SHOULD YOU OPT OUT OF OBAMACARE?

Is the Affordable Care Act affordable and does it actually address healthcare? Arguably the Affordable Care Act is unaffordable because it imposes an economic burden on wage earners struggling to make it through a lackluster recovery when the government’s time and resources during the worst recession since the Great Depression perhaps would have been better spent on economic recovery measures rather than a measure that many economists believe has slowed hiring and the economic recovery.

This act principally addresses the patient payment side of a broken transaction. It leaves the cost and supply side of doctors, nurses, hospitals and pharmaceutical companies largely unchanged. It does little or nothing to address the non-transparent pricing of medical services, a shortage of doctors and nurses, an over-prescription of drugs and medical services, healthcare fraud, high hospital costs, excessive bureaucracy, high cost prescription drugs, the high cost of medical malpractice litigation, and underachieving Medicare and Medicaid programs. What Obamacare has done is add 44 million people to the most costly healthcare system in the world, making it even less efficient. In fairness, our health delivery system may also be the best in the world and one of the least heavily subsidized until now. Our doctors and nurses are hard-working, well-educated and well intentioned for the most part – and as frustrated as most of their paying customers.  

The Act imposes questionable conditions on a healthcare insurance industry which is rightfully skeptical. Insurance is supposed to be an arm’s length transaction that contractually transfers the cost of unknown, and hopefully unlikely, future risks to a financial party (an insurance underwriter) in exchange for a monthly or annual fee (called a premium). Conceptually, insurance is a financial instrument that smooths out the insured’s cost of paying for unlikely future catastrophic events by transferring the cost of such events to an insurer in exchange for the insured paying an agreed periodic amount. Insurance companies make money because they have statistical knowledge of how frequently covered risks occur and how costly they typically are. Insurers charge a premium that covers these estimated future costs, plus a profit. By having a large, diverse pool of insured clients with randomly occurring, non-correlated risk events, insurance companies have a high probably of making money most years. Obamacare is not insurance in a traditional sense because it is not an arm's length transaction, it is mandatory, it is heavily distorted by subsidies, and insurance companies must accept costly pre-existing health conditions without being able to adjust premiums in correspondence with the risks. The only way to compensate for these burdens is for the insurance industry to charge higher premiums to healthy, young individuals.

If the Affordable Care Act is not affordable, is not insurance in an economic sense, and is not healthcare, what is it? It is a tax that implements the most significant new entitlement program in decades and effectuates a massive wealth transfer from healthier, younger, hard-working individuals to older, less healthy, lower-income individuals. Obamacare is obviously a tax to most knowledgeable observers, despite the assertions to the contrary by the President. The U.S. Supreme Court officially confirmed it was a tax in its 5-4 decision in June 2012. If it were not a tax Obamacare would be illegal because the President and Congress do not have the right to mandate the acquisition of insurance by individuals, which would violate the constitution. They do, however, have the right to tax the public. In fact the new taxes on individuals are 0.9% added to the Medicare tax on wages and other compensation in excess of $250,000 for those whose status is “married, filing jointly” and 3.8% added to Net Investment Income (interest, dividends, capital gains, rental income, royalty income, and certain other types of non-wage income) in excess of the same threshold. The most significant new tax, however, is the subsidy hidden in the insurance premiums that healthier, younger individuals must pay to defray the burden of insuring older, less healthy individuals and to pay for the tax credits offered to those with low incomes.

