How Much Will Insurance Cost Under Obamacare?

May 28, 2013 Update: California’s just-released prices for ACA coverage are close to my 2012 estimates, with an unsubsidized bronze plan (for a 25 year-old) available for $142/month in Los Angeles.

Health insurance premiums for minimum coverage will likely be around $150/month for 27 year-olds under the ACA, since the ACA includes relatively high-deductible plans under the Bronze plan option.

Now that the dust has settled on the Supreme Court ruling, let’s attempt to answer a simpler question – how much will health insurance cost under the ACA (Obamacare)? Individuals purchasing health insurance via the new health insurance exchanges will be able to select from four plan levels: bronze, silver, gold, and platinum. The law dictates that plans falling into these categories must have 60%, 70%, 80%, and 90% “actuarial value”, respectively. The concept of “actuarial value” dictates that the plan must cover the specified percentage of health care costs for enrolled individuals. Individuals enrolled in a bronze plan can expect their insurance to cover 60% of their health costs, for instance [1].

The Kaiser Family Foundation commissioned a study to determine the structure of plans that might meet the 60% actuarial value standard for the Bronze plan.  The study found that the following individual health care plans might qualify (all plans have a cap of around $6350):

  • A plan with a $6350 deductible and 0% coinsurance
  • A $4350 deductible with 20% coinsurance
  • A $2750 deductible with 30% coinsurance

How much would plans like these cost in 2014? We will focus on adults aged 27 in this example, since young adults more frequently go without insurance, and since young adults can now stay on their parents’ plans until 26. We can shop online for similar plans and get some results for comparison [2]:

  • $67.26 for a $2750 deductible / 30% coinsurance plan in Atlanta for a 27 year-old male
  • $98.21 for a $2750 deductible / 30% coinsurance plan in Atlanta for a 27 year-old female [3]
  • $129 for a $2750 deductible / 30% coinsurance plan in Silicon Valley for 27 year-old men and women
  • $73.22 and $95.07 for a $2500 deductible / 20% coinsurance plan in Chicagoland for a 27 year-old man and woman, respectively
  • $95 for a $2750 deductible / 20% coinsurance plan in Houston, TX for a 27 year-old man
  • $132 for a $2500 deductible / 10% coinsurance plan in Houston, TX for a 27 year-old woman
  • $70.75 and $90.46 for $2500 deductible / 20% coinsurance plan in Hartford, CT for a 27 year-old man and woman, respectively

Here are two market quotes for 63-year old females in relatively expensive markets:

  • $302 for $1200 deductible / 10% coinsurance HMO plan in New York, NY for a 63-year old woman
  • $516 for $3500 deductible / 10% coinsurance PPO plan in Santa Clara, CA for a 63-year old woman

The ACA stipulates that the most expensive policies for older individuals can be no more than 3 times the price of policies for younger adults. The data above show that a 27-year old can get a plan similar to the exchange bronze plan for around $100 per month today, but this is less than 1/3 the cost for older Americans. Using 1/3 of the cost of the plans for older women as a price floor, we get an estimate of $150 per month as the lower limit for plan prices [4].

This estimate is lower than the commonly-cited CBO estimate of $4500 per individual for bronze plans via the ACA exchanges. The CBO estimate is for 2016, and so it builds in two additional years of premium inflation (roughly 15%). The CBO number is also an average across all age groups – since young adults’ plans can cost 1/3 as much as the oldest (non Medicare-age) Americans, 27 year-olds’ plans will be much cheaper than the average. While the ACA should have allowed for more high deductible plans, it’s good to know that the bronze plans do provide for some affordable coverage options within the new health insurance exchanges.

[1] The 60% bronze plan threshold and other thresholds are applied to each plan considering the average expenditures for plan members. Given the deductible and copay structure of a particular plan, it’s possible that the plan spends a higher (or lower) percentage on a particular individual’s care. For instance, if you don’t use your plan at all in a given year, then your plan spent 0% on your care. At the other extreme, if you are diagnosed with cancer, and incur $100k in costs in a year, even a bronze plan would cover  perhaps 90% of that amount.

[2] All plans were found on ehealthinsurance.com on 8/2/2012.

