The Obamacare Story Starts To Unravel

Government-regulated healthcare doesn't come cheap. The nonpartisan Society of Actuaries, a professional organization serving 22,000 actuaries, concludes in a new report that the cost of long-run claims will increase by 32 percent by 2017 in the individual market when the Affordable Care Act is fully phased in.

Secretary of Health and Human Services Secretary Kathleen Sebelius dismissed the study, explaining that the increases were due to better insurance. Last week, in a White House briefing, she said, "Some of these folks have very high catastrophic plans that don't pay for anything unless you get hit by a bus. They're really mortgage protection, not health insurance."

But evidence shows that catastrophic health insurance could lower the cost of care, as people pay for routine expenditures out of tax-favored health savings accounts.

The report's conclusions are breathtaking. At the top end, Ohio and Wisconsin will see hikes of 80 percent, and at the bottom, the cost of care in New York and Massachusetts will decline by 14 percent and 13 percent respectively. The report projects that 42 states and the District of Columbia will see double-digit percentage increases, 3 will see single-digit increases, and 5 will see decreases.

Note that these costs don't refer to insurance premiums, which will depend on federal subsidies at different income levels, but to the cost of claims made to insurance companies.

Costs will increase, according to the report, because the newly-insured would increase their health care spending to the level of the insured. Savings from more preventive care would be offset by increased spending in areas such as corrective orthopedic surgery and advanced diagnostic tests.

Further, some employers will drop coverage either due to higher costs, or because their employees will be able to get subsidized care on the exchanges but not through employer plans. Healthcare on the exchanges will be more expensive than care through employer-provided plans, the actuaries calculate.

The actuaries note that their estimated 32 percent increase in costs does not include a number of other factors that might also work to increase the amount spent on healthcare. They specifically mention increased utilization due to pent-up demand for medical services, as the newly-insured get care that they have postponed.

Also, the pool of insured will likely get sicker. Health insurance is projected to get more expensive, reaching $20,000 a year for a family of five in 2016, according to the Internal Revenue Service. With low tax penalties for not signing up for insurance ($95 in 2014, $325 in 2015, and $695 in 2016 and thereafter), combined with the requirement that insurance companies take anyone at open enrollment periods, some healthy individuals may decide not to enroll.

What is catastrophic insurance, why doesn't it "pay for anything unless you get hit by a bus," and how can it help reduce the cost of health care?

Catastrophic insurance is insurance against large expenses. It is generally accompanied by tax-favored health savings accounts from which individuals pay for routine care. Health savings accounts for routine care combined with insurance for major illnesses were introduced in 1993 by an Indiana company, Golden Rule.

Under the Affordable Care Act, catastrophic health plans are only allowed to be sold on the exchanges for people under 30 years of age. Other plans have to include free preventive care, mental health and drug abuse coverage, and free contraceptives.

Sebelius seems to be unaware that the purpose of insurance is to protect purchasers against major unforeseen events-such as getting hit by a bus-rather than covering predictable expenses. People know that every year they should get a check-up, and that they might have to visit the doctor for the flu or a sprained ankle. These are expenses that are manageable, for which people can plan, because they are generally a small percent of income.

On the other hand, being hit by a bus, or getting cancer, or suffering a heart attack, is a substantial unforeseen expense. That's when insurance comes in. It is rational for people to pay a little every year in case they have to incur major health expenses that could reach hundreds of thousands of dollars. These expenses do not fit into most budgets, even with prudent saving.

Everyone who has purchased auto or home insurance knows that requiring insurance to pay for minor, foreseeable expenses raises the cost of premiums. With these types of insurance, the higher the deductible-i.e. the more the car or home owner pays out of his own pocket in case of damage-the lower the premium.

One reason is that the insurance company doesn't have the administrative and cost burden of paying for small expenses. Another reason is that when people pay out of their own pocket, they shop around, lowering the cost.

In the same way, there is ample empirical evidence that catastrophic plans encourage people to shop around, lowering the cost of health care. Costs of health care that are not covered by insurance, such as cosmetic surgery and skin revitalization procedures, have declined, rather than increased.

Here's why. If you pay routine, predictable costs out of pocket, you're more likely to shop around and find the best deals. You use less medical care, and you watch the dollars you spend carefully-just like the dollars you spend at the grocery store.

On the other hand, if these costs are invisible, because visits to the doctor come free or with a low copayment, you don't think twice about making that appointment. Sure, your cold might get better on its own in a few days-but if there's no cost to visiting the doctor, you might as well get him to check it out.

Moving from catastrophic health insurance plans to the Affordable Care Act's prescribed generous health insurance plans will change people's behavior. As people stop observing costs, they demand more of the service-and health care costs rise.

Indiana has saved millions by moving to catastrophic health insurance with tax-free health savings accounts to cover routine care.

In 2007 former Indiana Governor Mitch Daniels put in place health insurance plans for state workers and Medicaid recipients that lowered their health care costs. By 2010 the State of Indiana was saving 11 percent of health care costs with its catastrophic health plan and health savings accounts, known as the Healthy Indiana Plan (HIP). The Healthy Indiana Plan offered health care to 105,000 low-income Hoosiers through December 2012.

Residents have $500 in free preventive care to ensure they don't skip routine check-ups, often the low-cost way to resolve health problems. Ninety percent of recipients have a physician visit within a year of enrolling.

Then, participants have a health savings account, called a "POWER" account, for other medical expenses, with contributions from the state and the individual.

Under the Affordable Care Act, Indiana will have to give up its Healthy Indiana Plan, unless the U.S. Department of Health and Human Services grants a waiver so that the program can continue.

Healthcare is going to get more expensive under the Affordable Care Act for many reasons. But Congress could make one simple fix to the law. It could allow anyone on the exchanges, not just those under 30, to purchase catastrophic health insurance and pay for routine care out of health savings accounts. It's better than a 32 percent cost increase.