An old saying in the garment business goes like this: “You can’t make up in volume what you lose in money on each piece.” We could say the same thing about the Patient Protection and Affordable Care Act. President Obama thinks that the sudden surge in enrollments to about eight million people means “the repeal debate is and should be over.” I don’t think so.
The ACA has just begun its maiden voyage. Enrollment is only the first step. A sound evaluation of the program must explain how, over its entire life-cycle, it can overcome all of the theoretical objections about its design. That will at a minimum require solid knowledge of how this program is going to work, year in and year out. With sustainability as the key test, any such judgment depends on the implementation of the basic structure, the ACA’s arcane rules, and the behavior of insurers, covered firms, and individuals under the new rules.
In addition, it is critical to keep separate the ACA’s distinct components. There are all sorts of ways to keep young adults on their parents’ policies until they are 26, to improve Medicare reimbursement systems, to extend (wisely or not) Medicaid, and to deal with preexisting conditions, without also turning the private individual and employer market upside down.
Yet the ACA’s centerpiece—the individual and employer mandates—disrupt the market in major ways. Both of these do (or at least did) impose a play-or-pay requirement on the provision of health care. Under the original ACA approach, either you obtained minimum essential coverage, as defined by the ACA, or you had to pay a tax or a penalty to the government for failing to meet that requirement.
The individual mandate, which generated an epic constitutional battle, was at one time thought strictly required to counter massive consumer opportunism. Under the ACA’s open enrollment policies, people can sign up in the individual program even on the eve of a medical crisis, no questions asked, only to walk away when the emergency had passed. The mandate was the antidote to this moral hazard. The teeth were stripped from that mandate by two key decisions the Obama administration took unilaterally in March 2014. The first allowed individuals to avoid the mandate tax in cases of self-determined “hardship.” The second let employees keep their current noncompliant health-care coverage until 2017, in order to prevent as many as 8 or 10 million people—no definitive numbers are available—from abandoning what the President airily dismissed as “substandard policies.” That decision was combined with the postponement of the employer mandate for mid-sized employers (with 50-99 employees) until 2016, and a relaxation in the required number of covered employees (from 95 to 70 percent) until 2015.
It is odd for the President to insist on the sustainability of a plan whose key provisions have been temporarily shelved because they have threatened to destabilize the overall market. Indeed, the current information indicates that these built-in difficulties are far from being solved even as the President takes his premature victory lap.
Measuring Success
Start with the simple question of choosing the proper metric by which to evaluate the success of any social plan. If we judge Obamacare by the social gains and losses it generates, the eight million enrollment figure tells us nothing. We must know the full set of benefits and costs before making any judgment as to the desirability of the plan.
It is not enough, therefore, to claim victory because the individual signatories are better off from taking the plan—assuming, as is still unclear, that these signatories will fork over the required premiums. It is also necessary to add back in the handsome federal subsidies that they received on joining the plan. These subsidies introduce market distortions, so the total cost (both payment and subsidy) for joining the plan exceeds the private benefit to the plan member. Extended over a broad population, these subsidies add up to tens of billions of dollars now and into the future. Given that a large, if undefined fraction, of these new public enrollees were evicted from their private health-care plans, the net effect is that taxpaying for-profit programs are out, and tax-subsidized government bureaucracy is in. Throw on top of this the huge government cost of setting up exchanges and churning out and enforcing endless public regulations, and the old joke from the garment industry takes on new life. The social losses could well increase with each new member that signs up.
Adverse Selection
That anxiety only becomes greater when adverse selection is put on the table: on average, will the sick population sign up more? In the current debate, everyone stresses the need to recruit and retain high numbers of young people, between 18 and 34 years of age, into the program in order to subsidize the older plan members. Right now, the estimates are that about 28 percent of health-care subscribers are in that young group, but the ideal number for plan balance is estimated at around 40 percent.
The 12 percent shortfall is not our sole source of worry. On average, people in the younger age group are healthier than their elders. But the unresolved question is whether the young sign-ups who pay are a random sample from that age cohort. Given that these enrollees may use private information that they can keep from the insurers, the odds are that this group is on average more expensive to service than the random sample. In addition, the looming risk is that many of the people of all ages who have not signed up early will jump in, as feared, just in time to receive expensive coverage later on. In short, the plan could prove too expensive to many, who then drop out with the next round of premium increases.
The recent report that UnitedHealth Group may be hit with a quarterly $0.35 health-care cost on $1.10 per share earnings does not bode well for the overall stability of the program. UHG is just one straw in the wind. As part of his premature victory statement, President Obama trumpeted the decline in the rate of increase in health-care costs from about 8 percent to 4 percent per annum. That number is phony because it assumes that prior declines were all attributable to the ACA whose key provisions on individual and employer plans have yet to take effect. Some long overdue Medicare reforms, and an overall decline in employment levels during the recession, and modifications of standard insurance policies offer more likely explanations for the change.
But now that the Act is taking hold, subsequent reports speak of a “recent surge” in health-care expenditures, some of which are attributed to the expanded ACA coverage. These increased expenses will work themselves into next year’s premiums, which could lead to the adverse selection death spiral that the President pooh-poohs. If it does, we can expect yet another round of belated and ad hoc government interventions.
Structural Flaws
The current flap over the enrollment rates should not, moreover, obscure the many structural flaws in the ACA. Its centerpiece of “minimum essential benefits” will be a constant thorn in the long-term operation of the system. That comprehensive list contains benefits not currently found on even the most expensive voluntary plans, a strong indication that they are worth less to consumers than they cost.
The money to fund these benefits has to come from somewhere. But where? One early casualty of the overall system is the President’s now forgotten pledge that if you like your current health-care plan, you can keep it. But the choice of physicians and hospitals is an expensive perk, albeit one highly valued by consumers. However, because legislation sets out a comprehensive list of required services, insurers will have to scramble to identify other ways to economize on costs. Typically, that imperative requires limiting physician choice, and the number of secondary and tertiary care centers to which patients can go. The upshot is that the new plans will be less consumer friendly than earlier ones that gave greater choice in the overall mix of benefits provided. No government can dictate in advance the features that people value most. One reason why the government plans will get high levels of new enrollment is that they cut out by law the private plans that people would prefer to sign up for with their health-care dollars.
The President constantly derides his critics for their unwillingness and inability to come up with any viable alternative to the ACA. But there is a simple response to his point. The ACA designers ignored efforts to reduce regulations that could have increased competition in the health-care market. They took no steps to permit interstate sales of private insurance or to relax licensing requirements to allow large retailers to provide general health-care services. Instead, they opted for compulsion backed by a bevy of special taxes and fee regulations. Higher costs and fewer choices are not the recipe for long-term success. The President may not understand these fundamentals right now, but he will when the system comes crashing down around him in the months and years to come.
