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.

31 replies »

  1. 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.

  2. “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 health care system is quite good despite its own problems and an ongoing struggle to balance cost with access.

    I had hope for the ACA, but it has boiled down to a mandated insurance system with unfair subsidies so that the money keeps flowing to corporations and providers. Republicans don’t have any viable alternative if they kill it. The best we can hope for is continued fixes, but they always come late for some and on time for others.

    The biggest threat to this Democracy is the present system of political war between Republicans and Democrats fueled by the hysterical right.

  3. 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.

  4. 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?

  5. 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 false. 2 of the couples found that their health premium was actually going to go down once they took the time to get an application. The best comment I heard after that investigation was “I don’t care if it saves me $400.00 per month. It’s Obamacare. It can’t be good”. Sounds like Kool aid to me.

  6. 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 but make it optional for those that can prove they have better coverage or sufficient assets to self insure otherwise.

    The outsourcing comment comes from noticing that in the early 1990’s I made 50k. Believe it or not 24 years later that income is hard for many americans to attain. 24 years ago we made so much more here. But searching for more and more profits drives business to look elsewhere for products and services. Thus eliminating more and more jobs here. At some point you realize that the job your eliminating might actually belong to your customers!

    Who knows. If I was in your position I might have tried that idea myself. Not judging, just noticing that the vicious cycle of outsourcing is at the heart of killing this countries middle class earnings.

    I don’t have all of the answers. But I think the ACA is trying to right some of the wrongs of the healthcare system. At least it looks like it to me. With my health history and with my employer not offering coverage next year, where would that leave me if the law had never changed?

  7. 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 thanking the rest of us who are paying for you.

  8. “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.

  9. 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.

  10. 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.
    I think government has gotten too big, too expensive, and they think they are “entitled” to my personal info. Entitled? I think not. No-one is “entitled”. People need to think about the word “entitled”. That word is ruining our country.

  11. 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.

  12. 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.

  13. 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.

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

  15. 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 premiums, not including co-pays and deductibles. That won’t change under Obamacare.

    Don’t forget that insurance is still community rated, so if there are too few young healthys and too many old pre-existing in your community, the rates will reflect that.

    You’ll see as this unfolds how real Obamacare is – it does not solve our health care problems – which is COST.

  16. 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.

  17. “My rates went up year after year and when they far exceeded what I could afford only then did I look into what could be done to reduce the premium.”

    That’s health insurance in America. My rates also went up 6% – 10% compounded annually as well as an age bump every so often – until I decided to self insure. Do you think rates will not go up as before just because of Obamacae? Do you think subsidies will rise at the same rate?

    “But on many of benefits there was an asterisk and until you got to the fine print you find what the asterisk meant.”

    Did you not figure that out when reading the policy or did you enjoy the false sense of security from a low premium?

    “Don’t you think that I should have been able to go back to the higher premium?”

    Only if you think everyone else who also signed contracts could also “go back” and get a premium that did not reflect a pre-existing condition. If that were the case how expensive do you think insurance would be. The old rate reflected you with no tumor, so it did not assume YOU would ever get one, only that some people in your group might get one.

    “BTW the premium for the new policy is $996 without subsidies.”

    Could you afford $996 without a subsidy? On some exchanges the rates are lower, in my state of NC and many other states we don’t get any savings from the exchanges, we get premium increases. But be thankful your rate reflects other people paying more.

    I believe the first year rates are teaser rates and only optimistic estimates about who will sign up. I think year two and beyond will reflect reality.

    “Still $500.00 less than what my employer has been paying and the new policy has better coverage.”

    Maybe your employer’s rate was so high because he accepted you back with a pre-existing condition. Are you sure the policy has better coverage – read the asterisk marked terms? What’s you deductible?

  18. My rates went up year after year and when they far exceeded what I could afford only then did I look into what could be done to reduce the premium. The policy stated that all of the coverage I needed was there. But on many of benefits there was an asterisk and until you got to the fine print you find what the asterisk meant. Now for 25 years I paid the premiums for the proper coverage. For only 5 months I got a lower premium. Don’t you think that I should have been able to go back to the higher premium? Not now. No sir you have cancer and can’t get that policy anymore. Now go start to die until you get sick enough to get admitted into the hospital. By then it will be too late but, hey it’s the american way!

