Consumer Power Report: What’s a Half-Trillion-Dollar Mistake Among Friends?

Published August 15, 2011

Here’s more on that half-trillion-dollar mistake in Obamacare that we referenced a few weeks back.

This paper published by the National Bureau of Economic Research highlights a major problem in the assumptions that informed the Congressional Budget Office’s calculations about the cost of President Barack Obama’s health care law: The estimates were based on assumptions that sufficiently accounted only for the costs of covering individual employees–not the costs of covering their spouses and families.

According to The Daily Caller’s Neil Munro in his interview with economist and study co-author Richard Burkhauser, the cause is an instruction buried in the Joint Committee on Taxation’s recommendations, which “directed the Congressional Budget Office to ignore family members when determining whether employees actually pay more than 9.5 percent of their household income on insurance.”

The president’s health care law provides government subsidies for, among others, private-sector employees who earn between 1.33 times and 4 times the poverty level, and who also spend more than 9.5 percent of their family income on health care.

On May 4, 2010, the Joint Committee on Taxation directed the Congressional Budget Office to ignore family members when determining whether employees actually pay more than 9.5 percent of their household income on insurance.

The instruction was included in a correction of a complex, 150-page March 21 document. The correction read: “ERRATA FOR JCX-18-10 … On page 15, Minimum essential coverage and employer offer of health insurance coverage, in the second sentence of the second paragraph, ‘the type of coverage applicable (e.g., individual or family coverage)’ should be replaced with ‘self-only coverage.'”

Because of this rule change, Burkhauser said, employees who otherwise meet the eligibility requirements to receive the federal subsidy can be denied it, if their own share of the family’s insurance costs total less than 9.5 percent of their families’ incomes.

If theory, he added, “this will mean that millions of families that are not provided with affordable insurance [by companies] will be ineligible to go to the federal exchanges,” he said. But companies and their employees share great incentives to rearrange workers’ compensation to win more of these federal subsidies, he said.

For example, he explained, an employee can ask his employer to raise the price of company-provided insurance in exchange for an equal increase in salary. In many cases, that would boost the share of his income spent on health insurance to a percentage above the 9.5 percent threshold.

Such an arrangement, Burkhauser added, would make the employee, his spouse, and his children all eligible for federal health care subsidies while enriching both employer and employee – even after the Treasury Department collects fines from U.S. workers.

As Heartland Institute Senior Fellow Avik Roy points out: “Because the average cost of an individual-only plan is about one-third that of a family plan, this tweak makes it three times as hard for an employer-sponsored plan to be deemed as ‘unaffordable.'”

Once again, we see the problem with the estimates that went into this poorly designed reform: They are based on faulty assumptions about the way people respond to the incentives and disincentives of government, on an assumption that no one will game a system that is obviously easy to game. Past reports by the Congressional Research Service and others have found, of course, that people will absolutely game these scenarios whether to avoid the individual mandate or to gain access to subsidies. Why would you not, when free money from the government is the reward?

As more of these faulty and sometimes fraudulent estimates become known, the Affordable Care Act looks less and less affordable. And taxpayers will be left to bear the costs.

— Benjamin Domenech


  • Eleventh Circuit Offers Another Ruling Against Obamacare
  • Study: New Medicaid Patients More Expensive than Current Ones
  • Drug Shortages and Government Intervention
  • Missouri Lawmakers Look at Health Care Exchanges


An interesting and lengthy decision in the Florida case makes the next stop the Supreme Court. Hadley Heath of the Independent Women’s Forum collects responses to the ruling, which found the individual mandate unconstitutional but judged it severable from the rest of the law. Here’s this from Randy Barnett:

Now that judges appointed by both Democratic and Republican presidents have found the individual insurance mandate to be unconstitutional, the nation’s interest requires the Supreme Court to hear this case next term. Only then would the uncertainty inflicted upon the national economy by this unprecedented and unconstitutional law be lifted. Both the country and the Constitution cannot afford any delay.

Heartland’s staff responds here.

SOURCE: Healthcare Lawsuits


A new Avalere analysis confirms what we already suspected:

The people who will be added to Medicaid through healthcare reform are more sick – and therefore will be more expensive to treat – than current beneficiaries.

