Starting With Curious

Unqualified success or unmitigated disaster?  If we’re talking about my attempts at home repair, that’s an easy question.  But I meant the Affordable Care Act, aka Obamacare.  The battle lines have certainly been sharply drawn.  It’s pretty clear that with regard to expanding coverage, the answer is qualified success.  Currently, the focus is on costs.  Many opponents of the law are now claiming that Obamacare has caused health care costs – actually meaning health insurance costs – to skyrocket, citing increases in the high double digits.  That sure sounds bad.  How bad is it, really?

To answer that question, we need to distinguish between health care costs and health insurance costs, and between the cost of insurance actually purchased under the ACA and employer-sponsored insurance.  Only about 12 million people actually purchased individual plans on the insurance markets established under Obamacare (an additional 10 million or so got coverage through the expansion of Medicaid.  The vast majority of Americans under the age of 65 continue to get coverage through their employer.  The good news is that for those folks, premium costs are actually going up more slowly than before the law.  Yes, Obamacare has actually decreased health insurance inflation for the 154 million people with employer-sponsored insurance.  As cited in a Commonwealth Fund study released today: “Compared to the five years leading up to the ACA, premium growth for single health insurance policies offered by employers slowed both in the nation overall and in 33 states and the District of Columbia.”  The rub is that at least some of this is due to employers shifting more of the costs onto workers via high deductible plans (a trend that predates but was accelerated by the “Cadillac tax” provision of the ACA).  And the increase in out-of-pocket costs hurts, even if it’s offset in part by the absence of cost-sharing for preventive services.  But it’s impossible to argue that overall Obamacare has made health insurance more expensive.

So what about those 70% increases being thrown around.  Well, for the plans purchased on the Obamacare marketplace (formerly known as the exchange), premiums are going up steeply next year – an average of 22%, and in some areas much higher.  Doesn’t this prove the law is a failure?  Yes and no. First of all, given lower than expected premiums in the first years of the marketplace, the actual premiums for 2017 are pretty much in line with what was forecast when the law was first drafted. (Full disclosure: Doug Elmendorf, the director of the Congressional Budget Office who produced that forecast, was a college classmate.)

More importantly, let’s look at the reasons for the huge jumps in marketplace premiums for 2017:

1. Many companies have withdrawn from the exchanges, leaving less competition
2. The reason companies have pulled out is they were losing money, due to:

a. Too few healthy people signing up

b. Setting too low a price in the past to attract more people

In other words, the free market – which despite the rhetoric is exactly what Obamacare established, a market for insurers to compete for customers – is doing exactly what the free market does.  Insurers are charging as much as they can in a non-competitive environment.

As originally envisioned, the ACA sought to mitigate this by requiring everyone to buy insurance, no matter how healthy (the individual mandate), and be ensuring competition by providing a public option.  The former was watered down by insignificant penalties for not complying, and the latter was eliminated.  In place of a public option, a number of co-operatives were formed, with substantial government subsidies, but these have generally not had the scale to compete successfully with large insurers the way Medicare could.

Those who are complaining about the rate increases “caused” by the ACA propose to…further unleash the market, and thus make the problem worse.  Donald Trump, for example, proposes eliminating the individual mandate (see 2.a. above), increasing the tax deductibility of health insurance premiums (which would decrease the incentive to shop on price), and allow insurers to sell across state lines (which by some analyses would decrease premiums for healthier people but increase those for people with higher utilization by a greater amount).  Paul Ryan’s plan similarly depends on those market-based elements that are driving the current increases.

It’s important to remember that despite the name and despite the administration’s claims, the Affordable Care Act was not primarily about health care costs.  It was about expanding coverage – which it has done, by addressing insurance costs.  Which it has done.  Both Democrats and Republicans worried that the bill did little to address overall costs.  Indeed, market forces would suggest that if there are more people with insurance demanding services, there would be upward pressure on the price of those services.

So yes, people continue to pay more for health care, as for almost everything else.  For most people – those with employer-sponsored insurance –  that rate of increase for insurance has actually slowed.  For others, those who benefited directly by getting new coverage from the market-oriented reforms known as Obamacare, the sticker shock is real.  But let’s not pretend that turbocharging the market is going to fix the problem.  That would be like buying me more power tools.  Bad idea.