Archives For health care

Once again, my constitutional law professor has embarrassed me with his gross misunderstanding of the U.S. Constitution.  First, he insisted that it would be “unprecedented” for the U.S. Supreme Court to overturn a statute enacted by a “democratically elected Congress.”  Seventh-grade Civics students know that’s not right, but Mr. Obama’s misstatement did have its intended effect:  It sent a clear signal that the President and his lackeys would call into question the legitimacy of the Supreme Court should it invalidate the Affordable Care Act (ACA).  Duly warned, Chief Justice Roberts changed his vote in NFIB v. Sebelius to save the Court from whatever institutional damage Mr. Obama would have inflicted.

Now President Obama – who chastised his predecessor for offending the constitutional order and insisted that he, a former constitutional law professor, would never stoop so low – has both violated his oath of office and flouted a key constitutional feature, the separation of powers.  I’m speaking of the President’s “administrative fix” to the ACA.  That “fix” consists of a presidential order not to enforce the Act’s minimum coverage provisions, a move that President Obama says will allow insurance companies to continue offering ACA non-compliant policies to those previously enrolled in them if the companies wish to do so and are able to obtain permission at the state level.

This is, of course, nothing more than a transparent attempt to shift blame for the millions of recently canceled policies.  Having priced their more generous ACA-compliant policies on the assumption that there would be an influx of healthy customers now covered by high-deductible, non-compliant policies, insurance companies would shoot themselves in the foot by accepting Mr. Obama’s generous “offer.”  Moreover, state insurance commissioners, aware of the adverse selection likely to result from this last-minute rule change, are unlikely to give their blessing.  (Indeed, several have balked – including the D.C. insurance commissioner, who was promptly fired.)

But putting aside the fact that the administrative fix won’t work, the main problem with it is that it is blatantly unconstitutional.  The Constitution divides power between the three branches of government.  Article I grants to the Congress “all legislative Powers,” including “Power to lay and collect Taxes.”  Article II then directs the President to “take Care that the laws be faithfully executed.” With his administrative fix, President Obama has essentially said, “I promise not to execute the law Congress passed.”

Moreover, the President went further to say, “I promise not to collect a tax the Congress imposed.”  Remember that the penalty for failure to carry ACA-compliant insurance is, for constitutional purposes, a tax.  That was the central holding of last summer’s Obamacare decision, NFIB v. Sebelius.  When the President assured victims of insurance cancellations that he would turn a blind eye to the law and allow their insurers to continue to offer canceled policies, he also implied that he would order his administration not to collect the taxes owed by those in ACA-noncompliant policies.  Indeed, this matter was clarified in the letter the Department of Health and Human Services sent to state insurance commissioners notifying them of the Obama Administration’s decision not to enforce the law as written.  That letter stated that the Department of the Treasury, which is charged (through the IRS) with collecting the ACA’s penalties/taxes, “concur[red] with the transitional relief afforded in this document.”  That means the IRS, pursuant to the President’s order, is promising not to collect a tax the Congress has imposed.

This, my friends, is a major disruption of the constitutional order.  If the President of the United States may simply decide not to collect taxes imposed by the branch of government that has been given exclusive “Power to lay and collect Taxes,” the whole Constitution is thrown off-kilter.  Any time a president wanted to favor some individuals, firms, or industries, he wouldn’t need to go to Congress for approval.  No, he could just order his IRS not to collect taxes from those folks.  Can’t get Congress to approve subsidies for green technologies?  No worries.  Just order your IRS not to collect taxes from firms in that sector.  Or maybe even order a refundable tax credit.  You think Congress has enacted job-killing regulations on an industry?  Just invoke your enforcement discretion and ignore those rules.  Whew!  This sure makes things easier.

President Obama twice promised, under oath, to “take Care that the Laws be faithfully executed.”  Unfortunately, he also rammed through a terrible law.  Our Constitution now gives him the option to enforce the enacted law and pay the political price, or seek Congress’s assistance to change the law.  On the particular matter at issue here, Congress is willing to help the President out.  On Friday, the House of Representatives voted to amend the law to allow insurance companies to continue to offer ACA non-compliant policies.  Mr. Obama doesn’t like some details of the legislative fix he’s been offered.  Unfortunately for him, though, he’s not a king.  He has to work within the constitutional order.

At least, that’s what I thought I learned in constitutional law.

In yesterday’s hearings on the disastrous launch of the federal health insurance exchanges, contractors insisted that part of the problem was a last-minute specification from the government:  the feds didn’t want people to be able to “window shop” for health insurance until they had created a profile and entered all sorts of personal information.

That’s understandable.  For this massive social experiment to succeed — or, at least, to fail less badly – young, healthy people need to buy health insurance.  Policy prices for those folks, though, are going to be really high because (1) the ACA requires all sorts of costly coverages people used to be able to decline, and (2) the Act’s “community rating” and “guaranteed issue” provisions prevent insurers from charging older and sicker people an actuarily appropriate rate and therefore require their subsidization by the young and healthy.  To prevent the sort of sticker shock that might cause young invincibles to forego purchasing insurance, Obamacare advocates didn’t want them seeing unsubsidized insurance rates.  Determining a person’s subsidy, though, requires submisison of all sorts of personal information.  Thus, the original requirement that website visitors create a profile and provide gobs of information before seeing insurance rates.

Given the website’s glitches and the difficulty of actually creating a working profile, the feds have now reversed course and are permitting window shopping.  An applicant can enter his or her state and county, family size, and age range (<50 or >50) and receive a selection of premium estimates.  To avoid dissuading people from applying for coverage in light of high premiums, the website takes great pains to emphasize that the estimated premiums do not account for the available subsidies to which most people will be entitled.  For example, to get my own quote, I had to answer a handful of questions and click “Next” a few times, and in the process of doing so, the website announced seven times that the estimated prices I was about to see would not include the generous subsdies to which I would probably be entitled.  The Obamacare folks, you see, want us consumers to know what we’re really going to have to pay.

Or do they?

According to the website, I could buy a Coventry Bronze $15 co-pay plan for $218.03 per month (unsubsidized).  An Anthem Blue Cross Blue Shield Direct Access Plan would cost me $213.39 per month (unsubsidized).  When I went to a private exchange and conducted the same inquiry, however, I learned that the price for the former policy would be $278.66 and, for the latter, between $270.17.  So the private exchange tells me the price for my insurance would be 27% percent higher than the amount Healthcare.gov estimates in its window shopping feature.  What gives?

