Medicare Actuary Rick Foster is a respected, non-partisan analyst, and his report on the health overhaul law is a big deal because it shows that many of the promises made by the law’s proponents will be broken. Foster shows that businesses and families will face higher premiums, millions of people will lose their current coverage, seniors will have difficulty accessing care, and health spending will increase.

His analysis gives credence to the fears that led the majority of the American people to oppose passage of the law.

Foster’s analysis already is having an impact on decisions regarding implementation of the new temporary high-risk pools created by the health overhaul law. The law allocated $5 billion for the pools until 2014 when enrollees would be transferred into the new health insurance exchanges.

Foster estimates that the $5 billion “would be expended during the first 1 to 3 calendar years of operation.” That means states could be left to fill the funding void. At least 15 states have told HHS Secretary Sebelius they don’t want to be responsible for the added cost of the high-risk program and that they have a fiduciary responsibility to protect taxpayers in their states from yet another unfunded liability. The federal government is obligated by law to run the programs if the states decide they don’t want to contract to implement them.

Foster’s analysis also shows the new law falls far short in bending the health spending curve downward, as promised. He says that total national health spending will increase by $311 billion as a result of PPACA, thereby bending the curve up.

In fact, Foster warns that the cost of the health overhaul law may be much greater than advertised. It relies on more than $500 billion in Medicare cuts to help pay for the new spending. But these cuts “may not be fully achievable” because "Medicare productivity adjustments could become unsustainable even within the next ten years."

The report also highlights the shaky financial footing of the new long-term care insurance program – the CLASS Act. Foster says it will face "a significant risk of failure," resulting in "a very serious risk that the problem of adverse selection will make the CLASS program unsustainable." At a time of ballooning deficits and record debt, he finds the program will result “in a net Federal cost in the long-term.”

Foster’s report also shows that millions will be forced off their current plans due to the new law. He says about 14 million people will lose their employer coverage by 2019 as smaller employers terminate their plans and as workers who currently have employer plans enroll in taxpayer subsidized coverage. He warns, “The additional demand for health services could be difficult to meet initially with existing health provider resources and could lead to price increases, cost-shifting, and/or changes in providers’ willingness to treat patients with low-reimbursement health coverage.”

For seniors, Foster estimates that more than seven million will lose their current Medicare Advantage plans and that the “new provisions will … result in less generous benefit packages.” Recipients on traditional Medicare also will have trouble accessing care: Fifteen percent of all hospitals, nursing homes, and other providers treating Medicare recipients could be operating at a loss by 2019 and “possibly jeopardize access to care for beneficiaries.”

Foster’s report did not calculate the overall economic impact of many of the tax hikes the new law imposes, such as higher taxes on higher-incomes or on medical devices, pharmaceuticals, and health plans, or the dislocations to the job market as a result of the mandates and penalties on employers. But his report does point out that billions of dollars in new fees and excise taxes will “generally be passed through to health consumers in the form of higher drug and devices prices and higher premiums."

When Americans begin to feel the impact, they will see there was independent evidence of the false promises proponents made to gain votes to enact this unpopular legislation.

Covering 30 million or more people with no more than a one percent increase in national health spending is actually quite impressive when you consider that this is an 11 percent increase in the number of people with insurance. But the Act will not significantly slow the rate of growth in health spending.

For example, David Cutler predicts $600 billion in savings to consumers and governments under the act over the next 10 years (Wall Street Journal, March 9, 2010). He argues that the act promotes savings in several ways including: an excise tax on high-cost health plans; increased competition from “exchanges;” a new Medicare advisory board to fast track refinements in payment systems; and other features. However, the Cutler estimates do not include an offset for the increase in utilization of health services for newly insured people, which could be up to $40 billion per year.

Even if the net savings do turn out to be $600 billion, this represents only a 1.5 percent reduction in health spending over 10 years. Even with these savings, health spending will continue to grow about twice as fast as average family income. Since most of the savings under the act will be from Medicare, it will have little impact on spending for people under age 65, which is the group most at risk of losing coverage due to uncontrolled cost growth.

Savings will be small because the Act leaves the fee-for-service (FFS) system largely intact. It is widely acknowledged that the FFS system creates incentives for physicians to provide more and more billable services even if they are unnecessary or are of minimal value. Because of this, the Act does include demonstrations of new Medicare payment systems designed to change physician incentives by rewarding quality and efficiency rather than simply the volume of services performed. However, launching a few Medicare demonstrations falls far short of the system-wide shift in provider incentives required to “bend the curve.”

