Bryan Caplan  

Obamacare: What the Future Holds

Question for Left-Libertarians... Irrational Partisans...
The "Affordable Health Care for America" timeline that Arnold shared is... interesting.  Assuming that its seven pages accurately summarize the multi-kilopage bill (a big if), four measures stand out.

1. It provides "immediate access to insurance for uninsured individuals with a pre-existing condition," creating a big adverse selection problem with one swoop.  The provision "ends when Exchanges are operational" in 2014.  But beginning in 2014, "Health plans can no longer exclude coverage for treatments based on pre‐existing health conditions."  So apparently consumers will be free to play "Heads I win, tails I break even" from now on.

2. A while back, Krugman loudly insisted that if you ban pre-existing conditions clauses, you also have to mandate insurance.  While the new bill has a mandate, it doesn't begin until 2014, and the penalty clause is absurdly small.  Here's what passes for "promoting individual responsibility":
Requires most individuals to obtain acceptable health insurance coverage or pay a penalty of $95 for 2014, $325 for 2015, $695 for 2016 (or, up to 2.5 percent of income in 2016), up to a cap of the national average bronze plan premium. Families will pay half the amount for children, up to a cap of up to a cap of $2,250 per family. After 2016, dollar amounts are indexed. If affordable coverage is not available to an individual, they will not be penalized.
In practical terms, then, "Heads I win, tails I break even" remains the winning strategy.  And as adverse selection drives up the price of insurance, paying the uninsured penalty until you're seriously ill gets smarter and smarter.

3. While new regs penalize firms that don't offer insurance, the penalty seems to asymptote to $2000/employee:
Requires employers with 50 or more employees who do not offer coverage to their employees to pay $2,000 annually for each full‐time employee over the first 30 as long as one of their employees receives a tax credit. Precludes waiting periods over 90 days. Requires employers who offer coverage but whose employees receive tax credits to pay $3,000 for each worker receiving a tax credit up to an aggregate cap of $2000 per full‐time employee.
I have a feeling that post-recession jobs are going to be a lot less likely to offer health insurance. 

4. The "Cadillac tax" doesn't kick in until 2018.  But given the regulation-induced adverse selection problem, plus many other provisions to hobble discount insurance, I wouldn't be surprised if half of the insured ended up paying it:
Tax is on the cost of coverage in excess of $27,500 (family coverage) and $10,200 (single coverage), increased to $30,950 (family) and $11,850 (single) for retirees and employees in high risk professions. The dollar thresholds are indexed with inflation...
Notice that the thresholds are indexed to inflation, even though medical costs have increased at a much faster rate than inflation for ages.

I won't propose any bets until I get a better sense of what's going on.  But once my head stops spinning, I'll probably want to bet on the fraction of private insurance in 2020 that's subject to the Cadillac tax.  Considering the weak incentives on individuals and firms to buy insurance, though, maybe I should just bet on the fraction of the population that still has private insurance in 2020.

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COMMENTS (29 to date)
Neal W. writes:

It seems like I should recommend to everyone I know with private insurance that they should dump it until they get sick.

Ted writes:

I wouldn't assume anything. I'm sure the numbers will change on these things before 2014 hits.

kebko writes:

The bill couldn't be passed now with higher penalties. But once it's in place, people who opt out can be demonized, and a new bill can be passed that ratchets up the penalties so there is a meaningful mandate. I hope that the mandate is found to be unconstitutional, but if it is, I don't see how this ends in anything but one big mess. I guess we can hope that everyone drops their insurance and pays cash & the government just serves as a major medical provider with some low-income subsidies thrown in, which is probably about as good a place as we could hope to be. But, on second thought, there is no way something that straightforward would ever come out of Washington.

Patrick writes:

kebko is right. I'll bet you the penalties get much harsher. Maybe that's the thing the Republicans can contribute after they're done pretending to the Tea Partiers they're going to repeal any of it.

