Health care costs drop but for the wrong reason

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March 10, 2015 by Tony Novak

The latest (March 2015) estimate from the Congressional Budget Office (CBO) projects a decrease in health care spending of $200 Billion over the next ten years. Since most observers feel that we, as a nation, spend too much on health care (at 16.5% of GNP) we might conclude that this reduction is a step in the right direction. I’m not convinced that the latest CBO announcement is good news.

Other published information indicates a drop in demand by middle income consumers who are afraid or unable to afford the thousands of dollars of out-of-pocket costs built into their Obamacare policies. Lower income individuals on Medicaid, in contrast, do not have these costs so demand for medical services among this lower income group remains strong. I covered in an earlier blog post here that doctors report that their waiting rooms are now primarily populated with newly insured Medicaid patients but their traditional middle income patients are simply staying away.

The likely long term solution is the marketplace adoption of supplemental insurance as a standard coverage similar to the system that is used in other countries or by Medicare beneficiaries here in the U.S. Supplemental insurance can be paid by an employer or the individual. Employer-provided supplemental insurance is exempt from the restrictive tax law provisions of the Affordable Care Act (ACA). The long term decline in employer-provided primary health coverage will continue and in fact the trend is accelerating under ACA. Some industry observers including myself predicted that employers would eventually switch to offering only supplemental insurance and allow employees to seek their own coverage through the government-established insurance exchanges. Recent tax regulations proposed by the Obama administration will support that market transition.

Yet firms like my Freedom Benefits report that small and mid-sized employers have been slow to make the transition from offering primary insurance to offering supplemental coverage. I think that at this point most small business employers lack a clear vision of the marketplace that that lack of vision prevents them from adopting an effective long term health benefits strategy for their employees. ACA triggered a 180 degree change in the way that employers should look at employee health care and many simply have not grasped the new reality yet. That clarity will come slowly over many years to come.

In the meanwhile, it appears that many middle income people will simply choose to avoid receiving some types of health care.

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