Real World Impact of the Health Care Control Legislation

Last night I received an email from the company I work for addressing the ironically named Patient Protection and Affordable Care Act.  I'm not going to quote the letter in its entirety, but here are a few excepts.

The legislation requires all Americans to have health insurance and provide for assistance to low-income individuals to help them afford coverage. The legislation begins to set up a competitive marketplace to provide more options. However, due to the varying effective dates included in the legislation, we expect that xxxxxxxx’s costs will increase in the short-term. These cost increases are primarily driven by two provisions.

The first is a provision that affects the Medicare Part D subsidy for prescription drug coverage. Because xxxxxxx offers retiree prescription drug coverage today, the government provides a 28 percent subsidy to help offset the financial burden of offering that coverage. The subsidy was intended to help employers continue to offer prescription drug coverage for retirees so that these retirees would not have to use the Government Medicare Part D program. However, changes affecting the Part D subsidy will make it less valuable to employers, like xxxxxxx, and as a result, may have significant implications for both retirees and employers.

Additionally, there is a provision that taxes high-value health plans expected to begin in 2018. Many of the plans that xxxxxxx offers to employees and retirees are projected to have costs above the thresholds in the legislation and will be subject to the 40 percent excise tax.

My layman's reading of this is email is: get ready to pay more for less.  There's no question I have good health care benefits today, but I pay a fair amount out of pocket for each doctor visit or procedure.  I'm certain my out of pocket expenses to continue to increase each year with or without Obamacare.  I think many Americans with health care provided by their employers will have a similar experience.

Better minds than mine have speculated (see Martin Feldstein's article in the Washington Post) that the rational behavior for individuals (and companies) is to drop their current health insurance, pay the penalties, and wait to purchase insurance when they get sick.  This type of behavior would have a devastating impact to the financial assumptions behind the program.  In Feldstein's own words:

Consider: 27 million people are covered by health insurance purchased directly, i.e. outside employer-based plans. The average cost of an insurance policy with family coverage in 2009 is $13,375. A married couple with a median family income of $75,000 who choose not to insure would be subject to a fine of 2.5 percent of that $75,000, or $1,875. So the family would save a net $11,500 by not insuring. If a serious illness occurs--a chronic condition or a condition that requires surgery--they could then buy insurance. Since fewer than one family in four has annual health-care costs that exceed $10,000, the decision to drop coverage looks like a good bet. For a lower-income family, the fine is smaller, and the incentive to be uninsured is even greater.

The story is similar for single people. The average cost of an individual policy is $4,800. An individual with earnings of $50,000 would face a fine of $1,250 and would therefore save $3,550 by not insuring.

In short, for those who are now privately insured through employers or by direct purchase, there would be substantial incentives to become uninsured until they become sick. The resulting rise in the cost to insurance companies as the insured population becomes sicker would raise the average premium, strengthening that incentive.

Only time will tell whether Feldstein's predictions will come true.

Another interesting take on Obamacare is written by his second cousin, Dr. Milton R. Wolf, entitled Questions for your representative.