Dan Mendelson, chief executive of Avalere Health, said the cost of covering the new Medicaid beneficiaries will likely spike in the first year, then come into line with existing Medicaid patients.

A new Avalere analysis found that roughly two-thirds of Medicaid beneficiaries report being in “excellent” or “very good” health – compared with only about half of the low-income uninsured population that will gain access to Medicaid in 2014.

“What it means is that this is a more expensive population to treat, at least initially,” Mendelson said.

For more on this, read my recent essay on the economic downturn and Medicaid.

SOURCE: The Hill


Former White House advisor Ezekiel Emanuel writes in The New York Times about the shortages of cancer drugs currently hurting patients:

Of the 34 generic cancer drugs on the market, as of this month, 14 were in short supply. They include drugs that are the mainstay of treatment regimens used to cure leukemia, lymphoma and testicular cancer. As Dr. Michael Link, the president of the American Society of Clinical Oncology, recently told me, “If you are a pediatric oncologist, you know how to cure 70 to 80 percent of patients. But without these drugs you are out of business.”

This shortage is even inhibiting research studies that can lead to higher cure rates: enrollment of patients in many clinical trials has been delayed or stopped because the drugs that are in short supply make up the standard regimens to which new treatments are added or compared.

This is accurate, as far as it goes. But later in the piece, Emanuel mourns the fact that the FDA can’t forcibly require drugmakers to make products (!). A new study from the Fraser Institute regarding drug policy in Canada illustrates the problem of government intervention:

By observing per capita drug spending as a percentage of per capita income the study compares the average personal affordability of drug costs for Canadians and Americans. The method provides a way to estimate the actual economic burden of prescription drug costs on consumers in Canada and the United States relative to the differences in living standards.

– Consumers in Canada and the United States spend nearly the same proportion of their per capita gross domestic product on prescription drugs (1.6 percent in Canada and 1.8 percent in the United States) and of their per capita personal after-tax income (2.5 percent in Canada; 2.3 percent in the United States).

– The number of prescriptions dispensed per capita in both countries is roughly similar (14.9 in Canada; 12.9 in the United States).

Why is the personal affordability of prescription drug spending roughly the same in Canada and the United States?

– While brand-name drugs in Canada are significantly cheaper on average than in the United States, generic drugs in Canada are about 90 percent more expensive on average.

– Americans also tend to substitute lower-cost versions of drugs for relatively more expensive brands more often than Canadians; and per capita after-tax incomes are higher in the United States than in Canada.

The Canadian government’s greater intervention in prescription drug markets offers no affordability advantages for consumers compared to competitive markets in the United States.

SOURCE: New York Times


We noted a few weeks ago that Missouri state Senator Jane Cunningham had done a great job killing the Obamacare exchange in her state. Here’s the next step from exchange proponents:

President Pro Tem Rob Mayer, R-Dexter, has appointed an interim committee to study whether Missouri should follow federal guidelines and enact a health insurance exchange.

The exchange would be a quasi-governmental body that would allow individuals and small business to compare and buy health insurance plans. Creation of an exchange is mandated in the federal health care reform bill passed last year. States have until 2013 to design the structure of the exchange and the criteria insurance plans must meet to be included. If they miss the deadline, the federal government will implement the law and make those decisions.

A bill creating the “Show-Me Health Insurance Exchange” cleared the Missouri House this year with unanimous support. The measure died in the state Senate, however, after several Senators expressed concerns. State Sen. Jane Cunningham, R-Chesterfield, denounced the legislation as a violation of Missouri law and a repeal of the will of the voters. Missourians voted in 2010 to prohibit governments from forcing individuals and businesses to purchase health insurance, as required by the federal health reform law.

Perfect timing, considering there’s new money for exchanges. Attached? Convenient strings! As we’ve pointed out before, the idea of exchanges in the abstract is not all bad – but the limits placed on the creation of Obamacare’s exchanges makes them entities designed only for the speedy delivery of bureaucratic policies from Washington to the states, nothing more. Let’s hope Missouri makes the right decision.