Will Healthcare Law Lower or Raise Costs?

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.

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About Sean Patrick Hazlett

Conservative clean energy crusader, national security hawk, financial analyst, engineer, and former military officer.
This entry was posted in Finance and Economics, Healthcare, Politics and tagged , . Bookmark the permalink.

4 Responses to Will Healthcare Law Lower or Raise Costs?

  1. ET says:

    Would like to see a copy of that bill to see if the cost is warranted or maybe part of the reason healthcare costs are rising so fast.

    • I think the intentions of the law are good, I just don’t think they take into effect how people and organizations respond to different economic incentives. For instance, many companies will find that they can reduce costs by “dumping” their more expensive employees onto the public exchanges. Their competitors will likely follow. As a result, more people will likely use the public exchanges than the CBO projects resulting in a cost of $1.4 trillion instead of $450 billion. Additionally insurance companies are likely raising costs in California because healthier people are dropping insurance coverage to save money (i.e., adverse selection) while more expensive customers stay on. Healthier people can now drop their plans in the interim without fear of falling into the preexisting condition category. Of course this loophole will close when the individual mandate kicks in. Until then, it is economically rationale to cancel your insurance if you are healthy.

  2. Charles McCormack says:

    What you’re pointing out just lends more support to the argument for a one-payer healthcare system — not one “run” by the government, but one that is funded by the government ala Medicare (which despite all criticisms is a wildly successful Government-funded program). Too many people are feeding at the healthcare trough to allow any meaningful reform and cost control. Does anyone seriously think Big Pharma, insurance companies, well-paid doctors and hospitals are ready to sacrifice their profits and wealth to help average people? Also, despite simplistic slogans like “Only in Washington does spending money save money”, Americans need to understand that just like putting insulation in your house, spending some money to prevent a problem does actually saves money in the end. Health maintenance and preventative is the exactly the same thing. The free market and private enterprise, unfortunately, will not solve this alone.

    • I completely disagree. Medicare may be great for seniors, but it is terrible for everyone else. Not only did it soak up nearly 11% of the federal budget in 2009, but it is tremendously inefficient. The FBI estimates that Medicare fraud costs the government $60 billion a year — nearly 14% of what the government spent on Medicare in 2009. I also worry that the system on which the government healthcare is based — i.e., Massachusetts — has nearly doubled its cost as a percentage of the state budget on healthcare over the past decade.

      Big Pharma and doctors are well compensated because we have the most innovative biotech sector and the best doctors in the world. It is prohibitively expensive to develop new drugs. Biotech companies wouldn’t take this risk if they couldn’t make a profit. I have been part of a healthcare system that did not compensate its doctors well and I wouldn’t recommend it to my worst enemy. The insurance companies are barely surviving. My understanding is that the average health insurance company’s profit margins hover around 3.4% — barely breakeven.

      I agree that something needs to be done. Unlike many conservatives, I think that the individual payer mandate is the only way you can get the system to work. However, I’d rather the government take a much less active role in the program and spend less money. I simply don’t trust that the government’s actions will save the country any money. In fact, I think it will end up costing it more.

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