[3] The wide discrepancy between plan prices for men and women will be eliminated by the ACA. For these purposes, averaging men and women’s prices enables us to get closer to a representative price under the ACA.

[4] Since health insurance is more expensive for women, and more expensive for older Americans, we used a 63 year-old woman as the prototype for an expensive risk in the existing private health insurance market. At age 65 virtually all Americans gain entry into Medicare (or Medicaid for seniors), and so 63 is the oldest age for which insurance quotes can reliably be obtained (some insurers won’t write short-dated policies, and no insurer writes non-Medicare policies for 65+ Americans). The average price from the two expensive quotes thus obtained was $409. After adding in 10% in premium inflation between now and January 2014, we get a premium estimate right around $450 per month. By law, one-third of this is the minimum that the exchanges can charge for any adult – and this equals $150 per month.

A One-Line Fix For Medicare Spending

My one-line Medicare / Medicaid spending fix:

Medicare should continue to pay 80% of health care costs for recipients’ care below $40,000 per calendar year, but should pay only 50% of health care costs above $40,000 per calendar year.

With the ongoing debt-ceiling debate and political discussions over how to cut spending dominating discourse, I thought I’d chime in with a simple plan to fix America’s long term budget crisis. The majority of America’s future budget deficits are a result of runaway growth in health care spending, despite reductions in Medicare spending put in place with the recently passed health care reform. Paul Ryan and other conservatives propose to fix this by ending the Medicare program, and replacing it with an insurance-voucher scheme. President Obama proposes to control cost growth through the IPAB, a board with the power to control Medicare reimbursement policies.

My plan is far simpler than either, and will preserve Medicare as it exists today for 90% of recipients. How does this plan work? Kaiser Foundation research shows that 90% of Medicare recipients receive less than 40k per year in health care. The remaining 10% of recipients actually spend 60% of the Medicare budget. The proposed change would require these recipients to either shoulder more of the cost of expensive treatments, or to utilize less expensive treatments. Note that Medicare would not leave any recipient high-and-dry, but it would require even cost sharing for expensive treatments.

When faced with higher cost-sharing, many Medicare recipients would opt not to receive the newest cancer drugs, or the latest titanium hip replacement. It’s also quite likely that when faced with this two tier reimbursement structure, many health care providers would change treatments and pricing to stay competitive within the new structure – there’s evidence that today, health care providers charge Medicare what they do simply because Medicare will pay.

How much money would the proposed change save? Assuming that most spending above the $40k mark is eliminated [1], then Medicare and Medicaid might save $200B in the first year alone. This kind of change would also reduce health care cost inflation, since high-cost care would be curtailed significantly. It’s quite likely that this change would completely eliminate Medicare’s unfunded liability, without changing the program significantly for the majority of beneficiaries. But clearly this is too simple and non-ideological a change to stand a chance [2]!

[1] According to CMS, in 2011 total Medicare and Medicaid spending will total $1 Trillion. If my proposal to cut government cost sharing to 50% above 40k eliminated most spending above the 40k line (since many Medicare patients would not be able to pay their increased share above 40k), then the federal government would save half of the money expended above the 40k line. In 2006 the average expenditure for the high spenders in Medicare was $48k – in 2011 this would likely be over $60k per year with inflation and cost growth totaling 5% per year. Assume that the entire 20k per year above the 40 line were saved from using a resume builder online – that would mean that the high spenders’ health care expenditures would be reduced by 33%, reducing total government health care expenditure by 20% (one-third of the 60% spend on these expensive patients).

[2] I should note that this plan would leave some patients with expensive conditions to make difficult choices. By ending the endless spigot of government health care money, 10% of current beneficiaries would have to decide whether they could afford to have certain expensive procedures. But patients, not regulators, would be able to decide – the patients would simply be required to pay an even share for expensive treatment.

[3] In actual implementation, such a plan would have to be phased in. For instance, Medicare could initiate a 1 percentage point reduction in cost-sharing for each of the next thirty years, gradually moving from 80% to 50% for expenditures over the threshold.

The End of Government Subsidized Medical Innovation

Most Americans don’t realize it, but America’s status as the world’s primary source of medical innovation is heavily government-subsidized. During the healthcare reform debate, many pointed out that America spends over 17% of its GDP on health care, far higher than any other nation, and almost double the average for OECD nations. This high rate of spending on health care has fostered the growth of high technology health care, from pharmaceuticals to biotech, medical devices, imaging equipment and even surgical robots. What would happen if the government were no longer able to spend at such a rate?

