The Crown Jewel of ObamaCare Failures

Now we get to the biggest failure of them all — the individual mandate. The premise was simple: If people aren’t buying what they should (in this case, health insurance), pass a law telling them they have to, and they will. Presto, Change-o problem solved!

Now, to be fair, Congressional Democrats weren’t quite that simple minded. They threw in lots of subsidies and required that insurers enroll anyone who applied, no questions asked. So, they made it affordable and available, along with being mandated. So, it should work like a charm, right?

Well, maybe in a vacuum. But in reality this rule is being inserted into a very complex and mature system of existing subsidies, responsibilities, and incentives. In this case, one of the primary factors is the role of employers in providing and paying for coverage.

Many people, including this writer, believe that placing that responsibility on employers was a major policy screw-up that created all the wrong dynamics in health care and virtually eliminated market functions because the payer and the consumer were not the same person.

Nevertheless, it is a system we have lived with for two-thirds of a century. Almost everything about health care and employment has been built around that relationship — prospective employees consider a company’s health benefits when deciding to take a new job; employers devote a lot of staff time and resources on choosing benefit programs; laws and regulations are written to ease the problems of interruption of benefits when people change jobs; courts are concerned that employers may not always fulfill their obligations to their workers. Not all employers provide benefits, but all feel an obligation and responsibility to do so, and the ones who don’t offer health benefits often feel conflicted about it.

Unwinding all this, even if desirable, is extremely complex and should take a very long transition period as we all learn new ways of doing things.

Enter ObamaCare. This law provides stark incentives for employers to get out of the business immediately. It even assuages any guilt feelings the employer might have by, first requiring that they continue to help pay for it, and next, by offering workers richer subsidies than the employer typically can. An employer will be able to save many thousands of dollars per worker by dropping coverage and sending employees to the Obama Exchange where they will get a choice of benefits plans and substantial subsidies if they make under 400% of the poverty level. Instead of paying, say, $10,000 per worker for coverage, now the employer can pay a simple $2,000 penalty and use the savings to give each worker a raise. Most employers will be able to save even more by reducing their HR departments, and they will be freed of complaints about any problems with the health plan they offer.

In February, 2011 McKinsey & Company did a large (1.329) survey of employers asking about their intentions with the Affordable Care Act and found that 30% said their company would “probably” or “definitely” drop coverage as a result. McKinsey is an extremely credible firm, but that didn’t stop supporters of ObamaCare from lambasting the survey because it was not consistent with other economic analyses. McKinsey had to issue a statement explaining it was not intended to be an economic analysis, it was an opinion survey. I would argue that such a survey is probably far more accurate than an economic analysis that must rely too much on assumptions. Indeed, it likely understated the situation. As employers learn more about the requirements of the new law they are more likely to run away from it.

We can’t know until it happens how many employers will drop coverage, but the 30% estimated by McKinsey may be the minimum. That could mean 50 million or more people who used to get employer coverage no longer will. For those employees this means:

  • No more automatic enrollment going along with the job. People will have to take the initiative to find out about the Exchange.
  • No more pure community rating of the employee share of premiums. The Exchange will vary premiums every year based on a person’s age.
  • No more paycheck deductions of the employee share of premiums. People will have to make some kind of payment arrangement for their share of the premium.
  • No more convenient and friendly HR Department people to answer questions. People will have to seek out an “Exchange navigator” to get their questions answered.

These employees are also likely to find at the Exchange:

  • A clunky web site run by the state or federal government laying out the coverage options.
  • Overpriced insurance options. (Because insurers can no longer ask medical questions, they will have no idea what kind of risks they are enrolling, or the premiums needed to cover those risks. They will err on the side of caution and charge higher premiums.)
  • Confusion about how much they will be charged for their share of the premium. (They will be subsidized, but the amount of the subsidy will vary according to their age, income, geographic location, family size, and choice of plan.)
  • Insurance plans that cover a bunch of stuff they don’t want or need.
  • No reliable source of personalized information. (Ever tried to call the Medicare helpline?)

Finally, they will realize that they don’t need to go through all this. They can delay making a decision until they really need to get health care services:

  • Exchange coverage is guaranteed to accept them at any time with no questions asked.
  • They can save a whole lot of money by not paying premiums and using that money for more pressing needs.
  • There is no meaningful penalty for failing to enroll. What penalty there is applies only to people who make enough money to pay income taxes, and it can be collected only by seizing whatever tax return is due the taxpayer. This can be easily avoided by upping deductions at the start of the year.

