Obamacare’s Individual Mandate Very Inefficient
(A version of this Health Alert was published by Forbes.)
Next Tuesday afternoon, I am scheduled to testify before the U.S. House of Representatives’ Ways and Means Oversight Subcommittee on Obamacare’s individual mandate that almost all Americans maintain health insurance.
This is Obamacare’s least popular feature. It was the subject of the 2012 lawsuit asserting Obamacare was unconstitutional: Never before had the federal government forced any resident to buy a good or service from a private business. The people lost that argument. Nevertheless, Republicans have pledged to eliminate the individual mandate. This commitment remains good politics. However, it is also good economics.
According to last November’s Kaiser Family Foundation Tracking Poll, only 35 percent of respondents have a favorable view of the individual mandate. The proportion drops to just 21 percent among Republicans, and just 16 percent among Trump supporters.
However, getting rid of the individual mandate also poses a political dilemma: It balances a very popular provision of Obamacare. Recall the theory of the individual mandate is to prevent free-riding: Americans should be responsible for maintaining continuous health coverage so they do not become a burden on taxpayers when they become sick.
If you bought a house and did not invest in homeowner’s insurance, few citizens would urge the government to require insurers to issue you a policy after your house was destroyed by fire. We all understand the market for homeowner’s insurance could not function under such a law.
However, we seem to have a blind spot with respect to this problem when it comes to health insurance. In the same poll, 69 percent of respondents support prohibiting insurers from denying coverage because of a person’s medical history. The proportion is 63 percent among Republicans, and 60 percent among Trump supporters.
This supports the academic economic argument for the individual mandate alongside a means-tested tax credit for buying health insurance: Without them, people will wait until they become sick to buy health insurance. President Obama and his allies accepted the academic argument without recognizing its political costs. Fortunately, evidence show the individual mandate is also bad economics. Whether we label the punishment for disobeying the mandate a fine or a tax, it is a very, very inefficient way to raise money to finance health care.
The IRS also counts the money going in both directions, the tax credits and the fines. Although paid to insurers, the tax credits are applied to individuals’ premiums. One of the problems is that taxpayers have to guess how much money they will earn in a year, because the tax credits phase out in a confusing way. A beneficiary might be surprised to learn that he has to refund tax credits to the IRS!
A new report from the IRS demonstrates this. For 2015:
- According to forms submitted with individuals’ tax returns, about 5.8 million taxpayers received advance payments of premium tax credits.
- However, according to forms submitted to the IRS by Obamacare’s exchanges, 7.3 million taxpayers received advances.
- The IRS figures the difference (about 1.5 million people) comprises taxpayers who have not filed the appropriate form with their tax returns.
- About 2.4 million taxpayers claimed more tax credit in their tax return than they had received in advance.
- About 3.3 million taxpayers reported they had received too much in advance and had to refund some. The total was $2.9 billion.
As for the individual mandate:
- About 12.7 million taxpayers filed for an exemption from the mandate. (There are a number of grounds for exemption, including self-declared “hardship”).
- About 6.5 million taxpayers reported a total of $3.0 billion in penalties due for not maintaining coverage. (Recall U.S. health spending in 2015 was $3.2 trillion, so the penalties comprise an utterly trivial share of health care financing.)
In summary, almost no taxpayers who receive Obamacare premium tax credits can estimate them accurately; the government cannot reconcile data on tax credits reported by different sources; and the penalties for disobeying the mandate do not make a significant contribution to health care financing.
Means-tested tax credits and an individual mandate are very inefficient ways to ensure President Trump’s goal of “insurance for everybody.” A better way would include a universal tax credit financed by payments already accounted for by Medicaid, other welfare programs, and a limit on the exclusion of employer-based benefits from taxable income.
John, you want, — “limit on the exclusion of employer-based benefits from taxable income.”
This is smart. Dr. Price and the Republican want a max of $20,500 per year for family employer-based insurance.
So the Miami-Dade County employees who have coverage that costs $42,000 a year would owe Federal income tax on $21,500 per year. In most states they would owe the state income tax too. This would make employer-based health insurance just a bad memory of the pea-picking-past very quickly.
