Today, the focus is on how Obamacare is supposed to lower costs. Advocates of the law argue that provisions like the insurance rate review, the medical loss ratio (MLR) requirement, and the small business tax credit decrease health care costs. But Heritage research shows that these provisions have been largely ineffective at lowering costs.
A Powerless Provision
Obamacare implements a rate review of “unreasonable” premium increases, arbitrarily defined as any increase that exceeds 10 percent. Heritage’s Ed Haislmaier explains:
These rate-review provisions were an entirely political exercise from the start. They were only added to Obamacare in the fall of 2009—after the health-insurance industry had the temerity to point out that other provisions of the legislation would drive up premiums—in order to give [the Obama Administration] authority to review so-called “unreasonable” premium increases. Blame for Obamacare’s inevitable cost increases could thereby be deflected onto insurers.
Haislmaier adds that “it is a well-documented effect of price controls that sellers respond to the imposition of price ‘ceilings’ by turning them into price ‘floors.’” In this case, that means raising premiums as high as they’re allowed: 9.9 percent.
It is not as if there was no oversight before Obamacare. Competition among insurers and state regulatory oversight already protect consumers from unjust rate hikes.
A Competition Killer
Obamacare imposes an MLR requirement on insurers in the individual market to spend 80 percent of premium revenue (85 percent in the group market) on medical claims or activities that improve quality. If the ratio is not met, insurers must rebate the difference to the consumer. As Haislmaier testified before Congress, the MLR harms start-up insurance companies by forcing them to rebate funds instead of reinvesting in their business growth or repaying investors. In addition, existing insurers are already leaving the market because of the requirement. Decreasing the number of insurers in the market erodes competition and gives consumers less choice.
Moreover, the MLR won’t lower costs; it could instead increase them by creating an incentive for insurers to charge higher premiums as a means of protection against the MLR requirement. Haislmaier states, “This is because if an insurer overestimates expected spending on medical care, it must refund excess premiums to policyholders, but if it underestimates expected claims costs, it cannot keep more revenue the next year to recoup that loss.”
A Failed Incentive
Obamacare’s small business tax credit was supposed to make health insurance more affordable for small businesses to offer employees coverage. The Administration’s initial estimate was that 4 million small businesses would be eligible to receive the credit. However, as of October 2011, only 309,000 firms have applied—just 7 percent of the original estimate—as the number of small businesses not offering coverage continues to grow.
These are just some of the ways in which Obamacare will not reduce health care costs—and they’re only the beginning. The main provisions of the law don’t kick in until 2014, at which point expansive benefit requirements and new rules for insurers will further drive up the cost of health insurance for Americans.
To learn about how to bring costs down in the health insurance market by empowering individuals instead of government, read Heritage’s reform proposal, Saving the American Dream.