Obamacare is therefore a tax imposed on healthier, younger people with good jobs who do not qualify for subsidies. It is a short-sighted, vote grabbing, quick patch entitlement that does not solve underlying problems. Real problems take more than the four year term (or 8 year term in the case of a re-election) of a president to fix and are therefore generally ignored while short-term gratifications are commonly implemented. The success of the Act is dependent on enough healthy, young people with good jobs agreeing to buy overpriced insurance such that older, unhealthy people with no or low incomes can be given heavily discounted healthcare delivered by the same broken system that remains unfixed. Some of the largest health insurance companies have chosen not to participate in the new health insurance marketplaces (exchanges) due to concern that they will be left covering a disproportionately large number of participants with serious pre-existing medical conditions and not enough healthy, young customers. Many of the insurers that have filed plans to operate on the exchanges are smaller, less experienced companies with small networks of doctors and hospitals. In addition, there is great uncertainty whether the massive software needed to run the healthcare exchanges will work properly. By the way, as we are launching another major entitlement program, Social Security, Medicare and Medicaid have for years been mortgaging the future of younger Americans with good jobs, yet we have not addressed this massive, ballooning financial problem, learned from our mistakes, or stopped taxing our younger citizens with good jobs.

Taking care of those who are unable to take care of themselves is a noble goal, but let’s find the best way to accomplish the objective. Let’s also recognize that the current healthcare system has been taking care of uninsured indigents all along without a government mandate. Sure, emergency rooms are used as community healthcare clinics for the poor and uninsured, but this is a less costly subsidy than what Obamacare creates. Furthermore, Americans are the most generous donors on earth whose charitable donations have significantly assisted the plight of the poor. Bad government policy will certainly crowd out charitable giving by individuals and charity work by doctors and hospitals as these entities see their incomes shrink and taxes grow.

Problems and Unanswered Questions. Obamacare poses structural problems and leaves many questions unanswered. It was not until a week before the online healthcare insurance exchanges were set to open on October 1, that policy premiums were disclosed, offering little time and clarity for tens of millions of people to shop for insurance. What we know at this point is that, according to the Wall Street Journal, the national average premium for a 27-year-old nonsmoker, regardless of gender, will start at $163 a month for the lowest-cost "bronze" plan, $203 for the "silver" plan, and $240 for the most comprehensive "gold" plan. The policies will take effect on January 1, 2014 and must contain certain standard terms, including 10 “essential health benefits” such as preventative services, hospitalizations, emergency services, maternity and newborn care, mental health, substance abuse care, and prescription drug coverage. People with pre-existing conditions cannot be denied coverage or charged a higher premium due to the pre-condition. Obamacare forbids insurers from determining premiums based on health status, unless the patient is a smoker. Only age can be used to set premiums, with the further stipulation that the oldest consumers cannot be charged more than three times the average premium paid by a 21-year-old. Tax credits between 2% and 9.5% of income can offset the cost of premiums for individuals with incomes less than $45,960 and couples making less than $62,040. Beyond these broad basic guidelines, there is scant information on the details of the insurance policy terms, and good luck trying to get a call through to an insurer for an explanation – they are overwhelmed. I would imagine the government authorized “navigators” are as well. Understanding an insurance policy is difficult for most people but overwhelmingly difficult for someone who has never been insured. It is hard to believe that a navigator with 21 hours of training will offer much enlightenment.

The basic things you need to find out about the new policies being offered are the healthcare expenses that are covered and excluded (medical, dental, vision, psychotherapy, prescription drugs, eye glasses, physical therapy, or whatever else is important to your particular condition), the amount of the annual deductible, the amount of the co-pay per visit, the annual and lifetime maximum coverage limits, the amount of the premium, and whether a healthcare spending account feature is available and how it works. The above-mentioned information needs to be compared with your current policy terms if you have one. Further questions might include: What are the differences between an insurance company’s policies that are offered through the healthcare exchanges and those that are offered outside the exchanges? Are the policies that are offered through the exchanges identical for all competitors (there are 10 “essential health benefits” that they all must have), or do I have to understand the unique details of everyone’s policies? What happens if I have existing coverage that extends beyond January 1, 2014 or I decide to delay beyond January 1 buying insurance coverage – it appears that I can enroll until March 31 and thereafter I am closed out of the system for 2014. If I am insured for part of the year and uninsured for the remainder, does the full penalty apply or is it prorated for the months that I am not insured? What happens if I buy an individual policy through an exchange and then join a company with a different healthcare plan – am I relieved of the obligation to continue paying for Obamacare for the months between joining the new company’s plan and the end of the year? My guess is that many questions don’t have clear answers yet and that a lot of misinformation will be disseminated. As a starting point, use the official government website, www.healthcare.gov, or call 800-318-2596. Another site with useful information is the Kaiser Family Foundation website, www.kff.org. 