This would really help the local taxpayers and make America great again.
I say drop the max to $20K per year, per family, for a nice round number.
Capping the exclusion is essentially the same thing as the Cadillac tax. It’s just accounted for differently.
I seem to recall Cadillac tax proceeds being earmarked for something or other, but could be mistaken. Applying it toward a tax credit seems reasonable though.
If we’re talking about merely limiting the exclusion but not eliminating it, then would the (otherwise universal) tax credit be limited to individuals who don’t benefit from the tax exclusion? That’s what I’ve been arguing for.
Finally, with talk of a universal credit as a better replacement for an individual mandate, does this mean that NCPA has thrown in the towel regarding community rating? I don’t see how it works otherwise. You’d basically be spending the same dollars twice– for individual tax credits, and then again to subsidize the risk pool in whatever form it appears.
We have always thought community rating is a poor way to help those with pre-existing conditions. A recent two-part interview with U. Penn. professor Mark Pauly came to the same conclusion.
Thanks, Devon.
Although the question wasn’t whether community rating was the preferred method, but whether you and John have given up fighting what seems to be the default GOP approach.
If not, what purpose would a universal tax credit serve? Where will the money come from? Helping those with pre-existing conditions will take gobs of money, which will not be available for the purpose if it’s given away to healthy people who don’t need it.
I earlier remarked that if there is a $2000 tax credit limited to ACA-compliant (or equivalent) individual coverage that is not already tax advantaged, then the net cost would be around $24 billion.
This assumes 6 million individuals in the exchanges who don’t receive a means-tested subsidy, and an additional 6 million with off-exchange compliant coverage. To include COBRA coverage as “compliant”, then perhaps $30 billion should cover it.
Of course these are static estimates. If additional low tax bracket individuals forgo tax advantaged employer coverage and take advantage of the tax credit, cost would rise (offset somewhat by reductions in the employer tax expenditure). An interesting side-effect would be an overall transfer from general fund to Social Security and Medicare, since a good part of the tax exclusion concerns these payroll taxes (especially in the lower brackets).
The point I started to make was that the Cadillac tax or exclusion cap need only raise $24 to $30 billion.
Correct Bart, employer-based insurance is stealing from Medicare, Social Security and workers’ comp.
Day 1 President Trump signs order to begin the end of Obamacare just like he promised.
We need a Special Prosecutor for Hillary.
The New York Times Propaganda
By THE EDITORIAL BOARD JAN. 21, 2017
The Republican Health Care Con
“When it comes to health care, Mr. Price and other Republicans say their goal is to give people more choices. It is hard to argue against choice. But in the ideological world inhabited by Mr. Price, House Speaker Paul Ryan and many other Republicans, choice is often a euphemism for scrapping sensible regulations that protect people.”
“If you like your doctor you can keep your doctor, PERIOD!” Barack Hussein Obama (LIE)
The NYT thinks taking your choice of doctor away is sensible.
I have no problems philosophically with the new Cadillac tax –
but poitically it is going to have some pretty fierce opponents. Well-paid public employees, professors, and union members with family coverage will see perhaps an additional $5,000 of taxable income, or $2,000 in actual taxes, or $166 a month. That is enough to be noticed.
Telling them this is fair may not be enough.
.
Persons who now get an actual credit of $4,000 will effectively suffer the same loss of income if the top credit goes down to $2,000.
Seems to me we have had vituperative public anger over just high gas prices, which unless you were a trucker cost the average person much less than $166 a month.
If it only needs to raise $24 billion, that’s less then 10 percent of the total employer tax expenditure. So hopefully they don’t try to make the Cadillac tax overly draconian, which would only excite opposition.
It’s certainly safer than trying to eliminate the employer exclusion on day one in favor of a truly universal tax credit.
In order to be fair to non-believers in insurance, the tax credit needs to be available for medical expenditures as well as health insurance and increase along with level of expenditure.
It sounds like you are asking for the tax credit to be a tiny mini med policy to cover small amounts of care.
Though I understand your concerns and am uncomfortable as well with any intervention, I wonder who pays the bills for one that chose to remain uninsured and cannot pay them himself?