As it turns out, the federal exchange assumes (without admitting it) that anyone under age 49 is 27 years old.  The private website, by contrast, based quotes on my real age (42).  Obviously, the older a person is, the higher the premium will be.  Since the ACA mandates that individuals up to age 26 be allowed to stay on their parents’ insurance policies, the age the federal website assumes is the very youngest age at which most people would be required to buy health insurance or pay a penalty.  In other words, the federal website picks the rosiest assumption in estimating insurance premiums and never once tells users it’s doing so.  It does, however, awkwardly remind them seven times in fewer than seven consecutive screens that their actual premiums will probably be lower than the figure quoted.

Can you imagine if a private firm pulled this sort of stunt?  Elizabeth Warren’s friends at the CFPB would be on it like white on rice!

Look, the website problems are a red herring.  Sure, they’re shockingly severe, and they do illustrate the limits of government to run things effectively, limits the ACA architects resolutely disregarded.  But they’ll get fixed eventually.  The main reason they’re a long-term problem is that they exacerbate the Act’s most fundamental flaw: its tendency to create a death spiral of adverse selection in which older and sicker people, beneficiaries under the ACA, purchase health insurance, while young, healthy folks, losers under the Act, forego it.  Once this happens, insurance premiums will skyrocket, encouraging even more young and healthy people to drop out of the pool of insureds and thereby making things even worse.  The most significant problem stemming from the website “glitches” (my, how that term has been stretched!) is that they have made it so hard to apply for insurance that only those most desperate for it — the old and sick, the ones we least need in the pool of insureds — will go through the rigmarole of signing up.  On this point, see Holman Jenkins and George Will.

But who knows.  Maybe Zeke Emanuel can fix the problem by getting the Red Sox to sell Obamacare to young invincibles.  (I’m not kidding.  That was his plan for avoiding adverse selection.)

Go Cards!

The Wegman’s grocery store chain has long offered health insurance benefits to part-time employees working at least 20 hours per week.  The Affordable Care Act, however, has now driven the company to cut health insurance benefits for part-time workers.  Wegman’s management, it seems, has discovered that employees are better off if they can’t get insurance from their employer and are therefore allowed access to the generous subsidies available under the ACA.

As the Buffalo News explains:

[P]art-time employees may actually benefit from Wegmans’ decision, according to Brian Murphy, a partner at Lawley Benefits Group, an insurance brokerage firm in Buffalo.

“If you have an employee that qualifies for subsidized coverage, they might be better off going with that than a limited part-time benefit,” Murphy said.

That’s because subsidized coverage can have a lower out-of-pocket cost for the insured employee while also providing better benefits than an employer-paid plan.

Under the Affordable Care Act, part-time employees are not eligible for health insurance subsidies if their employer offers insurance.

“It’s a win-win. The employee gets subsidized coverage, and the employer gets to lower costs,” Murphy said.

Once employees get a taste for the ACA’s generous subsidies–which far exceed the implicit tax subsidy in employer-provided health insurance–they’ll be hooked on the statute.  Proponents of the ACA should therefore view this as a win-win-win!  The only losers, I suppose, are we taxpayers who must pay for all these subsidies.  At least we can take comfort in the fact that the statute reduces the deficit.

Has a piece of legislation ever been subject to as much cynicism-inspiring manipulation as the Affordable Care Act?  It was rammed through Congress, on a totally partisan basis, via an unprecedented use of the reconciliation process.  Its passage required blatant vote-buying with such unjust goodies as the Cornhusker Kickback and the Louisiana Purchase.  Its proponents sold it with bald-face lies that nobody with any sense believes (e.g., “It will reduce the deficit.”), and they credit it with successes for which it is obviously not responsible.

Now the Obama Administration has decided to delay a key, but unpopular, provision of the Act—the so-called “Employer Mandate” that fines firms with 50 or more employers if they fail to provide qualifying insurance to employees working at least 30 hours per week—until after the mid-term elections.  Never mind that the Act itself doesn’t permit the Administration to waive these requirements.  This is “Obamacare,” after all, and that means The Big Guy gets to decide how it’s implemented.  He sure as heck doesn’t want it generating a bunch of lay-offs and hours-reductions right before mid-term elections!

Many in the business community are cheering the one-year delay.  It does, after all, hold off a provision that has been causing firms to reduce workers’ hours, thereby raising the  administrative costs of keeping businesses properly staffed.  But this delay is going to cause huge problems for implementation of the ACA and does nothing to address the biggest problem inherent in the Employer Mandate scheme.

IMPLEMENTATION PROBLEMS

The reporting system connected to (and delayed along with) the Employer Mandate is integral to the ACA’s subsidized health exchanges.  As Michael Cannon has explained, it’s hard to see how the exchanges could possibly work without the reporting system:

. . . Obamacare offers tax credits and subsidies to certain workers who don’t receive an offer of acceptable coverage from an employer. The law requires employers to report information to the IRS on their coverage offerings, both to determine whether the employer will be subject to penalties and whether its employees will be eligible for credits and subsidies.

The IRS both delayed the imposition of penalties and “suspend[ed] reporting for 2014.” As the American Enterprise Institute’s Tom Miller observes, without that information on employers’ health benefits offerings, the federal government simply cannot determine who will be eligible for credits and subsidies. Without the credits and subsidies, the “rate shock” that workers experience will be much greater and/or many more workers will qualify for the unaffordability exemption from the individual mandate. Either way, fewer workers will purchase health insurance and premiums will rise further, which could ultimately end in an adverse selection death spiral. The administration can’t exactly solve this problem by offering credits and subsidies to everyone who applies either. Not only would this increase the cost of the law, but it would also lead to a backlash in 2015 when some people have their subsidies revoked.

Now, the IRS hasn’t yet released its “formal guidance” detailing how the Employer Mandate/reporting system delay will operate.  It’s possible that regulators have come up with some way to offer selective subsidies absent the reporting system.  But given ACA proponents’ heretofore lack of concern about the practicability of the health care law, I wouldn’t hold my breath.