Most people have very few medical expenses in the course of a year. According to this chart 50% of the people in the United States consume only 3.9% of all health care expenses each year, while the top 20% consume 78.3%. People in the top 20% will certainly want to be covered but the bottom 50% get no advantage from insurance coverage. They spend far less on services than they would on insurance premiums.

Annual Spending as a Percent of the Total, by Decile 

Source: Taken from “Medicare for All,” a presentation by Paul Y. Song, MD, PNHP 2011, slide #41; data attributed to Thorpe and Reinhardt.

Obviously not everyone will make the choice to go uninsured. People who are risk-adverse, or who have ongoing medical needs, or who have small children, will continue to be covered. But every year, every person will have to decide how best to spend their money. A very large number will decide they have better things to do with that money than spend it on insurance coverage they don’t want and never use.

The odds are that after all the trauma and expense of enacting and implementing ObamaCare, we will have fewer people insured than we did before it was enacted.

Comments (25)

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  1. August says:

    “Instead of paying, say, $10,000 per worker for coverage, now the employer can pay a simple $2,000 penalty and use the savings to give each worker a raise. Most employers will be able to save even more by reducing their HR departments, and they will be freed of complaints about any problems with the health plan they offer.”

    I’d argue that this is a plus. As you say:

    “placing that responsibility on employers was a major policy screw-up that created all the wrong dynamics in health care and virtually eliminated market functions because the payer and the consumer were not the same person.”

    If the exchange/personal insurance market and mandate is fixed then this could be start of a shift away from the current employer based system.

  2. Diogenes says:

    It worked in that socialist paradise Switzerland, are they that much smarter than the US.

    Oh, that bottom 10% vs the top 10%. We’re all in that bottom 10% when we’re young and we’re all in that top 10% just before we die.

  3. Linda Gorman says:

    Switzerland? Not exactly health care nirvana. They have problems with age discrimination and properly locating facilities.

    As for the deciles of spending, it simply isn’t true that spending peaks just before someone dies. A person may need a hip replacement one year and be fine for a number of years after. Someone may be born as a premie, hitting the top decile in one year, and be fine thereafter. Same goes for heart attacks, cureable cancers, trauma injuries, accidents, and so on.

    Spending for the non-institiutionalized elderly seems to peak in the 70s, then drops as people age.

  4. Chris says:

    And the solution?

    1. Remove the employer provider insurance tax subsidy.
    2. Give every US citizen a voucher for health insurance (aka refundable tax credit) – let it apply towards your tax bill for your employer provided coverage, or for private insurance. If you don’t spend it though, you don’t get it. Every citizen gets the same voucher/credit, no matter age or income. If any credit is unclaimed have the money go to a community health organization (free clinic) in the citizen’s geographic area. The voucher should be enough to cover barebones insurance, anything nicer can be paid for by the consumer out of their own pocket (ie, you’re entitled to the safety net, not the cadillac).
    3. Ask Amazon and Google to setup nationwide exchanges and educate consumers on coverage options, and honestly, with 300 million shoppers, you’ll likely not even need to ask.
    4. Remove all the ridiculous coverage mandates and allow customers and insurance providers and the market to dictate what plans should and should not cover. Not every cable TV subscription needs to come with HBO.

    You essentially keep the government out of it entirely except as a source of funding. Sort of like school vouchers, essentially.

  5. Susan says:

    Switzerland? I was just there and they must go to a PCP first and have very stringent access to specialists etc. That is certainly one way to control costs – but I don’t think Americans want to give up access, choice…

  6. Diogenes says:

    “they must go to a PCP first”

    That sounds like a large percentage of US health insurance and medicare advantage plans. Americans don’t have access or choice, they just think they do. If you’re the working poor, you have next to no access. If you’re middle class, your access has been eroding for decades. The US has 2.3 physicans per thousand, Switzerland 3.3. You do the math.

  7. Claudia says:

    While travelling in Switzerland in 2004 my 82 year old mother suffered a stroke and was helicoptered to intensive care in Bern. We joined her there one day later and were told in clear terms that we must not expect American-style attempts to save her life. At her age – 82 – no extraordinary measures would be taken, according to Swiss policy. I don’t know what the Swiss cut-off is, but submit that elderly Americans would consider that too young.