They should be used to pay for care directly, not just via insurance.
John, I understand your approach and my comment is not agreement or disagreement. I am trying to better understand what you are advocating. If that money is used for direct care then who pays for the expenive care that might come afterwards?
The answer is we all do. When someone cannot afford to pay their bills but incurs expenses, it’s called “uncompensated care” – which drives up the cost of care for everyone else.
The current ideas expressed by Ryan, Price, et al for replacement are nothing more than a shell game played in front of the unwitting American people. Let’s shift payment responsibility from the Federal govt to the states, and from the states to the people wherever and whenever possible. Let’s privatize Medicare and Medicaid. Let’s pray that by doing so, insurers will compete and drive costs down. The problem is that insurers, and the entities that they pay (hospitals, doctors), are interested in profit, not cutting costs. Slowing the federal (and state) spigots isn’t going to make it less expensive to buy health care in this country – the average American will pay more.
Thank you Jeff. I understand uncompensated care and it doesn’t worry me that much. What I wanted to know what John was advocating since he represents the NCPA.
“The problem is that insurers, and the entities that they pay (hospitals, doctors), are interested in profit”
I’m sure they are as you are when you charge for your services or negotiate your benefits package. That is why we have to rely upon a degree of market competition to keep prices down. A lot of cost is mixed into marginal care, new industries that have sprouted up around the healthcare sector, inefficiency, moral hazard, etc.
So long as the community-rating requirement remains in place, the benefit of a tax credit will flow mainly toward high-cost individuals. For low cost individuals, the tax credit merely compensates them for paying higher premiums then they would have in an underwritten market.
This is essentially the same as what’s already happening with the employer exclusion.
Parity for the self-insured would not be the same tax credit; instead it would require some sort of reimbursement for catastrophic expenditures. The deduction for medical expenses above 7.5 percent of income falls along these lines; a more accurate one might be a tax credit toward expenditures above a fixed dollar amount.
Community rating should disappear. Insurance companies exist to make a profit by taking risk from the individual and placing it on themselves. Competition exists to keep the insurers honest and create an innovative marketplace.
This means that some people will have trouble buying insurance. That is where the socialists enter the picture trying to solve the problem of the known high cost individual at the expense of the much greater number of unknown high cost individual in addition to all the rest. They pretend to be doing the bidding of society when all they are doing is the bidding of their own corrupt ideology.
Tax credits, if used, should have the least possible effect on the marketplace, but the question I am concerned with is the misuse of tax credits and further politicalization of them. The whole issue of healthcare doesn’t even belong in the federal environment. It is one of the problems that was left with the states by our Constitution. Of course the socialists will disagree for their belief seems to be that the Constitution is no better than a roll of toilet paper to be replaced as soon as a need appears.
Allan, I would love to find a way where healthy persons could get the low premiums that come from medical underwriting, but unhealthy persons would find coverage they could afford also.
I grant that the ACA ‘solution’ of guaranteed issue and community rating has been no solution at all. Both sick and healthy face extremely high premiums and require elaborate federal subsidies.
My own solution thus far would be to let extremely sick people sign up for Medicare. We can work out how much they should pay for this. The taxpayers will have to subsidize them somewhat. A broad Mwdicare payroll tax hike will not kill us.
As for the state’s right issue: the socialists fear (with some reason) that some states will not try to solve the problems of the medically needy. The history of the WPA, of Social Security, of Medicare, of Medicaid, and of the ACA, has many instances where racist or corrupt or stingy local officials refused to do anything to help the less fortunate. These persons have given state’s rights a bad name.
What you are doing is trying to remove the penalty from it being known that one is at high risk. That is generous goal, but in the process you are creating tremendous problems for a much larger group, the unknown sick along with the relatively healthy.
It might let you feel good about your generosity, but it causes great pain to the other 95%-99%.
“let extremely sick people sign up for Medicare. We can work out how much they should pay for this”
And how much other Americans should pay – that, too? I hope you agree it would be a serious management mistake to enact a major federal program change without understanding the cost, or knowing how to pay for it until some unspecified later time.
(You haven’t shown your work to support one of your previous comments on this subject.)
