Stumbling Toward Implementation

Some would call it “Bait-and-Switch.”  Others would see it as a cruel joke.  Those who are inclined to be more tolerant and understanding defend it as an expected part of any major change in operating procedure.  No matter which way you view it, the Affordable Care Act is not what its proponents said it would be. 

When proponents praise the reform effort they frequently point to the insurance provision that plans must offer dependent coverage for adult children until they reach their 26th birthday.  But whether this mandate has actually increased coverage is a matter of contention.    A study published by the Robert Woods Johnson Foundation (April 2013) estimates that adult children (age 19-25) covered as dependents on their parents’ policies increased from 30.7% in 1999 to 36.5% in 2011.  That increase looks good until you factor in the decrease in those in the age group who are covered on their own from 21.8% to 16.5% over the same time period, a net 0.5% increase. 

Several provisions in the law have actually been repealed.  In early 2011 Congress eliminated the requirement that business firms issue 1099 income tax forms to any supplier that receives more than $600 for goods and services provided.  Normally, the 1099 is used to document compensation payments to free-lance contractors, such as temporary workers or consultants, who are not classified as an employee.  But in this case it was in the law to better track inter-firm payments and to improve tax compliance. 

More recently the CLASS Act, the long-term care insurance provision in the law, was eliminated.  Soon after passage HHS recognized that CLASS was not financially sound and postponed further efforts toward its implementation.  Finally, as part of the vote to avoid the 2013 fiscal cliff, Congress fully repealed CLASS. 

Led by Minnesota Senator Al Franken, Congress repealed the 2.3% revenue tax on medical devices, which translates into an average tax of 34% on industry profits.  According to the Manhattan Institute the tax would have generated over $30 billion in revenues and eliminated 146,000 jobs in the that industry.  Because the tax was on revenues and not profits, it would have cut the R&D budgets of many of the firms in the industry, 80% of which employ less than 50 employees.   In this case, economic reality triumphed over bad policy. 

Other aspects of the law have not fared well in their operation.  The Act provided a $5 billion subsidy to operate a high-risk pool for individuals with pre-existing conditions until the full law became operational in 2014.  Instead of the expected 350,000 participants, there were never more than 135,000 enrolled.  In early 2013 the program ran out of money and new enrollment was suspended. 

An important element of the plan to secure small business support was the Small Business Health Options Program (SHOP).  Intended to provide a marketplace where owners and employees of small businesses could select from a list of qualified health plans, SHOP will not be ready by the October 2013 target date, but instead implementation is delayed until 2015.  And even then there may only be one option available, instead of many as promised.    

IPAB, discussed repeatedly in this blog, is scheduled to produce its first report and recommendations for the Medicare program by January 2014.  Yet, not one of the 15 member board has been nominated by the President, or vetted in the Senate, much less appointed to the board.  Defenders will argue that this is really not a problem because the law allows the Secretary of HHS to take over the responsibilities of the board.  No wonder Modern Healthcare has listed Kathleen Sebelius as one of the top five most powerful people in health care in each of the last several years. 

Quite possibly, the biggest failure looming in our future is the federal government’s failure to set up the health insurance exchanges.  HHS has known since 2010 that a significant number of the states were not inclined to set up their own exchanges and that the task would be left to the federal government.  Yet, with less than 5 months left until the October deadline, there is still not a federal model.  The individual mandate requires that affordable plans be available for low income individuals and the exchanges must be functioning to deliver the subsidies to make that a reality. 

Failure to have operable exchanges would be a catastrophe.  Senator Max Baucus (D, Montana) recently showed his concern by labeling the implementation process a “train wreck.”  Baucus is not the only one to show concern.  Senator Jay Rockefeller (D, WV) described the implementation efforts as “beyond comprehension.”  And Henry Chao, chief technical officer responsible for implementation, showed his concerns when he admitted to being “nervous,” worried that process may end up “a third world experience”  for the millions of Americans who will be relying on the exchanges as the marketplace for their personal coverage. 

How should we respond to the looming collapse of the health care sector?  One suggestion is to simply sit back and let it happen.  Unfortunately, the American public often has to be hit square in the face with total disaster before demand action.  Recent polling shows that 40% of those surveyed didn’t even know that the Affordable Care Act was actually the law.  The poll results are perfectly understandable because nobody in the administration is publically promoting the law.  We’re less than 5 months away from the early sign up date for insurance coverage.  It’s getting late in the game and things don’t look good for the home team. 

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.

Broken Promises


The Impact of the ACA on Middle-Class Taxes

“And I can make a firm pledge; under my plan no family making less than $250,000 a year will see any form of tax increase.”
    –Barack Obama, Sept. 12, 2008, Dover, New Hampshire

Now to be fair, Barak Obama is not the first president to break a promise, and he’s likely not the last either.  I remember in 1988 when George H.W. Bush pledged “read my lips, no new taxes” and eventually caved to Congressional pressure and broke that promise.  One of the big differences between then and now is the media’s virtually ignored Obama’s broken promise and never let us forget Bush’s. 

For of you who need a reminder of the new taxes on those of us who make less than $250,000, I’ll chronicle a few.  It didn’t take long for the President to break his promise.  On February 4, 2009, a mere 15 days after taking office, he signed legislation raising the federal excise tax on cigarettes by 158%.  By the way, this tax is one of the most regressive taxes we have and impacts the poor disproportionately. 

A year later, President Obama signed the Affordable Care Act, which by most accounts has at least 15-20 new taxes that affect Americans who make less than $250,000.  I’ll try to be brief. 

