Four Trojan Horses

Of all the criticisms that have been leveled at “ObamaCare” over the past year, the four worst features of the legislation have been almost totally ignored — by Republicans in Congress, by the national news media and even by serious economists. So you’re seeing it here first:

  1. People will be required to buy a product whose price will be rising at twice the rate of growth of their incomes and they will be barred from doing many of the things needed to control these costs.
  2. A bizarre system of subsidies will disrupt the entire labor market — causing massive layoffs and, ultimately, a complete restructuring of industrial organization.
  3. A health insurance exchange will give health plans perverse incentives to attract the healthy and avoid the sick; and after enrollment, to overprovide to the healthy and underprovide to the sick.
  4. A weakly enforced individual mandate will give people perverse incentives to game the system — remaining uninsured while healthy and obtaining insurance only after they get sick; choosing limited-benefit plans while healthy and scaling up to richer plans after they get sick.

Beware of … Bearing Gifts

 

The Ever-More-Costly Mandate. President Obama did not create the underlying problem. Health costs per capita have been rising at twice the rate of per capita income for the past 40 years. Nor is this a uniquely American problem. On the average, the same trend is in place for the entire developed world. But here is the bottom line: If you have to buy something whose cost is rising at twice the rate of growth of your income, that mandated purchase will consume more and more of your disposable income with each passing year.

To make matters worse, the normal consumer reactions to rising premiums are going to be disallowed. For example, most people would react by choosing a more limited package of benefits, or going to catastrophic coverage only or relying more on Health Savings Accounts. But these and other responses are limited or barred altogether under the new law.

The Bizarre Subsidies. Look at it from the employee’s point of view. The new law says that an employee must have insurance costing, say, $15,000 for family coverage in 2016. Remembering that employee benefits are a dollar-for-dollar substitute for wages, that implies that a previously uninsured $30,000-a-year worker will get a 50% cut in pay. Further, the only help this worker will get from Uncle Sam will be the ability of the employer to pay the premiums with pretax dollars. That’s worth about $2,000. (See the chart here.) On the other hand, if this worker can get the same insurance through the newly created health insurance exchange, the federal government will pay almost all the premium and reimburse most out-of-pocket expenses to boot. That’s a total subsidy worth more than $19,000.

It follows that every worker in his right mind at this income level is going to want to work for a firm that does not offer health insurance and pays cash wages instead. Yes, this employer will have to pay a $2,000 fine. But the fine is well worth the opportunity to obtain a $19,000 benefit.

Now consider a $100,000-a-year worker. This employee will get no subsidy in the exchange. But insurance premiums paid by the employee will avoid a 15.3% payroll (FICA) tax, a 25% federal income tax and, say, a 5% state and local income tax. So at work, Uncle Sam is prepared to pay almost half the cost of this employee’s health insurance. It follows that any worker in his right mind at this income level will want to work for a company that does offer health insurance.

In competition for labor, therefore, companies and entire industries will reorganize. Low-income workers will congregate in companies that do not provide insurance; high-income employees will work for firms that do provide it. Firms that ignore these worker preferences will not survive.

This implies two bad results: (1) much higher burdens for taxpayers as millions more take advantage of the subsidies than the Congressional Budget Office (CBO) has predicted and (2) an entire economy whose structure is based not on sound economics, but on gaming an irrational subsidy system.

Perverse Incentives for Health Plans. We have heard much from the White House and Congressional leaders about how insurance companies are abusing people. You haven’t seen anything yet. Inside the health insurance exchange, no insurer will be able to charge a sick person more or a healthy person less. So insurers will try to attract the healthy and avoid the sick — even more than they do today!

Furthermore, after enrollment the perverse incentives will not end. Health plans will tend to overprovide to the healthy (to keep the ones they have and attract more) and underprovide to the sick (to discourage the arrival of new ones and the departure of the ones they already have). Of course, there are countervailing forces: professional ethics, malpractice law, regulatory agencies. But ask yourself this question: Would you want to eat at a restaurant that you know does not want your business? You should think the same way about health plans.

