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Obamacare Sticker Shock: Not Very Shocking

“Death panels” are out. “Sticker shock” is in. For the last few weeks, critics of Obamacare have spent less time on their more hysterical claims and focused, instead, on a practical argument. Because the new health care law mucks up the insurance market with regulations on pricing and benefits, they say, you’re going to pay a lot more for insurance. “Health insurance costs are going up,” Sally Pipes, president of the Pacific Research Institute and one of the law’s most persistent critics, wrote recently in a Forbes column. “And for that, you can thank Obamacare.”

It’s the kind of argument that gives the administration and its political allies night sweats, because it has some basis in fact. Come next year, when the Affordable Care Act takes full effect, some people are going to start paying more for their health insurance than they would otherwise. But notice the key word in the previous sentence: “Some.” The real story about Obamacare, the one the law’s critics don’t emphasize, is that far more people will actually pay less. And while those paying more may not be happy about it, they’ll also be getting something for the extra premium dollars they pay up front.

Who are these people? Before we get to that, let’s talk about who they are not. If you are like most non-elderly Americans with private insurance, you get health benefits from a medium- or large employer. It’s part of your compensation. Obamacare isn’t going to have much effect on your premiums one way or the other—except, hopefully, in the long run, as the law’s efforts to control health care costs gradually reduce the annual increases to which you’ve become accustomed.

No, the real action in the health care law will take place in what’s known as the “non-group” market, which affects far fewer people (a few million) but does so in some pretty profound ways. If you’ve ever tried to buy insurance on your own, then you know what a nightmare it is. Here is where insurers screen carefully for bad medical risks. If carriers decide you are one of these people—maybe you have diabetes or a history of gastro-intestinal problems, or maybe you beat cancer a few years ago—they will charge you higher premiums, withhold benefits for anything related to your pre-existing conditions, or deny you coverage altogether.1

The non-group market is also notoriously unstable. Premiums can jump wildly from year to year, depending on how well your insurer is doing financially and what’s happening to other people in your “block.” (That’s what insurers call a group of people who pay premiums into a common pool, from which insurers take money to pay those beneficiaries’ bills.) Benefits and networks vary enormously, from plan to plan. Even careful, conscientious consumers frequently discover that their insurance leaves them without coverage they expected—or, in cases of outright fraud, without coverage at all.2

One of Obamacare’s primary goals is to fix these problems. To do so, it will set up virtual marketplaces, known as “exchanges.” If that’s how you end up buying insurance—in other words, if you don’t get coverage through an employer or through a government program like Medicaid—you’ll discover that you can buy any policy insurers are selling, at the list price, no matter what your pre-existing medical status. The only variable will be your age and whether you use tobacco, but even for those factors insures will have only limited ability to change prices. You will have different options for coverage, hopefully quite a few, but you’ll also know that every plan includes comprehensive benefits—basically, everything from checkups to cancer care. And depending on your income level, you’ll be eligible for financial assistance on both premiums and future out-of-pocket expenses.

The regulations and subsidies that make this possible will each influence the price you pay, although in different and sometimes contradictory ways. The regulations on benefits, for example, will tend to make insurance more expensive, because today non-group policies are so notoriously spotty. Among the most conspicuous differences will be coverage of maternity care: Individual policies rarely include maternity benefits. Starting next year, they must. But that means insurers are going to be paying a lot more to deliver babies (and deal with the complications at birth, which can be enormously expensive). That will eventually come through as higher premiums. On the other hand, the financial assistance—which is in the form of tax credits—will make insurance less expensive for people who receive it. And those subsidies will get pretty big. For some people, they will amount to several thousand dollars a year.

As you may have guessed by now, what this all means to you personally depends primarily on who you are. As a general rule, the people who suffer the most under the current system will also benefit the most under the new one. If you are older or sicker and have been trying to get coverage in the non-group market, then you’re in luck because insurers won’t be able to jack up your premiums (or reduce or deny you coverage) anymore. If your income is moderate to low—say, less than $50,000 a year for a family of four—you’re also going to be a winner. The subsidies, which are larger for people with less money, will more than offset the higher costs.