This is 98% posturing. It's no coincidence Obamacare and Romneycare look nearly identical. Costs will spike until the parties figure out a way to impose rationing with plausible deniability. Maybe this will take ten years to shake out, but they'll find a way. Republicans will make hay of the sticker shock and win a few elections, but they won't touch the popular stuff, so the unpopular stuff, if repealed, will return shortly thereafter, though maybe in a different form.

The way they demagogued Medicare cuts proves this.

We'll probably end up with a Swiss-style hybrid system. There are worse fates.

Eric writes:

I agree the penalties are insufficient. It seems that catastrophic High-Dedeuctible plans and HSAs are still legal, but might be subject to the penalty (I'm not sure). I got this plan 2 years ago because, finally, I could purchase "insurance" rather than a pre-paid medical plan called insurance. Now, I'm even more sure I'll try hard to keep it and pay the penalties if necessary (as long as insurers exist who find it profitable to sell it). It's the only way to avoid being pooled with the sick people. After all, the people who can't be denied coverage will surely pick the most generous plan rather than continue to pay the full amount of their high deductibles every year.

Brian Shelley writes:

I'll have to disagree with kebko. Yes, they can demonize business owners for paying the fine and dropping insurance, but they won't be able to demonize individuals. There will be loads of 20-somethings making $20-$30K a year skipping the $6K/yr health insurance premiums. No one is going to think they are monsters for avoiding a 30% tax on their income.

The adverse selection will drive up premiums, and the hammer will fall on the "evil" insurance companies and their "obscene" profits.

Mike Hammock writes:

I don't think that's a very interesting bet, Bryan. This whole thing has been driven by health care expenditures; a bet about that would be more interesting. They've risen around 8% annually from 2000 to now; how about a bet that they'll continue to rise that fast or faster (suggesting that this bill will do nothing to constrain costs)?

Joey Donuts writes:

I assume the following scenario is permitted by the current Health Reform Bill.
An employer continues to offer "health insurance" to employees, thus avoiding the penalty. However, the employer also offers to split the savings (after payroll taxes) with the employee if the employee opts out of health insurance. These savings get paid until the employee opts to take health insurance.

Employers will do this until their contributions for health insurance exceed the savings from the split the savings arrangement. Only the sick will remain in the "Health Insurance" pool, thus causing insurance rates to rise for those in the pool and for the employer.

I think this scenario if its possible will dominate. Employers won't simply abandon paying for heath insurance and pay the fine instead, because in all likelihood (given competitive labor markets) they will have to increase wages to remain competitive.
Employers will view he scenario I describe above as more attractive if the wages including payroll taxes plus the fine for not offering health insurance is less than the cost of the scenario.

Ironically, the rules in the bill may cause two un-intended consequences. Fewer people with "insurance" and higher insurance rates for the sick.

Matt C writes:

What Joey Donuts said. Sounds like they're trying to prevent large companies from doing that, but there are a lot of companies with less than 50 employees.

I suspect that Blue Cross and Aetna are not going to cooperate cheerfully with the heads-I-win game. If you're counting on the must issue coverage rule, I'd recommend watching and waiting a little bit and seeing how that works in practice. Don't drop your health insurance just yet.

Anyone sorted out yet what the effective marginal tax rates for low and middle income people end up being under Obamacare?

I think it was Arnold who said, a while back, "let the games begin". If there was ever a shambolic mess that was made to be gamed, this is it.

simon... writes:

By 2014 most private health insurance plans, prevented from raising rates to brake-even level by public outrage and regulatory pressure will be driven out of business, and we will triumphantly transition to single-payer British-style system, which was all-along the real goal of this "reform".

Dr. Liberty writes:

"Pharmaceutical Manufacturers Fee.  Imposes an annual, non-deductible fee on the pharmaceutical manufacturing industry allocated according to 
market share and not applying to companies wth sales of 
branded pharmaceuticals of $5 million or less."

