Why Medical Insurance Policies Will Get Much More Expensive under Obamacare

By now, nearly everyone has heard of the Patient Protection and Affordable Care Act?PPACA?better known as Obamacare. The Act began taking effect early in 2010, and will be gradually phased in through at least 2020, but the meatier provisions of the bill will largely be in place by January 1, 2014.

Obamacare is filled with goodies, including:

  • higher annual and lifetime benefits
  • non-cancel-ability
  • non-exclusion for pre-existing conditions
  • no premium increases for pre-existing conditions (except tobacco use)
  • lower deductibles for employer plans
  • elimination of deductibles and co-payments on certain preventative care procedures
  • premium caps on policyholders earning up to 400% of the Federal Poverty Level

(Source: National Association of Insurance Commissioners (NAIC) Patient Protection and Affordable Care Act, Section by Section Analysis)

Why medical insurance policies will get much more expensive under Obamacare
Why medical insurance policies will get much more expensive under Obamacare
It?s hard not to find something (or a few something?s) to like somewhere in PPACA. And let?s be honest, some of these changes?like non-cancel-ability and non-exclusion for pre-existing?should have been there all along. If they had, we might not have even required sweeping healthcare reform in the first place.

Personally, I?m rooting for Obamacare to work. On the face of it, the provisions are very consumer friendly, and will go a long way toward eliminating or at least reducing the imbalances in the current system.

But there?s an open question: how are we going to pay for all the changes?

Increased taxes will foot part of the bill

PPACA will be funded largely by increases in a wide variety of taxes that will bring in additional revenue of more the $800 billion over a ten year period. The tax increases come through increased fees to health insurance companies, an excise tax on high cost health insurance plans (?Cadillac plans?), new taxes on the import of prescription drugs and medical devices, a reduction in medical deductions for personal income tax purposes and various other sundry tax increases.

The biggest tax revenue increase however will be a .9% increase in the Medicare portion of FICA taxes paid by individuals earning in excess of $200,000 per year, and married couples filing joint earning over $250,000. That provision will increase the Medicare tax from 2.9% to 3.8%, and is expected to raise over $200 billion. More on this provision in the next section.

This is just my own personal take, but the amount of tax revenue scheduled to be collected seems a little on the light side considering the magnitude of the reform bill. $800 billion dollars over ten years works out to be only $80 billion per year; how much difference will that make in a healthcare sector that now consumes $2.8 trillion per year? $80 billion is less than 3% of total healthcare spending; when you consider that annual increases in medical costs are already running around 6% per year, it looks like the new taxes won?t even be able to cover that.

Obamacare will bring many millions of people into the healthcare system, mandates certain coverage?s, lowers deductibles and removes exclusions?should we expect that all of those changes will be neatly funded with an additional $80 billion per year?

We have to doubt it.

How the bill will likely be paid

It?s very unlikely that scheduled tax increases will be sufficient to pay for the sweeping changes that PPACA is bringing in. My own thinking is that the taxes in the law are only the beginning, and we can expect to see some combination of the following:

Higher premiums. Many sources are predicting that we?re about to feel the effects of PPACA on health insurance premiums very soon. At a minimum, and since premium levels will flatten under the law, people who are young and/or in good health will see their premiums rise to pay for those who are older and/or in poorer health. Obamacare does little to address this outcome.

Still more taxes. A precedent to fund healthcare through payroll taxes is already established through Medicare, and the first shot at expanding it is also set to unfold with the aforementioned increase in the Medicare payroll tax from 2.9% to 3.8% for high income earners.

We should fully expect that the additional tax will be expanded to all income levels, and probably a lot sooner than we think. Once that happens, it?s likely that we?ll see periodic increases in the tax rate as the cost of pseudo national healthcare becomes more obvious. We may even see ?temporary? income or sales taxes added to the mix.