Imagine for a moment that America had a purely free-market health care system, with no Medicare, Medicaid, and without tax breaks for health care. The government currently pays for 62% of all health care spending, and without this support, our healthcare system would be much smaller. If a free-market approach to healthcare brought spending down to the OECD average, the US would spend $1.2 Trillion (48%) less on healthcare than it does today [1]. Without Medicare to pay for costly end-of-life care, it’s doubtful that $200,000 per year chemotherapy drugs would find a market, or that anyone would pay full price for replacements on hips implants. In short, a free market health care system would deliver less health care technology to America – though it would still deliver technology that proved itself worthy and affordable to patients.

Of course in the real world government-subsidized innovation isn’t going away – or is it? America’s long term budget problems are driven chiefly by health care spending, as acknowledged by the trustees of Medicare. The Soviet Union eventually went bankrupt by spending 40% of its GDP on defense. The United States is on track to spend 40% of its GDP on healthcare by 2050 [2], with much of that on high tech gadgetry with low marginal benefit, and with virtually all of that money coming from taxpayers. This is obviously not sustainable.

The newly enacted healthcare reform law begins cutting Medicare in earnest, but deeper cuts will be needed to prevent Medicare’s insolvency. These cuts will inevitably mean less spending, and less revenue opportunities for big pharma, biotech, and medical equipment companies. While many other countries already have highly regulated healthcare markets with lower profit margins, pharmaceutical and medical equipment companies have been able to achieve consistent growth by tapping the US market and US taxpayers. Regardless of how healthcare reform plays out, America’s huge and growing debt mean that this situation will come to an end. The golden age of subsidized medical innovation is drawing to a close.

[1] CMS estimates that 2009 health care expenditures were $2.5 Trillion, or 17.3% of GDP. If this were reduced to 8.9%, the OECD average, health care expenditures would be $1.29 Trillion, almost half of what they are today. While we don’t know exactly what US health care spending would be without government subsidies and programs, we do know that government spending and subsidies would drop by roughly $1.3 Trillion ($1.1 Trillion in direct spending plus $200 Billion in subsidies), leaving a number very similar to the OECD average.

[2] See Figure 4 of this CBO Report for long term health care spending projections.

What Percentage of US Healthcare Is Publicly Financed?

Public, taxpayer-funded health care spending will pay for for 53% of US health care in 2009. If health care tax breaks are included, this figure rises to 62%.

Of the $2.5 Trillion dollars expected to be spent in the United States on health care this year, what percentage is paid by taxpayers? The Kaiser Family Foundation calculates that 46% of health care spending was publicly financed in 2006, but this number seems to exclude health care for government employees. The Center for Medicare & Medicaid Services collects data on health care spending in its National Health Expenditure survey, which can be used to perform a direct calculation on the government share of health care financing. The following table summarizes the 2007 NHE data, the latest year for which a detailed breakdown is available:

Category Amount (2007 $ Billions)
Medicare [1] 418
Medicaid (Including State Funding) 340
Other Public Health Programs [2] 189
Federal, State, and Local Employee Health Care 134
NIH and FDA Budgets [3] 32
Total Public Spending 1113
All Private Health Spending 1018
2007 Total US Health Spending 2131

The 2007 data show that 52% of all health care in the United States is publicly financed. The NHE data also show that from 1987 to 2007, the government’s share of health care financing has risen by ten percentage points, or about half a percentage point per year. This means that in 2009, the public share of health care spending is likely at 53%, or perhaps higher as a result of rising unemployment due to the recession. If health care subsidies (primarily tax exemptions) are included as government financing of health care, they add another $200 Billion to the total, raising the government’s share of health care spending to 62%.

With the government already paying for the majority of US health care, one thing is clear about the current health care reform debate: The debate is not about whether the government will take control of the health care system, as that has quietly taken place over the last 40 years. The real debate is about how the government should distribute its health care spending, and on whether it will be able to rein in endless health care cost growth.

