Last week, I shared my thoughts on why Americans are turning on ObamaCare here on AIP. A reader named Liz commented on my post, asking for information on how the current proposals before Congress would impact her premiums. Like me, Liz has a high deductible insurance linked to a health savings account. Her annual premium for a family of four costs $6,000. If Liz finds herself insured under the public option, either by choice or because it becomes her only viable option, what will her premiums cost?
I set out to do some research to see if there were any hard numbers floating around on the internet because, as Liz guessed, there certainly aren’t any in the bill. While there haven’t been any premiums set by Congress, analysts have been able to make some predictions as to how premiums will be impacted. Here’s what we do know.
This WSJ article offers great insight into the trajectory premiums would surely take under ObamaCare.
Because the tax code subsidizes private insurance only when it is sponsored by an employer, the individual market is relatively small and its turnover rate is very high. Most policyholders are enrolled for fewer than 24 months as they move between jobs, making it difficult for insurers to maintain large risk pools to spread costs.Mr. Obama wants to wave away this reality with new regulations that prohibit “discrimination against the sick”—specifically, by forcing insurers to cover anyone at any time and at nearly uniform rates. But if insurers are forced to sell coverage to everyone at any time, many people will buy insurance only when they need medical care. This raises the cost of insurance for everyone else, in particular those who are responsible enough to buy insurance before they need it; they end up paying even higher premiums. And the more expensive the insurance, the less likely people will buy it before they need it.
Another proposed reform known as “community rating” imposes uniform premiums regardless of health condition. This also blows up the individual insurance market, by making it far more expensive for young, healthy or low-risk consumers to join pools—if they join at all. And if the healthy don’t join risk pools, then premiums go up for everyone and insurers have little choice but to reduce their risk by refusing to cover those who have a high chance of getting sick, such as people with a history of cancer. This is why 35 states today impose no limits whatsoever on how much insurers can vary premiums and six states allow wide variation among consumers.
New York, New Jersey and Massachusetts have both community rating and guaranteed issue. And, no surprise, they have the three most expensive individual insurance markets among all 50 states, with premiums roughly two to three times higher than the rest of the country. In 2007, the average annual premium in New Jersey was $5,326 for singles and in New York $12,254 for a family, versus the national average of $2,613 and $5,799, respectively. ObamaCare would impose New York-type rates nationwide.
Of course, it’s no surprise that these additional regulations on insurance come at a price. If people can purchase insurance at any time and have every medical problem covered, assuming the premiums are more expensive than the penalty fees one would pay for not having insurance under ObamaCare, which is most likely a safe assumption to make, it is inevitable that many would only opt in when facing a medical issue. And everyone else who is responsible and maintains coverage in both good and bad times would foot the bill.
In addition, if doctors are under-reimbursed under ObamaCare, as they are under Medicare and Medicaid, they would try to recoup those losses somewhere else, namely by shifting the costs onto private insurers. This would, in turn, drive up insurance premiums for private insurance. One study suggests that premiums would increase between 75 and 95% under ObamaCare. And of course, as the cost of private insurance increases, more individuals and employers will be forced to switch to the public option. This is why private insurance cannot endure in a system with a public option.
In addition to the higher premiums individuals like Liz would face, there is also the penalty that small business would incur if they cannot afford to insure their employees. Jimmie Bise crunched the numbers for us here at AIP last month. He assumed a 4 or 6% penalty on small business with payrolls (not profits, payrolls – an important distinction) of $250,000 or more. The current floor for the penalty begins at 2% for payrolls of $500,000 or more and increases to 8% as payrolls increase. These penal costs will have serious consequences. Businesses will be forced to let employees go, adding more people to the unemployment lines. Or, they might try to recoup costs by raising prices, which in this economic climate, is not good for private businesses or consumers.
And finally, there is also the matter of the tax hikes that will have to be implemented to pay for this huge government program. Taxes will surely be raised on the top income brackets, which include small business owners and investors who will not have that capital to invest and will not create new businesses, opportunities and jobs they otherwise could have. However, with health care costs adding to the deficit above and beyond the $239 billion figure originally estimated by the Congressional Budget Office, it might not just be the so-called rich facing tax increases.
ObamaCare’s deficit hole will eventually have to be filled one way or another—along with Medicare’s unfunded liability of some $37 trillion. That means either reaching ever-deeper into middle-class pockets with taxes, probably with a European-style value-added tax that will depress economic growth. Or with the very restrictions on care and reimbursement that have been imposed on Medicare itself as costs exploded.
Going back to Liz’s original question, Liz and others like her, including as many as 88 million Americans that could be forced into the public option (according to a study by the Lewin Group), can expect to pay premiums that are increased by as much as 75 to 95% under ObamaCare. Add in the penalties for small business owners and tax hikes, along with the collateral damage to the economy, and the cost of this program is astronomical.
*Originally published August 16, 2009 on The American Issues Project Blog, here.
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