An Integrated Analysis of the Demand- and Supply-Side Impacts of Health Reform

Since 2010 the Affordable Care Act (ACA) has increased the population enrolled in health insurance coverage in the U.S. by around 16 million . Researchers have estimated that the ACA coverage expansions, by reducing patients’ out-of-pocket costs at the point of service, increase patient “demand” for care by 1  to 4  percent depending on the type of service. The ACA also significantly altered Medicare payments to health care providers. These payment provisions include “productivity adjustments” that permanently lower the default rate of growth in Medicare fee-for-service payment rates, as well as introducing Hospital Readmission Reduction Penalties, and Medicare Accountable Care Organizations (ACOs). The “sequestration” provisions in the Budget Control Act (BCA) of 2011 imposed a 2% reduction in the level of Medicare payment rates on top of the ACA cuts.

We use RAND’s Health Care Payment and Delivery Simulation Model (PADSIM) to perform an integrated analysis of the impacts of the ACA coverage expansions and payment provisions on quantities and spending on physician and hospital services. PADSIM uses a blended equilibrium concept, in which the quantity of services provided reflects a compromise between patient demand and the quantity that providers prefer to supply. Providers’ preferred supply is, in turn, determined by the generosity of provider payment policy. To reconcile supply and demand, PADSIM uses the concept of “congestion,” which includes non-price factors that reduce patient demand but increase (or leave unchanged) provider supply.

To motivate the analysis, we focus on the question whether the ACA is increasing or decreasing total health care spending. The analysis consists of a comparison of four policy scenarios—with versus without the ACA coverage expansions, and with versus without the ACA payment changes. These policy scenarios are analyzed under three sets of behavioral assumptions—purely demand-driven, purely supply-driven, and a blend—which allows us to isolate the simulated impacts of the demand- and supply-sides of the ACA under alternative assumptions.

Under our preferred set of behavioral assumptions—in which quantity reflects a blend of supply- and demand-side preferences—the ACA is estimated to reduce total spending on physician and hospital services by around 2% . That reduction is driven mainly by the reduction in hospital output due to the ACA productivity adjustments, which more than offsets the increase in demand due to the coverage expansions. This finding contrasts with the estimates by the CMS Office of the Actuary (OACT) that the ACA would increase total health care spending in 2016 by 2% — those estimates are derived from a largely demand-driven modeling approach. Although the magnitude of the difference in conclusions may seem modest (plus versus minus 2% of health care spending), these represent economically significant dollar amounts, and they reveal an important conceptual differences in the approach to analyzing the aggregate financial impacts of health reform.