Thursday, April 24, 2014
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Obamacare’s Fatal Flaw

CAMBRIDGE – Obamacare, officially known as the Patient Protection and Affordable Care Act, is the health-insurance program enacted by US President Barack Obama and Congressional Democrats over the unanimous opposition of congressional Republicans. It was designed to cover those Americans without private or public health insurance – about 15% of the US population.

Opponents of Obamacare have failed to stop it in the courts and, more recently, in Congress. The program was therefore formally launched on October 1. Although it has been hampered by a wide range of computer problems and other technical difficulties, the program is likely to be operating by sometime in 2014.

The big question is whether it will function as intended and survive permanently. There is a serious risk that it will not.

The potentially fatal flaw in Obamacare is the very same feature that appeals most to its supporters: the ability of even those with a serious preexisting health condition to buy insurance at the standard premium.

That feature will encourage those who are not ill to become or remain uninsured until they have a potentially costly medical diagnosis. The resulting shift in enrollment away from low-cost healthy patients to those with predictably high costs will raise insurance companies’ cost per insured person, driving up the premiums that they must charge. As premiums rise, even more relatively healthy individuals will be encouraged to forego insurance until illness strikes, causing average costs and premiums to rise further.

With this in mind, Obamacare’s drafters made the purchase of insurance “mandatory.” More specifically, employers with more than 50 employees will be required after 2014 to purchase an approved insurance policy for their “full-time” employees. Individuals who do not receive insurance from their employers are required to purchase insurance on their own, with low-income buyers receiving a government subsidy.

But neither the employer mandate nor the personal requirement is likely to prove effective. Employers can avoid the mandate by reducing an employee’s workweek to less than 30 hours (which the law defines as full-time employment). But even for full-time employees, firms can opt to pay a relatively small fine rather than provide insurance. That fine is $2,000 per employee, much less than the current average premium of $16,000 for employer-provided family policies.

Not providing insurance and paying the fine is a particularly attractive option for a firm if its employees have incomes that entitle them to the government subsidies (which are now available to anyone whose income is below four times the poverty level). Rather than incur the cost of the premium for an approved policy, a smart employer can pay the fine for not providing insurance and increase employees’ pay by enough so that they have more spendable cash after purchasing the subsidized insurance policy. Even after both payments, employers can be better off financially. News reports indicate that many employers are already taking such steps.

But the biggest danger to Obamacare’s survival is that many individuals who do not receive insurance from their employer will choose not to insure themselves and will instead pay the fine of just 1% of income (rising permanently after 2015 to 2.5%). The preferred alternative for these individuals is to wait to buy insurance until they are ill and are facing large medical bills.

That wait-to-insure strategy makes sense if the medical condition is a chronic disease like diabetes or a condition requiring surgery, like cancer or a hernia. In either case, the individual would be able to purchase insurance after he or she receives the diagnosis.

But what about conditions like a heart attack or injuries sustained in an automobile accident? In those cases, the individual would not have time to purchase the health insurance that the law allows. If they are not insured in advance, they will face major hospital bills that could cause serious financial hardship or even cause them not to receive needed care. Anyone contemplating that prospect might choose to forego the wait-to-insure strategy and enroll immediately.

But private insurance companies could solve that problem by creating a new type of “emergency insurance” that would make enrolling now unnecessary and allow individuals to take advantage of the wait-to-insure option. Such insurance would cover the costs that a patient would incur after a medical event that left no time to purchase the policies offered in the Obamacare insurance exchanges. Emergency insurance might also cover the cost of care until the “open enrollment” period for purchasing insurance at the end of each year (if political pressure does not lead to the repeal of that temporary barrier to insurance).

This type of insurance is very different from existing high-deductible policies. Given the very limited scope and unpredictable nature of the conditions that it would cover, the premium for such a policy would be very low. It would not satisfy the broad coverage requirements that Obamacare mandates, forcing individuals to pay the relatively small penalty for being uninsured and to incur the subsequent cost of buying a full policy if one is needed later. But the combination of emergency insurance and the wait-to-insure strategy would still be financially preferable for many individuals, and the number would grow as premiums are driven higher.

Employers with a large number of full-time employees could encourage their existing insurance companies to create the emergency policies. They might even choose to self-insure the emergency risk for their employees.

The “wait-to-insure” option could cause the number of insured individuals to decline rapidly as premiums rise for those who remain insured. In this scenario, the unraveling of Obamacare could lead to renewed political pressure from the left for a European-style single-payer health-care system.

But it might also provide an opportunity for a better plan: eliminate the current enormously expensive tax subsidy for employer-financed insurance and use the revenue savings to subsidize everyone to buy comprehensive private insurance policies with income-related copayments. That restructuring of insurance would simultaneously protect individuals, increase labor mobility, and help to control health-care costs.

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  1. CommentedWilliam Lee

    There are other 'fatal flaws' not the least of which is the disincentive for capable and qualified students to now choose medicine as a career. That 'desire' is driven by various motivations; the need to help others, income generation, and, of course, the joy and satisfaction of the pursuit of the 'science'. These motivations are now conflicted with the pressure, expense, & burden of the government oversight let alone significant reduction in personal income. The impact In the reduction of the number and capability of future physicians will be the silent killer in the room the impact of which will only be recognized slowly and then with an ever increasing awareness.

  2. CommentedBenjamin Walter

    The so-called "fine" is not a fine at all. It is rather an option to purchase an asset worth many times the price. Cancer treatments are expensive. Having paid the fine, a person can go straightaway and purchase the "insurance" once his primary-care physician tells him he strongly suspects cancer. The combined cost of fine, "insurance", deductible (pays to buy platinum) and copays just a fraction of treatment costs. And, as has been pointed out, reinsurance is likely to appear on markets to cover the costs of the "fine". Problem with ACA is not that it is not "foolproof"; it is not "geniusproof".

  3. CommentedProcyon Mukherjee

    The insurance costs over the decade rose by 100% (2002-2012) as the study has shown : http://kaiserfamilyfoundation.files.wordpress.com/2013/03/8345-employer-health-benefits-annual-survey-section-1-0913.pdf The current rise of health insurance is not any different from what the past decade's annual rate of growth has been, so the claims of "driving up the premiums" with Obamacare must be backed with comparable data from the past decade.

  4. CommentedWayne Davidson

    Obamacare had its genesis in a society where the delivery of social justice is subjected to conflicted political ideology. Republicanism posits ( that individuals have control over their own actions) and thereby responsible for their own lives, or the democrats view that the disenfranchised and by default the poor and sick should be cared for by the state. What ever your political view the elephant in the room is Corporate medicine. The delivery of medical services should not be subject to capitalist exploitation under the guise of a free market economy. Capitalism is not bound by any moral code or oath. The failure of Obamacare will be the exponential rise in medical costs legalized by profligate politicians.

    1. CommentedGeorge Murphy

      We have the greatest health care system in the world. Corporate benevolence has been a great part in keeping the best health system in the world intact while providing help to untold millions of less fortunate individuals and families. Corporate America has provided money for medical research and health insurance to millions of people and their families with out the inefficiencies of federal control. My own dental practice (without federal involvement) has for over thirty years given 15% of the total practice production to less fortunate families....pro bono ! Most people espousing ideas like yours are for the mass involuntary redistribution of wealth that we are experiencing with the present administration. Our "old" system has provided the greatest level of health care for the greatest number of people of any country in the world . When it comes to health care, the United States is the envy of the free world.....Corporate influence and all.

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