The Biggest Failure of Obamacare: Increasing the Number of Uninsured

Published November 4, 2013

Some people have been surprised by the failure of the Obamacare web site and more broadly of the federal exchanges generally.

But those of us who have followed this legislation closely weren’t surprised at all. In fact, a year ago I wrote on John Goodman’s blog – “The Republicans may have lost this election, but a year from now millions of people may be begging to be freed from the scourge of ObamaCare’s exchanges.”

I’m not psychic. My conclusion was based on the dismal experience of everything the federal government had already tried and failed to do to implement the law and on the excellent reporting of Robert Pear at the New York Times. He had written months earlier that, while the state exchanges were doing their work in public, the federal effort was entirely behind closed door.  The Feds even refused to divulge what was in a “request for proposals” they had released to advertising agencies to help hype up interest in the exchanges.

Doing your work in secret may shield you from the criticism of political opponents, but it also prevents you from getting constructive suggestions from neutral outsiders. And that has been the primary problem with this whole exercise from the beginning. The idea was poorly conceived, the law was poorly written, and it is being poorly implemented, all because they didn’t want to hear from critics. The effort was so fragile that the slightest hint of trouble would have brought it crashing down. But it is far better to crash a poor concept on paper before it becomes law than to pass it and watch it wreck the lives of real people.

Now, not everything about this law has failed. Some things, like covering adult children on their parents’ policies to age 26, paying 100% for preventive services, and eliminating annual and lifetime caps on benefits, have been implemented smoothly. But these are all things that are within the scope of the normal regulatory process – the regulators tell the insurance companies what to do, and the insurance companies do it.  Both regulators and insurers have been doing this for decades.

These may or may not be good ideas, but they are easy to implement. In fact, all these provisions would have required only about five pages of legislation.

The problem comes in the other 2,695 pages of legislation. Why so many pages? Because they were creating entirely new functions for the federal government and all the agencies needed to operate them. And this is where the failures have come. The list is extraordinary –

  • The CLASS Act. This feeble attempt to create federal long-term care insurance was thrown overboard by the administration itself after it became apparent it would be impossible to do.
  • The 1099 provision. This requirement that businesses issue a 1099 to any vendor from whom they purchased $600 of goods and services in a year was repealed after business owners explained what an impossible burden it would impose.
  • Federal high risk pools. This program seemed to be well-funded, but they enrolled very few people at much higher cost than projected. They quickly ran out of money.
  • Retiree health subsidies. Large corporations and unions were more than happy to accept free money to do what they were doing anyway (provide health benefits to retirees), but all the money ran out in about a third of the time expected.
  • CO-OPs. As an alternative to the “public option,” Congress appropriated billions of dollars to create consumer-run, nonprofit insurance companies in each state and even created a whole new section of the Internal Revenue Code for them. It was never explained why mutual insurance companies were not adequate to the job. A few have been created but Congress put so many restrictions on them that even those few are unlikely to make it past the first year.
  • Small employer tax credits. The complexity and confusion of these credits deterred all but a handful of companies from applying.
  • Medical Loss Ratios. The MLR requirements have had the very predictable effect of discouraging innovation and cost containment. The requirements actually encourage higher premiums — the higher the premiums, the more money insurance companies have for administration and profits. Plus, they discourage fraud prevention efforts.
  • Medicaid expansions. The Supreme Court made these expansions voluntary for the states and only about half have done it. But it was an odd idea from the start. One-third of all the uninsured were already eligible for Medicaid but hadn’t bothered to enroll, and a large portion of the people now enrolling seem to be people who were already covered in the private market.
  • Limits on FSA funding. It is cruelly ironic, but the families most disadvantaged by the new $2,500 limit on FSA funding are those with special needs children.
  • Limits on the Medical Expense Deduction. Beginning in 2013, a taxpayer is able to deduct only those medical expenses that exceed 10% of income, up from the current 7.5%. Once again it is the sickest families that will be hurt.
  • Accountable Care Organizations (ACOs). These were intended to introduce an entirely new form of health care delivery to reduce costs and improve quality in the Medicare program, and eventually throughout the health care system. But they have been plagued with problems, including that nearly a third of the original participants have already dropped out. CMS is refusing to release information on how the rest are doing, suggesting it isn’t going well.
  • Health IT. The HITECH bill was enacted separately from ObamaCare, and many billions have been spent on it, but reports from the field indicate the top-down efforts result in lower quality and less efficiency as physicians spend more time wrestling with computers than taking care of patients.