IGNORING THE BIG PROBLEM WITH THE MANDATE/SUBSIDY SCHEME

Putting aside the apparent political motivation for and practical difficulties created by the Employer Mandate delay, the main problem with the delay is that it simply ignores the huge problem created by the ACA’s mandate/subsidy scheme.

The Employer Mandate ostensibly aims to increase employer-provided health insurance coverage by encouraging employers to provide such coverage as an element of their employees’ compensation.  If a covered employer fails to do so, it faces a $2,000 annual penalty for each of its employees who purchases insurance on a subsidized exchange.  When implemented along with the rest of the ACA, however, the Employer Mandate is unlikely to enhance health insurance coverage for lower-income employees.  Here’s why:

  • The ACA subsidizes purchases on the insurance exchanges by individuals whose employers do not offer qualifying insurance at an affordable rate.  The subsidies are inversely related to income.  They are quite generous at lower income levels and reduce to zero once income exceeds four times the federal poverty level.
  • The only subsidy for employer-provided insurance, by contrast, is an implicit tax subsidy resulting from the fact that compensation paid in the form of insurance benefits, rather than wages, is tax-free.  The dollar value of that implicit tax subsidy for any individual is the sum of her marginal tax rate and the payroll tax rate, times the price of the policy.  (For most lower-income workers, the effective subsidy will be 22.65% * the policy price. That assumes a 7.65% payroll tax (1.45% Medicare + 6.2% Social Security) and a marginal income tax rate of 15%.)
  • Absent the penalty provision of the Employer Mandate, the best outcome from the worker’s standpoint would be for the employer to provide health insurance only if the effective subsidy from getting the insurance benefit tax-free exceeds the subsidy the worker would receive if she purchased her own insurance on a subsidized exchange.  Because lower income workers (1) are subject to lower tax rates and therefore receive a smaller tax subsidy from employer provided insurance, and (2) are eligible for large subsidies on the insurance exchanges, they would typically be better off if their employers dropped coverage and thereby enabled them to access the subsidized exchanges.
  • The penalty provision of the Employer Mandate alters this calculus.  Because an employer that fails to provide health insurance must pay $2,000 per year for each employee that purchases insurance on an exchange, a covered employer that cut its health insurance would be willing to raise its employee’s salary by only the amount the employer would have paid for the policy (the price it doesn’t have to pay) minus $2,000 (the amount of penalty it now has to pay).  Thus, in the face of the Employer Mandate, an employee would prefer that its employer provide health insurance coverage only if the effective tax subsidy from getting insurance tax-free exceeds the subsidy available to the employee on an exchange less $2,000.
  • Because the subsidies available to lower-income workers on the insurance exchanges far exceed — by way more than $2,000 – the effective tax subsidy from employer provided health insurance, most lower-income workers will prefer that their employers drop insurance coverage, pay them more in cash, and allow them to take advantage of taxpayer-financed subsidies on the insurance exchanges.

An example may help here.  Suppose an employer wishes to provide $40,000 in total compensation to a 40 year-old employee who is the head of a four-person household.  If the employer were to purchase a family policy for the employee (approximate cost $12,000/year), she would pay the employee $28,0000/year in cash.  The employee would pay no payroll or income tax on the component of his compensation provided as health insurance, so he would receive an effective federal subsidy of $2,718 (22.65% * $12,000).  If the employer were to drop health care coverage and thus drive the employee to an exchange, the employer would have to pay $2,000 and would therefore reduce to $38,000 the total amount she would pay the employee.  The employee would then receive all his compensation — all $38,000 — as take-home pay.  On the $12,000 that otherwise would have been paid as benefits, he’d have to pay $2,718 in tax, but he would now be eligible to purchase insurance on his own at a heavily subsidized rate. The ACA would limit his out-of-pocket insurance expense to 4.52% of annual income ($1,718), which means he would receive a whopping $10,282 subsidy on the $12,000 family policy.  This employee is $5,564 better off if his employer drops coverage (costing him $4,718:  $2,718 in foregone tax subsidy plus a penalty-induced compensation reduction of $2,000) and allows him to access the more generous subsidies available on state exchanges (benefiting him by $10,282).

This is the huge problem with the ACA’s Employer Mandate/subsidy scheme:  The scheme as a whole creates incentives to dump lower-income employees on the subsidized exchanges.  The Obama Administration’s politically expedient delay in implementation of the Employer Mandate does nothing to alleviate this difficulty.  But it might help Nancy Pelosi get her old job back.

After two years of nagging and increasingly worse hip and leg pain, I learned last August (at age forty) that I have a congenital hip deformity and need to have both hips replaced.  In planning for this surgery, I’ve witnessed first-hand a problem that is driving American health care costs through the roof and is exacerbated by the Affordable Care Act (ACA).  Allow me tell you a little about my recent health care decision-making, the difficulty it exemplifies, and how the ACA squandered an opportunity to make things better.

The first decision I confronted after my diagnosis was when to have surgery.  Because I’m a teacher, the timing of my diagnosis—three days before fall classes were to begin—was most inconvenient.  I knew I could have surgery in early December and be recovered enough to begin the spring semester in mid-January, but that seemed like a lot of hassle.  I ultimately decided to hold off on my surgery until this summer and treat the pain with cortisone injections (of which I’ve now had seven).

In addition to having to decide when to have surgery, I’ve had to select a procedure and decide on a surgeon.  Because I’m young and active, one doctor recommended hip resurfacing, a procedure in which the femoral head is not removed but is instead shaved down and capped with chrome.  Another, stressing problems that may arise from the metal-on-metal aspect of hip resurfacing, recommended a total hip replacement.  I decided to follow his advice.

In researching physicians (which involved several costly office visits), I paid close attention to how different surgeons do things.  Most utilize the traditional posterior approach and access the hip joint from behind, cutting through the buttocks.  In recent years, a minority have switched to an anterior approach in which the incision is on the front of the pelvic area and no muscle is cut.  That approach results in a faster recovery and less risk of dislocation, but it requires a unique table and a surgeon who has received specialized training. 

