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Where Obamacare Went Wrong (Or Did It?)

By now, everyone has formed opinions of the Affordable Care Act (ACA). Ironically, the strongest opinions seem to come from people that know the least about it. Our research indicates that the best predictor of a favorable opinion is not a person’s age, gender, race, education, income, or even whether he/she is uninsured: what matters most is whether they voted for Mitt Romney in the last Presidential election.

This doesn’t make sense. If you look at the Affordable Care Act objectively, it has strong, market-oriented features that have been championed by conservatives for years. These include the individual mandate, the use of a private insurance marketplaces or exchanges, and the so-called “Cadillac tax”—which isn’t a tax at all, but really just a cap on how much of premiums are deductible. In fact, if you took the ACA — made the benefits less generous, expanded Medicaid less, and extended competition across state lines — you would be close to John McCain’s 2008 reform proposal.

The key political mistake – but not a policy mistake – was tying this reform to an individual mandate.

To see why, one needs to consider how insurance markets work. The key to success is have a proper mix of healthy and sick people, all paying into the system and sharing risks, in stable proportions over time. A primary virtue of our employer-based system – which has been taking a lot of criticism of late – is that it pools a large group of workers, most of whom are healthy, to share in coverage. (It is also a primary virtue of national health insurance systems.)

This need to pool risks is also why the dreaded pre-existing coverage exclusions exist. Without them, people who are healthy have little incentive to enroll. They can remain uninsured until catastrophe strikes, at which time they can buy coverage. The result is that the insured pool consists mainly of people with high health needs, and premiums become unsustainably large.

This helps explain the importance of the mandate in the ACA, at least in theory. Covering the uninsured means moving a large bolus of uninsured folks into this risk pool. This population is a heterogeneous mix of “young invincibles” in good health and older Americans with a constellation of chronic diseases. If all of these folks can be brought into the market, there should not be too much disruption.

But how to do it? One way is to make it against the law to not insure–i.e., use a mandate. If the ACA had required jail time for people who don’t get coverage, more people would enter. However, the penalties are actually quite modest – about $95 this year, although they do phase in to a maximum of 2.5% of income.

The real reason people enter the market is not to avoid penalties, but to obtain subsidies. That is, the plan is to lure the healthy poor into the market by paying part of their premiums. And therein lies the key to Obamacare’s success. If it can provide generous enough subsidies to bring everyone who is eligible into the market – and do it a reasonable fiscal cost – it will end up working.

This also provides a roadmap for how Obamacare will succeed or not in the long term. If costs can be controlled – or competition harnessed – in such a manner to keep young, healthy people entering the market, then ultimately this proposal will succeed. But if state regulators decide to offer expensive, bloated benefit designs – or if costs go up quickly – then young people may decide not to enroll, even with subsidies. Already some states are requiring that ACA plans offer coverage for services like chiropractic care and acupuncture, an ominous sign.

This also explains the mistake the President made in the ACA debate. In order to bring the right mix of consumers into the market, the individual mandate wasn’t necessary. The focus should have been on the subsidies that are actually bringing people into the market. The President should have required a less generous, minimum health care package that would have been even more inexpensive than we see in the marketplaces–perhaps even free (see our proposal here). Doing so probably would have been more palatable to Republicans and more fiscally prudent.

If costs keep rising, the future of the ACA is very uncertain. Congress could decide to raise the subsidies to entice the healthy, but this is unlikely at best. It also could mandate less generous coverage – something it should have done at the outset – but this would enrage many of the unions and employees at large firms because of fears their coverage might erode.

The bottom line is that the long-term future of the ACA depends not on what happens in Washington this month–or how fast they get the online marketplaces running–but rather on what happens to health care premiums over the next few years. The future for the ACA is not going to be written in Washington over the next few months, but rather in the States over the next few years.

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