Can someone explain the rationale behind this part of the bill? 

xtophr writes:

Most people will still get their insurance through their employers, and will only be able to add/change coverage during annual open enrollment, creating a disincentive for the opt-out-until-sick approach.

David K writes:

The point here would be valid if we had a citizenry of homo economicus. We don't. My guess is that many people won't want to pay the "fine", even if it would save them money. Interesting strategy for readers of this blog but otherwise I doubt if the aggregate impact of gaming is economically meaningful.

@Brian Shelley: such an individual (the 20-something with 20-30K in income) would only have to pay about $1000-2,000 a year for full insurance thanks to the subsidies, if they were over 26; under 26, they would still be covered by their parents' insurance. In all likelihood they will buy the insurance. The only people who could really make out on this where it was cheaper to pay the fine are more upper-income individuals who don't qualify for subsidies. They can easily be demonized (witness the fact that most of the taxes to pay for this are a new Medicare tax on those making over $200K).

Bon writes:

"Ironically, the rules in the bill may cause two un-intended consequences. Fewer people with "insurance" and higher insurance rates for the sick."

Aren't these two consequences a good thing in the long run? Less people on insurance will mean more people shopping around to find the cheapest medical service for minor illnesses. It will provide a price anchor and encourage transparency. Higher insurance rates would mean that insurance would only be used more for catastrophic conditions, and wala, the Singapore system. We shouldn't confuse insurance rate inflation with medical cost inflation. These unintended consequences seem to drive the latter down.

R Richard Schweitzer writes:


conforms to:


that requires:


and takes us back to those historic questions of who decides and how and to what ends who the "each" shall be.

"Affordable HealthCare" is a prime example.

Joe S. writes:

Maybe a few years from now we'll be talking about the 'pre-existing conditions health insurance meltdown' just like now we talk about the subprime mortgage meltdown.

steve writes:

This bill has several tiers of plans, including catastrophic insurance. The bronze level is a high deductible plan. Depending on the limits, the catastrophic plan could cost about the same as the fine.


Happy to be here writes:

With regard to your first point, you are lumping two things together that are actually separate programs. The immediate access to health insurance for people with pre-existing conditions is in the high-risk pools that will be set up in 90 days on a state by state basis by HHS. The high-risk pools don't cause a death spiral because they are an insurance pool of last resort for sick people who (1) do not have insurance now, and (2) were turned down in the last 6 months on the basis of pre-existing conditions. They don't create the death spiral because they are limited to that narrow group of people. Insurance companies will be free to continue to deny coverage for pre-existing conditions (except with regard to children) to people in the individual market until January 1, 2014. At that point, the regulations prohibiting denials for pre-existing conditions kick in at the same time the mandate begins.

If you drop your coverage now and you get sick before Jan. 1, 2014, you will not be allowed to buy new insurance until after Jan. 1, 2014. That would be a very bad strategy.

Blackburn writes:

Of course waiting "until I get sick" implies that medical insurance is only for chronic illnesses. You can run up a pretty sizable bill falling out of a tree.

mulp writes:

"I have a feeling that post-recession jobs are going to be a lot less likely to offer health insurance."

Before the bill was signed, it was always cheaper to not offer health coverage to employees than to offer it. However, for owners and managers, the much greater bargaining power of group rates and tax benefits make employer health benefits really attractive, but the tax deduction isn't allowed unless all full time employees are offered coverage.

After the bill, small businesses get some new subsidies, so for a small business offering coverage, dropping health benefits saves less money than before. And when 2014 arrives, dropping the benefit will save all employers less money than dropping it today, and for those without the benefit, the cost of adding it in 2014 will be lower than it is today.

And for many small businesses in the states without the power to force community rating, half the small businesses get screwed because their costs are higher than the median so their premiums are set higher, and the highest cost 10% have their policies canceled.

If there is no penalty for not providing a benefit, then it is always cheaper to not offer the benefit. A penalty might not make offering the benefit cheaper than paying the penalty, but it will certainly reduce the difference in cost.

