Magazine | April 19, 2010, Issue

You Think It’s Pricey Now?

Under Obamacare, insurance premiums will rise even faster than the deficit

From the moment Democrats introduced health-care legislation last year, Republicans focused on the adverse impact it would have on the federal debt.  But what is remarkable about the Patient Protection and Affordable Care Act is that its effect on the debt is not even its worst feature. That distinction goes to its devastating consequences for the cost of health insurance.

Consider the numbers: Based on the gimmick-free assessment of former Congressional Budget Office director Douglas Holtz-Eakin, from 2010 to 2019 the act will increase the debt by $562 billion — almost $5,000 per household. Not great news, to be sure. But a PriceWaterhouseCoopers analysis projected that, over the same ten-year period, Obamacare will increase the cost of health insurance by approximately $20,000 per family.

This cost will be borne primarily by the young, who will be forced to subsidize the care of the middle-aged; by freelancers and small-business owners, who will not benefit from the exemptions afforded to large, self-insured employers; and by middle-class families, who will most feel the squeeze of higher insurance costs yet will also be expected to finance the health care of others.

The effects of this legislation on the debt are worrisome indeed. But, barring a Weimar-style collapse of the U.S. economy, they will be less visible to the typical family than health-care inflation will be. Rapidly rising insurance premiums will blow a hole directly in the monthly paychecks of tens of millions of middle-class households.

In his stump speech on health-care reform, President Obama liked to say that the Democratic plan incorporated “almost every single serious idea from across the political spectrum about how to contain the rising costs of health care.” The opposite is closer to the truth: The best ideas for lowering health-care costs — unshackling insurance from employment, expanding consumer choice, and enacting malpractice-litigation reform — are either absent or unrecognizably weakened in the law. On the other hand, its blizzard of new insurance mandates, its dramatic expansion of Medicaid, its array of new taxes, and its protection of hospital monopolies will most assuredly accelerate the growth of the cost of health insurance.

Take the mandates. The law compels insurers to accept all comers, regardless of preexisting conditions, something that prior law had already required for those with preexisting insurance. The new stipulation incentivizes people to wait until they are sick before buying insurance. If insurers receive premiums only when people are sick, they will have to charge more.

Indeed, this provision obliterates the whole point of insurance, which is to average the high cost of caring for the ailing few with the low cost of caring for the healthy multitudes. The individual mandate, which requires that healthy people buy insurance or pay a $750 fine, will do little to mitigate the perverse incentives of this provision. The annual cost of insurance is far greater than $750. Many healthy people will prefer the fine; they can always buy insurance later.

The law contains other thoughtless but pleasant-sounding regulations, nearly all of which will drive up the cost of insurance. These include: banning preexisting-condition exclusions for children; eliminating lifetime and annual limits on insurance payouts; constraining the degree to which insurers can charge less to the young; and stipulating the percentage of premium revenues that must go to patient care. Each of these requirements, by increasing what insurers must spend on health care, increases what they must charge their policyholders.

#page#Another reason for the current high cost of private health insurance is the fact that government-sponsored health care, in the form of Medicare for the elderly and Medicaid for the poor, underpays hospitals and doctors for their services. Health-care providers are thereby forced to charge more to those with private insurance, to the tune of $90 billion a year. Obamacare will make the problem worse by adding as many as 20 million more Americans to the rolls of Medicaid. Democrats claim that by reducing the degree to which the uninsured use the system for free, expanding Medicaid will reduce overall costs. But it turns out that cost-shifting from the uninsured to the insured amounts to only a fraction of the cost-shifting caused by Medicaid and Medicare underpayment. The more these new Medicaid enrollees take advantage of their benefits, the more private health-care costs will rise.

Unsurprisingly, taxes will play a role in the impact of Obamacare on health-care costs. The law imposes annual excise taxes of $2.3 billion on pharmaceutical products, $2 billion on medical devices, and $6.7 billion on health insurance. Companies will be forced to pass these taxes on to consumers. The logic of taxing the sale of health-care products in order to subsidize their purchase is sublimely Washingtonian.

One of the biggest causes of health-care inflation is hospital monopolies. Many American communities are served by only a single hospital or hospital chain. These hospitals are free to jack up prices at will, knowing that insurers have no choice but to pay them. Across the country, small groups of physicians have banded together to found specialty hospitals focused on one area of medicine, such as heart surgery or injury rehabilitation. These smaller outfits draw patients away from the larger hospitals by offering lower prices, higher quality, and better service. But the big incumbent hospitals usually are among the largest employers in their communities and thereby hold considerable sway with politicians of both parties. Inevitably, hospital lobbyists had their say on the health-care bill: They inserted provisions banning the construction of new physician-owned hospitals, and restraining the growth of those already in operation.

In all of these ways, Obamacare will drive up health-care costs. These concerns are not theoretical: They are borne out by an examination of insurance prices in the 50 states. Those states that impose onerous mandates, subsidize health-care spending, raise taxes, limit hospital competition, and ignore malpractice litigation are those in which costs have risen the fastest.

Over the next several years, as the new law accelerates health-care inflation, don’t expect Democrats to take responsibility for the problems they will have caused. Instead, they will blame them on the demonic greed of insurance companies. But insurers are caught between two rocks and a hard place: They can raise premiums to reflect rising costs, deny care to policyholders, or go broke. That’s a lose-lose-lose proposition for consumers — but, for the Left, it’s win-win-win. Any of these outcomes will be exploited to argue that the free market can’t work in health care, and that the only solution is a European-style single-payer system.

Replacing the new law with a more sensible set of reforms is imperative. It is true that Obamacare will expand the size of our debt and the reach of our government. But it will also leave Americans with unaffordable health care — the very opposite of what they were promised, and the harbinger of a far graver crisis.

– Mr. Roy is an equity research analyst in New York City.

Avik Roy is the President of the Foundation for Research on Equal Opportunity (FREOPP.org), a non-partisan, non-profit think tank.

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