Remember when Nancy Pelosi said, “But we have to pass the [health care] bill so that you can find out what is in it.”  Well, they passed it.   We’re finding out what’s in it.  And there’s a lot not to like.  This sentiment is not based on my ideological stance against big government.  This legislation is flawed and Republican opposition or not, it needs to be fixed if there is any chance of a successful outcome.  It is understandable that there are problems.  The bill was cobbled together in the first place to ensure the required votes for passage (220-215 in the House without a single Republican vote).  The House had to accept the Senate version in its entirety because of the loss of the Massachusetts seat to the Republicans.  What we have is a document with 8 glaring problems that will be its undoing unless they are addressed. 

  1. Weak individual mandate.  The tax penalty is small relative to the premiums.  The mandate lacks a strong enforcement mechanism: no garnishing of wages, no attaching assets, no jail time.  The only hammer is a lien on over-withholding.  The lesson here is don’t expect refund if you don’t have insurance.  If you plan to forego insurance, make sure you withhold only what you will owe in taxes.   The result is an incentive to game the system.  In other words, don’t buy insurance until you absolutely need coverage and then drop it when you don’t.  This will create adverse selection in insurance pools with only sick people purchasing insurance and premiums will continue their upward march. 
  2. Disruptive employer mandate.   Firms with more than 50 full-time workers (defined as those who work more than 30 hours per week) are required to provide affordable insurance for their employees.  Those that don’t are subject to a $2,000 fine per worker.  The incentive exists to reduce current workers to part-time status, and only hire part-timers in the future.  Fully, one-third of the restaurant and hospitality industry (with unskilled, low wage employees) will make the shift to part-time labor.  Papa John’s, Carl’s Jr, Olive Garden, Red Lobster, Kroger, Hampton Inn, Sheraton, Holiday Inn, and even the College of Allegheny County have already announced their intentions to limit worker hours.  Welcome to the era of the 28-hour workweek. 
  3. Ambitious Medicaid expansion.  The legislation makes Medicaid eligibility uniform across the country at 138% of the federal poverty level (approximately $30,000 for a family of four).  Because establishing eligibility standards has historically been a state’s responsibility, they vary wildly from a low of 17% of FPL in Arkansas to as much as 285% in Minnesota.   The impact of the expansion would have relatively little impact in some states and result in significant increases in state spending in others.  Texas, for example, would see about a billion dollar per year increase in state obligations to the program.  The Supreme Court ruled that the expansion was voluntary, so as many as 17 states may choose to forego expansion.  Instead of covering an additional 18 million nationwide, the expansion will add only about 11 million. 
  4. Complex insurance exchange rules.  States were expected to set up and finance their own insurance exchanges to provide coverage for uninsured residents.  These exchanges require a massive amount of information to verify user identity, certify health plans, and provide a platform for individuals to shop and purchase plans.  The systems must be able to access employment information and IRS files to determine an individual’s eligibility for subsidies.  The complexity is enormous and states do not have to comply.  They can simply sit back and let the federal government do it for them.  Sixteen have already said that they will follow that route.  There is a potential problem if the states don’t act.  The subsidy is clearly available if insurance is purchased from a state-level exchange.  Any mention of subsidies in federal exchanges is glaringly omitted from the legislation.  Expect litigation. 
  5. Medicare spending cuts.  The Congressional Budget Office (CBO) reports that the law will cut Medicare spending by $741 billion over the next ten years.  This “savings” will be used to fund the Medicaid expansion and the state-level exchange subsidies.  CBO scoring of the law indicates that these same dollars will also be used to shore up the Medicare Trust Fund.  But as any first year economics student knows, every dollar has an opportunity cost.  If spent on Medicaid coverage, it can’t be spent to save the Medicare Trust Fund.  In other words there is no “savings.”  The result will be that by the end of the decade, 1 in 7 hospitals will drop Medicare and more physicians will refuse to take new Medicare patients (already 1 in 3 do not). 
  6. Spending continues to rise.  A bill that was promised to “bend the cost curve” falls woefully short.  Currently, health care spending at 17.6% of GDP will approach 20% by the end of the decade.  Premiums will continue to rise, especially for the young who will be pooled with their elders and pay substantially more for their insurance than is actuarially fair.  Many will opt out, choosing not to buy insurance, but rather pay the tax penalty (or not), and insurance premiums for everyone who does buy insurance will be higher. 
  7. Not universal coverage.  The CBO estimates that at least 30 million will not have insurance coverage, about 10% of the non-elderly population.  States opting out of Medicaid, the problems with subsidies in the federal exchanges, and widespread gaming are likely to drive that number up substantially. 
  8. Does not improve access.  Nothing in the legislation addresses the current and future physician shortage.  Basic economics tells us that when you increase demand and do nothing to supply, prices go up or if they don’t, availability lags.  The law has a backup plan for Medicare when this happens.  It’s the Independent Payment Advisory Board (IPAB).  With Medicare price controls as their only tool, seniors can expect at best bottlenecks in their access to care.  At worst, the low hanging fruit is end-of-life care.  (If you want to read more on this topic go to https://blogs.baylor.edu/jimhenderson/2012/10/15/will-obamacare-lead-to-death-panels/). 

