Chart of the Day

Obamacare bends the cost curve...up. Completely predictable given all the mandates on insurers. The WSJ explains: (H/T:  Hotair)

Regardless of the health law, national health spending has been rising in recent years and economists expect that to continue. In February, the federal Centers for Medicare and Medicaid Services projected that overall national health spending would increase an average of 6.1% a year over the next decade.

The center's economists recalculated the numbers in light of the health bill and now project that the increase will average 6.3% a year, according to a report in the journal Health Affairs. Total U.S. health spending will reach $4.6 trillion by 2019, accounting for nearly one of every five U.S. dollars spent, the report says.

"The overall net impact is moderate," said lead author Andrea Sisko, an economist at the Medicare agency. "The underlying impacts on coverage and financing are more pronounced."

Regulating Economic Inactivity

In earlier posts, I discussed the problematic individual mandate with Obamacare. In a recent column, George Will illustrates the logical extension of that mandate if it's ruled constitutional.  He poses these questions to Elena Kagan for her Supreme Court confirmation:

So, instead answer this harmless hypothetical: If Congress decides interstate commerce is substantially affected by the costs of obesity, may Congress require obese people to purchase participation in programs such as Weight Watchers? If not, why not?

• The government having decided that Chrysler's survival is an urgent national necessity, could it decide Cash for Clunkers is too indirect a subsidy and instead mandate that people buy Chrysler products?

• If Congress concludes that ignorance has a substantial impact on interstate commerce, can it constitutionally require students to do three hours of homework nightly? If not, why not?

• Can you name a human endeavor that Congress cannot regulate on the pretense that the endeavor affects interstate commerce? If courts reflexively defer to that congressional pretense, in what sense do we have limited government?

 As stated earlier, the individual mandate changes the social contract between the individual and the government. If the government can regulate economic inactivity, there's nothing they can't regulate.

#5 How Obamacare will Transform America: Medical Innovation to Include Life Saving Technologies will be Stifled

Here's a recap from previous posts #1-2, 3, 4 explaining some of the effects of Obamacare on America. This post focuses on how Obamacare will hamper medical innovation to produce the latest live-saving technologies.

The health care legislation that was passed will hit medical device makers with a 2.3% excise tax on all medical devices, from bedpans to surgical instruments. Fox News reports that drug makers are also hit with fees estimated to yield $27 billion through 2019, according to the Joint Committee on Taxation. While these taxes and fees may very well raise revenue, it will seriously hurt medical innovation, an area where the US continually outperforms Europe. As Tyler Cowen points out in a NYT oped:

When it comes to medical innovation, the United States is the world leader. In the last 10 years, for instance, 12 Nobel Prizes in medicine have gone to American-born scientists working in the United States, 3 have gone to foreign-born scientists working in the United States, and just 7 have gone to researchers outside the country.

The six most important medical innovations of the last 25 years, according to a 2001 poll of physicians, were magnetic resonance imaging and computed tomography (CT scan); ACE inhibitors, used in the treatment of hypertension and congestive heart failure; balloon angioplasty; statins to lower cholesterol levels; mammography; and coronary artery bypass grafts. Balloon angioplasty came from Europe, four innovations on the list were developed in American hospitals or by American companies (although statins were based on earlier Japanese research), and mammography was first developed in Germany and then improved in the United States. Even when the initial research is done overseas, the American system leads in converting new ideas into workable commercial technologies.

In real terms, spending on American biomedical research has doubled since 1994. By 2003, spending was up to $94.3 billion (there is no comparable number for Europe), with 57 percent of that coming from private industry. The National Institutes of Health’s current annual research budget is $28 billion, All European Union governments, in contrast, spent $3.7 billion in 2000, and since that time, Europe has not narrowed the research and development gap. America spends more on research and development over all and on drugs in particular, even though the United States has a smaller population than the core European Union countries. From 1989 to 2002, four times as much money was invested in private biotechnology companies in America than in Europe.