  8. Claudia says:

    Meant to add, this is a very helpful analysis. Thanks for the clarity.

  9. Harv Randecker/NAABC says:

    You know, every day, there are pundits, talking heads and others discussing ObamaCare. After being temporarily into the discussions, I always walk away wondering why we, as a society, were sucked into something so stupid, so poorly constructed and thinly veiled power grab by a socialist regime, that we can actually talk about it and debate others in a serious manner. It’s like discussing the virtues of walking on the ceiling as a normal mode of ambulation. Greg, I appreciate your comments on this Obamanation and the manner in which you present this folly.

  10. Devon Herrick says:

    Diogenes makes a couple good points — although I doubt this is what he expected other visitors to glean from his comments.

    1) Health coverage that is Persona & Portable — like what is the norm in Switzerland — is the direction we need to work towards.

    2) The graphic suggests that most people have no need for the PPACA provisions that ban lifetime and annual benefit caps and could make due with high-deductible plans or a limited benefit plans

    This graphic also suggests that the vast majority of people would be better off financially with a high-deductible plan that is coupled with an HSA. While young, the proportion of their premium dollars going for insurance would be much lower than the proportion going into the HSA account. As people approached middle-age, their health status would deteriorate and their high-deductible health plan would go up in price. During this phase of their lives, people would begin spending down their account. That way, people would pool their own health risks over their lifetime rather than depend on an arbitrary risk pool of young workers to cross subsidize them. People would also have appropriate incentives to consume medical care wisely. There would also be fewer cross subsidies to distort the medical marketplace and encourage inefficiency among providers.

  11. Thomas says:

    It’s hardly a novel idea that monopolies, of any kind, create market inefficiencies. These oversteps are unfortunate indeed.

  12. Thomas says:

    It’s worth it to note that Barack Obama promised universal healthcare without an individual mandate during the 2008 Democratic primaries, abandoning this “crown jewel” simply to make it past Hilary Clinton.

  13. Harlan Johnson says:

    “The strength of the vampire, lies in those who do not believe.” Dr. Van Helsing. Keep it up Greg. I agree, it is an ‘Obamanation’! A reoccuring statement I hear is:”We had to do something, our current system is broken”. I venture the premise that we don’t have to do anything, especially when the major complaint/premise is “it’s too expensive”, and the solution is to accept a plan that admits it’s more expensive, (Sen. Harry Reid, chief spox in the US Senate). The architect of the ACA himself readily admits that it will be more expensive, “but most people will get a subsidy [from the government]“. A government with no money. It’s not so much socialism, as it is pure financial armegeddon.

  14. Kyle says:

    Thomas, with a vertical market like healthcare — there is quite a bit of literature that suggests monopolistic structures could increase efficiency.

    Not saying I believe it, but it could (perhaps) temper some of the prices.

  15. Slater says:

    Interesting analysis..

    “Confusion about how much they will be charged for their share of the premium. (They will be subsidized, but the amount of the subsidy will vary according to their age, income, geographic location, family size, and choice of plan.)”

    This sounds like a disaster waiting to happen.

  16. Dee says:

    California at least is solving the “wait until sick” problem. Health insurance will only be available during an annual open enrollment, Jan. 1-Mar. 31. So, if you don’t buy and then get sick you will be on the hook for your treatment until the next open enrollment. Should make for interesting times.

  17. Greg Scandlen says:

    Dee,

    California will have a THREE MONTH open enrollment period? That is one quarter of the year. Do they really think that will deter people from waiting unto they get sick?

  18. Don McCanne says:

    Greg,

    Excellent commentary. We just cross-posted it to our website with the comment, “This article for NCPA is presented in its entirety to demonstrate how much agreement there is with those of us at Physicians for a National Health Program in defining some of the problems with the highly flawed Affordable Care Act (Obamacare). This article could have been written by one of us at PNHP.”

    Where we disagree, of course, is on solutions. Your advocacy is for consumer-directed health care and ours is for single payer, an improved Medicare that covers everyone. This is discussed further in our posting:

    http://www.pnhp.org/news/2012/december/greg-scandlen-explains-the-irrationality-of-the-individual-mandate

    Peace,
    Don

  19. Wasif Huda says:

    Forcing a segment of the populace to buy a service they won’t utilize feels wrong. That said, perhaps we should have a system that is less cluttered, limited 3rd party involvement. Just let the consumers and the respective producers interact and negotiate out the cost of services, as a oppose to having 3rd party agents cluttering the pool.