  • The first tax created by the act was the 10% excise tax on indoor tanning services (effective July 1, 2010). 
  • The individual mandate tax.  Is it a penalty?  Is it a tax?  The only reason it matters is that Justice Roberts said it is a tax, which makes the mandate constitutional.  Otherwise, we’re not having this conversation.  At any rate, by 2016 it will be a 2.5% income tax on anyone that does not purchase a qualified insurance plan. 
  • The employer mandate tax.  A business that employs more than 50 full-time workers must provide a qualified plan for its workers (not their dependents).  Failure to do so can result in a $3,000 penalty per worker, if even one worker receives a subsidy to purchase insurance from a state exchange.  As a result, fewer workers will have jobs and those who do will be paid less.  (This is great news in light of the recent news that median per capita income has fallen to $50,054, its lowest levels since 1995.) 
  • A 2.3% tax on medical device manufacturers.  This tax will make everything from hearing aids, motorized wheel chairs, and hip implants more expensive. 
  • A 5% tax on elective cosmetic medical procedures (whether paid for by insurance or out-of-pocket).  This will work like a simple sales tax. 
  • A health insurance premium tax will be levied on all insurance companies.  This is a tax that will be passed on to all purchasers of insurance in the form of higher premiums. 
  • The law creates a cap of $2,500 on the amount of pre-tax income you can put in your flexible spending account.  The result of this provision is you’ll have to pay your copays and deductible with before-tax dollars. 
  • Those of you with health savings accounts, health reimbursement accounts, and flexible spending accounts may already be aware that as of January 1, 2011, you can no longer use your account to purchase over-the-counter medications without a prescription. 
  • Cadillac tax on high-premium insurance plans.  Any insurance policy with an individual premium over $10,200 or a family premium over $27,500 will be taxes at a 40% marginal rate.  You may not think this provision affects you, but the cap is incremented annually by the CPI plus 1%.  Recently, premiums are increasing much more than that.  It may not be too long before your plan makes you a target for this tax. 

Another tax that affects everyone is the tax you pay every time you fill your car with gasoline.  When President Obama took office in 2009, the price of a gallon of regular gasoline was $1.84.  Since that day, the price of gasoline has risen to $3.86 per gallon, and in many parts of the US it’s approaching $4.  If you drive 12,000 miles annually and your car averages 20 MPG, you’re spending $100 per month more on gasoline than you did when Obama took office. 

At the same time, supporters of this policy are trying to convince us that it’s for our own good.  I’m sure George Harrison was thinking that the “Tax Man” never saw a tax he didn’t like.

If you drive a car, I’ll tax the street,
If you try to sit, I’ll tax your seat.
If you get too cold I’ll tax the heat,
If you take a walk, I’ll tax your feet.

Don’t ask me what I want it for
If you don’t want to pay some more
‘Cause I’m the taxman, yeah, I’m the taxman.

Beatle’s, Revolver, 1966.

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.”

Let’s hear from the Democrats

The DNC begins its convention in Charlotte today, one week after a reasonably successful Republican convention in Tampa.  (That is if you measure success by a 6-point bump in the polls.)  A stark difference between the two parties will be their approach to President Obama’s signature domestic policy achievement, the Affordable Care Act.  The Republican mantra “Repeal and Replace” was repeated frequently.

 Preconvention comments indicate that the Democrat’s talking points will focus on 3 points: dependents will be able to stay on their parents’ insurance until age 26, contraceptives will be available without copay, and insurance cannot be denied due to pre-existing conditions.  You probably won’t hear much about $716 billion in cuts to Medicare, the individual mandate and tax to ensure participation, or the billions in other taxes to pay for it all.  You will hear about Paul Ryan’s plan to change Medicare as we know it, but you probably will not hear that the Dem’s own Ron Wyden of Oregon is a cosponsor of the legislative proposal. 

You also won’t hear much from Jonathan Gruber, Harvard economist and expert on health policy matters.  You see, in 2009 Gruber using his own micro-simulation model predicted that by 2016 premiums in the individual insurance market would be 13% lower for young people and 31% lower for older Americans.  At the same time the consulting firm PriceWaterhouseCoopers came out with a study that reached far different conclusions.  Instead of lowering premiums, they predicted that those same premiums would be 47% higher.  It was widely publicized that the PWC study was funded by the American Health Insurance Plans.  Waffling members of Congress were appalled that AHIP would resort to such underhanded tactics in their opposition.  Little did they realize that Gruber was not as “objective” as they thought.  He actually served as an outside adviser to the President.  Gruber carried the day and the legislation passed. 

Fast forward to today and Gruber is telling a different story.  Consulting for state legislatures in Wisconsin, Minnesota, and Colorado, his simulation model now seems to indicate that premiums in the state exchanges will rise, not fall.  In Wisconsin they will go up 30% because of the ACA, in Minnesota it will be a 29% increase, and in Colorado the increase will be a modest 19%. 

Why the different conclusions?  Adverse selection will be a bigger problem than originally thought.  Actually, PWC took it into consideration in their study in 2009, but Gruber did not.  During the reform debate, the President stated repeatedly that annual premiums for the average family would fall $2,500.  This will not happen.  More liberal benefits, lower out-of-pocket spending requirements, and generous subsidies serve to increase demand.  Those who qualify for expanded Medicaid will benefit as will low income workers who qualify for subsidies.  But as we’re used to hearing: “There is no such thing as a free lunch.”  Somebody will pay and in this case it will be US taxpayers.   

All week I plan on considering the ACA’s impact on different aspects of the economy and the various stakeholders.  Summarizing the impact on health insurance premiums is easy, they will increase.