One Year After ObamaCare, Health Insurance Premiums Are Still Rising


As the one year anniversary of the Patient Protection and Affordable Care Act nears, The New York Times notices that health insurance premiums still haven't gone down. Just the opposite, in fact:

The new federal health care law may eventually "bend the cost curve" downward, as proponents argue. But for now, at many workplaces here, the rising cost of health care is prompting insurance premiums to skyrocket while coverage is shrinking.
As Congress continues to debate the new health care law, health insurance costs are still rising, particularly for small businesses. Republicans are seizing on the trend as evidence that the new law includes expensive features that are driving up premiums. But the insurance industry says premiums are rising primarily because of the underlying cost of care and a growing demand for it.
Across the country, premiums have more than doubled in the last decade, with smaller companies particularly hard hit in recent years, federal officials say.

The article presents the two stories of the rising cost of health care—costs are rising because of government mandates, and costs are rising because of growing demand for expensive care—as competing. But they don't have to be. In some sense, they're both right.

We know, for example, that benefit mandates drive up the cost of insurance. This ought to be self-evident to anyone who's ever purchased, say, car insurance: A bigger benefit package means more expensive premiums. The same is true in the health insurance market. In 2009, the Council on Affordable Health Insurance, an insurance-industry group, counted 2,133 state-level insurance mandates nationwide and estimated that the existence of the mandates adds anywhere from 20 to 50 percent to the cost of health insurance.

But a combination of technological advances and demand probably play a role too. But where does that demand come from, and what is driving spending on new technology? There's good reason to believe that this is also a product of government policy.

When MIT's Amy Finkelstein looked at the beginnings of Medicare, which obviously provided a huge boost in the nation's health insurance figures, she found evidence that it was the introduction of a new, unlimited health insurance benefit that drove both the demand for care and the adoption of expensive new medical technologies. The National Bureau of Economic Research summarizes some of her findings:

Unlike an isolated individual's change in health insurance, market wide changes in health insurance may increase market demand for health care enough to make it worthwhile for hospitals to incur the fixed cost of adopting a new technology. Consistent with this, Finkelstein presents suggestive evidence that the introduction of Medicare was associated with faster adoption of then-new cardiac technologies.

Call it the Buffet Effect: When health care is presented as an all-you-can-consume affair, demand for it goes through the roof. This helps explain why Medicare's initial cost-estimates were so low. Experts guessed that individuals would continue to use roughly the same amount of care as they did prior to having health coverage. In fact, it turned out that the Medicare population used far, far more coverage immediately. First year costs were almost four times the maximum projected figure. Ultimately, Finkelstein estimates that the introduction of Medicare may have been responsible for about 40 percent of the total increase in per capita health spending between 1950 and 1990.

And as Finselstein suggests, all that extra demand helped pave the way for additional supply: More money poured into expensive new hospital equipment and specialized staff. No doubt there have been upsides to all this extra spending—life-saving technologies developed and life-extending procedures perfected that might not have been in a different world.

But overall, it's not clear that Medicare and its all but unlimited commitment to health spending have significantly improved health outcomes. Finkelstein found no change in elderly mortality during Medicare's first decade in operation. A massive study of the effects of health insurance by the RAND Corporation between 1971 and 1982—considered the industry standard in terms of health insurance research—found that introducing cost-sharing into the health insurance equation produced, on average, no decrease in health outcomes, but significantly reduced the use of health care services. Subsidized coverage resulted in improved health outcomes for a handful of ailments, mostly in lower-income populations. A metastudy of consumer-driven plans with high deductibles found similar results: Cost-sharing and less comprehensive coverage resulted in dramatically lower expenses, but no average reduction in health outcomes.

Again, it's the Buffet Effect: When health care is a buffet, people use more, especially when it's being paid for by someone else. There's not much evidence, however, that doing so increases overall health.

So mandates probably help explain part of the story. But government-subsidized coverage is likely a large factor too. Yet the response of those who authored the PPACA was not to change the way the government provides coverage. It was to expand the subsidization of generous coverage and, at the same, time, make it more difficult for insurers to weed out waste through activities like fraud prevention and utilization review. A decade from now, I suspect, The New York Times will be telling the same story.