Essentially, everything the federal government itself has been responsible for doing has failed. None of this should have been a surprise. Any honest reading of available research would have shown the futility of these efforts. For example the United Kingdom was way ahead of us in trying to upgrade its health information technology. It spent $12 billion on the project before concluding it was an abysmal failure and shut it down completely. An effort very similar to ACOs was tried from 2005-2010 in the form of the Physician Group Practice demonstration project. It, too failed. Medical loss ratio limits have been tried without success in several states.

But, like the old Gene Autry song, the true believers in the Obama administration didn’t want to hear a discouraging word, so they locked themselves away and even refused to let the public know what they were doing.

But the biggest failure of all is still a few months away. This is the essence of the law – that it will reduce the numbers of uninsured. It will not. It is far more likely to raise the numbers of people without insurance coverage. Why? Three reasons –

  1. The Medicaid expansion will have at best a modest effect on covering new people. As we said above one-third of the uninsured are already eligible for Medicaid but not enrolled. In many cases, they have been on the program before and haven’t bothered re-enrolling. They simply don’t find value in it. They are more likely to see a doctor by going to the hospital ER, and they know if anything big happens they will be instantly signed up. Having a Medicaid card in their wallets just to please some bureaucrat is no enticement.

Now, it is likely that the Medicaid roles will grow, but this will be from people who were already covered by their employers. Medicaid is free while employers expect a premium contribution. It makes sense to switch, but it doesn’t add any uninsured people.

The individual market is gone. This means some 15 million newly uninsured people. Some of them will get coverage on the exchanges, but not many. The exchanges offer benefits that are too rich – things like pediatric dental care that few private insurance plans cover – and all those “enhanced” benefits cost money. Yes, some will be offered some subsidies, but in most cases people will still pay more than they have been used to, and the enrollment process is a nightmare.

Employers will drop coverage in droves. That has been happening slowly for years, but Obamacare will accelerate it dramatically. In 2011 the McKinsey Company did a large survey of the employers and found 30% said they would definitely or probably drop their coverage. This was blithely dismissed by administration supporters, but McKinsey is a rock solid company with no interest in political spin. This means perhaps 50 million people will no longer have coverage on the job. They will find –

  • No more automatic enrollment going along with the job. People will have to take the initiative to find out about the Exchange.
  • No more pure community rating of the employee share of premiums. The Exchange will vary premiums every year based on a person’s age.
  • No more paycheck deductions of the employee share of premiums. People will have to make some kind of payment arrangement for their share of the premium.
  • No more convenient and friendly HR Department people to answer questions. People will have to seek out an “Exchange navigator” to get their questions answered
  • More importantly, they will find no more employer contribution to the cost of their coverage.

Very few people have significant medical expenses in the course of a year. The cost of insurance coverage far outweighs the cost of their medical expense – especially if they are paying the entire premium themselves.

Annual Spending as a Percent of the Total, by Decile

Source: Taken from “Medicare for All,” a presentation by Paul Y. Song, MD, PNHP 2011, slide #41; data attributed to Thorpe and Reinhardt.

So there might be 20% – 30% of the total, maybe even 50% who find that insurance is a good deal through the Exchanges, but that leaves 25 million people who are newly uninsured.

Taken together, the numbers of uninsured Americans may double after Obamacare is fully implemented. How’s that for a kick in the head?

Now, you may be wondering about all those pitiful, helpless people you have heard about who have been denied coverage for all these years. Won’t they be lining up around the corner to finally get insurance coverage? Yes, very likely they will be.  But keep in mind that the only people subject to such a denial are new applicants for individual coverage. This is a very small segment of the population. People getting employer based coverage are free of any such concern, as are people on Medicare or Medicaid. AHIP (the insurance company trade association) reports that in 2008, there were only 1,763,000 people who applied for individual coverage, and only 223,000 were denied. Many of these people were allowed to enroll in a state high-risk pool, so were not uninsured when this law was passed. That’s a pretty tiny number of people compared to the many millions who are about to become uninsured.

Finally, there is the issue of the mandate itself. Won’t those people who refuse to enroll be severely punished? No. There is no effective enforcement mechanism. Many commentators have remarked on how low the tax penalty is, but even that penalty is easily avoided. The only tool the IRS has for collecting the penalty is seizing a taxpayer’s tax refund. It may not garnish wages, it may not place a lien on property, it may not bring the taxpayer to court. It is easy enough to avoid a refund, by adjusting withholding at the beginning of the year. That has the added effect of giving the taxpayer more money in his paycheck during the course of the year and depriving the federal government of an interest-free loan from the taxpayer.

So the biggest failure of all will take place in the next six to nine months: We will discover the numbers of uninsured has doubled just in time for the 2014 elections.