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Martin Feldstein: Obamacare's fatal flaw

The US healthcare plan is unravelling precisely because of the feature its supporters most praise

Martin Feldstein 

Martin Feldstein

Obamacare, officially known as the Patient Protection and Affordable Care Act, is the health insurance programme enacted by US President Barack Obama and Congressional Democrats over the unanimous opposition of congressional Republicans. It was designed to cover those Americans without private or public health insurance - about 15 per cent of the US population.

Opponents of Obamacare have failed to stop it in the courts and, more recently, in Congress. The programme was, therefore, formally launched on October 1. Although it has been hampered by a wide range of computer problems and other technical difficulties, the programme is likely to be operating by sometime in 2014.

The big question is whether it will function as intended and survive permanently. There is a serious risk that it will not.

The potentially fatal flaw in Obamacare is the very same feature that appeals most to its supporters: the ability of even those with a serious pre-existing health condition to buy insurance at the standard premium.

That feature will encourage those who are not ill to become or remain uninsured until they have a potentially costly medical diagnosis. The resulting shift in enrolment away from low-cost healthy patients to those with predictably high costs will raise insurance companies' cost per insured person, driving up the premiums that they must charge. As premiums rise, even more relatively healthy individuals will be encouraged to forego insurance until illness strikes, causing average costs and premiums to rise further.

With this in mind, Obamacare's drafters made the purchase of insurance "mandatory." More specifically, employers with more than 50 employees will be required after 2014 to purchase an approved insurance policy for their "full-time" employees. Individuals who do not receive insurance from their employers are required to purchase insurance on their own, with low-income buyers receiving a government subsidy.

But neither the employer mandate nor the personal requirement is likely to prove effective. Employers can avoid the mandate by reducing an employee's workweek to less than 30 hours (which the law defines as full-time employment). But even for full-time employees, firms can opt to pay a relatively small fine rather than provide insurance. That fine is $2,000 per employee, much less than the current average premium of $16,000 for employer-provided family policies.

Not providing insurance and paying the fine is a particularly attractive option for a firm if its employees have incomes that entitle them to the government subsidies (which are now available to anyone whose income is below four times the poverty level). Rather than incur the cost of the premium for an approved policy, a smart employer can pay the fine for not providing insurance and increase employees' pay by enough so that they have more spendable cash after purchasing the subsidised insurance policy. Even after both payments, employers can be better off financially. News reports indicate that many employers are already taking such steps.

But the biggest danger to Obamacare's survival is that many individuals who do not receive insurance from their employer will choose not to insure themselves and will instead pay the fine of just one per cent of income (rising permanently after 2015 to 2.5 per cent). The preferred alternative for these individuals is to wait to buy insurance until they are ill and are facing large medical bills.

That wait-to-insure strategy makes sense if the medical condition is a chronic disease like diabetes or a condition requiring surgery, like cancer or a hernia. In either case, the individual would be able to purchase insurance after he or she receives the diagnosis.

But what about conditions like a heart attack or injuries sustained in an automobile accident? In those cases, the individual would not have time to buy the health insurance that the law allows. If they are not insured in advance, they will face major hospital bills that could cause serious financial hardship or even cause them not to receive needed care. Anyone contemplating that prospect might choose to forego the wait-to-insure strategy and enrol immediately.

But private insurance companies could solve that problem by creating a new type of "emergency insurance" that would make enrolling now unnecessary and allow individuals to take advantage of the wait-to-insure option. Such insurance would cover the costs that a patient would incur after a medical event that left no time to purchase the policies offered in the Obamacare insurance exchanges. Emergency insurance might also cover the cost of care until the "open enrolment" period for purchasing insurance at the end of each year (if political pressure does not lead to the repeal of that temporary barrier to insurance).

This type of insurance is very different from existing high-deductible policies. Given the very limited scope and unpredictable nature of the conditions that it would cover, the premium for such a policy would be very low. It would not satisfy the broad coverage requirements that Obamacare mandates, forcing individuals to pay the relatively small penalty for being uninsured and to incur the subsequent cost of buying a full policy if one is needed later. But the combination of emergency insurance and the wait-to-insure strategy would still be financially preferable for many individuals, and the number would grow as premiums are driven higher.

Employers with a large number of full-time employees could encourage their existing insurance companies to create the emergency policies. They might even choose to self-insure the emergency risk for their employees.

The "wait-to-insure" option could cause the number of insured individuals to decline rapidly as premiums rise for those who remain insured. In this scenario, the unravelling of Obamacare could lead to renewed political pressure from the left for a European-style single-payer healthcare system.

But it might also provide an opportunity for a better plan: eliminate the current enormously expensive tax subsidy for employer-financed insurance and use the revenue savings to subsidise everyone to buy comprehensive private insurance policies with income-related copayments. That restructuring of insurance would simultaneously protect individuals, increase labour mobility, and help to control healthcare costs.

The writer is professor of economics at Harvard University. Copyright: Project Syndicate, 2013

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First Published: Sun, November 24 2013. 21:50 IST