A Warning from Massachusetts

A Warning from Massachusetts

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If Congress passes President Obama's health care reform, it will "bankrupt this country" and "wipe out the American economy within four years."

That comes not from a speaker at a Tea Party rally or from congressional Republicans, but from Timothy P. Cahill, state treasurer in Massachusetts, a state that is beginning to see the fallout from a plan virtually identical to the one being pushed by Obama and the Democrats.

The basic structure of the Massachusetts program is the same as the president's: an individual and (weak) employer mandate; heavy subsidies for low-income residents, including an expansion of Medicaid; and an exchange (the "connector") to make it easier for people to participate in individual and small group insurance markets.

Most of the insurance regulations Obama seeks were already in place in the state. But most importantly, Massachusetts, like Obama, put its emphasis on expanding coverage, rather than on controlling costs. 

Although the state's official count is suspect, there is no doubt that Massachusetts did significantly reduce the number of uninsured residents. However, it did so not by making insurance more affordable, but simply by subsidizing coverage within the existing high-cost market. In fact, two-thirds of the newly insured are subsidized.

Predictably, insurance premiums, already the highest in the nation, have continued to rise. Over the first three years following the state's reforms, premium increases averaged 8-12 percent, nearly double the national average. This year, insurers sought hikes ranging from 8 to 32 percent. This in turn has driven the cost of subsidies ever higher. Despite a cigarette tax hike, fee increases and federal aid, the program continues to threaten an already overburdened state budget. Now, price controls, global budgeting and the inevitable rationing that they bring, are looming.

The president's plan faces the same inevitable downward spiral.

According to the Congressional Budget Office, if we do nothing, health insurance premiums will roughly double by 2016 and keep rising after that. The president's bill does little or nothing to change that. For most Americans, who receive insurance through large employers, premiums will most likely remain unchanged or at best decline by 3 percent less than would otherwise occur. That represents a best-case savings of just a few hundred dollars. But for the millions of Americans in the individual market, those most likely to receive subsidies, their premiums will actually increase by 10-13 percent more than if we did nothing.

Supporters of the president's plan generally answer this criticism with two arguments. First, this added increase in premiums is not due to an incremental per unit rise in the price of insurance, but rather because people will be receiving more comprehensive benefits. That's true, but ultimately irrelevant. If the government ordered everyone to sell their current car and buy a Porsche, it could be argued that the per unit price of automobiles hadn't risen. Yes, people will have to pay more, but they will arguably be receiving a better car. But that doesn't change the bottom line. The car costs more and people will have to pay more for it.

Second, it is pointed out that roughly 57 percent of those buying insurance through the individual market would receive subsidies. And those receiving subsidies will end up paying considerably less than they would without reform. But the overall cost of the insurance will not change, it will merely be shifted from the individual to the government.

Worse, however, CBO makes it clear that its estimate of future premiums is far from guaranteed. Several outside studies have suggested that premiums will rise even faster. Yet, by establishing a new entitlement, the president's bill will lock the government in to paying those premiums whatever they may be. The insurance industry will undoubtedly be thrilled with that prospect--but American taxpayers should not be.

Michael Tanner is a senior fellow at the Cato Institute and head of research into health care reform.