David R. Henderson  

John Goodman on ObamaCare

Logic: Denying the Antecedent... Kahneman on Happiness...

John Goodman writes:

The two most serious defects of ObamaCare were never discussed at the Health Care Summit or in the President's speech this afternoon. I blame the Republicans for that. As a result, things have gotten worse for the GOP. President Obama is now offering to make minor concessions on the issues the Republicans did bring up and call the whole effort a "bipartisan compromise."

Goodman then highlights the two defects. One is the following:

In 2016, ObamaCare will require almost everyone to have insurance that costs an estimated $15,000 for a family (House version). For a $30,000-a-year worker, there are additional limits on out-of-pocket costs. If the employer is providing the insurance, the total tax subsidy from the federal government will be about $2,295. However, if the employee were not getting insurance from the employer, he would qualify for the better insurance (less out-of-pocket exposure) in a new health insurance exchange -- with a federal subsidy that would be $17,105 higher!

The other:

ObamaCare (House version) would create marginal tax rates in excess of 60% for workers earning as little as $25,000! This is caused by the steep withdrawal of health insurance subsidies (in the exchange) as income rises.

Goodman shows some eye-popping graphs. In the comment section, though, North Carolina State University economist John Seater offsets some of Goodman's pessimism, writing:

I see no reason why the Republicans cannot bring up these points now. A few clear, simple examples of just how stupid this plan is would make an effective case against it. The fact that the same case could have been made before won't matter to the average voter, who didn't watch the broadcast of the health care summit anyway. Now is the time to pound the table with simple facts about gigantic marginal tax rates for some middle-income people but not others with almost the same income, gross "unfairness" (a favorite word among the big-hearted Democrats) in the form of higher subsidies for higher income families, and nearly unbelievable disruption of the labor market. The average guy can understand it all if it is presented clearly and simply, and it is all true.

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COMMENTS (10 to date)
Blackadder writes:

If understand Goodman correctly, he's saying that ObamaCare would make it advantageous for employers not to provide health insurance. Why is that a bad thing?

Justin Dailey writes:

Eliminating job lock and allowing consumers to purchase their own health insurance wouldn't be bad in and of itself.

However, a worker earning $30,000 gets an employer plan tax subsidy of $2,295. The same worker who is on the exchanges receives a $19,400 subsidy!

This has several negative implications:

As our low income worker moves from an employer plan to the exchanges, his negative effect on the federal budget is 8.45x what it previously was.

The other problem is that it no longer makes sense to provide low wage workers with health care benefits. Any employer that tries will either vastly overcompensate its work force, or pay too little in salaries and watch its best employees get picked off - either way the employer in this example gets his lunch eaten. This means that we'll have a lot of people moving to the exchanges. Probably more than we currently expect. These people will have better coverage and most cost insulation than they enjoy now. Higher than expected numbers of participants on the exchanges, all of whom are highly insulated from cost pressures screams that we're going to be spending a lot more on this than we are probably anticipating.

Then there's the effect of high implicit marginal taxes and the bigger subsidy combined. Think about a family with two workers making $30,000 and $20,000 a year, and neither employer provides health insurance. The income from the second earner goes mostly to paying for health insurance in the individual market and for day care for the couple's two young children. All of a sudden, the second earner can quit and see a subsidy of $19,400 that they aren't currently getting - plus no need to spend money on child care!

A commentator on John's blog suggests that maybe the way to single payer is that this system turns out to be such a disaster. Perhaps the Public Option as a trojan horse for single payer was just a distraction - the real trojan horse is still in the bill!

Gary Rogers writes:

Although this is a compelling argument against what our government is doing to us, the Republicans did not miss an opportunity. Not enough people understand marginal tax rates for this to be a persuasive argument. I would venture to say that even though the concept is not that difficult, the number of lawmakers that are capable of grasping the concept could be counted on one hand and the general population is even less likely to understand. Economists do understand, though, and it scares me to think how many have sold their soul to the devil to be a part of the destructive policies coming out of Washington.

