How the bill will evolve

by on March 23, 2010 at 12:04 pm in Medicine | Permalink

Many Americans will receive subsidies for insurance, from what I understand roughly in the range of 6k to 12k.  Many other Americans — namely those who already have health insurance — will not receive direct subsidies of this nature.  Yet the subsidy-receiving and non-subsidy-receiving Americans will very often belong to the same income classes.

This disparity does not bother me personally (I have other worries about the subsidies), but I believe it will be very unpopular once it is publicly understood.  One way or another, the "firewall" between the exchanges and the employer-supplied system will break down.  Some people will want to spread the subsidies, others will want to limit them.  Yet the former is budgetarily problematic and the latter will be politically difficult.

A second and related issue is that the differences in reimbursement rates — across private insurance, Medicare and Medicaid (highest to lowest) — will become a more pressing issue.  For one thing, Medicaid patients will be crowded out by those buying private insurance on the exchanges, plus they will be crowded out by the growing number of Medicaid (and Medicare) patients.  There will be pressure to fix this problem and the difference in rates will lead to growing supplier gaming, queues, quality differentials, and so on.

Over time, reimbursement rates across programs (insurance subsidies, Medicare, Medicaid) will converge to an increasing degree.  Subsidies will be increasingly determined by income class rather than previous insurance history. 

In the limiting case (I'm not suggesting we will get there), everyone will receive means-tested subsidized vouchers for regulated private insurance.  In this strange way, Medicare and Medicaid could end up partially privatized and Ezekiel Emanuel — a voucher advocate — will end up being more influential than his brother Rahm.  We will have to live with the problems of means-testing to a higher degree than today, but we will have something closer to a unified system, as do most other countries with universal coverage.  There will be political pressure for compulsory health care savings, as they have in Singapore, to lower costs of finance.

It would be good if such vouchers could evolve in the direction of emphasizing catastrophic care and eventually they will have to.

Massive pressure will be put on such vouchers if either health care consumes 30-40 percent of gdp or income inequality continues to rise.  In the former case, subsidies become increasingly expensive and involve extraordinarily high implicit marginal tax rates (earn more, your subsidy declines in value).  In the latter case, it becomes increasingly difficult to ensure "near-equal" levels of health care access at feasible subsidy levels.  Those pressure points are not unique to the Obama bill, but they become especially critical under the evolutionary scenario I am outlining.  Perhaps we would give up the ideal of near-equal access, but that day is a few decades away.

Addendum: Here is Bryan Caplan's scenario, which means the bill will not work; my above post is assuming that problem is solved by raising the penalty.  I am reading long lists of why the bill is so good but few proponents are analyzing that problem. 

Commenterlein March 23, 2010 at 12:29 pm

Excellent post.

[There is a mistake in the third paragraph – replace “Medicaid” by “Medicare”.]

2999 March 23, 2010 at 12:39 pm

Interesting. What will the impact on medical innovations/new technologies be?

tg March 23, 2010 at 12:48 pm

Caplan writes that due to the asymptotic nature of the employer penalty, maxing at $2,000 per employee, post-recession jobs are less likely to offer health insurance. As a civil engineer who would prefer to negotiate for results-only work and contract for piecemeal projects, this could ultimately work in my favor (and for efficient labor generally). I’ll gladly take care of all my benefits (health, vacation, retirement) if my employer lets me work when and where I want.

Brian J March 23, 2010 at 1:08 pm

“Many Americans will receive subsidies for insurance, from what I understand roughly in the range of 6k to 12k. Many other Americans — namely those who already have health insurance — will not receive direct subsidies of this nature. Yet the subsidy-receiving and non-subsidy-receiving Americans will very often belong to the same income classes.

This disparity does not bother me personally (I have other worries about the subsidies), but I believe it will be very unpopular once it is publicly understood.”

How are you going to know who is receiving a subsidy and who isn’t receiving one?

Andrew March 23, 2010 at 1:17 pm

I had a similar thought.

In some cases a don’t-ask-don’t-tell ignorance helps a system. For example, noone knows who is getting paid (and how much) and who isn’t in my grad school department. However, in other situation it undermines it. You will know if you aren’t receiving a subsidy. Many will assume everyone else is.