The Lewin Group’s own analysis of the act shows some savings, including a modest shift to lower-cost health plans through increased competition in the exchange and the excise tax on high-cost plans. However, these savings would be more than offset by the cost of increased health services utilization for newly insured people. We estimate that national health spending would actually increase by about $265 billion over the 2010 through 2019 period, and $344 billion over the 2020 through 2029 period. This is less than a one percent increase in spending.

No. What is surprising is the projection of health care spending over the next decade rising only about one percent (1%) while expanding coverage to 34 million individuals who otherwise would not have access to affordable health insurance. CMS Chief Actuary Richard Foster’s estimation that post health care reform, the nation will see a modest increase of almost one percent in health care spending in the first ten years is good news. However, slowing the trajectory of national health care expenditure growth in a dynamic environment will take both time and bipartisan political will to contain system-wide costs and to improve quality and value that has not been seen thus far.

A close reading of Foster’s estimate suggests that as enacted, over the long term, health reform provides many tools for bending the health care cost curve downward. Mandated coverage combined with extensive efforts to reduce waste and fraud in addition to potential actions of the Independent Payment Advisory Board should help to exert downward pressure on future health care cost growth rates. New federal programs to expand cost effective health care delivery mechanisms also have the potential to accelerate savings. However, implementation of serious system-wide cost containment and quality improvement efforts that address the massive inefficiencies of the American system will be deeply challenging especially considering the absence of comparable data and far greater health industry transparency regarding utilization, pricing, costs and profits.

John Goodman complains that the White House and its allies on the Hill have marketed the health reform they passed as “all-gain-no-pain.” I leave aside the question how fair that accusation is, given that the sources of funding the plan – i.e., the pain -- were pretty clearly spelled out.

But John then invites us to a link which portrays the reform as all-pain-no-gain.

Is that proper?

Is Rick Foster's report a big deal? Of course it is. Here is my brief summary of the Chief Actuary's findings: http://www.john-goodman-blog.com/obama-administration-report-is-a-devastating-critique-of-obamacare/

Comments by David Cutler, Karen Davis and Uwe Reinhardt are technically interesting, but they miss the wider poilitical point: The most credible source within the US govenment on these matters is completely undermining the all-gain-no-pain propaganda coming out of the White House and from the leadership on Capitol Hill and from their apologists (who seem to be everywhere).

In August 2008, Jack Hadley et al. ( ) estimated that, with the status quo of 2008 as the baseline, moving to universal health insurance coverage would increase total national health expenditures (NHE) by about 5%. That estimate, however, implied coverage of all then uninsured.

Other authors suggested that the increase might be higher, if one took into account certain dynamic effects – e.g., price increases – that might be triggered by a major insurance coverage (http://healthaffairs.org/blog/2008/09/04/covering-the-uninsured-springing-a-leak-in-the-cost-shifting-hydraulic/ and http://healthaffairs.org/blog/2008/08/25/covering-the-uninsured-cheap-at-twice-the-price/).

Focusing specifically on the Obama plan as presented during the presidential campaign, Roger Feldman (http://www.hsinetwork.com/Obama_HSI-Assess_08-21-2008.pdf) estimated in August 2008 that “if implemented immediately and in total, there would be a reduction in the uninsured by 25.5 million covered lives (from 47 million) at an annual cost exceeding $452 billion dollars.” It would have amounted to an increase in NHE of about 18%.

Against that backdrop, a white paper entitled “Estimated Financial Effects of the ‘Patient Protection and Affordable (sic) Act,’ as amended” issued by Richard S. Foster, Chief Actuary of the Centers of Medicare and Medicaid Services (CMS) on April 22, 2010, (http://thehill.com/images/stories/whitepapers/pdf/oact%20memorandum%20on%20financial%20impact%20of%20ppaca%20as%20enacted.pdf) must come as a relief to people who feared that whatever health-reform became law would to drive up future NHE sharply.

In their report, the CMS actuaries report that “in the aggregate, we estimate that for the calendar years 2010 through 2019, NHE would increase by $311 billion, or 0.9%, over the updated baseline projection that was released on June 29, 2009”, but that, “by 2019, an additional 34 million US citizens and other legal residents would have health insurance benefits meeting the essential-benefit requirements.”

Now it is true that sizeable cuts off the projected growth in Medicare helped keep the overall projected increase in NHE spending lower than it would otherwise have been. These reductions are detailed with high granularity in Table 3 of Foster’s report. They sum to $575 billion over 2010-19, or about 8% of the projected $7.1 trillion of Medicare spending over that period. The point to note, however, is that Medicare spending would continue to grow even after this haircut. It would not shrink.

