ObamaCare with Lipstick
The two most serious defects of ObamaCare were never discussed at the Health Care Summit or in the President’s speech this afternoon. I blame the Republicans for that. As a result, things have gotten worse for the GOP. President Obama is now offering to make minor concessions on the issues the Republicans did bring up and call the whole effort a “bipartisan compromise.” (More on that below.)
Okay, what is the single worst feature of ObamaCare that no one ever talks about? It is something that would completely disrupt American labor markets. Take a look at the chart below. It shows why no employer anywhere is going to be able to (a) provide health insurance to employees and (b) employ workers who earn $30,000. The reason: Any competitor employing similar workers and not providing health insurance would have a huge, insurmountable cost advantage.
In 2016, ObamaCare will require almost everyone to have insurance that costs an estimated $15,000 for a family (House version). For a $30,000-a-year worker, there are additional limits on out-of-pocket costs. If the employer is providing the insurance, the total tax subsidy from the federal government will be about $2,295. However, if the employee were not getting insurance from the employer, he would qualify for the better insurance (less out-of-pocket exposure) in a new health insurance exchange — with a federal subsidy that would be $17,105 higher! Think of this as an enormous federal government gift to the employer and the employee. With competition in the labor market, we would expect the worker’s wage to eventually rise by the full amount the employer was spending on health insurance. (Higher wages replace insurance in the compensation package.) But along the way, the employer and employee combined will have $17,105 more than they had before. (Calculations by Steve Entin.)
Of course, in the various versions of ObamaCare there are financial penalties for employers who do not provide insurance. But in all versions, the penalties are mild compared to the potential gains of moving worker insurance from the employer to the exchange for average- and below-average-wage workers. Moreover, as I explained in my analysis of the Senate version of ObamaCare, industrial reorganization can minimize those costs. High-paid workers with employer-paid insurance will cluster in some firms, while average- and below-average-wage workers will cluster in others. Overall, ObamaCare will create irresistible economic pressure to restructure the entire labor market. Anytime there is a way for employers to cut their labor costs by 50%, they will exploit it. Along the way, however, millions of workers will be dislocated and the unemployment rate will soar. We will be left with industrial organization dictated not by economics, but by a subsidy system that can only be called bizarre.
Lest you think there is some rational reason (say, equity or fairness) for all of this, take a look at the next chart — which compares the subsidy available to a $90,000-a-year employee getting insurance in the exchange with that available to a $30,000-a-year worker getting insurance at work. In this case, a worker with three times as much income gets almost twice as much help from the government!
What Republicans should have said at the Summit: You can’t have rational health reform unless you subsidize all insurance equally — regardless of where it is obtained.
Now for the second biggest problem with ObamaCare: high marginal tax rates for middle-income families. Take a look at the next two graphs (from IRET) and remember why both political parties came together during the Reagan years to reduce tax rates. ObamaCare (House version) would create marginal tax rates in excess of 60% for workers earning as little as $25,000! This is caused by the steep withdrawal of health insurance subsidies (in the exchange) as income rises.
Michael Schuyler, who produced these diagrams, describes them as follows:
The charts actually understate the spikiness of the marginal rate “skyline.” They are drawn as though the subsidy smoothly phases out between the pairs of incomes for which CBO provides subsidy estimates. In practice, the phase-out would have “cliffs,” in which a few dollars of added income would cut the subsidy by hundreds or thousands of dollars, resulting in stratospheric marginal tax rates in the immediate vicinity of the cliffs.
As is well known by economists and policymakers alike, when people get to keep only one-third of each extra dollar they earn, they react in all kinds of ways that are harmful to the economy. They will choose more leisure and less work; they will substitute untaxed fringe benefits for taxable wages; they will disguise consumption as a business expense; and they will substitute unreported (and, therefore, untaxed) income for reported income.
What Republicans should have said at the Summit: Health reform is no bargain if it imposes on the middle class the same marginal tax rates that high-income earners faced during the years of stagflation.