    BTW the premium for the new policy is $996 without subsidies. Still $500.00 less than what my employer has been paying and the new policy has better coverage.

  19. “And yes it may raise rates for those that have phony policies that really don’t cover you when you need it.”

    Your policy was not “phony” it was what you could afford, but you only focused on the price and did not read the terms.

    Don’t assume that everyone doesn’t read their insurance policy before buying and don’t assume the ACA will solve those problems. Many people can only afford high deductible policies which will be a great financial burden when they need expensive care. The ACA does not change the system of insurance in this country, it uses the system as it existed prior but adds mandatory policy coverage – which everyone has to pay for.

    How do you address a family having to pay thousands of dollars for a policy but who fall just outside the subsidy qualification? How do you justify people having to turn down raises or a new job because the income increase would put them $1 above the subsidy level or any subsidy at all?

    You narrowly look at your own situation and say – hey I’m a winner, to hell with everyone else.

  20. Yes after subsidies. And yes it may raise rates for those that have phony policies that really don’t cover you when you need it.

  21. “Come to find out my new policy would not cover any diagnostic or cancer treatment unless I was admitted into the hospital.”

    Did you not read the policy terms?

    “After enrolling in the ACA my new rate is less than $500.00!”

    Before or after the subsidy?

    “The ACA focuses on treating ALL americans with fair and affordable health insurance.”

    Affordable for those who get subsidies. It transfers dollars from from one risk group to another, it does not reduce medical treatment or insurance costs.

    Don’t misuse the word affordable as the President is doing. For some who don’t get subsidies it will raise their premiums and could possibly make insurance unaffordable.

  22. Let’s see how the ACA would have helped me. In 2009 my personal health insurance plan raised my rates to $1100.00 per month for the plan I had. This raise was way out of my budget so I evaluated their (Blue Cross) other plan offerings and saw one for $700.00 that while it had higher deductibles, the rest of the coverage seemed adequate. 5 months later I was diagnosed with a tumor in my neck. Come to find out my new policy would not cover any diagnostic or cancer treatment unless I was admitted into the hospital. I asked to go back to my old plan and was told that I would have to re-qualify.
    Thankfully my employer, while not obligated to, decided to add coverage thus getting me coverage in time, more than likely saving my life.
    The ACA would have helped me in 2 ways here. First it would have not let that substandard policy exist in the first place. Second, the pre-existing condition or “qualification” is eliminated with the ACA.

    Then last year my 23 year old daughter was laid off from her employer, thus losing her insurance. Because of the new provision for sons or daughters being able to be covered up to age 26, she was able to go on my policy during her unemployment period. Once again the ACA saved me.

    Lastly, my employers have had business hardships and cannot afford to continue to offer us health insurance. They shared some numbers with me as to how much the policy was to cover my family. The rate they were paying was $1496.00 for just me and my family. After enrolling in the ACA my new rate is less than $500.00!

    Those that continue to demonize the ACA are either hyper partisan or have never had any health issue that caused them problems with their insurance companies. The ACA focuses on treating ALL americans with fair and affordable health insurance. Those that want it stopped need to look at what it does right, figure out how to fix what it doesn’t and other than that shut up.

  23. Some day we will be forced to concentrate on the root cause of this entire mess, health care costs. We all know it; no one wants to change it. Easier to complain about Obamacare.

  24. And thanks to all of the bean-counting, paper-pushing bureaucratic waste being generated by the Death Star, ObamaCare, my guess is that the medical-industrial complex with scarfed down an even larger chunk of the GDP and then quickly vomited it up, leaving the cosmic taxpayers to pay for the massive cleanup.

  25. I cannot fathom why anyone would trust large employers, whose basic fiduciary responsibility is to stockholders, with something as important as ones healthcare when something as basic as job security itself is so tenuous?