Of the total of $575 billion, about $233 billion would come from reduced payment updates under Part A and B of Medicare. Coupled with the fact that some 20 million of the newly insured are estimated to be in Medicaid/SCHIP, with its generally low payments to providers, the proposed reductions in the Part A and Part B undoubtedly will put great financial stress on a large fraction of U.S. hospitals, whose profit margins have always shown a large variance among hospitals. It is an impact worth monitoring closely. Foster estimates that 15% of hospitals will be forced into the red.

In reacting to this dire forecast, however, the providers of health care should keep this in mind: The Patient Protection and Affordability Act (PPACA) has been harshly criticized by many pundits and politicians for not reducing health spending enough! In other words, the impact of the reform is much milder than many people had wanted it to be.

If Americans really are serious about wanting a significant reduction in the growth of their health spending – actually a big IF -- then they inevitably will put serious financial stress on many current providers of health care and force them to downsize or downgrade their facilities or even close them altogether. This is precisely what the American people want by saying that they want to cut health spending. They are saying in effect that they want to cut health-care incomes, reduce employment opportunities in health care or the health-care incomes from employment in the health sector or the profits made by the manufacturers of health care products or to downsize the delivery system, or all of the above. Is that, then, what the American people want?

The expectation that a significant reduction in health spending can be achieved without that effect is unrealistic – one might even say, immature.

About $145 billion of the projected savings of $575 in Medicare spending is to come from reduced payments to Medicare Advantage (MA) plans. As Foster notes, “under prior law [the Medicare Modernization Act of 2003 (MMA ’03)], the Medicare Advantage payment benchmarks were generally in the range of 100 to 140 percent of fee-for-service costs [under the traditional, government-run Medicare].” The $145 billion is to come from bringing down these extra payments closer to zero, that is, to pay the MA plans on average no more than the cost of the Medicare fee-for-service program. It is to be achieved level through a very complicated schemes that takes quality and regional variation in spending under the fee-for-service system into account.

Foster argues that this reduction in payments inevitably will lead MA plans to cut their benefit packages for Medicare beneficiaries and thus drive roughly half of them now in MA plans back into the traditional Medicare fee-for-service plans. While uncertain of the exact magnitude of such effects, I do agree that this will be the general effect. The idea that these MA payments can be cut without any impact on the Medicare beneficiaries now enrolled in them has always struck me as a tall tale.

But here the question may be raised why only beneficiaries who have chosen choose the MA plans should be rewarded by taxpayers with the added benefits from an added, tax-financed payment to the MA plans – as the MMA ’03 does – or, the flipside, why beneficiaries choosing to stay in traditional Medicare should be punished by not being granted a similar extra allowance for extra benefits. It is a political question, but one that can fairly be raised.

Overall, I am grateful that Rick Foster and his crew went to the great effort to develop these numbers and share them with us, and I am even more grateful that this Administration allowed him to do so. It was not always so.

Last week, the Office of the Actuary (OACT) within the Centers for Medicare and Medicaid Services released a memo estimating the impact of the recently enacted health reform law on national health expenditures. OACT concluded that national health expenditures would increase by $311 billion over the ten-year 2010-2019 period, or by about 0.9 percent of the $35 trillion the country is projected to spend in the coming decade. Much of this increase was associated with the federal cost of covering the 34 million previously uninsured Americans through Medicaid and the new health insurance exchanges. Health spending as a percentage of gross domestic product (GDP) was estimated to rise 0.2 percentage points in 2019, from 20.8 percent of GDP to 21 percent.

The Commonwealth Fund and Harvard University economist David Cutler have previously detailed the conservative assumptions used by OACT and the Congressional Budget Office (CBO). Both OACT and CBO rely primarily on the limited number of peer-reviewed studies that evaluate the impact of isolated policy interventions. Excluded from their analysis is an important body of research that outlines the tremendous inefficiency in the U.S. health care system, the prevalence of misaligned financial incentives, and the ways in which high performing health care institutions have realigned those incentives and employed innovative delivery models to improve quality while reducing costs. It is particularly important to bring this evidence to bear when assessing the impact of the comprehensive health reform law as there have been no clinical trials involving such complex and wide-ranging policy interventions.

Further analysis by Commonwealth Fund grantee Jon Gabel at the University of Chicago has shown how failing to properly account for the behavioral response of providers to substantial changes in financial incentives and delivery system reforms has led CBO to significantly underestimate savings and overestimate cost over the previous thirty years. For example, changes to the Medicare hospital payment system in the early 1980s saved twice what CBO originally had projected between 1983 and 1986. Medicare savings after the enactment of the reforms contained in the Balanced Budget Act of 1997 were 50 percent greater than CBO had originally projected in 1998 and 113 percent greater in 1999. Actual spending under the Medicare Modernization Act of 2003 has been 40 percent lower than the original estimates by CBO.

