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.