Obamacare attempted to rewrite the laws of economics by preventing insurance companies from charging high-risk customers more than low-risk customers. But to make this work without bankrupting the companies, all agreed that the young and healthy would need to be forced to buy insurance. The flaw that doomed the law was that the penalties for not buying were too low to actually motivate healthy people to buy. Consumers were charged just a few hundred dollars per year to forego insurance that would have cost many thousands. Given that they could always decide to get insurance in the future, at no added cost, the choice was a no-brainer. Without these healthy people keeping costs down, insurance premiums have risen alarmingly.
Ironically, the Supreme Court noticed this flaw as well. In sustaining the Law’s constitutionality, Justice Roberts argued that the relative lightness of the penalties was insufficient to compel anyone to buy insurance and, as a result, he considered them to be a “tax” that could be voluntarily avoided rather than a coercive penalty to force commercial activity. (Presumably had the tax been high enough to actually work, it would have rendered Obamacare unconstitutional – see my 2012 commentary).
However, the Republican replacement plan, which removes all taxes on individuals who don’t buy insurance, and all penalties on employers who do not provide insurance to their employees, will actually make the problem far worse.
The only reason healthy people buy health insurance is that they know that if they wait until they get really sick no insurance company will sell them a policy. The same principal holds true for all insurance products. You can’t buy auto insurance after you get into an accident. You can’t buy life insurance at a reasonable cost after your doctor has given you six months to live. The fact that your car is already wrecked, or your arteries already clogged, are pre-existing conditions that no insurance company would be expected to ignore.
Allowing voters the low-cost option to buy health insurance after they actually need it is very popular. It’s like promising motorists they can stop paying their monthly auto insurance premium and just buy a policy after they have an accident. If the government were to require this, all auto insurance companies would quickly go out of business (unless they were bailed out by the government).
Obama’s solution was to use the penalties to force healthy people to buy insurance before they actually needed it. As the years wore on, the relatively low cost of the subsidized exchange plans and the availability of those plans to anyone proved popular. However, the mandates and penalties, as well as skyrocketing premiums for non-subsidized policies, were clearly unpopular.
The Republicans have taken the “brave” political approach of keeping the parts that are popular (subsidized access, pre-existing conditions waivers, expansion of children’s coverage until age 26) and jettisoning those that are not (the mandates and the penalties). The new plan pretends to offer a replacement to the Obamacare penalties by allowing insurance companies to charge a 30% increase to the premium for those who come back into the system after having previously allowed their coverage to lapse. But the problem here is that the premium increase is far too small to force anyone healthy to buy insurance. In fact, it is so low that any healthy person currently insured may decide to drop coverage.
The effect of this law, were it actually enacted, would be the death of the health insurance industry. As the law removes the requirement that larger employers provide insurance, I believe that big companies would look to self-insure employees for routine care. For example, employer and employees could pay into a common risk pool that would set their own deductibles and co-pays. For employees who incur medical charges in excess of the cost of an actual policy, the pool could provide funds to pay for outside insurance at the increased 30% premium. As a result insurance costs would be encountered only if there is a need.
Self-employed individuals would only buy insurance if the total cost was less than the tax credit provided by the new plan. If they can’t find such coverage, they would likely buy a new form of insurance that this law may create: A policy that would pay for health insurance premiums if the user ever got sick enough to need them. Such insurance would be very cheap, as the maximum exposure to the insurance company is only 130% of the premium for a standard health insurance policy.
In the end, the only people buying health insurance would be those who can buy it for free using their tax credits and really sick people for whom insurance premiums are cheaper than their medical bills. But as insurance companies lose money on the latter group, they will be forced to raise their premiums on the former. This puts us right back in the box we are stuck in with Obamacare.
As premiums soar well above the amount of the tax credits, more people will drop out. Unless the amount of the tax credits rises substantially, which will cost a fortune, all health insurance companies will eventually go out of business. The end result will be socialized medicine, only it will be Trump not Obama that gets the blame. It seems to me that this would be a political loser for the conservative cause. I would rather we go down in flames with Obamacare as then, at least, we will have a chance at a free market solution that could actually work.
The government has a very poor track record with containing the cost of a service when it gives consumers money to buy it. Think student aid and college tuition. Plus the plan is constructed in a way that makes it ripe for potential abuse. Whenever the government is giving away money, people always game the system to get it. Think about the wide-spread fraud in welfare, food stamps, disability, and even cell phone credits. Trumpcare will be no different. Many people will buy catastrophic plans with extremely high deductibles just so they can pocket the difference between the tax credits and the costs of the plans. If they actually incur a medical condition that results in a high out-of-pocket expense, they can just switch their coverage to one with a much lower deductible. Such a switch may even be possible without the 30% premium for lapsed coverage.
If Trump and the Republican leadership can push this monstrosity through, despite the obvious mathematical shortcomings, look for them to make similar efforts on infrastructure and defense spending. All this adds up to uncounted trillions in new debt, and a giant step closer to the utter bankruptcy of the nation. But the real danger lies in the possibility that the law is voted down by conservative Republicans and Trump turns instead to Democrats.
In contrast to the former mission statement of the Republican Party, Trump believes that government solutions can work as long as they are “smart.” The opening weeks of the Trump presidency were dominated by combative rhetoric, conservative and pro-business appointments, and nationalistic executive orders. And while this approach sent Democrats and the media into convulsions, it solidified the loyalty of Trump’s political base, and allows him to pivot toward the center if he wants. If he could peel off some “Red State” Democrats, he would be in a position to enact some of the biggest spending increases that the country has ever seen, even if fiscally conservative Republicans bolt.
If those conservatives defeat the new health care bill, Trump could look to partner with Democrats in a heartbeat. Of course, to get that support, he would have to make the current bill even more generous. Let’s hope that his self-inflicted wounds continue to prevent such an unholy alliance.