Surgeons also differ on what brand of artificial joints they use (some are better than others), whether they use stems that are cemented within the femur (uncemented stems become fixed as the bone grows into them), what size femoral heads they employ (bigger heads tend to be more stable, at least to a point), the amount of time they keep patients in the hospital (some send patients home the same day of the surgery, others keep them in the hospital for a few days of rehab), and whether they will replace both hips at once.  Not surprisingly, surgeons’ views on all these matters were quite important to me as I made my choice of doctor.    

In the end, then, I’ve had to decide:

  • When to have this surgery (December or June);
  • How many rounds of cortisone injections to get (they become less effective);
  • Which procedure to have (hip resurfacing or a total hip replacement);
  • Whether to go with a posterior or anterior approach;
  • Which components to utilize (cemented or uncemented stems, larger or smaller femoral heads, which manufacturer)
  • How long to stay in the hospital; and
  • Whether to schedule two surgeries or have both hips replaced at once.

The amazing—and disturbing—thing is that I’ve made all these decisions without ever, a single time, considering the relative cost of the options before me.  Cortisone injections (which, according to my latest insurance statement, cost $790 a pop) have been effectively “free” for me ever since I met the measly annual deductible on my health insurance.  From my perspective, the only cost of another round has been the pain and inconvenience of getting the injections.  In deciding on procedures (resurfacing vs. replacement), approaches (anterior vs. posterior), components (cemented/uncemented, larger or smaller head, brand), surgeons, hospitals, length of hospital stay, and whether to do both hips at once, the price of different options has never been mentioned.  Indeed, I’m nearly certain the doctors I saw couldn’t have quoted me any kind of a price had I requested one.  But, of course, I never requested pricing information because I didn’t care about relative prices.  I didn’t care about relative prices because I have an insurance policy that will pay for whatever I select.  And the various providers I’ve been considering—doctors, hospitals, and equipment manufacturers—know that I’m not considering price in making this decision and am thus unlikely to be swayed by a discount.  They don’t compete on price because doing so won’t win them any business.

My experience exemplifies the problem inherent in any system of third-party health insurance:  The people making consumption decisions are paying with other people’s money, so they have little incentive to shop on price, and providers, aware of that fact, have little incentive to lower their prices in an attempt to win business. 

While the problem is to some degree intractable, it’s been exacerbated by generous health insurance policies that have transformed true “insurance” (protection against catastrophic and unforeseeable risks) into what is essentially pre-paid health care (i.e., coverage for even foreseeable and minor expenses like check-ups and antibiotics for strep throat).  As an increasing number of foreseeable and cheap services and products are covered by insurance—so that the person making the consumption decision doesn’t bear the cost of her choice—prices will rise.  Why, for example, would a doctor lower or constrain her charge for an annual check-up when she knows doing so won’t win her any additional business? 

Unfortunately, the Affordable Care Act not only failed to make a simple change that could have helped mitigate this problem, it also imposed mandates that will make the situation worse.

A Sin of Omission: Failure to Fix the Tax Code’s Perverse Encouragement of Overly Generous Insurance Policies

As explained above, consumers’ incentive to ignore (and providers’ consequent disincentive to compete on) the prices of medical services grows as insurance becomes more and more generous. When everything is covered, a consumer won’t give a hoot about price, and neither will the providers competing for the consumer’s business. The system works best, then, if insurance—at least for lots of folks—is somewhat “stingy” and requires insureds to make some significant out-of-pocket expenditures. If there’s a substantial group of consumers out there whose insurance covers only unforeseeable and catastrophic events, competition for their business on foreseeable and minor expenses will end up lowering health care costs for all. It’s crucial, then, that there be a substantial number of insureds with stingy insurance (i.e., high deductibles and co-pays, significant coverage limitations) and an incentive to shop on price.

Unfortunately, the federal tax code discourages this type of health insurance. Under current law, employer contributions to an employee’s health insurance, but not individuals’ own expenditures on such insurance, are not taxed. This creates an incentive for employers to replace salary, upon which their employees are taxed, with more generous health insurance benefits (i.e., low deductibles, low copayments, lots of costly coverages), which are tax-advantaged. Those generous benefits, in turn, discourage both price competition and thoughtful decisions about health care consumption.

That the tax code perversely encourages overly generous insurance policies is hardly controversial. Indeed, a National Public Radio survey of liberal and conservative economists recently identified eliminating the deductibility of employer contributions to health insurance as one of six policy proposals “that have broad agreement, at least among economists.” As the diverse group of economists explained, the fact that “[n]either employees nor employers pay taxes on workplace health insurance benefits … encourages fancier insurance coverage, driving up usage and, therefore, health costs overall.” Even ACA architect Christina Romer (former Chair of President Obama’s Council of Economic Advisers) recently argued that overly generous insurance plans “lead families to be less vigilant consumers of health care.”

So why didn’t ACA proponents, who know the terrible damage wrought by the tax code’s treatment of employer-provided health benefits include a fix to the problem in the ACA? In a word, politics. In the 2008 campaign, John McCain proposed to eliminate the tax deductibility of employer-provided health benefits so that employer-provided and individually purchased insurance policies would receive equivalent tax treatment. He then proposed to provide refundable tax credits for health insurance purchases. By eliminating the incentive for employers to pay (and employees to demand) a greater proportion of worker compensation in the form of tax-free insurance benefits, the McCain plan would have encouraged individuals to buy cheaper but stingier insurance policies – precisely the sorts of policies that both mitigate the moral hazard problem inherent in any system of third-party health insurance and encourage health care providers to engage in price competition. Unfortunately, McCain’s plan was easy to construe as a “tax increase,” and, in a startlingly disingenuous line of attack, then-candidate Obama went there. He launched television ads accusing McCain of proposing to raise taxes, and he gave lots of speeches where he said things like this:

I can make a firm pledge: under my plan, no family making less than $250,000 will see their taxes increase – not your income taxes, not your payroll taxes, not your capital gains taxes, not any of your taxes. My opponent can’t make that pledge, and here’s why: for the first time in American history, he wants to tax your health benefits. Apparently, Senator McCain doesn’t think it’s enough that your health premiums have doubled, he thinks you should have to pay taxes on them too. That’s a $3.6 trillion tax increase on middle class families. That will eventually leave tens of millions of you paying higher taxes. That’s his idea of change.

