Obamascare

THE MOST coherent rationale for congressional Republicans in shutting down the U.S. government a few weeks back was their demand that ‘Obamacare’ be defunded. ‘Obamacare’ refers to complex legislation passed in 2010, aiming to make affordable health insurance available to as many Americans as possible.

My European and Asian friends ask: what could be wrong with that? Republicans must be callous, hard-hearted brutes. To be sure, the Republican shutdown belied the Constitution. Obamacare is the law of the land. If Republicans think it’s wrongheaded, their task is winning enough elections to secure repeal. You can’t skip that part and insist on defunding a program you don’t like, resorting to blackmail on the people if you don’t get your way. That would allow minority views to prevail over representative majorities. But the wrongness of the shutdown does not prove the wisdom of Obamacare. Republican critiques of Obamacare should at least be understood, even if the shutdown strategy for stopping it cannot be countenanced. In their core indictment, Republicans contend that Obamacare: 1) costs way too much; 2) hampers private sector job creation; and 3) downplays the urgency of cutting health care costs. Some add that Obamacare is objectionably ‘socialist’, that it gives too much new power to an already oversized federal government, or that it snarls the health care sector in spools of red tape. Without going into detail, I submit that these latter objections are less substantial than the core three-point indictment.

One cannot understand Obamacare without first grasping some peculiar features of the American health care and insurance system. No planner with a smidgen of sanity would ever devise such a system. Having evolved in fits and starts without rational planning, it now blunders forward with such enormous momentum as to make rational reform very difficult.

Most U.S. health care comes from private providers and is obscenely expensive, though generally high-quality. While other developed countries spend less than 9% of GDP for health care on average, America spends over 16%, almost double. Theories differ as to why costs are so high. Doctors make much more money in America than in comparable countries. Charges for services are typically non-transparent and they vary wildly among hospitals. In a classic market failure, huge information disparities between providers on one side and patients/insurers on the other mean that the latter fail to exert meaningful price discipline on the former.

Another problem is that most Americans pay for health care not out of pocket but through insurance, which they also do not pay for directly. Because consumers do not bear expenses directly, they worry little about immediate costs and they consume services they may not really need, thereby stressing scarce resources and forcing costs upward.

In any case, sky-high costs mean that Americans without health insurance risk financial catastrophe. Prolonged hospital care for a family member can easily bankrupt an American household. On the other hand, health insurance is also terribly expensive because the underlying care is so costly.

Most Americans with health insurance get it through their employers as part of job compensation, rather than paying for it out of pocket (or having it paid by government). But if you don’t have a job or have one without insurance benefits, you must pay for coverage out of pocket or go without. The one is expensive, the other potentially ruinous, and those in this position are predominantly low-income, of course. This peculiar employer-centered system emerges from a quirk in the tax code, whereby employer-provided health insurance is not counted as taxable income to the employee. Firms and workers alike therefore find it advantageous that compensation be partly in the form of health insurance rather than take-home pay.The tax exemption for employer-provided health insurance costs the Treasury an estimated $250 billion a year: more than the deductions for mortgage interest, charitable contributions or state and local tax payments and more than the favorable treatment of capital gains income. It disfavors the poor—those without jobs or with jobs offering no insurance benefits-and favors the rich, whose jobs offer the most generous benefits.

Experts indicate that repealing the exemption would raise enough federal revenue to provide government health insurance (‘single payer’) for every American twice over. But this would spell the collapse of employer-provided health insurance. If the new revenue were not devoted to universal health insurance (there are plenty of other things for which the money could be used), Americans would be left paying for coverage out of pocket. This might prove especially tough on middle-income households, forced to buy expensive coverage out of their post-tax incomes.

With the exception of government-funded Medicare (for the old) and Medicaid (for the very poor), U.S. health insurance comes from private underwriters. For understandable reasons, they attract the young and healthy by offering them low premiums while charging more for those with higher health risks and excluding coverage altogether for those who are seriously sick (‘pre-existing conditions’). Those who need coverage least get it most cheaply, while those who need it most cannot get it all–unless they have jobs with insurance benefits.

On this complex, confusing and contradictory landscape it is far from obvious what the reform priority should be, though most agree that reform is badly needed. Reform of any element sends reverberations through the rest of the sector as well as the wider economy. Obamacare emphasizes extending coverage to the currently uninsured. In its fine print, it also supports initiatives to cut health care costs. Republicans respond that broadened coverage should take second place: the crucial priority must be reducing underlying health care costs, thereby making both care and insurance more affordable.