You will also know if you are being penalized and still being responsible through alternative provision for yourself and your family. Increasing this inherent unfairness is not going to “fix” the problem and you can’t charge the people who aren’t insuring enough to pay for their insurance. And you won’t be able to charge the high-earners enough to make them feel good about being herded into the Malthusian emergency room.

E. Barandiaran March 23, 2010 at 1:33 pm

Sorry, Tyler, but you insist on “mear fuera del tarro”. You replace an analysis of Obamacare with your outline of an evolutionary scenario. From your first two paragraphs –both related to Obamacare– you conclude without argument that rates will converge, subsidies will be determined by income class, means-tested vouchers will be received by everyone, and results will not be good leading to the abandonment of the ideal of “near-equal” access. In sum, Obamacare is too costly as a means to achieve this ideal. To say the least, your conclusion is incomplete because it can be argued that the ideal can be achieved by reducing substantially the quality of service. In Argentina, we know a lot about how to do this trick.

And as a footnote you mention that don’t worry the penalty that may prevent Obamacare to meet your evolutionary fate is going to be raised. In other words, let us replay the game.

tharanga March 23, 2010 at 1:53 pm

The “non-subsidy-receiving Americans” have been receiving subsidies the entire time; they just haven’t known it. Even after McCain campaigned on ending the tax exclusion, I don’t think it’s widely recognised.

As for comparing income classes: in this context, one has to add the employer-provided benefits to the total compensation. If I’m self-employed and making $50k, and my brother is employed by a large company that pays 70% of his insurance premium, and provides access to a plan and price that I could never buy into as an individual, we aren’t exactly comparable.

In the long run, Americans will have to decide whether they want insurance to be closely related to their employer, or not. By starting the exchanges, this bill does start us down the path towards that discussion. So in some sense, I agree this could eventually lead to a tipping point of some sort. McCain or Wyden would have moved that tipping point up to the current discussion.

Lord March 23, 2010 at 2:14 pm

I wouldn’t worry about the low penalty. That would just move this towards being catastrophic coverage which would also be an improvement.

Alan Gunn March 23, 2010 at 2:16 pm

Even before this was adopted, implicit marginal rates on low-income workers with kids were about 100% over a pretty broad range of incomes. Are they even higher now? Have we finally reached the stage where it may pay workers to ask for pay cuts?

Andrew March 23, 2010 at 2:29 pm

Except when the government refuses to pay for new treatments it will be a great thing called evidence-based medicine.

thehova March 23, 2010 at 2:48 pm

Most people have employer provided insurance and it’s in their interest to see the penalty increased.

So I’d imagine once people realize that, congress will have no problem increasing the penalty.

Bill Harshaw March 23, 2010 at 2:58 pm

If…” health care consumes 30-40 percent of gdp “? Doesn’t basic economics indicate a limit at some point? After all higher wages for health care providers based on the increased demand financed by subsidies should end up increasing the supply and reducing their wages?

thehova March 23, 2010 at 3:35 pm

As noted above, larger employers have a lot of purchasing power which drives down insurance rates.

I don’t think the competition of the exchange markets will drive down the rates in such a strong manner….right????

R Johnson March 23, 2010 at 3:58 pm

Yet another example of how fame has made Tyler boring…

Colleen7 March 23, 2010 at 4:50 pm

Could this disparity be cleared up if they just added a line to your W2 that showed how much the government subsides your health plan? That way everyone sees how much they are benefiting. The problem now is that most of the people getting government subsidies through their health insurance look down on the people that get their subsidies directly through exchanges as though they are the freeloaders. They think they are “earning everything they get” when they are taking government money as well, just in a different format.

Andrew March 23, 2010 at 5:02 pm

It’s an interesting question, but let’s get this straight. You are not taking government money when you are being taxed.

Andrew March 23, 2010 at 5:08 pm

Oh, and by the way, they basically even eliminated the tax on the premium insurance plans.

It’s a shame this is over because I would have liked to see the new rationale from the shills.

Al Brown March 23, 2010 at 6:15 pm

Subsidies have always distorted health care decision making and more subsidies will increase that problem.

I have to wonder what the true cost of this tax code is. Just trying to figure how much you’re getting screwed is enormously difficult. And there seem to be a fair number of people who think they’re better off when they’re actually not.