President Obama, of course, failed to abide by his “firm pledge.” But far more importantly, his strong and misleading rhetoric against McCain’s plan to level the playing field between employer-provided and individually purchased health insurance policies made it impossible, as a political matter, to make the change economists of all stripes believe would help lower health care costs. As Bob Woodward observed in another context, Mr. Obama’s politics carry a price. Sadly, we’re the ones who pay it.

Two Sins of Commission

In addition to squandering an opportunity to enhance price competition among health care providers, the ACA, when fully implemented, will dampen the nascent price competition that is just beginning to rein in medical inflation and destroy price competition on preventive medical services and products.

Reducing Existing Price Competition by Impairing the HSA/High-Deductible Policy Option. In recent years, the rate of medical inflation has slowed significantly, leveling off at about 3.9%, substantially below the 6.2 to 9.7% of most of the 2000s. Not surprisingly, ACA proponents attribute this decrease to the Act. But that’s implausible given that (1) the bulk of the ACA hasn’t yet been implemented, and (2) the slowdown in medical inflation began around 2002 and the rate had substantially moderated by 2005, well before the Act was passed. The sluggish economy is undoubtedly responsible for some of the slowdown in health care inflation, but macroeconomic woes can’t explain the pre-recession reduction.

So what else is going on? One thing is that a drastically increased number of health care consumers are now insured under high-deductible health plans (HDHPs), typically coupled with Health Savings Accounts (HSAs) in which insureds may sock away money tax-free for meeting deductibles and making minor health care expenditures. From 2005-2012, the number of Americans covered by these plans jumped from one million to 13.5 million. Consumers who are so insured are far more price sensitive, and providers, courting their business, are more likely to compete on price. Indeed, a recent Rand study estimates that families using these health care plans cut health care spending by a whopping 21%. It seems likely, then, that “stingier” insurance has played a significant role in reducing medical inflation. That’s the judgment of Harvard health care economist Michael Chernew, who recently wrote that “[r]ising out-of-pocket payments appear to have played a major role in this decline [in medical inflation], accounting for approximately 20% of the observed slowdown.”

Unfortunately, the ACA threatens to derail the HDHP/HSA revolution. The threat comes from two of the Act’s requirements. First, the statute requires that qualifying (“bronze” level) policies have an “actuarial value” of 60%, meaning that the policy must cover at least 60% of an insured’s medical expenses. That’s a problem for any high-deductible policy coupled with an HSA because, by definition, the portion of medical payments made out of the HSA are not made under the policy sold by the insurer. In a recent guidance bulletin, the Department of Health and Human Services announced that payments made from employer contributions to HSAs would count as insurance payments, but when consumers spend HSA money they contributed themselves, those payments won’t count toward the proportion of medical payments from insurance—even though the insureds are spending money they would have spent on insurance premiums had they purchased policies with lower deductibles. Because a significant proportion of medical payments made by an insured with a high-deductible policy and HSA won’t count toward the minimum 60% actuarial value, insurers will have to raise payments made under the policy by lowering the deductible and/or covering more services. This will both raise the price of the policy, making the HDHP/HSA option less desirable to insureds, and destroy the social value of the HDHP/HSA approach—i.e., the more thoughtful consumption decisions and enhanced price competition that result when individuals are paying for medical care with their own money.

The ACA’s “80/20 rule” also promises to impair the HDHP/HSA model. Under that rule, an insurer must spend at least 80% of collected premiums on health care reimbursements or refund the difference to its insureds. Because high-deductible health plans collect smaller premiums but face fixed administrative costs, they are particularly likely to run afoul of this rule. Consider this example from Robert Bloink and William Byrnes:

[I]f an insurance plan collects $500,000 a month in insurance premiums in Florida and the corresponding administrative costs are $100,000, then $400,000 a month—or 80 percent—of the premiums are paid in benefits and the plan remains within the limits of the 80/20 rule. A HDHP that collects monthly premiums of, say, $300,000 in Florida with the same administrative costs will violate the 80/20 rule because the administrative costs represent more than 20 percent of the $300,000 in premiums collected within the state. The insurer will then be required to refund the difference to Florida policyholders, eliminating much of the incentive for offering low premiums in the first place.

Thus, the ACA, by reducing the attractiveness of the successful HDHP/HSA model, impairs the very development that is most likely to reduce medical inflation in the long run.

Decimating Price Competition on Preventive Measures.  One of the most controversial provisions of the ACA is the requirement that insurers fully cover all preventive measures. The controversy has centered on HHS’s directive that contraception, including the so-called morning after pill, be included in employer-provided coverage. Employers who oppose contraception on religious grounds maintain that HHS’s requirement violates their constitutionally protected right to exercise their religion freely, and I agree. But there’s another huge problem with the ACA’s mandate: it will greatly dampen price competition among providers of preventive services and products, thereby driving up their cost.

If consumers pay nothing for a preventive service regardless of its price, they have little incentive to select relatively cost-effective services, and providers therefore have little incentive to compete on price. If a woman’s birth control is, from her perspective, “free,” then why would she shop around? And if no one’s shopping around, why would contraceptive manufacturers lower or constrain their prices?

ACA proponents insist that the adverse effect of eliminating price competition on preventive measures will be offset by down-the-road cost reductions resulting from better preventive care. But that seems unlikely. Insurers already have an incentive to adopt an optimal reimbursement policy that covers preventive measures when doing so lowers total expected costs. Their scads of actuaries spend all day trying to strike a cost-minimizing balance. The mere fact that a service may lower future costs, then, doesn’t mean it should be fully covered by insurance.

Automobile insurers understand this principle. As John Cochrane observes, they don’t raise premiums slightly and cover routine oil changes—even though regular oil changes prevent higher costs down the road—because they know that insurance coverage would destroy price competition among mechanics and drive up the price of oil changes. By the same token, the ACA’s mandate that insurers fully cover all preventive health services is sure to increase the price of those services in the future.

Conclusion

My recent hip saga has really opened my eyes about the way health care consumption decisions are made. If I had a little more skin the game, I probably would have made some different decisions. I almost certainly wouldn’t have incurred charges of $5,530 ($790 * 7) for nine months of pain relief. I probably would have dealt with the hassle of a “hectic” holiday season and had surgery in December, saving thousands of dollars in fees for palliative care. I might have made different decisions about procedures, doctors, hospitals, cities, components, and whether to do both hips at once—though I really don’t know, since I have absolutely no idea how the relative costs of all these options differ.

