December 2013 - Volume 18, Number 4
The Obamacare Train Wreck
by Richard A. Epstein
It is now common knowledge that the bugs in the Obamacare website have been embedded in the system from the start. For the past two weeks, not only have many individuals found it impossible to access the website, but they are often frozen in place once they pass through the initial portal. The problems will just get worse. The current law requires extensive communications between enrollees and their chosen insurance carriers, as well as massive interaction with both federal and state organizations. As a result, web traffic builds up behind bottlenecks and leads to massive frustration. As I warned last May, watching Obamacare unravel is a painful business.
The Bright Side of Bad News
As a result of these problems, calls to delay the implementation of the individual mandate are now reaching a fever pitch, such as Peggy Noonan’s to delay the individual mandate a year. The bugs need to be worked out before ordinary people are slapped with fines for failing to enroll in the derelict system before the penalty deadline now set for March 31, 2014.
Thus far, the Obama Administration has been mum on the sources and extent of the difficulties. But make no mistake about it: they reflect the broader structural weaknesses of the program, which were hidden from view by the disastrous launch. Nonetheless, the system’s basic design is flawed, and its gaffes will become only more apparent as implementation moves forward.
Republicans are howling to repeal and defund Obamacare. As a policy matter, that is surely the correct move. But as a political matter, the prompt repeal of Obamacare is just not going to happen over the uncompromising opposition of a Democrat President and a Democrat Senate. So, if the first-best solution is not possible, more modest fixes for Obamacare are in order until Republicans start winning elections. Here are three areas of the law to change: the employer mandate for employees who work 30 hours-per-week; the coverage rules; and the medical loss ratio.
But the larger difficulty is structural. As Andrew Puzder recently argued in The Wall Street Journal, the closer we come to implementation of the employer mandate, the stronger the pressure becomes for employers to hire part-timers who unambiguously work less than 30 hours per week. It will not happen in all cases. But in some significant fraction of cases it will be cheaper for a firm to hire more workers on a part-time base than fewer workers on a full time basis.
Alternatively, some employers will find it more efficient to hire fewer high-skilled workers with overtime payments in order to minimize the mandate’s burden. Both of these Obamacare-driven strategies are inefficient because neither would be adopted in a tax-free world, with higher optimal output.
The administration wanted to keep the hours exemption low in order to reduce the number of employers who would avoid the mandate. What they did instead was to put the cart before the horse. In the effort to force-feed the healthcare market, they managed to cast a major pall over a struggling labor market. It is far better to expand labor markets in ways that create more wealth instead of restricting them for the sake of a botched employer mandate.
Obamacare’s Coverage Rules
In this case, the first problem is that the set of minimum benefits under the various plans is defined so generously that people will have to pay for services that they would never chose to acquire in a voluntary market. The clear implication is that the higher coverage generates social losses, not social gains. The inclusion of exotic items (e.g. habilitative care) not only raises the price of access, but it also makes it harder to get sensible benchmark pricing in what was, until the advent of the ACA, a non-existent market. Cutting back on these benefits should go a long way to controlling some of the price issues that have surfaced with the initial quotes, and bring healthcare costs into greater alignment.
Under the current system, too many people make a beeline for coverage in the hopes of receiving huge subsidies — subsidies large enough to lure them away from private plans for which they pay market rates. That migration undermines private insurance companies that currently serve these people. It also requires cross-subsidies from healthier individuals to pick up the slack built into the system. The required revenues will not come from direct government payments, but only from other plan participants, namely younger enrollees now forced to pay above-market rates to supply the subsidy — if they chose to participate, which they often won’t.
This form of community rating has pronounced effects. Under the ACA, the maximum allowable rate differential is three-fold between a young person and a senior, but the market differential is about five-fold. Under those circumstances, the young person is likely to resist even movie-star exhortations to enroll in a plan that offers a net negative.
That tendency will increase because of the generous accommodations Obamacare makes for applicants with preexisting conditions. Most insurance plans design their enrollment and premium strategies to combat the constant risk of adverse selection. People have private information about their healthcare status, and thus are more likely to purchase healthcare at standard group rates when aware of their own precarious healthcare position.
Most traditional plans use various devices to control the risk of adverse selection. These include an individual disclosure, which allows firms to raise prices or exclude customers. With group plans, it is commonplace to require a minimum level of employee participation to prevent individual opportunism. But Obamacare goes in the exact opposite direction and requires insurers to enroll parties who know of their increased risk.
There is today a huge public ground swell that insists that no one should be excluded from healthcare on the grounds of their preexisting conditions. Nothing in the short run can stop that dynamic. But it is at least possible to slow down its effects. Thus, if open enrollment is allowed at any time, at least require all persons who enroll to remain in the plan for a year so that the insurer can earn back some of the money that it loses thanks to these strategic enrollments.
There is a limit to the size and quantity of subsidies that can be required. Pushing the balance back may well make access to the exchanges a more attractive proposition for those who right now are likely to stay out. Even if some community rating system is sacrosanct, its size is not. Tapering down on the program is a sensible mid-level strategy. The blunt truth is that the Republicans have to win elections in order to force a fundamental overhaul.
The Medical Loss Ratio
As currently constituted, the ACA imposes extensive restrictions on the way in which insurance companies spend their premium dollars. In an ordinary business environment, the savvy firm is always making trade-offs at the margin between its medical and administrative expenses. Finding the right combination lets firms compete effectively in the marketplace. There is, moreover, no single ratio that works for all firms: much depends on the composition of its insured, the nature of its specialization, the local regulatory environment, and many other factors.
The medical loss ratio pays scant attention to these differences and limits the amount of “administrative expenses” that can be spent to 20 percent of individual plans and 15 percent of small group plans. Since 2012, firms that do not meet their respective targets have been required to issue rebates to their customers.
This boneheaded system is yet another example of how Obamacare forces private insurance companies to incur costly administrative expenses in order to deliver inferior services to their customers. This system is based on the peculiar belief that government agencies know, in the abstract, which expenses count as administrative, and how much they can be. It also assumes that governments should force firms into predetermined paths even though businesses, facing competitive pressures, have a far better grasp of how their cost structures should operate. These requirements are a back-handed form of price regulation, which should and could be eliminated right now without gutting the core of Obamacare.
Repealing Obamacare should be a high priority for the Republicans if they can win national elections. But they can only get there if they play the short-term game well. The usual three imperatives for healthcare are to ensure access and quality while controlling price. I know of no top-down administrative system that can begin to reach those three goals. The efforts to force access and mandate quality are not only counterproductive, but they will also drive up prices in ways that undermine both access and quality.
The only viable counterstrategy treats deregulation as the first line of attack on the inefficiencies of the current system. Reduce costs and avoid regulatory nightmares, and access to care will rise as rates decline and quality of care improves. Once this is done, targeting subsidies at certain individuals to allow them to purchase healthcare plans that the market offers, such as the Healthy Indiana plan, without taking over management of the system, will result in greater access without compromising quality.
Playing hardball is a losing strategy. The Republicans will never get their turn unless they use today’s computer glitches and enrollment delays as a platform on which to propose modest market-enhancing reforms. This might give the public the confidence in the GOP’s ability to work on more substantial reforms down the road.
Richard A. Epstein is the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution. He researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects.
This article appeared on October 14, 2013, on the Hoover Institution's Defining Ideas: A Hoover Institution Journal. The article is reprinted with permission from the Hoover Institution.
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