One leading Republican proposal boils down to extracting routine care from insurance coverage altogether so that Americans would pay for it out of pocket. This will induce them to forego health services they do not really need and to scrutinize services and prices more carefully. With lower consumption and greater price discipline, health care costs will go down, as will the price of health insurance. Suppose every family can secure a tax exemption for $5000 per year to be held in a health savings account (HAS). That tax-favored money can be used for health care that year, saved for future years or even invested. It becomes subject to taxation only if later spent for something besides health care, which families are also free to do. Under this system, as Republicans contend, households have an incentive to get smart about health care consumption and costs will consequently come down.

Critics point out that this plan invites the classic insurance problem called ‘adverse selection.’ Those most drawn to HSAs will be the young and healthy: those most likely to amass wealth through the tax break, through low consumption of care and through accumulated savings. Older and sicker Americans, more dependent on health insurance, will tend to stick with their coverage. But they will see their premiums go spiraling upward as the healthy and young depart, forcing proportional pay-outs in the ‘risk pool’ of remaining clients to rise.

One may also wonder whether the smart-shopper model makes sense for health care in the first place. Can consumers really grasp the complexities of modern medicine and can they make dispassionate judgments to control costs when the health of self or family is at stake?

A second Republican proposal is that households be allowed to buy insurance across state lines (currently disallowed because insurance is regulated by the states, not the federal government). With nationwide sales, interstate competition among underwriters will intensify compared with what currently takes place in the separate states. Underwriters competing for customers nationwide will strive harder to cut premiums. This in turn will drive them to bargain harder with health care providers on charges for services. Costs will come down for both care and insurance.

There are at least two reasons to doubt this cost-cutting proposal. First, it assumes that more underwriters operating in any given state means more ‘competition’ in an economically relevant sense: not true if there are already enough players in the separate states to prevent oligopoly pricing. Second, the proposal forgets that reducing health care costs reduces the need for insurance. How plausible is it that underwriters will fall over themselves to cut the costs that make insurance necessary in the first place? Won’t they instead fall over themselves trying to avoid this?

In addition to cost-cutting proposals, Republicans suggest expanding coverage through tax breaks to low-income families that buy health insurance. But for this to be seriously helpful for hard-pressed families, tax breaks would need to equal the presumably unaffordable cost of the insurance in question. And as a means of helping the poor, the proposal runs up against the fact that some 43% of U.S. households pay no federal income tax anyway, largely because their earnings are too low. If you pay no taxes, tax breaks won’t help much. Those without health insurance fall overwhelmingly in that bracket.

If Republican proposals seem unimpressive, what about Obamacare? Obamacare rests on several pillars crucial to success. Mandatory issuance means that insurers must cover anyone who applies, without higher prices for pre-existing conditions. An employer mandate means that firms with 50 or more full-time employees must offer health insurance with specified coverage or else pay a penalty. The individual mandate means that persons without employer-provided insurance must purchase their own coverage or else pay a penalty. This prevents the young and healthy from gaming the system, going uninsured until they need health care and then buying coverage under the mandatory issuance rule. Allowing low-risk citizens to avoid paying premiums would force insurers to charge the old and sickly higher rates in order to maintain profitability: adverse selection again.Exchanges are on-line markets where citizens can enroll for insurance after comparing coverage and prices. Subsidies are tax-funded support for those who cannot afford the insurance they are compelled to buy. Cost control comes in theory from ongoing governmental scrutiny of health care charges and unspecified future regulations to pull them downward.

Republicans doubt the efficacy of Obamacare’s speculative cost control mechanisms. Their other two core critiques focus on the price tag for subsidizing coverage and on the employer mandate’s negative job-creation effect.

The Congressional Budget Office estimates that Obamacare subsidies will cost USD 1.76 trillion over the next decade. This comes at a time when the U.S. government already stands USD 17 trillion in debt, with deficits averaging well over a trillion dollars annually since 2009. Already concerned about the drag on growth these deficits and debts may pose, Republicans insist that Obamacare’s massive new spending commitment is catastrophic.

Laudable in intent, Obamacare remains a patch job on a deeply flawed system. Their opposition methods may be unconstitutional and their alternatives lame, but Republicans have good grounds to worry about Obamacare.

A graduate of Harvard Law School, Mark Hager lives in Pelawatte and consults on complex legal, writing and negotiations challenges. mark.hager@gmail.com