[1] The detailed NHE data split up by source of payment can be found here:

In calculating the numbers in the above table, I used Table 1 in the pdf. I allocated all costs associated with Medicare to the public sector, unlike the table in the pdf, which counts Medicare premiums and contributions as private sector payments. From a standpoint of determining government involvement in the health care system, it makes more sense to count all Medicare dollars as public financing, particularly since paying Medicare taxes is precisely how most of the Medicare system is funded!

[2] According to the NHE pdf, other federal, state, and local health programs “Includes maternal and child health, vocational rehabilitation, Substance Abuse and Mental Health Services Administration, Indian Health Service, Office of Economic Opportunity (1965-74), Federal workers’ compensation, and other miscellaneous general hospital and medical programs, public health activities, Department of Defense, Department of Veterans Affairs, and State Children’s Health Program (SCHIP)” and “Includes other public and general assistance, maternal and child health, vocational rehabilitation, public health activities, hospital subsidies, and state phase-down payments.”

[3] The NIH budget is $30 Billion, and can be classified entirely as health care spending, though it’s often left uncounted. But isn’t research to cure disease health care spending? If it’s not, then what exactly is it? I have also included two-thirds of the FDA budget, as that is the portion related to drug and medical device supervision.

List of Countries with Universal Healthcare

Update 1/21/2013: With the Supreme Court’s decision to uphold the ACA (aka Obamacare), and President Obama’s inauguration to a second term today, the US will have universal health care in 2014 using an insurance mandate system.

Thirty-two of the thirty-three developed nations have universal health care, with the United States being the lone exception [1]. The following list, compiled from WHO sources where possible, shows the start date and type of  system used to implement universal health care in each developed country [2]. Note that universal health care does not imply government-only health care, as many countries implementing a universal health care plan continue to have both public and private insurance and medical providers.

Country Start Date of Universal Health Care System Type
Click links for more source material on each country’s health care system.
Norway 1912 Single Payer
New Zealand 1938 Two Tier
Japan 1938 Single Payer
Germany 1941 Insurance Mandate
Belgium 1945 Insurance Mandate
United Kingdom 1948 Single Payer
Kuwait 1950 Single Payer
Sweden 1955 Single Payer
Bahrain 1957 Single Payer
Brunei 1958 Single Payer
Canada 1966 Single Payer
Netherlands 1966 Two-Tier
Austria 1967 Insurance Mandate
United Arab Emirates 1971 Single Payer
Finland 1972 Single Payer
Slovenia 1972 Single Payer
Denmark 1973 Two-Tier
Luxembourg 1973 Insurance Mandate
France 1974 Two-Tier
Australia 1975 Two Tier
Ireland 1977 Two-Tier
Italy 1978 Single Payer
Portugal 1979 Single Payer
Cyprus 1980 Single Payer
Greece 1983 Insurance Mandate
Spain 1986 Single Payer
South Korea 1988 Insurance Mandate
Iceland 1990 Single Payer
Hong Kong 1993 Two-Tier
Singapore 1993 Two-Tier
Switzerland 1994 Insurance Mandate
Israel 1995 Two-Tier
United States 2014? Insurance Mandate

Will the United States join this list in 2014?

[1] Roughly 15% of Americans lack health insurance coverage, so the US clearly has not yet achieved universal health care. There is no universal definition of developed or industrialized nations. For this list, those countries with UN Human Development Index scores above 0.9 on a 0 to 1 scale are considered developed.

[2] The dates given are estimates, since universal health care arrived gradually in many countries. In Germany for instance, government insurance programs began in 1883, but did not reach universality until 1941. Typically the date provided is the date of passage or enactment for a national health care Act mandating insurance or establishing universal health insurance.

System Types:

Single Payer: The government provides insurance for all residents (or citizens) and pays all health care expenses except for co-pays and coinsurance. Providers may be public, private, or a combination of both.

Two-Tier: The government provides or mandates catastrophic or minimum insurance coverage for all residents (or citizens), while allowing the purchase of additional voluntary insurance or fee-for service care when desired. In Singapore all residents receive a catastrophic policy from the government coupled with a health savings account that they use to pay for routine care. In other countries like Ireland and Israel, the government provides a core policy which the majority of the population supplement with private insurance.

