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Health Care's History of Fiscal Folly

Expanding health coverage busted state budgets. Will it bust the federal budget too?

Peter Suderman
April 7, 2010

The Affordable Care Act—otherwise known as ObamaCare—isn't the first attempt to expand health insurance coverage in America. Before Washington passed its law, a number of states took smaller-scale cracks at the job—each of which proved far more expensive than planned. As the nation dives further into debt, the destabilizing fiscal effects of those programs don't bode well for how ObamaCare will shape the U.S. budget.

As spectacular failures go, it's hard to do worse than Tennessee. This early state attempt to dramatically increase health coverage, dubbed TennCare, started off promisingly. In 1994, the first year of its operation, the system added half a million new individuals to its rolls. Premiums were cheap—just $2.74 per month for people right above the poverty line—and liberal policy wonks loved it. The Urban Institute, for example, gave it good marks for "improving coverage of the uninsurable or high-risk individuals with very limited access to private coverage." At its peak, the program covered 1.4 million individuals—nearly a quarter of the state's population and more than any other state's Medicaid program—leaving just 6 percent of the state's population uninsured.

But those benefits came at a high price. By 2001, the system's costs were growing faster than the state budget. The drive to increase coverage had not been matched by the drive to control costs. Vivian Riefberg, a partner at consulting firm McKinsey & Company, described it as having "almost across the board, no limits on scope and duration of coverage." Spending on drug coverage, in particular, had gone out of control: The state topped the nation in prescription drug use, and the program put no cap on how many prescription drugs a patient could receive. The result was that, by 2004, TennCare's drug benefits cost the state more than its entire higher education program. Meanwhile, in 1998, the program was opened to individuals at twice the poverty level, even if they had access to employer-provided insurance.

In other words, the program's costs were uncontrolled and unsustainable. By 2004, the budget had jumped from $2.6 billion to $6.9 billion, and it accounted for a quarter of the state's appropriations. A McKinsey report projected that the program's costs could hit $12.8 billion by 2008, consuming 36 percent of state appropriations and 91 percent of new state tax revenues. On the question of the system's fiscal sustainability, the report concluded that, even if a number of planned reforms were implemented, the program would simply "not be financially viable." 

Democratic Gov. Phil Bredesen declared the report "sobering," and, rather than allow the state to face bankruptcy, quickly scaled the state back to a traditional Medicaid model, dropping about 200,000 from the program in a period of about four months. Though the state still calls its Medicaid program TennCare, Bredesen's decision to scale back effectively shut the program down. In 2007, he told the journal Health Affairs, "The idea of TennCare, as it was implemented, failed."

Maine took a different route to expanding coverage, but it also resulted in failure. In 2003, the state started Dirigo Care, which, it was promised, would cover each and every one of the state's 128,000 uninsured by 2009. The program was given a one-time $53 million grant to get things started, but was intended to be eventually self-sustaining. It wasn't. Indeed, the program managed the neat trick of drastically overshooting cost projections while drastically undershooting coverage estimates.

In 2009, the year in which the program was to have successfully covered all of the uninsured, the uninsured rate still hovered around 10 percent—effectively unchanged from when the program began. Taxpayers and insurers, however, had picked up an additional $155 million in unexpected costs—all while the state was wading deeper into massive budget shortfalls and increased debt. The program has not been shut down, but because expected cost-savings did not materialize, it's been all but abandoned. As of September 2009, only 9,600 individuals remained covered through the plan.

And then there is the Massachusetts plan, the model for ObamaCare. The state's health care program has successfully expanded coverage to about 97 percent of the state's population, but the price tag may be more than the state can bear.

When the program was signed into law, estimates indicated that the cost of its health insurance subsidies would be about $725 million per year. But by 2008, those projections had been revised. New estimates indicated that the plan was to cost $869 million in 2009 and $880 million in 2010, an upwards increase of nearly 20 percent. More recently, the governor's office announced a $294 million shortfall on health care funds, and state health insurance commissioners have warned that, on its current course, the program may be headed for bankruptcy. According to an analysis by the Rand Corporation, "in the absence of policy change, health care spending in Massachusetts is projected to nearly double to $123 billion in 2020, increasing 8 percent faster than the state’s gross domestic product (GDP)." The state's treasurer, a former Democrat who recently split with his party, says that the program has survived only because of federal assistance.

Defenders of the program argue that it's not really a budget buster because the state's budget was already in trouble. But for those worried about ObamaCare's potential effects on the federal budget, that's hardly comforting. The Congressional Budget Office (CBO) has warned that, without significant change, the U.S. fiscal situation is "unsustainable," with publicly held debt likely to reach a potentially destabilizing 90 percent of GDP by 2020. Democrats managed to get the CBO to score ObamaCare as a net reduction in the deficit, but those projections are tremendously uncertain at best. As Alan Greenspan warned last weekend, if the CBO's estimates are wrong, the consequences could be "severe".

The history of health coverage expansion should make us worry. If ObamaCare's actual fiscal effects look anything like previous efforts to expand health coverage, the federal budget is in for a world of hurt.

Peter Suderman is an associate editor at Reason. This column first appeared at Reason.com.


Peter Suderman is Associate Editor


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