Many are still in shock from the Supreme Court ruling last
week on PPACA. I received an email from a friend the day after the ruling
reminding me that in a speech a year prior I predicted this outcome. He
reminded me that I said it would be upheld in a 5-4 vote and that I even
mentioned that Roberts might side with the liberals on the court. I hate being
right and this is certainly not an article about my luck in predicting this
outcome – far from it. The point is that it was pretty obvious to many that
this would happen.
Actually the only surprises were the surreptitious manner in
which Justice Roberts covered the mandate with a side step to taxation and the
blow that was delivered on the Medicaid expansion.
Many felt that the Court might not rule on the mandate
because it was indeed a tax and as such was not in their privy till such a tax
was actually levied (2014). Roberts took this thinking a bit further and bent
the rules by saying “it is reasonable to construe what Congress has done as
increasing taxes on those who have a certain amount of income, that choose to
go without health insurance. Such legislation is within Congress’s power to
tax”. I will leave it up to the legal scholars
to opine on the ramifications of this type of ruling and the door that it opens
for Congress to force “mandates” on the American people. But suffice it to say
I think this ruling is a very slippery slope and one that creates a great deal
of latitude for Congress in the future to circumvent the Commerce Clause.
I know to those that know me this may come as a shock but I
have been in favor of a mandate for health insurance for more than 20 years. I
agree we have to have a comprehensive pool of citizens in the healthcare system
to create the appropriate spread of risk and eliminate adverse selection and
inconsistent pricing. Since many, particularly the young, feel they don’t need
health insurance and choose not to purchase it, this distorts the pool and
creates adverse selection. Also these folks still get healthcare through our
safety net (hospitals) but a much higher price which is then subsidized by
those that are insured. The only way to fix this is to require that these folks
buy health insurance like the rest of us. Where I differ from PPACA is how we
go about doing that.
In practice the mandate will not affect that many Americans
and in its early stages will not have much of a financial impact. Over time
this will not be a big revenue source for the government as most uninsured who
can afford health insurance will eventually buy it to avoid the escalating tax.
Young professionals will reluctantly just buy health insurance as they should
and the poor will be subsidized and end up avoiding the tax as well.
Interestingly the way the tax is designed it would have the biggest impact on
wealthier citizens who don’t purchase health insurance not on the poor. Since
the poor make up the clear majority of the 32 M that would be added to the
insured ranks they will have little contribution via the mandate. So I don’t believe that the mandate will
provide much funding for the huge subsidies that are embedded in PPACA.
However, it is a tax and is another burden on Americans in a very tough
economy.
The Medicaid ruling is actually the more serious of the two
pieces of the ruling. The Medicaid expansion addresses upward of 17 million
uninsured that are below the poverty level and will cost a massive amount over
the next 5 years.
In the ruling the Court basically said that the Feds could
not force (coerce) the States into accepting the Medicaid expansion by telling
them that if they did not expand per PPACA rules they would lose prior Federal
funding. This is huge because it allows States to refuse to expand their
Medicaid systems. Since this expansion is a huge piece of the law and its
financial structure the impact could be significant. Politically I suspect that
most States will eventually expand as it will be difficult to explain why not
and the Feds will coerce them with other funding not governed by PPACA. The
Feds will pay for the entire expansion in the first year and 90% thereafter.
With this kind of funding and the pressure to insure the poor, I doubt any
Governor can really opt out over the long haul. Where this ruling will have an
impact is in how the expansion is done. I can see States arguing for
significant changes in the expansion rules to meet their needs and many could
win. These changes could have both coverage and financial impacts yet to be
determined.
So PPACA moves on. What can we expect?
First I think this ruling gives the President a boost in the
election race. Many people will see this as a victory for him and want to join
the “winning team”. Will he win reelection? Who knows?
If he does he will have significant power to do many things
that will drastically change the American landscape. We should be thinking
about this as we go to the polls in November. This is a lame duck President who
has a very specific agenda and believes even the Constitution is not outside
his privy to change as needed. For example will he attack ERISA as the next
phase of his healthcare reform? I suspect he will.
PPACA will continue to drive up healthcare costs. This fact
cannot be disputed. The small numbers of regulations that have been implemented
have already increased premiums nationally by 3-7%. As we implement the
remainder of the law, costs will continue to rise sharply. Why? In simple terms
we have to pay for this mammoth law that really just spends and does practically
nothing to curb costs. The CBO last stated in May, that it would cost us over
$1.76 Trillion dollars. Since the Medicaid ruling and the continued economic
recession the CBO now says they have to go back and re-calculate the costs. I
suspect they will be significantly larger as unemployment is still over 8%,
manufacturing is down, trade deficits are up, gas prices are still fluctuating,
and housing is nowhere near normal. Many of these factors were assumed to get
better in the original CBO predictions and now will have a negative impact on
the revised numbers.
