Why ObamaCare Will Make Health Insurance More Expensive

A chief selling point for ObamaCare was that it would lower the cost of health insurance. President Obama famously promised that the health law would lower premiums by an average of about $2,500 annually per family. That was never particularly plausible, but the law’s advocates have continued to dangle the possibility that ObamaCare might at least restrain the growth of health costs and, in turn, the premiums that health plan beneficiaries pay for their insurance.

Don’t bet on it. With or without the president’s health care law, insurance premiums were destined to rise. ObamaCare won't restrain this trend. It will probably make it worse. The law includes several provisions that are virtually guaranteed to make insurance more expensive, not less.

Start with the law’s annual “fee” on health insurers. This fee is little more than a tax on health insurance. And that means higher costs for you: Analyses from both the insurance industry and the government’s bean counters agree that ultimately the tax will be passed on to consumers.

The insurance tax doesn’t hit individuals directly. Instead, it’s a fixed-dollar amount that the major health industry players all have to pitch in to cover starting in 2014. The fee is set at $8 billion for the first year, and rises annually to $14.3 billion in 2018, after which point increases will indexed to the average growth of health insurance premiums. The amount each insurer has to pay is calculated based on the total volume of premiums each insurer collected over the course of a year, and allocated proportionally so that the largest insurers pay the biggest fee.

Charging health insurers rather than consumers is intended to disguise the fact that the effect is essentially the same. As the Joint Committee on Taxation (JCT) wrote last summer, “the fee on health insurance providers is similar to an excise tax based on the sales price of health insurance contracts.” And the likely effects on the insurance market are pretty clear. According to the JCT, those taxes “may be borne by: consumers in the form of higher prices; owners of firms in the form of lower profits; employees of firms in the form of lower wages; or other suppliers to firms in the form of lower payments.” The Congressional Budget Office came to the same conclusion, noting in 2009 that the fees “would largely be passed through to consumers in the form of high premiums for private coverage.”

In other words, the fee doesn’t simply hit insurers. Someone, somewhere down the line, has to pay.

How much will they have to pay?

The consulting firm Oliver Wyman ran the numbers at the request of the health insurance industry last year. The firm found that in 2014, when the tax kicks in, premiums affected the tax would rise 1.9 percent to 2.3 percent. Over the next decade, the firm found, insurance premiums are likely to increase by an average of 2.8 to 3.7 percent. The net cost to an individual in the small group market over a decade would be about $2,800. For a family it would be about $6,800 over the same time frame. A November 2012 update to the analysis shows that in high-cost states like Massachusetts and New York, the ten-year impact of the fee on the individual market could be nearly $10,000. Small employers in West Virginia and New York could see more than $9,000 in additional premium costs over the same time.

That’s not the only new fee that could hit health insurers under the law. Last month, the Department of Health and Human Services (HHS) proposed charging health insurance companies a 3.5 percent “user fee” if they sell plans through federally run health exchanges.

There’s a clear political component to this proposal: The federal government wants states to set up and run their own exchanges under the law rather, but officials in a number of states are resisting, preferring to let HHS handle it instead. The proposed user fee will help prod insurers into lobbying wavering state governments to set up exchanges on their own.

But several states have already made a decision not to operate an exchange. Federal exchanges have several legal hurdles to climb, but if HHS successfully sets up exchanges in those states, and decides to implement the new user fee, then it’s reasonable to expect that premiums will rise accordingly—passed on to the customer, just like the other insurer fee.

That means premiums would rise even more than already projected. An American Action Forum graph shows how much single coverage premiums would rise relative to the increases that were already expected if the 3.5 percent fee resulted in a 3.5 percent price hike.

It’s not a huge increase, all things considered. But it would make the already large increases expected to follow the law even bigger. Nor are these the only new fees likely to make premiums rise: Coverage mandates and insurance regulations will probably result in higher individual market premiums, as will rules governing how much of each premium dollar insurers have to spend on medical care. At this point, then, the question isn’t whether ObamaCare will raise the cost of health insurance premiums: It’s how much. 

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  • Auric Demonocles||

    The government is getting even more involved in a industry, and prices are going to go up? This is not possible.

  • sarcasmic||

    Don't worry. Before long employers will opt to pay the fee instead of insuring their employees, forcing everyone onto the government single payer plan. No doubt a failure of the free market.

  • LTC(ret) John||

    I fully expect my employer to joyfully axe all insurance come 2014. Pay a fixed pentaltax, sure! Employees will not like, but who cares about them?

  • sarcasmic||

    "Let's see here. Do I spend fifteen grand a year for my share of each employee's health insurance, or pay a two thousand dollar penaltax? I dunno. Such a difficult decision. I think I'll have to sleep on it."

  • R C Dean||

    Better check with Finance. They understand this math stuff.

  • Julio Cesar Samper Uribe||

    Other titles suggested for this article:

    Why do Bears Shit in the Woods

    Why the Pope is a Catholic

  • Auric Demonocles||

    Why the Pope is a Catholic

    He likes being right.

  • ||

    "Is the Space Pope Reptilian?"

  • Enough About Palin||

    "Why the Pope is a Catholic"

    One word: alterboys

  • fish||

    "The phony Pope can be recognized by his high top sneakers and incredibly foul mouth."

    /Kent Brockman

  • Brutus||

    Re your alt-text: Suderman, you don't get the political delight that will flow from health insurance reform reform. We now have decades of somber politicians telling us their wondrous plans for fixing The Plan. Eventually, "conservative" candidates will gasp at the "liberal" candidates who want to raid the funds of the The Plan to lard up yet another Master Plan that will serve us great unwashed even more lavishly. Thus will the debate shift.

  • R C Dean||

    This is a never-ending gusher of wedge issues, fundraising appeals, lobbying contracts, and all-around rent-seeking and influence-buying. Make no mistake.

  • NoVAHockey||

    guess the only reasonable thing to do is raise my hourly rate and/or retainer fee.

  • Brutus||

    And let's not forget the glittering new one-stop-shop for all of your rent-seeking needs that has been set up. Now Congress can be lobbied (and will) to include any manner of things into the "minimum" health insurance package people will be marched at bayonet-point into buying. I can hardly wait until therapeutic massage by winnowy blondes is discovered to be an inalienable right.

  • R C Dean||

    I can hardly wait until therapeutic massage by wi[ll]owy blondes is discovered to be an inalienable right.

    Well, when you put it that way . . . .

  • ||

    Only if it also includes therapeutic massage by burly lumberjacks. EQUALITY!

  • Homple||

    Of course the (effective) excise tax on insurance premiums will show up as higher insurance premiums, but the imbecile public will blame the added cost on the insurance carriers and not Obamacare. Howls for more regulation will ensue. Regulation will further squeeze the insurers and we will eventually have to get all our health care from an analog of the Department of Motor Vehicles.

  • sarcasmic||

    The corporations are supposed to pay the taxes from their profits, not by raising premiums!

    That just shows how greedy they are!

    Greedy capitalists must be taken down!

  • Heroic Mulatto||

  • Brutus||

    But he only sucks the blood of Islamic and Christian babies.

  • Heroic Mulatto||

    It's not "sucked," silly, it's baked into Matzo.

  • Way Of The Crane||

    How do you get to Shalom Street?

  • Brandon||

    Obviously the people have decided that health insurance should be more expensive, and that certain undesirables will become expendable. Because that is all that government does.

    -Tony.

  • ||

    Start with the law’s annual “fee” on health insurers. This fee is little more than a tax on health insurance.
    ...
    the Department of Health and Human Services (HHS) proposed charging health insurance companies a 3.5 percent “user fee” if they sell plans through federally run health exchanges.

    BUT DON'T YOU DARE SAY THIS IS A GOVERNMENT TAKEOVER OF HEALTHCARE!!!

  • Ken Shultz||

    "Start with the law’s annual “fee” on health insurers. This fee is little more than a tax on health insurance. And that means higher costs for you"

    I don't understand how that works.

    How could taxing health insurance make it more expensive?

    Taxing gasoline doesn't make it more expensive. And taxing income doesn't make hiring unemployed people more expensive either.

    I know because all the Obama-lama-ding-dongs in the media told me so.

    And they know everything. Otherwise, they wouldn't be on television.

  • Brutus||

    It only makes things more expensive when those are things they hate, Ken, like cigarettes, booze or ammunition. Things that Americans have an Absolute Right to get more affordable when taxed.

  • ||

    The major reasons the law will cause premiums to rise is that the law encoraged cost-inflation in health care prices through a number of mechanisms:
    1) The law institutionalizes third-party payment, mandates comprehensive insurance coverage, and mandates zero co-pays for "preventive care". All of these things will encourage people to over-use medical services, and encourage doctors to over-test and over-charge for their services, since consumers will be heavily insulated from costs.

    2) The medical loss ratios encourage insurers to allow over-charging and over-testing so that the amount of money spent on health care provision will rise relative to their administrative costs.

  • ||

    Analyses from both the insurance industry and the government’s bean counters agree that those analyses weren't really necessary.

    Made a correction to your post, Suderman.

  • PapayaSF||

    This is nearly as idiotic as the medical devices tax. "We're making your health care cheaper by making medical devices cost more!" As Orwell said, some ideas are so stupid that only intellectuals will believe them.

  • Ken Shultz||

    The idea was to force hospitals to stop spending money on new technology and make them spend it on adding more beds and nurses to hospitals.

    In other words, this was like Obama's statement about how ATM machines cost people jobs. He has no understanding of the implications or results of advancing technology.

    The fact that new and better imagery by way of new and better MRI, CT scan machines, etc. means catching, say, breast cancer sooner and avoiding more costly treatment for cancer in its advanced stages is completely lost on Obama.

    He's basically a Luddite, and he sees money spent on technology and money spent on treating more people as a zero sum game. He's that out of it.

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