Sunday, December 8, 2013

Obamacare: The Policy and the Politics

Note: A number of readers have suggested that I enlarge my topical universe to public policy matters beyond finance: I will attempt to comply. Let me know if you think this is a bad idea.

On a policy level, there are things to like about Obamacare: it heads in a number of helpful directions.
The current healthcare system has many flaws: (1) the consumer has little incentive to limit his consumption; (2) the employer model does not work well in a fluid labor market; (3) the individual insurance market is expensive and uncompetitive; (4) there is a large cohort of low-income people who need a subsidy to afford health insurance; and (5) there are many unwell people who cannot obtain affordable health insurance. Obamacare addresses each of these problems.
Better consumer incentives
Obamacare will push people into plans with high deductibles and copays. This will provide the consumer with strong incentives to shop on the basis of price, and will force providers to disclose and compete on pricing. It will also limit excessive healthcare consumption.
Moving away from the employer model
There is no reason why employer-provided health insurance is not taxed as regular income, nor is there a good reason why affordable insurance should be linked to employment. Although ACA does not end the tax-free treatment of employer insurance, it will lead many employers to push people off of group plans and into the exchanges, where they can buy portable policies. Over time, this will reduce the cohort who obtain insurance through their employers, and will make individual insurance more affordable, and increasingly the norm. (The tax treatment of health insurance and the employer linkage will have to be addressed in the future--the distant future.)
Lower cost of individual insurance
The larger the number of people shopping for individual insurance, the larger the risk pool and thus the lower the cost. The exchanges are intended to force  the insurance companies to compete on price, which should also force providers to compete on price. (There should be a national health insurance market, but that was a bridge too far for the insurance industry, which desires multiple barriers to entry.)
The uninsured
There are many people who need but can’t afford individual insurance. The premium subsidies will help.
The sick
By ending underwriting on the basis of expected claims, Obamacare will make affordable insurance available to those who are already sick. This is really a subsidy not insurance but the cost of sickness should be socialized since it is not a choice.

Over time, these policies should have the benefits of making healthcare cheaper and more available. On balance, I think that Obamacare is good policy, so long as one believes that healthcare and health insurance fall within or should fall within the federal penumbra. 
I take the legal view that the founding compact was explicitly intended to prevent a federal Leviathan; and I take the policy view that the Constitution is correct, in that the European social model is bad policy on a number of levels: incentive structure; equity; private property; national character; economic growth; the benefits of free market competition. That’s for another blog. Now to the politics of Obamacare.

The central political debate today between left and right is about the size and scope of the welfare state: do we want the US to adopt the European “social model”, or do we respect the idea of limited government?  Democrats desire the European social model; Republicans want limited government. Obamacare is an expansion of the social welfare state, and thus the latest battle in this 100 year-old war.
Crudely put, the European social model creates political constituencies with subsidies, such that voters receiving such subsidies will vote for the party that dispenses them (see: France). Politically, Obamacare was conceived as another such subsidy: a way to add millions of new government dependents, and thus create another constituency for the Democratic Party.
The Democrats told middle class voters that Obamacare would reduce their healthcare costs and would be paid for by others: insurance companies, doctors, hospitals, and “the rich”. The Democrats saw saw Obamacare attracting many new Democratic voters--and so did the GOP. They were both wrong.

We now know that both parties got it completely backwards. It was already accepted dogma that Social Security and Medicare reform were politically toxic. It should also have been obvious that healthcare is another “third rail”: my premium, my deductible, my copay, my policy, my doctor, my hospital, my children. The Democrats are slowly coming to the realization that changing voters’ healthcare arrangements is bad politics, even if it is “good for them” in the long run.
In  retrospect, it is important to remember that ~85% of Americans were satisfied with their healthcare arrangements, and that most of Obamacare’s would-be beneficiaries were already within the Democratic demographic. Even had the law been rolled out perfectly, Obamacare would in all likelihood have created few new Democrats, and many new Republicans. The botched website and the 5 million cancellations served to focus attention on the law and its larger implications for middle class families.
For any healthy voter who makes more than the subsidy cut-off, Obamacare will generally make health insurance more expensive (higher premiums, copays and deductibles). The electoral demographic which is going to have to pay more is not just the rich, but also the middle class, and the middle class has begun to discover this fact. For example, Anthem Blue Cross in California received a recent letter from a woman complaining about a 50% premium hike who wrote, “I was all for Obamacare until I found out I was paying for it”. She and many other voters thought Obamacare would be free to them, like an EBT card.

Giving voters free entitlements is politically popular. By contrast, cancelling policies, forcing employers to drop health insurance, raising premiums and deductibles, limiting doctors and hospitals, forcing people to renew their policies under a government template: these are politically unpopular. That should have been readily anticipated (by both parties) when the law was being written.
Today, many are asking how President Obama and the rest of his party could have stated repeatedly that ACA would not cause those who like their insurance policies to lose them. I don’t think that this was a conscious lie on anyone’s part; I think rather that the Democrats in Congress and the White House didn't understand the full implications the law: they had to implement it to find out what's in it. That was political negligence: they paid too much attention to getting it passed, and too little attention to its practical impact on middle class families. They also chose to pass the law without a single Republican vote, which means they now own it politically.
Juan Williams (FNC) was recently  invited to the West Wing to discuss the Obamacare rollout. After the meeting he said: “What you hear from these senior officials is that they wish the insurance companies hadn't sent out the cancellation notices.” In other words, the senior officials were not aware that this was going to happen. That was a fatal blunder, particularly because so many Democratic congressmen and senators were told to repeat this falsehood. They got no heads up about the five million cancellations, which is why they (and Obama) are so angry at the policy munchkins.
As it has turned out in practice, everything fabulous that Nancy Pelosi expected and everything awful that Ted Cruz feared has not happened. Instead of creating a new constituency for the Democrats, Obamacare has revived the electoral prospects of the GOP.

I would not conclude that the fate of Obamacare represents a shift by the middle class voter away from new entitlements. So long as they are believed to be "free", voters will take them. What Obamacare shows is that any attempt to reform something as personal as healthcare is dangerous, as Bill and Hillary Clinton learned to their detriment in 1994. The political lesson of HillaryCare was not “Keep at it”; it was “Don’t go there.”

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