ObamaCare Explained

Some readers might wonder why this blog has not commented on the US Primaries and the Republican leadership race. Very simply because it doesn’t matter yet. American political developments will become interesting with regard to a presidential election, when both candidates are known. A politically and economically interesting development in American constitutional and political life however, is upon us in the form of the Supreme court’s review of the Patient Protection and Affordable Care Act (PPACA). 26 States have joined in an effort to abolish the PPACA and the Health Care and Education Reconciliation Act of 2010 collectively known in Right of center circles as ObamaCare. Many a legal experts and US Supreme Court watchers have dubbed this a once in a lifetime redefining of State and Federal powers. So while ”who will be the next leader of the Free World?” is an interesting topic of discussion, the powers that Chief Executive will wield, seems like a relatively more important issue.

The legal and technical issues at hand are quite complex. The very first complaint against the bill, if I recall correctly, was that it was incomprehensibly long and complicated (even for lawyers apparently). So a quick recommendation: go wikipedia PPACA now, come back and read this post later… Now that you are back with a mild understanding of what ObamaCare attempts to do we can start raising some of the important  issues at stake here. Just in case Wikipedia wasn’t clear enough, the staples of the Acts are:

• The “individual mandate” where all individuals would be required by law to purchase health insurance coverage.
• Insurance providers will no longer be allowed to discriminate against pre-existing health conditions except smoking.
• Medicaid eligibility will be bumped up to 133% of the American poverty threshold.
• Sliding scale of subsidies for insurance purchase for Americans earning between 133% and 400% of the poverty threshold.
• Minimum standards of insurance policy will be imposed
• Penalties for 50+ person firms not offering insurance plans to employees

This healthcare plan proudly embodies the American penchant for convoluted government  market distortions. That the World hasn’t been struck by a wave of micro economists’ heart attacks following ObamaCare’s signing into law, is surprising in itself. The effects of minimum insurance policy standards would have been twofold. One to cover the new costs of the added ‘standards’, insurers would have raised prices. Subsequently health insurance consumers would have less coverage options and would face a higher price, leading to less purchase; less Americans covered. Faced with this prospect the democrats added mandatory purchase of insurance. ”You think insurance is too expensive? BUY some anyways” says Nancy Pelosi in this recurring nightmare libertarians get at night. At some point in 2009 someone must have asked the question: ”Now that we’ve figured out how to insure all Americans (by force), how do we do it without raping low income workers disposable income?”. The Answer was double. First they chose to bump up Medicaid coverage to a fixed percentage of people earning 133% or less of the statutory poverty, and then giving a subsidy to people earning more than that revised threshold. Now that subsidy would help people earning up to four times the poverty threshold. That means people (household of 1 in the 48 contiguous States + DC) earning up to 43,560$, just shy of the median household income, would be eligible for financial assistance. As an example: for a household of four in Alaska, the subsidy would be accessible up to a household pretax income of 111,760 US$.

Now people earning 43,560 US$ represent the cream of the crop of wealth on a World scale. So why would the federal government give subsidies to so many people most of whom don’t even register as poor? The answer isn’t in the fine print it’s actually in between the lines. The high threshold for subsidy eligibility is actually an admission that the basic laws of supply and demand are right. How so? What happens when 30 million uninsured poor Americans suddenly show up simultaneously at their local insurance office with an Uncle Sam signed cheque asking for some premium quality insurance? Insurance companies having struck gold all jack up their prices. Now, all those Americans on the cusp of middle class status have to compete for insurance products with a crowd of people wielding federal government credit cards, one word, though! So the price of insurance would rise for all, hence the necessity to help people who thought they were middle class.

Knowing the way the American tax code works, we could say that a cleavage has been created, cutting the american population roughly in two, where the top earning half suffers higher insurances prices and higher taxes to help pay for the bottom half’s increasingly expensive healthcare. Is this the only cleavage this legislation creates. No it isn’t. One major component of the legislative package is the clause prohibiting price discrimination. Price discrimination is allowed but only on a geographic basis. What might be the result of that policy. Unable to charge higher premiums for unhealthy individuals, insurance companies will have to charge higher average premiums on everybody including healthy people. So the Portland health nut who bikes to work, eats vegan, works out and lives a balanced lifestyle will have to pay higher premiums so that the overweight McDonald’s inhaling, binge drinking couch potato need not pay the fair value of his unhealthy ways. One might say this legislation is anti model citizen. If you are going to live a long healthy and successful life get ready to be whacked in the wallet.

The essential of this legislation is to create a one tiered healthcare system. Even if some Americans will buy their own healthcare from a private insurance corporation, they will do so on federally dictated terms. No free choice = no free will = no free market = one tiered system. However imposing purchases on consumers creates an inelastic demand (even if only partially), what do businesses do when facing an inelastic demand they raise prices and increase their profits. So what will be the ultimate result of these laws? The United States of America will consolidate its lead as the country with the most expensive healthcare in the World. This continues a long tradition of Left leaning policies to always collaterally benefit somebody already wealthy. Last weak we joked that Francois Hollande’s taxation policies would enrich Swiss bankers and now we follow this up with insurance providers in the US readying themselves for some unimaginably gluttonous profits.

Understandably a majority of States are worried. They are reportedly on the hook for less than 5% of the estimated 500 billion yearly added healthcare spending. Now the Obama Administration has repeatedly said that States may opt out of the plan. However that option is conditional on states finding their own way to newly cover as many uncovered constituents as the federal plan would have. Here lies the States assertion that the legislation is coercive. In previous rulings it was found that over excessive inducing does represent undue coercion. Coercion in itself being an attempt against States’ constitutional sovereignty. Now this blog being about economics and not law, a different argument shall be posed. While assuming that opting out of the plan includes opting out of the plans funding a fundamental inequity subsists. The Congressional Budget Office has opined that the healthcare proposals are not fully funded. That is to say the federal government will incur more costs to the program than the proposals projected revenues. So this deficit will have to be covered by revenues from other sources such as income and corporate taxes levied nationally. This means than should States opt out of the plan as proposed they still run the risk of bearing the burden of cost without seeing any of the benefits. This surely represents an undue coercive reality all states are aware of.

Is it not strange that a constitutional law expert (Obama) would behave as though the Residual power were granted to the federal government instead of the states. What ever happened to respecting not just the letter of the law but also its spirit. More importantly where were the American micro economists when this legislation was being adopted? Canada with a one-tiered system has cheaper healthcare. France with its ultra comprehensive two-tiered system has cheaper healthcare. Instead of moving in the direction of making healthcare cheaper for all Americans Obama is moving in the opposite direction! with the caveat that the 15% of uninsured wont be anymore. Whether for personal rights, constitutional or economic reasons, ObamaCare leaves much to be desired.

Shout out to our Lithuanian readers!