What awaits the millions of people who will be dumped from their insurance in two short months?
The stunning failure of the Obamacare launch has two dimensions. The first is the appalling breakdown of HealthCare.gov in processing routine applications. The second and far more ominous development is that private insurers have now dropped their insureds in the individual healthcare market in droves effective January 1, 2014. That problem has no technical fix. The nightmare scenario is that people will be dumped from insurance they like and need before they are able to procure substitute protection. As many 10 million individuals could be caught in this bind before the end of the calendar year.
Today’s Rhetoric of Evasion
In 2009, President Obama often repeated this soothing assurance: “No matter how we reform healthcare, we will keep this promise . . . If you like your healthcare plan, you will be able to keep your healthcare plan. Period. No one will take it away. No matter what.” That across-the-board assurance demonstrated to American public Obama's respect for their private choices. It positioned the plan as providing coverage to the uninsured without disrupting medical coverage for everyone else.
Illustration by Barbara Kelley
It
was, alas, a false promise. From day one, the Affordable Care Act used
its own narrow definition of a healthcare plan so that the tiniest
modification of any coverage, coinsurance, or copay provision, for
example, removed the promised grandfathering protection. It took no
immense foresight to predict that Obama’s ambitious reworking had to
crater. Doubters on this point need only listen to the spirited debate that I had with Judy Feder at the NYU Law Forum on September 18, 2009.The stunning failure of the Obamacare launch has two dimensions. The first is the appalling breakdown of HealthCare.gov in processing routine applications. The second and far more ominous development is that private insurers have now dropped their insureds in the individual healthcare market in droves effective January 1, 2014. That problem has no technical fix. The nightmare scenario is that people will be dumped from insurance they like and need before they are able to procure substitute protection. As many 10 million individuals could be caught in this bind before the end of the calendar year.
Today’s Rhetoric of Evasion
In 2009, President Obama often repeated this soothing assurance: “No matter how we reform healthcare, we will keep this promise . . . If you like your healthcare plan, you will be able to keep your healthcare plan. Period. No one will take it away. No matter what.” That across-the-board assurance demonstrated to American public Obama's respect for their private choices. It positioned the plan as providing coverage to the uninsured without disrupting medical coverage for everyone else.
Illustration by Barbara Kelley
By 2013 the rhetoric had changed entirely. No longer were consumers able to exercise intelligent choices in healthcare plans. Now, a newly paternalist president insisted in Faneuil Hall in Boston that those people who were forced out of their current coverage could get a better plan from the exchanges, once they were up and running. Democratic Congressman Sander Levin, ranking member of the House Ways and Means Committee, assured people that “the ‘so-called cancellation notices’ merely ‘help people transition to a new policy.’" But Levin never explains why people have to be tossed overboard before they find substitute coverage.
But far from confessing error, Obamacare defenders use threadbare rationales to reassure the anxious that time will heal all wounds. Take a close look at two arguments that appeared in the New York Times editorial page on Sunday November 3, dealing with paternalism and catastrophic risk respectively.
The Paternalism Defense
Taking paternalism to a new high in its editorial “Insurance Policies Not Worth Keeping,” the Times reported as if it had made its own actuarial assessment of the business choices of people who were content with the plans they had. In its attempt to soften Obamacare’s current failure, the editorial opined, “insurers are not allowed to abandon enrollees.” Not so. No insurance company is obliged to take its chances with those plans that meet the exacting standards of the ACA. If it wants, it can withdraw from the market, or offer high cost policies through the exchange.
Still worse, those plans that do remain in service are not obligated to assure patients that they can see their own doctors. Indeed UnitedHealthcare in New York cited the ACA as a reason to terminate many doctors from its system, whose patients now have to scramble to form new doctor-patient relationships within the new restricted coverage provisions. Worse still, many in-plan physicians are likely to opt out of the program because its compensation levels are not high enough to lure them in.
The Times argues that all this dislocation is worth bearing once people remember how “terrible” many of the soon-to-be-abandoned policies were, chiefly because of their high deductibles and skimpy coverage. But the Times mistakes the disease for the cure. The difficulty with Obamacare is that its rich and comprehensive plans are beyond what many informed people want to buy. In ordinary budgets, healthcare competes with other imperatives, and the grand pronouncements of the right plan are made without reference to the sacrifices needed in other domains to buy these fancy coverages.
The Times lauds the fact that all new policies will have to supply minimum essential benefits, noting that many of these—like mental health, substance abuse, and maternal care—are not covered by many policies. The Times also notes that catastrophic care is built into the plan, but never explains why Obamacare allows that protection to be purchased only when it is bundled with other insurance features that people don’t want to buy at all. The Times cannot grasp that limited coverage is an attractive feature for people who know what they want and how much they can afford to pay for it.
Then there are the massive cross subsidies from young to old built into the plan. No rational young person will take coverage that costs more than it is worth, especially if they have the option of immediately joining the healthcare plan of their choice at standard rates after learning that they unfortunately have some sort of health problem. The result will be the familiar adverse selection “death spiral” in which only sick people join the plan for prices that offer them a net subsidy that has to be paid for by someone else. But just whom would that be?