ObamaCare is a flawed document.  The Democrats were in such a hurry to pass it that they forgot the fundamental tenant of medical care: First, do no harm.  Well, we’re stuck with it, so what do we do?  The current makeup of body of lawmakers does not bode well for compromise.  All too often with the leadership we have, it’s either “my way or the highway.”  They say that we deserve the leaders we elect.  If that’s true, I’m fearful for the Republic. 

The opinions expressed in this blog post are mine alone, and do not reflect the opinions of Baylor University.   Baylor is not responsible for the accuracy of any of the information provided in this post.

Fact Checking the President

In a campaign stop in Florida this weekend, the President discussed Medicare reform, or at least the Republican version of it.  Citing a new study from the progressive Center for American Progress Action Fund, tied closely to the administration, the President claimed that the Romney-Ryan reform proposal “would mean as much as $16-26 billion in new profits for insurance companies.” Continuing his criticism he said: “Your costs would rise by the thousands and the insurance companies’ profits would rise by the billions.” Just how accurate is this study cited by the President? 

First of all the authors (well at least one of them) are heavyweights in the health policy debate.  David Cutler, Harvard economist and former Obama adviser, is the lead author in this Internet hit piece.  Second, the study purports to analyze the Romney-Ryan plan using data from several reports provided by the Congressional Budget Office (CBO) examining the impact of Ryan’s 2011 budget plan as it pertains to Medicare and Medicaid (without its most recent revisions).  In other words, Cutler’s analysis does not take into consideration of recent changes in the Ryan approach. 

Cutler’s angst is primarily focused on Romney’s promise to repeal the Affordable Care Act and not the long-term sustainability of traditional Medicare.  (In all but one week since passage of the ACA, Rasmussen’s tracking poll reports that at least 50% of those surveyed favor repeal of the legislation.)  There are several obvious omissions in Cutler’s analysis.  Looking at the reference section of the report, there are two obvious omissions that stand out.  He cites several points made in a paper by Ezekiel Emanuel in the August 2012 New England Journal of Medicine (“A systemic approach to containing health care spending”) without citing the counterpoint paper in the same publication by Antos, Pauly, and Wilensky (“Bending the cost curve through market-based incentives”).  In addition he failed to cite his own paper in the August 1, 2012, Journal of the American Medical Association (“Potential consequences of reforming Medicare into a competitive bidding system”).  I guess Cutler doesn’t like alternative views, even if they are his own. 

The viability and acceptance of any premium support plan depends critically on the type of coverage available in the plans offered and the adjustments to the premium support levels.  Ryan’s most recent plan requires that a traditional Medicare option is always offered and that at least one of the plans available at the benchmark premium has traditional Medicare benefits.  The target for spending growth is set at the growth in GDP plus 0.5% and not the CPI as reported by Cutler.  In fact, if spending exceeds the target, Congress is required to act in much the same way that the Independent Payment Advisory Board does to curb spending growth.  To date I haven’t seen Cutler lashing out at the IPAB. 

