Let Noncompliance, Adverse Selection, and Tax and Entitlement Reform Lead the Way to True, Market-Based Healthcare Reform.
What started as a full-fledged assault on the President’s signature achievement, the Affordable Care Act (aka Obamacare), the House of Representative’s now ill-fated efforts to defund the 2000-plus-page behemoth have been relegated to settling for a measly income verification provision in order to receive an Obamacare subsidy as a condition of approving the latest in the ritualistic series of stopgap measures funding Uncle Sam.
The insistence perpetuated by many in the media that a clean continuing resolution funding the government was somehow sacrosanct or that House Republicans had no legitimate demands with regards to invalidating the worst parts of the ACA (most notably the innovation-crushing medical device tax) has manifested itself into a public that has swiftly soured on the obstructionist mentality in the GOP. Surrounding this whole kerfuffle around the Tea Party’s doomed fight in Congress to condition the latest continuing resolution and debt ceiling rise on some meager tweaking of Nancy Pelosi’s brainchild, both Harry Reid’s Senate and President Obama, having obstinately refused to negotiate in the slightest, ultimately ended up prevailing.
With the partial government slim-down just culminating, a president who relishes blaming everybody but himself in hopes of scoring some much-needed political capital, and a media that is hell-bent on sullying the limited-government faction that forced Speaker Boehner’s hand, it would seem that this act of rebellion from the status-quo ended in vain, securing much ire from the American public and little if any cessions from the democratically controlled Senate. Despite the obvious that Obamacare is not going anywhere anytime soon, the odds are that it will not be around for too long.
The fatal conceit of busybodies in Washington is that it is virtually impossible to micromanage roughly 18% of the US economy without a rash of subsequent unintended consequences that end up producing far greater disparities than was ever the case before the legislation was enacted.
Whether by design or just out of sheer incompetence, the seeds were sown for Obamacare’s implosion right from the very onset of crafting the legislation. The success of the new law hinges on the individual mandate portion of the Affordable Care Act, whereby individuals without insurance are now required to purchase healthcare coverage under the threat of paying a fine. Without an individual mandate provision, there is every reason to suspect that the law’s two other major components- a community rating provision and a guaranteed issue provision- will cause the whole thing to unravel. This series of unintended consequences is called adverse selection, and it has the potential to escalate into something that health economists call a death spiral.
This occurs when younger, healthier people, for whatever reason, forgo purchasing insurance. Because insurance companies are forbidden under the new law to exclude enrollees based on any pre-existing conditions (hence the name guaranteed issue), they must provide coverage no matter what. Additionally, the ACA’s community rating provisions prevent insurers from charging individuals with pre-existing conditions a higher premium and only permit them to adjust premiums based on tobacco use, age, family size, and place of residency. So, essentially people who are not currently ill or who are not in desperate need of coverage have little if any incentive to purchase insurance, knowing that they can sign up whenever -without the fear of being denied or paying substantially more.
As the aforementioned younger, healthier group either opts out and pays the comparatively meager fine (as opposed to purchasing insurance) or neglects to pay tribute to the IRS at all, the remaining pool of insurees are now comprised of a relatively sicker and older bunch. In order to cover the price tag of insuring this less healthy, more costly group of individuals, insurers must now raise premiums across-the-board. This additional rise in premiums causes more people to drop out of the insurance pool, leaving the remaining group even sicker and older than ever. Premiums for those still enrolled will skyrocket, and even more people will decide to forgo insurance altogether. This cycle of premiums shooting up and individuals dropping out of the insurance market is indicative of adverse selection- paving the way for the ultimate possibility of a death spiral occurring, whereby the entire insurance pool collapses.
With the advent of universal guaranteed issue and varying forms of community rating, crafters and supporters of the Affordable Care Act are relying on the individual mandate to act as a prophylactic to mitigate the potential for this jumping in and out of the insurance market based on immediate need.
However, proponents of the law should be wary of placing much (if any) of their confidence in the greatly maligned individual mandate.
For all the (justifiable) bemoaning from conservatives and libertarians alike about the onerous demands of individuals required by law to now buy health insurance or pay a penalty, the reality of the Affordable Care Act’s individual mandate is not quite so menacing. As Reason’s Jacob Sullum points out “the penalty is low compared to the cost of insurance. The minimum payment is $95 in 2014, $325 in 2015, and $695 in 2016 (and thereafter, adjusted for inflation).” Additionally, the penalty can be easily evaded, leaving the IRS with scant options left at its disposal to punish those who refuse to purchase insurance and then ignore the penalty.
