How much time are people willing to spend calculating and arguing about the cost of something that cannot happen anyway? Apparently, quite a lot.
On Capitol Hill at least, the most important issues in health reform seem to be budget issues: How much will ObamaCare cost? Will it add to the deficit? Or reduce it? Poll after poll has shown the public is not buying the official estimates. And as often happens, public opinion on this matter is more reliable than expert opinion.
Here’s why. ObamaCare will require just about every nonelderly person in America to buy health insurance, the cost of which is going to rise at twice the rate of growth of their incomes. At the same time, the legislation will prevent people from all of the natural adjustments you would expect in the face of rising premiums. They will not be allowed, for example, to scale back and choose more limited insurance. They won’t be allowed to shift to catastrophic-only plans or rely more on self insurance through Health Savings Accounts.
In the short run, one of two things will happen with respect to this dilemma. The government (1) can insulate people from rising health insurance costs by providing them with ever increasing subsidies, or (2) it can allow the cost of mandatory health insurance to consume an ever-increasing share of the family budget. Neither approach is tenable.
In practice, the Congressional Democrats have chosen a middle course — carefully selected to make the cost of the whole program come in under budget. But no one on Capitol Hill can seriously believe this is a viable solution — even over the next ten years.
The initial subsidies in the health insurance exchange have been set so that health care costs will not exceed a certain percent of income — ranging from 2% (for people at 133% of the federal poverty level to 9.8% (for people at 400% of poverty). Yet, as health care costs increase through time, so will premiums; and unless the subsidies are increased as well, mandatory health insurance will steadily reduce every family’s discretionary income. The problem for people who get insurance at work will be worse. Their only subsidy is the current income tax code — which excludes employer premium payments from taxable income.
If you think that outcome is politically palatable consider how Congress handles a similar problem with the elderly. For most seniors, Part B Medicare premiums are subtracted from their monthly Social Security checks. But Congress limits these premium increases so that they cannot exceed the Social Security cost-of-living adjustment (COLA) in order to insure that the senior’s disposable income does not go down.
There will be enormous political pressure for the government to be equally protective of nonseniors. After all, if Congress thought that a family should pay no more than 4% of its income for health insurance in 2010, what makes you believe it will think any differently in 2020 or 2030? Limiting health expenses to a fixed percent of family income, however, has one huge drawback: the required subsidies will not only grow through time, they will grow even faster than health care costs are growing!
If that doesn’t immediately knock your socks off, you need to stop and remember President Obama’s number one argument for health reform. Uncontrolled health care spending, the President said, threatens to bankrupt the federal government. Yet if ObamaCare limits health insurance costs to a percent of family income, it will create an implicit entitlement that will be growing even faster than the federal government’s direct health care entitlements (mainly Medicare and Medicaid)!
To see what this means in dollars and cents, let’s take some round numbers. The Congressional Budget Office is projecting per capita health care spending will rise at a rate of 8% per year. If we continue the trend of the past four decades, then income growth per capita will be about half that amount, say, 4%. Take a $50,000-a-year family required to buy insurance that cost $15,000, and assume that a more stingy government policy initially limits the family’s financial burden to, say, 10% of income. That requires a federal subsidy of $10,000.
At a growth rate of 4%, this family’s income will reach $100,000 in 18 years. Over the same period, however, health care costs will quadruple — and the required premium will reach $60,000. With no subsidy at all, the family will then have to pay 60% of its income on health insurance. On the other hand, if the government continues to limit the family’s insurance costs to 10% of income, the federal subsidy will now become $50,000.
Over a period of 18 years, health care costs will have grown fourfold. But over the same period, the expense for the federal government will have increased fivefold! ObamaCare not only does not solve the federal government’s health care entitlement dilemma; it makes the problem much worse.
All of this assumes, of course, that ObamaCare does nothing to slow the overall rate of growth of health care spending. I think that is a correct assumption. You cannot control costs unless someone does the controlling. And there is nothing in the legislation that would free either patients or doctors to do that job. Instead, the minimal cost-control efforts that are planned all involve trying to control costs from Washington.
Certainly the experiences of other countries with a command-and-controlled approach gives us little reason for optimism. Our rate of growth of real per capita health care spending over the past 40 years has been right at the average for all developed countries (see here and here). It appears that the whole developed world is traveling up the same unsustainable health care spending path.
Policymakers need to accept the fact that we are on an unsustainable spending path. Getting off that path will require liberating 300 million potential patients and 800,000 doctors and thousands of other medical personnel to use their intelligence, creativity and innovative ability to seek efficiencies the way people do in other markets.
In the meantime, creating new implicit entitlements for nonseniors and pretending they are paid for will only make our problems worse.