Dr. Thomas Boehm of Jerini, a biomedical research company in Berlin, titled his article in The Journal of Medical Marketing in 2005 “How Can We Explain the American Dominance in Biomedical Research and Development?” (ostina.org/downloads/pdfs/bridgesvol7_BoehmArticle.pdf) Dr. Boehm argues that the research environment in the United States, compared with Europe, is wealthier, more competitive, more meritocratic and more tolerant of waste and chaos. He argues that these features lead to more medical discoveries. About 400,000 European researchers are living in the United States, usually for superior financial compensation and research facilities.

This innovation-rich environment stems from the money spent on American health care and also from the richer and more competitive American universities. The American government could use its size, or use the law, to bargain down health care prices, as many European governments have done. In the short run, this would save money but in the longer run it would cost lives. [emphasis added]

Dr Paul Hsieh at Pajamas Media blogs about the economic consequences of this tax. Here's CEO Richard Packer of Zoll Medical, makers of devices designed to stop cardiac arrests like defibrillators, explaining on Fox News to Neil Cavuto the consequences of what this tax means for his company:

PACKER: So, for our company, it will be somewhere between $5 and $10 million. What's in the current bill from the House should put it at 2.3 percent, which will be about $7.5 million dollars. Our total profit last year was $9.5 million dollars.

CAVUTO: So, it almost wipes out your profits?

PACKER: So, it almost wipes out our profits.

CAVUTO: So, you have a couple of choices here. You cut jobs or send them overseas, or you increase the price of your product, not easy to do.

PACKER: Yes, or cut back on research and development. And our business is built around new science, new clinical trials.

CAVUTO: Or a lot more people die as a result. They don't get your....

(CROSSTALK)

PACKER: That's right. [emphasis added]

Just this week, the Boston Herald highlighted that medical-device makers in the Bay State will have to cut back on operating costs due to the tax: (H/T: Hotair)

Massachusetts medical-device companies say they’ll cut back on operational costs - and jobs - after a planned 2.3 percent tax on their products is implemented in 2013, according to a new survey.

The Massachusetts Medical Device Industry Council, which held its annual meeting yesterday in Boston, said about 90 percent of the 100 medical-device firms said they would reduce costs due to the new tax tucked into the recently passed health-care reform bill.

The tax - imposed to help pay for the massive health-care industry overhaul and expansion - is “of the greatest concern” to a majority of its members, the survey found. 

Now it is true that medical technology is one of the major causes of the rise in health care costs. Keith Hennessy uses this chart from the CBO that summed up 2 key studies on this very topic:

As he points out, technology accounts for half to 2/3 of long term growth in per capita spending. But he also notes how the preferential tax treatment of employer provided health care distorts the incentive for Americans to consume more care.  Here he sums up the conundrum:

Any solution that addresses the technology source of health care cost growth will mean that new medical technologies will be developed less rapidly.

Nobody in Washington wants to tell you that last point.  We argue about administrative costs, about medical liability costs, about insurance company profits, and about waste, fraud, and abuse.  All of those are important contributing factors to high levels of health spending, and we should definitely make reforms that try to lower those levels.  But our long-term problem is principally about the growth rate, and addressing the growth rate involves a real tradeoff.  New medical technologies and drugs will still be developed, but not quite at the breakneck rate that we’re used to.  This is grasping the rose by the thorn.

The only question left then becomes who will make those determinations.  Should determinations of “high value health care” and “high value technology improvements” be made by the government, or as the result of the decisions of millions of Americans acting independently based on their own preferences? 

It's ironic that "progressives" do not want to acknowledge that government centralization of health care does indeed squash innovation.  Some will argue that the government can fund innovation just as well as the private sector, pointing out the successful example of the NIH, but Megan McArdle and Tyler Cowen do quite well in disputing their arguments not by denigrating the NIH, but pointing out the importance of the commercial sector alongside the NIH.  Keith's questions outlines one of the stark contrasts between liberals and conservatives: who do you trust more on price discovery and delivery of the most innovative of medical technologies? The market or the government? This leads well into my next blog on health care, where cutting costs will ultimately lead to rationed care.

