Code Red: Two Economists Examine the U.S. Healthcare System

October 28, 2013

The Web Site Meltdown is Just the Opening Act

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 7:48 am

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.

3 Comments

  1. Hi Professor Dranove,

    The healthcare debacle / circus prompted me to consider the amount of management time allocated to determining what healthcare benefits to offer in US companies. By comparison, companies in my native UK barely give any consideration to healthcare costs.

    The norm that healthcare should be provided by one’s employer seems at odds with the typical rhetoric heard in the staunchly capitalist USA…it seems reminiscent of the Russian collective or the Chinese state-owned enterprise!

    Adam

    Comment by Adam Carley — November 5, 2013 @ 8:29 pm

  2. Insurable but Unemployable

    Winston Churchill said, “He who is under 30 and not a socialist has no heart. He who is over 30 and still a socialist has no brain.”
    Just the thought of paying $ 800 million for the ACA website sends chills down my spine.

    This article begins to peel the onion by revealing additional ‘unintended consequences’. There will be many more.

    Under the ACA, you will not be denied insurance, but it will cost you. Letting insurance companies pay for medical care (already diagnosed) is a perversion of the word insurance. There is no need to insure something, which is already a certainty. It is, however, less expensive than paying for it directly due to the massive (60%) discounts insurers get off the ‘sticker price’ of medical procedures. Why pay retail?

    We should call it COST TRANSFER not insurance. (There is no need to calculate the 100% probability of the need for treatment.)

    For companies which do continue to offer health benefits, we will have a new class of employment selection. After all, just one employee with a soon to be expensive medical condition can skew the entire budget.

    We will soon have American citizens who are Insurable but Unemployable!

    Comment by Gene Kamarasy — November 6, 2013 @ 7:49 pm

  3. Lot of learned individuals comment on the good and the bad of exchanges and PPACA in general as they affect people. But Government’s goal may not be providing health insurance but more control over the masses through redistribution of income. To a degree this might be OK if not badly botched as socialistic governments tend to do.

    Comment by Dhun Mehta — November 7, 2013 @ 9:36 am


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