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Washington Examiner


Rhetoric and Reality On the Anniversary of Obamacare

March 22, 2013

By Paul Howard

For all of the bitter partisanship that attended Obamacare’s passage three years ago, key elements of the law -- including subsidies to uninsured Americans making up to $94,000 a year and expanding Medicaid coverage to 12 million new enrollees -- won’t take effect until 2014. The law’s full impact on American health care, in other words, is yet to come.

But it’s not too soon to start comparing claims made about the law with the latest data on how it is likely to perform. This is exactly what my colleague Yevgeniy Feyman and I attempt to do in a new report for the Manhattan Institute, which focuses on the law’s probable impact on U.S. health care costs. We found that the law is unlikely to significantly lower the rate of growth of U.S. health care costs, and several provisions are in fact likely to increase them.

The administration and the law’s supporters have been adamant that Obamacare will produce substantial savings for the health care system. For now, at least, the trends point in the opposite direction. Since the passage of the law, household insurance premiums have increased by a full 11.3 percent, faster even than increases in medical inflation (6.8 percent). Last year, the Congressional Budget Office and the Joint Committee on Taxation predicted that by 2016, employer-based insurance coverage for families will cost about $20,000 -- a 27 percent increase from 2012.

Per-enrollee private health insurance premiums are projected to keep rising steadily through 2021, with the exception of a brief dip in 2014, when the Obamacare subsidies start flowing. The problem, however, is that this is a one-time transfer of costs from people buying insurance on the Obamacare exchanges to the government, i.e., taxpayers.

A recent study from the American Action Forum, a think tank, also found that several Obamacare reforms (like restrictions on how much older enrollees can be charged compared with younger ones) will probably cause significant spikes in insurance premiums, particularly for young and healthy policyholders. New taxes on drugs, insurance companies and medical devices will also, on average, put more upward pressure on premium prices.

U.S. health care spending was going to go up with or without Obamacare. The U.S. spends well over $2 trillion on health care, or about 18 percent of GDP -- far more than other advanced economies. But Obamacare only passed because of claims that it would "bend" the curve of U.S. health care spending. In reality, the Centers for Medicare and Medicaid Services predicts that between 2012 and 2021, the U.S. will be spending about $500 billion more on health care because of the law than it would have otherwise.

The law also misses some opportunities to slow health care spending. Obamacare’s relatively small pilot projects on delivery system reforms have had disappointing or mixed results thus far. And the Congressional Budget Office’s estimated impact of the law’s small net reduction in the federal deficit is entirely the result of government revenue increases through a variety of new taxes and penalties, rather than true reductions in health care spending.

The design of the Obamacare subsidies will also reduce U.S. out-of-pocket spending on health care, bringing it down from an already low 11 percent to 9.3 percent by 2021. As consumers spend less out-of-pocket for health care and third parties pay more, consumers become less sensitive to the prices that doctors and hospitals charge for their services. With even less skin in the game, prices may rise under Obamacare, rather than fall.

For Medicaid, the federal government and the states will be paying close to $1 trillion annually by 2023, expanding a health care entitlement for the poor that offers spotty access to doctors and poor outcomes for chronic diseases, compared with private health insurance.

That’s why we give Obamacare a grade of "C" on the likelihood that it will control health care costs. The evidence that it will do so is weak, and there is some evidence that it could even increase cost trends.

What to do, then, in a bitterly partisan atmosphere, to improve the prospects of better cost controls? One approach would be to pare back subsidies on the exchanges, down from 400 percent of the poverty level (annual income of $94,200 for a family of four) to 300 percent (annual income of $70,650), and encourage most nonpoor Americans to purchase higher-deductible health plans with a savings component. Studies have suggested that these plans can help slow the increase in costs but still offer high-quality care and protection against catastrophic costs.

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