We recently “celebrated” the seven years anniversary of the Affordable Care Act and marked it with a botched attempt at “repealing it”. While it has been seven years since the passage of the law many people still do not understand it. What is often not understood is that one policy leads to another and that did not change with Obamacare. I want to take a few minutes and talk about those effects and what it does. If you want to hear a more in-depth analysis I suggest this twenty-five to thirty minute talk by CATO’s Michael Cannon.
The perverse incentives of Obamacare come in two forms; the consumer’s side and the insurer’s side. Both these monsters shared one heart– the ban on discriminating on preexisting conditions. Imagine bringing a car to a car insurer but it is not any car. It is a car without a driver door, no window, and only three tires. A terrible car. An insurance plan, if you could get one, would by sky high and I do not think any rational person would argue it was not justified. Put aside any emotion and be cold and rational for a second. Should a twenty-one year old in perfect health be viewed as the same as a twenty-one-year-old who has had cancer twice and multiple sclerosis? I know this may not make us feel good but our feelings do not change underlying economic realities. Of course, someone who costs more to insure should pay more to ensure otherwise it is not insurance but a subsidy of sick people paid for by healthy people.
But wait, how do healthy people subsidize them? Sick people will join because the price is lowered for them but how does this get extra healthy people in to pay for them? It does not, that is why a mandate is necessary. People without health insurance prior to Obamacare fell into two camps. Either they did not want health insurance or they could not afford it. Let us deal with the former group first.
Healthy people think they will stay healthy so they do not want to buy health insurance. To get around this you just force them via a tax on not buying insurance (yes, you can be taxed for not buying something according to Chief Justice John Roberts). On its face, this is a plausible theory. The mandate is more expensive than buying insurance so you buy the mandate except the mandate was not higher than buying insurance. Paying a tax to the IRS was cheaper than buying insurance for millions of people so they coughed out money to the IRS. Over seven million chose to pay the fine rather than buy insurance and another twelve million got an exception (another five million did not specify). The only solution to this problem, that does not repeal Obamacare, is to hike the tax so that is more expensive than health insurance.
But all this brings up another unintended consequence, (and let us ignore the fifty independent and different set of state laws for simplicity) what if you buy a cheap plan to avoid buying an expensive plan or the tax? Why could I not just buy a plan for five dollars a month that only buys me cough syrup? I could, that is why they needed essential health benefits (as well as other regulations but let us ignore those to keep things simple). For those that do not know, those are requirements for what your insurance has to do. While progressives will point to things like pregnancy coverage but will conveniently forget this includes pregnancy coverage for people who can not physically become pregnant. This is not a mistake, this is a plan to raise insurance prices to offset the cost of sick people now getting on health insurance.
Hold on for another second, what if you can not afford this convoluted scheme? Here is where we tie back into the second group, the group which could not buy health insurance originally. Not only could they not buy health insurance before but now essential health benefits (and other regulations) are in place to make it even more expensive. This is why Obamacare had to have massive subsidies, so people who could not afford insurance could now afford it to offset sick people who only got health insurance because the people at the begging at this chain decided to make someone else do what they thought was nice.
But how is it funded? I will give you a guess. Bernie Sanders, the Obamas, and the Clintons are all a part of this group. The rich. Just to be clear, the rich will not pay every cent but like with most taxes, they will pay a disproportionate share of it. Let us call it quits here and avoid exploring the effects of higher taxes.
What a genius system. Remember when I said one government policy leads to another? This is what I meant and we still have another set of disastrous unintended consequences to cover. Like with consumers, the Obamacare created a set of incentives for insurers.
Remember, the ban on preexisting conditions? Well, let us hop back to that for a moment. To tie back to our car analogy, if you were Progressive and President Obama was making you insure the trash heap of a car what would you do? Simple, try and get out of it. While you can not refuse you can make your coverage so bad that the car owners decided to go across the street to State Farm. Of course, State Farm will do the same thing and so will progressive and every other insurance company creating a race to the bottom. Make coverage so bad that the sick customer either goes to a competitor or so bad that it either minimizes costs or somehow becomes so bad that it actually becomes profitable because you never have to pay out for the expensive treatment.
While this side of the equation is less complicated it is also, arguably, far worse. Before sick people could at least get coverage but not they are partaking in a race to the bottom. No one wants to insure them because they are uninsurable. These two tracks are why the Republican replacement to Obamacare was so bad. In isolation, people like the pre-existing conditions being covered and some supporting aspects but they also dislike others. The Republican plan tried to remove what people did not like and weaken some of what people did like. While this was done under the pretense of making the insurance market more competitive, all it does is loosen the supports on the insurance markets and would of likely caused it to collapse into an even greater death spiral. Government policies do not exist in vacuums, the only way to fix the American healthcare system is to take a wrecking ball to it and let the free market build it back up.