To summarize what Goodman is saying, it is that when tax rates rise quickly there is no incentive to try to improve your position and people tend to stay where they are rather try to improve themselves and suffer a higher tax rate. If you have to work harder to make more money but most of it goes to pay higher taxes, why work harder or get that extra education or try new ideas? This was a big problem in the seventies but mostly at higher income levels. When high marginal taxes start as low as $25,000 we have a real incentive for third world living.

What does need to start happening is grass roots economic education including lots of examples. Great blog post!

mark writes:

do i read that correctly that there is a $19,000 subsidy for a $15,000 policy? It doesn't make sense.

Separately, to the last point of Justin Dailey's comment, I think that this is where we are headed if the bill passes, not by design but by accident. Having failed on single payer or public option, their next step down to take it out on the insurance companies. I cannot imagine how any of them could survive, so yes, I think the outcome, if not the intent, is to ruin them and make single payer the inevitable default outcome in about 8-10 years and then progressives will pat themselves on the back for having had the brilliant foresight that more limited humans lacked.

Justin Dailey writes:

Mark, I believe the extra several thousand dollars are cost sharing subsidies.

David C writes:

The House version was killed and modifications are being made based on the Senate version. John Goodman wasted a lot of time analyzing a bill that has almost no chance of becoming law.

R. Richard Schweitzer writes:


How about the fact the nobody raised the issue of what is the Federal government doing in the HealthCare business anyway and by what authority given Congress; plus the other two OBVIOUS constitutional issues?

Justin Dailey writes:

David, that is a fair point. Although the senate bill is less generous than the house bill, the two are structured fairly similarly and the basic argument still applies.

The distortions in the senate bill aren't quite as large out of the gate, although in my view it will only be a matter of time before inflation increases the senate bill's distortions to the level seen in the house bill.

John Goodman writes:

All versions of ObamaCare have the defects I described. The Senate bill is less bad, but we are still talking about differential subsidies in excess of $10,000.

The reason why the subsidy in the exchange is higher than the cost of the insurance is that these insurance plans have quite a lot of out-of-pocket exposure; and under the House bill, someone making only $30,000 a year is entitled to additional subsides if he has substantial out-of-pocket costs.

F. Melese writes:

Bill Moyers’ Journal on PBS this evening discussed the Health Care Bill...

How John Goodman might have responded to Moyers if he had been invited on the show:

Wow...Talk about a one-sided message. What I just saw, was two articulate representatives on the same side of the issue. The first guest argues in favor of the health care bill because it increases government control. Your token opposition revealed she's opposed to the bill because she favors even stronger government control. What about a third view?
Say reducing government's massive role in health care, and putting that responsibility back in the hands of the consumer, while providing direct (means-tested) medical debit cards to those who fall through the cracks? Even better, this could be combined with a policy (guaranteed to be hated by the insurance industry and State regulators) to open the country to true competition so consumers would be free to choose among private (and non-profit) insurance companies across state lines. Or how about fixing the distortion created by WWII's wage and price controls? Since employers couldn't raise wages, but still needed to attract workers, they were temporarily allowed to offer tax free health benefits. The government forgot to repeal this artifact of a War-time economy. Today workers find themselves tied to those benefits, while those not so fortunate who must purchase their own don't get the tax break. Worse yet, anyone covered has little incentive to pay attention to costs. (I plead guilty). Informed and motivated patients paying for health services with their own money out of their medical savings accounts (combined with a high deductible catastrophic insurance policy) are the key to reducing health care costs. Another is to identify where competitive markets are possible. Instead of stuffing thousands of different medical products and services under the broad umbrella of "health care," and instead of increasing regulations to control costs, why not relax regulations and allow markets to work? For example, could we trust informed consumers to pay for delicate and complex health care procedures with their own money and make good choices for themselves in highly competitive national markets for those procedures? If so, then like any other competitive market we should observe steadily improving quality, more people served, and lower costs. Too good to be true? What about laser eye surgery or plastic surgery? Safer, more accessible and cheaper than ever before. That's the prescription....

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