Since the Republicans chose instead to focus on matters of far less seriousness, Obama is now responding by making trivial compromises with respect to those issues. In yesterday’s letter to Congress, here is what he proposed:
- To reduce fraud, waste and abuse, use random government undercover investigations of health care providers, as proposed by Sen. Coburn.
- Establish medical malpractice demonstration projects, as proposed in the Coburn bill and the Ryan bill.
- Explore ways to increase Medicaid reimbursements to doctors, as proposed by Sen. Grassley.
- Expand Health Savings Accounts by offering them in the exchange, as proposed by Sen. Barrasso.
I don’t know about you, but I think the debate was going much better when the Republicans weren’t saying anything at all.
Nice post. And I agree. We were better off when the Republicans were not saying anything.
If anything, President Obama’s speech was less conciliatory than was expressed at the White House Summit and in his letter to Congress.
In his speech, President Obama reiterated his support for virtually all the primary elements of the Senate bill. He acknowledged that he disagrees with Republicans on insurance regulations. He explained his view that for coverage to be affordable, everyone must be covered. He even suggested his (highly regulated) health exchange was supported by Republicans before politics intervened.
The President finished his remarks with assertions that the debate had gone on for a year and starting over from scratch would take another year. Without saying “reconciliation” verbatim, he made it clear he would support this measure, stating he would ask Congress to “get it done!”
This all suggests the White House Summit and the letter to Congress were really all a sham – hoping the American public would believe the health reform bill rammed through Congress was not partisan.
Glad you are willing to criticize the Republicans. They deserve it.
I totally agree with you on one thing: Nobody else is talking about this. But why not?
I see no reason why the Republicans cannot bring up these points now. A few clear, simple examples of just how stupid this plan is would make an effective case against it. The fact that the same case could have been made before won’t matter to the average voter, who didn’t watch the broadcast of the health care summit anyway. Now is the time to pound the table with simple facts about gigantic marginal tax rates for some middle-income people but not others with almost the same income, gross “unfairness” (a favorite word among the big-hearted Democrats) in the form of higher subsidies for higher income families, and nearly unbelievable disruption of the labor market. The average guy can understand it all if it is presented clearly and simply, and it is all true.
Important as the subsidies-inequality issue is, the more fundamental flaw is the one raised by Holman Jenkins in this morn’s WSJ. As soon as Obama began to preach that, “if you like what you have in insurance today, you can keep it! No problem!” serious reform was dead.
Is it just me, or is the left trying to impose a horrible, byzantine, bureaucratic nightmare in this bill such that, after a few years of frustrating attempts to implement it, we’ll all happily opt for a simple, single payer system? As John has said before, 95% of what’s wrong with our health care now is a result of government involvement. Republicans have got one thing right — this bill is extremely bad for America and it should be totally scraped.
John, good post. Any idea why there was NO angst from the American people on restoring the 21% Medicare cuts in physician reimbursement…when that’s the stated avenue from the White House on how we’re going to cover 30million more Americans and still reduce the cost of medical care?
The President’s speech seemed calculated to motivate Democrats to vote for his bill.
If the Democrats had the votes, they would have already passed Obamacare. Dems are struggling to cobble together enough members willing to sacrifice their own political careers.
Paging: Marjorie Margolies-Mezvinsky.
The Summit failed to address the crucial need to drastically reduce the number of health care transactions that involve third party payers. A mechanism exists to accomplish this; it is high deductible health insurance. As long as virtually every visit to a doctor generates an insurance claim, forget about reducing the cost of health care. How does one pay the deductible? The answer is the hefty savings from the reduced health insurance premiums. Do not expect cooperation from the health insurance industry because high deductibles decrease the commissions earned by brokers. The industry must cooperate, however, unless they want to be put out of business by a reckless Congress.
John,
GOP, the party of no.. has nothing to offer… so became more and more marginal to the improvement of the American Society. They were 8 years late to the debate and then decided not to participate once again in repairing health care system , and the environment , or the economy.
John, great piece.
Call me determined. I don’t think that plan is going through.