Given the economic realities that we will one day be forced to accept, I have to wonder how much longer this system can continue without major, major problems. They just keep stuffing things under the rug and then run out and spend more on the next boondoggle.

thehova March 23, 2010 at 6:51 pm

well, this post actually makes me feel better about reform.

HCR will, in the long term, separate employment and insurance. It will provide a mechanism to drive down costs (I worry about that…but it’s necessary).

JonF March 23, 2010 at 8:57 pm

Re: Many other Americans — namely those who already have health insurance — will not receive direct subsidies of this nature.

Huh? The vast majority of them (myself included) are already receiving subsidies, but from their employers, facilitated by a major tax break. That’s not going to change: the majority of people will continue to be subsidized either by the government or by their workplace with an assist from the government. And the latter subsidy applies all the way to the top of the income scale.

mulp March 23, 2010 at 9:14 pm

You can’t tell me that I’m getting my Social Security tax benefit as part of my pay.

By that logic, you get no benefit from your auto insurance because pays the costs of other people’s accidents. You get no benefit from your homeowners insurance because it pays for fire, storm, or accidents on the property of other homeowners.

For nearly three decades I got nothing from paying for homeowners insurance, which the bank holding the mortgages on my houses mandated I pay.

Likewise, I’ve paid disability and dependent insurance for as long as I’ve worked for taxable income, but guess what, I haven’t collected because I haven’t become disabled nor have I died. On the other hand, I’ve known a number of my coworkers, all young professional computer engineers who have become disabled or died, leaving behind dependent children. A number of them were athletes. I remember the shock we had when one died on one of his regular runs.

Andrew and others seem to think these people chose to die or get crammed by a car running a red light or the other misfortunes, but the lesson I took was “shit happens” to everyone at any time.

Insurance is a bet we make and hope to lose.

Unless you are a Wall Street type and you can buy insurance on the disaster you are bringing down on other people….

m March 23, 2010 at 9:21 pm

I read Yglesias earlier today [End of Big Government Liberalism] as saying the health care bill heralds the long-awaited end of history. I’ve never understood the health care debate but I like ideas like this. US ‘liberals’ will have achieved their primary historical or most expensive goal, and the more right-wing leftists will be emboldened to make peace with the right on issues like trade. Fukuyama was right, except that we were just waiting to clear a wee bump on the road to ideological convergence.(?)

mulp March 23, 2010 at 10:17 pm

Could this disparity be cleared up if they just added a line to your W2 that showed how much the government subsides your health plan?

That begins next year as per the health reform bill; all you need to do is compute what the tax you saved on your health benefit cost, listed on your 2011 W-2, at your marginal tax rate, plus FICA, and any state and local income taxes.

smack March 23, 2010 at 11:20 pm

if the plan migrates to the point where the government is subsidizing everyone and employers are doing nothing then why the hell would the government spend its money on insurance instead of spending its money on care?

Doug March 24, 2010 at 3:07 am

“The current bill has catastrophic insurance as a choice among its plans. I am guessing that, depending upon the limits, it may cost close to the $2,000 fine. In that case, it would make sense to opt for that rather than pay a fine.”

It does? What section is that in if you don’t mind?

Floccina March 24, 2010 at 9:14 am

“There will be subsidized health insurance for families of four earning up to $88,200 a year, a ceiling certain to be raised, repeatedly.” George F. Will

“When you subsidize everyone you subsidize no one. You cannot subsidize the middle class. ” Me

Andrew March 24, 2010 at 4:03 pm

“When you subsidize everyone you subsidize no one. You cannot subsidize the middle class. ”

Perhaps you can’t subsidize them, but at least you can justify controlling their lives since you are giving them nominal cash.

drive a man wild March 25, 2010 at 3:07 am

I hope this health care reform will be beneficial for Americans because majority of people are in oppose of this but why they don’t understand that this bill will help small business owners struggling to keep their doors open and who have to buy their own individual policies.

Ben Johnson August 23, 2010 at 1:14 am

I think, This is not a bad idea, but not necessarily easy to calculate. But at least, W2 or pay stub, they may well show how much the employer pays for your premium. If people come to see it as part of their total compensation, then they will really see how expensive their insurance.

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