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Coming soon: A bigger, costlier Obamacare

By Ron Johnson and Douglas Holtz-Eakin,June 16, 2011

Obamacare poses two great dangers to our nation: lower quality of care and runaway costs. It will stifle innovation and lead to rationing. But the overwhelming cost and the damage it will do to our nation’s finances at a pivotal moment in our history deserve greater scrutiny.

The promises Obamacare supporters have made about the ultimate cost of the program are based on highly unlikely premises. Those who support the 2010 health-care law are betting that costs will remain under control largely because its central feature — health insurance exchanges, which amount to a centralized, government-run market of subsidized insurance policies — will not be all that popular. They are counting on the notion that when the government offers “free” money, there will be few takers. This is not realistic.

The history of entitlement programs is certainly not encouraging. Congress tends to overpromise and underfund. Medicare, for example, cost nine times more in 1990 than was expected in 1965 ($109 billion, instead of the $12 billion originally estimated). We don’t believe that the federal government has gotten any better at cost estimates or resisting the temptation to expand programs. And at a time of crushing deficits, we can’t afford to be that far off again.

One of us is an economist who has laid out the math showing why roughly 35 million American workers will almost certainly be transferred from employer-provided care to the Obamacare exchanges. For these workers, it will be possible for both the employer and the employee to be financially better off if they are “dumped” into the exchanges. Only the taxpayer loses. As even some in the Obama administration have noted, many employers — and millions of employees — will find the idea of taxpayer-subsidized care very attractive.

The other of us, as a former businessman, knows what it’s like to purchase coverage for employees. There are many employers who would happily get out of the practice of providing health insurance, if they could do it without hurting their workers. Obamacare will encourage them to do so. In the current system, most employers are highly reluctant to drop health coverage for employees because they don’t want their workers to be financially exposed. But under Obamacare, instead of paying $15,000 for family coverage, an employer can choose to pay a $2,000 fine, pay more in cash wages, make his employees eligible for a huge government subsidy and come out ahead. Confident that their employees are also gaining, millions of employers will follow this logic.

Tens of millions of workers will be given the opportunity to take advantage of those subsidies. It makes no sense to think that just a few million will wind up in the exchanges.

A recent employer survey by McKinsey & Co. found that more than half of all American companies are likely to “dump” their workers into the government-run exchanges. If half of the 180 million workers who enjoy employer-provided care wind up in the exchanges, the annual cost of Obamacare would increase by $400 billion by 2021. If the other half eventually follows suit, and all American employees wind up in the exchanges — which we believe is a goal of Obamacare — then the annual cost of the exchanges would increase by more than $800 billion. Like Medicare in 1965, this would be more than nine times the original cost estimate of $93 billion each year ($893 billion vs. $93 billion).

This extraordinary additional cost is being ignored by the administration. Rather than honestly discussing the likely cost of these new benefits, and ensuring that they match our budget realities, the White House has tried to dodge the issue. When Health and Human Services Secretary Kathleen Sebelius recently appeared before a Senate subcommittee, one of us questioned her about the likely cost of the exchanges. Instead of tackling the question head-on, she called it “cynical.”

But it’s not cynical to think that employers will choose to improve their companies’ bottom lines while enabling their employees to take advantage of generous heath-care subsidies. In fact, Joel Ario, Sebelius’s own director of exchanges, recently said that if the exchanges work well, employers may well say, “I can now dump my people into the exchange and it would be good for them, good for me.”

This isn’t cynicism; this is realism.

Once they are established, the costs of entitlement programs tend to spiral out of control. At a time when our nation is being crushed under a mountain of debt, it’s dangerous to bet that Obamacare will reverse the trend. That’s especially true when you consider the danger that the exchanges will experience far higher utilization than the Obama administration has budgeted.

Ron Johnson is a Republican senator from Wisconsin. Douglas Holtz-Eakin, a former director of the Congressional Budget Office and an adviser to John McCain’s 2008 presidential campaign, is president of American Action Forum, a nonpartisan research institute.