Going, Going, Gone…The arguments that justified Obama­care are already being discredited

Yuval Levin:

In the continuing debate over Obamacare, both the law’s champions and its critics are now focused largely on the mechanics of implementation. This is understandable. The insurance exchanges are supposed to launch October 1, most of the law’s other major provisions take effect January 1, and every week seems to bring fresh news of some delay or dysfunction for critics to highlight and defenders to justify or dismiss.

The technological architecture of the exchanges appears to be behind schedule and below expectations, and concerns about fraud and identity theft are especially grave. Some provisions of the law (most notably the employer mandate, some reporting requirements, and verification of eligibility for subsidies) have been found too difficult to implement and have been put off, at least temporarily, while others (like the CLASS long-term-care insurance scheme) have been found unworkable and abandoned altogether. Some major insurers have opted out of offering coverage in some states as a result of excessive regulatory burdens or price controls. Early premium data from some states suggest huge price spikes for key portions of the population, while employment data suggest the economic incentives created by the law may be undermining hiring and growth.

From here on, the fate of Obamacare obviously hinges on how it works out in practice, so it makes sense to pay close attention to such early indications. But lost in the commotion over these practical setbacks have been two important shifts in the underlying argument for Obamacare—one about how to build risk pools and the other about what insurance is for—that could prove at least as significant over time. Both have involved meaningful, if perhaps not fully intentional, concessions on the part of some of Obamacare’s defenders as they struggle to respond to unwelcome news; both point to the incoherence of Obamacare’s design and to the shape of a compelling alternative.

The health care debate is plainly far from over, and it has changed more this year than a cursory reading of the news about implementation would suggest.

Cost and Value

The first shift has occurred as the result of a chain of defensive arguments surrounding the early data about premium costs in the state exchanges that are supposed to open this fall. Those data have suggested that, in many states, some consumers—especially younger and healthier ones—will see major price increases in the individual market next year.

For instance, comparing detailed data about 2013 premiums compiled by the Government Accountability Office and preliminary 2014 exchange-premium data made available by eight states so far, Investor’s Business Daily reporter John Merline found earlier this month that “the average price for the lowest-cost Obamacare ‘bronze’ plan in eight states is 122 percent higher than the cheapest plan currently available in those states.” Premiums vary from state to state, and different analysts break down the numbers available so far in different ways, but all agree that for people who now qualify for the cheapest plans on the individual market, next year will bring far higher costs. That kind of price shock could make it very difficult to attract the sorts of young and healthy insurance buyers the new system will need to sustain itself.

Some defenders of Obamacare have sought simply to ignore or deny this problem. The president himself, in an August 9 news conference, said that people who are now uninsured are “going to be able to go on a website or call up a call center and sign up for affordable quality health insurance at a significantly cheaper rate than what they can get right now on the individual market.” But for a great many people, that will plainly not be the case.

Many other Obamacare defenders have responded to the premium figures by pointing to the fact that some people will qualify for subsidies in the new exchanges, which will effectively function as discounts on insurance premiums, provided on a means-tested sliding scale. But the emerging pattern of premium spikes suggests that for many young and healthy Americans, the subsidies will not be enough to make up for next year’s premium increases.

In January, a study by Kurt Giesa and Chris Carlson in the magazine of the American Academy of Actuaries estimated that 80 percent of Americans below the age of 30 in the individual market would find themselves with higher premiums next year than this year, even after subsidies. Early data from the states suggest this estimate may not be far off the mark. As the Manhattan Institute’s Avik Roy has found, in California, “if you’re a healthy, non-smoking 25-year-old, and you make more than $18,558, your health insurance will cost more under Obamacare—possibly a lot more.” That means more than 90 percent of such younger Californians who are eligible for subsidies would still pay more after those subsidies next year than they would pay for coverage now.

Obamacare’s defenders tend to respond to such figures by arguing that it would mostly be such relatively young and healthy people who faced higher costs even after subsidies, while the new system would surely reduce costs for older and sicker Americans—especially those with pre-existing conditions who now find it difficult to obtain any affordable coverage. As the Washington Post’s Ezra Klein put it on MSNBC in June, “at its core, health insurance, what we’re doing here, is redistributing from the healthy to the sick and from the young to the old, and we are putting in big subsidies to help people who are poor.” To focus on the higher costs for the young and healthy, such Obamacare champions contend, is to neglect the problems of the sick.

Clearly, one of the many things Obamacare is designed to do is to make it cheaper and easier for sicker and older people to get health insurance. This is a worthy and important goal. Any meaningful reform of our health care system would have to offer a serious solution to the plight of people with preexisting conditions, and Obamacare’s supporters are right to insist that this is generally a more significant moral and social problem than the plight of the young and healthy.

But consider the solution they propose. Obamacare’s “redistributing from the healthy to the sick and from the young to the old” happens for the most part not through government taxing and spending, or through the sorts of subsidized high-risk pool arrangements that conservatives propose, but through a redesigned insurance system in which the cost of risk is massively redistributed. The young and healthy are expected to enable that system to function in two ways: They will pay significantly higher rates than they do now, and more of them will buy coverage. But there is an obvious contradiction between these two expectations. If the cost of something goes up, why would more people buy it?

In fact, the problem is even worse than that. Obamacare doesn’t just increase the cost of coverage for the young and healthy, it also reduces the value of insurance for them. The law’s insurance rules mean that a sick person can buy insurance for essentially the same price as a healthy person, so healthy people know that if they get sick they will never be more than one enrollment period away from being able to buy coverage for the same price they would pay while they are healthy. That doesn’t mean they will always be able to get coverage as soon as they need it (if they become sick or injured outside the annual enrollment period, they will have to wait, perhaps even a few months, until the next one), but it still means a major health setback while uninsured will involve far less risk than it does today.

Insurance exists to offer protection against the risk of a medical calamity becoming a financial calamity, and part of its appeal to the healthy has always been that waiting to buy coverage means running the risk that poor health will make such coverage unaffordable later. Coverage rules that dramatically reduce that risk for people who are healthy therefore make insurance less valuable for them.

So young and healthy people who now choose not to buy even the cheapest available insurance plans are expected next year to buy insurance that is both more expensive and less valuable, and the entire system depends on their choosing to do so. To focus on the financial incentives they will confront is not to neglect the system’s redistributive purpose—if the young and healthy stay out, older and sicker Americans will face higher costs and less access to coverage, and the system will fail by its defenders’ own standards. Its mistreatment of the young and healthy is therefore actually a huge problem for the law, and points to the core of the new system’s economic irrationality, or rather to its failure to contend with how people understand their economic options.

In theory, it has always been fairly stupid for young and healthy people not to buy insurance: Coverage has been very cheap for them in much of the country, and the risk of unexpected health costs—which would both deplete their meager resources and make it much tougher for them to get insurance in the future—while statistically low, is financially grave and serious. Low-cost protection against that risk would be worthwhile for most. But in practice, when weighing their particular risks and finances, a great many young and healthy people have nonetheless opted against it. That is a major part of the reason why two-thirds of the uninsured are under the age of 40.

Read more