Perverse Incentives for Individuals and Families. A poorly reported development in Massachusetts is the growing number of people who are gaming the system. People remain uninsured while they are healthy and get insurance after they get sick. Then, after they receive care and their medical bills are paid, they drop their coverage again. This behavior is more likely, the lower the penalty for being uninsured and more weakly the individual mandate is enforced.

Under ObamaCare, the fines for being uninsured are low. When fully phased in, the fine is $695 for individuals who do not pay premiums of $5,800 and $2,085 for families who do not pay premiums of $15,200. Further, the IRS is indicating that it has no plans to enforce even these fines.

Individuals gaming the system could be the death knell for private insurance — leading to what many in Congress wanted all along; a single-payer private public plan.

Comments (27)

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  1. Devon Herrick says:

    The CBO only expects around 30 million people to get their coverage through the Exchange by 2019. Considering that subsidies in the Exchange are nearly four times greater for moderate-income workers that the tax subsidy for employer coverage, over time more and more workers will get dumped into the Exchange. Ultimately, taxpayers will have to pick up the tab when the employer market shrinks.

  2. Jay A. Huminsky, RHU, REBC says:

    The only positive that comes from oppresive legislation like this is the increase growth or religon. People will be seeking devine healing as a more cost effective solution to the single payor system. I myself have though about starting a church and appling the HR3590 automatic enrollment provision to all of my employee benefit clients. My clients automatically become members of my church and we all get the religous exemption afforded groups like Amish and Christian Scientists. Praise the Lord and remember to vote this November!

  3. Don Levit says:

    I am curious if the law allows for employers to split their employees between the exchanges (individual policies) and the employer provided group policies?
    Typically, insurers require participation of at least 75% of the employees.
    And, those with individual policies typically do not count in the participation requirements – they are considered “uninsured.”
    So, if over 25% of the employees opt to purchase exchange (individual) policies, the 75% participation minimum cannnot be met.
    Is there anything in the law which does away with the 75% minimum participation requirements?
    Don Levit

  4. Blakle Woodard says:

    John -

    This is your best column yet and the best I’ve seen from anyone on the guaranteed failure of the health insurance system under Obamacare.

  5. L. Brody, MD says:

    Cheers to you John, This article made my day.

    Its ugly. More government power and regulation and more gaming the system. But only the government wins as it keeps collecting taxes, and actually doesn’t care what happens out there.

    A few people die,the government collects their estate taxes, and the system moves on.

    thanks again for reporting the Trojan horses. Of course you are talking about insurance, which may or may not correlate with quality of healthcare or illness care. I imagine many services will be disallowed or non-reimbursable.

    It is still survival of the fittest out there.

  6. grover bailey says:

    At my age,soon to be 94,I will be murdered early so I won’t have to go through all of this garbage.

  7. grover bailey says:

    Estate taxes? I have nothing,so it will cost the kenyan money to get rid of me,so he will have to steal it from someone else.

  8. Bart Ingles says:

    In competition for labor, therefore, companies and entire industries will reorganize. Low-income workers will congregate in companies that do not provide insurance; high-income employees will work for firms that do provide it.

    I’ve been thinking the same think, but isn’t this already the case to a lesser extent? Low income employees–at least the healthy ones–are already better off with individual policies.

    I wonder what income level is at the crossover point with the new law. Is it $88K, or something slightly lower?

  9. Mary M.Bonin says:

    quote: President Obama did not create the underlying problem.
    That maybe true but he DID seize the opportunity to use universal health care as a way to gain CONTROL of the American people by way of bigger government and to increase entitlement programs (spreading the wealth) to gain votes and future control for the Democratic Party.
    We all knew without a doubt that health reform was needed but the very best approach would have been more gradual and by the private sector.
    LEAVE the Government out of the formula since it causes more fraud,corruptness and inefficiency as demonstrated in the past.
    In fact a lot could be accomplished just by doing that.

  10. Tom H. says:

    Great post. Best analysis I have seen of ObamaCare.

  11. Protonius says:

    John,

    Excellent analysis!

    Do you see any realistic hope that this health-destructive/economy-destructive/power-grabbing law can be overturned — and soon — whether by the next Congress or by the Supreme Court?

