Commentary

Six Problems with the ACA That Aren't Going Away


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As Congress and the Obama Administration await the Supreme Court’s decision in King v. Burwell, there is heightened interest in what happens after the decision. One common assumption is that if the court rules in favor of the administration, there will be no need to make any major changes in the Affordable Care Act (ACA). This assumption is wrong.

There is an urgent need to make major changes in the law regardless of how the Supreme Court rules. These are changes that will require bi-partisan cooperation—something that is rare in health policy.

The changes are needed because there are at least six major problems that aren’t going away.

An Impossible Mandate

The slowdown in the rate of increase in health care spending over the past decade is welcome news, but no one is predicting that health care spending will not exceed the growth of income in future years. In fact, for the past 40 years real, per capita health care spending has been growing at twice the rate of growth of real, per capita income. That’s not only true in this country; it is about the average for the whole developed world.

You don’t need to be an accountant or a mathematician to know that if something you are buying is growing faster than your income it will crowd out everything else you are consuming. Health care spending will take more and more of the family budget; it will take an ever larger share of workers’ gross pay. The Affordable Care Act (ACA) did not create this problem. But it limits our ability to manage it by restricting our ability to choose a smaller package of benefits, more cost sharing, etc. In short, the health reform law is trying to force us to remain on an unsustainable path.

Further, there are three “global budgets” in the ACA and (ironically) they are likely to make matters worse for ordinary citizens. The law restricts the growth of total Medicare spending, the growth of Medicaid hospital spending, and (after 2018) the growth of federal tax subsidies in the health insurance exchanges to no more than the rate of growth of real GDP per capita plus about ½ of a percent. This means that as health care costs become more and more of a burden for the average family, they will get less and less help from government through time.

The traditional idea of a global budget is to restrict overall spending. The global budgets in the ACA only restrict the government’s outlays.

An obvious solution is to jettison the whole idea of a defined benefit. Instead, make a defined (tax subsidy) contribution to each family and let competition determine what benefits the market can provide.

Unworkable Subsidies

A family of four at 138 percent of poverty is able to enroll in Medicaid in about half the states and obtain insurance worth about $8,000. Since the coverage is completely free, that’s an $8,000 gift. If they earn one dollar more, they will be entitled to go into a health insurance exchange and obtain a private plan that costs, say, 50 percent more in return for an out-of-pocket premium of about $900. That’s a gift of more than $11,000.

At the same time, the employees of a hotel earning pretty much the same wage will be forced to have an expensive family plan and they and their employer will get no new help from the government. After calculating the value of employers’ ability to pay premiums with pre-tax dollars, let’s call that a newly created $10,000 burden. This is only one of scores of ways in which ACA’s treatment of people is arbitrary and unfair.

But the biggest problem is not unfairness. It is the real impact these differential subsidies will have on our economy. As businesses discover that almost everyone who earns less than the average wage gets a better deal from the federal government in the exchange or from Medicaid and most people who earn more than the average wage get better deal if insurance is provided at work, they will change their employee benefits radically and maybe even restructure the organization of entire firms.

The incentives for small businesses to stay small and for employers to prefer part-time workers, contract labor, and outsourcing to full-time employees are all very real. And there are many other perverse incentives as well. All these perversions have a common source: treating people at the same income level very differently depending on where they get their insurance, how many hours they work, how many other employees they work with, etc.

Again, there is a straightforward solution: make the tax subsidy for health insurance the sameregardless of where people get their health insurance. It would be even better if we let people use their tax credit to buy into Medicaid and let people on Medicaid leave and claim the tax credit to buy private insurance instead. At a minimum, this would liberate the job market from the arbitrary burdens of health reform.

Perverse Incentives For Insurers

In the exchanges, insurers are required to charge the same premium, regardless of health status and they are required to accept anyone who applies. This means they must over-charge the healthy and under-charge the sick. It also means they have strong incentives to attract the healthy (on whom they make a profit) and avoid the sick (on whom they incur losses).

The result has been a race to the bottom. In order to keep premiums as low as possible, the insurers are offering very narrow networks, often leaving out the best doctors and the best hospitals. They are also opting for higher deductibles than what most people are used to.

The insurers apparently believe that the healthy buy on price—ignoring other features of the plan. By contrast, only people who plan to spend a lot of health care dollars pay close attention to deductibles and which doctors and hospitals are in the insurer’s network. By keeping deductibles high and fees so low that only a minority of providers will accept them, the insurers are able to lower their premiums.

A race to the bottom doesn’t happen in normal markets. What makes the ACA exchanges different? Answer: the incentives of buyers.

If I am healthy why wouldn’t I buy on price? If I later develop cancer, I’ll move to a plan that has the best cancer care. If I develop heart disease, I’ll find a plan with the best heart doctors. And by law, these plans will be prohibited from charging me more than the premium paid by a healthy enrollee—if they can stay afloat in the market, that is.

Incidentally, the problem here is not merely one of narrow networks and high deductibles—defects that you might suppose are fixable. The more general problem is that in any system of managed competition insurers have an incentive to under-provide to the sick.

