Through the Looking Glass

October 30, 2013 · by · in , ,

“Why, sometimes I’ve believed as many as six impossible things before breakfast.” ― Lewis Carroll, Alice in Wonderland

Now that enough people have made it through the looking glass of www.healthcare.gov, we are beginning to find out more about the economic reality of the restructuring of the health care financing system.

The Affordable Care Act (aka “Obamacare”) is a classic government intervention in a market (the healthcare insurance market) that the politicians see as inefficient. Although often discussed as “healthcare reform” the act does nothing to change the way care is delivered or what it costs. Like any other intervention on this scale there are winners and losers – what economists refer to as the “distribution effects.”

One of the key market failures identified by the administration was the fact that your insurer could cancel you if you got really sick or not accept you as a customer if you were already sick. This is similar to a drunk driver losing their car insurance or one with a bad record getting stuck in the state’s high-risk pool where premiums are very expensive. The big difference, of course, is that illness is not typically the result of individual behavior.

To solve this problem the law forces insurance companies to make an uneconomic risk-return decision by insuring old people and those with pre-existing conditions at premiums so low the coverage will not be profitable. To offset those losses, the insurance companies need to increase premiums on everyone else and bring more healthy people into the pool for balance.

Coercing the insurance companies is easy. You just pass a law and threaten them with massive sanctions, penalties and executive jail time if they don’t do what you want.

The individuals are a little harder to corral. That is the purpose of the ACA poll tax (sometimes called a head tax). Recall that a poll tax is one you pay not because you buy something or earn money or own something. A poll tax is one you pay simply because you exist. Taxes of this nature have a pretty ugly political history. In 1990, thousands rioted in the UK to protest Margaret Thatcher’s new poll tax. The Affordable Care Act is the first Federal poll tax in U.S. history.

You can avoid the poll tax simply by buying health insurance. Which brings us to the solution for the third market failure. About 15 percent of the population chooses not to buy insurance for various reasons.

The ACA poll tax starts low at $95 or 1 percent of income and grows to $695 or 2.5 percent of income in a few years. The max is $2,085 per year. So let’s suppose I am a healthy 26-year old male earning $45,000 annually. The premium on the cheapest ACA-compliant plan for me in California is $2,256 per year. Unfortunately, it does not provide any benefits until I have paid $5,000 out-of-pocket. For most young people this will feel like no insurance at all since they rarely get sick they will not see any monetary benefit. Too bad for them but, if there are enough that sign up the large profits on these policies will help finance the deficits on the policies described above.

So the economic decision is whether to pay the poll tax of $450 or pay $2,256 to protect against the odd chance of contracting leukemia or a brain tumor. But wait! Under the ACA, the insurance companies must cover me even if I have a pre-existing condition. So it does not matter if I have insurance before I get sick. I can get coverage for that event when it occurs. Cool.

If the government can’t get the intelligent-uninsured to offset the losses who is left to bring into the system? Basically anybody not covered by an employer’s plan or benefitting from the thousands of waivers handed out to businesses, labor unions and other special interest groups. That means people with individual insurance policies.

How can the ACA attract individuals into the exchanges? Simply change the requirements so their current policy is illegal. This is why millions of cancellation notices are currently being issued across the country. There are 19 million individual policies. Some industry experts estimate that as many as 16 million policies will be cancelled by December.

These are the people that will pay much higher premiums for somewhat better coverage. If they make less than $45,000 they may qualify for a taxpayer subsidy but still pay more out-of-pocket than before. Despite the fact that cancelling millions of insurance policies was a critical and fully disclosed part of the plan way back in 2010, many seem shocked and surprised.

To put this all in perspective you have about 6 percent of the population with individual policies getting cancellations and 15 percent that will have to pay the tax. For everyone else the ACA only means slightly higher premiums as employer plans are brought into conformity with the new ACA requirements. So, only 21 percent of the citizenry need to get up close and personal with heathcare.gov. Not so bad.

Eventually, the law of unintended consequences will begin to play out in ways that are hard to fathom. We have seen some of this already with the corporations increasing part-time employment to avoid the ACA penalties.

Will large companies dump their plans, pay the $2,000 fine and send their employees off to heathcare.gov to fend for themselves, perhaps with a stipend to help defray the cost? Will doctors be happy with the system? (Early opinions from N.Y. State are decidedly negative.) Will the insurance companies stay in the game if the delicate pool balancing detailed above does not produce profits?

All this uncertainty weighs heavily on consumers and businesses. There is one thing, however, that we know for certain. The ACA is here to stay.

So what if the website launch was a mess. Be honest now. We’ve all been part of product launches that were flops at least once in our careers. The difference between Obamacare 1.0 and all those failures you and I have experienced is that the government never ever gives up. They aren’t like us. They don’t just put Google Maps back in the I-phone and fire the guy that took it out.

Today this is a political firestorm but it might only be a tempest in a teapot because the vast majority of Americans including, of course, the members of congress and their staff, are exempted from the worst provisions of the law. The only question remaining – do the 21 percent that are getting the full ACA-treatment regularly make their way to the polls for off-year elections?