Health spending slows but premiums still rising

A funny thing happened as a result of Obamacare, signed in March 2010: Although the cost of health care has increased at a slower rate than in previous years, premiums for health insurance and the share of premiums used for purposes other than paying claims has been increasing faster than in previous years. This is a direct consequence of the health care reform.

The crisis of 2008 resulted in job losses and a reduction in the number of Americans with private coverage. The annual rate of increase in spending by private health insurance dropped by two-thirds, to an annual increase of just 2.4 percent in 2010, according to the federal Centers for Medicare and Medicaid Services (CMS).

This tightening of private health spending has led to an overall reduction in the rate of increase for health spending to 3.9 percent in 2010, versus 7.6 percent in 2007. The Altarum Institute estimates that aggregate annual health spending for 2011 increased by a still reasonable 4.5 percent from 2010.

Before Obamacare, private health insurers responded to the squeeze by getting leaner and improving their business processes, according to McKinsey and Co.McKinsey concludes that of the various categories of health spending, expenditures on “health administration and insurance” increased the least – just 1.6 percent annually – during the period 2006 through 2009. CMS data shows that the share of health insurance that does not pay for medical claims shrank by an average of about 2 percent annually in 2008 and 2009.

But this came to a screeching halt, followed by a fast U-turn, when Obamacare was signed. The share of health insurance that does not go toward medical claims jumped by 8.4 percent in 2010 as Obamacare took effect. For the first time in seven years, growth in total private health insurance premiums exceeded growth in total benefits in 2010 and was higher than any other component of health spending.

The Milliman Medical Index (MMI) for 2011 reported total health costs (including the administrative load of insurance) for a family of four covered by a preferred-provider organization of $19,393, a 7.3 percent increase over 2010. The Kaiser Family Foundation’s latest survey of employer-based health benefits reported a significant increase of 9.5 percent from 2010 to 2011. These premiums are increasingly unaffordable for many small businesses: The proportion of small firms offering health benefits dropped from 69 percent to 60 percent just from 2010 to 2011.

There are two primary reasons for this harmful consequence of Obamacare:

First, some of the law’s anti-competitive “consumer protections” took effect in September 2010, especially eliminating pre-existing exclusions for children, coverage of preventive health services and extending dependent coverage for young adults up to age 26 on their parents’ plans. Although there is a wide range of cost estimates for each “protection” that came into force in 2010, the midpoint for the aggregate effect is a premium increase of about 3 percent.

Second, choice and competition are disappearing fast from U.S. health insurance. Reports abound of health insurers retreating, especially from small-group markets. For example, New York’s Empire Blue Cross Blue Shield has decided to shrink dramatically, dropping more than 20,000 small groups containing more than 200,000 beneficiaries.

As insurers flee, those who remain will reap the benefits of reduced competition. According to an analysis by Bloomberg Government, average operating profit margins for four of the largest health insurers increased by more than 8 percent in the 18 months after the law was signed. Quarterly earnings per share from continuing operations between the third quarters of 2008 and 2011 jumped 29 percent.

If Obamacare had not been passed, the recession would have been somewhat softened by moderate premium increases for health insurance. Obamacare rubs salt in the wounds of the American people – either unemployed or without a raise in four years – who are suffering unnecessary premium increases driven by that misguided reform.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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