Friday, June 7, 2013

Obamacare Isn't Perfect. Here's What Should Be Fixed.

As most of you are probably already aware, I'm a supporter of President Obama's sweeping health care overhaul. But I've been remiss: by writing posts mostly defending the law, I've probably given the impression that I think the law has no major flaws. Not so, I'm afraid. Indeed, the biggest thing that needs fixing in this monumental law would be what's known as the employer mandate. However, the employer mandate is just a symptom of a larger health care problem--employer-sponsored health insurance. 

First of all, what is this employer mandate? Well, the good folks over at Wonkblog have a pretty concise explanation:
"The health-care law requires companies with more than 50 employees to offer insurance to those who work 30 hours a week. That insurance must cover a set of core set of benefits and be affordable (which the law defines as premiums costing no more than 9.5 percent of an employee’s income). 
The company has to offer that insurance, but it can’t require an employee to sign up for the benefits. So employers do not get fined if a worker does not purchase coverage. The employee does, however pay a $95 fine in 2014 for not carrying coverage (that would rise to $695 by 2016). So there is a fee to pay for not buying that coverage, although it’s not nearly as large as paying monthly health insurance premiums."
So you can imagine that this might deter hiring. The only reason I'm not a lot more outraged by this than I am is because the same thing was tried in Massachusetts with Romneycare and it seemed to turn out just fine. But I digress. 

The reason the employer mandate exists in the law is the same reason we have inefficient, ham-handed policies in general--politicians, fearing public backlash at more government spending, try to move that spending off the books by placing requirements, restrictions, and incentives on businesses to achieve their ends. In this case, that end was increased insurance coverage for individuals. The same could be said of the minimum wage, or EPA fuel economy requirements. The list goes on and on. But just because these costs are moved off of the government's books doesn't mean that they go away. You can't get something for nothing.

This all started with the massive tax deduction for employer-provided health insurance. Basically, what this tax deduction does is that is provides a (perverse) incentive for employers to take money out of your paycheck (that is not taxed) and buy health insurance for you. Here's a simple example, which should make the problem a bit more apparent:
"For example, a worker who pays federal and state income taxes at a combined rate of 30% will receive $7,000 for every $10,000 his employer provides in gross salary. But the same employee will receive $10,000 in benefits for every $10,000 his employer spends on health insurance—a 43% improvement."
The long and short of it is that the deduction incentivizes companies to provide overly generous and expensive health care plans to their employees compared to what those same employees would purchase on their own if given the chance to, say, buy a plan out of Obamacare's exchanges. Since these employees don't buy their own insurance, they don't understand the trade-offs that exist between brand-name, large hospital coverage and lower insurance costs. Simply put, because the individuals don't pay for their own insurance, they're insensitive to the costs and benefits associated with each plan, and thus seek only the plans with the best benefits. All of these things drive up health care costs by encouraging over-consumption of health care. Which brings be back to the employer mandate.

The law, rather than trying to fix the problem of employer-based coverage once and for all, makes it both better and worse simultaneously. The mandate itself makes the problem worse by making employer coverage more prevalent. At the same time, the law levies a large (40%) excise tax on expensive employer health care plans, as a way to discourage them from providing those overly generous plans I mentioned earlier. So the law does address the problem somewhat, but hardly the way I would prefer.

Speaking of which, I've done a whole lot of criticizing of our health care system so far, but I've provided no tangible policy solutions. "If you're so smart, what would you do, Andre?" Well, I'm glad you asked. The first thing I would do would be to phase out the employer deduction for health coverage. This would be an outrage to many people, since they would have to switch insurance plans, but they'd be better off for it in the long run. We all would be. The second thing I would do would be to use the money saved from eliminating that deduction (a huge sum at nearly $180 billion in 2011 alone, see the chart below for more) and use it to provide tax credits for people to purchase insurance in Obamacare's competitive exchanges. 

But here's the rub: that money might not be enough to cover everyone, which means we might have to spend a bit more money to help cover everyone. Based on current cost projections for the exchange subsidies, the money from ending that deduction would be able to cover most, but probably not all of the people transition from employer coverage (see figure below for more).

But this shouldn't deter you from being in favor of ending employer-provided health insurance. Like I've said before, just because the costs aren't on the government's books before doesn't mean that they didn't exist. Businesses still had to spend money on providing expensive health care for people instead of, say, hiring more workers or paying the ones they had more money. I'll say it again: you can't get something for nothing. But the "something" we'd be getting in this case is a much healthier economy in the long-run, and that's just fine with me.