Bob, you say, “but unhealthy persons would find coverage they could afford also.”
Healthy Discounts will cut the insurance cost in half so healthy people buy insurance and don’t GAMBLE on flying naked without insurance.
You don’t want people GAMBLING then not pay the price if they lose, do you?
It’s not Federal or State but Personal Responsibility.
Bob,
you said “My own solution thus far would be to let extremely sick people sign up for Medicare. We can work out how much they should pay for this. The taxpayers will have to subsidize them somewhat. A broad Medicare payroll tax hike will not kill us.”
As an Insurance agent, what is your definition of Insurance?
Lee, I accept that Medicare (and Medicaid) are not insurance.
They are medical welfare, and that is fine with me.
If you wait too long to buy insurance, but you need care that will keep you alive but you cannot afford, then you need medical welfare.
I used to sell LTC plans, and I saw this every day.
People who were utterly uninsurable would ask about policies every day.
I have no problem paying some taxes to help such persons. People as a whole are myopic about insurance, failing to buy it when it would be cheap. I am not in the mood to punish them too much for their mistakes.
“I am not in the mood to punish them too much for their mistakes”
But, you are willing to punish someone else.
What about people who lose coverage for reasons beyond their control, for example when their insurer decides to leave the market?
Anyway this seems to be a moot argument, since Trump as well as both parties in Congress have already indicated an intention to cover preexisting conditions.
State insurance law requires insurers to pay into a reinsurance fund that pays if beneficiary goes to another insurer at higher risk rating.
Whoa, Allan. If we decide to let one million high risk persons under age 65 into Medicare each year, and we subsidize them to the tune of $4,000 each to help them buy Medicare, the total outlay for this reform is $4 billion a year.
If this $4 billion was covered by an increase in the Medicare payroll tax, the increase would be 5 one hundredths of one percent. Not one percent, but .05 of one per cent.
For spending this relatively tiny amount, the premiums for millions of healthy persons in the individual market could go down, maybe by a lot.
This is not punishment. Not all tax increases are punishment, if they save money for millions of persons.
One of my favorite bloggers is Dean Baker, and in his column called Beat the Press he constantly reminds us to look at federal budget numbers in context.
“the increase would be 5 one hundredths of one percent. Not one percent, but .05 of one per cent”
Bob – no credit for this answer unless you show your work
Bob, in 10 years that is $40 billion a year? That is only $.04 a year, per person, if we tax 100 billion people.
Per the CBO, raising the payroll tax by 1% brings in over $70 billion of revenue starting in 2018….
https://www.cbo.gov/budget-options/2016/52268
Thus it takes a fraction of 1% to raise $4 billion a year.
Bob,
If that money were spent on more police in certain areas we might save more lives from crime, drugs, accidents etc. Should we raise the tax another several percentage points for that as well. By the way our debt is quite high. When those holding the debt demand higher interest rates to be paid do we raise the tax even more? Have you not noted that our infrastructure is in disrepair? Should we raise taxes there as well? And what about food, clean air, irrational climate fears, the military,etc. Should we raise a few percentage there as well?
I suggest you go to http://www.freetochoose.tv/broadcasts/ftc80.php and listen to all the broadcasts. You may become enlightened since it appears you have an open mind.
“This is not punishment. Not all tax increases are punishment, if they save money for millions of persons.”
This sentence makes no sense. I used the word punish because you used it and I was transferring that word to the one paying the bill. Why should anyone be forced to pay another’s bill so as not to “punish them too much for their mistakes”?
If a person makes a mistake and racks up $5,000 worth of traffic violations should we not punish him so much and have other’s pay the bill? Why shouldn’t people pay for their own mistakes?
I’m not going to bother to interpret your numbers. John Fembup already stated that you need to show your work because if it were as easy as you think then they could be privately insured.
Note to Allan –
my comment about taxes saving money was not worded very elegantly, but here is what I had in mind:
The extra taxes in the ACA on persons making over $250,000 a year help to pay for the subsidies which are received by persons making less than 400% of poverty.
The subsidies currently total about $56 billion a year, and I have read that the taxes in question bring in about $35 billion a year.
Good or bad, the tax on one group saves money every month for a larger group.
