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Obamacare gets cheaper

Rick Newman
Senior Columnist

The Affordable Care Act gets less disastrous every day. The latest boost: Overall costs are now likely to be $14 billion per year lower than estimated just two months ago, and $56 billion per year cheaper than the first official estimate in 2010. That's a 30% reduction, compared with the 2010 numbers.

The Congressional Budget Office regularly updates its cost projections for all big federal programs, and its latest numbers show an improvement related to Obamacare, as the ACA is known, that few supporters or critics saw coming. In 2010, the year Congress passed the law, the CBO said the annual cost of administering the law and providing subsidies to enrollees to help them purchase insurance would be about $172 billion in 2019, when all the provisions of the law are fully in effect. In January of this year, CBO dropped its 2019 estimate to $135 billion per year. It has now dropped that even lower, to $121 billion per year. This chart shows the changes:

Source: Congressional Budget Office

The agency cites two primary reasons for the sharp decline. The chief reason is the drop in overall healthcare costs — which is good news for everybody who pays for healthcare, whether enrolled in Obamacare or not. From 1998 to 2005, the growth in health insurance spending per enrollee was 5% per year, after accounting for inflation. Those are private-sector numbers CBO used in 2010, when estimating future costs for Obamacare. But from 2006 to 2013, such spending rose by just 1.8% per year — a slowdown that surprised most healthcare economists. Factoring those lower annual increases into the CBO’s forecasting model led to the lower projections for future costs.

What's behind the slowdown?

Nobody is quite sure why the growth in healthcare costs has slowed so dramatically, after two decades of growth at 3 or 4 times the rate of inflation, which harmed both family and company budgets. Possible reasons: A tough recession that forced many families to cut back on healthcare spending, cost-control efforts throughout the healthcare system, and insurance policies that force consumers to pay more out of pocket, making them more likely to cut bank on nonessential things.

Obamacare supporters claim the law itself has helped curtail costs, since more people are able to get preventive care, pre-empting the need for costlier interventions when problems go untreated. But it’s probably too early to know for sure if that’s happening, especially because the main coverage provisions of the ACA only went into effect last year.

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It’s also possible the growth in healthcare spending could revert to earlier, higher levels, as the economy improves and people feel more comfortable spending.

The other factor leading to the lower cost estimates for the ACA is a slight drop in the CBO’s estimates of the number of people who will be uninsured in the future. That decline means fewer people will need to enroll in Obamacare, which will lower the total cost of subsidies.

The Obama administration says 11.7 million people will obtain coverage under the ACA in 2015, up from about 7 million in 2014. Despite the law’s technical challenges, its cumbersome bureaucracy and unpopular provisions such as the individual mandate, the ACA has become integral to the healthcare system and is clearly reducing the number of uninsured Americans. Meanwhile, many of the most dire predictions related to the ACA have failed to materialize. Employers have not canceled private coverage en masse, as some critics predicted, and given that employers have created an impressive 3.3 million jobs during the last 12 months, nobody is calling Obamacare a job-killing monstrosity any more.

One big hurdle remains: A legal challenge to the ACA, King v. Burwell, just heard by the Supreme Court, which will issue a ruling in June. If the court sides with the plaintiffs, it will basically invalidate the law in 34 states that don’t have their own healthcare exchanges and rely on the federal marketplace, Healthcare.gov. That would prompt a chaotic unwinding of the law that could bump 7 million people off insurance by the end of the year. If the court upholds the law, there may be few obstructions left to prevent Obamacare from becoming a pillar of the healthcare system, next to Medicare. If that happens, then, maybe we can make it better.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.