The Most Important Feature of ObamaCare is Something No One is Talking About

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.

Stupid Thing


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.

Comments (26)

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  1. Vicki says:

    Good song pairing. Fits ObamaCare to a tee.

  2. Joe S. says:

    I agree with Vicki. Also, it is a stupid thing.

  3. Neil H. says:

    You are right about the fact that no one is talking about this. By the way, other health care proposals have this same problem. The Wyden/Bennett bill, for example, has an individual mandate. But federal subsidies in the bill were (I believe) limited to the CPI. So over time the burden of cost control would be shifted to individuals.

  4. Bart Ingles says:

    I wonder why they didn’t simply mandate that personal income increase at the rate of medical inflation.

  5. Tom H. says:

    Good point, Bart. That would have been about as sensible as everything else they did.

  6. Stephen C. says:

    I agree that no one is talking about this. I also agree that it is the most troubling feature of the legislation. It is also the reason why Congress will be back legislating on health care — again and again and again.

  7. Gweilo66 says:

    “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”

    Yeah? Well..can YOU think of a more efficient way to create total dependence on the government? They can always increases taxes on..uh…THOSE people. You know..when the economy booms again. That stimulus effect is just about to blossom.
    And don’t give me any nonsense about the “unfunded liability” to the states by making them pick up the tab for increased medicaid enrollees. Boo hooo. They have plenty of fat to police and fire departments.

  8. Judy M. says:

    Gweil066: Do I detect a wee bit of sarcasm. Perk up. Better days are ahead. Especially after November.

  9. Larry says:

    Excellent post. So long as the rate of increase exceeds income growth we are on an unsustainable path. (By the way if it is individual’s money, without a third party payer involved, if people want to spend a larger percentage of their wealth on health care that is okay.)Add itionally, this is why every nation in the world, no matter what the system of health care delivery is, is struggling under the weight of this problem.

    The issue isn’t resolved by rationing care — not allowing people access to care at say end of life or where the QALY is not sufficient as a ratio to the expense of the procedure or drug. The issue is cost growth. Driving the same type of efficiency into health care as has been driven into every other sector (e.g., computers, autos, etc.). Secondly, understanding diseases, specifically chronic disease.

    When we understand a disease it is inexpensive, when we don’t it is expensive because we treat sypmtoms. for example polio. As soon as we understood it, we provided a vaccine and it became cheap. Diabetes – we don’t understand and it is expensive.

    You can follow my blog at for more about reform of the delivery system.

  10. Stan Ingman says:

    John.. May be good for you to write about what you like about the bill…. since much of it came from Republican minds..or it is deemed a moderate bill by most writers.

  11. Frank Timmins says:

    Of course the framers of this legislation know very well it is unsustainable. That, after all, is the idea. The Holy Grail for the left is the single payer government run “free” healthcare for all utopia. The obvious original gateway to that end was the much championed “public option”. Even the most naive (with a little prodding) can understand how this would eventually lead to single payer.

    On the other hand the more covert process of systematically eliminating private sector financing through Draconian coverage and price fixing methodology will most certainly accomplish the same end, while giving the left the appearance of some measure of compromise. We will all wind up as wards of the state either way.

    Mr. Ingman, I hope you will share with us exactly what you are talking about in your post, because whatever came from Republican minds was severely altered before it made it to this healthcare bill.

  12. Joe S. says:

    There is nothing moderate about this bill. It is really quite radical, and it will have a huge (negative) impact on the US economy.

  13. Virginia says:

    Excellent post.

    Do we really expect the cost of health care to rise 8% a year into the future? If so, I think I need to update my 401k allocation.

  14. Arnie Poutala says:

    Mr. Ingman, as Mr Timmins has requested, could you please share with us the Republican ideas that are in the bill? Your comments sound like what I have heard from the President that this bill is full of bipartisahn ideas.

  15. Ronald Feldman MD says:

    New CMS administrator nominee, Donald Berwick, claims that costs will be controlled by paying physicians based on value, not volume.

    Besides the fact that physician fees are only 20 percent of health care payments, exactly how is it possible to calculate a value for services? I know of no way to do that as it relates to individual physicians.

  16. Doesn't Matter says:

    I’ve seen republican support for the “health care mandate” in many places. Most notably, Lindsey Graham (and other republicans) on the Wyden/Bennett bill, and Romney Care….yet no republican wants to come out and say there is some common ground that we can build on. Why is that? Now they are calling it unconstitutional?

  17. James Piereson says:

    John, Agree. Perhaps this is a little like subsidies for college tuition, which has driven tuition costs ever upward, requiring ever larger subsidies.

  18. Art says:

    I, like Doctor Feldman, question the value [quality] approach as being able to “replace” volume [quantity] values. And hope that the “Gatekeepers” of care [physicians] stop the process before it grows any larger by simply rejecting it as detrimental to society based on the following facts:

    Today we have too few physicians to supply quality care to the current insured.
    Entitlement programs at current increasing rates do not provide profits to these small businessmen [physicians].
    Increased quality will require increased time spent with patients and increased tests which drive up costs, which are out of control now.
    Increased time spent with patients decreases the number of patients a physician treats.
    The approach would make treating entitlement program recipients more profitable than is the case now but will take more time, thus physicians could “control” their time and income by reducing their patient loads which will greatly decrease the numbers of patients they would treat.
    As this occurs, the government would determine which patients they would be allowed to see.