All I was trying to say is that such a tax is not wanton ‘punishment’ – it is a redistribution.
This can surely be debated, but the word ‘punishment’ set me off.
I understand what you are saying Bob. The one that earned a lot of money, saved, educated his children, protected his wife and was a credit to humanity should pay for the traffic violations of the man that doesn’t work much, fathers kids and leaves them while spending whatever money he earns on whores and alcohol. You want that because to you it sounds “fair” that the one with more should give to the one with less.
I use this wayout example to help you think of the reasons why one should support another. We have Medicaid for those that truly cannot earn enough to provide reasonable healthcare. Why must we redistribute wealth?
where is the whore and alcohol line? ill switch parities tomorrow!
Remember Tug McGraw – when asked by a sportswriter what he was going to do with his 1980 World Series winners share, answered:
“Ninety percent I’ll spend on good times, women and Irish Whiskey. The other ten percent I’ll probably waste.”
A political science professor once told me that the hardest aspect of social policy was this:
“When we help those who are desperate, do we unintentionally reinforce the kinds of mistakes that make them desperate?”
Daniel Pat Moynihan wrote about this dilemma regarding Aid to Dependent Children. Charles Murray wrote about it in regard to all aspects of welfare.
Some form of tough love is the answer,but it is very hard to craft the right policies.
A friend of mine has a child who was born with liver disease. Between transplants and many hospitalizations, the child is alive at age 25 but the total medical bills have exceeded $2.0 million.
Here is the point I am trying to get to. This child has been on two health plans, one for a school district and one for public employees in Cloquet MN. (reflecting the jobs that his parents have had).
This poor child has damn near bankrupted both plans.
The employees of the school district actually lost their plan and could not get another one until the ACA rules for group insurance changed in 2009. The public employee plan has about the highest rates in the state, and the wages are not that high in this sawmill town.
My point, and thanks for your patience, is that if the child had been put onto Medicare or Medicaid, his costs could have been covered by all taxpayers and this would have had a very tiny impact on any one taxpayer.
I was pleased to hear Rand Paul make a point like this on MSNBC last week. He said that people who are severely sick should be on a federal program and not mainstreamed into regular insurance. Sen Paul is a doctor and I think he is right.
What I think Rand Paul was advocating was not destroying a marketplace by placing people artificially within a marketplace.
Just to clarify something, is anyone here really advocating that someone should be able to voluntarily decline coverage and then be entitled to join after they get sick? Bob, are you?
I certainly don’t. Medicare has draconian penalties for people who don’t join when first entitled. I think most current Republican proposals do as well. So all this about whores and alcohol seems to be a straw man.
Bart, the whores and alcohol was started by me and wasn’t meant to be used as a discussion of Medicare penalties. My sarcasm was meant to comment on Bob’s redistributionist comments
My point was to question whether anyone here is even advocating redistribution policies as extreme as the examples given.
I don’t think on this list that type of extreme thinking exists, but I am sure in the crowds where threats to bomb the White House is heard a good number of nuts might have those extreme feelings.
Guess Liberals have a hard time reading a joke. 🙂
Bob,
I asked how would you as an agent define insurance?
What is it for?
Why do clients come to you?
What are the clients trying to accomplish by giving you money?
I’m not trying to be argumentative with you I’m just trying to understand your philosophy.
on a side not I do think Medicaid is welfare however Medicare is an insurance purchased by the insured through mandatory payroll contributions. Medicare is not an entitlement it is a purchased product that is horribly administered.
Lee, although you didn’t ask me, I agree that Medicaid is a medical welfare program, and Medicare is not. Medicare does look a lot like insurance but at the same time by law, the US government pays for something like 85% of Medicare costs. It’s understandable that many people regard Medicare as a federal entitlement.
John,
your wisdom is always welcomed I grant you the family waiver:)
Bob,
You said” I used to sell LTC plans, and I saw this every day. People who were utterly uninsurable would ask about policies every day.”
Yes people every day want to buy insurance after the fact. damn I just had a car accident now I need to buy insurance. Honey the river flooded the basement last night call the insurance agent and get some flood insurance right away. What you are pregnant! lets get that maternity rider added to the policy right away.