How can economists not figure out how to draw the supply curve. Today, the curve starts a $0 for quantity zero and ends at $(premium-tax benefit) for quantity one; in 2014, it shifts to $2000 at quantity zero and ends at $(premium-subsidies-tax benefit). The cost of quantity zero in 2014 will increase $2000 and decrease by the small business subsidy for quantity one - how can 2014 result in less demand than today?

mulp writes:

One of the interesting things is the assumption that if people don't have health insurance, they don't incur medical costs, so that increasing the amount of health insurance bought by $1 increases the total spending by $1.

The HHS actuary who does the health care cost forecasts for the US economy as part of the Medicare cost planning reported the Senate bill would increase the total US health care spending in 2019 from 20.8% of GDP to 20.9%. So, the "trillion dollar" cost of the bill in the next decade amounts to just 0.1% of GDP net increase in health care costs.

That health care costs are forecast to be over 20% of GDP when they were 8% of GDP at the beginning of the Reagan Revolution of small government is extremely disturbing. But they passed 16% during the Bush return of the Reagan Revolution. Note that all those socialist nations were at 6-8% of GDP in 1980 and are today around 8-10-11% of GDP with better health outcomes.

And while the insured in Canada might wait longer for some elective treatment than the insured in the US, the US uninsured, many of whom were previously insured in the US, wait much longer for desperately needed health care than Canadians do for elective care. But then, even spending twice as much as Canada per capita, the US free market health care system really needs to ration care to keep costs from being even higher.

Nick C. writes:

mulp, "Before the bill was signed, it was always cheaper to not offer health coverage to employees than to offer it."

Not necessarily. Health coverage is part of the total compensation package, so the trade-off is that employees are paid a lower salary. If they didn't offer health insurance, then they would have to pay a larger salary to entice people to work for them.

In fact, in some cases it may be cheaper for them to offer coverage. Let's say an employee desires some after-coverage base salary and that his total compensation is simply salary plus the price of insurance. If the employer doesn't provide insurance, then he would have to pay extra so that the employee could purchase private coverage and still meet his base salary requirements. If the tax incentive structure allows the employer to obtain acceptable insurance at lower prices than in the private market, then the total compensation he pays would be lower than if he just paid a salary high enough for the employee to buy his own.

Of course whether or not it's actually cheaper to offer health coverage depends on any number of factors. In a recession jobs are scarce, so the employee might accept the lower salary and no coverage. The employee may have poor bargaining skills, so they might accept the first salary offer regardless of coverage. Small companies with low revenue may not have the same bargaining power with insurers that larger companies enjoy. So yes, sometimes the employer may be better off not offering coverage, but it's hardly the case that it's always cheaper to not offer.

Nick C. writes:

mulp, "One of the interesting things is the assumption that if people don't have health insurance, they don't incur medical costs, so that increasing the amount of health insurance bought by $1 increases the total spending by $1."

I don't think the issue is total spending as much as it is public spending. If the private sector pays that $1 cost, then public sector spending increases by $0. When people talk about increased spending due to health insurance reform, I think they mean increased public sector spending. The implicit concern is that the government has a spending problem as it is, so it can't be a good thing to give them even more responsibility with money. Obviously we can debate the details; I'm just saying that for many Obamacare opponents, public spending is a bigger issue than total spending.

"That health care costs are forecast to be over 20% of GDP when they were 8% of GDP at the beginning of the Reagan Revolution of small government is extremely disturbing. But they passed 16% during the Bush return of the Reagan Revolution. Note that all those socialist nations were at 6-8% of GDP in 1980 and are today around 8-10-11% of GDP with better health outcomes."

I don't think anyone is arguing that our status quo is anywhere close to an optimum system, so it's not exactly fair to equate spending 20% of GDP on healthcare with a free market system. Small government advocates would say that health care costs would drop considerably in the absence of burdensome regulations; it's not as if we have to choose between spending 20% for a free market system and 6% for a socialized system.

