Tuesday, September 4, 2012

The Complex Mess that is Obamacare

By Richard Epstein

The law will hurt the very people it's supposed to help.

Now that the Supreme Court has held President Obama’s Patient Protection and Affordable Care Act (ACA) constitutional, mounting evidence suggests that the statute’s most ardent defenders may well come to rue the day. During the legal struggles over the ACA, its defenders both on and off the Supreme Court took for granted the proposition that the law would deliver on its major promise, which was to extend affordable coverage to the over 47 million people who now lack healthcare insurance, without disrupting the protection that others currently enjoy.

Unfortunately, these bold pronouncements failed to take into account the old and powerful economic law of unintended consequences. Sometimes these are positive, which is why the selfish actions of ordinary individuals in competitive markets prove socially beneficial. Adam Smith said that each individual “is led by an invisible hand to promote an end which was no part of his intention.” But those unintended consequences often turn bad in connection with the many forms of government regulation that limit the scope of contractual freedom, which the ACA does in a big way.

The result may turn into an Obamacare quagmire. Public officials, at both the federal and the state level, are grappling with the Herculean task of implementing the law. Its internal complexity and flawed design make it a program that was built to fail. The most recent evidence of the ACA’s administrative breakdown comes via the New York Times in a story by Robert Pear—no enemy of Obamacare—who reports that the fine print of the ACA could leave the dependents of millions of low-income employees without coverage from either their employers or the ACA’s insurance exchanges.

Health Insurance by Administration

The ACA commands that employees who receive “affordable” healthcare from their employers—defined as care that costs less than 9.5 percent of income—are not eligible to participate in either the ACA’s state or federal insurance exchanges. As Pear notes, these exchanges operate as insurance “supermarkets” that allow prospective enrollees to compare the benefits of the various healthcare plans they will receive a large federal subsidy to buy. But that task is not as easy as it sounds. The devil lies in the details.

The statutory language requires an employer to offer proper healthcare to “its full-time employees (and their dependents)” in order to avoid the ACA’s penalties. The status of “dependents” under this ruling is unclear, and the IRS lawyers, in the Obama administration no less, have interpreted this provision to say that so long as the cost of coverage to the individual employee is below that 9.5 threshold, the employee is not eligible to seek out family coverage under the exchanges. The cost of covering dependents is ignored in making these calculations.

For 2011, a Kaiser Family Foundation study reports that the average plan for single coverage costs $5,430. That figure is nearly three times as large for family coverage—about $15,070. On average, the employee share for individual coverage was $920, but ran to $4,130 for family coverage. The $920 is about 2.62 percent of average earnings for a person whose family income is $35,000; the $4,310 is about 11.8 percent of that $35,000 figure. Under the IRS’s interpretation, someone in this situation is not eligible to purchase insurance on the exchanges, which is estimated to provide a subsidy of about $6,000 per person, which could cover the financial shortfall.

The IRS has already been bombarded with howls of protest, which may lead it to back off its position. But the consequences of that choice are controversial as well. The additional burdens could disrupt many health plans, both state and private, that supply only limited coverage, forcing the United States Treasury, which is already handling huge federal deficits, to pay extensive financial subsidies that could run to thousands of dollars per year per family to fill the gap.

As Pear reports elsewhere, these exchanges may not even be up and running by the estimated January 1, 2014 implementation date. At this point, only 13 states have signed up to establish the exchanges. Other states, many with Republican governors or legislatures, have signaled that they don’t want to enter into this business at all. The final count of federal exchanges won’t be known until after the November presidential election, adding further uncertainty to the issue, which is likely to be mired in litigation for years. No one can even begin to speculate on how this program will run in the event of a Romney/Ryan victory in November.

This complex set of circumstances puts the unenviable task of setting up these exchanges into the hands of the federal government. Without the benefit of any road map, legions of federal officials will be required to set rules for widely divergent market settings, all in the face of underground resistance from many state officials who would rather see the ACA repealed. To cloud matters even further, through a glitch in the ACA’s statutory language, it appears that individual enrollees in the federal plan are not eligible for the federal subsidy, which can only complicate the administration of the law.

A similar pall of confusion is cast over the state-created exchanges, albeit for different reasons. Most state insurance offices are smallish operations that tend to operate on an informal basis in collaboration with their own elected officials. They have no experience in running virtually all of their decisions through the Department of Health and Human Services and the other federal agencies that, by law, oversee their operations.

All state created exchanges operate under federal oversight, which puts cooperative states in the impossible position of not being able to proceed until they receive federal guidance or approval for key steps. Yet that approval may be long in coming because federal officials, out of a commendable sense of prudence, don’t want to commit themselves to a decision for one state without knowing how it will play out with other state exchanges, who have yet to address similar problems.

Read the rest here.

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