But a system that no longer discriminates against some people is, by definition, also a system that no longer discriminates in favor of others. That brings us to the people who really will see higher prices, the ones the Obamacare critics have in mind. They will tend to be younger, healthier, and more affluent—and they will tend to be men. These are the people who, today, benefit from medical underwriting: They pay low premiums, and tolerate tiny doctor networks or skimpy benefits, because they are unlikely to have medical conditions that require extensive medical treatment. These are also the people who, under the new system, will make too much money to qualify for large subsidies, enough to offset the cost of higher insurance.

Exactly how many people fall into these categories? How much more will they pay? It’s difficult to say definitively. Several estimates are circulating, but each has their limitations. They frequently don’t account for geographic variation or the subsidies or the availability of reduced-benefit, “catastrophic” plans available to people 29 and under.3 “If the catastrophic plans are part of a separate insurance pool as proposed, that would largely do away with any rate shock for twenty-something males if they choose to enroll in those plans,” says Larry Levitt, an expert on insurance and senior vice president at the Kaiser Family Foundation.

Many states have been looking to MIT economist Jonathan Gruber to provide estimates, just as the Romney administration in Massachusetts and then the Obama Administration in Washington. Gruber, a reform advocate, tells me that “In most of the states I have looked at, many more people end up better off than worse off.” Levitt, who has been studying the available projections, has a similar take:

"With the cushioning impact of federal premium subsidies, most people buying their own insurance today will end up paying less under reform for equivalent coverage. Premiums for some will go up because of minimum benefit requirements, but that’s a trade of better insurance protection for somewhat higher premiums.4"

That last point is important. If you are one of the young, non-poor, healthy men who will end up paying a few hundred dollars or even over a thousand dollars more for your coverage next year, you might not really care that you’re among a relatively small group.5 You also might not care about the question of obligation—whether, in order to have an insurance system that protects everybody, it’s fair to ask those who have youth, health, and enough money to pay for decent insurance to fork over more than they are now.6

But before you decide Obamacare is a bad deal for you, remember that it’s not just about moral principle. It’s also about your self-interest. Today you are healthy. Tomorrow you may not be. You might have an accident or develop a serious illness—and up facing huge hospital bills. The coverage you get under Obamacare won’t be perfect, but if you’re paying more for it then it’s probably going to offer you more protection than you have now. Yes, you’ll be spending more money—but you’ll be getting something for it, too.

  1. Karen Pollitz and a team of researchers at the Kaiser Foundation once conducted a test: They made up seven fictional people, each with different medical conditions—one had hay fever, one who’d had knee surgery a decade before, one with HIV, one who’d had breast cancer, and so on. Then they had these fictional people submit applications to insurers in markets across the country. The result? Only 10 percent of applications produced a “clean” offer—coverage with full benefits and standard prices. About 60 percent had higher rates, reduced benefits, or some combination of the two. The rest, close to 40 percent, were rejected outright. 

  2. One scam victim was a Florida woman named Janice Ramsey, about whom I wrote in my book Sick and later in a New Republic item, which you can read here. Her experience was hardly unusual, as a Commonwealth Fund report by Mila Kofman some years ago detailed.

  3. One example of this is a recent analysis from Oliver Wyman, which garnered a lot of attention with its prediction that 80 percent of young people would pay higher premiums. Overall the analysis seems sound, but, as one of the co-authors confirmed to me, the analysis did not take account of the catastrophic plans. 

  4. This is entirely consistent with what the Congressional Budget Office predicted while Congress was still debating about how to structure health care reform. 

  5. There’s a practical issue here, as well. If young people decide the steep prices make insurance a bad deal, and opt instead to pay the tax penalty for no coverage, that could raise prices for everybody else who has insurance. State regulators worry about this. A lot

  6. Many people, including the conservatives writing about this, believe that asking the young and healthy to subsidize the old and sick is fundamentally wrong. I disagree, obviously, but it’s a legitimate philosophical debate.