Did the Election Save ObamaCare?

The morning after Tuesday’s vote, there is one thing every commentator agreed on. The election of Barack Obama guaranteed that his signature piece of legislation — health reform — can now go forward. Republicans are powerless to stop it.

Yet there is something all these commentators are overlooking. There are six major flaws in ObamaCare. They are so serious that the Democrats are going to have to perform major surgery on the legislation in the next few years, even if all the Republicans do is stand by and twiddle their thumbs.

Here is a brief overview.

But can you save me
Come on and save me

ObamaCare is not paid for. At least it’s not paid for in any politically realistic way. As is by now well known, the legislation will lower Medicare spending over the next 10 years by $716 billion in order to fund health insurance for young people. This reduction will primarily consist of lower payments to physicians, hospitals and other providers — reductions that are so severe that they will seriously impair access to care for senior citizens.

In the last two Medicare Trustees reports, the Office of the Medicare Actuaries has predicted that these cuts will force one in seven hospitals out of the Medicare system in the next eight years. Payments to doctors under Medicare will fall below Medicaid levels in the very near future and will fall continuously behind Medicaid in the years ahead. From a financial point of view, seniors will be less desirable patients to doctors than welfare mothers. Harvard health economist Joe Newhouse envisions that seniors may have to seek care in the same places that now cater to Medicaid beneficiaries: at community health centers and in the emergency rooms of safety net hospitals.

During the election campaign, Barack Obama claimed that his administration had found $716 billion of “savings” and Democrats generally claimed that the money would come out of the pockets of doctors, hospitals and insurance companies, with no bad effects on seniors. In fact, no “savings” have been found and seniors will indeed be affected by low reimbursement rates — just as low-income patients must deal today with the fact that almost one in three  doctors is not taking any new Medicaid patients.

But if the current crop of politicians is afraid to admit that they have taken something away from senior voters, what do you think future politicians are going to do when real pain starts setting in? The betting in Washington is that the cuts will be restored. That will mean that ObamaCare will hugely add to deficit spending, indefinitely into the future.

ObamaCare promises what it cannot deliver. To most politicians, acquiring health insurance means that people will be able to get medical care that the uninsured are not now getting. Yet in order for the country as a whole to get more medical care, there must be more doctors and nurses and hospital personnel — something that ObamaCare does not create.

Adding to the problem is that the law will require all of us to have access to a long list of preventive services without deductible or copayment. Economists at Duke University calculated that if every American actually got all of the recommended screenings and tests, the average primary care physician would have to spend 7 ½ hours of every working day doing nothing else but giving preventive care to mainly healthy patients!

What we will be facing is a huge increase in the demand for care, but no change in supply. As the waiting times grow, providers will tend to see those patients first whose insurance pays the highest fees. Those in plans that pay below market will be pushed to the rear of the lines. These will be the elderly and the disabled on Medicare, poor people on Medicaid and (if the Massachusetts model is followed) the newly insured in subsidized plans in the health insurance exchanges. In other words, access to care is likely to diminish for our most vulnerable populations.

ObamaCare mandates and subsidies will destabilize entire sectors of the economy. The law will require employers of workers earning $15 an hour or less to provide very expensive health insurance ($15,000 for a family) or pay a $2,000 fine. For these employees, the cost of family coverage is equal to more than half their income and there are no new subsides to help the employer or the employee bear this cost. Yet, if these workers don’t get insurance from an employer the government will pay almost all the cost of the insurance through Medicaid or in the new health insurance exchanges.

For this reason, employers in the restaurant and hotel businesses, for example, are moving to part-time employment — in order to escape the mandate. And if one firm manages to avoid a 50% increase in labor costs, that firm’s competitors cannot afford not to do the same.

The problems are really economy-wide. We could see entire firms dissolve and recombine, just in response to health insurance subsidies, rather than based on economic considerations.

ObamaCare creates perverse incentives that threaten the quality of care. Within the newly created health insurance exchanges, insurers must charge the same premium, regardless of expected health care costs. Since this necessarily means they will profit from healthy enrollees and incur losses on the less healthy, all plans will have a perverse incentive to attract the healthy and avoid the sick. Moreover, after enrollment, the incentive will be to over-provide to the healthy (to keep the ones they have and attract more just like them) and under-provide to the sick (to encourage the exodus of the ones they have and discourage enrollment of any more of them). That’s not good if you are sick.