The Problem of Catastrophic Risk
This key sticking point is not addressed in Nicholas Kristof’s indignant column, “This is Why We Need Obamacare.” Kristof focuses his account on the tragic condition of 47-year old Richard Streeter, now afflicted with advanced colon cancer. Streeter lost his employer coverage in 2008, after which he could not find “affordable” coverage. He decided to go bare at great risk and lost that bet. Kristof uses Streeter’s story to denounce the entire American healthcare system for the inferior care that it gives not only to the old but also to the young and needy.
But there’s another side of this issue that Kristof fails to mention. The Wall Street Journal carries a moving story by Edie Littlefield Sundby, who has fought stage-4 gallbladder cancer for four years only to discover that her “affordable lifesaving medical insurance policy has been canceled effective December 31, 2013.” No need to guess why. She is now adrift without substitute help from California’s exchange. What Kristof has to explain from his own moral perspective is why Obamacare should shatter the lives of those with coverage when that drastic move is unnecessary to protect people like Streeter.
Besides, why did Streeter’s employer drop his coverage anyway? One strong possibility is that the pervasive state mandates that were precursors to the Obamacare program helped reduce employer-based healthcare by about 10 percent or 15 million people. Under these mandates, no one is under a duty to sell healthcare coverage, but if any coverage is sold it must contain certain minimum provisions. Put bluntly, prior to Obamacare, many people lost insurance on essential matters because the state mandates set high minimum standards. Obamacare repeats that same mistake.
On to a second inconvenient fact: Streeter turned down offered coverage because he deemed it unaffordable. In retrospect, three points are clear. First, he made a serious mistake in going without coverage. Second, it is highly likely that the insurance company offered him a good deal, given his known risk factors. Third, there was no market failure in that case.
This last point requires some elaboration beyond competing anecdotes. The reason markets work is that voluntary exchanges produce mutual gains. No market therefore will generate the implicit subsidy that people desperately seek. That outcome is not a failure of insurance. Thus, suppose Streeter has, because of his preexisting condition, a 20 percent chance of developing a condition in one year that will cost $1,000,000 dollars to treat. Ignoring administrative costs and interest rate issues, the right insurance premium is $200,000. Indeed, if it were certain that Streeter were to get cancer at that time, technically no insurance could be sold. All that Streeter could do is make a prepayment of that expense.
So when people are saying that insurance should be affordable, what they are asking for is a subsidy from others. But we still haven’t answered the question of from whom. Under Obamacare, it looks as though Streeter will get coverage paid for by future plan members. But these future losers will steer clear of that plan until they need coverage. And if the plan bankrupts, the subsidy must come from general revenues, at the cost of high tax payments across the board. That problem does not arise with Sundby who bought her insurance at market rates.
Is it, even in Kristof’s decent society, appropriate to pay one million dollars in public funds to extend Streeter’s life for days or weeks in the face of competing public needs of poverty and malnutrition across the land? Should we spend public healthcare dollars on the very young who can lead more productive lives for years, or on the very old or sick, who can’t? So long as resources are scarce, there is an obligation to spend them wisely.
Obamacare is not the cure for Streeter’s sad situation. The best way to deal with the risk of catastrophe is for people to buy their coverage early, when they are young, so that premiums are low. In any well-functioning market, they can acquire a renewable policy with guaranteed rates. At that point, does it become morally reprehensible to deny additional coverage to those individuals who passed on this possibility? No. Sadly, the abysmal performance of the American healthcare system lies not in the market economy that Kristof deplores, but in the elaborate network of regulation that shrinks the domain of voluntary choices, and leaves consumers with fewer choices than they would have had if the government had just stood by.
The Fatal Conceit
Indeed, this last point exposes the fatal conceit of the hard-core Obamacare defenders, one and all. Their efforts started with the dangerous and uninformed decision to make deals with the insurance companies. What the Obamacare planners should have done was to find ways to knock down any and all barriers to entry that prevented low-cost competitors from entering the market. That means letting healthcare insurers cross state lines; it means letting for-profit businesses enter into businesses supplying walk-in care at affordable prices. None of that was done, so the current legislation piles outsized benefit packages on top an unworkable delivery care system.
Alas, so long as moralists at the Times have their way, the structural rot will only deepen. The broken websites are a sideshow. Mark these words: the breakdown in the individual insurance market is only a small foretaste of the total chaos from mass insurance cancellations that will come when and if the employer mandates go into effect.
Richard A.
Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover
Institution, Laurence A. Tisch Professor of Law at New York University,
and senior lecturer at the University of Chicago, researches and writes
on a broad range of constitutional, economic, historical, and
philosophical subjects. He has taught administrative law, antitrust law,
communications law, constitutional law, corporate law, criminal law,
employment discrimination law, environmental law, food and drug law,
health law, labor law, Roman law, real estate development and finance,
and individual and corporate taxation. His publications cover an equally
broad range of topics. His most recent book, published in 2011, is Design for Liberty: Private Property, Public Administration, and the Rule of Law. He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).
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