The greatest unknown is whether Obamacare will survive at all. The exchanges could fail if too few individuals and businesses agree to participate, especially if the participation among younger and healthier people is weak.

Who benefits and who loses? The poor, especially those with chronic illnesses, benefit from Obamacare, as do certain people in the roughly 50-64 year old group who have retired or are unemployed.  Those 65 and over can rely on Medicare. The very wealthy are economically harmed but have the financial resources to bear the cost without changing their lifestyles (this comment does not address the fairness of the harm or whether the rich will correspondingly reduce their charitable giving by the amount of the Obamacare tax which would largely negate the net benefit of Obamacare to the poor). The real losers are the younger, healthier individuals in the middle class, the upper middle class, the well-off but not rich, and the class of upwardly mobile young adults.

What needs to be done? Obamacare does not address the problems of our healthcare delivery system, and it defies the traditional concept of insurance, as mentioned above.  

What we should do:

1.   Focus the healthcare system on providing primary and preventive care which will save society much of the cost of post-incident treatment.

2.   Make primary and preventative care affordable. One important measure it to remove legal and regulatory impediments that prevent nurses and physician’s assistants from performing routine evaluations, immunizations, tests and procedures that now require a licensed MD to administer or oversee. Also, place more nurse practitioners in cost-effective, privately-owned clinics in retail locations close to the customers. This is already being done or a limited scale that could be materially increased.

3.   Do not cover primary and preventative healthcare costs with insurance. In the traditional risk transfer concept of insurance, primary and preventative care costs would not be covered, though this is how healthcare insurance is structured. The analogy for auto insurance would be to file an insurance claim for every routine maintenance service and oil change performed on your car. If individuals paid for primary and preventative care (well-visit checkups, common illnesses and the treatment of minor accidents) and insurance covered the more complex care, the cost of insurance would plummet because only a small number of major procedures would be covered while numerous, minor procedures would no longer burden the insurance system. Furthermore, the cost of primary and preventative care would plunge because individuals would comparison-shop and would decline unnecessary procedures. In addition, the cost of insurance fraud would be reduced because there would be a less complex system which would be easier to control and harder to defraud. Finally, the cost of insurance administration by healthcare providers, insurance companies and patients would be significantly reduced. (Excluding the costs of primary and preventive care is not equivalent to having a plan with a high deductible and high co-pay because such plans still require medical service providers to file insurance claims on patients, and insurance companies have to keep track of patient healthcare spending so that they know when the deductible has been satisfied, hence much more paperwork is required than the circumstance in which the care is simply not covered.) Step 3 will significantly reduce health insurance premiums and eliminate the payment of deductibles and co-payments associated with primary and preventative care that would have to be paid if these costs were covered by insurance. The savings generated by Step 3 allow the patient to pay the premium for insurance covering only more complex care and fully bear the cost of primary and preventative care yet have lower annual out-of-pocket expenses than would be the case with Obamacare. The reason this is so is because insurance companies set their premiums to allow themselves to fully recover the expected cost of care, plus a contingency cushion, plus a charge to cover administrative expenses, plus a profit. When the patient pays a portion of the healthcare directly, premiums (which exceed the cost of healthcare because of the add-on charges) drop by more than the cost of care. As a bonus, the administrative complexities of Obamacare would be reduced astronomically. 

4.   Reconnect patients and doctors by having individuals pay doctors directly and file their own insurance claims. In our healthcare system, typically the healthcare provider collects a small co-payment from the patient and has the administrative burden to collect the remainder of the invoice from the insurance company, without the patient having to file a claim and causing the healthcare provider to wait weeks to get paid. Our system is more properly called a third-party payer system than insurance and results in the patient being disconnected from the healthcare provider and the cost of care. The healthcare provider’s real customer in our system is the patient’s insurance company.

