Obamacare Reducing Insurance Premiums

by: Steven Hansen

This past week Nobel Laureate Paul Krugman stated:

There has been a striking slowdown in overall health costs since the Affordable Care Act was enacted, with many experts giving the law at least partial credit.

And we now have a good idea what insurance premiums will be once the law goes fully into effect; a comprehensive survey by the Kaiser Family Foundation finds that on average premiums will be significantly lower than those predicted by the Congressional Budget Office when the law was passed.

From ThinkProgress (first hyperlinked reference in the above paragraph):

In fact, a ThinkProgress analysis of the Kaiser data found that the rate of growth has slowed since the law's passage in March of 2010, though it is impossible to directly attribute the cost trend to the new law.From 2002 to 2010, family premiums for employer health coverage increased by almost 8.2 percent per year on average. Since 2011, they rose 5.6 percent per year.

It is true that the rate of growth of consumer spending on health care has been slowing since 2011 (not 2010). The graph below shows consumer spending on health care through the second quarter of 2013. The rate of increase of health care costs are now growing at close to the headline inflation rate.

Figure 1 - Consumer Spending on Health Care - total (blue line) and year-over-year change (red line)

Click to enlarge

But this follows decades where health care costs have been growing at a rate double the general rate of inflation. Logically, at some point - health care cost growth must slow or soon health care would be 100% of the consumer budget.

Figure 2 - Year-over-Year Growth of Health Care Costs (blue line, left axis), cost index for headline inflation (green line, right axis), and cost index for health care (green line, right axis)

Click to enlarge

Another way to look at health care costs is to view the ratio between personal health care expenditures and GDP. There are many times in history where growth has moderated - are all due to Obamacare?

Figure 3 - Ratio between unadjusted personal consumption expenditures for health care and unadjusted GDP.

Click to enlarge

There are so many dynamics in health care, that it is opinion whether Obamacare is positively or negatively affecting costs. The mechanics of Obamacare are still be worked out - and the devil is in the details.

For something to reduce costs, there must be some real change:

  • gains in productivity;
  • change in liability;
  • elimination or reduction of a cost component;
  • technological breakthrough;
  • someone else to pay the bill.

Obamacare is a mix-master, moving costs from one pocket to another. There is as much chance of Obamacare increasing costs (as a percentage of GDP) as reducing costs. Yes, there will be sectors or groups in the economy which will see an overall reduction of health care costs, while others will see an increase.

How many think the 1% will have higher health care costs under Obamacare? If you do not think so - then for every middle or lower class person who sees lower health care costs, there will be another with higher costs.

It is more important to focus on the overall costs to the USA economy - because it is higher as a percentage of GDP than other advanced economies - all while the USA ranks 51st in life expectancy. In any event, the rate of growth of health care costs must moderate or decline - or it will overwhelm the economy.

In my instablog, I have taken a second look at the retail sales data released Friday - as well as summarized the week's economic releases.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.