A funny thing happened on the way to the so-called health reform promised in the Patient Protection and Affordable Care Act (PPACA), signed by President Obama on March 23, 2010: Although the cost of health care has increased at a slower rate than in previous years, premiums for health insurance and the share of premiums used for purposes other than paying claims has been increasing faster than in previous years.
That’s not exactly what President Obama promised, is it? In fact, it is the opposite of what he promised. What is going wrong?
The crisis of 2008, which resulted in a significant jump in unemployment, meant that the number of Americans with private coverage dropped. As a result, the overall rate of private health spending has decreased. As shown in the table below, the annual rate of increase in spending on private health insurance was 7.8 percent in 2007. It has dropped by more than two thirds to an annual increase of just 2.4 percent in 2010, according to a recent article written by analysts at the federal government’s Centers for Medicare and Medicaid Services (CMS).
Of course, Medicare (the federal single-payer health plan for seniors) and Medicaid (the joint state-federal complex of plans for the poor) have continued along their unsustainable course. Nevertheless, the tightening of private health spending has led to an overall reduction of the rate of increase in U.S. health spending to 3.9 percent in 2010, versus 7.6 percent in 2007. The Altarum Institute estimates that aggregate annual health spending for 2011 increased by a still reasonable 4.5 percent from 2010.
One would reasonably expect that, in such an environment, private health insurers would be in the doldrums, suffering from a loss of beneficiaries, and competing like mad for the smaller pool of still employed Americans.
That’s how they responded when the crisis hit in 2008 and 2009, before PPACA (or ObamaCare) was passed. Furthermore, health insurers became significantly more efficient at their business processes. McKinsey and Company describes the dramatic reduction in the rate of increase of health spending as “…the longest stretch of continuous deceleration since 1960. The recession appears to have contributed to this slowdown, marking the first time in five decades that an economic downturn has had an immediate and measurable effect on healthcare spending growth.”
McKinsey’s analysis concludes that of the various categories of health spending, spending on “health administration and insurance” increased the least — just 1.6 percent annually — during the period 2006 through 2009. The next lowest category was outpatient care, which increased by only 3 percent annually over the period. The CMS data shows that the “net cost of health insurance” (that is, the share of health insurance that does not pay for medical claims) shrank by an average of about 2 percent annually in 2008 and 2009, also shown in the table.
But this came to screeching halt, followed by a fast U-turn, when PPACA was signed. Although the rate of increase of private health spending is still low, this is now driven by increasing premiums, which make coverage less affordable for working Americans and their employers. The “net cost of health insurance” jumped by 8.4 percent in 2010, as PPACA began to overwhelm the U.S. health system. (This figure includes private plans’ costs of administering Medicare Advantage, Medicaid managed care, and other government health programs for which they win contracts, as well as private insurance.) CMS’ analysts conclude that “for the first time in seven years, growth in total private health insurance premiums exceeded growth in total benefits” in 2010. The increase in the “net cost of health insurance” was higher than any other component of health spending.
As a result, premium growth is accelerating. The Milliman Medical Index (MMI) for 2011 reported total health costs (including the administrative load of insurance) for a family of four covered by a PPO of $19,393, a 7.3 percent increase over 2010. The Kaiser Family Foundation’s latest survey of employer-based health benefits reported a significant increase of 9.5 percent from 2010 to 2011, much higher than in previous years, as shown in the table. Furthermore, this is for plans that usually have higher deductibles than in previous years: 31 percent of beneficiaries had deductibles over $1,000, versus only 12 percent in 2007. These premiums are increasingly unaffordable for many small businesses: the table shows that the proportion of small firms offering health benefits dropped from 69 percent to 60 percent just from 2010 to 2011.
There are two primary reasons for the fact that ObamaCare has caused premiums to spiral out of control for American families and businesses, despite tame increases in health costs. The first is static and the second is dynamic.
First, some of the law’s anti-competitive “consumer protections” took effect in September, 2010, especially eliminating pre-existing exclusions for children, coverage of preventive health services, and extending dependent coverage for young adults up to age 26 on their parents’ plans.
Linda J. Blumberg of the Urban Institute has summarized the official estimates of the consequences of these and other so-called “consumer protections.” Although there is a wide range of estimates for each “protection” that came into force in 2010, the mid-point for the aggregate effect is a premium increase of about three percent.
In the longer term, the second-dynamic-effect will be more pernicious and more difficult to estimate as ObamaCare continues its roll-out. Choice and competition are disappearing fast from U.S. health insurance. Reports abound of health insurers retreating, especially from small-group markets. For example, New York’s Empire Blue Cross Blue Shield has decided to dramatically shrink, dropping over 20,000 small groups containing over 200,000 beneficiaries.
Obviously, as insurers flee, those who remain will reap the benefits of reduced competition. According to an analysis by Bloomberg Government, average operating profit margins for four of the largest insurers (UnitedHealth Group, Aetna, Cigna, and Humana) increased to 8.24 percent in the 18 months after the law was signed, versus 6.88 percent in the 18 months before the law was signed. Quarterly earnings per share from continuing operations between the third quarters of 2008 and 2011 jumped 29 percent.
If PPACA had not been passed, the recession would have been somewhat softened by moderate premium increases for health insurance. ObamaCare rubs salt in the wounds of the American people — either unemployed or without a raise in four years — who are suffering premium increases driven by that misguided reform.