A weakly enforced mandate will undermine the health insurance marketplace. The fine for being uninsured will be small, relative to the cost of insurance. And there is not much the IRS can do to people who ignore the mandate, other than withhold refund checks. It cannot garnish wages or attach assets, for example. Hence, people will have an incentive to stay uninsured while they are healthy (and avoid paying hefty premiums), enroll after they get sick (to get their medical bills paid) and then drop coverage after they are well again. Yet if everyone does this, only sick people will have health insurance and the premiums will be completely unaffordable.

A strongly enforced mandate will strain almost every family budget. For the past 40 years, health care spending has been growing at twice the rate of growth of our incomes, on the average. Nothing in ObamaCare is likely to change that. Yet if we are required to buy coverage and denied the right to scale back benefits, choose higher deductibles, etc., health insurance premiums will crowd out more and more of the average family’s budget. Eventually, health insurance costs will threaten to crowd out every other form of consumption!

Again, these problems have nothing to do with Republican opposition. They are inherent in the legislation itself. Democrats will be forced to face them whether they want to or not.

Comments (25)

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  1. Ken says:

    Nice analysis.

  2. Studebaker says:

    ObamaCare in its current form will probably only last for a decade or so. By 2020 – maybe 2030, costs will have skyrocketed. Upper middle-class families will begin to have problems affording health insurance. The cost of providing Medicaid (and Medicare) to the elderly and the poor will bust the budget. The cost of providing health insurance subsidies will make budget problems worse. At that point, the public plan option will look good by comparison. The government can slowly start to regulation the private plans until only a few big ones remain. The big ones will become little more than a TPA for the government.

  3. ecdski says:

    The solution will be the dissolution of the medical insurance industry and conversion to single payer, which has been the plan all along.

  4. Ron Bachman says:

    I just finished a strategic planning discussion with a major carrier discussing their exchange product plans. It is clear, they expect poor claims from exchange members, especially in the first year or two as pent up demand for care from the uninsured will drive up premiums. They have developed a product that is uncompetitive hoping to participate in exchanges but avoid sales for at least the first wave.

    The real effort for carriers is to market through private exchanges where products can be sold with fewer restrictions and avoid the poor risks of the exchange subsidied populations.

    In any government structure, the rich do well, It is under government controls that the poor are always hurt the most. But is they who voted for this approach. It is tiresome trying to help those who need help the most only to see them choose the worst option of socialism. We need the “concentrated compassion” of conservatism, not the “fake compassion” of liberism.

  5. Ron Luke says:

    I do not disagree with any of your points. However, the analysis is static. It stops with describing the pressures placed on the existing delivery system and does not really examine how providers of health plans and health services could respond by reorganizing the production of services to profit from lower unit prices but higher aggregate demand.

    There are hospitals and physician practices in the Rio Grande Valley that organized to generate high profits from fee for service Medicaid; so much so that they were temporarily able to pass a statute (repealed in 2011)prohibiting the state from extending Medicaid managed care to the Valley. I suspect that the lower rates specified in the ACA would appear generous to many health service providers in northern Europe.

    It is difficult to see how the U.S. medical cost curve can be bent without lower unit prices. Lower unit prices, if they actually occur, will force a major reorganization of the U.S. health delivery system. Such a reorganization will be painful for health service consumers and providers. I am confident entrepreneurs can find ways to deliver acceptable quality health services for less. I am doubtful Congress and current and future Presidents have the political will to force the changes.

  6. Cindy says:

    I first learned of the “perverse incentives” argument from the NCPA. It’s interesting to see someone engaging in the debate about what the practical implications will be in terms of overall volume of care to vulnerable populations. I get the sense that, if candidates engaged in this debate, we’d have a broader and more informed national conversation about healthcare — and not a moment too soon.

  7. James Mule says:

    Nicely said.

  8. Jackson says:

    Finding Obamacare will be a huge problem for democrats. It’ll be interesting to see what they do!

  9. H D Carroll says:

    In regard to the point about insurers seeking the appropriate strategy to avoid or discourage sicker members, it is going to be an interesting environment, and certainly one not like any most insurers have ever faced. However, they do have the additional factors brought to bear by the three “Rs” – reinsurance program, risk band redistribution, and risk adjustment – embedded in the exchange programs. It allows them to mitigate some of the downside risk, but certainly not all, and keep in mind the small group side is not individually selected. Otherwise, your points on the various issues with the reform law are pretty dead on.