– Budget reconciliation cannot be used when changes are made to Medicare per the Byrd rule. It’s possible that Obama has weeded the Plan to remove ALL Medicare changes…BUT
– He is definitely still using 1/2 trillion from the Trustee Medicare Acct. They call it a TRUSTEE acct for a reason. It’s against the law to misuse funds in any Trustee Account. My husband & I paid Medicare taxes from our salaries. All Americans have deductions from their checks for Social Security/Medicare. Our money cannot be used for a new entitlement program, for uninsured who didn’t contribute to the Trustee Acct, or for illegals.
I’ve asked the Treasury for an audit of the Social Security/Medicare account. They are through with me yet.
Delores109@cox.net
correction…They are NOT through with me yet!!!
Delores Smith
Delores109@cox.net
Why is it bad if ObamaCare makes it advantageous for employers not to provide health insurance. I would think that would be a feature, not a bug.
Gene Steuerle (Urban Institute) has made somewhat similar calculations (with some different assumptions) in a presentation given at AEI http://www.urban.org/uploadedpdf/509103_healthcarereform.pdf. He asks, if the total cost of an employee to an employer were equal [total compensation, including health insurance or no HI with higher pay], would an employee be better off under the employer’s plan, or an exchange plan? Answer: Up to roughly $90K in total compensation, the employee fairs better under the exchange.
Blackadder: When the CBO scored the health care legislation, they assumed that only a small fraction of employees would qualify for subsidies in the exchange. If, in fact, everyone eligible for the subsidy shifts to the exchange, the cost of ObamaCare will skyrocket exponentially. America can’t afford to foot the bill.
I agree totally with Conrad. This is a financial disaster waiting to happen.
Good post. One question: Who gets to approve the eventual changes to this 65% marginal tax rate? It doesn’t seem reasonable to require a signed law for every single change to insurance premiums.
Bart: I think that how premiums rise through time and how subsidies are to be withdrawn are all part of the legislation.
The future looks like this: Every worker who earns total compensation below $90,000 will get it through an exchange or Medicaid. Those who earn $90K+ will still get employer-based benefits. Is this beginning to look a little like the German system?
However, a twenty-person firm might have only one or two people who earn over $90K. The administrative costs, per beneficiary, of employer-based benefits will surely explode, making it more expensive.
“Call me determined. I don’t think that plan is going through. Budget reconciliation cannot be used when…”
There is another option which I have read and I am starting tho think is very likely. A “bait and switch” by the Senate Dems on the House Dems. Step #1 in this particular reconciliation is for the House to pass the (already-passed) Senate bill. Then the House starts their shenanigans with a second bill which effectively amends the first bill. This second bill then has to pass the Senate, and _that_ is the bill that would be done with “budget reconciliation.”
The Senate, after the House votes on bill #1, could just say, “Yay! We passed the perfect health care plan. All done!” and totally ignore the second bill. That hangs the House Dems out to dry, but it is also much prettier for the Senate. No Biden overriding the parliamentarian, no drawn out, ugly amendment process, no abuse of the Byrd rule.
To prevent this con, Obama would have to commit not to sign bill #1 unless and until bill #2 also passes, which I don’t think he will do, or at least I’m not sure he would be believed even if he did.
Tom H and Blackadder both touched on something important. Why is neither side talking about this?–because they both have the goal to get employers out of the health insurance business. It is disastrous for our economy in competing with other nations among other things. But the people have and will cry bloody murder against that (which is why I’m disappointed with GOP for not explaining it up front.)
The way to get there is what they’re fighting over. Obama etal want to do it thru mass destruction and govt takeover. The other side wants to do it gradually and much less painfully, by removing the perverse incentives that Gov has caused in the first place and stimulating more private sector economic activity toward fixing the problem.
It was clear that the Dem tactics were: (1)say that they agree with Rep. concepts, state that they are all in the Dem bill, and declare that they are not that far apart; (2) have Obama respond to all Rep charges so that the time did not count agaist the Dems while the president was their chief defender.