  12. LSteward says:

    Best Analysis I have seen yet!

    You are absolutley right about people opting to pay the “fine” and then opting in to the plan once they need it. The insurer where I work actually does not have pre-existing conclusion exclusions and I have seen this exact thing happen. (Not all health insurers are totally evil!)

    Another issue that will have a huge impact on the whole economy concerns those “small” employers in the service sector who operate under margins where it is impossible to provide health care. My husband employs 80 people in Ohio. This mandate will require an extra $100,000 in costs. Even without paying himself he does not clear $100k. His only option will be to close the business thus resulting in 80 people being out of work.

  13. Darren Duvall says:

    Your last sentence is the kicker. This is not designed to work, it’s designed to appear to work and then fail. The goal is and always has been single-payer. The American people would not accept that, so the current system is going to be bent to the point where it no longer works. With the political cover of a non-working system (made worse by government mandate and regulation) the solution becomes a single-payer system.

    The proponents of single-payer can even be reluctant when the idea is floated, but then can point to the failing system and say, “But we tried the free-market way!”…even though there is little to nothing that is free-market in this legislation.

    I just hope the system collapses before I turn 45. As a physician, I’d be welcome in a country like Australia but not after I turn 45. The day the government institutes single-payer here is my last day of work as a physician.

  14. David Rose says:

    John:

    You state “Health costs per capita have been rising at twice the rate of per capita income for the past 40 years. Nor is this a uniquely American problem. On the average, the same trend is in place for the entire developed world.”

    This statement should have been qualified. The per capita health care cost increase is largely due to demographics. The problem is not that any given individual’s health care costs are rising that fast – they aren’t – it is that the proportion of the population that is old is getting larger. So it does not follow that a person who is today 20 years old will in 20 years being paying twice the rate of growth in his income for his health insurance. But this is the impression that is left by the statement.

    This is not merely a quibble because by not recognizing the difference you implicitly accept a premise. If the proportion of old people never changed but health care costs rose at twice the rate of income growth, that would suggest some kind of underlying structural problem that needs addressing. But the other extreme – that the increase is solely a result of backing out a per capita statistic from an aggregate one in conjunction with a rising proportion of seniors in the population – does not imply that there is anything seriously wrong with the health care market and therefore no cure is warranted and would likely prove inefficient.

    Reality is somewhere in between. Much of the increase is due to demographics, but some is due to structural problems. The largest structural problem, in my view, is due to cost shifting due to artificially low reimbursement rates on the part of Medicare. As the proportion of health care expenditures under the auspices of Medicare have increased, the effect of these distortions has increased geometrically.

  15. Darren Duvall says:

    I don’t think Mr. Goodman is that far off the mark, David. The reason that health care costs have increased has as much to do with technology and policy as it does demographics.

    There were old people before Medicare. But since Medicare has been implemented we have seen the development of (off the top of my head):

    The CT scanner
    The MRI scanner
    The PET scanner
    Intravascular stents
    Cholesterol-lowering drugs
    Increasingly sophisticated pacemakers
    Organ transplantation
    Laparoscopic surgery
    Arthroscopic surgery
    CABG as a common operation
    Biological-derived anti-cancer drugs (Avastin)

    and the list goes on. We had old people before Medicare. We didn’t have all that stuff before Medicare, though, Medicare got sandbagged by technology. It used to be that people got old and died, Medicare was there to help them through their terminal event. Medicare now intercepts and prevents multiple terminal events, which is part of the reason costs are 9x higher than projected at the outset.

    The other reason health care costs are increasing is that there are no policy steps to curb increases. People with insurance do not pay for the majority of their medical care. As Phil Gramm said in the early 1990s, “If I paid 5% of my grocery bill I would eat differently and my dog would, too.” Consumers are insulated from the costs of their health insurance, the part of the insurance “iceberg” they see above their awareness are copays and some deductions. They rarely see their hospital bills, or question why a hospital could bill $45,000 for an operation and yet be satisfied with $13,500 from an insurance company. It’s a bizarre system that is insensitive to cost, because the cost keeps getting passed along and hidden.

