Globalist Analysis

The Costs of Overturning Obama’s Healthcare Reforms

Why should the average American family have to pay nearly one-third of its annual income for a healthcare system that will claim about 18% of GDP by 2016?

President Obama and Vice President Biden (Credit: Pete Souza/White House)

Takeaways


  • Health care will claim $22,366 from an average U.S. family in 2016, or 32.5% of their adjusted income of $68,700.
  • The average worker earning $68,700, a manager making $150,000, and the CEO earning $5 million all pay roughly the same $14,700 for their family coverage.
  • After Clinton's healthcare reform failed in 1994, it was 15 years before another President and Congress took up the issue again.

It has been clear for some time that, without major reforms, the U.S. healthcare system will soon impose unmanageable and unsustainable burdens on millions of middle-class Americans.

By 2016, the average family is expected to earn about $54,000. In that year, moderately-priced health insurance for a family of four will cost about $14,700. Employers will pick up much of the tab for most middle-class families.

But all of those employer payments come out of people’s wages and salaries. So, adding the value of that coverage to the average family’s income in 2016 — $54,000 + $14,700 = $68,700 — we see that the cost of health insurance alone will soon claim more than 21% of an average family’s annual resources.

On top of that, the average U.S. family’s co-payments and other uninsured expenses are expected to come to another $5,100. The average family also pays payroll taxes that help cover other people’s health care — 2.9% of their wages for Medicare ($1,566). They also pay perhaps $1,000 more in federal and state taxes for Medicaid and Medicare costs not covered by the payroll tax.

Add all of that to the cost of their insurance, and health care will claim $22,366 from an average U.S. family in 2016, or 32.5% of their adjusted income of $68,700. Why should the average American family have to pay nearly one third of its annual income for a healthcare system that will, by 2016, claim about 18% of GDP?

Part of the answer is that the average worker earning $68,700, a manager making $150,000, and the CEO earning $5 million all pay roughly the same $14,700 for their family coverage. The result is that middle-class families spend a much larger share of their income on health care than wealthier families.

That is very different from other countries such as Germany, where health insurance costs are assessed as a percentage of income (up to a certain level). Thus, lower income earners pay the same share of their income to have health care as people who are financially better off.

Despite these stark economic realities and pressures, much of the commentary on the Supreme Court case focused on trying to interpret the questions, gestures and tone of the Justices in hopes of divining which party and vision of government will likely prevail. This would seem to be, at most, of secondary importance. Moreover, any such divinations are notoriously unreliable in controversial cases.

One of the reasons why health insurance costs middle-class families in the United States so much is that their bill includes a good share of the costs of treating those without insurance. A reasonable estimate of the costs of treating the uninsured that are passed along to average policyholders is about $300 per person, or $1,200 for a family of four.

President Obama’s plan to end those pass-along costs by mandating universal coverage was, of course, the central issue in last week’s arguments at the Supreme Court. Behind the high-minded debates over principle lies the harsh politics of who is to pay for it. The Obama Administration’s reforms shift most of the costs of the uninsured to the government.

These costs ultimately will be financed through non-payroll taxes — the personal and corporate income tax — that in turn fall disproportionately on higher-income Americans.

That is the choice, and it helps explain the vehemence of the partisan battle over the mandate: The President’s reforms will shift tens of billions of dollars in annual costs from middle-class families with private insurance to more affluent taxpayers.

Bending the cost curve

Tax battles aside, let’s look at the larger picture, from the point of view of national competiveness and cost effectiveness.

Covering the uninsured should reduce the cost of their care, at least over the long term. Uninsured people are much more likely to suffer strokes, for example, because they are much more likely to have undiagnosed hypertension, diabetes and high cholesterol.

Among people with cancer, the uninsured today are much more likely to be diagnosed later, and so require the most expensive interventions.

Uninsured people also are less likely to recover fully from many injuries, making them more likely to suffer subsequent medical problems that require more treatment. Ensuring that everyone has insurance, therefore, should reduce those costs.

The reforms now being reviewed by the Supreme Court include a package of measures that may begin to slow the rising costs of health care. These measures range from the push to establish uniform electronic medical records, to a more results-based reimbursement process for doctors and hospitals, and steps to encourage them to adopt more cost-efficient medical protocols and practices.

To be sure, the reforms do not include the most controversial and partisan cost-saving measures, including tough medical malpractice reforms and an option for public insurance in places where competition among private insurers is weak. Still, they are a beginning.

After Bill and Hillary Clinton’s push to reform health care failed in 1994, it was 15 years before another President and Congress took up the issue again. If the Supreme Court unravels what they did, it almost certainly will be many more years before anyone tries again.

The economic consequences of that scenario would be severe. The number of uninsured people and families will continue to grow. The costs of their treatment will continue to squeeze coverage and increase the costs of private insurance for most middle-class families.

And without measures to “bend the curve” of medical cost increases, average families will find themselves forced to spend one-third or more of their real incomes on their health care.

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About Robert J. Shapiro

Robert J. Shapiro is co-founder and chairman of Sonecon, LLC, a private firm that advises U.S. and foreign businesses, governments and non-profit organizations.

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