Another Way Taxpayers Lose Under ObamaCare

NCPA November 26, 2013

State insurance commissioners have long seen themselves as protectors of the public's wallets -- the officials who say "no" to insurers' requests to increase health insurance premiums. It has not yet sunk in that on this coming New Year's Day, the Affordable Care Act (ACA) will flip the commissioners' motives upside-down, prompting them to approve and even encourage premium increases, says Robert F. Graboyes, a senior research fellow with the Mercatus Center and professor of health economics at Virginia Commonwealth University.

• Under the ACA, a family of four with $30,000 in income will only pay $600 for, say, a $10,000 insurance policy. The federal government will cover the remaining $9,400.
• Under the "medical loss ratio" rules, the insurer can keep $2,000 for overhead and profit. The remaining $8,000 must go to health care providers -- doctors, hospitals, therapists, etc.

Now, suppose the insurer raises the premium to $20,000.

• The family of four will still pay only $600. The federal government absorbs 100 percent of the increases and must now kick in $19,400 instead of $9,400.
• The insurer doubles payments to providers by paying higher reimbursement rates and by expanding the menu of benefits, (e.g., more tests, more surgeries, lengthy spa visits.)

Again, the enrollee pays no more for insurance, but providers get $16,000 in income rather than $8,000 -- and insurers retain $4,000 instead of $2,000. Plus, the enrollee gets much more generous benefits. No insurer has any motive to reduce premiums, since no purchasers will benefit.

Some critics argue that a swelling-premiums scenario would never occur because state regulators would never approve such increases. But why not?

• Until now, commissioners were strongly motivated to hold the line on costs. Until now, forbidding insurers to raise premiums meant more money in the wallets of the state's voters and possibly the state's health care providers, too.
• Now the commissioner who insists on lower premiums reduces the amount of care available to subsidized voters and doesn't save them a dime.
• Because of the ACA's bizarre structure, higher premiums now mean better benefits for subsidized enrollees; higher incomes for doctors, hospitals, other providers and insurers; and higher state tax revenues from now-richer providers and insurers.

The only loser is the U.S. taxpayer, who must pay for these swelling costs.

Source: Robert F. Graboyes, "Another Way Taxpayers Lose Under ObamaCare," U.S. News & World Report, November 11, 2013.