support. Health care, minimum wages, the impact of Keystone Pipeline are all examples of outright misinformation or probably political deception by this administration. I would suggest a fundamental reason for the existence of any University is to seek truth and question the perpetrators of national lies.

    Comment by John M Mackowiak — November 20, 2014 @ 10:45 am


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