May 16, 2013
This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Welfare Reform (CCWR) Peter Ferrara was published May 15, 2013 on The American Spectator website.
Health policy economists are puzzled by a persistent slowdown in the growth of health care spending that seems to have started in mid-2005, and accelerated since then. The Wall Street Journal summarized it on Monday, saying, “The health [spending] growth rate has flattened out at about 3.9% over the last three years–a record low since the 1960s and down from the old normal of 6.2% to 9.7% in the 2000s.”
Economists thought at first that the slowdown in spending was due to the recession, when people didn’t have the money to continue to increase health care spending as much as in the past. But new papers published in the journal Health Affairs last week provide “evidence that the moderation [in rising health spending] is durable, and that it is structural–the result of permanent changes in the health system itself rather than the business cycle,” as the Wall Street Journal further explained on Monday.
These papers indicate a sharply reduced role for the recession in slowing the rise in health spending, and indicate a greater role for market choice, competition, and incentives. But even these folks don’t have the full story.
The Health Savings Account Revolution
Health Savings Accounts (HSAs) were enacted into law in December 2003. Traditional, old-fashioned insurance involves a nominal deductible, leaving the insured to pay only the first $100 or $250 each year, with the rest covered by the insurance, perhaps with a modest, limited, co-insurance fee above the deductible. That structure creates the “third party payment” problem. With the insurance company paying for virtually all the bills, neither the patient nor the doctor bears any incentive to control costs. But they both decide between themselves what and how much health care to consume, and bill the insurer. Naturally, that makes health insurance very expensive.
The concept behind HSAs is to greatly reduce the cost of the health insurance with a high deductible, in the range of $2,000 to $6,000 a year, or more. The savings from that lower expense is then kept in the HSA to be used to pay for health care costs below the deductible. Whatever the patient does not spend from those HSA funds on health care he or she gets to keep, for future health care expenses, or anything in retirement. That creates full market incentives to control costs for all non-catastrophic health expenses, because the patient is effectively using his or her own money for such costs. Since the patient is now concerned about costs, the doctors and hospitals will compete to control costs.
The insight of the godfather of HSAs, John Goodman, president of the National Center for Policy Analysis, was that the health insurance savings from a deductible in this range would be almost enough to finance all expenses under the deductible for the year. After one healthy year, the insured would have more than enough in the HSA to pay for all expenses below the deductible.
Moreover, patients with HSAs would enjoy complete control over what health care to spend their HSA funds on. They don’t need to beg for the approval of a health insurance company to spend their HSA funds on the health care they want.
These are the reasons why the sick as well as the poor would still prefer HSAs. The sick would have complete control to spend their HSA funds on the health care they prefer. The poor would be fully covered and could pay themselves out of the health care savings they gain with HSAs.
Such HSAs and their incentives have proven very effective in controlling costs in the real world. Total HSA costs, including the savings to fully fund the HSA savings account to cover the deductible, have run about 25% less than the costs for traditional, old-fashioned insurance. Annual costs increases for HSAs have run more than 50% less, sometimes with zero premium increases for years.
These are the reasons why HSA accounts soared by 22% in 2012 alone, to over 8 million. Total savings and assets in the accounts zoomed by 27% to $15.5 billion. That is expected to increase by nearly three-fourths to almost $27 billion by 2015. That booming growth has continued since HSAs were adopted in 2003.
According to the National Health Interview Survey of the federal Centers for Disease Control and Prevention, about one fourth of the privately insured population is covered by HSAs, similar Health Reimbursement Accounts (HRAs), or other high deductible plans, which probably exceeds HMO enrollment by now. About half of those with private insurance obtained outside employer plans are covered by such high deductible plans.
The proof is in the pudding. As HSAs and similar plans have soared in the private market, health spending growth has plummeted. That is the result of market competition and incentives.
Obamacare: Somewhere Between High Crimes and Misdemeanors
Most who support Obamacare do so because of a principled belief that everyone should have access to essential health care. But even the Washington Establishment CBO, still dominated by career Democrats, projects that 10 years after full implementation, Obamacare will still leave 30 million uninsured.
But it is going to be much higher than that. Under the perverse incentives of Obamacare, tens of millions will lose their employer provided insurance because of the perverse incentives under the program. CBO reported in February that at least 7 million, and as many as 20 million, will lose their employer coverage. CBO estimated then that “in 2019 [5 years after Obamacare is implemented], an estimated 12 million people who would have had an offer of employment-based coverage under prior law will lose their offer under current law [aka ‘Obamacare’].”
That is because of a second problem caused by Obamacare. Obama promised us that Obamacare would reduce the cost of health insurance by $2,500 a year. But it has already increased those costs by $3,000 per year. That is because of the new mandated benefits and other regulatory burdens of Obamacare already coming online. Obamacare will also increase health care costs by driving up demand but reducing supply, and through new taxes applying to health insurance and health care.