  10. Earl Grinols says:

    Let’s be generous and say that federal taxes last year were 16 percent of GDP.

    The IMF (2011 report) says that to cover expenditures the USA would have to raise federal taxes immediately and in perpetuity by 15 percent of GDP (i.e. last year would need to have been 31 percent of GDP federal).

    The rich (upper 1%) produce income equal to 9.2 percent of GDP. What is the maximum that they could be made to pay? 6% of GDP? That implies approximately an additional 3% of GDP in tax revenue (they do already pay taxes, after all). Not enough to cover the 15 percent needed.

    The upper 5% ($180,000 cut off) produce income equal to 12.3% of GDP. Still not enough.

    Go down to the top 20% ($100,000 cut off) and take 53% more of their household income in taxes. That might just do it.

    Even granting the other sources of potential taxing, do you think that Obama and those around him have really done the math?

  11. Charlotte Spencer says:

    This is very worrisome in so many ways.

  12. Pete Joachim says:

    A very one-sided perspective. I don’t believe you can rely solely on opinions of the delivery side professionals to give honest opinions of our health care industry. As I always say, “check their motivation at the door”. Goodman’s opinion of anything that affects the status quo in health care delivery is apparent in everything he writes. His bread and butter idea, the HSA, is a flawed, tax break for the wealthy under which the average family cannot reap much tax benefit. It is simply pass the costs to the employee marketed under the guise of consumer is now in charge of his medical costs to drive them down (great, how is a electrician gonna know if he should trust his doc or not and get another opinion? Answer – he doesn’t so, for economic reason he simply doesn’t get the care.) The statement that Obamacare is not funded is absolutely false, thats why he qualifies w/the “politicaly speaking” phrase – but its a nice headline.

  13. seyyed says:

    well written piece-it’ll be interesting to see how democrats go forward with the law

  14. DoctorSH says:

    Someone earlier stated that Obamacare would fall under its own weight within 10-20 years.

    Ha!!

    It is set to fail before Obama’s term in office ends, so he can call another crisis, and try to institute a single payer system.

    What he does not have though is a democratic controlled house to push that through. So in 2016, if and when Obamacare has shown all of its many flaws, hopefully a new more realistic administration will come in and create a program where market forces are allowed to bring down costs.

    Someone else earlier stated that Obamacare was fully funded! I would like to know from where???

  15. Paul Nelson says:

    The basic problem, or course, is that our nation’s healthcare industry is the most inefficient in the world. There is no provision in the ACA2010 to fix it. A “Tragedy of the Commons” (Hartin) has occurred. Our national finances have been managed for about 100 years by separating monetary policy (Federal Reserve) from fiscal policy (Congress). It is time to view the practice of having health insurance also define what is a Covered Benefit. This is a deeply entrenched conflict of interest. A “Federal Reserve” like institution would be necessary with a Congressional Charter. The Charter would establish a widely supported institution with a mandate to: 1) define reimbursable health benefits for all sources of payment, 2) connect this with a plan to achieve justly accessible enhanced Primary Health Care for each citizen, community by community, and 3) reduce the national healthcare cost to 13.4% of the GDP by 2022. The concepts of Professor Elinor Ostrom reargding “Managing the Commons” (1990) would apply to the affairs of this new institution.

    My own opinion is that Primary Health Care is unlikely to assist with this scenario, as it should, unless its source of re-imbursement is capitation. Hmmm! The transition for this Plan might be painful, BUT much easier than the current trajectory for our nation’s economy: closing hospitals.

  16. Robert says:

    I think you’re underestimating the power of change that the NCPA can help bring about!

  17. Ashley says:

    I’d think that some major fixes will be included in the debt ceiling debate

  18. Janice says:

    I have worked in healthcare as a nurse for 34 years and we have always been able to give care to the elderly and poor. For decades politicians had worked to stop what now will be shoved on us. Now we are stuck unless a miracle happens.