The basis of the CBO report on the Ryan plan are simply too pessimistic.  Self admittedly “CBO does not have the capability at this time to estimate such effects [of a competitive bidding process] for the specified path of Medicare spending”(CBO, “The long-term budgetary impact of paths for federal revenues and spending specified by Chairman Ryan,” March 2012).

I’m currently working on a more detailed critique of the Cutler report and hope to have it available shortly.

The impact of the ACA on young Americans

“Young Americans,” the classic David Bowie song repeats these lyrics:

“We live for just these twenty years
Do we have to die for the fifty more?
All night
He wants the young American.”

I know I show my age by citing a Bowie song, but he was an icon of my generation.  And I liked his music (and still do).  The lyrics have more meaning for me today as the Democrat’s nominating convention winds down.  I see them as reflective of our government’s view of young Americans:  “You’re only young once (and for a very short time) and then you die.  We’d better get as much out of them while we can because the dying process begins all too soon.” 

The cornerstone of the Affordable Care Act is the individual mandate, declared constitutional not by the commerce power of the federal government, but because it is viewed (at least by one person) as a tax.  Why do we need a mandate in the first place?  Now that coverage is available, won’t everyone want to have it?  Not by a long shot and let me explain why. 

Before implementation of the act, approximately one-half of all uninsured people in the US were between the ages of 18 and 34.  Now several million under the age of 26 are receiving coverage through their parents’ policies.  Will the rest purchase insurance when the ACA is fully implemented?  First, understand that about one-third are offered insurance through their jobs but refuse to participate because of it costs too much.  Their share (averaging 25% of the total premium) is too much.  Second, they’re young and healthy and don’t think they need it.  Has anything changed? 

These are people who on average have about $800 in annual medical expenses.  Ignoring administrative costs and profit, the actuarially-fair premium would be $800 (about $67 per month).  A 75/25 split between employer and employee would result in a net monthly premium of about $16.  This result would require homogeneous risk pooling with only adults age 18-34 in the pool. 

In contrast, people 35-64 years old spend on average 6 times the amount of those 18-34, or about $4,800.  The same homogeneous risk pooling will require they pay their own way and not rely on younger Americans to subsidize them.  Thus, their annual premium is $4,800 (or $400 per month).  A similar agreement with their employer would result in a worker share of the premium of around $100 per month, roughly 6 times that of their younger co-workers. 

How does the Affordable Care Act affect this result?  Well, the ACA only allows a premium differential of 3 to 1.  Let’s see what this does to premiums.  According to the 2010 US Census, there are approximately 2 times as many people in the older age category.  Assuming that the risk pool has twice the number of 35-64 year olds and 18-34 year olds and that the older group’s premium is only 3 times the younger group, the annual premium for the young American will be $1,480 and that of the older co-worker will be $4,440. 

The 3:1 ratio in premiums results in the younger group paying 85% more than the actuarially-fair premium so the older group can pay about 8% less.  Remember in my last post I noted that Jonathan Gruber failed to take adverse selection into consideration in his predictions on the ACA’s impact on premiums?  How does adverse selection affect my example?  I’ll tell you how.  Young people won’t buy the insurance.  There will be fewer in the pool to subsidize their older co-workers and premiums will rise for everyone. 

If half of the young refuse to purchase insurance, the premium will rise another 4% to $1,540 for young people and to $4,620 for everyone else.  In economists’ lingo, this is the beginning of the death spiral.  More young Americans will drop out and premiums will rise for everyone.  Soon 35-44 year olds will resent paying the same premiums that 45-64 year olds pay and demand separate pooling.  If they don’t get what they want, they too will drop out of the pool and premiums will continue to rise.  Soon insurance for the older group costs more than $4,800 and even those with chronic medical conditions will consider the prospects of dropping insurance.  Drop the insurance, pay the penalty, and re-enroll when you need medical care.  The structure of the act encourages this type of gaming. 