    Now, after 40 years, the cost is getting big enough that employers are not able to cover most of it, costs are being passed to the insured and the insured are saying, “Hey! Why is this so expensive?” It’s so expensive because for 40 years nobody has worried about the cost.

  16. Madeleine says:

    Why is everyone blaming all of this on “Old people” are you all forever young? I would like to have that secret. My husband needed a triple bypass at age 69, thats a senior, he had the operation, that was 8 years ago, I have had my husband for 8 years because we had good insurance, now he needs a valve fixed, it is not a big operation, just an electric needle is used to plug small hole, we can still get that and we will before this health care kicks in, my husband is in good shape otherwise, he is out shopping now, he enjoys life and I enjoy having a husband, why would anyone deny someone their life because of age, I am a younger than he is but I am a senior and in great shape, never been sick a day in my life, I don’t take meds for anything and if I got sick are they going to let me die? I am helping my son through college, he decided to go back ot school, I help my daughter with clothing for my grandchildren and in hard times send her money, same with another daughter who I supported while she was out of work, I spend more money than most working people , I give to the veterans and other groups and I am going to volunteer for the Veterans Hospital, I am a productive citizen more than some 30 somethings so I don’t think someone else (Obama), who is a spoiler, should decide when I live or die or anyone else who things age is a crime and old people should just lay down and die and I don’t need meidicare to help me through any terminal event, its none of their business, not in my case anyway, if you think new technology for older people is a waste of time then you shouldn’t ask for it when you get old, decline it, while we are at it, let those pesky kids with disabilities drop dead too, they will cost money down the road, God! what have we become. I am looking into dual citizenship, when the Government and people start talking like this I want out. I hope this is all ended by the time you reach senior age, it comes faster than you think. I never thought about my age before, I’m sitting here listening to Lady GaGa and drinking a beer,is that OK with you?

  17. Darren Duvall says:

    That was not my implication, Madeleine, I am sorry if you took it that way.

    The innovations improve quality AND quantity of life, they’re not bad things they are just expensive. Seeing as we’re the richest large country in the world per capita, health is one of the things that we can afford to spend money on. The simple fact is that in 1965 if you had cardiac disease the complication rate for CABG was pretty high. Now, with angioplasty you don’t even go to CABG unless you have more than two blockages in most cases. We can intervene, so we do. It racks up bills, but we do. We’re even making headway in cancer survival, our nation’s cancer survival is the highest in the world in almost all categories.

    Our national healthcare dollars may not be allocated in an ideal fashion, and the cost may have been allowed to grow out of control, but it’s not a bad thing that we have productive senior citizens. I hope to be one myself someday. My dad will turn 71 in May, his $20,000 pacemaker saves his life pretty often and the people he helps as a volunteer or just dispenser of useful wisdom are appreciative. He got that pacemaker when he was 67 or so, I’m very glad he’s still here.

    The problem with a youth-oriented society is that youths are, well, ignorant. They have no experience upon which to draw. I think we undervalue our more experienced citizens, at our own disadvantage. There’s a lot of wheels that get reinvented when you don’t listen to experience, and a lot of mistakes that could be avoided.

    Apparently, BHO doesn’t agree, because he’s cutting half a trillion out of Medicare in the next decade.

  18. Charles Johnsen says:

    Apparently our political masters are switching from a policy of unintended consequences to one of intended consequences.

  19. Art says:

    Wow! I never thought that intelligent consumers [which is apparent from these replies] could “take the bait” on all the soundbites over the past year.

    Every argument made is true to the soundbites but misses the facts. Compared to all industrialized countries, whose healtcare is rising as fast as ours, we pay twice as much for the goods and services, from drugs which I hope everyone is aware of by now, to CT and MRI equipment and the servicing of the same. We do not pay more for physicians, but all in all twice the percent of GNP is spent here compared to the other countries who have more physicians and better heathcare ststistics. Do you think that perhaps physicians make the difference?

