The Economic Costs of Obamacare
With six hours of oral argument, the Supreme Court began wrestling this week with procedural and constitutional issues surrounding the Patient Protection and Affordable Care Act, the health insurance law that President Obama wrested from a Democratic Congress in 2010.
The headline issue is whether Congress exceeded its constitutional authority in requiring people to buy health insurance starting in 2014, the so-called individual mandate.
If a court majority finds that Congress went too far, they must also rule on whether the entire Act shall fall-or just the individual mandate. This is known as the severability question. The High Court is expected to decide by the end of June.
The nine justices consider only legal arguments. But what are the economic costs of the new law? Below, I list ten separate costs.
1. It raises the costs of employment by requiring employers to offer qualifying insurance coverage or pay a penalty. Because this requirement will apply, starting in 2014, to firms with more than 49 full time employees, it will discourage the hiring of full-time workers, especially low-wage hands whose work can more easily be divided among part-timers. Firms with over 49 workers WILL have to pay $2,000 a year for each employee without qualifying coverage. Expanding to 50 workers would, in 2014, cost a firm $40,000 a year (the first 30 workers are exempt).
This is one reason that the unemployment rate is still above 8 percent almost three years after the end of the recession. Employers aren't stupid, and they plan ahead.
2. ACA encourages employers to substitute part-time for full-time workers to avoid the penalty. A firm with 60 employees would pay a penalty of $60,000 a year if it did not have qualifying health coverage. But if it put 11 workers on part-time, and hired another 11 part-timers, it would not owe a penalty, because it would have 49 full-timers. The full-timers who became part-timers and lost salary and benefits would be worse off.
3. There are many ways that ACA raises the cost of health insurance. One way is by requiring an overly-generous plan. In order to be counted as a "qualified benefit plan" and be able to sell health insurance in the exchange, an underwriter must cover routine health care-such as check-ups, and most recently contraceptives-without copayment. It must also cover maternity care, mental health and substance abuse, and, as we have recently discovered through recent Health and Human Services regulations, free contraceptives.
While such generous coverage may lead to earlier access to health care for some people, it also adds to the cost of insurance. Evidence that increased access to health insurance leads to healthier outcomes is mixed.
4. Another way ACA raises the cost of health care is by discouraging workers from shopping around for routine expenditures. If routine costs are free, individuals don't care about the cost, and don't seek the least costly provider. In contrast, when individuals have to pay for care out of their own pockets, costs go down. The costs of Lasik eye surgery and cosmetic surgery, usually paid out of pocket, have fallen steadily as competition has driven down the price.
Unfortunately, plans that encourage shopping around, such as health savings accounts, where people get a fixed sum to spend on medical care and can keep what is left over, are prohibited by ACA. They cannot be sold on the exchanges.
In 2010 the State of Indiana saved 11 percent of health care costs with its health savings account, which was selected by 70 percent of Indiana state employees. Under the Healthy Indiana Plan, the State deposited $2,750 in an employee's account for health expenditures. Whatever was left over was the employee's permanent property. For the six percent of employees who needed additional care, the employee and State shared an additional $8,000 of costs, after which the State paid the rest.
5. The penalty for not signing up for insurance, $750 a year, is too small relative to the cost of health care coverage, about $5,500 a year. Since insurance companies are required to take all applicants, healthy people, especially the young, who incur few medical expenses, will pay the penalty rather than buy the insurance. This makes the pool of insured individuals sicker and more costly, on average, and their premiums will be higher. With higher premiums, more people will choose to pay the penalty, and a downward spiral will unfold.
6. The law is unfair. It is structured so that the young, who are at the beginning of their careers and have lower earnings, subsidize older people who earn more. Younger workers will be forced to purchase the "qualified benefit plan," a far more generous plan than they need, with the excess savings going to fund health care for their parents' generation.
7. ACA threatens to constrict innovation through the proposed Independent Payment Advisory Board, appointed by the president, which can decide what treatments are cost-effective and therefore covered. IPAB will have unprecedented power, and will be accountable to no one. Some health economists believe that it will be attentive to the wishes of Congress, lest Congress abolish it.
Imagine if an Independent Technology Advisory Board had decided that smartphones were not cost effective back in 2000, and so purchase was not allowed. In 2011, according to the Pew Internet & American Life Project, about 35 percent of American adults owned smartphones. Successive waves of sales improved devices and lowered prices. This won't happen in healthcare if IPAB gets its way.
8. There is a myth that the Act, in spite of its costs, will enable low-income families to get the coverage that they would otherwise lack, or lack now. But there is a gaping hole in the Act. A worker who is offered affordable single coverage by his employer is required to take it, but employers are not required to offer affordable family coverage.
American Enterprise Institute economist Joseph Antos told me, "The intentional exclusion of family members from coverage under subsidized insurance through the exchanges meant that the Act was scored as reducing the deficit, rather than increasing it. That was the key to passage among fiscally-conservative Democrats."
And, here's the rub: families of employees who have coverage for only themselves will not be eligible for subsidized coverage on the exchanges. If they can't afford full-price premiums, family members will be stuck in uninsured limbo, depending for their health care on hospital emergency rooms and community health centers. In a paper published last August, Cornell University professor Richard Burkhauser, Indiana University professor Kosali Simon, and Cornell PhD candidate Sean Lyons estimated that 13 million low-income Americans would be affected. The low cost mini-med or catastrophic health insurance policy that these families could buy today will no longer be legal come 2014.
9. The costs of ACA will balloon as different categories of individuals get health insurance from the exchanges or from community centers and emergency rooms. Original Congressional Budget Office estimates relied on firms continuing to offer health insurance. This month, CBO estimated that 20 million workers would lose coverage and have to go on the exchanges by 2019. For one reason, see #8, above, that families of low-wage workers won't be able to get insurance through employers. Another reason is that the Health and Human Services regulations for permitting existing employer insurance plans were stricter than predicted, which will lead firms to drop them.
10. The government will have to hire additional Internal Revenue Service and Health and Human Services employees to administer and enforce the new law. After ACA was passed, the IRS asked Congress to modify a section that would have required business owners to submit a tax document, called a 1099 form, for all vendors from whom they purchased more than $600 worth of goods or services annually. IRS argued that the provision, which would have raised $19 billion over the period 2012 to 2019, would have overwhelmed its bureaucracy. President Obama signed a repeal of the provision in April, 2011.
Even without the 1099 forms, the IRS will be the main enforcer of the law, checking to see whether people have signed up, or have paid the fine. This will require substantial resources. Similarly, HHS will be busily developing additional regulations to deal with new problems that will surely arise.
Nobel Prize winner Milton Friedman's most famous book was entitled Free To Choose, a treatise on the centrality of choice to a free economy. ACA militates against choice. The individual mandate is not just a constitutional issue, it is fundamentally an economic issue. The coercive mandate explains why the law is unpopular two years after passage, and why politicians who passed it are not using it as the centerpiece of their campaign.