Monday, October 28, 2013

Peter Schiff On the Real Shock of Obamacare

The Website is Fixable, Obamacare Isn't
By Peter Schiff

Since Obamacare made its debut, discussions have focused on Ted Cruz' efforts to defund the law and the shockingly bad functionality of the Website itself. Fortunately for Obama, polling indicates that Senator Cruz has lost, at least for now, the battle for hearts and minds. The President has not been nearly so lucky on the technological front. If current trends continue, the rollout may go down as the worst major product launch in history. But given the government's enormous resources, it's safe to say that the site itself will ultimately be fixed. But when it is finally up and running, the plan's many deeper, and more intractable, flaws will come into focus. That's when the fun will really begin.

Put simply the program is built on a mountain of false assumptions and is covered by a terrain of unanticipated incentives. Any cleared-eyed observer should conclude that it is perfectly designed to raise the costs of care and wreck the federal budget. However, like just about every other complicated problem that bedevils the nation, the public has become far too caught up in the politics and has ignored the horrific details.

Most people agree that the plan can only remain solvent if enough young and healthy people ("the invincibles") agree to sign up. They are the ones who are likely to pay more into the system than they take out. But now that insurance coverage is guaranteed to anyone at any time (at the same price -- even after they have gotten sick or injured), the only incentive for the invincibles to sign up will be to avoid the penalty (I think we can dismiss "civic duty" as an effective motivator). But as I detailed in a column last year, Justice John Roberts declared the law to be constitutional only because the penalties are far too low to actually compel behavior. Once young healthy people understand that they can save money by dropping insurance, they will. No amount of slick, cheerful TV ads will change that.

The good news for Obama is that the plan will get a large percentage of young people covered. The bad news is that many of those that do sign up will not help the bottom line. The youngest and healthiest of the group are under 26 and will now be able to stay on their parents' plans. This group will add nothing to the pool of premiums (but will use services). Among those older than 26, the ones who qualify for the largest subsidies will be more inclined to sign up. The way the plan is structured, individuals and families earning between 1.38 and 4 times the Federal poverty level will qualify for a subsidy. The government subsidy covers almost the entire premium for those near the bottom of that spectrum. These individuals will definitely sign up. But just like those under 26, they will be a net drain on the system.

From my estimations, private premium contributions don't surpass the government contributions until an individual or a family makes about 2.5 times the poverty level (which equates to about $28,000 for an individual and $55,000 for a family of 4). Since a very large percentage of young people earn less than that, many will sign up to get the benefit. But these people will likely be net drains to the system as well. Their total premiums paid may be more than the services they receive, but that may not be true when you look only at what they actually pay in.

Young women, who plan on using maternity care, may also be motivated. But they can cost more than they bring in. The real cash cows are the young men, not covered by parents, who make more than 4 times the poverty level. But their only incentive to sign up is to avoid the penalty. But at just one percent of income, the penalty just won't be a deciding factor. Most young men will save money by dropping insurance, paying the tax and incidental doctor visits out of pocket, and then only adding the insurance if and when something really bad happens.

The subsidies in Obamacare kick in and kick out very abruptly. People finding themselves on the wrong side of a dividing line will face difficult choices that hurt the plan's finances. The San Francisco Chronicle recently profiled a California couple in their early 60s making about $64,000 per year who would be able to qualify for a $14,000 annual subsidy by reducing their income by $2,000 dollars per year. It's easy to imagine such individuals reducing their hours or their pay to qualify. Of course this type of behavior modification has not been anticipated by preparing premium and budget projections. It is no accident that the government has offered no serious projections about how much in healthcare subsidies it should expect to pay out over the coming years.

In truth, the premium levels themselves are based on nothing but assumptions. It is true that those lucky enough to actually get through the website's technological maze have seen (unsubsidized) premiums that are lower than similarly constituted plans in the private market. But those low prices are only possible because no one knows what the new pool of insurance holders will look like. They assume it will look like the pools that already exist. But they won't.

Of course, the incentives for the young and healthy to drop out, and for the sick, old and the heavily subsidized to drop in will mean that the post-Obamacare pool will have very different actuarial arithmetic than the current pools. But all of that is as yet unknown. The numbers we see now were put there just to make us feel good. But once the economics kicks in, look for them to rise quickly.

It is also ironic that high-deductible, catastrophic plans are precisely what young people should be buying in the first place. They are inexpensive because they provide coverage for unlikely, but expensive, events. Routine care is best paid for out-of-pocket by value conscious consumers. But Obamacare outlaws these plans, in favor of what amounts to prepaid medical treatment that shifts the cost of services to taxpayers. In such a system, patients have no incentive to contain costs. Since the biggest factor driving health care costs higher in the first place has been the over use of insurance that results from government-provided tax incentives, and the lack of cost accountability that results from a third-party payer system, Obamacare will bend the cost curve even higher. The fact that Obamacare does nothing to rein in costs while providing an open-ended insurance subsidy may be good news for hospitals and insurance companies, but it's bad news for taxpayers, on whom this increased burden will ultimately fall.