#4 How Obamacare will Transform America

1.    #4: Obamacare will put a heavier burden on small businesses in these fragile economic times, jeopardizing the economic recovery.

      

      According to recent stats from the Small Business Association, small businesses, defined as having less than 500 employees, make up over 99% of all employer firms, and employ over half of private sector employees. Small businesses drive the economy; they produce over 50% of non-farm US GDP. Over half of small businesses are home-based and face higher compliance costs with tax laws than their larger counterparts. They constituted nearly 65% of hiring of net new jobs between 1993 and 2008. 

S    Some major impacts on small businesses are reported by Fox and CNN:

• States, by no later than 2014, must establish Small Business Health Options Programs (SHOPs), which will enable small businesses to pool their resources to buy insurance;
• Until the SHOPs are established, businesses with 10 or fewer full-time employees earning less than $25,000 on average will be eligible for a 35 percent tax credit; firms with up to 25 workers who average up to $50,000 will receive partial credits, while businesses with more than 25 workers will receive no credit;
• Those tax credits will remain steady at up to 50 percent of costs for the first two years any company buys insurance via state exchanges;
• Beginning in 2014, under the reconciliation plan, firms with more than 50 employees must offer health care to employees or pay penalties of up to $2,000 per employee for all but the first 30 workers. (The penalty would initially be $750/employee but would eventually rise to $2000). This also includes mandated coverage for part-time employees.

      However, small business owners don’t seem to take comfort in these tax credits. The National Federation of Independent Business, a major small business association, sent Sen Harry Reid and Sen Mitch McConnell a letter about 6 months ago warning that the health care bill raise costs for small businesses. Factors cited that were included in the final bill:

• Incentives for small businesses to cut back hiring of employees (the bill mandates that businesses provide all employees health care coverage once they have 50 employees)
• Due to the rise in premiums that will come about because of the mandates on the type of insurance people must purchase, small businesses may be forced to drop coverage since they are especially sensitive to price changes. Small businesses have lot less capital cushion than large businesses.
• The change in precedent for steeper payroll taxes on specific wage owners (those who make over $200K annually); businesses still have to pay a portion of these taxes.
• Higher paperwork costs to meet government compliance standards

NFIB is not the only small business group worried. The chairman of the National Small Business Association said the following:

"There's going to be a lot of incentive to drop coverage, even with the penalty," Ashmus said. "And will we not be getting subsidies because of our size, and we are still in the small-group  market because not all of our employees get coverage through us. That will impact us  significantly."

Like other NSBA officials, Ashmus said other shortcomings of the legislation include the sharp and continual rise of small business health premiums and tax increases on both earned and unearned income.

"This bill will place significant new pressures on small businesses to both offer and pay for employee health insurance, starting in the earliest stages of reform," the National Small Business Association (NSBA) said in a statement. "However, the provider-level reforms that could contain costs and enable small business to afford this commitment will not be fully effective for many years — if at all. We justifiably expect that small companies caught between these twin pressures will see their ability to grow, prosper and create jobs greatly diminish." 

Because this bill will drive up health insurance premiums, the incentive to drop coverage and pay the fine grows stronger as costs escalate. We analyzed earlier how premiums in the individual insurance market will also rise under this bill. Many people are going to be forced into the exchanges, or will simply opt to pay the fine for not having insurance. The latter will most likely be cheaper. This will most likely exacerbate health care costs, potentially creating a downward spiral where more businesses drop coverage and pay the penalty as cost rises, and so on.

Upward costs are not the only way small businesses will feel a hit. ABC reports new investment taxes: a 3.8% tax would be imposed on interest, dividends, capital gains and other investment income for individuals making more than $200K a year, and couples making more than $250K. The bill also increases the Medicare payroll tax by 0.9 percentage point to 2.35 percent on wages above $200,000 for individuals and $250,000 for married couples filing jointly. While the majority of small business owners make under $200K (many small businesses are one-man shops or only employ a handful of people), the largest ones that fall in that income bracket are the job creators.  Heritage estimates that while companies with 50–199 workers represent only 8 percent of total firms in the U.S., workers across these companies comprise an estimated 22 percent of total employment in the U.S. 

