Economics

The Opening Act

That past month of debate over the botched launch of the health care exchanges has brought the programming geeks, and their hired mouthpieces, out in the open to defend the indefensible. As painful as this has been for so many Americans, we cannot help but be amused to hear so many commentators doing their best impression of Captain Renault and expressing their shock that the federal procurement system could have produced such an outcome. Of course, most of this is a sideshow, the opening act to an even more serious drama in the making.

Let us be clear from the outset, the rollout of Healthcare.gov is an embarrassment. However, this only becomes a real problem if it dissuades enough people who were already marginal customers with respect to their purchase of health insurance on the exchanges to simply pay the penalty and avoid the hassle of staring at a computer screen, waiting on hold for hours, or refusing to try again once the geeks get this all sorted out.

While the self-appointed technology experts on both sides of the aisle have been debating the causes of the web site debacle, attention has been diverted away from the necessarily frank discussions we must have about the real potential benefits and looming costs of the exchanges.

In a valiant attempt to steer the conversation towards the benefits of the ACA, President Obama held a rose garden press event where he repeatedly claimed that the health insurance on the exchanges is good product. But as is all too often the case, the President talked about the benefits and side stepped the difficult conversation about the costs.

At least he is half right. If they can ever fix the web sites, people with pre-existing conditions who shop on the exchanges will gain access to insurance at a more affordable price. Enrollees may save thousands of dollars. But let’s not kid ourselves.

The exchanges do not reduce the cost of medical care; they only change who pays for it. And we all know who that is.

If we think way back to the debate about the ACA in 2009, policymakers and pundits waited with bated breath for the Congressional Budget Office score of the budget impacts of the bill. The CBO estimated the ACA would be effectively revenue neutral over its first 10 years. Both sides had a number of quibbles with this analysis. Supporters of the bill felt that not enough credit was given for savings from preventative care while opponents thought the Medicare cuts would ultimately prove illusory. But we believe both sides of this budget scoring debate refused to acknowledge the elephant in the room.

The CBO assumed that the ACA would cause relatively few employers to stop offering health insurance. CBO estimated that only 3 million people with employer provided benefits would end up on the individual exchanges. This assumption, which directly fed into the CBO’s budget score, was based in part on the experience in Massachusetts. But there are dangers in assuming that the experiences of any one state will translate to a Federal policy change.

Given the economic incentives created by the ACA, we expect that well over 3 million Americans will lose employer-sponsored coverage. A recent paper by Doug Holtz-Eakin and Cameron Smith provides a simple calculation of the large number of Americans who would be made financially better off by their employer no longer offering health benefits. These numbers are compelling. Consider the case of a family of four earning 150 percent of the poverty line. If these individuals are currently receiving employer provided insurance, they will lose out on approximately $13,000 in federal subsidies. If your workforce is primarily made up of people eligible for subsidies, why continue to offer them insurance “benefits” in the face of these economic facts.

While numerous employers and employees would be made better off under this setting, and our previous commentary discusses why we think the economy might be better off, there is no free lunch here. Someone has to pay the piper, and in this case it will be the American taxpayer. Holtz-Eakin and Smith estimate that there could be an additional $1 trillion in additional subsidy payments as a result of these employer decisions. We both think that number is likely an over-estimate.

However, we also realize that employer responses to the ACA are going to represent a real and growing cost to the American budget for which we are not adequately preparing. (Had the ACA cut the tax benefit for employer-sponsored insurance, we could have seen the same shift to exchanges with far less severe budget implications.) To make matters worse, the web site debacle will likely keep healthy enrollees out of the exchange unless additional subsidies are forthcoming.

The President clings to his belief that “good” employers should continue to offer health insurance. But employers aren’t in business to do good…they rightly leave that to the community and the church. Most employers are savvy, however, and are figuring out that they can increase profits by curtailing health benefits (to cut costs), increasing wages (to retain employees), and encouraging their employees to sign up for the exchanges (to take advantage of taxpayer-funded subsidies).

Perhaps more importantly, the new economic reality of the ACA is that it’s no longer even morally good for employers to provide health benefits to low income employees. This might have been the case before a real non-employer option, but now many employees will be far worse off financially if their “good” employer offers them benefits.

David Dranove, PhD is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including “The Economic Evolution of American Healthcare and Code Red.” This post first appeared at Code Red.

Craig Garthwaite, PhD is an assistant professor of management and strategy at Northwestern University’s Kellogg Graduate School of Management.

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GH
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GH

I love this latest attack. “You said I could keep my existing plan if I wanted it. You lied!”
Well come to find out the catastrophic plan you think you love wouldn’t cover cancer treatment! Guess that cancer isn’t catastrophic enough. Only way it would cover you is if you got hit by a bus and during your treatment in the hospital they discovered you had cancer. Now we can treat you for the cancer while your here.

Yeah that plan is going away. Sorry for looking out for you.

legacyflyer
Guest
legacyflyer

Initial “glitches” are one thing. Personally (because I am covered by employer provided healthcare) it has not bothered me. But I can understand the frustration of those that have tried to sign up and have been unable.