Let’s look at the different segments of PPACA as they exist
today. I will review each and the impact I expect as they are implemented.
The Expansion of Coverage
The CBO says we can expect the law to expand coverage to
approximately 32 million Americans. This means we will still have approximately
16 million uninsured when PPACA is fully implemented. Of the 32 million, 17
million are to come from the expansion of Medicaid and 15 million who would buy
insurance on their own through Exchanges. The numbers on the Exchange growth
vary from 15 million to 22 million but there is no actual explanation of why.
Interestingly the recent CBO study showed that while the
number of people buying insurance on exchanges would be about 22 million by
2022, many of these folks would actually be people that are covered by small employers
today. Specifically many micro groups (between 2 and 10 employees) would opt
out of offering a group plan and simply direct their employees to Exchanges to
buy coverage. This swap of coverage source is not actually an increase in the
number of covered folks and the CBO said they expect upward of 4 million people
will lose their employer coverage by 2016. So these numbers are suspect and
since the law only penalizes groups above 50 lives from dumping coverage, there
would be no additional revenue (short term) to the Federal government when this
shift occurs.
To be fair I will assume that some of the increase in
individual plans through exchanges will actually be young folks afraid of the
mandate tax. Unfortunately, since no one seems to know with any statistical
certainty how many of these young folks are actually opting out of current
employer plans or choosing not buy individual coverage, it is impossible to
ascertain how many new young people we will be covering. My educated guess
would be no more than 2-3 million. This number may actually be lower because all
data I reviewed was prior to the expansion of dependent coverage to age 26
which allows a lot more young people to stay on their parents’ coverage longer.
Keep in mind that the Individual mandate does have some
exceptions and this combined with the weak tax/penalty in early years will
probably see it driving less to coverage than expected. For example recent
studies estimate there are between 12 and 15 million illegal aliens in the US.
While they clearly use our healthcare system (most often for free) they won’t
be affected by the mandate so their behavior will not change. I assume the
parents of the 800,000 illegal alien children that the president is granting
immunity to will have to be governed by the mandate but that remains to be
seen.
I think it is also interesting that the mandate tax is only
$95 per person in 2014 or 1% of income. If your expected premium for health
insurance (whether group or individual) is going to be $5000 would a $95
penalty/tax deter you from continuing to go without coverage and using the
hospital system as your safety net? What about in 2016 when the tax escalates
to $695 per person or 2.5% of your income? Would you buy then? Keep in mind
that at current healthcare inflation rates the premium would now be at above
$6000. It is doubtful that the tax will have much impact in 2016 either since
one would have to be earning over 250K to have the tax equal the expected
premium for health insurance. How many folks do you know making over 250K have
no health insurance?
Add to this that the IRS has basically admitted it has no
way to enforce the new penalty/tax short of a typical audit. And while it plans
to do massive hiring no one knows exactly how the mandate/tax will be enforced.
What about the subsidies? Well families with household
incomes up to 400% of the federal poverty level can receive premium credits and
the law also states it will reduce the amount these folks have to pay for
medical copayments. Since this area of the law is still to be defined we can’t
really tell if this will drive purchasing behavior. Since the clear majority of
folks targeted fall below the 133% of the federal poverty level, they will be
looking to the Medicaid expansion to provide coverage. The group between 133 %
and 400% that are currently uninsured are the question mark in this equation.
It will all depend on how HHS designs the subsidies for this group.
Health Care Costs
PPACA seeks to decrease costs over time by the following
provisions:
It assumes that the many of the newly insured folks driven
into the pool by the mandate will be young and healthy. In turn these folks
will provide cash to pay for the costs of older sick folks and over time drive
down the cost of health insurance. Sounds great in theory but probably will not
come to pass. First, we are not sure how many young health people will join the
insured pool. Second, even if all did join the pool, their contributions would
be more than offset by the huge population of Baby Boomers who are aging and
taxing the system more daily. Third, unless we actually curb the cost of
procedures, their inflation (at nearly 9% per annum) will far outpace any gain
from the young and healthy.
The second brilliant cost savings method is cutting Medicare
administrative costs by rewarding the consumer if their insurer spends more
than a set level on admin costs. I fail to see how this saves anything since
they are paying the consumer when admin fees are too high. Since admin accounts
for about 10% of the costs this would have very little impact in any case. It
sounds like we are just swapping dollars not decreasing any cost at all.
