From Vox.com, a post summarizing recent findings about how well Obamacare is working on cost containment. There are two particularly interesting links in the post, one from the Kaiser Foundation about the expected 2015 health insurance plan costs, and an updated estimate from the Congressional Budget Office on the future costs of Obamacare. They both present slightly surprising news about how well Obamacare is working.

Falling health insurance premiums

The Kaiser Foundation reviews the cost of health insurance plans annually, and in 2013 it released estimates of the 2014 plan costs. This year it updated those estimates, using comparable methodology, and has found that the cost of some plans is going to fall dramatically, with a 0.8% drop in the cost of plans overall. The Foundation press release is available here, and includes a link to the report here [pdf]. This report is interesting because it looks at the cost of specific types of health insurance plan available through the health insurance exchanges (HIE) set up under Obamacare, so it is directly assessing the cost of plans that were introduced under Obamacare’s rules, operate within its mechanisms, and should be subject to cost containment and competition under the system established by Obamacare. The plans analyzed were the lowest-cost Bronze plan and the two lowest-cost Silvers. These plans are chosen because they are subject to subsidies, so the change in costs will directly affect the government’s budget bottom line, and they are also the plans poorer Americans are most likely to take up.

The system under which these plans operate is costly, but is explained fairly simply in the report. Basically people earning up to 400% of the poverty line are eligible for subsidies when they select these plans, which ensure they pay no more than 9.5% of their income for health insurance and as little as 2.5% for the poorest. Bronze plans get a stronger subsidy rule for people on up to 250% of the poverty line (I think). This is a kind of compensation for having been forced to take up insurance by the Individual Mandate aspect of Obamacare. Furthermore there is a nasty little competition-enhancer built into the act, which I didn’t know about and which is explained on page 4-5 of the document: if you are on a subsidized plan and some new insurer offers a cheaper plan of the same kind, your subsidy will be reduced by the difference in plan costs if you don’t switch plans. So as soon as a cheaper plan enters the marketplace, the insurer offering the more expensive plan will begin to bleed customers; and because there is now no way for an insurer to refuse to sell you a plan, the major blocker of churning (inability to switch plans due to pre-existing conditions) that used to exist will no longer prevent competition from being effective. As we will see, this nasty little trick buried in the law may have a significant role to play.

The Kaiser Foundation analyzed 15 plans from 15 states that included a major city and that have released their 2015 estimated premiums. It found major increases in the cost of plans in some states, from 8.7% in Tennessee to 0.8% in Los Angeles; and major falls in others, from 0.7% in New York to 15.6% in Nevada (page 2; unlabelled figure). Note that this means just in California and NY alone you are seeing no average change in plan costs in an area affecting a population of something like 60 million people. The average fall over the whole dataset was 0.8%; it’s not clear to me if this is a population-weighted average. On pages 3-5 you can see that these changes don’t affect people living on salaries up to 400% of the poverty line in most cases; all the changes actually affect is the size of the subsidy these people receive. It seems to me that this means all the competition pressure on health insurance companies arises from offering plans to people earning over 400% of the poverty line, to employers, and in attempts to grab market share through offering cheaper plans to the subsidized population. I think this is still a huge amount of competition pressure on the insurance companies, and the Kaiser Foundation offers some evidence that this competition is working. Vox.com is all breathless about how “premiums never fall” and “this is unprecedented,” but I don’t know if that is true or not; it could just be that the health insurance companies miscalibrated their plan prices in 2013, when the HIEs were first opening, because they (like a lot of people!) misjudged how popular the Exchanges would be, and now they are able to lower prices because they have a larger pool of low-risk customers than they expected. If that is the real reason for these falls, then it seems likely future falls in premium price are not to be expected; but even if this is the case, it still points to a huge win for Obamacare, since getting low-risk young people into insurance plans to push down prices was a core goal of the policy.

I have a caveat on the future progress of premium prices under best-case scenarios; see my final point below for more on this.

Reduced subsidy cost to the government

The CBO report can be accessed here [pdf], and presents an interesting picture of both predicted costs to the government, and insurance numbers. This report is also an update on a previous report, calculated using the same methodology, so enables comparability over time. Basically the CBO over-estimated the cost to the government of subsidies provided to people taking plans on the HIEs, to the tune of $100 billion over 9 years (that’s a pretty big overestimate!!) The main reason for this overestimate is that the cost of insurance plans is lower than expected, and is expected to rise at lower rates than previously predicted. The average cost now is $3,800, which is expected to rise to $6,900 over the next 9 years; the estimate for 2015 is $3,900 where previously it was $4,400 (page 6), indicating that greater downward pressure has been exerted on prices than was expected, and driving future savings.

The CBO also provides estimates and predictions of health insurance coverage rates (Table 2 on page 4), which show some pretty amazing figures. Most importantly from a coverage perspective, the number of uninsured has been calculated to have decreased by 12 million in 2014, rising to 26 million in 2024 with the majority of those figures being made up in the early years. That’s a huge achievement for health reform in the USA, and if it is sustained will truly be Obama’s great legacy. From the perspective of other nations with 99% coverage of universal insurance it’s a poor outcome, but from the perspective of the USA it’s the biggest social welfare achievement in several generations.