  20. Uwe Reinhardt says:

    After following this nation’s torturous debate on health policy for over three decades now, I though I had seen it all.

    But to see Greg Scandlen, of all people, put up so passionate a defense of employment-based health insurance just amazes me.

  21. Greg Scandlen says:

    Uwe,

    Is that really what you take from this post? Odd. I am not a supporter of employment-based health insurance, but I AM a supporter of working people. I don’t like to see them whipsawed around on the whim of some grandees in Washington.

    Moving out of the existing employment-based system is no small or easy thing. It needs to be done rationally and gradually. ObamaCare ain’t that.

  22. Uwe Reinhardt says:

    Greg:

    I recall being on a team of five trying to advise then Senator Bill Bradley during his primary run against Al Gore (who ended up calling Bradley a racist!).

    We thought that Bradley’s health plan should be one that might appeal also to Republicans, to get bi-partisan support. So basically we recommended not touching the employment based system but to build up along side it a system of individually purchased, portable insurance offered through an exchange — initially the FEHB even. And we copied that idea from something Rep. Congressman Bill Thomas had been working on.

    Our idea was that business — especially small business — should not be burdened with the chore or organizing health insurance for employees. I personally wanted to see the entire employment based system whither away, lest employers become the Nurse Ratchet of their employees (which now they have become).

    So the idea was that over time more and more employees would tumble out of the employment based system into portable, individually purchased health insurance.

    I believe that in a way ObamaCare does just that. It won’t be a quick, one short tumble. It will happen gradually, over time.

    I sometimes think you folks let the very word “Obama” get into the way of your analysis.

  23. Greg Scandlen says:

    Uwe,

    Al Gore called Bill Bradley a racist?!?! Yikes.

    Now, let me pick myself up from the floor and respond to your thoughts.

    I vaguely remember Bradley’s proposal. I thought it generally had a lot of merit. However, more specifically, I wonder why you think the federal government is the best party to organize such a purchasing system. I guess our difference lies in our confidence in having the Wizard of Oz orchestrate the world. I have none, you seem to have a lot.

    Yes, there is the FEHBP, but that is a profoundly different responsibility than what you (and Heritage) are looking for. The Feds as an employer is a far cry from the Feds taking the employees of hundred of thousands of other employers and doing the same thing. Just keeping track of the payroll systems of all of these disparate companies would be Herculean.

    I would be happy if the Feds simply equalized tax law, and then let the market work out how best to deliver the products. That delivery might well resemble an FEHBP-type system as I note in my Private Exchange paper. But if the first iteration had bugs (and it certainly will), the market would be able to roll out Version Two and Version Three and so on without a lot of fuss. If you lock things into law, it becomes nearly impossible to revise it.

    My strongest example here is the inclusion of Rx benefits in private sector coverage versus Medicare.

    I would (and have) make the same argument with a President Bradley, President Bush, or President Obama (or even a President Reinhardt if the Constitution were changed)>

  24. Sebastian Alexander says:

    It appears that CCIIO has allowed open enrollment but has not defined the period. Three months seems a little long, although not being an actuary I hesitate to be certain.

    The Colorado exchange anticipates open enrollment as per the federal guideline, which is a much shorter period of October 1 through December 7. This corresponds with Medicare’s open enrollment, which must obviously be tolerable for insurers.

    I wonder if this difference explains why California’s exchange has not yet been approved, but Colorado’s has? Regrettably, I lean towards the conclusion that open enrollment will largely eliminate the anti-selection problem, contrary to Greg Scandlen’s conclusions.

  25. Dee says:

    Now California has refined the open enrollment period for individual plans. First year, October 1-March 31. Subsequent years Oct. 15-Dec.7. Otherwise, unless there is a qualifying event, individual health insurance cannot be purchased. People from the exchange have also stated that the penalty for not buying health insurance will become whatever it has to be so that people will buy. The state is now run completely by the Democratic Party, which has a super majority in both Assembly and Senate, so the Democrats feel very vulnerable on this matter, and are determined to make it work. I asked a member of the exchange board if there would be lack of treatment for those who do not buy health insurance. His response was that would have to be worked out.