Now that the
Supreme Court has given its narrow blessing to the Affordable Care Act, the
big question is whether it will deliver the benefits that its proponents
promise. Unfortunately, as it is now constructed, the plan will backfire
causing fewer healthy people to buy insurance, raise premiums for those who
do, destroy employment opportunities, cripple the health insurance industry,
and weaken the economy.
In order to
guarantee insurance to all, regardless of age, health or pre-existing
conditions, the framers of the plan concede that it is essential that the
young and healthy (who are less likely to be heavy users of health care) pay
into the insurance pool. The surplus generated from their premiums
compensates for the money lost to those receiving more in services than they
pay in premiums (e.g. older people and those with medical conditions). But
the ACA has given these healthy people a "Get out of Jail Free"
card that many of them are sure to play.
Most healthy
young people know that they are losing money to insurance providers, at least
in the near term. That is the nature of insurance. You pay to prevent costly
exposure to an unlikely event. And just as homeowners wisely pay for fire
insurance even though they don't expect their homes to burn down, given the
high cost of medical care it is also practical that healthy young people buy
health insurance.
But, the ACA
makes it illegal for insurance providers to deny coverage to anyone for any
reason. This allows healthy people to drop insurance until they actually need
it without incurring any risk. It's like allowing homeowners to buy fire
insurance after their houses burn down. To counteract these new free rider
incentives, the law imposes "no insurance" penalties (also defined
as taxes by the Supreme Court). The problem is that these "penaltaxes" (for lack of a better word) are insufficient
to the task. In fact, Chief Justice John Roberts ruled the law constitutional
precisely because the burdens were not high enough to compel behavior. (In
other words, he thought the law was constitutional because it will be
ineffective.) The numbers support his arguments.
On average,
in 2010, a typical healthy young person paid at least $2,500 per year for
insurance (for a plan that would still involve significant out of pocket
expenses). In some areas of the country, premiums were more than twice as
high. When the program takes effect in 2014 the penaltaxes
will be the greater of $95 or 1% of household income. A single person earning
$40,000 per year who chooses to go uninsured would then be subject to a $400 penaltax. The decision would be an easy one: drop the
insurance, incur the penaltax and pay for any
routine medical services out of pocket. In the unlikely event that he gets
cancer or is hit by a bus, he can always buy insurance in the ambulance on
the way to the hospital. Even in 2016, as the penaltax
increases to the greater of $695 or 2.5% of household income, it will still
not make sense for many people to buy insurance. The penaltaxes
are capped at levels that equal the full cost of an average health plan. So
even high income individuals are no worse off financially for not buying
insurance. In addition, the IRS' ability to actually collect these penaltaxes is limited to garnishing income tax refund
checks. If an individual is not getting a refund, the IRS is impotent.
The law
places no requirements for businesses with fewer than 50 employees to offer
insurance. So when younger workers realize the benefits of dropping
insurance, they will naturally gravitate to savvy businesses that offer
higher pay instead of insurance. This will drain more premiums from the
insurance pools.
In contrast,
the burdens placed on employers with more than 50 workers are complex,
onerous and unpredictable. Those that don't offer insurance would be subject
to substantial (and open ended) penalties if at least one employee receives
an insurance tax credit or a government subsidy to an insurance exchange. If
they do offer insurance, they will also be subject to substantial (and open
ended) penalties if the plan fails to cover 60% of employee health expenses,
or if premiums for any employee are more than 9.5% of family income. It has
been left wholly unexplained how employers are supposed to accurately
determine these triggers which involve knowledge of family income, not just
employee income.
Smaller
employers will look to avoid these headaches by staying below the 50-employee
threshold. Though it should be obvious, there is plenty of evidence to
support this tendency. French law involves significant regulatory
requirements for businesses that have more than 50 employees. As a result,
there are currently 2.4 times more French companies that have 49 employees
than there are with 50. Incentives for businesses to stay small will hurt the
economy and will further shrink the numbers of people paying into the health
insurance pools.
Employers
will also be incentivized to avoid hiring lower paid workers who would be
more likely to trigger the penalties tied to household income. As a result,
many small companies will likely look to replace lower rung employees with
temps, automation or outsourcing, further raising the barrier to workforce
entry for lower skilled workers. The unemployable workers will then qualify
for free health insurance, further draining the system.
Unless the penaltaxes are raised significantly, far too many needed
premium payers will drop out. As they do, insurance companies will try to
recoup the lost revenue by raising premiums for the customers who remain. As
the gap between the relatively low penaltaxes and
the high cost of health insurance premiums increases, so too will the
incentive to drop coverage. This self-reinforcing dynamic will render the
entire plan non-viable.
It is a
foregone conclusion that the Obama Administration and its congressional
allies are already planning to raise the penaltaxes.
Although such increases would render the plan unconstitutional if they compel
behavior, according to Roberts's analysis, I do not expect the Supreme Court
to ever rule on this case again. The Court has a history of opening small
cracks in the Constitutional barn door for the bureaucratic horses to
stampede.
Unless we can
summon the political will to repeal the poorly conceived law, we should all
brace for higher health care costs, many more layers of impenetrable federal
bureaucracy, a significantly weaker economy, diminished employment
opportunities, and lower living standards.
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