  19. fred says:

    I don’t know why the two parties as well as the media continue ignore the reality that many physicians are already refusing to take medicare patients because of the low reimbursement rates and in some cases are even asking existing patients who become eligible for Medicare to leave. Both circumstances have happened to me. Recently, in trying to finding doctors in Las Vegas in contemplation of a move there, I kept running into rejections because I receive Medicare. I am required to use Medicare to continue health receiving health benefits from my former employer. One doctor’s office suggested I try to find a free clinic. I was silently outraged. What’s worse is that I’m not poor but Medicare’s policies make me ineligible for quality health care from regular doctors. Obama’s proposals for continued reduction in reimbursements for Medicare services instead of increases which the majority of Members of Congress of both parties reject on the surface (but the Democrats passed the Affordable Health Care Act adopting these policies). Obama is killing seniors but he is also killing the entire middle class. Poor people are getting hugh bonuses as are rich people through less visible federal contracts, loans and grants and sweetheart tax provisions which in the latter case are all supported by both parties.

    The middle class really needs it’s own party since both parties are shafting these people including me

  20. Bob Hertz says:

    This could be a terrific dialogue, let’s keep it going.

    Dr. Goodman has done his usual good job highlighting the internal problems of Obamacare.

    My only quibble might be that the “716 billion in cuts to Medicare” only refer to changes in the fee schedule. In the history of Medicare, changes in the fee schedule have very rarely reduced total costs. History shows that medical providers will adjust the volumes of care. It is also easy for many providers to quietly move over to the kinds of care where fees have NOT been reduced.

    Washington bureaucrats are absolutely no match for 500,000 doctors and 5,000 hospitals who have a lot of money at stake in defeating fee controls.

    Ron Bachman’s post is a blockbuster in its quiet way. For three years now everyone has been assuming that the private insurance industry was eager to get those extra customers from Obamacare and its mandates.

    Ron points out that health insurance is a very unique product, in that some customers are very unprofitable. This is not the same as computers or paper clips. In these industries, you sell to anyone you can, it is all profit if you have costed it right.

    But in health insurance, there are customers you do not want. Back in 1994, someone said, “What if you gave a managed care party and no one came.”

  21. Unsettled Worker says:

    Your analysis does not lack a depth, but it is a typical example of “count the costs, ignore the benefits fallacy”. I mean there are clear impacts Obamacare will have on the whole economical system ["My only quibble might be that the “716 billion in cuts to Medicare” only refer to changes in the fee schedule" - comment from Bob Hertz], but there are important benefits for the poor sectors of the american society too. The weak parts of the legislature can be repaired and renegotiated with the opposition. The important thing is that it is finally a reality, which means it exists and it provides a service to the american population.

    I prefer Obamacare rather than some half way reform that does not resolve anything. It is up to us how will this system work. I´m for the higher taxes for better government services (this topic is well elaborated in fight against the economical crisis).

  22. Al says:

    Obama never cared about Obamacare. It was a stepping stone. Take note of his speech first in 2009 then to the AFL-CIO in 2003

    Before election 2003:
    re single payer: “we may not get there immediately”

    2009:
    “I have not said I was a single payer supporter”

    Both speeches are on the same video, 2003 follows 2009
    http://www.youtube.com/watch?v=-hsqzSKuC44

    Obamacare: Built to fail so that it can be replaced with single payer.

  23. Bob Hertz says:

    I understand that Obamacare may look like it was ‘built to fail,’ but I do not think that was the case.

    I think that the designers of Obamacare went into the 2008-2009 legislative process and did hope to come out with something like single payer.

    But they found out they had no ability to raise taxes to single payer level — i.e. about 14% of payroll — and with the financial crisis at that time, they were afraid to put the insurance companies out of business — which single payer would surely bring about.

    So, they designed a hybrid plan that uses private insurance companies and employer plans, but regulates and subsidizes and nudges and supervises and taxes just about everyone in the process.

    When you look at the countries which actually have single payer plans, what these nations have in common are strong left-wing parties and strong unions. This is true in Germany, France, England, Canada, and Sweden to name a few.

    Also, some countries have single payer because their private insurance system collapsed during war and depression. Japan is the most ironic of all — their single payer plan was installed by American lawyers working for McArthur during our occupation.

    I bring up this history to suggest that no matter how clever we think Obama is, he cannot bring about single payer on his own!

  24. Jeanie says:

    Does the ACA impact how corporations should select health care options for 2013? Is there anything we can do now for 2014, or do we just take the wait and see approach?

  25. This is the time for employer’s to drop their coverage. Send all there employees to the exchange. Pay the $2000 and set up a premium only Health Reimbursement Arrangement (HRA) say $3000 per employee per year, save mass sums of dollars, save the time and headache of providing benefits, and define their future healthcare cost.

    This is the perfect time to get out of the business of providing benefits.