Reduced coverage. Given the fact that healthcare growth shows no sign of slowing, nor is there is any consensus to make it happen, reduced coverage is just a matter of time. At some point in the near future, we?re likely to see cost cuts forced on the system, and that?s when the real bill for reform will arrive. We?re already seeing this with Medicare and it?s slow but relentless reductions in healthcare reimbursements. Once the drive to raise taxes and increase premiums begins to hit serious resistance we should expect to begin experiencing reductions in coverage in an effort to retain some form of universal coverage.

Though Obamacare is a step in the right direction toward providing health insurance for the entire population, it does not address the other major healthcare issue, which is spiraling costs. If anything, Obamacare will probably contribute to that spiral.

How do you think the funding portion of Obamacare will play out? Do you think we?ll see increases in premiums and taxes in addition to cuts in services? Or do you think something entirely different will happen?

( Photo from Flickr by borman818 )

4 Responses to Why Medical Insurance Policies Will Get Much More Expensive under Obamacare

  1. Who do you think is going to pay for this? The taxpayers, that’s who. Everybody except the politians who voted for it because they don’t have to abide by it.

  2. Hi Charlotte–I actually disagree! I think it will be paid for with deficit spending, which sadly has become the way we fund too much of our public spending these days. It’ll be a win-win for the taxpayers, at least in the short run. Higher benefits at no ***apparent*** cost. In fact under the law, many millions of households will get healthcare subsidies! So let’s say that some taxpayers will pay for it, but probably most won’t.

  3. The overall direction of healthcare in this country, as you?ve pointed out, is unsustainable. The silver lining in this dark cloud is that the failure of the system, as a whole, may lead to better health statistics. The U.S. consumer and taxpayer currently spend more and get less in return for their healthcare dollars than medical consumers in other countries. The U.S. is certainly not top dog in health or healthcare statistics.

    A lot of unnecessary tests and treatments have helped drive up healthcare costs. Many of these expensive tests are more about protecting doctors from litigation than being of benefit to the patient. Therefore, if the consumer is required to bear a much larger percentage of the cost, through a reduction in coverage, they will be tempted to skip them. Less demand on the system would serve to lower healthcare costs.

    It would be our guess that there are many more unnecessary tests, drug prescriptions, and surgeries than necessary ones. Each test, drug prescription, and surgery carries its own set of risks and potential complications that can quite often trigger new diagnostic tests and treatments. Every invasive medical procedure becomes the entry point for sickness and disease to enter the body.

    The forgotten principle of, ?First, do the patient no harm? has been thrown under the bus by the pharmaceutical and medical establishment. It is now all about churning out institutional profits at the expense of the patient?s health and personal finances. The more these costs are socialized (via taxation and inflation) the less responsible the individual patient becomes in performing their own due diligence and the more aggressive the pharmaceutical and medical establishment become in promoting frivolous testing and treatment schemes. Quite frankly, there is no excuse for individuals not assuming more personal responsibility for their own health and healthcare decisions. Credible information is available to everyone willing to do a little research on their own, via the internet, to eliminate many unnecessary and potentially dangerous tests and treatments.

    Americans are increasingly turning to ?medical tourism? as a quite viable alternative to the American healthcare system. They are seeking excellent medical and dental treatment in Mexico, Panama, Ecuador, Thailand and India at a fraction of the cost of treatment in the U.S. They are able to pay for their healthcare, airfare, hotels, meals, post-operative sightseeing, and incidentals while bringing home a bit of spare change to boot. Many of these Americans also find that their doctors are U.S. trained and that they are treated with much more courtesy and respect than here in the U.S.

  4. Hi Steven–I’ve been wondering how medical tourism will fare under PPACA; my guess is that it will be compromised if anything. We’ll be completely on our own if we choose to go that route. Until recently, some health insurance plans have covered foreign procedures as a way of reigning in costs. That will probably be stopped very soon.

    I agree that we have to take greater responsibility for our own healthcare. We should have been doing that all along, but now it will be an imperative. It’s anyone’s guess how all of this will play out in the next few years, but it’s about to happen.

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