How Obamacare Might Increase Costs

For those of you following at home, the President gave a big speech on health care reform tonight. Specifically, he argued for a plan composed of three major planks:

First, …. it will be against the law for insurance companies to deny you coverage because of a pre-existing condition. As soon as I sign this bill, it will be against the law for insurance companies to drop your coverage when you get sick or water it down when you need it most. They will no longer be able to place some arbitrary cap on the amount of coverage you can receive in a given year or a lifetime. We will place a limit on how much you can be charged for out-of-pocket expenses, because in the United States of America, no one should go broke because they get sick. And insurance companies will be required to cover, with no extra charge, routine checkups and preventive care, like mammograms and colonoscopies – because there’s no reason we shouldn’t be catching diseases like breast cancer and colon cancer before they get worse. That makes sense, it saves money, and it saves lives.

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[Second,] We will [create] a new insurance exchange – a marketplace where individuals and small businesses will be able to shop for health insurance at competitive prices. … For those individuals and small businesses who still cannot afford the lower-priced insurance available in the exchange, we will provide tax credits, the size of which will be based on your need.

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[Third, U]nder [this] plan, individuals will be required to carry basic health insurance – just as most states require you to carry auto insurance. Likewise, businesses will be required to either offer their workers health care, or chip in to help cover the cost of their workers.

If I may sum up these points, Obama is essentially proposing to

1. Extract more value out of insurance policies, by expanding who, what, and how much is covered,
2. Improve accessibility to individual insurance policies, including a nonprofit, self-sustaining public option, and
3. Mandate that every American carry health insurance.

It’s a good plan for extending health insurance coverage to all Americans, which in itself is a worthy goal. But I am much more skeptical of its effect on health care costs. Health care reform has been billed as including powerful cost-cutting measures. But before we pour our faith into arcane budget estimates, we would do well to remember a few ways in which this plan may end up costing us more, not less, than our current (broken) system.

If you have insurance, you may end up getting less services for more money. This would directly contradict Obama’s promise, but it’s a reasonable possibility. Under this reform plan, insurance companies will no longer be able to save money by dropping customers or limiting their coverage. On paper, they would not be allowed to charge customers more, and would have to raid their profit margin to come up with the difference. But in practice, they will almost certainly try to get the money from customers somehow – directly through higher premiums, or indirectly through government subsidies.

If you don’t have insurance, you will get it (public or private, subsidized or not), and might therefore increase your utilization of health care. If people who today are being denied health care because of insurance shenanigans get the care they need, they might be healthier for it, but this care won’t come free.

Even if you get insurance but don’t increase your utilization of health care, you would still be paying for insurance. You might not use your new policy, but you would still be paying for it. That’s less money in your pocket, more money in the national health care expenditures column.

Not all of these cost increases are necessarily bad. Of course it will cost money to provide un- and underinsured Americans with lifesaving (or even just life-enhancing) health care. Of course everyone who can should pitch in to spread out the risk of ill health. If the economic times were good and (dare I dream) the federal government were running a surplus, I would gladly ignore all these factors. However, given a runaway national debt and a shaky economy, we simply cannot afford health care reform that costs more money than it saves. I have a hard time believing that Medicare and Medicaid waste and inefficiency are so great as to equal the costs of insuring the 45-some million uninsured Americans and providing improved health care for everyone.

There are ways to improve health insurance coverage while tackling the fundamental inefficiencies of the market. I proposed one half-baked and politically unfeasible specimen a while back. In any case, if we cannot have health care reform that both expands coverage and reduces costs, then let us at least be candid about this limitation and the need for further reform. It wouldn’t have sounded as good in his speech, but President Obama would have been prudent to acknowledge that he will likely be far from the last President trying to reform a costly and inefficient health care system.