For these reasons, Aetna CEO Mark Bertolini said last December that Obamacare (as Investor’s Business Daily later put it) “will likely cause premiums to double for some small businesses and individuals.” Former CBO Director Douglas Holtz-Eakin estimated in a study for the American Action Forum of 5 major cities that premiums would climb there under Obamacare by an average of 169%.
Many employers will prefer to pay the fine for not providing coverage than bear these cost increases. Moreover, employers can give their workers healthy raises plus Obamacare health insurance subsidies if coverage at work is dropped. That is why Holtz-Eakin estimated in another study for the American Action Forum that more than 40 million workers would lose their employer coverage under Obamacare. So much for another Obama promise that “If you like your health insurance, you can keep it. No one is going to take that away from you.”
Employer desperation to avoid the added costs of Obamacare will cause chaos in the labor market as well. To avoid the employer mandate that applies only to companies with 50 or more full time employees, employers are already replacing full time employment with part time employment paying lower wages and no benefits. Small businesses with less than 50 employees are already freezing hiring, and those just above 50 employees have already begun layoffs. Moreover, Obamacare’s employer mandate does not require employers to cover the family dependents of their workers. So employers have already be
gun a trend towards terminating that coverage as well.
President Obama told us during his State of the Union address earlier this year that “A growing economy that creates good, middle class jobs–that should be the North Star that guides all of our efforts,” and he has repeated that numerous times since then. But all of these labor market effects and the soaring costs of Obamacare will just mean still more declining real incomes for the middle class and for working people, and fewer good, middle class jobs, which have been the actual hallmarks of Obamanomics. That means another central promise by President Obama, repeated over and over, will continue to be violated, more and more.
The young and healthy will also take steps to avoid the high costs of Obamacare’s individual mandate. Under Obamacare’s regulation, any insurer they choose must take them no matter how sick and costly when they sign up, and charge them no more than anyone else. Consequently, many, including myself, will refuse to buy any insurance until they are sick with some costly condition such as cancer or heart disease. Then they will sign up for full coverage at no extra charge, until they recover.
The individual mandate, as well as the employer mandate, was supposed to prevent this. But individuals, like employers, can just skip the insurance and pay the penalty, at a savings of thousands of dollars a year. But why even pay the penalty? When it was put to a vote in Congress, your double talking, unserious representatives denied the IRS the authority to enforce the penalty by garnishment or seizure.
So the end result will be still millions more uninsured under Obamacare, probably in the end even more than there were without Obamacare. But as the young and healthy drop out of insurance pools, that will drive up the costs for those that remain still more, driving still more out, in a financial death spiral for private insurers. So if you like your health plan, you can keep it, until Obamacare drives your insurer out of business. At best, that will leave you only with a government monopoly, like the Post Office, for your health care.
Obamacare will soon be teaching seniors on Medicare what that means. While Democrats and President Obama talk a good game about Republicans wanting to throw grandma over a cliff by slashing Medicare, it is the Democrats and President Obama who have already done that, through Obamacare.
Obamacare already has slashed $716 billion over the next 10 years from Medicare payments to doctors and hospitals for the health care they provide to seniors, growing into trillions in future years. By the end of the decade, Medicare will be paying less for health care for seniors than Medicaid will pay for health care for the poor. That already often leaves the poor without access to essential, timely care, with many suffering worse health outcomes as a result, including premature death, as recent studies have shown. Seniors, do not ask for whom the bell tolls! As John Goodman recently explained on his health policy blog at ncpa.org, “One out of seven hospitals will leave Medicare in the next seven years, say the actuaries, and beyond that things just get worse and worse. Access to care will become a huge issue as waiting times to see doctors and enter hospitals grows…. From a financial point of view, seniors will be less attractive to doctors than welfare mothers.”
In other words, the government monopoly of Medicare will become an official, institutionalized means of denying health care to seniors, just like the government monopoly of Medicaid has become for the poor. And that is what the coming government monopoly of Obamacare will be soon enough, an official, institutionalized means of denying essential health care to everyone, just like socialized medicine in every other country.
Universal health care, indeed. Just another “progressive” delusion, if not outright lie. In a recent paper for the NCPA, John Goodman and I explain how universal health care for all can be assured through Patient Power, free market reforms, without Obamacare, no individual mandate, no employer mandate, at a savings of $2 trillion or more for taxpayers.
As Jon Roland of the Constitution Society has recently shown, the constitutional grounds for impeachment, “high crimes and misdemeanors,” really means violating your oath of office, especially by lying to the American people. Impeach Obama for Benghazi, for Nixonian IRS abuse, for illegal wiretaps of the press? No, impeach him for Obamacare, and the thoroughly wasted, trillion dollar, so-called “stimulus,” which are the biggest lies told in U.S. history.