Monday, April 2, 2012

Some Thoughts on the Affordable Care Act - ObamaCare

Recently, on one of the more conservative blogs I follow, the Tyler Cowen linked two articles that made some pretty smart critiques of Obama's health care act, one from Ross Douthat and another here from John Cochrane.  Douthat makes the point that whether or not the mandate proves to be constitutional, its unpopularity will ultimately sink it.  He offers some predictions on how both conservatives and the liberals might respond:
For conservatives, these reforms might look like the proposals that James Capretta and Robert Moffit outline in the latest issue of National Affairs — a tax credit available to people whose employers don’t offer insurance, better-financed high-risk pools and stronger guarantees of continuous coverage for people with pre-existing conditions. 

Liberals, for their part, would probably focus on gradually expanding Medicaid and Medicare to cover more of the near-elderly and the near-poor, creating a larger public system alongside the private marketplace. Indeed, the White House apparently considered switching to exactly this approach in the aftermath of Scott Brown’s surprise Senate win.
Let's first talk about the high risk pool for those with pre-existing conditions:
Think carefully about this for a second.  The main properties of Obamacare is that it offers one big community exchange for those not in a big company pool.  The way the insurance exchange works is that it spreads risk across a broad population.  One person in the pool who uses a lot of health care is subsidized by another who uses less of it.  The pool makes health care more affordable for everyone.

This only works, though, if you have expensive people offset by healthier people.  One other important property of the pool is that it gives the manager of the pool (the company or government in the case of medicare) more power to negotiate rates with insurance companies and health care providers.  More customers translate to lower rates.

A high-risk pool does not work as well.  Everyone in the pool is expensive which is why you need the "better financed" part of what Douthat suggests. What this means is that those not in the high risk pool - everyone else, has to pay higher taxes in order to finance the health care of everyone in the high risk pool.  If you play a bit with the linguistics, call this tax a premium, then you have just replicated Obamacare's exchanges with the mandate and the regulation or, at least, you've come awfully close to it.

Second, let's talk about Douthat's proposal to offer a tax-credit to those not in a private employer insurance pool.  Just so we're clear, those of us who get health insurance from a private employer also enjoy a major tax-credit wrapped around that health insurance.  That tax-credit goes to the employer but it makes it more affordable for the employer to provide this benefit to the employees.  More importantly, big companies who have more people on the insurance pool have greater negotiating power, have a greater capability to spread risk across more people, and therefore have a greater capability to provide more affordable health care to their employees.

So, say we decide to adopt Douthat's suggestion and offer a tax-credit for someone on the individual market.  This has the effect of dropping the tax rate for everyone who chooses to purchase health insurance (by an unequal amount by the way,  those in a higher tax bracket gets a bigger tax break).  So, those who don't choose or are unable to choose to purchase health insurance has to pay higher taxes than those who do.  Tell me how this is different than Obama's mandate?  Really, there's no practical difference.  In affect, then, combine Douthat's suggestion and you've implemented the mandate in two different ways.

A bit more on this.  Consider a healthy young person who uses very little health care has the choice between being on the individual market or takes the insurance offered by their employer.  If both options are equally subsidized through a tax-credit, it will likely be cheaper to go with the individual market.  In the company pool, the company is trying to negotiation one common rate for everyone in the pool, which presumably combines young and healthy workers with older, sicker ones.  For the insurance company to make a profit, the premium has to be higher than the cost of the average worker.  The individual, then will logically be able to get a cheaper rate going at it alone.  As healthier people opt out of the company insurance pool, it makes insurance still more expensive for those who cling to the employer pool.  Eventually, more and more companies may stop offering it.  Then, you are left with a single, subsidized exchange for those with pre-existing conditions and an individual market for everyone else.

By the way, this result is not so bad.   Leaning, as we do, so heavily on employer provided insurance is a really bad idea.  Getting rid of the employer based tax-credit loophole would go a long way to both simplifying the tax code and making space for alternative ideas that don't rely on employer cooperation.  However, if you end up with a high-risk pool offered to those people who are likely to need it (I can see this ultimately covering those over 50 - or alternatively, medicare could be expanded to get cover these people) and an individual insurance for people who don't need much health care anyway - you actually have backed into a system very similar to Obamacare.  The difference would be how the high risk pool was implemented.  If it was made of of a collection of regulated private insurance companies, it would be almost identical to Obamacare.  If it was single payer government sponsored insurance, you are a whisper away from medicare for everyone.

I'll get to the second article in my next post.

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