The question I have is: What do the initial glitches say about the overall competency of the design?

In other words, if the people in charge can’t get the website right, what else can’t they get right?

GH
Guest
GH

My guess is that if those people were truly hurting then it would show up as a subsidy in their premium. Most all of the complaining comes from people who refuse to even look at what their actual premium would be. We all know about how bad the websites are. Therefore the only info they get is from all of the people bitching on Fox news. Hannity had 4 couples on last week. All of them making claims how Obamacare was killing them. A journalist seeked out all of these people and in every case proved all of their assertions… Read more »

MS
Guest
MS

I don’t watch Fox News. I am talking about people I personally know. I do watch NBC News and this evening they report that the Administration knew 3 years ago that 7-10 million people would lose their individual policies and they continued nonetheless to lie that you could keep your plan if you liked it.

I, and a lot of other folks, are still waiting for our thanks for subsidizing you.

GH
Guest
GH

Now that is an informed point of view. Let’s cancel your parents medicare and social security while your at it. Maybe a tryout on the Hannity show would make you feel better.

MS
Guest
MS

You are being subsidized by people who are hurting and who were lied to by the people who passed this – they didn’t have their premiums reduced, they couldn’t keep plans they liked and they couldn’t keep doctors they liked.. I have friends who have lost their coverage because of ACA and been told that the substitutes will cost them considerably more and another friend who worked part-time and lost their coverage because of ACA (and they worked at a non-profit!). You won, they lost. Rather than telling people who don’t like that outcome to shut up you should be… Read more »

Sheryl D Davidson
Guest

Obamacare—-What an opportunity for the government to get into my hair even deeper. I do not want it, will not participate, and will die before I get healthcare from it. Seriously, the government is getting more and more up our asses, literally! I need them OUT. Can you imagine if we all operated our businesses like the government does? You know what I am talking about. Do the policies and “new programs” remind you of something? It reminds me of Russia before the “wall” came down. Those people were standing in line for toilet paper and spam – for days.… Read more »

GH
Guest
GH

Oh, BTW. Your India experience sounds alot like outsourcing. That worked really well for the middle class last time. Let’s just export that portion of our economy to India and China and see what the impact on the economy would be.

Peter1
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Peter1

“Let’s just export that portion of our economy to India and China and see what the impact on the economy would be.”

I guess you don’t shop at Walmart and also look for the highest price American made when shopping. Your “solution” to unaffordable high insurance costs is government subsidies – tell me how that is sustainable.

I’m as loyal to the U.S. health industry as they are to me. You seem to have a few complaints about the home based insurance industry yourself.

GH
Guest
GH

You’re right I am frustrated with what we have. I also have a few friends in Canada who are in disbelief of what we go through here. One has a son who got into a motorcycle accident here and at 24 years old racked up a 650k hospital bill, and ran out of coverage. Needless to say he went bankrupt. They say nothing like that happens in Canada. My personal belief is we need a 2 tier system here. A national plan and for those that can afford it a private plan. I think we should model the Canadian plan… Read more »

Peter1
Guest
Peter1

“You’re right I am frustrated with what we have.” As am I. I’m actually Canadian, and would like single-pay here. I hoped for a public option – but again Obama sold out to industry as he did to the banks – political reality when you have to rely on corporations for campaign funding. You may be interested in a book – “Who Stole the American Dream”, it’s about the decline of the middle class since the late 70s. Canada has higher taxes (15% sales tax), double the price for gas, very high real estate prices and property taxes. However their… Read more »

GH
Guest
GH

CA exchange was still pretty bad. Crashed several times and still has logon issues. On the plus side is after calling for help I have been contacted 3 times by CA reps to address any glitches I had during the online process.

GH
Guest
GH

The California version and yes got the coverage. I admit it was a hassle but I did it first week. My buddy did it last friday and still a hassle but not as bad. No doubt the websites need work.

Peter1
Guest
Peter1

I’ve heard the CA exchange (state run) is operating better as is a couple others. Don’t think your experience transfers to the rest of us.

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/25/healthcare-gov-is-busted-these-four-state-exchanges-arent/

Peter1
Guest
Peter1

Oh GH, I have to ask, did you get on the Healthcare.gov website and actually get coverage?

GH
Guest
GH

There is no pre-existing conditions on group policies. Old deductible was $2500. per per person with family max $5000. New deductible $2250.00 with $4500.00 family max.

Have you ever had a major medical issue? Know someone who has and not had insurance or was cancelled after it was known they were sick? Or reached lifetime max benefits and had their insurance cancelled?

Let’s hope not but I guarantee if you find yourself in one of these situations you’ll be glad of the new safeguards that are part of this law.

Peter1
Guest
Peter1

I agree with those new policies, but the ACA has NOT reduced the cost of medical care – maybe only for you because you now receive a subsidy – which I and many thousands of others (who are not “rich”) don’t qualify for but we pay anyway. Yes I had a major medical need – a new hip joint. I went to India to a qualified surgeon in an accredited hospital for less than 25% on what I would have paid here. If I had been paying insurance I would have more than paid for the surgery here just in… Read more »