Moreover, these taxes are not indexed to inflation, meaning more businesses will eventually fall in this category.   Higher taxes on their investments will lead to some sort of trade off, most likely, negatively impacting job creation or wages.  Since many of these mandates do not take effect until 2014, it's possible we'll make an economic recovery before then despite the law. But income and investment is simply zero sum: the more you tax it, sooner or later, the less there will be--the only thing that grows with higher taxes is the government.

#3: How Obamacare Transforms America

In our continuing series on Obamacare:

3.  Obamacare will add an unsustainable entitlement that will increase the national debt, requiring higher taxes in the future that will negatively impact economic growth.

Can you imagine balancing your checkbook by counting 10 weeks of revenue versus 6 week of pay-outs to produce a net plus in your balance? Or running your business in such a manner?  By Washington standards, this bill does that-- just substitute weeks for years.

For an in-depth look at the accounting gimmicks in this bill, the person who really explains this best is Rep. Paul Ryan who takes Pres Obama to task on this:

Former CBO director Douglas Holtz-Eatin estimates that if you strip the accounting gimmicks from the HCR bill, the cost of Obamacare over the next decade will add at least $562 billion to the deficit. In the long run, it’s likely much higher as the numbers of insured rises, and consume more health care.  

My liberal friends often say regarding the deficit: You Republicans are a bunch of hypocrites—you guys drove up the deficit! (Note: while the budget deficit refers to the difference between government revenues and expenditures, national debt refers to total $ the government owes. You can think of debt as accumulated deficits, which the government funds through borrowing by selling Treasury bills, savings bonds, etc.  Our national debt is the money owed to holders of those bonds and bills. I use both terms in this section as appropriate).  They point out Reagan drove up the deficit, Clinton had a budget surplus, and Bush 43 ran a deficit.  While Bush 43 did increase entitlement spending with the prescription drug benefit for Medicare, most economists generally accept deficit spending is legitimate when you’re financing wars. This is not a value judgment on the wars we’re in; it’s merely to point out that historically, deficits due to wartime spending are normally temporary.  The deficits under Reagan can largely be attributed to an increase in defense spending during the Cold War, and Bush 43 had to deal with 9-11.  Clinton’s air war on Serbia lasted only 76 days. So overall defense spending should eventually come down as we start executing exit strategies from Iraq and Afghanistan (unless of course, Congress decides to expand the military or buy expensive new weapons systems). The deficit during the Reagan years were partially offset by the largest peacetime expansion of the economy due to his tax cuts.  After the Cold War was over, the deficit was further tackled by his successor, Bush 41, who cut military spending with the “peace dividend,” and raised taxes (remember the latter part of that didn’t turn out so well for him). Clinton continued the trend of cutting defense spending.

Further this type of fingerpointing of he-created-deficits-too does not distinguish between a cyclical deficit produced by the business cycle, and a structural deficit that is made up of entitlement spending. Megan McArdle sums this up well:

As I've been writing about the deficits, one of the things that occurs to me is that conservative and liberal policy analysts are really talking past each other on this issue, because they're talking about different sorts of deficits. Liberals are focusing on the cyclical deficit, which is not a big problem. Conservatives are talking about the structural deficit, which is a huge problem. And so one side says, "the deficit is a problem," and the other side says, "the deficit is manageable," and both sides are both right and wrong.

Cyclical deficits are the kind of deficit you run when you lose your job: you've had a temporary income shock, and so you're going to be spending more than you take in. In the case of government this is actually a good thing -- "automatic fiscal stabilizers" like welfare, unemployment insurance, and food stamps keep recessions from being as bad as they used to get. (I know you think this recession is bad, but trust me, in neither absolute misery, nor the size of the relative decline, does it even approach the convulsions of the Great Depression, or several of the 19th century "panics".)