The CBO estimates of coverage include estimates with and without illegal immigrants included, because undocumented immigrants are not eligible for subsidies or access to the HIE, and will form a larger portion of the pool of uninsured as time passes. However, even after excluding them from the pool of uinsured, by the CBO’s calculations the problem of the uninsured will not be fully solved by Obamacare at any time in the next 10 years: insurance coverage will increase to 92% of non-elderly legally resident Americans by 2024 (Table 2 on page 4, again). The exact increase in coverage over a world without Obamacare is not calculated, but it appears to be about 10 percentage points. Now, in 2014, with Obamacare fully functional for 6 months to a year (and some of its provisions in place for a couple of years) coverage is still only 86%. For the sake of America’s poor and sick, I hope that the CBO’s projections prove to be an underestimate.

From the CBO’s projections it is worth noting that Obamacare is expected to cost the government about $150 billion a year a decade from now. That’s not small change! But the vox.com post has some other figures from other reports which suggest that actually there are major cost containment outcomes beginning to show, which is interesting and in my opinion unexpected – I thought cost containment would be one major area where Obamacare would fail. I also didn’t think competition pressures would be effective in lowering prices at least in the short term, so it will be interesting to see if Obamacare exceeds my expectations. Watch this space!

These two linked reports between them do give a fairly good overview of the function of Obamacare, how it works in practice and where its limitations are. Obamacare is a complex beast and it’s worth reading them if you want to get a better understanding of how the new system works from a policy and financing perspective. Reading them also helps to give a sense of how complex the US health financing system is, and how difficult and delicate a task it is to introduce a law aimed at moving towards universal health coverage that doesn’t use a top-down single payer system. The more I see of Obamacare in action, the more I appreciate the challenge Obama faced and the skill with which he developed his signature policy.

A caveat on the future of Obamacare: where the real costs lie

At the bottom of the Vox post is a link to this related post on eight facts about America’s insurance system. It has some interesting material about different problems with the American system, but point 5) seems most relevant to the debate about cost containment under Obamacare. According to this post, hospitals and health plans have very low profit margins compared to drug companies and manufacturers. Part of this is probably just statistical anomaly: major hospital networks and health plans in the USA are not-for-profits, and by design cannot be expected to contribute to calculations of profit margins. But the broader point is important: while Obamacare focuses heavily on competition through health plans, the companies providing these plans don’t have the ability to cut costs through their own operations. If they achieve cost containment, they are going to have to do it through pushing down the profits of the people they purchase drugs and technology from. But these are the people furthest removed along the purchasing chain, and hardest for a fragmented insurance industry to force price reductions from. This suggests that in future the health plans will not be able to further compete on price without further structural reforms to the way the industry works, most particularly some kind of cost constraints on the medical device and drug manufacturers. While superficially this might seem antithetical to the modern capitalist system, it’s pretty standard in most countries with good cost containment programs (Australia and Japan, for example) to have fairly strict price controls on drug companies.

The problem for insurers in America is that they don’t have bargaining power. They need to exert price controls on companies that can sell to their competitors, and because they are offering a service in a fragmented market they can’t effectively withdraw their purchasing power as a last-ditch negotiating tactic. In future I think this means a US administration is going to have to step in to directly fix some maximum prices, or use innovative policy instruments to give defacto joint bargaining power to the insurance industry. I suspect one way that this could be done would be to make the HIE a vehicle for price negotiation – so all insurance plans operating through an HIE can use the HIE as an intermediary for price negotiations with device/drug companies, kind of like the Wheat Marketing Board that used to negotiate prices on behalf of all wheat farmers in Australia. You can bet that the pharmaceutical industry will fight such a change viciously. Another possibility could be to exempt health insurance companies from racketeering or anti-competitive practices laws when they are negotiating with providers, so that they are able to openly collude to fix prices. This would likely also kick up a huge stink, and could have serious negative consequences if other sectors of the economy managed to successfully demand the same right (I’m looking at Microsoft, of course). Another option would be for the government to find ways to encourage (or force) mergers of insurance companies until they reach a large enough size that they can effectively negotiate with providers; but the size required would likely lead to monopoly providers in some states, which would undermine the competition benefits arising from exchanges.

I think this is a fundamental problem of a free market in health, that is going to be very hard to fix without substantially altering the amount of “freedom” in the free market. Obama has shown, I think, that carefully-constructed law has the potential (not yet achieved!) to guide a free market system towards universal health coverage without completely breaking its fundamental structures, so maybe future extensions of Obamacare to resolve these cost constraint limits are also possible. But when we look at how difficult it has been to get Obamacare through, and consider the unique properties of the person who achieved it, it’s really hard to believe that after Obama leaves office there will be another person with the same talents and traits, and the same initial popularity, who will appear in the next 10 years and be able to achieve the next steps in health financing reform in the USA. Maybe Clinton could, though I don’t know; but certainly things will be dire for Obamacare if the next president is a Republican. I really hope that Obama is able to turn Obamacare’s political image around, and use it to win the next presidential election. For America’s poor, the next couple of years will be crucial, and the outcome far from certain.