I suggest that the Rep have a press conference and hold up 6 of their ideas (as stated in the summit) and ask the Dems to pick out 6 of their most critical items from the Senat/House bills. Together they can write acceptable bipartisan legislation. The theme might be 6+6=Bipartianship
The restated idea of starting over with a blank sheet did not resonate well as an alternative. The same thing coul have been accomplished with a specific offer of equal ideas being hashed out as a bipartisan initiative.
Good grief. The budgets are completely misshapen relative to market preferences. You can bankrupt a nation with this baby.
(See my Forbes.com blog post titled, “No Small Ambitions: The social abyss beyond the president’s health care summit” by following this URL: http://www.forbes.com/2010/03/01/health-care-summit-obama-opinions-columnists-richard-a-epstein.html)
I listened to last night’s open conference call sponsored by the Heritage Foundation. It included very well organized opening remarks by my very long time friend Congressman Tom Price. He labeled the President’s description of the contents of his Health System Reform Bill as “mischaracterization”
The Congressman, who inappropriately blurted out during the State of the Union Message you will recall, said it more directly.
The President said to Senator McCain, during the recent Health Care Summit, “the campaign is over.” The same holds true for the President.
Those who have studied the Health System Reform proposals incorporated into pending legislation, particularly AMA Leaders and all physicians, must speak out loudly when there is a clear discrepancy between the written word and the pronouncements of politicians.
Purposefully deceiving the American People on the issue of Health System Reform is an outrage and must be exposed by presenting the facts. This is a responsibility of the Profession.
Respectfully,
Ralph Kristeller
P.S. I am, and have been for many years, and unaffiliated voter who votes regularly.
You all miss the point!
Obama isn’t trying to “save” our healthcare system, he is trying to replace it and there is no better or faster way to do this than by increasing the rate of failure to require it to have to be replaced.
Obama has always said he supports a single pay system that the rest of the World has, which provides better care for less and seeks to make this happen simply by increasing amounts the government spends and forcing cuts that adversely effect all other government programs. It is a shrewd yet effective way to gain a place in history, but he fails to realize that in doing this he will end up historically in a place that isn’t one of glory.
What he fails to realize is that healthcare isn’t a financial process, but is one of highly trained and experienced people applying skills. We have half the number of physicians and other providers that other countries do and as the “boomer generation” TV show pointed out, the largest numbers of these providers come from that era. When and if providing care becomes simply a financial matter, how many of the majority of providers who do not have financial need will “stay the course” and continue to practice in a government run program that satisfies no one. And if the supply of providers isn’t maintained, how do we “produce” millions of trained and experienced people to replace them?
Obama or someone close to him or his administration will eventually realize that destroying a flawed system to replace it with one that has no chance of success will not advance care in our country. If not soon, it will be a known commodity before the next Presidential election. And when it does, where will he spend the rest of his years?
As Thomas L. suggests, the “reconciliation” issue is irrelevant, and it is not even part of the democrat game plan. If Pelosi can bribe her minions into voting on the Senate bill, we are going to have the Obama signing it into law immediately. Reconciliation? They don’t need no stinkin’ reconcilation.
I want to see if I really understand the federal cost impact of this blog piece because, other than John Stossell commenting on it, I have not seen any other mention.
It seems to me that companies with less than 50 employees are financially incented to drop group insurance because they can budget their taxes for not providing coverage and the employee (and family) is better off with the larger federal subsidy, about 17,000 for a family with $30,000 of annual income.
I believe when CBO scored the bill, they assumed that no small employer would drop insurance so they have drastically underestimated the federal cost due to the change in behavior of dropping coverage. Am I correct about this?
If I am correct, is there a way for Hewitt or some other like firm to rescore the bill assuming a lot of small employers will drop coverage? I would think that the federal cost would sky-rocket and scare some in congress enough that they would not support the bill(s)now being considered.
Thanks,
Arnie
The Tea Party Guide to Health & Fitness – http://www.healthhabits.ca/2010/10/21/tea-party-guide-health-fitness/