I won't argue that some nations with socialized healthcare achieve comparable outcomes at a lower total cost. Of course I have my opinions, but I won't fall on my sword in their defense. I'm not sure if there's a proper economic term for this effect, but if cost is plotted as a function of the extent of government involvement, then it seems to me that our status quo is somewhere near a local maximum. In other words, we'd be better off either moving towards a socialized system or a free market system because bad compromises tend to amplify the drawbacks and dampen the benefits. If we compare the socialized system with the results at the local maximum, then of course nationalization wins. What's not clear is if it still wins when compared to a more free market system.

Nathan Smith writes:

My advice to John Roberts/the conservative Supreme Court majority:

(1) Rule the individual insurance mandate unconstitutional, but

(2) Say the law can be interpreted as a poll tax of $695 (or whatever) combined with a waiver for those with private health insurance, so it can remain in force under that interpretation.

The decision would be, in one sense, meaningless. It would not affect the actions of government agents, or people's choice sets. But it would make it harder to demonize people as law-breakers who decline to comply with the mandate: their just opting for the poll tax. And although I'm not lawyer, it seems to me the right thing from a legal point of view too. Choosing not to buy health insurance is not a form of interstate commerce, and doesn't fall under the jurisdiction of the federal government according to the Constitution.

R Richard Schweitzer writes:

The new law levies a "Penalty."

Congress is not authorized to levy penalties, so it must be a tax.

If it is a tax, it must be uniform or upon income.

The penalties prescribed are not uniform.

But, the great laugh is to be found in reading the "findings" that the "requirement" for the individual (etc.) mandate "affects" interstate commerce.

Oh no not this again writes:

If you fall out of a tree without insurance it's easy to pay for your medical care. Simply walk out of the hospital as per usual. Also, if you don't want to buy insurance OR pay the $700 fine there's this:

Section 5000A(g)(1):
IN GENERAL.—The penalty provided by this section shall be paid upon notice and demand by the Secretary, and except as provided in paragraph (2), shall be assessed and collected in the same manner as an assessable penalty under subchapter B of 23 chapter 68.

Cool, as long as there's nothing unusual in paragraph (2)...

SPECIAL RULES.—Notwithstanding any other provision of law—
‘‘(A) WAIVER OF CRIMINAL PENALTIES.— In the case of any failure by a taxpayer to timely pay any penalty imposed by this section, such taxpayer shall not be subject to any criminal prosecution or penalty with respect to such failure.
‘‘(B) LIMITATIONS ON LIENS AND LEVIES.—The Secretary shall not—
‘‘(i) file notice of lien with respect to any property of a taxpayer by reason of any failure to pay the penalty imposed by this section, or
‘‘(ii) levy on any such property with respect to such failure.

...completely toothless.
It's not easy forcing people to pay for something you feel required to give them, especially if you're not willing to do anything about when they refuse.

Jay Alt writes:

Bet whatever you want on Obama's 1993 GOP healthcare plan. I'll give 3 to 1 odds that by 2012 voters will really appreaciate it.

MarkS writes:

Good points and an accurate view of the various incentives in the current legislation.
I am 62, unemployed, and in good health. I recently looked into buying a 'catastrophic' insurance plan ($5000 deductible) which would cost $8000 a year for me and my wife.
Why should I spend $8000 for insurance that I won't use and will cost me another $5000 before it pays for anything?
I like the new legislation. I can wait until I get sick to buy insurance. After age 65, I'll have Medicare.
The Republicans did me a favor by opposing the public option. I like this free market approach. I only have to pay for health care and insurance if I need it.

Courtney Norris writes:

The Health Care Bill is absolutely stupid. We should not have to be forced to buy insurance. Obama is trying to take over our country and make it a socialist country. The way it should be is the way it is. If you want insurance then buy it, if you do not want it then don't buy it. Having this bill will make the quality of our health care decrease drastically. This bill should not be followed through with.

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