One thing I do know, though: Separating the consumer from the price signal is a sure-fire way to waste resources.  The sad thing is that policy makers were beginning to understand that problem and some practical ways to mitigate it. The HDHP/HAS revolution was generating improvements and shedding light on how to move forward.

Then the Affordable Care Act happened.

What a tragedy.

Ezekiel Emanuel, Rahm’s brother and former health care adviser to President Obama, acknowledges in today’s Wall Street Journal that adverse selection may prove to be a “bump in the road” in the implementation of the Affordable Care Act (ACA).  But never you mind.  He’s got solutions.  And, as usual, they all come down to messaging.

Emanuel describes the ACA’s adverse selection problem in what are, for this Administration and its surrogates, remarkably frank terms:

Here is the specific problem: Insurance companies worry that young people, especially young men, already think they are invincible, and they are bewildered about the health-care reform in general and exchanges in particular. They may tune out, forego purchasing health insurance and opt to pay a penalty instead when their taxes come due.

The consequence would be a disproportionate number of older and sicker people purchasing insurance, which will raise insurance premiums and, in turn, discourage more people from enrolling. This reluctance to enroll would damage a key aspect of reform.

Insurance companies are spooked by this possibility, so they are already raising premiums to protect themselves from potential losses. Yet this step can help create the very problem that they are trying to avoid. If premiums are high—or even just perceived to be high—young people will be more likely to avoid buying insurance, which could start the negative, downward spiral of exchanges full of the sick and elderly with not enough healthy people paying premiums.

Of course, Emanuel leaves out an important part of the story: the fact that the ACA itself encourages young, healthy people (the “young invincibles,” he calls them) to forego buying health insurance.  The statute does so by mandating that health insurance be sold on a “guaranteed issue” basis (meaning that insurance companies can’t deny coverage to people who waited to buy it until they became sick) and at prices based on “community rating” (meaning that those who are sick or susceptible to sickness can’t be charged more than the healthy).  Taken together, these provisions largely eliminate the adverse personal consequences of waiting to buy health insurance until you need medical treatment.  (You can’t be denied coverage or charged a higher premium reflecting your illness.)  They thereby decimate the incentive for young, healthy people to buy health insurance until they need it.  And since the law doesn’t (and can’t, according to the Supreme Court) require young, healthy people to carry insurance, many are likely to forego buying coverage in favor of paying a small “tax” — $95 in 2014, as opposed to the $2,480 out-of-pocket cost for an individual policy bought on a subsidized exchange by a 26 year-old earning $30,000.  As I have argued on this blog and elsewhere, the ACA is likely to generate a devastating spiral of adverse selection as the “young invincibles” drop out of the pool of insureds, causing premiums for the covered population to rise, encouraging even more of the marginally healthy to exit the risk pool, causing premiums to rise even further, etc., etc.

But don’t you worry.  Dr. Emanuel’s got it figured out.  He explains:

Fortunately, there are solutions [to this ACA-induced adverse selection problem]. First, young people believe in President Obama. They overwhelmingly voted for him. He won by a 23% margin among voters 18-29—just the people who need to enroll. The president connects with young people, too, so he needs to use that bond and get out there to convince them to sign up for health insurance to help this central part of his legacy. Every commencement address by an administration official should encourage young graduates to get health insurance.

Second, we need to make clear as a society that buying insurance is part of individual responsibility. If you don’t have insurance and you need to go to the emergency room or unexpectedly get diagnosed with cancer, you are free- riding on others. Insured Americans will have to pay more to hospitals and doctors to make up for your nonpayment. The social norm of individual responsibility must be equated with purchasing health insurance.

Finally, and most important, we should adopt some of Massachusetts’ practices. When state officials in 2006-2007 were rolling out their exchange—called the Massachusetts Connector—they mounted a sustained campaign to encourage enrollment by young people. One aspect of the campaign focused in particular on young men, even heavily promoting the new exchange on TV during Red Sox games and hosting an annual “Health Connector Day” at Fenway Park.

So we’re going to lick this pernicious adverse selection problem by combining President Obama’s legendary star power with a dollop of good old fashioned shaming and some targeted advertising during baseball games?  One is reminded of Homeland Security Secretary Tom Ridge’s 2003 statement that Americans should use duct tape to protect themselves from chemical weapons attacks.  But this is really worse.  The chance of a chemical weapons attack in 2003 was pretty small.  Insurance premiums’ rising as a result of ACA-inspired adverse selection, by contrast, is a near certainty. Let’s make sure we keep the President and HHS Secretary Sebelius on that commencement address circuit!

In his nationally syndicated column this week, Washington Post columnist George Will highlights what he termed my “plausible judgment” (I’m taking that as high praise!) that the Supreme Court’s Affordable Care Act decision “may have made the ACA unworkable, thereby putting it on a path to ultimate extinction.”

Will focuses on the first of my three major points about the ACA, as interpreted by the Supreme Court.  In finding the penalty for failure to carry health insurance to be a tax, the Court emphasized its “smallness” relative to the cost of purchasing qualifying insurance.  (That was one of three factors the Court cited in explaining why this particular “penalty” is really a tax for constitutional purposes.)  Presumably, if Congress were to raise the penalty to approach the out-of-pocket cost of buying insurance, it would cross the line from a tax to, in the Supreme Court’s words, “prohibitory financial punishment” that is not a tax.  This means that the ACA’s low penalties are constitutionally locked in, at least to a significant degree.  That’s a problem, because the penalties are currently so low that it makes sense for young, healthy people to forego insurance and pay the low penalties instead.  This is because the ACA removes the natural incentive for young, healthy people to carry insurance: the risk that they will not be able to get it at affordable rates if they become sick in the future.  That risk is eliminated by the ACA’s “guaranteed issue” and “community rating” provisions.  The former requires insurance companies to sell insurance to anyone who seeks it; the latter forbids them to charge a higher premium to one who is sick or susceptible to sickness.  If you know you can get insurance at a an affordable rate the minute you need health care (which, if you’re young and healthy, you’re not likely to need anytime soon), then why buy it now?  The ACA’s penalties are theoretically designed to motivate young, healthy people to go ahead and buy insurance (thereby subsidizing premiums for the less-healthy), but they’re way too low to be effective.  And the Supreme Court’s tax reasoning suggests that they will cease to count as a “tax” if they’re raised to the point at which they would be effective.  Of course, once young, healthy people leave the pool of insureds, premiums will rise on everyone else, causing even more healthy people to drop out.  Economists call this adverse selection, and it’s wildly pernicious.