Even if you think the government shouldn't be doing stimulus spending, cyclical deficits just aren't that much of a problem. We have a recession on the order of this one about once every thirty years, which turns even a $1.3 trillion dollar deficit into a manageable $43 billion per year, or less than $200 per person. Given the misery that would obtain if we slashed outlays to meet intake, or raised taxes, that's not a terribly bad sum for what you might think of as Great Depression insurance. Plus the debt's going to be eaten away by inflation, so it will cost even less than that in real terms.

The problem is our structural deficit: the mismatch between our spending and tax revenues that remains even when the economy is just plugging along. That mismatch was manageable in the pre-Obama era; as long as your debt is growing at roughly the rate of your GDP, or less, even persistent structural deficits can be tolerated. (I don't think they should be--but they will not drive either your economy, or your government, into serious trouble.) But as the structural deficit begins to exceed the rate at which the economy is growing, you rapidly start to run into trouble. Interest payments start to grow as a proportion of your budget, and as they get bigger, the size of the tax increase or spending cuts needed to close the budget deficit starts to grow. Naturally, the bigger the tax hike or spending cut required, the less likely it is to happen.

To put it in a historical perspective using OMB numbers, our debt is approaching its highest point in history—the only time it was higher was during WWII.

Defense spending is discretionary spending that rises and falls as determined by the administration. Congress must appropriate for discretionary spending annually. While it’s not politically easy to cut defense spending, it has been done numerous times throughout history at the end of major wars, and can be done if necessary.  Mandatory spending, on the other hand, is entitlement spending that is signed into law. It cannot be changed unless there are changes to the law; money must be paid out to those entitled to it according to the law.  Politically, it’s nearly impossible to cut.  Entitlement spending has continued to grow with social security, pensions, Medicare, Medicaid, and now the recent health care entitlement plus direct lending of student loans to boot. Mandatory spending makes up ~ 60% of overall government spending. If you add interest to pay down the debt, mandatory spending approaches about 2/3 of all government spending. Defense makes up about half of discretionary spending. The bottom line: Even with cuts in defense due to a theoretical drawdown, the debt is not going to greatly decrease due to the upward trajectory of health care spending. The GAO also confirms that entitlement spending is unsustainable:

The projected growth in entitlement spending under current law – chiefly for Social Security, Medicare, and Medicaid – will ultimately affect every citizen in the nation. Continued growth in health care costs is expected to cause government spending for its major health programs to grow faster than both the economy and Federal revenues over the next 75 years2 . Similarly, population aging is expected to cause the Government’s Social Security and health program costs and expenditures to increase as a share of GDP over that period. Consequently, total Government expenditures are projected to exceed total assumed revenue throughout the projection period, with the fiscal imbalance – between spending and revenue – growing larger each year into the future.

Keep in mind social security has gone into deficit already, and even with a brisk economy recovery, demographic forces will overtake the fund starting in 2014 and outlays will exceed revenue every year afterwards. When it scored the President’s 2011 budget, which included changes to health care, the CBO is projecting the national debt will increase to reach 90% of the GDP by the end of 2020:

The CBO determined that 1/3 of increased spending for mandatory outlays results from the proposed changes to health care—this assumes Medicare physician rates are frozen until 2020.  The CBO included a drop in spending for wartime operations from roughly $160 billion requested annually (based on FY2010 and 2011 numbers), to a $50 billion placeholder each year after 2011. 

And the impact of that number is explained by an opinion piece titled "When Deficits Become Dangerous--Stunningly Expensive Big Government" in the WSJ by Michael, Boskin, professor of economics at Stanford University who chaired the Council of Economic Advisers under President George H.W. Bush:

Ken Rogoff of Harvard and Carmen Reinhart of Maryland have studied the impact of high levels of national debt on economic growth in the U.S. and around the world in the last two centuries. In a study presented last month at the annual meeting of the American Economic Association in Atlanta, they conclude that, so long as the gross debt-GDP ratio is relatively modest, 30%-90% of GDP, the negative growth impact of higher debt is likely to be modest as well.