5. Companies should offer defined contribution healthcare plans rather than defined benefit plans. This causes individuals to be more mindful of the cost of insurance as well as the cost of healthcare.  Better informed and more discerning customers will help hold down insurance and healthcare costs.  

6.   Focus attention on the root problems, and recognize that Obamacare does not deal with the healthcare delivery system and does not address the reasons why many people cannot afford healthcare. The real problems are high unemployment, a stagnant economy, an inadequate public education system, an outdated healthcare delivery system, and unhealthy lifestyles.

7.   Address problems at the local level within national guidelines rather than at the national level through a federal bureaucracy. For example, the federal government could transfer more money to the states for investment in more community clinics.

8.   Answer the question of whether virtually unlimited healthcare is an inalienable right and one that society can afford. While we cannot put a value on a human life, if it costs hundreds of thousands of dollars to extend the life of an elderly, terminally sick individual for a few weeks at the cost of society rather than at the cost of the individual and his family, is this a proper and sustainable use of public resources?

9.   Determine what the American public really wants and can afford. U.S. citizens, who are just now beginning to understand Obamacare, have to confront the question of whether mandatory health insurance is compatible with their own ideas of American democracy, capitalism and the U.S. Constitution which was built around the concepts of individual rights and liberties, limited government that could not capriciously usurp individual rights, and federalism versus an overly powerful central government.

10. Don’t keep taxing younger, healthier individuals in the middle class, the upper middle class, the well-off but not rich, and the class of upwardly mobile young adults. Undoubtedly this is a minority of the US population, and therefore it is correct for the President to assert that the majority of Americans benefit from Obamacare (in the short run, but not the long run). However, this minority is the backbone of the US economy and is the group on whom most of the hopes and aspirations of our society depend. Furthermore, this Over-Burdened Backbone will always remain a minority – the Pareto Principle ensures that fact! (The Pareto Principle, also called the 80-20 Rule, asserts that a small minority of any population or set of data contribute the majority of the population’s results.) It is impossible to legislate the redistribution of motivation, hard work, creativity and the pursuit of excellence that embody the Over-Burdened Backbone. This minority group is our country’s future; it should be nurtured, not eviscerated and discriminated against.

11. See what can be salvaged from Obamacare. The concept of standardized insurance plans that all contain the same minimum basic coverage (the “essential health benefits”) is sound because it allows the various competing plans to be more easily compared. Including mental health and substance use disorder as part of the “essential health benefits” is a good idea; most plans historically have not offered this coverage. The concept of exchanges that provide readily accessible online platforms on which to buy insurance is a good theoretical concept, though the cost and technological challenge of implementing and integrating a massive amount of software to interconnect thousands of incompatible healthcare systems, building an enormous data storage and management system, and providing the data security necessary to make the system work may be beyond the federal and state governments’ capabilities, at least in the near term.

What advice would I offer investors? It is much too early to tell who the winners and losers in the healthcare industry are going to be. Unless you have access to knowledge not widely available to the market and are an aggressive investor, my recommendation is to stay out of healthcare for the time being.

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References:

I gratefully acknowledge input from Web Golinkin, CEO of RediClinic, a retail health clinic, and President of the Convenient Care Association, the industry trade organization.

“Second-Term Nightmare,” Pete du Pont, Wall Street Journal, July 27, 2013.

“The Attack on Self-Insurance,” WSJ, September 12, 2013.

“The Health-Care Overhaul: What You Need to Know,” Anne Tergesen, WSJ, September 8, 2013.

“Big Insurers Skip Health Exchanges,” Timothy Martin, WSJ, September 18, 2013.

“Prices Set for New Health-Care Exchanges,” Louise Radnofsky, WSJ, September 25, 2013.”

“Daniel Henninger: Let ObamaCare Collapse,” WSJ, September 25, 2013.

US Government website, www.healthcare.gov

IRS website, http://www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs