Spotlight Exclusives

May 4, 2009: The Stimulus and Poverty: President Obama۪s Plan to Expand Health Care Coverage, By Pamela Herd, Assistant Professor of Public Affairs and Sociology and Affiliate of the Institute for Research on Poverty, University of WisconsinMadison

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Over the coming weeks, Spotlight is running a special series that examines how the American Recovery and Reinvestment Act affects low-income Americans.

Economist Timothy Smeedingopened the serieswith the pieceFirst Steps toward a Strong Antipoverty Policy: New Attention to a Growing Problem.” Professor Daniel R. Meyer ofthe University of Wisconsin-Madisoncontinued the series with an analysis of the bill۪s tax and transfer programs and how they will affect those in need. Professor Andrew Reschovsky then added an examination of whether the stimulus bill will protect public education from spending cuts. Sociologist Pamela Herd provides the following installment, which examines stimulus spending on health.

Health spending in the United States is growing steadily. In 2008, total health care spending came to $2.4 trillion or $7,800 per person, representing 16.6 percent of the gross domestic product (GDP). If spending continues to increase at current rates, the U.S. Department of Health and Human Services projects it will reach $4.4 trillion by 2018, or 20.3 percent of GDP.

In addition to anxiety over rising costs are concerns about the accessibility of health care. A substantial proportion of the population lacks health insurance. Many uninsured Americans are postponing or foregoing care, which can lead to more serious conditions (that are more expensive to treat), and to financial ruin in the event of catastrophic illness.

The stimulus package tries to address these growing problems by devoting about 20 percent of outlays to health spending, coming in at nearly $150 billion. The distribution of these dollars reflects the Obama administration۪s overall health care reform goals, which include maintaining and expanding access to coverage, controlling health care spending, and improving the quality of care.

The responses to this package, however, also reflect the challenges of broader health care reform. With health care spending consuming about 17 percent of GDP, everyone from consumers and employers to suppliers, including insurance and pharmaceutical companies, have vested, and not necessarily aligned, interests in reform. The health care industry alone spends nearly one billion dollars a year lobbying on their own behalf. And this lobby has had a huge impact on U.S. health care reform.

One of the least controversial components of the stimulus۪s health spending is the $90 billion 60 percent of the health stimulus spending which is devoted to keeping low-income, disabled, and other eligible Americans insured by subsidizing state Medicaid costs. A report by the Kaiser Family Foundation indicates that 45 million people under the age of 65 including 9 million children were uninsured in 2007. Of those 45 million, more than eight in ten come from working families with low incomes who either lack employer-based coverage or cannot afford employee premiums. Medicaid, which consumes about 20 percent of state budgets, provides health insurance coverage for 13 percent of all Americans and nearly 30 percent of children under age 18. But with the recession causing rising budget deficits and rising demand for the program, states were going to cut back on the program. This spending is actually on top of the $60 billion reauthorization and expansion of the State Children۪s Health Insurance Program (SCHIP), which is expected to almost double the number of enrollees.

The lack of opposition to this expansion on the part of the health care lobby, in particular, may reflect the extent to which private health insurance companies actually participate in these programs and thus benefit from their expansion. Currently, over half of Medicaid enrollees are in a private managed-care plan, compared to nine percent of enrollees in 1991.

The other strategy for keeping Americans covered, which focuses on employer-provided health insurance, is more controversial. About 17 percent of the stimulus is devoted to protecting health insurance coverage for those who have lost their jobs due to the recession. While these individuals are eligible to maintain their existing employment-based health insurance coverage through COBRA, they must pay the full premium costs, which in 2008 averaged $4,704 for a year of single coverage and $12,680 for family coverage, according to the Kaiser Foundation. Many cannot afford to pay these amounts, especially after having lost their jobs. Consequently, the stimulus money will subsidize 65 percent of premium costs for up to nine months for individuals whose income does not exceed $125,000 and married couples whose income does not exceed $250,000.

While the subsidy is being provided by the government, many employers were unhappy about the measure. They were concerned that it would increase their administrative costs to manage the program. Any attempt at expanding coverage that shifts cost burdens towards employers encounters resistance. Indeed, employers, particularly small-business employers, played a huge role in the failure of the 1994 Clinton health care reforms. Responses to the stimulus reflect the inherent difficulty in expanding coverage in an employer-based health insurance system.

A portion of the stimulus spending is also focused on reducing health care costs, some parts of which are uncontroversial and other parts of which are very controversial. Health care costs are projected to consume over 20 percent of GDP by 2018. Consequently, President Obama has made it clear that he plans to tackle the cost issue as an integral component of broader health care reform.

One widely promoted and popular strategy for reducing costs, and improving care, is to update the medical care system so that medical records are stored electronically. Around 17 percent of the health stimulus spending will go to make all medical records electronic by 2014. Many hospitals and health care providers still rely on paper files to maintain their patient record systems. Electronic records, however, improve efficiencies, reduce costs, and can be used as a mechanism to improve care. For example, people with multiple chronic diseases generally see multiple physicians. Electronic records would allow each physician access to the patient۪s full medical files. This leads to fewer medical errors and thus lowers costs.

One of the most controversial portions of the stimulus was also among the smallest, though it is considered to be one, if not the, key approach to controlling health care costs. The bill devotes about $1 billion to comparative effectiveness research, which examines the effectiveness of varying treatments for the same health problem. All other industrialized countries employ comparative effectiveness research to help control costs. For example, most new drugs that come on the market are for conditions where there are existing drugs used for treatment. But in the U.S., these new and expensive drugs are compared to placebos as opposed to the currently accepted drug treatment to test for their effectiveness. Drug and biotech companies, which rely on new innovations to bolster profits, have come out in opposition to comparative effectiveness research, arguing that it will lead the government to ration care, not just weed out ineffective drugs. Some lawmakers have also made it clear that they will fight attempts to pursue this cost-control mechanism.

The final major element of the health care stimulus spending, a 30 percent increase in the National Institutes of Health (NIH) budget, reflects broad concerns about improving care and overall population health. But it also reflects the difficulty in predicting health policy reform and politics.

In fact, Congressional approval of the entire stimulus bill hinged on this relatively small portion of the stimulus package. Then-Republican Senator Arlen Specter, from Pennsylvania, demanded the NIH increase to secure his vote for the overall stimulus package, arguing that $335 billion of government spending on research will lead to a cure for cancer.

All told, the stimulus package both addresses immediate health care needs and works toward long-term plans to expand health care access, reduce costs, and improve the quality of care. Cross-national comparisons reveal that the U.S. is spending substantially more on health in one study, more than twice the average among rich nations but Americans receive about the average in terms of services. Clearly, there is room for improvement.

The measures encapsulated in the stimulus health spending represent a step in the direction of a new, and much needed, approach to health care in the U.S., while also working to reduce the number of Americans who will lose coverage during the recession.

Pamela Herd is an Assistant Professor of Public Affairs and Sociology and an Affiliate of the Institute for Research on Poverty at the University of WisconsinMadison

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