But as it gets to 90% of GDP, there is a dramatic slowing of economic growth by at least one percentage point a year. The likely causes are expectations of much higher taxes, uncertainty over resolution of the unsustainable deficits, and higher interest rates curtailing capital investment.

The Obama budget takes the publicly held debt to 73% and the gross debt to 103% of GDP by 2015, over this precipice. The president’s economists peg long-run growth potential at 2.5% per year, implying per capita growth of 1.7%. A decline of one percentage point would cut this annual growth rate by over half. That’s eventually the difference between a strong economy that can project global power and a stagnant, ossified society.

Such vast debt implies immense future tax increases. Balancing the 2015 budget would require a 43% increase in everyone’s income taxes that year. It’s hard to imagine a worse detriment to economic growth.

(For a more in-depth discussion on the debt and likelihood of default, a good analysis can be found by Bruce Bartlett, who’s been a critic of the Bush administration and conservatives, as well as this article by Jeffrey Hummel).

Paul Volcker is publicly talking about a VAT to pay for all our expenditures.  Passage of this bill has worsened entitlement spending to the point of steering the Titanic straight towards the iceberg.  If this bill remains law, higher taxes and slower economic growth are in the cards for the future.

The Top 10 Ways ObamaCare Will Transform America

Due to the complexity of this topic, this will be Part I of a series of posts. The health care bill signed into law is H.R.3590, Patient Protection and Affordable Care Act, and the Reconciliation Bill, H.R. 4872.  You can read the bills side by side here.  Or you can query the Library of Congress.  The links to the bills change often, so you may have to query the bills by their numbers a few times if you take a break from reading them. But this view of the bill provides a hyperlinked table of contents so you can go back and forth to various sections that are referenced.  For those who want a 40 page summary, the Kaiser Family Foundation sums up the major components of the bill topically here.  For the 5-min version, a timeline of when benefits and taxes kick in can be found at CNN and the WSJ. 

1. Obamacare changes the social contract between free Americans and the government. Government is no longer accountable to the people. People are accountable to the government.

Individual Mandate: Section 1501 requires every American to purchase “minimum essential coverage” by 2014 or face a fine.  Employers with companies over 50 individuals must offer a plan for all employees to include part-timers.  Individuals or an employer who would normally decide what policy is in their own or employees’ best interests will not determine the minimum essential coverage. The all-knowing Secretary of HHS will tell you what you MUST purchase, and it’s much more than catastrophic plans would cover.  Shikha Dalmia in Forbes, explains:

A mandate will fundamentally alter the relationship between Americans and their government. Instead of the government being accountable to them, they will become accountable to their government. No less than the Congressional Budget Office--a non-partisan government agency--once admitted as much. "A mandate requiring all individuals to purchase health insurance would be an unprecedented form of federal action," it noted. "The government has never required people to buy any good or service as a condition of lawful residence in the United States."

If the government can force Americans to buy coverage on the threat of fines or even imprisonment--an option that Nancy Pelosi has pointedly refused to rule out--every other government diktat becomes small potatoes by contrast. In fact, it becomes necessary. If uninsured Americans must buy coverage, why shouldn't other Americans be taxed to subsidize them? Why shouldn't the insurance industry be required to sell them coverage? Why shouldn't government set insurance prices to ensure affordability? Why shouldn't doctors and hospitals be asked to charge only "reasonable" rates--or offer only government-sanctioned treatments?

As an article in the DC SCOTUS Examiner points out, the government is essentially fining you for economic inactivity.  I’m not a constitutional lawyer and the courts will have their say in this. The punditocracy seems convinced this will stand constitutional muster. But to me, it seems this mandate essentially tears apart the concept of a limited government as outlined by enumerated powers in the Constitution.  It makes the Bill of Rights the only guaranteed rights for Americans.  If the government can define any activity as economic to invoke the Commerce Clause, and regulate economic inactivity to boot, they can dictate and regulate just about anything.  Government paternalism with all the bureaucracy it entails will become an accepted way of life.
2.  Obamacare will make health care more expensive, causing premiums to rise. Obamacare essentially gets rid of risk-based insurance—and instead, turns insurance companies into regulated utilities that provide health care assurance for all. Within the first year of it being signed into law, Obamacare will provide the following benefits:

• Insurers will be barred from imposing exclusions on children with pre-existing conditions. Pools will cover those with pre-existing health conditions until health care coverage exchanges are operational.
• Young adults will be able stay on their parents' insurance until their 27th birthday.
• Insurers will not be able to rescind policies to avoid paying medical bills when a person becomes ill.
• Lifetime limits on benefits and restrictive annual limits will be prohibited.
• Subsidies begin for small businesses to provide coverage to employees.