Limiting insurance pricing for older people is embedded in
the new law. In simple terms an insurance company cannot charge an older member
more than 3 times what it charges a young person. This again is a useless and
dumb regulation. If an insurance carrier charges $200 a month for a young
person it can only charge $600 for an
older person, however, if the older persons healthcare costs are $800, the
insurance company will simply increase the young person rate so that the cost
for the older folks are covered. Even with the new rating authority given to
the states, insurance companies will always be able to charge enough to cover
costs and administration. Since most insurers of healthcare do not make large
margins (2 -4%) anyway this regulation will do nothing to decrease the actual
cost of care.
So sadly the law does nothing to affect the actual costs of
healthcare. Since the cost of care accounts for 90% of all premiums paid in the
US, PPACA is focused entirely in the wrong direction. Insurers just pass
through the cost of care, taxes and admin in their premiums so trying to curb
their admin costs is futile and will have no overall impact on consumer costs.
Since cost is the driving force for the purchase of health insurance coverage,
PPACA should be addressing that and not arbitrary access and rating rules.
The US healthcare system is too expensive because we pay
more for care and drugs than any other country on earth. It is that simple. It really
is not about private healthcare versus government run healthcare – it is about
the cost of care. We pay our providers primarily based on the number of
transactions/procedures they do rather than the quality and outcomes of that
care. We built this system and we must fix it. PPACA does nothing meaningful to
address this.
Employer Based Coverage
According to the President we will maintain this system and
employees who like their current coverage can keep it. He neglected to tell us
that that care will costs us a great deal more as we pay for PPACA and that our
employers could chose to stop offering these plans because PPACA provides other
alternatives for employees to get individual coverage from Exchanges. The law
has a $200 per employee penalty for employers over 50 who do not offer health
insurance. Since most employers are now paying over that amount for employee
health insurance it might be a lot cheaper to opt out of offering the plan and
pay the penalty. Some studies are suggesting that up to 20 million workers now
covered by employer plans may lose the insurance as employer opts out and pays
the penalty.
The subsidies for small employers to offer health insurance
are not large enough to motivate that behavior and many micro groups are expected
to dump coverage and force employees to find it through Exchanges.
Something that is not mentioned very often is the new
insurance company taxes that will start in 2013. These new taxes are there to
help offset the huge cost of covering this additional 32 million people. They
escalate over time and are expected to be passed through to the consumer. So in
fact they are a new tax on health insurance which will further drive up the
cost of premiums making it harder for current insured to stay that way and less
likely that uninsured people will enter the system.
Finally in 2018 there will be a new tax on “Cadillac plans”.
These are plans that cost over $10,200 per employee or $27,500 for a family.
When developed this was designed to attack rich executive plans and high
benefit union programs. Interestingly a new study is now predicting that with
current health insurance inflation the average American family will be paying
more than $20,000 for coverage by 2016. I guess by 2018 many Americans will be
paying a tax on their “Cadillac plan”.
Keep in mind that this study has not contemplated all the new costs
associated with PPACA that could easily drive these premiums higher.
Guarantee Issue
While in principle I agree with this provision of the law we
need to look at the ramifications more carefully. If we want to take all comers
and charge them close to level premiums then in turn we must have level costs.
We don’t have level costs. We have no transparency into the cost of healthcare
and subsequently typical consumer price pressures are nonexistent. Additionally,
I don’t think that we should have a system where people can abuse their bodies
through bad lifestyle choices and everyone else who does not, has to cover
their costs. If we don’t build in some personal
responsibility for health we will never have control over health care costs.
PPACA contemplates none of these issues and actually fosters a structure that
will cause rampant cost inflation.
One has to ask whether this was contemplated by the authors
and that PPACA is merely a step in driving the American people to accept
National Government healthcare as a cheaper alternative in a few years. I think
this is a valid question as I refuse to believe that the authors could not see
the cost drivers in the law and the long term effect they would have on the
cost of health insurance.
Summary
It is apparent that PPACA if implemented as written will
have a major negative impact on the American economy. While it will ostensibly
cover 32 million more people it will still leave over 16 million with no
coverage. The cost of insurance will continue to rise significantly over the
next 6 years and our debt will rise accordingly. Nothing in the law will truly
impact the cost of care or the behavior of the consumer. Without these two
mitigating factors the law will just drive up costs.
While no one can argue that we must find a way to cover all
Americans it is obvious that PPACA is not the answer. I am saddened and amazed
that the Obama administration could not have crafted something better and I
think it begs the question whether PPACA is just a way to drive National
Healthcare in the near term? We have the ability to fix our healthcare system,
to cover all Americans and to keep high quality private delivery in place. The
truth is with a little political will, compromise by all sectors of healthcare
and consumer education we could deliver such a solution for no increase in cost
or debt. Let’s hope sensible bipartisan change is coming as this debacle will
hurt us all.