Obamacare: A Health Insurance Subsidy, Not Health Care Reform

Serious reform or status quo? Marshall Auerback warns that Obamacare dangerously expands the role of the health insurance industry.

The healthcare legislation is important politically since President Obama now looks suddenly like a “winner”. But will it actually achieve the objective of improving the nation’s health care? Yes, more people will get INSURANCE. Will they actually get more health care paid for?

Not necessarily. We’ve had a bailout for bankers and now the principle seems to be extended to the insurance industry. As Randy Wray and I discussed in a recent paper, the health care bill just signed into law entrenches the centrality of private health insurance companies and contain no serious proposals to limit costs. More people will get hit with deductions, co-pays, annual limits (for several more years), exclusions, out of pocket expenses. This will ensure that health CARE remains too expensive to actually take advantage of their new INSURANCE. And many currently insured people are going to get higher taxes. Premiums will rise.

Health insurance is the primary payment mechanism not just for expenses that are unexpected and large, but for nearly all health-care expenses. It’s akin to going to your local grocery store, buying food, submitting the bill to a 3rd party who reviews it, reimburses the grocer for part of the cost, and then extracts a 13% charge from you for the privilege of scrutinizing the bill in the first place.

The “reform” introduced by this bill largely promotes the status quo by pulling more people into an expensive health care system that is managed and funded by private insurers with no countervailing government option. Given that over half of all household bankruptcies are due to health care costs, creating mandates to force people to turn over an even larger portion of their income to insurance companies will further erode household finances and exacerbate the problem of declining incomes. It’s the Wall Street bailout principle extended to the health insurance industry.

Our progressive allies have criticized us for drawing attention to these uncomfortable truths and failing to celebrate the President’s great social triumph. Yes, it may well have been catastrophic had the bill not passed, as it probably would have emboldened the radical forces of the right and torpedoed any hope of further significant reform legislation of any kind (which we desperately need in areas as diverse as financial reform to employment policy).

But the “victory”, such as it is, comes at the cost of a huge price subsidy to private health insurers. Our new health care reform is essentially the Massachusetts plan writ large. Robert Prasch, a professor of economics of Middlebury College and a long-time resident of Massachusetts, had this to say of his state’s plan:

[A]ffordability] does not come from controlling costs, but by shifting them. Shift to whom? A hallmark of the Heritage/Romney plan is that no change of the distribution of income is to occur with the financing of this plan. NONE. Rather, funding is to be from three sources — those with supposedly “Cadillac” plans, those who have “opted out’ because of the laughably high cost of coverage relative to their own risks, and to the state general fund…In light of state budget shortfalls, it is no surprise that the latter source is declining quickly, and tens of thousands of Mass residents have ALREADY lost their subsidies (this trend will certainly occur on Capitol Hill over the next several years as ‘deficit mania” kicks in). So, get this, as your income declines and your house is repossessed, the cost of your health care rises with higher premiums AND lower subsidies. But, make no mistake, even as the subsidies decline, the mandate will stay — why should the big companies give up this huge windfall of unchecked access to the wages of the low paid?

Professor Prasch notes that health insurers were losing premiums because employers were dropping coverage. This happened in part because they could not compete, since no country in the western world uses private insurance exclusively to provide health care. Healthy individuals were dropping because no reasonable calculation could show insurance to be good value for the money.

Why is this? Because the economics of private health insurance consists of marketing to people who are relatively unlikely to need care health, whilst avoiding selling it to those are more prone to get sick. Of course, the opposite applies to a potential consumer of health care. Healthy individuals do not want to buy health insurance and sick people pay too much on the basis of what the insurance industry considers to be actuarially sound principles.

What about insurance for unforeseeable events, so-called “Acts of God”? Almost by definition, these events are not insurable. In almost any bargaining situation, you never want to get to a place where something is most valuable to you at the same exact moment as it is least likely someone will pay it out. The cost of insuring one’s house after a major earthquake or flood is likely to be prohibitive. You don’t want to pay the price likely to be charged, nor does the insurer doesn’t want to provide it at anything like an affordable rate. The objective is not to pay out.

Or consider an even more pertinent example suggested by my ND20 colleague Mike Konczal:

Can you even imagine a universe where you could call your health insurance and say ‘I think I’ll be sick next month — can you show me how you are putting aside money to make sure you’ll cover my illness?’ If anything you’d be worried they’d start digging into you right then for pre-existing illness and other reasons to kick your claims.

Any real reform which cuts costs would be far less profitable. So government has, in effect, made a grand bargain with the insurance companies. Force healthy people to pay premiums. Yes, they knew there would be a trade-off; they’d have to take some unhealthy people. But, contrary to the cheerleaders for Obamacare, giving these people insurance via subsidization on the part of the healthy part of the population is not synonymous with paying directly for HEALTH CARE. As anybody who has had regular experience with a health insurance company can attest, read the fine print of the policy. It doesn’t follow that you’ll get the health care provision you assumed you would receive when you were paying those expensive monthly health insurance premiums.

Consider a recent example. Aflac offers a one-time payment program for breast cancer. Does this mean that a patient would receive supplemental payments to cover the costs of cancer treatment in the event that the existing plan would not cover everything? No, it doesn’t.  The person concerned gets a one-time payout of $X if he/she is diagnosed with cervical cancer, $Y if he/she gets breast cancer, $Z for pancreatic cancer, etc. One wonders who is actually writing these policies and what sort of ingenious Wall Street engineering is behind it.

We will need to reduce, rather than expand, the role of insurance. Nutrition, exercise, education, diet and public safety may now be more important than care in producing further advances in longevity and quality of life. Expanded health care provision is a worthwhile and genuine health care reform. We want to ensure that the key components of a civilized life — including health care — are available to all, regardless of their money income. Unfortunately, Obamacare does nothing to help achieve this objective.