Now the ban on pre-existing conditions (known as the guaranteed issue) is a popular reform, and this is where the for-profit system was truly failing people.  Insurers don’t want people with chronic conditions on their rolls since they drive up their costs.  The GOP had the guaranteed piece in most of its legislative proposals as well.  That could have been a starting point to passing a smaller, bipartisan bill.  The insurers wanted the mandate, particularly for young healthier people who normally don’t buy insurance, on the rolls to offset the costs of all the above benefits. However, the individual mandate does not kick in until 2014 while the guaranteed portion starts this year. This will make the individual insurance market more expensive, as ABC News pointed out when they fact-checked Obama on his claims:

Premiums would be 27-30% higher because coverage would be better. The law, for example, requires that all policies cover maternity care, prescription drugs, mental health & substance abuse and no denial of coverage for pre-existing conditions.

Premiums would be 7 to 10 percent lower b/c of changes to the way the individual market is structured.

Premiums would be 7 to 10 percent lower b/c of an influx of more people, many of them healthy, into the insurance market.

The net effect of those three factors: Premiums would be 10 to 13 percent higher for the average policyholders.

A rise in premiums was also confirmed by an Aetna’s CEO, Ron Williams in a Businessweek interview:

 Will insurance premiums go up?

The answer is yes, and some of the things that will drive those premiums are significant additional taxes the industry will ultimately have to pay in the first year.

The President said that this bill would not have any impact on people who already had coverage, that it was about the uninsured, that there would be no change. Will this legislation change the coverage of people who are already paying for it?

My perception is, yes, things will change. You might not have a plan that includes the exact same doctors. You might have plans that have richer benefits, and therefore you're going to pay more for benefits you may or may not want. It would have been a better message to say, we're going to make certain you maintain your eligibility.

Additionally, even when the mandate kicks in, it’s not likely to offset costs. Most people have insurance through their employer. This is one of the main reasons health care costs are becoming more expensive—people who have low-deductible plans without co-pays are not sensitive to the pricing of services and therefore, consume more health care.  Professor Katherine Baicker, Professor of Health Economics at Harvard, testified before the Senate on this phenomenon:

Why does insurance cause greater consumption of health care? Insurance, particularly insurance with low cost-sharing, means that patients do not bear the full cost of the health resources they use. This is a good thing – having just made the case for the importance of the financial protections that insurance provides – but comes with the side-effect of promoting greater consumption of health resources, even when their health benefit is low. This well-documented phenomenon is known as “moral hazard,” even though there is nothing moral or immoral about it. The RAND Health Insurance Experiment (HIE), one of the largest and most famous experiments in social science, measured people’s responsiveness to the price of health care. Contrary to the view of many non-economists that consuming health care is unpleasant and thus not likely to be responsive to prices, the HIE found otherwise: people who paid nothing for health care consumed 30 percent more care than those with high deductibles.4 This is not done in bad faith: patients and their physicians evaluate whether the care is of sufficient value to the patient to be worth the out-of-pocket costs. The increase in care that individual patients use because of insurance has even greater system-wide ramifications. R&D in new medical technologies responds to the changes in aggregate incentives driven by health insurance. While these technologies may improve welfare, they also raise premiums because of larger armamentarium of treatments available to the sick. There is evidence of these system-wide effects: when Medicare was introduced in 1965, providers made spectacular investments beds in high-tech care, and hospital spending surged over 25 percent in 5 years.5

She goes on to point out that preventative care, which is mandated in Obamacare, will not lower prices either.

