The Congressional Budget Office (CBO) has projected the healthcare law would shave $140 billion from the deficit over the next decade. This week, it suggested that repealing the law would add $230 billion to the deficit over the same period.
However, some early data has indicated that some of these initial projections appear to be wildly off the mark. David Brooks’ column yesterday suggested that “New Hampshire’s plan has only about 80 members, but the state has already burned through nearly double the $650,000 that the federal government allotted to help run the program.” It therefore appears that, in New Hampshire’s case, early costs appear to be coming in far ahead of projections. Economists Douglas Holtz-Eakin and James C. Capretta suggest that the CBO’s cost projections of $450 billion between 2014 and 2019 for people moving to public exchanges could be underestimating the ultimate cost by nearly $1 trillion.
Meanwhile the cost of healthcare continues to skyrocket. For instance, Blue Shield of California is currently seeking a 59% increase in premiums.
Massachusetts Monster or Miracle?
Some have cited the Massachusetts healthcare law as inspiration for the current federal one. However, there appears to be little evidence that the law has actually reduced costs. Healthcare spending now accounts for 37% of the state’s budget, up from 21% in 2000 (see “Medicaid Cost Crisis Looms for Bay State”). It is also worth mentioning that a Republican, not a Democrat, was governor when this law passed in 2006.
Adverse Selection and the Individual Mandate
In my opinion, one of the reasons costs are coming in much higher than anticipated is due to adverse selection. Adverse selection is an economic term that describes, in the case of health insurance, the tendency for the sickest customers to sign up for services. Without healthier customers, the health insurance business falls flat on its face. Hence the healthcare law’s individual mandate. For the law to work, healthier customers must subsidize the unhealthy ones – particularly those with preexisting conditions.
The bottom line is that the costlier customers are signing up early, while the healthier ones see no reason to sign up, especially in the current economic climate. If legal challenges to the individual mandate triumph, the law becomes moribund. Without a larger risk pool, it will be impossible for insurance companies to operate without drastic cost increases.
Make no mistake, healthcare reform is critical. Cost increases are becoming unsustainable. Just today, my wife went to the dentist and came back with a bill for $3,095, of which we were responsible for $835. I would have told them to keep my tooth. The key question is the degree to which government should be involved. Hopefully less rather than more.