The real shock of Obamacare is not the unbelievable ineptitude in which it was launched, but the naiveté in which it was designed. The only thing worse than the product launch may be the product itself. But unlike other major entitlements, like Social Security and Medicare, that took years to produce red ink that was far in excess of original assumptions, the financial shortfalls in Obamacare should show up very quickly. Republicans should not miss that opportunity to destroy this monster that threatens us all.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.


  1. Means-testing, privatizing and decentralization to the states does not work. Conservatives want to "reform" Medicare and Social Security by means-testing, privatizing and decentralizing these programs. Conservatives paint themselves into a corner when criticizing Obamacare.

    1. These programs should be just plain outright abolished.

    2. this is warm piss being served up as the fanciest french Champagne. its not a conservative thing or a liberal thing its a government thing as both sides agree they would rather get the government out of the health care business by kicking the sick and old out and spending all that moolah on things that interested the people who had given vast amounts in campaign contributions.The democrats had to do it because if the republicans had done it ...well the plan came out of Heritage a long time ago and hadn't gone anywhere because putting up the medicare age was electoral suicide.

    3. Jerry, your argument does not work to convince, annoy, or otherwise animate anyone. Your starting premise is unfounded. You have offered no reason for anyone to believe your premise that "Means-testing, privatizing and decentralization to the states does not work"

  2. Besides tax benefits to overuse insurance, Peter forgets the one factor truly drives higher costs for patients = FEE FOR SERVICE. Doctors have little incentive to lower costs and improve quality.

    1. In a competitive, unregulated, and open market, fee for service is most definitively a driver of lower costs and higher quality (which is why the AMA does not oppose the idea of regulation, just some of the particulars in how it's been implemented over the past 70 years).

      Fee for service fails both of Anonymous 5:15's goals when the fee is establisbed by either a public or private third party payer entity (i.e., CMS or an insurance company) rather than the actual service provider. This rate fixing has not only distorted the market, it led to the disastrous experiment with capitated plans, which resulted in increased (or at least stabilized) revenue for the provider at the expense of quality of care, which in turn begat the whole PCMH racket.

      It's long past time to scrap the whole cobbled together system which only benefits bureaucrats and cronies at the expense of everyone else, and revert to one in which purchasers of medical services are free to negotiate pricing directly with the provider of their choice (even if this provider is not sanctioned by the AMA), in which insurers are able to provide actuarially sound and market-competitive products to provide willing consumers protection against catastrophic health events, and in which hospitals are both accountable to the consumer for their charges and have the flexibility to resume their charitable heritage, rather than be forced to morph into massive 501(c)(3) behemoths or become Medicare-feeding "for-profit" bottom dwellers.

    2. Quoting from the article:

      "It is also ironic that high-deductible, catastrophic plans are precisely what young people should be buying in the first place. They are inexpensive because they provide coverage for unlikely, but expensive, events. Routine care is best paid for out-of-pocket by value conscious consumers. But Obamacare outlaws these plans, in favor of what amounts to prepaid medical treatment that shifts the cost of services to taxpayers. "

      Third-party payer models (the general term covering various insurance plans, "single-payer", etc.) destroy natural market incentives between sellers and buyers of products by siphoning money and resources towards middlemen, and creating new perverse govt-supported incentives. And then the Govt blames rising costs and inefficiences on "market failures".

      Hey, idiot Govt bureaucrats, you destroyed the price system! When are you going to man up and own up for your actions?

  3. IMO, one mistake in the analysis is that healthy young people will sign up and pay what we all would consider a great bargain for health insurance because they will get a large subsidy to offset most of the premium cost. The problem with these plans however, is not the subsidized monthly premium cost, but the deductibles which make it as good as having no insurance for most that qualify for a subsidy. While these people may not have the money smarts of a hedge fund manger, they certainly know a bad deal when they see one. Why would they throw even $50/month away on something they do not have the financial means to use. Oh,and if the control freak progressives that created this leviathan think these people are afraid of an IRS penalty, they are in for a rude awakening. They have about as much respect for the IRS as Obama does for the Constitution.

    1. Indeed. From what I understand, the IRS's ability to punish nonpayment is much much less than for other taxes. Check with your accountant to be sure, but they can't jail you, add aditional penalties and interest to unpayed ACA taxes, can't levy your bank account. They CAN take out of your tax refund if you are owed one.

      Very different from what they can do for nonpayment of income tax.

    2. They will find a way around it, as always. If there is one thing they are good at (and yet still inefficient), it's murdering and thievery. Perhaps they will assess the penalty FIRST, then apply your tax payments to taxes due AFTER, with the effect of having the penalty converted into tax due rather than a post-tax penalty.

  4. Who gives a rats ass what conservatives think. Libertarians do not want to "reform" anything, they want to eliminate the warfare-welfare state.