Maybe I am too late to write about this topic since the Affordable Care Act has already been passed and is in the process of implementation. Then again, the bill is infamously opaque, and I believe very few people, either in Washington, the media, or the general public understand what Obamacare is, or how it will make healthcare more affordable. A study in the Journal of Health Economics published this month claims that only 14% of Americans between ages 25 and 64 have a basic understanding of how insurance works, let alone how Obamacare will effect it. Nobody even seems to know how long the bill is with estimates ranging from 10,000 to 33,000 pages of mind-numbing bureaucratic documents.
According to Nancy Pelosi we should start to know what is in the bill at this point, so I will take a crack at it.
The Patient Protection and Affordable Care Act is a jumble of convoluted regulations designed to encourage economic interactions which are uneconomical.
Over the last fifty years, extensive government intervention has distorted the private healthcare market beyond repair, resulting in skyrocketing costs and premiums. With tens of millions of Americans priced out of the health insurance market, Obamacare seeks to increase coverage by mandating individuals, businesses, and insurance companies into the existing market structure.
If that last sentence doesn’t make a lot of sense, that’s because it doesn’t. Thirty to fifty million Americans were not insured in 2010 for a reason: because it’s not feasible to do so (for most of them at least). The actuarial models used by health insurance companies suggest that insuring such people will cost more money in the long run than it would produce. Therefore, no private, for-profit company will touch theses uninsured individuals.
The reason Obamacare is an incomprehensible pile of minute regulations is because every single attempt by the state to alter the market creates five worse problems in its wake, which are subsequently “fixed” by more regulations, which create more problems, and so on and so forth.
It would take a monumental effort to go through the reasoning behind every component of the bill. For the sake of this article, I will just look at a few major components and their effects on the economy.
Obamacare’s ultimate goal is to expand health care coverage to the uninsured. In the government’s typical blunderous ways, it largely does so by ordering companies to accept more customers and then paying them for it with taxpayer money. This is done primarily through its massive Medicaid expansion which aims to provide coverage to 21.3 million Americans by expanding eligibility for the program (mostly by allowing wealthier people to opt in). The Supreme Court determined that states are allowed to opt out of the Medicaid expansion if they want to, which would leave poor Americans in such states on the national Obamacare/Medicaid plan, but this hardly makes a difference to the federal tax payer as the federal government will cover 90% of state based Medicaid costs in perpetuity anyway.
The other big expansion plan comes from the pre-existing condition mandate. Insurance companies are no longer allowed to “discriminate” (if you want to use scary language) against individuals with pre-existing conditions which makes them obviously unprofitable to insure. Depending on the source, about one third to one half of Americans have pre-existing conditions.
Anyone with even a cursory understanding of insurance should be able to see how terrible of an idea this is. A paralyzed man with five types of cancer could get a job in a medium sized business and suddenly be blessed with healthcare coverage which will cost his insurance company tens of millions of dollars. This policy basically breaks the entire (already severely broken) health insurance model, and does not have a shred of logical backing beyond naked appeals to emotion.
Unlike individual pricing in regular markets, wherein a customer is charged in accordance with his received service, insurance customers only bear a tiny fraction of the total cost of their service. Nearly all of the profitable insurance customers are already in the market, so the tens of millions of added customers will be almost entirely dead weight loss. Meanwhile, the nonlinear nature of healthcare costs (ie. a small number of individuals require far more services than the rest of the population) will further accentuate the problem as private insurance companies as they are no longer able to filter out customers with pre-existing conditions.
In sum, these two regulations add massive, non-sustainable costs onto the private healthcare market, which could easily bankrupt the entire industry. Even transferring a significant portion of these new costs onto the federal government would only delay the inevitable collapse. As costs grow, the insurance companies will charge higher and higher premiums. In response, profitable customers will begin jumping ship, leaving a smaller and smaller pool of productive customers to carry an ever growing pool of unproductive customers.
To combat this crippling market distortion, the federal government opted to implement further regulations designed to force productive customers to stay in the health insurance system.
Please Don’t Leave
Plenty of Americans are already choosing to go without health insurance at the current (absurdly high) premiums. With this number threatening to expand under rising premium costs, the crafters of Obamacare opted to fight market forces with the Employer and Individual Mandates.
Most Americans currently receive health insurance through their employer, rather than independently. Of course, when employers insure their employees, they eat a significant chunk of the cost. With rising premiums, many companies are deciding it’s not cost-effective to continue this benefit. Obamacare advocates would like to just mandate that all businesses must provide health care benefits, but even they realize that such a measure would pretty much wipe out small businesses with even smaller profit margins.
The solution is to pick a number out of a hat, and declare than any business with as many or more employees than that number must provide health care. The number is fifty, the same as France’s arbitrary cut off line for a slew of state-mandated employee benefits. Unsurprisingly, there are 2.5 times as many businesses with 49 employees in France, than businesses with 50 employees.
One can only begin to imagine the number of unintended consequences that come with such a policy. The average cost to employers for providing healthcare benefits last year was about $11.5 thousand (on top of the average $4.5 thousand picked up by the worker). This means that for a company to increase its payroll from 49 to 50 workers, it will have to incur an additional cost of about $575 thousand per year on top of the added employee’s salary and other benefits. And premium costs are only expected to increase.
The other major regulation is the Individual Mandate. Personally, I think the Employer Mandate is just as bad, but the Individual Mandate’s naked attempt at behavior manipulation and wealth redistribution really struck a chord with a lot of Americans. To stop millions of Americans who freely choose not to buy healthcare coverage, the federal government will threaten them with a fine (dependent upon income level) for not opting into a broken system. This way, either individuals will pay for a product they feel is not worth the price, or they will be forced to pay directly into the national healthcare pool with no personal benefit. Millions of individuals will be metaphorically sacrificed for the collective.
That is Obamacare. It is a monstrosity which takes a problem caused by government, uses more government to try to fix it, and then throws more government at it to fix that. The result will probably be disastrous as the government mishandles one of the largest and most complicated industries in the world.
Already we are being treated to glimpses of unintended consequences. In New Hampshire and California, health insurance companies are running away from potential customers and cutting services to reduce costs and preserve their margins. Hundreds of businesses have laid off workers, or reduced full time employees to duck under the crippling 50 employee line, or just reduce overall expenses.
We can only expect skyrocketing costs, worse services, and a weaker economy as Obamacare continues to go into effect over the decade.