By Peter Schiff
Tuesday, October 29, 2013
Since Obamacare made its debut, discussions have focused
on Ted Cruz' efforts to defund the law and the shockingly bad functionality of
the Website itself. Fortunately for Obama, polling indicates that Senator Cruz
has lost, at least for now, the battle for hearts and minds. The President has not
been nearly so lucky on the technological front. If current trends continue,
the rollout may go down as the worst major product launch in history. But given
the government's enormous resources, it's safe to say that the site itself will
ultimately be fixed. But when it is finally up and running, the plan's many
deeper, and more intractable, flaws will come into focus. That's when the fun
will really begin.
Put simply the program is built on a mountain of false
assumptions and is covered by a terrain of unanticipated incentives. Any
cleared-eyed observer should conclude that it is perfectly designed to raise
the costs of care and wreck the federal budget. However, like just about every
other complicated problem that bedevils the nation, the public has become far
too caught up in the politics and has ignored the horrific details.
Most people agree that the plan can only remain solvent
if enough young and healthy people ("the invincibles") agree to sign
up. They are the ones who are likely to pay more into the system than they take
out. But now that insurance coverage is guaranteed to anyone at any time (at
the same price -- even after they have gotten sick or injured), the only
incentive for the invincibles to sign up will be to avoid the penalty (I think we
can dismiss "civic duty" as an effective motivator). But as I
detailed in a column last year, Justice John Roberts declared the law to be
constitutional only because the penalties are far too low to actually compel
behavior. Once young healthy people understand that they can save money by
dropping insurance, they will. No amount of slick, cheerful TV ads will change
that.
The good news for Obama is that the plan will get a large
percentage of young people covered. The bad news is that many of those that do
sign up will not help the bottom line. The youngest and healthiest of the group
are under 26 and will now be able to stay on their parents' plans. This group
will add nothing to the pool of premiums (but will use services). Among those
older than 26, the ones who qualify for the largest subsidies will be more
inclined to sign up. The way the plan is structured, individuals and families
earning between 1.38 and 4 times the Federal poverty level will qualify for a
subsidy. The government subsidy covers almost the entire premium for those near
the bottom of that spectrum. These individuals will definitely sign up. But
just like those under 26, they will be a net drain on the system.
From my estimations, private premium contributions don't
surpass the government contributions until an individual or a family makes
about 2.5 times the poverty level (which equates to about $28,000 for an
individual and $55,000 for a family of 4). Since a very large percentage of
young people earn less than that, many will sign up to get the benefit. But
these people will likely be net drains to the system as well. Their total
premiums paid may be more than the services they receive, but that may not be
true when you look only at what they actually pay in.
Young women, who plan on using maternity care, may also
be motivated. But they can cost more than they bring in. The real cash cows are
the young men, not covered by parents, who make more than 4 times the poverty
level. But their only incentive to sign up is to avoid the penalty. But at just
one percent of income, the penalty just won't be a deciding factor. Most young
men will save money by dropping insurance, paying the tax and incidental doctor
visits out of pocket, and then only adding the insurance if and when something really
bad happens.
The subsidies in Obamacare kick in and kick out very
abruptly. People finding themselves on the wrong side of a dividing line will
face difficult choices that hurt the plan's finances. The San Francisco
Chronicle recently profiled a California couple in their early 60s making about
$64,000 per year who would be able to qualify for a $14,000 annual subsidy by
reducing their income by $2,000 dollars per year. It's easy to imagine such
individuals reducing their hours or their pay to qualify. Of course this type
of behavior modification has not been anticipated by preparing premium and
budget projections. It is no accident that the government has offered no
serious projections about how much in healthcare subsidies it should expect to
pay out over the coming years
In truth, the premium levels themselves are based on
nothing but assumptions. It is true that those lucky enough to actually get
through the website's technological maze have seen (unsubsidized) premiums that
are lower than similarly constituted plans in the private market. But those low
prices are only possible because no one knows what the new pool of insurance
holders will look like. They assume it will look like the pools that already
exist. But they won't.
Of course, the incentives for the young and healthy to
drop out, and for the sick, old and the heavily subsidized to drop in will mean
that the post-Obamacare pool will have very different actuarial arithmetic than
the current pools. But all of that is as yet unknown. The numbers we see now
were put there just to make us feel good. But once the economics kicks in, look
for them to rise quickly.
It is also ironic that high-deductible, catastrophic
plans are precisely what young people should be buying in the first place. They
are inexpensive because they provide coverage for unlikely, but expensive,
events. Routine care is best paid for out-of-pocket by value conscious
consumers. But Obamacare outlaws these plans, in favor of what amounts to
prepaid medical treatment that shifts the cost of services to taxpayers. In
such a system, patients have no incentive to contain costs. Since the biggest
factor driving health care costs higher in the first place has been the over
use of insurance that results from government-provided tax incentives, and the
lack of cost accountability that results from a third-party payer system,
Obamacare will bend the cost curve even higher. The fact that Obamacare does
nothing to rein in costs while providing an open-ended insurance subsidy may be
good news for hospitals and insurance companies, but it's bad news for
taxpayers, on whom this increased burden will ultimately fall.
The real shock of Obamacare is not the unbelievable
ineptitude in which it was launched, but the naiveté in which it was designed.
The only thing worse than the product launch may be the product itself. But
unlike other major entitlements, like Social Security and Medicare, that took
years to produce red ink that was far in excess of original assumptions, the financial
shortfalls in Obamacare should show up very quickly. Republicans should not
miss that opportunity to destroy this monster that threatens us all.
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