The Cost of Obamacare

Private health insurance alone can never provide protection for all Americans. People with pre-existing medical conditions (including old age) will not be able to afford the premiums charged to them and healthy, risk-neutral people will find the purchase of private insurance too much of an unfavorable bet.

To close this coverage gap, many government-financed solutions have been employed or proposed.  Obamacare, with its expansion of Medicaid and subsidized private health insurance, closed part of the gap, but has not achieved 100% coverage.  Several Public Options have been proposed to remedy this shortfall.

Medicare For All (MFA) has been proposed to not only replace Obamacare, but all private health insurance. One would imagine that MFA would be much more expensive than Obamacare, but it would at least close the coverage gap, something Obamacare failed to do completely.

I have written previously that the financial stability of the health insurance exchange created by Obamacare is highly suspect. The individual mandate is too weak, even when it is being enforced, to stop the collapse of the exchange when there is a shock to the market.

So, I predict Obamacare will have to be replaced eventually. This makes its cost and the costs of possible replacements or additional programs relevant to the discussion of how best to close the coverage gap.

So, what is the cost of this new program compared to other health insurance programs?

Table 2. Healthcare Expenditures by Coverage Type, 2017

*Adjusted for people covered by more than one insurer.

Table 2. shows my estimates based on the 2017 Medical Expenditure Panel Survey (MEPS). The number of enrollees is adjusted for people with more than one type of coverage. So, for example, if half of a person’s healthcare expenses were paid for by Medicare and the other half by Medicaid, that person counted as one half person enrolled in Medicare and one half in Medicaid.

The ACA “caused” via Medicaid eligibility expansion or the purchase of private insurance (i.e. premium subsidization and the individual mandate) 23 million previously uninsured people to be insured at an average cost of $3,180 per person.

The cost per person of the ACA compares favorably with that of Medicaid, Medicare and private insurance, but this is not because of some cost-saving feature of the ACA. It is because many of the previously uninsured are relatively young and healthy and have fewer healthcare needs than older and sicker people.

The real test of the efficiency of the ACA (from a taxpayer’s perspective) is found in the Average Discount column. Approximately half of the previously uninsured who are now insured because of the ACA are new Medicaid enrollees and the other half are privately insured. As you can see, Medicare and Medicaid enrollees receive the largest average discounts from billed changes at 65.6% and 66.6% respectively. Private enrollees receive the smallest discounts (48.2%). Consequently, the ACA population is in between (56%).

This 10% average discount difference between the ACA and Medicare amounts to $720 per person ($16 billion in total) that taxpayers and the newly insured are forced to pay for. This amounts to a large transfer of wealth from taxpayers and the previously uninsured to healthcare providers, especially hospitals. As I have written before, the biggest beneficiaries of Obamacare are healthcare providers, not the uninsured and definitely not taxpayers.

What’s Missing?

These costs only include expenditures by payers, i.e. insurers, and patients. They don’t include several other costs of providing health insurance. The MEPS doesn’t include the cost of premiums paid by enrollees nor the administrative costs incurred by insurers. I could have included an estimate of these extra costs, but I don’t think that would add anything to the accuracy of the comparisons.

In the long run, the premiums received by insurers equal the payments to healthcare providers and the costs of administration. These include costs such as claim validation and payments to investors. For private insurers, these costs typically range from 6% to 10%. For public insurers, however, they are much less.

But as I have written before, our accounting systems don’t accurately capture the costs of providing public insurance. Private insurers must attract voluntary capital investment. In other words, they have to pay for it. Governments don’t have to voluntarily attract capital. They can appropriate capital through involuntary taxation. But taxation is not free. All taxes come with an added cost, called deadweight loss.

So, it is at least plausible and, in my opinion, very likely that the administrative costs of private insurance are balanced out and possibly even eclipsed by the deadweight losses caused by public insurance. Otherwise, why stop at public health insurance? Why not have the government pay for all food consumed? A lack of food can be as deadly as a lack of healthcare. Why not clothes and housing and any other necessity?

There is nothing special about healthcare that makes it particularly well-suited for 100% public provision. National defense, police protection and roads are non-excludable. There exists a free-rider problem that prevents their efficient provision by private markets. Yet, healthcare is completely excludable.  If you don’t pay for it, you don’t get it. There is no free-rider problem there.

Public education creates a large positive externality. A literate populace is necessary for a well-functioning democracy and equality of opportunity is the hallmark of a just society. However, healthcare does not create more positive externalities than most other privately provided goods and services, except for protection from communicable diseases via vaccination.

This is the core of the difference between centrally-planned (aka socialist) and market-driven (aka capitalist) economies.  Who is more likely to efficiently and fairly invest our scarce capital: the government or private investors? The Lone Economist clearly prefers the latter in most instances.

Published by TheLoneEconomist

I am a PhD economist who studies just about anything and proudly specializes in nothing.

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