OACT’s prediction regarding the future financial health of the nation’s hospitals is similarly driven by an assumption that facilities and providers will fail to respond to financial incentives and that hospitals simply can’t or won’t improve productivity in a manner consistent with other industries in our economy. This stands in stark contrast to the industry’s own prediction and promise. Last year, the American Hospital Association agreed to improve efficiency and quality by doing its part to reduce the growth in health care expenditures by 1.5 percentage points annually, much more than what is required under the new health reform law.

Commonwealth Fund analysis shows that, in reality, there are several significant "game changers" in the Affordable Care Act that will begin to realign incentives to reduce cost growth far in excess of OACT and CBO’s predictions. New health insurance exchanges will more efficiently pool risk, lower administrative costs, and provide eligible individuals and businesses a choice of affordable health plans. Establishment of an Innovation Center within the Centers for Medicare and Medicaid Services will test and rapidly spread effective payment methods that reward quality of care rather than volume of services. Creation of an Independent Payment Advisory Board with the authority to make recommendations that reduce cost growth and improve quality in both the Medicare program and the health system as a whole will reign in excessive and wasteful spending.

Drawing on a more balanced set of research, the Commonwealth Fund and Dr. Cutler have recently found that the new health reform package signed into law by President Obama will reduce national health expenditures by $692 billion over the next decade, slowing the annual growth in health expenditures from 6.3 percent to 5.7 percent. Federal budget savings of $448 billion are projected over the same 2010-2019 period. Families are expected to save nearly $2,000 in premium costs in 2019 as a result of increased efficiencies. As OACT notes in its recent memo, there are inherent challenges to modeling complex pieces of legislation over extended periods of time. However, a set of assumptions that more completely takes into account the potential for improved health system performance leads to the conclusion that the Affordable Care Act will significantly reduce costs and increase value for families, businesses, and our country.

The actuaries at the Centers for Medicare and Medicaid Services released a report this week estimating that health reform would marginally increase medical spending over the next decade. The estimated increase was less than 1 percent. Despite the small magnitude, the report was picked up by the usual suspects opposed to comprehensive health reform and used in the usual way—as false proof that the sky is falling. Even though health reform is now the law of the land, the health reform debate is far from over.

But these conservative Cassandras miss the real point. Thanks to the Patient Protection and Accountable Care Act we now have in our hands the ability to bend the health care cost curve—to demonstrate that quality health care can be made available to all Americans at lower costs. We no longer need to debate whether health reform will save money. We get to try and prove the skeptics wrong.

The Affordable Care Act contemplates two sources of cost savings. The first is reduction in the growth of traditional Medicare spending, including lower overhead payments to Medicare Advantage plans and reduced rates of price increases to hospitals. These savings are expected to reduce Medicare spending by 7 percent over the next decade.

Contrary to many claims, these savings are not that large. The Balanced Budget Act of 1997, for example, made larger cuts to Medicare—and in that case, the money was taken out of the health system entirely. The health reform law, in contrast, reinvests the money in new coverage. If the providers were not worried about these savings, it’s hard to see why anyone else should be.

But as the actuaries also note, traditional payment reductions are not a long-term source of financing. Prices can be reduced only so far before they become unreasonably low. What is essential is the second source of savings—reduced spending associated with modernizing the health care system and driving out inefficiencies. This includes more efficient production by eliminating layers of administrative cost, the prevention of acute episodes of care, and improved care management when people are sick.

The estimates of possible efficiency savings range up to 30 percent or more of medical spending. The Affordable Care Act is premised on the idea that Medicare reform can lead to savings in these areas. Payment reforms to improve the quality of care while lowering costs—including bundled payments, accountable care organizations, value-based purchasing, and care coordination—combined with better use of information technology are fundamental to the strategy laid out in the new law.

There are no controlled trials of large-scale payment innovations of the type envisioned in the health reform law. Thus, the CMS and CBO actuaries did not know how to evaluate the likely savings from them. In both cases, this translated into an assumption of essentially no savings.

Those of us who disagree—and there are a lot of us—now have the chance to prove the skeptics wrong. We get to show that we can create a higher quality, less expensive health care system. If we are right, then costs will fall more rapidly than expected. Since the coverage expansions are already paid for through traditional payment reductions and revenue increases, all of the incremental savings can be used for deficit reduction, with perhaps some for expansions in subsidy amounts.

If we are wrong, we still have the traditional savings from Medicare reform to balance costs in the first decade. But in any case, arguing over the likely effects of reform is now irrelevant. The country made its decision on health care a month ago. People believed that cost savings were feasible, and that the strategy for realizing them was the right one. It’s time to turn belief into reality.

A version of this post also appears at the Center for American Progress Web site.