    As small businessmen the smartest thing to do that would end the problem is for the physicians to just say no to new entitlement patients.

  19. Don Levit says:

    I agree with youir assessment on subsidies.
    There must be a better way to hold down costs other than expanding benefits (lower deductibles, co-pays, no annual or lifetime limits), and making the net cost cheaper.
    Don Levit

  20. david porter says:

    Some really big U.S. companies are filing SEC documents stating that the newly enacted health care reform is costing them big bucks?

    AT&T says it is booking $1Billion in costs; Caterpillar $150 Million, AK Steel $31 Million! Dems said it would LOWER health care costs for employers. So what’s going on?

    Well, if you’ve taken college level accounting and know a thing a two about these booking costs you would know what the news isn’t telling you.

    The “costs” that these companies are “booking” are tax-free government subsidy payments that the companies receive to help these companies pay the cost of health care for their employees.

    The health care reform has taken away these tax-free government subsidy payments to these companies.

    It’s NOT that the companies are having to PAY OUT in cash the $1Billion or $150 Million or $31 Million, it’s that these companies are no longer getting government checks, they cannot “book” these checks as tax-free income anymore.

    The checks issued to these companies from the government are really your tax dollars.

  21. Chris Ewin, MD says:

    I agree with Art and Dr. Feldman.
    There is no real data that can measure true quality of the real gatekeepers (primary care physicians) and for that matter, any physician except for the outcomes data for surgical procedures, ER pneumonia treatment, OB C- section rates, etc.
    Further, many physicians (especially primary care physicians) are saying no not only new entitled patients, but also to all patients with third party contracts.
    They are in survival mode.

  22. Andy says:

    “…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.”

    That has worked wonderfully so far. The same scenario presented in the article happens with or without Obamacare. Does the “market” really work the same for healthcare as for cars?

  23. Andy says:

    What market incentive is there for private insurers to reduce medical costs? As long as they can sell a policy that is profitable and affordable, who cares how much healthcare costs? Insurers are deincentivized to reduce healthcare costs to a “reasonable” level. “Affordable” healthcare negates the need for insurance.

    The incentive is in selling affordable, profitable policies. As with cars, and every other free market good, you get what you pay for. The car market ranges from $200 to $150,000 and up. The major difference is that the decision to purchase a $200 auto doesn’t effect the price of a $20,000 auto. Secondly, the exclusive price of exotic cars has much less of an impact than being excluded from equally expensive medical procedures. All of the extra costs of maintenance with the $200 car fall upon the owner almost exclusively. The decision to buy a cheap, later to be discovered inadequate, healthcare policy directly effects EVERYONE paying for insurance and or healthcare waiting for you to pay your high deductibles and co-pays. Essentially, your unsecured, non-interest bearing loan from your provider is being paid for by all other policy holders. Not to mention the uninsured effect on costs.

    As for healthcare providers, they may not be served well by a cash and carry pure market system that determines real, undistorted prices. As long as big insurance and government continues to pay medical fees, I don’t see much free market incentive for providers to reduce cost either.

    When new products and technologies emerge, no one knows the value until it is on the market. Is a heart stent REALLY that expensive? Use it to open an artery, priceless. Use it to shape a vaccuum hose in an automobile, it may be marketed for much less, assuming that it could be used in that application. Point being, we consumers don’t know and there is absolutely no motivation or obligation to inform us.

    Is anyone other than a physician qualified to determine the value of an MRI? (value of diagnostic data, not cost of machine) They may be just as much the “victim” of pricing as we are in the true cost of healthcare. We are most definitely a captive consumer when being rushed to the nearest hospital. Considering the assymetric knowledge in the healthcare industry, insurers and providers have a distinct advantage in determining medical prices.

    Is it possible the opposition is simply a matter of not wanting to lose profits, packaged as a fight for “freedom”? I would fight hard for my 12K salary, and I imagine everyone else would as well.

  24. Andy says:

    The following passage was taken from, FAQ page explaining the difference between individual and group insurance. There has been a lot of debate about selling insurance “across state lines.” The idea presented by many Conservatives is that increased competition within the health insurance industry will lower cost. The concept of “law of large numbers” in the quoted article below seems to be contrary to the idea that competition will lower cost. Insurers that compete and monopolize will have an advantage in balancing risk, rather than having a reduced risk pool for each of the competitive insurers. Government administered, universal, single payer healthcare may be a large enough monopoly to ensure affordable healthcare.

    “Most group insurance, however, is issued without medical examination or other evidence of individual insurability because the insurer knows that it can cover enough individuals to balance those in poor health against those in good health. The risk of an insurer failing to achieve this balance is diminished as the size of the group increases, or as the insurer underwrites additional group policies and increases the total number of individuals covered. This is known as the “law of large numbers.”

  25. Anyelinx says:

    From John B to John A: Most of these health care panrters would fall under heavy pressure and would either merge to form one central health care conglomerate or they would wither away due to the universal aspect of health care that Obama is trying to implement. Best believe that people would still continue to put their trust in the private health sector.

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