Obamacare: The Effects on Your Health Care Costs

This is the third part in a series of articles on the rollout of Obamacare, and how the law will change our health care system. Each week, we will publish two articles -- one on the changes in medicine and medical care, and one on changes in the insurance industry. We hope this series of articles will help you make better decisions when it comes to your health care and how you buy insurance.



When fully implemented over the next few years, the Affordable Care Act promises to provide insurance for 30 million Americans currently without health insurance coverage.

Those 30 million Americans were receiving health care, though they did not have insurance. In many cases, people without coverage never used hospitals nor had any expensive diagnostic tests during a given year. When they needed to see a doctor, they paid out-of-pocket. Some of the uninsured who did make use of inpatient hospital services were admitted through the emergency room; others received outpatient services in this setting. In either case, the patient at best paid a small portion of the bill, and in some cases met the standard for free care established by the institution and was never charged. In most cases, the hospital charges were eventually written off as uncollectible bad debts.

It is inevitable that those among the uninsured who will now receive health insurance coverage under Obamacare will make greater use of health care services than they did before.

The extent of the increase in utilization -- doctors visits, lab tests, outpatient surgeries, diagnostic tests, inpatient care -- is difficult to predict. But there is reason to expect that average utilization levels for the previously uninsured who will now get coverage through the exchanges or the expanded Medicaid program will soon approach, if not equal, those of similar age people who have historically had health insurance coverage already.

In various studies I have performed for clients, I have conservatively estimated the increase in utilization at between 30% and 50% over previous utilization levels for the uninsured. Assuming no change in prices, the 30% to 50% increase in utilization for about 10% of the population will increase overall health care costs by a few percentage points per year.

Since this population is in most cases below the age of 65, utilization rates are generally lower than for the Medicare population (over age 65 and disabled people), which can be 3 to 4 times that of the under 65 population. Whatever else happens as a result of the Affordable Care Act, the cost of providing services to the newly insured will increase health care costs. The total cost of insurance to pay for these services will, of course, rise even more, since there was no insurance cost previously (other than the bad debt cost that providers absorbed and included in their prices to insurers). The new insurance costs will also include administrative costs and the insurers’ profit margin.

This new increment to health care utilization and expense will occur in a country where health care costs, by any comparative measure, are already far beyond those of any other developed nation. Costs are much higher here whether measured by percentage of GDP devoted to health care, or by health care costs per resident. In 2010, the U.S. spent 17.6% of GDP on health care. The Netherlands was second at 12%. The average for OECD countries, including the United States, was 9.5% of GDP for health care.

Along with common complaints about high costs, critics of the American health care system point to outcome numbers, which do not appear to justify the high cost burden. American life expectancy is a few years below the highest levels among OECD countries, and seems to have plateaued. There is higher infant mortality in the U.S. as well, though much of this is related to how statistics are kept in various countries (many countries do not count babies that were born and died quickly as live births).

Cancer survival rates are higher in the United States, and medical research is centered here as well. New drugs and technologies are brought to market much faster in the U.S. than in many other OECD countries, despite the constant sniping at the slow FDA approval process.

In any case, it would be very difficult to make a case that U.S. costs, almost double the OECD average, are buying that much in additional value. U.S. costs are higher for various reasons. Most simply, they are higher because: a) there is more care delivered per person at pretty much every stage of life; and b) at higher cost per incident of service. The U.S. has far higher levels of diagnostic tests (particularly in radiology -- double the utilization rate of other OECD countries), and higher levels of various surgeries (especially knee replacements, caesarean section deliveries, and heart bypass surgeries). Hospital care tends to be more intensive than in other countries on average, and the cost of inpatient stays is three times the OECD average despite shorter lengths of stay in the hospital.

There is little reason to believe that this will change rapidly, if at all, as a result of the Affordable Care Act.

In essence, the ACA creates a new insurance system or coverage for those without care, but provides the same fee-for-service structure that is at work in the remainder of the health care system. In the fee-for-service system, the more doctors order, the more they and the other providers of care (e.g., surgery centers, hospitals) get paid. In other words, the providers of care determine the level of volume.