Cancer! that sucks lets quick buy a Critical Illness policy to help pay the bills.
Bob if you could, please explain why health Insurance should be treated differently than any other types of insurance?
“People as a whole are myopic about insurance, failing to buy it when it would be cheap”
exactly! and that is an individual choice and choices have consequences.
Don’t get me wrong I would personally love to buy insurance they way you are suggesting I’m just not sure I can get the market to go along with it.
Well, there is no democracy that treats health insurance like other insurance. It is not something to be reasoned with.
Didn’t The Individual Market operate that way pre ACA?
I asked Bob what insurance was for. We all know Insurance is purchased to transfer the risk of an individual to a company willing to accept that risk and hopefully make a profit.
If we use Ron’s number of Miami Dade county employees costing $42,000 a year. Exactly what risk are the employees transferring for $42,000 at tax payers expense?
Blue Cross Blue Shield of Massachusetts is charging $45,936 per city employee to taxpayers.
http://www.eastlongmeadowma.gov/index.aspx?NID=478
AND – BCBS is NON-Profit
How much is MA BCBS Medicaid?
taking on risk is like striking gold!
“Exactly what risk are the employees transferring”
Lee, once again you didn’t ask me, but here’s my nickel’s worth. I think it’s reasonable to assume Miami-Dade does not buy group insurance, instead buys a contract for self-funded group administrative services only. I also think Miami-Dade would transfer very little real risk under a group insurance contract.
There is an argument that buying an insured group contract does transfer meaningful risks. For one thing, if an insured contract slips into a deficit, the plan sponsor can cancel, leaving the insurance company to eat the deficit vs. under a self-funded arrangement, the plan sponsor eats any deficit because it pays virtually the entire medical cost sent to the plan every day. For another, an insured contract essentially “capitates” the insurer under a fixed per employee monthly premium; the plan sponsor pays the premium, and is shielded from unfavorable variance in month-to-month medical cost. On the other hand, advantages of an insured contract decline rapidly as enrollment increases because variations in monthly and annual claim fluctuation diminish making their prediction more statistically credible. Medicare for example is entirely self-funded using administrative services only contracts. I think Miami-Dade is large enough (25,000 employees, many more total covered) to retain most of their own risk under a self-funded contract (but it should still buy an excess insurance policy to transfer excess risk for whatever level they consider very high-dollar, individual claims).
https://www.miamidade.gov/info/library/at-a-glance.pdf
So to me, it doesn’t much matter from a risk-transfer perspective whether the Miami-Dade contract is self-funded or insured. I think (1) the differences are mostly matters of efficient financing rather than insurance underwriting, (2) Miami-Dade’s annual expected medical cost is experience-rated based on prior medical utilization of the county’s enrolled group (3) the amount and details of its calculation are shared with Miami-Dade (4) therefore the projected cost of the actual medical care consumed by the Miami-Dade employees is not a secret number, or a made-up number and (5) the employees’ expected medical cost is the largest single component of the annual Miami-Dade budget for its employees medical coverage (or, if the contract is actually insured, is the largest component of the insurance company’s premiums).
(btw, that $42,000 figure we periodically hear from Senator Leghorn is eyebrow-raising, innit? It means the annual cost for Miami-Dade’s 25,000 employees is currently $1.05 billion dollars. The total 2016-17 Miami-Dade budget is about $7.15 billion. So nearly 15% of Miami-Dade’s tax revenues go to pay medical benefits for county employees. Wonder what the county’s pension costs are?)
John,
I agree. The county and most employee programs do not take into account what insurance policies are meant to cover. Insurance has been replaced by a bill paying service.
John,
Do you think that there is an incentive for the contracted carrier that provides service to design plans that are over utilized to maximize profits to the contractor?
Most public sector employees are risk averse people. They like job security. They like first dollar or near first dollar health insurance coverage. They may or may not realize that they are paying for it in the form of lower wages than would otherwise be paid. They think paying for health insurance, generous pensions, wages, and other employee benefits is management’s problem. If money is a bit short, just raise taxes or seek more aid from a higher level of government. That’s always their answer.