There’s a health policy joke that MIT’s Jon Gruber likes to tell: A health economist dies and goes to heaven. When he gets there, he is greeted by St. Peter and told that he can ask God one question. The economist asks, “Will there ever be universal health insurance coverage in the United States?” God replies, “Yes, but not in my lifetime.”
Well, it looks like the good professor is going to have to find a new opener for his health care speeches. On Tuesday, March 23, against the prognostications of many (including myself), President Obama signed into law the Patient Protection and Affordable Care Act. When the act’s major provisions go into effect in 2014, universal coverage (or something very close to it) will become a reality in the U.S.
The core of the reform is the individual mandate. Four years from now, each citizen will be required to purchase insurance or be penalized with a hefty fine. Combined with a system of subsidies for poorer Americans and a ban on rate discrimination by insurers (with exceptions for age and geographical location), this reform will end the problem of adverse selection in health insurance markets and finally make it possible for insurers to offer actuarially fair premiums without losing money.
Most Americans — those covered by employer-provided insurance or already under a mandate (like Massachusetts) — will not notice the difference. They already enjoy the large risk pools that a mandate would provide, and a small payroll tax increase notwithstanding, will probably go about their lives as usual. But for the unemployed, self-employed, those who own or work for small businesses, and those who are otherwise unable to access employer pools, there will finally be a functioning free market from which to purchase health insurance.
The robust non-group market that this bill provides will better allow millions to insure themselves against one of the greatest financial risks that the average citizen faces and will remove a significant barrier to job switching. As a result, our economy will be more efficient and dynamic, and offer greater horizontal equality. Finally, Americans will no longer be stuck to their jobs or bankrupted due to health conditions.
The act is unlikely to “bend the curve” of health care costs, but not due to lack of trying. The act adopts a large range of measures in an attempt to rein in our rising health care costs, but curbing health care costs is a difficult issue without a simple solution even if political considerations were stripped out of the debate.
The absence of a public option should not be of concern. Lack of competition is not a defining issue in insurance markets, and accordingly the Congressional Budget Office has estimated the impact of a public option to be negligible. Furthermore, a public option would have left a back door open for government to take over the provision of health insurance by running the option at a loss to drive out private insurers. By keeping it out, we have preserved our free market system and averted creating a source of regulatory risk for private insurers.
Although the act’s passage will provide a small bump to Democratic approval ratings in the short term, do not expect the effect to last long. Between now and 2014, the act does little, and what it does do will likely be to the detriment of Democratic re-election chances. There are three primary reasons why the act will remain unpopular.
First, Democrats will take their lumps for the favorable CBO score they obtained. When health care bills were first being floated, the CBO scored them as adding at least $900 billion to the national debt over a ten-year window. The bill that passed was scored at roughly $150 billion in the black over that same window. Deficit-fighting is not a free lunch, and Democrats took their pound of flesh out of seniors to reach budget neutrality. Some $500 billion will be cut from Medicare over the next decade.
This cut may exacerbate an existing problem, namely that of doctors and hospitals refusing to serve public program enrollees due to low rates of remuneration. To the act’s credit, most of this reduction will come in the form of cuts to wasteful spending and overly generous procedure reimbursements, which will only affect the bottom lines of hospitals and private practices indirectly as they can be somewhat offset by reductions in the number of tests and procedures performed (with hopefully little impact on quality of care provided). However, profits from wasteful spending are still profits, and it remains that on the net, hospitals and doctors will find their revenue tightened. Each senior that loses their doctor or otherwise finds their health care changed as a result will likely be a Republican vote in the next election; in particular, keep an eye on the ten million subscribers to Medicare Advantage.
Furthermore, during the debate, Republicans were able to successfully link the “doc fix,” a perennial vote to avert a large cut to doctor reimbursement rates that has been programmed into the Medicare program, to health care reform by arguing that savings wrung out of Medicare should be used to permanently solve the problem of doctor reimbursement. As a consequence, Democrats will be open to fresh charges of either harming seniors or growing the deficit every time the issue comes up.
Secondly, as strong as this act is, there is one area Democrats sacrificed their rationality to sentimentality. Throughout the debate, they referenced the “three-legged stool” of health insurance reform: You couldn’t ban discrimination based upon pre-existing conditions without a mandate, and you couldn’t in good conscience enact a mandate without subsidizing those who cannot afford health insurance. They pointed out, quite rightly, that ending discrimination based upon pre-existing conditions without a mandate was a recipe for an insurance death spiral: Of the six states that had attempted such a move, all six are now among the eight most expensive insurance markets in the country.
And yet, if the bill’s language is interpreted as the Obama administration intended, starting immediately insurers will be unable to charge different rates on children with pre-existing conditions. As a consequence, between now and 2014, we should expect a rapid deterioration of the non-group family insurance market. The reaction from parents without mentally or physically handicapped children will be vicious.
Lastly, the experience of individual mandates in Massachusetts should provide some illumination on the act’s likely effects. Although coverage in this state has skyrocketed, insurance premiums have remained among the highest in the nation and continue to rise. Critics has seized upon this as evidence that the mandate is not working as advertised — all other things equal, insurance mandates should lower premiums, not raise them. The critics are wrong, but the truth is not much prettier. Despite fixing the market failure, Massachusetts insurance costs are still dominated by underlying health care costs. What benefits have been provided in terms of reduced premiums have been drowned out by the noisy (and growing) health care costs of which the premiums are derivative.
If Democrats are expecting voters to sit and listen to a differences-in-differences statistical analysis of how health care reform actually helped them even though their premiums just went up, then they really have ignored the lessons from the stimulus package. “Things are bad but not as bad as they would have been if we had done nothing” is a thoroughly unconvincing argument to the layman, whether applied to unemployment or health care. Most of what the act achieves will not be useful campaign fodder for anyone but those who voted no.
In short, Democrats did the hard, but right thing. Although the act is (and will likely remain) markedly unpopular, it will correct a large and persistent market failure and ultimately lead to a higher standard of living for all. As ugly as the process was, it worked. In the partisan environment that we live in, when so many of our representatives are too craven to act as trustees, not tribunes, of the public interest, this is not just a victory for health care reform, this is a victory for our American system of democracy. Finally, the system works.