Will lays all this out in his typical elegant fashion.  He concludes that “as the president begins his second term, the signature achievement of his first term looks remarkably rickety.”  Indeed.

For two other reasons the ACA, as construed by the Supreme Court, is destined to fail, see my recent Regulation article, How the Supreme Court Doomed the ACA to Failure.

My recent essay, How the Supreme Court Doomed the ACA to Failure, is the cover article of the current issue of Regulation Magazine.  I’ve been over the essay’s basic points several times (e.g., here, here, and here), so I won’t belabor them now.  My basic assertions are:

  • The Affordable Care Act (ACA) provisions mandating both “guaranteed issue” (insurers must sell to everyone) and “community rating” (insurers can’t charge higher rates to high-risk insureds) create a perverse incentive for young, healthy people to forego purchasing costly health insurance until they need medical treatment, at which point they will be assured coverage (because of guaranteed issue) at rates not reflecting their infirmities (because of community rating).
  • When young, healthy people drop out of the insurance pool, premiums — reflective of the average health care expenditures of the covered population — will rise, driving even more young, healthy people from the pool.  To prevent such “adverse selection,” the ACA needs to encourage the young and healthy into the insurance pool, and ensure that they remain covered.
  • SCOTUS’s opinion upholding the ACA, however, rejected (quite properly) the Act’s mandate to carry insurance and instead read the ACA to impose a “tax” on those who freely opt not to buy insurance.  That tax, though, is far too small to induce a great many young, healthy people to stay in the insurance pool — even after the ACA’s generous (i.e., expensive) subsidies are accounted for.  And the reasoning of SCOTUS’s majority opinion limits Congress’s ability to raise the no-insurance penalties to an effective level.  Thus, adverse selection is inevitable and will tend to drive up the cost of health insurance by “sickening” the pool of insureds and increasing the average number of claims per insured.
  • Now, an increase in claims per insured would not necessarily raise health insurance premiums if the ACA actually reduced the underlying cost of medical services, the primary driver of health insurance premiums.  Sadly, though, it does no such thing.  The handful of provisions in the 1,000-page statute that are aimed at underlying medical costs, rather than health insurance, range from anemic to silly.  Some, such as the requirement that all preventive services be provided with no out-of-pocket expenditure (the requirement underlying the controversial “contraception mandate”), are sure to increase underlying medical costs.  After all, what incentive do providers have to compete on the price of preventive services if the individuals making the decision to purchase those services face no marginal cost when deciding whom to patronize?
  • The fundamental problem with the ACA’s purported cost-saving provisions is that they ignore the primary driver of underlying medical costs: the near complete absence of price competition among health care providers, who know that most individuals making consumption decisions (those with a standard or better health insurance policy) have no “skin in the game,” get no benefit from selecting a cheaper provider, and thus will not tend to award business to providers who are less expensive.  This unfortunate result stems largely from the federal tax code, which perversely encourages employees to demand (and employers to provide) such generous health insurance benefits that insurance has now effectively become “pre-paid health care.”  The tax code achieves this result by making employer contributions to health plans tax free, while fully taxing any dollars paid instead as salary.  As that bastion of free-market ideology, NPR, has reported, economists across the ideological spectrum agree that tax subsidies for employer-provided health insurance drives up the underlying cost of health care.  So did President Obama and his team, as evidenced by this op-ed in which Council of Economic Advisers Chair Christina Romer explains how “[e]mployers['] … strong incentives to pay workers with more generous insurance policies” tends to “lead families to be less vigilant consumers of health care.”  Sadly, President Obama’s shamefully disingeuous 2008 attacks on John McCain’s proposed health care reforms took off the table any treatment of the perverse tax code provisions that largely underlie medical inflation.  Ah, the Price of Politics.
  • So the ACA will drive up the costs of health insurance and underlying medical costs.  But isn’t its redeeming virtue the fact that it will drastically expand health insurance coverage?  Hardly.  First, SCOTUS’s opinion prevents the Feds from forcing states to expand their Medicaid rolls, one of the primary means by which the ACA was to increase health insurance coverage.  At this point, ten states (including biggies like Texas and Georgia) are not participating in the Medicaid expansion, five others (including New Jersey and Virginia) are leaning against participation, and fourteen others (including Florida, Michigan, Ohio, and Pennsylvania) are undecided.  The upshot is that in a great many populous states, individuals and families that are not Medicaid eligible but earn incomes less than 133% of federal poverty level will receive no subsidy to buy health insurance on an individual basis.  Moreover, the plain language of the ACA denies individual purchase subsidies to citizens of states that decline to set up a state insurance exchange.  As of January 4, 2013, 25 states had firmly decided not to set up their own exchanges, and several others were in limbo.
  • The primary reason that the ACA will fail to expand insurance coverage, though, is that it encourages employers of low- to moderate-wage employees to drop health insurance benefits.  The media have largely lambasted employers for this move, but it’s actually in the interest of their employees.  The ACA, you see, provides generous subsidies to employees who cannot obtain qualifying health insurance from their employers at an affordable price.  Those subsidies are far, far larger than the implicit tax subsidy an employee receives for employer-provided health care (by virtue of the fact that compensation paid as health benefits is not taxed).  Employees thus have a strong incentive to demand — and employers to provide — a compensation package that consists of higher salary in exchange for no health insurance coverage.  In the Regulation article, I run the numbers to show how the ACA creates an incentive for employers to drop coverage and pay a higher salary but fails to incentivize moderately compensated employees to turn around and purchase health insurance.  The upshot is that coverage levels are likely to fall.

So this is where we are.  The grand promises of reduced health care costs and expanded coverage look ever less credible.  As the ACA implodes, watch for calls for a single-payer system.  We may start with a Public Option, but I’d be surprised if single-payer’s not where we end up at the end of the day.  On the bright side, maybe we can see something groovy like this at the next American Olympics!