Our problem is that “we live for just these twenty years,” the time of our lives when we do not have much money.  There are demands on our money other than the purchase of insurance.  And the last thing we want to do is subsidize a bunch of older, sick co-workers who make more money than we do.  Even though we too will one day be old and sick.  But as Scarlett O’Hara said: “I can’t think about that right now.  If I do, I’ll go crazy.  I’ll think about that tomorrow.”

Fact Checking Paul Ryan’s Speech

I received an email this morning from Jim Messina, the President’s campaign manager, accusing Paul Ryan of lying in his acceptance speech last night.  “He lied about Medicare.  He lied about the Recovery Act.  He lied about the deficit and debt.  He even dishonestly attacked Barack Obama for the closing of a GM plant in his hometown of Janesville, Wisconsin — a plant that closed in December 2008 under George W. Bush.”

I write about health policy, so I’m not going to comment on all the accusations, but I will say this about the Janesville plant closing.  President Obama visited that plant during his 2008 campaign.  During that visit the President said: “I believe that if our government is there to support you. . . this plant will be here for another hundred years.”  Ryan’s comment:  “Well, as it turned out, that plant didn’t last another year.  It is locked up and empty to this day.”  Yes, the plant was scheduled for closure during the Bush administration, but I believe the point was not to blame President Obama for its closure, but to point out that promises are easy to make, but hard to keep.   And one of the themes of the speech was that we shouldn’t judge someone by their promises, but by their actions.  By the way, the Wikipedia account of the plant closing has already been edited to clarify the actual sequence of events.

Now let’s focus on the Medicare “lie.”  Ryan referred to the Affordable Care Act (out of concern for all those leftist pundits who are stroking out because they see racism in certain code words, I’ll refrain from calling the ACA, Obamacare) as the “coldest power play of all [coming] at the expense of the elderly.”  He went on to explain that “the planners in Washington … didn’t have enough money…. So, they just took it all away from Medicare.”  Ryan is referring to estimated $716 billion that is removed from Medicare to fund the expansion of Medicaid and the state exchange subsidies in the new law.  He concludes the Medicare portion of his speech by saying, “The greatest threat to Medicare is Obamacare.”

I’m assuming that the last statement is the “lie” that Messina is talking about.  So to what extent does the ACA threaten Medicare?  The obvious threat is the one to Medicare Advantage.  About 25% of the cut comes out of the Medicare Advantage program.  As a result the CBO estimates that about half of its enrollees will be forced out of the program and back into traditional Medicare.  It’s fair to ask the seniors who will lose their insurance of choice and are forced back into traditional Medicare whether or not that’s a threat.

Possibly the biggest threat to the program comes as a result of the creation of the Independent Payment Advisory Board (IPAB) and its control over payment rates to providers.  As I said in an earlier post (“The Obama Medicare Reform Plan,”  August 24, 2012) if historical growth rates prevail into the future, using the ACA formula, spending on physicians’ services will have to be reduced by almost 5% annually.  Ignoring the obvious threat to provider incomes, how are these spending cuts a threat to Medicare?  The obvious answer, they will affect patient access to medical services.

The Affordable Care Act was about giving people access to health insurance with little thought to providing access to medical services.  Too many physicians do not accept new Medicare patients now.  How will payment cuts affect future access?  How will the Act affect access to hospitals?  Only about 12% of all community hospitals make enough on Medicare to cover their expenses.  Without the ability to shift costs to privately insured patients, an out-of-date financial model, those who can’t at least break even on Medicare will only accept Medicare patients in emergency situations.  Seniors will simply receive their medical care at hospital emergency rooms.

Is this a threat?  I’ll let you answer that question.

I wish they would have read it first

Remember when House Speaker Nancy Pelosi said that “we have to pass the bill so that you can find out what is in it?”  As you are aware, they passed the bill and now we’re finding out that there are problems with it.  The New York Times calls the recent discovery “A glitch in health care reform” (see August 25, 2012 edition).