Insurance Mandate: The government mandates that all citizens purchase insurance, whether from private, public, or non-profit insurers. In some cases the insurer list is quite restrictive, while in others a healthy private market for insurance is simply regulated and standardized by the government. In this kind of system insurers are barred from rejecting sick individuals, and individuals are required to purchase insurance, in order to prevent typical health care market failures from arising.

Healthcare Bubble

Dot com bubble. Real estate bubble. Commodities bubble. Healthcare bubble? How can the US healthcare system be a bubble when tens of millions are uninsured and more people fall through the cracks daily? The media, public, and politicians alike have been more concerned with the inadequacies of the system than with its rapid growth. US healthcare spending has grown enormously, exceeding the rate of inflation for decades to become the largest sector of the US economy. The United States now spends over 16% of its GDP on healthcare, almost double the average for developed nations.

Perhaps Americans just demand the best and priciest healthcare, with the most modern technology and treatments. Other insurance prices are on a steep rise, including home, accidental and auto insurance. If Americans paid for healthcare themselves, this would simply represent a rational spending choice. But the federal government now incurs 60% of all healthcare spending, meaning that taxpayers, and not individuals, pay for most of our healthcare. Medicare, Medicaid, and other direct government healthcare accounts for 46% of healthcare spending, while tax breaks on healthcare subsidize another 10-15% of healthcare spending [1].

At current growth rates, government healthcare spending will exceed the entire Federal budget by 2050 [2]. Total spending on healthcare will near one-third of GDP by 2030. It’s unlikely that the US can devote 1/3rd of all productive capacity to healthcare without crippling other sectors of the economy and reducing overall economic growth. The healthcare bubble thus dwarfs all previous bubbles in size, since the technology, real estate, and energy sectors are all so much smaller.

How will the bubble pop, and what will its effects be? Since most healthcare spending is federal, the bubble will pop when the government can no longer afford its healthcare outlays. The US has been able to borrow freely by issuing debt for many decades, but this will eventually end once our debt exceeds GDP. With the current downturn, government debt may actually exceed GDP by 2015 [3]. Thus the reckoning may come sooner than many expect.

Will healthcare reform contain costs and deflate the bubble gradually? Most reform plans focus more on increased coverage than on cost control, so they may exacerbate the problem. Eventually the hard choices will have to be made, and they will include some combination of reducing Medicare benefits, cutting provider reimbursements, openly rationing government health care, and limiting the tax break on health insurance. I just hope that some of the hard choices are made before we are collectively up against a fiscal wall.

[1] $200 Billion in taxes are foregone as a result of the employer-based healthcare tax deduction, equivalent to 10% of all healthcare spending. When this subsidy is included the government’s share of healthcare spending rises to 56%. This analysis does not include the exemptions on property taxes and sales taxes that healthcare providers receive; adding these subsidies in would likely drive the government’s share of health care spending over 60%.

[2] The CBO predicts that Medicare and Medicaid will account for 14% of GDP by 2050. This figure doesn’t include healthcare spending through the VA system, SCHIP program, and other federal healthcare programs, which total $100 Billion in spending today. If these programs also grow commensurately, total government spending may near 18% of GDP in 2050, roughly equivalent to total government revenue.

[3] This projection of public debt growth shows that US government debt will exceed gdp by 2050. This only takes into account debt held by the public, however. Gross government debt is already above 65% of GDP, and may grow to 75% by the end of 2010 as a result of the recession and stimulus spending. With deficits of $500B+ per year possible for several year, US total government debt could exceed gdp in less than 10 years.

Excellent Analysis of the State of US Healthcare

I’ll digress here from my typical short-essay style to post an excellent series of articles by Dr. Richard Fogoros on the state of US healthcare. Dr. Rich does an excellent job showing how healthcare in the US is primarily government-funded, and how politicians’ inability to confront growing healthcare demand has led to covert healthcare rationing. He goes on to argue that open rationing of public resources is the only long-term approach moving forward, and proposes a system for rationing. The “Grand Unification Theory of Healthcare” is a bombastic title, and the articles are verbose, but Dr. Rich does an excellent job of addressing the topic head-on, and I agree with most of his conclusions.

The Grand Unification Theory of Healthcare, Dr. Richard N. Fogoros, MD