Again, there is a better way. In a market with “health status insurance,” when I leave one plan and join another I am charged a real premium that reflects my real risk. I pay only an average premium out of pocket. However, if I am a high-cost enrollee, the plan I leave makes a payment to the plan I enter to cover my above-average expected cost.

Other Perverse Incentives For Buyers

As is well known, the fines for being uninsured are relatively low. The IRS can’t do much to collect them other than withhold a refund and millions of people are exempt from the mandate anyway. In fact, 90 percent of the uninsured will be exempt from the mandate in 2016, according to government estimates.

That raises an interesting question: why do we have a mandate in the first place? Clearly we don’t want people to game the system. If they can wait until they get sick to insure, then pay the same premium as a healthy person, then drop their insurance after they get care and the bills are paid—the whole insurance system will collapse. But with a semblance of a mandate in place, we seem to be getting this kind of gaming anyway. Early indications are that the people buying insurance in the exchanges are older and sicker, while a lot of healthy people are sitting on the sidelines.

Here’s something everybody seems to be ignoring. We have already found effective ways to deal with this problem without mandates. Medicare Part B, Medicare Part D, and Medigap insurance are all guaranteed issue and community rated. But if people don’t enroll when they first become eligible, they are penalized.

Lack Of Access To Care

One interesting finding from the first year’s experience under the ACA is that there has been no surge in doctor visits and other efforts to seek medical care. If the economic studies are correct, however, the newly insured will eventually try to consume twice as much health care as a result of their insurance. Along the way almost everyone else is being forced to have more generous insurance than they previously had and with these new benefits they are likely to seek more care. Bottom line: we are in the process of greatly expanding the demand for care while doing virtually nothing about supply.

As waiting times grow longer, those who can afford it will turn to concierge care. But every time a doctor elects to become a concierge doctor, she gives better access to about 500 patients while leaving 2,000 to fend for themselves. Add to this the growing pressure by third-party payers to keep fees down and the doctor response is predictable. Those who are in plans that pay below market will be the last patients the doctors see. And unfortunately these are the most vulnerable populations: the elderly and the disabled on Medicare, the poor on Medicaid, and low-income families with newly subsidized private insurance.

To make matters worse, about half the newly insured will be in Medicaid. The recent study of Oregon’s experience affirms what previous research had already shown: Medicaid enrollees use the emergency room about 40 percent more than the uninsured. So traffic to our safety-net institutions will be going up, not down, at the very time the ACA will be reducing federal subsidies to these facilities for uncompensated care.

To top it off, provisions of the ACA that mandate preventive care without any deductible or co-payment make it impossible to give enrollees financial incentives to use non-doctor services, which could expand the supply of care while maintaining quality.

There are many things that need to be done to correct all of this. But for starters consider this: Under the ACA the federal government is offering millions of people tax credits for the purchase of health insurance and a great many of them will turn that offer down. Under current law, unclaimed tax credits simply fatten the Treasury’s bank account. Instead, these unclaimed subsidies should be sent to safety-net institutions in the communities where the uninsured live. (See an extensive explanation of this idea here.)

Impossible Burden For The Elderly And The Disabled

About half the cost of the ACA is paid for by cuts in Medicare spending and the only practical way those cuts can be made is by reduced fees to providers. The Medicare actuaries have noted with alarm that Medicare fees to doctors will drop below Medicaid levels in the near future and the combined effect of lower Medicare and Medicaid hospital spending will drive one in seven hospitalsfrom the market in the next five years.

Although the administration talks about making Medicare more efficient, three separate reports by the Congressional Budget Office (CBO) have concluded that the pilot programs and demonstration projects that are supposed to find these efficiencies are not working. In fact the only place in Medicare that shows any promise at all is in the Medicare Advantage (MA) program. But the administration is determined to proceed with cuts in MA subsides and appears to be paying no attention whatever to the efficiencies MA entrepreneurs are discovering.

Because no serious budget analyst believes the Medicare spending cuts can withstand the inevitable political backlash and because they don’t believe the pilot programs will work either, both the CBO and the Medicare Trustees are annually publishing “alternative forecasts” in an effort to predict how Congress will cave. But if Congress does cave and restores the previous Medicare spending path, that means that the ACA isn’t paid for; and that, in turn, means large unfunded liabilities stretching out indefinitely into the future and increasing federal debt.

There is no simple way out of this financial bind. But at a minimum is it time to consider some fairly radical changes to Medicare. Tom Saving and I recommended nine changes that we think will save taxpayers money, but will also be pleasing to elderly enrollees. We need to do all of that and much more.


John C. Goodman is a Senior Fellow at the Independent Institute, President of the Goodman Institute for Public Policy Research, and author of the widely acclaimed Independent books, A Better Choice: Healthcare Solutions for America, and the award-winning, Priceless: Curing the Healthcare Crisis. The Wall Street Journal and the National Journal, among other media, have called him the “Father of Health Savings Accounts.”


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