Workers making less than 400% of poverty level income (about $90,000) are eligible for subsidies to purchase their own insurance if they can’t afford the policy available to them through their work.  The “glitch” comes because of the law’s definition of the “affordable” policy.  The employer’s obligation to provide insurance only applies to individual coverage.  For example, a worker making $50,000 can qualify for a subsidy if his or her share of the insurance plan costs more than 6.77% of income, or $3,385.  If the worker pays 25% of the total $4,500 premium, or $1,125, there is no subsidy and the worker pays $1,125.

The problem arises if the worker is looking to insure a family of four.  The typical plan costs $12,130 and the employer is only obligated to provide an individual plan.  The worker is covered, but the family is not.  Remember the worker is eligible for a subsidy only if his or her share is over $3,385.  The worker’s share of the premium for the required plan is still $1,125.  Thus, if family coverage is desired, the worker pays the difference between the cost of a family plan and that of an individual plan.

More proof that it would have been nice if we had known what’s in the law before they passed the law.  The Kaiser Family Foundation has estimated that as many as 3.9 million dependents may be affected by this “glitch.”

The Kaiser Family Foundation Subsidy Calculator can be found at http://healthreform.kff.org/Subsidycalculator.aspx.

Do you really want the insurance policy your employer chooses for you?

One of the President’s promises when he was promoting the Affordable Care Act was the now infamous “If you like your health insurance, you will be able to keep your health insurance.” Soon after he made that statement, the Congressional Budget Office (CBO) provided an analysis of the legislation and estimated that 6-7 million Americans would lose employer sponsored insurance (ESI) and instead receive coverage from one of the insurance exchanges.  After the June SCOTUS decision on the Act’s constitutionality, the CBO revised that number and now estimate that it will be more like 20 million.  Other analyses (McKinsey) estimate that the number losing ESI could run as high as 80 million.

I’m not sure whose estimate is closer, but let’s consider the incentives.  Using the table below let’s look at it from the employer’s perspective.  Working with the column on the left, suppose a worker is paid $50,000 in salary and has a generous family insurance plan with the employer paying 75% of the $13,375 annual premium. The total compensation cost of hiring the worker is $41,335 (the employer pays FICA and gets a tax deduction equal to 35% of the before tax expense).  Instead the employer could forego providing insurance and instead choose to pay the penalty ($2,000) for failure to do so.  In that case, the employer could pay the worker an additional $6,200 and still end up with a total compensation cost of $41,335.

With Insurance


Without Insurance


Salary Paid



Family Premium (75%)



Salary + Insurance



FICA (7.65% Medicare Salary)



BT Personnel Expense



Tax Deduction (35%)



AT Personnel Expense






Personnel Expense AT &   Penalty


Examine the table below to understand how will the employee might respond to this situation.  With insurance the employee receives $50,000 (enjoys a $43,086 before-tax take-home) and a generous insurance policy provided with a generous subsidy from the employer.  Without insurance the worker receives $56,200, pays the FICA tax, a 2.5% penalty for not having insurance, and still has $50,600 to take home before-taxes.  Should the worker seek insurance through an exchange, there is no penalty and the maximum premium of 7.7% of income.  Bottom line, the worker has comparable insurance and $47,573 after paying for health insurance (a 10% increase in take-home pay).

With Insurance


Without Insurance


Salary Paid



Family Premium (25%)



Medicare Salary



FICA (7.65% Medicare Salary)



BT Take Home



Penalty (2.5%)



BT Take Home less Penalty



Maximum Exchange Premium



BT Take Home with Insurance


With the prospects of insurance and an additional 10% take-home pay, workers have an clear incentive to request (no, demand) the additional income and seek their own insurance through the exchange.  Employers would be indifferent.  How many will pursue this option?  Six million, 20 million, 80 million.  What would you do?  The choice seems obvious, 10 percent more money and the ability to choose my own insurance policy – personal, portable, and designed to fit my needs.  I know which one I’m choosing.