Another day, another (presumably) unintended consequence of the Affordable Care Act.  (I say presumably because there’s a plausible theory out there that the Act was engineered to fail and thereby pave the way for a single-payer health care system. I’m not cynical enough to embrace that view, though a close look at the Act reveals design flaws so fundamental that one wonders who ever could have expected the thing to succeed.)

The latest unintended development is the move by employers to cut workers’ hours so as to avoid having to provide ACA-compliant (generous) health insurance policies. Under the Act, an employer with 50 or more employees faces an annual fine of $2,000 per worker if it fails to offer high-benefit insurance at an affordable rate and a full-time employee therefore purchases subsidized insurance on a state exchange.  One way to avoid this liability is to hold employees’ hours below thirty per week so that they are not deemed full-time.  The CEO of Papa John’s Pizza recently announced that his franchisees are likely to take that tack.  Darden Restaurants, which operates 2,000 restaurants under Olive Garden, Red Lobster, and Longhorn Steakhouse labels, is currently experimenting with a 29.5 hour work week aimed at evading the ACA’s so-called employer mandate. Applebee’s and Jimmy John’s are making similar plans, as are, according to the Wall Street Journal, Pillar Hotels and Resorts (owner of 210 franchise hotels), CKE Restaurants (parent of Carl’s Jr. and Hardee’s restaurants), and Anna’s Linens.

ACA proponents are incensed.  Referencing an interview in which Jimmy John thanked his parents for the start-up money they provided him and stated “I hope that I can give back to society the way they have,” one blogger wrote:  “Maybe Jimmy John can start ‘giving back to society’ by giving his employees health care? What a loser.”

In actuality, the kindest thing employers can do for their low-wage employees is to drop their health insurance coverage.  Here’s why:

  • It is well understood in labor economics, and a vast body of empirical research demonstrates, that employee benefits are a one-for-one substitute for salary. When an employer purchases benefits for an employee, she normally reduces the employee’s take-home pay by an amount equal to the amount she spends on the benefit. The employer thus faces a “wage or benefits” decision whenever she sets up a employee’s compensation package, and she should settle on the combination that provides the most total benefit to the employee.
  • When the employer buys health insurance for her employees, they receive an effective subsidy from the federal government because compensation paid in the form of health insurance benefits, rather than salary, is not taxed. The amount of the effective subsidy is the sum of the payroll tax rate and the employee’s marginal income tax rate times the policy price paid by the employer. Because marginal tax rates increase with income, the effective subsidy for high-wage earners is much greater than for low-wage employees. (For most lower-income workers, the effective subsidy will be 22.65% * the policy price. That assumes a 7.65% payroll tax (1.45% Medicare + 6.2% Social Security) and a marginal income tax rate of 15%.)
  • If, but only if, an employer declines to purchase ACA-compliant insurance for her lower-wage employees (those earning up to 400% of the Federal Poverty Level), they may purchase federally subsidized insurance on a state exchange. The amount of the subsidy available on an exchange is greater at lower-income levels. It generally swamps the effective subsidy for employer-provided health insurance, especially at lower wage levels.
  • Because higher-wage employees (1) receive relatively higher effective subsidies for employer-provided health benefits, and (2) are not eligible for ACA subsidies on state exchanges, it makes sense for their employers to continue providing them with health insurance benefits. Lower-wage workers, by contrast, are better off if their employers stop compensating them with health insurance, for which only relatively small subsidies are available, and thereby enable them to take advantage of the large subsidies available to employees without employer-provided health care coverage.

An example may help here. Suppose an employer wishes to provide $40,000 in total compensation to a 40 year-old employee who is the head of a four-person household. If the employer purchases a family policy for the employee (approximate cost $12,000/year), it will pay the employee $28,0000/year.  The employee will pay no payroll or income tax on the component of her compensation provided as health insurance, so she receives an effective federal subsidy of $2,718 (22.65% * $12,000).  If the employer were to drop health care coverage, the employee would receive all her compensation — all $40,000 — as take-home pay.  On the incremental $12,000 paid as cash rather than benefits, she’d have to pay $2,718 in tax, but she would now be eligible to purchase her own insurance at a subsidized rate. The ACA would limit her out-of-pocket insurance expense to 4.95% of annual income ($1,980), which means she would receive a whopping $10,020 subsidy on the $12,000 family policy. This employee is $7,302 better off if her employer drops coverage (costing her $2,718 in foregone tax subsidy) and allows her to access the more generous subsidies available on state exchanges (benefiting her by $10,020).

In a competitive labor market, we can expect all sorts of employers seeking to attract lower-wage workers to follow this “pro-employee” practice. We can also expect ACA-proponents and a compliant press to pillory such employers. The real culprit, though, is the group of policymakers who forced upon us the perverse set of incentives known as the Affordable Care Act.  Sadly, it seems it’s here to stay.

I’ve recently posted to SSRN a new paper with the same name as this post.  The paper asserts, in greater detail, a number of points I’ve previously made on TOTM:

  • Health insurance premiums will rise under the (SCOTUS-modified) ACA, because the Act’s “guaranteed issue” and “community rating” mandates will generate widespread adverse selection that cannot be corrected through the (now constitutionally constrained) penalty system the Act imposes.
  • Underlying medical costs will continue to outpace inflation because the ACA does nothing to alleviate the primary driver of health inflation: the lack of price competition among providers, an artifact of the federal tax code’s encouragement of overly generous health insurance policies that ultimately amount to “pre-paid health care.”
  • Insurance coverage will expand far less than ACA proponents promisedbecause (1) the Act encourages employers to drop insurance coverage for lower-income workers, and (2) SCOTUS has largely disabled the Act’s Medicaid expansion.

I’ve been talking about these matters quite a bit lately.  On Constitution Day, I participated in this discussion of the ACA with my Missouri colleagues Phil Peters (a health law expert), Josh Hawley (a constitutional scholar and former Roberts clerk), and Stan Hudson (associate director of MU’s Center for Health Policy).  (My remarks begin at 23:45.)  On September 25, I presented a lecture on the ACA at my undergraduate Alma Mater, Wheaton College.  My PowerPoint presentation is not visible in the Wheaton video, but I’m happy to share it with anyone who’s interested.  Just email me at lambertt at missouri dot edu.