Even increases in preventive care do not usually pay for themselves: in general prevention is good for health, but does not reduce spending. Some preventive care has been shown to be cost- saving – such as flu vaccines for toddlers or targeted investments like initial colonoscopy screening for men aged 60-64 – but most preventative care results in greater spending along with better health outcomes. Indeed, some money spent on preventive care may not only cost money, but may be no more cost effective than some “high-tech” medical care For example, screening all 65-year-olds for diabetes, as opposed to only those with hypertension, may improve health but costs so much (about $600,000 per Quality Adjusted Life Year) that that money might be better spent elsewhere.6

The CBO has confirmed her analysis on preventative care costing more here, and cites several other studies confirming these results.  While preventative care may makes sense on an individual level, it is not cost effective at a group level, because doctors do not know ahead of time who will succumb to a particular disease.  While screening will catch a few illnesses to the benefits of those individuals, the cost of preventative care for everyone exceeds the savings for the individual.  While prevention is a positive factor in producing better health outcomes, the socialization of these costs in the current bill is a further entrenchment of a collectivist mindset than puts government in charge of our health care, using boards and bureaucracies to tell us what type of care we ought to be receiving, stripping individuals of responsibility for their own health.  This goes back to how the individual mandate changes the contract between the government and individuals.  It opens the door for society later to start demanding and mandating people engage in healthier behavior, for example, by taxing unhealthy foods, such as soda taxes that many states are starting to consider as a serious proposal. If you’re wondering what’s wrong with that logic, why not get rid of the marriage penalty and instead provide an additional tax to single people over the age of 25, or provide more government spending for faith based initiatives? Medical studies consistently show married, religious people are healthier than single people or those not religious. As Megan McArdle points out, we don't have any programs promoting those lifestyles, but elites have no problem insisting on calorie menus and sounding the alarm on obesity: "when you listen to obesity experts, or health wonks, talk, their assertions boil down to the idea that overweight people are either too stupid to understand why they get fat, or have not yet been made sufficiently aware of society's disgust for their condition."

But back to the cost issue.  The Dems will say these premium raises are offset by subsidies. However, the WSJ pulls back the curtain on this pretend savings:

So the bill will increase costs but it will then disguise those costs by transferring them to taxpayers from individuals. Higher costs can be conjured away because they're suddenly on the government balance sheet. The Reid bill's $371.9 billion in new health taxes are also apparently not a new cost because they can be passed along to consumers, or perhaps will be hidden in lost wages.

This is the paleoliberal school of brute-force wealth redistribution, and a very long way from the repeated White House claims that reform is all about "bending the cost curve." The only thing being bent here is the budget truth.

Moreover, CBO is almost certainly underestimating the cost increases. Based on its county-by-county actuarial data, the insurer WellPoint has calculated that Mr. Baucus's bill would cause some premiums to triple in the individual market. The Blue Cross Blue Shield Association came to similar conclusions. 

The health care debate is complicated but Americans aren’t economically illiterate—they understand the money to fund this entitlement has to come from the taxpayer.  And they understand when you have more services in your health care plan, as mandated by Congress, there will be increased costs that are passed onto the consumer. On both ends—not only through premium increases, but also likely, on increased taxes in the future.
In an upcoming series of posts, I'll discuss how Obamacare transforms America in these ways:
3. Obamacare will add an unsustainable entitlement that will increase the national debt, requiring higher taxes in the future that will negatively impact economic growth.


4. Obamacare will put a heavier burden on businesses in these fragile economic times, and jeopardize an economic recovery.

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  5.  5. Obamacare will hamper medical innovation to produce the latest life-saving technologies.

2.   6. Obamacare will warp the patient-doctor relationship where cutting costs will be placed above what is right for the patient.

    

      7. Obamacare will lead to rationed care.

      8. Obamacare will lead to a two tiered system of health care, magnifying economic inequality.

9. Obamacare worsens the special interest alliance between government and big business.

10. Obamacare will transform America to a European style welfare state, leading to a loss of freedom.