Health Care: A Free Lunch Paid For By The Healthy

Two big promises were made in the effort to pass the Affordable Care Act: that insurance coverage would be extended to those with pre-existing conditions,and that subsidies would be provided to people who could not afford insurance. In both cases, the extension of benefits will be accomplished by making other (healthier or richer) people pay for these new free lunches.

Economists are famous for saying there is no such thing as a free lunch, but that depends on the context. There is no truly free lunch in the sense that somebody somewhere is paying the bill, but there are lots of free lunches from the viewpoint of the people getting benefits without having to pay for them. In this case, lower-income people are being promised free or subsidized health insurance, courtesy of the taxpayers. People with pre-existing conditions will get insurance at the same price as healthy people by forcing young, healthy people to buy health insurance and by raising the prices for everybody to spread the cost.

This all sounds great if you are one of the people who currently does not have and cannot afford insurance, or if you have a pre-existing condition and either cannot get insurance or have to pay a very high price for it. It is not such a good deal if you are a taxpayer or are young, healthy, and currently choosing not to buy health insurance. However, the big problem is going to come when the two free lunches collide.

If the Obama administration does not keep Obamacare within or near the budget targets, it will face withering Republican criticism. If the subsidies cost more than originally projected, those overruns may need to be balanced by eliminating other free lunches.

The obvious candidate is people with pre-existing conditions, because there are fewer of them than members of the group expecting subsidies. If insurance companies can charge a somewhat higher price for this group (or other groups with higher expected costs such as smokers), offsetting savings could be captured in an attempt to stay within the projected budget.

In fact, shortchanging those with pre-existing conditions has already begun.

The Affordable Care Act provided for people with pre-existing conditions during the transitional period between passage of Obamacare and its full implementation in 2014. The Pre-existing Condition Insurance Plan within the Department of Health and Human Services was created to begin providing coverage to people with pre-existing conditions with the government paying most of the costs and a budget of $5 billion.

However, the costs have been higher than expected and the program is running out of money.

Because of this budget constraint, HHS has stopped accepting new people into the Pre-existing Condition Insurance Plan and also raised the co-payments required from the people in the program. In other words, people with pre-existing conditions who were unable to obtain insurance before are now getting turned away by the very government program created to provide them with insurance. And those lucky enough to be enrolled in the program must pay thousands of dollars more out-of-pocket because of the changes in co-pay limits.

The fact that a government program cannot solve the problem it was designed to solve for the promised amount of money is no surprise. Government programs almost always end up costing more than the projections used when the programs are passed. The government always underestimates the cost of new initiatives. This means one of three things will happen as Obamacare is fully implemented.

One possibility is that health insurance reform will cost more than projected and the federal government will simply allow the cost overruns. The budget deficit will rise, pushing the true cost of the program off into the future and also limiting what can be spent in the short term on other discretionary programs.

The second possibility is that the reform will not fully deliver on its promise of universal care. Subsidies might be smaller or be phased out at a lower income level (right now they go to families at or below 400% of the poverty level which is over $90,000 per year for a family of four). Pre-existing condition coverage could be restricted or made less generous, leaving a central promise of the reform fulfilled in name but not in spirit.

The third possibility is that taxes could be raised to offset the increased costs. These could be income taxes, taxes on specific items or services (like the medical device tax included in the original legislation), any kind of tax. Scores of tax increases are included in the Affordable Care Act, but more could always be added if the Democrats convince the Republican-led House to go along.

Which one of these scenarios happens (higher costs, less coverage, or higher taxes) is yet to be determined. Given the current political dynamic the most likely outcome is the second. That means we may be in store for a huge battle between different constituencies each hoping to secure a free lunch under Obamacare.

There isn't enough food for all the people lined up at the buffet. Somebody is going to go hungry.

President Obama and the Democrats love to offer people free lunches. But unless somebody is willing to write the checks, the number of free lunches is limited by the current budget standoff. That means somebody is going to lose out. Either the higher-income people supposed to get subsidies or those with pre-existing conditions are the most likely candidates to have the promises made to them broken.

That is the danger of relying on a free lunch. Such benefits are never as dependable as people think.