ObamaCare’s Broken Promises

Author: Daniel P. Kessler

Publication: The Wall Street Journal

URL: http://online.wsj.com/article/SB10001424127887323374504578217720567917856.html

As the federal government moves forward to implement President Obama’s Affordable Care Act, the Department of Health and Human Services is slated to spend millions of dollars promoting the unpopular legislation. In the face of this publicity blitz, it is worth remembering that the law was originally sold largely on four grounds–all of which have become increasingly implausible.

* Lower health-care costs. One key talking point for ObamaCare was that it would reduce the cost of insurance, especially for non-group insurance. The president, citing the work of several health-policy experts, claimed that improved care coordination, investments in information technology, and more efficient marketing through exchanges would save the typical family $2,500 per year.

That was then. Now, even advocates for the law acknowledge that premiums are going up. In analyses conducted for the states of Wisconsin, Minnesota and Colorado, Jonathan Gruber of MIT forecasts that premiums in the non-group market will rise by 19% to 30% due to the law. Other estimates are even higher. The actuarial firm Milliman predicts that non-group premiums in Ohio will rise by 55%-85%. Maine, Oregon and Nevada have sponsored their own studies, all of which reach essentially the same conclusion.

Some champions of the law argue that this misses the point, because once the law’s new subsidies are taken into account, the net price of insurance will be lower. This argument is misleading. It fails to consider that the money for the subsidies has to come from somewhere. Although debt-financed transfer payments may make insurance look cheaper, they do not change its true social cost.

* Smaller deficits. Increases in the estimated impact of the law on private insurance premiums, along with increases in the estimated cost of health care more generally, have led the Congressional Budget Office to increase its estimate of the budget cost of the law’s coverage expansion. In 2010, CBO estimated the cost per year of expanding coverage at $154 billion; by 2012, the estimated cost grew to $186 billion. Yet CBO still scores the law as reducing the deficit.

How can this be? The positive budget score turns on the fact that the estimated revenues to pay for the law have risen along with its costs. The single largest source of these revenues? Money taken from Medicare in the form of lower Medicare payment rates, mostly in the law’s out-years. Since the law’s passage, however, Congress and the president have undone various scheduled Medicare cuts–including some prescribed by the law itself.

Put aside the absurdity that savings from Medicare–the country’s largest unfunded liability–can be used to finance a new entitlement. The argument that health reform decreases the deficit is even worse. It depends on Congress and the president not only imposing Medicare cuts that they have proven unwilling to make but also imposing cuts that they have already specifically undone, most notably to Medicare Advantage, a program that helps millions of seniors pay for private health plans.

* Preservation of existing insurance. After the Supreme Court upheld the constitutionality of health reform in June 2012, President Obama said, “If you’re one of the more than 250 million Americans who already have health insurance, you will keep your insurance.” This theme ran throughout the selling of ObamaCare: People who have insurance would not have their current arrangements disrupted.

This claim is obviously false. Indeed, disruption of people’s existing insurance is one of the law’s stated goals. On one hand, the law seeks to increase the generosity of policies that it deems too stingy, by limiting deductibles and mandating coverage that the secretary of Health and Human Services thinks is “essential,” whether or not the policyholder can afford it. On the other hand, the law seeks to reduce the generosity of policies that it deems too extravagant, by imposing the “Cadillac tax” on costly insurance plans.

Employer-sponsored insurance has already begun to change. According to the annual Kaiser/HRET Employer Health Benefits Survey, the share of workers in high-deductible plans rose to 19% in 2012 from 13% in 2010.

That’s just the intended consequences. One of the law’s unintended consequences is that some employers will drop coverage in response to new regulations and the availability of subsidized insurance in the new exchanges. How many is anybody’s guess. In 2010, CBO estimated that employer-sponsored coverage would decline by three million people in 2019; by 2012, CBO’s estimate had doubled to six million.

* Increased productivity. In 2009, the president’s Council of Economic Advisers concluded that health reform would reduce unemployment, raise labor supply, and improve the functioning of labor markets. According to its reasoning, expanding insurance coverage would reduce absenteeism, disability and mortality, thereby encouraging and enabling work.

This reasoning is flawed. The evidence that a broad coverage expansion would improve health is questionable. Some studies have shown that targeted coverage can improve the health of certain groups. But according to the Robert Wood Johnson Foundation’s Economic Research Initiative on the Uninsured, “evidence is lacking that health insurance improves the health of non-elderly adults.” More recent work by Richard Kronick, a health-policy adviser to former President Bill Clinton, concludes “there is little evidence to suggest that extending insurance coverage to all adults would have a large effect on the number of deaths in the U.S.”

The White House economic analysis also fails to consider the adverse consequences of income-based subsidies on incentives. The support provided by both the Medicaid expansion and the new exchanges phases out as a family’s income rises. But, as I and others have pointed out in these pages, income phaseouts create work disincentives like taxes do, because they reduce the net rewards to work. Further, the law imposes taxes on employers who fail to provide sufficiently generous insurance, with exceptions for part-time workers and small firms. On net, it is hard to see how health reform will make labor markets function better.

Some believe that expanding insurance coverage is a moral imperative regardless of its cost. Most supporters of the law, however, use more nuanced arguments that depend on assumptions that are increasingly impossible to defend. If we are ever to have an honest debate about entitlement spending, we will need to distinguish these positions from one another–and see them for what they really are, rather than what we wish they would be.

Mr. Kessler is a professor of business and law at Stanford University and a senior fellow at the Hoover Institution.