According to the Associated Press’s Stephen Ohlemacher:
“The law, however, severely limits the ability of the IRS to collect the penalties. There are no civil or criminal penalties for refusing to pay it and the IRS cannot seize bank accounts or dock wages to collect it. No interest accumulates for unpaid penalties.”
So, with the Internal Revenue Service robbed of their most intimidating weapons, their only remaining recourse consists of writing a scary letter to the tax delinquent, or they could withhold any refunds that the taxpayer is due to receive. Even the most insubordinate taxpayers who do not feel the need to purchase health insurance can avoid having their refunds withheld by simply adjusting their withholding so that the IRS owes them nothing come the end of the year, according to Sullum.
Given the fecklessness of the mandate and the civil disobedient (who will refuse to obey because there are few, if any, repercussions facing noncompliance), it is entirely feasible to suggest that the whole law will be turned on its head from folks hopping in and out of the insurance market because they cannot be denied coverage when they are sick or be charged substantially more for doing so- and cue the adverse selection death spiral.
As premiums are set to rise all throughout the nation on the cheapest plans offered in Obamacare’s insurance exchanges (compared to the cheapest plans available pre-ACA levels), the incentive for relatively healthier people to opt out is all that more justified.
Collapsing under its own bureaucratically-burdensome weight, the demise of the Affordable Care Act could take a few years to unfold. However, as this inevitable meltdown ensues, the question then becomes, “What will happen to the state of healthcare in the United States?”
Many on the left will channel the “never let a crisis go to waste” mantra in order to push their utopian-style, single-payer obsession that many progressives still clamor for today. In turn, many on the right will probably fight them tooth-and-nail all while offering no substantive measures to ameliorate the mess left in Obamacare’s wake. Hopefully, those of the free-market persuasion will look to famed economist, Milton Friedman, for some guidance.
Friedman argued that despite the exponential technological and scientific advances that have been emblematic of every-other major industry in the 20th century, healthcare seems to be unique in that prices are on the continual rise and dissatisfaction with the way medical care is delivered seems to be omnipresent. In contrast, most other technological breakthroughs see a gradual decrease in price and a more satisfying experience offered to the consumer (think LED TVs and iPad’s). He attributes most of the rise in both prices and dissatisfaction to the overwhelmingly dominant role that third-parties- such as employer-provided insurance and Medicare/Medicaid- play in our healthcare system.
Summing it up, Friedman contends that in order to curb costs, all while delivering the most innovative of medical care, the government would do best by just butting out.
Employer-provided health insurance and the tax exemption given to it, relics from the wage and price controls of the World War II economy, artificially inflate the cost of healthcare. Because employer-provided insurance is not subject to the income tax and is treated as a tax-deductible expense for the employer, the employee is incentivized to accept more of his/her remuneration in healthcare and the employer is happy to dish out a more generous insurance plan. Moreover, with the enactment of Medicaid and Medicare in 1965, the government has ever since assumed the role of a third-party payer for every poor and elderly person in America. All this money unleashed into the healthcare system inevitably materialized into the ubiquitous inflation, which plagues our poor and confounds our economically illiterate leaders, that has come to characterize medicine in the United States.
He goes on to lambaste the increasing bureaucratization of medical care (made possible by the presence of a predominately third-party payment system) as causing the growing dissatisfaction among consumers. And he criticizes the perversion of health insurance which, over time, has deviated away from its intended purpose of covering extremely unlikely catastrophes to now covering even the most routine of medical procedures. The subsequent moral hazard (caused by consumers so disconnected from the real price of medical care that they could care less how the dollars are spent) along with state-mandated regulations on a vast array of areas that insurance must now cover has also put upward pressure on healthcare prices.
Instead of blindly following the tyranny of the status-quo (which is fiscally unstable at best), Friedman recommends repealing the tax exemption for employer-provided insurance, deregulating the insurance industry, and replacing Medicare and Medicaid with some form of a universal catastrophic-care policy. These aims to curb overconsumption and thus, inflation in medicine could conceivably be achieved through tax and entitlement reform. However, if the panic around sequestration is any indication, touching entitlements and repealing a popular tax exemption would be the political equivalent of throwing grandma off a cliff.
While Friedman’s prescriptions for healthcare reform may not be politically feasible at the moment, the future after Obamacare is pregnant with possibilities.