    Congress and the President think they have everything covered, except they all forgot that the only votes that count are those of the physicans, who can simply vote by changing careers, retiring, or just by not taking any new Medicaid or Medicare patients or dropping out of these programs all together. When and if this happens since it takes 10 years to produce physicians and we can’t produce and keep primary care physicians today, what is the next “cost saving plan”? I’m waiting for one that pays Primary care physicians more than specialists, which would just shift the specialty physicans to practice as primary care physicians so we would know what was wrong but wouldn’t have the specialty physicians to “fix the problems”!

  20. Darren Duvall says:

    Art, not all specialty physicians can practice as primary care physicians. Someone who’s been a cardiologist for a decade or two is going to need retraining to get back in the primary care groove. I’m a radiologist, I would have to do a full 3-year residency to be qualified to be a primary care physician. Same with most anesthesiologists and pathologists.

    So basically, my options were I to leave my discipline are a) spend three years being scut-boy at an academic center for less than a tenth of my current salary so I can go into a field I deliberately chose for reasons of temperament and job satisfaction to avoid the first time around all so I can be a scut-boy for the government, or b) do something I would rather do, like teach.

    Once my mortgage is paid off, which do you think I will do? Relocate my family so I can continue to serve the All-Seeing Eye of Sauron, or teach?

    You are correct. There is a problem with physician supply here. And it’s only going to get worse.

  21. Dr. Francis Kendrick says:

    This analysis makes sense, but only to the extent that it applies to health care insurance. However, insurance itself is much of the problem. Over-utilization occurs largely because of third party payers. Fraud occurs largely because of third party payers. Excessive overhead costs occur largely because of third party payers. Interference in doctor patient decisions occurs only because of third party payers. The answer exists without legislation, bureaucracies, taxes, loss of freedom. It is consumer driven health care conceived by John Goodman and implemented by not enough other wise decision makers.

  22. LFB says:

    This marxist law was designed in a way to bust the private insurance companies so that few years down the road these marxist ***** will pass a total nationalization law.

  23. ilovebenefits says:

    Very interesting post. Essentially, we have a leaking boat, to which we are about to add 31 million more people. The Congress would say that they have put nearly every idea to improve quality and reduce cost into the bill (medicare data, quality measurement dollars, CER, bundled payments, ACOs, pilots, HIT, and more — maybe not enough) but – at some point we need to focus on the new arena of health care.

    Early evidence suggests that the ‘free’ preventive coverage will cost 3-4% of premium in the short run and maybe will be neutral in long term. So we need to quickly get on with this and get focused on redesigning the delivery system.

    Now is the opportunity to focus on innovation, creativity and the American spirit to drive change and get after the cost and quality portion of the equation. Go to http://www.healthcarebenefitsnetwork.com to begin to discuss and find out about what benefits professionals are thinking for the future.

  24. cristina says:

    hiiiiiiiii

    That is my way fraud occurs largely because of third party payers.When and if this happens since it takes 10 years to produce physicians and we can’t produce and keep primary care physicians today, what is the next “cost saving plan”?
    ………………
    cristina

  25. Charles Johnsen says:

    The American spirit, since our Revolution, is for Congress to shut up and adjourn and leave us alone.
    Leaving innovation and creativity to individuals instead of elected bodies is not the best way to improve. It is the ONLY way.

  26. R says:

    Our legislation seems to have forgotten that they are ELECTED officials who are supposed to do what WE the people want. They’re just average citizens who have the privilege of parrticipating in governmental service ( which shouldn’t be paid for, it should be elected volunteerism.) The HOR and Senate don’t seem to think that Americans who don’t work in government are smart enough to know what’s good for them. Also, we’re on the fast-track to becoming the next France and relying completely on social programs provided by the government. It’s not by accident, either we are all going to be slaves if things don’t turn around soon. And I didn’t learn that in my college classes either, colleges teach you to love the government with all your mind, body, and spirit lol

  27. [...] But…and this will come as a surprise to some…ObamaCare leaves intact all three flaws discussed above. Plus, it adds a new dimension — a bizarre system of new subsidies that give a whole new meaning to the idea of undeserved costs and benefits. As previously explained: [...]