Obamacare and Free Market Solutions

Written by John Lounsbury

A funny thing happened on the way to the forum hospital:  Socialized medicine was passed into law and free market implementation broke out.  Liberals have proclaimed the 2010 Patient Protection and Affordable Care Act to be the first step in establishing truly universal care for all Americans – in their view it is a step down the road to single payer “socialized medicine“.  And this is exactly why many conservatives criticize it as a “government take-over of health care“.

This observer now sees Obamacare as a government enabled and subsidized free market health care insurance system. What is happening is a progression toward an ideal that this observer argued for in 2009 here and here. The consumer (the patient) is becoming the economic arbiter of his own health care insurance implementation. This is a step toward eliminating major sources of waste in health care. As I said in 2009:

If the patient is negotiating for service with his own money, we will have the most effective and affordable control of fraud and unnecessary treatment possible.

Corporate Sugar Daddies

Since the middle of the last century the traditional source of health care has been employer provided insurance. Employees have generally liked that arrangement – they had a major economic factor (their health care costs) magically paid for by their corporate sugar daddy. Someone who was paid $50,000 a year in salary never considered the cost in dollar terms of his comprehensive coverage as part of his compensation, even though it might have been as much as 20-40% of taxable salary. Few recognized that the $50,000 salary they received was actually part of their larger compensation – they were also receiving the equivalent of another $10,000 to $20,000 a year in tax free medical benefits.

This employee was receiving his compensation in two forms:  $50,000 in taxable cash and $10,000 to $20,000 in untaxed services.  The employee probably paid a great deal of attention to how he spent the cash; he paid very little attention to how effectively he “spent” the services portion because he wasn’t viewing that as part of his income.  He rather viewed it as a “benefit” that flowed like nectar from the gods.

Even as employee contributions to health care have been implemented over the past two decades the perception of company paid health care benefits as part of total compensation in a dollar context has not been on the minds of most employees. That is all changing very rapidly because of Obamacare.

How Much Will Government Costs for Health Care Increase?

The CBO (Congressional Budget Office) seems to know the answer: The government will pay a lot more, rising to 8% of GDP by 2038 (up from 4.6% in 2012).

However, how health care costs will accrue to the government in the future is subject to much uncertainty and the CBO’s current projections could be either too high or too low. From a recent GEI News article:

One study finds that small increases in employer provided plans could shift millions of people into the public insurance exchanges and shift the supplemental support for premium payments from companies to government.

Another study finds that costs of Obamacare accruing to the government could result in enormous pricing power for the consumer and hence reduce the cost of government subsidies. The study also concludes that the cost savings could be impacted by continued political resistance. Those politically active in “fighting” Obamacare may achieve the opposite of their stated objective; they may reduce the cost savings that could otherwise be achieved and thereby increase government expenditures, according to researchers from the Brookings Institute and Georgetown University.

The shift of health care costs from corporations to employees and government is picking up speed. GEI News recently reported the movement of corporations away from group health plans for retirees:

Corporate benefits for retiree health care have been shrinking for years but the latest changes appear to be accelerating the process. Late last month GEI News covered the shifting pattern of employers moving from sponsored group plans to use of private insurance exchanges where employees shop for individually tailored coverage with corporate support of part of premium costs through donations to HCAs (Health Care Accounts). The changes are especially common for retirees.

Corporate giants who are making this change include General Electric (NYSE:GE), IBM (NYSE:IBM), DuPont (NYSE:DD), Caterpillar (NYSE:CAT) and Time Warner (NYSE:TWC) which made the announcement today (09 September 2013). GEI News covered details of the IBM change in the article last month.

The answer as to how much government costs for health care will increase over the next 5, 10 and 20 years is not one for which a reliable estimate can be made at present. The playing field is changing in a revolutionary way.

Private Insurance Exchanges are NOT Obamacare

What corporate headlines are reflecting is not a shift from corporate group plans to Obamacare. The private insurance exchanges that are rapidly expanding have been operational on a smaller scale for a number of years. They are just now becoming major players as large corporations shift their retiree health plans from corporate sponsored group plans to the new format. And, even though just a month ago survey results indicated a much lower active interest in the insurance exchange format, now the use of exchanges for active employees is suddenly in the news. Just last week Walgreen announced it was shifting its 160,000 employees from a company group plan to individual purchase on a private exchange.

The public exchanges opening for registration of applicants next month under Obamacare are newcomers to the exchange platform concept. As time goes on the efficiencies of the older private exchange system and the public exchanges can be compared and operational costs can be reduced. Eventually there may be just a single set of insurance exchanges with a merger of public and private structures.

Winners and Losers

Any time big changes are made there will be winners and losers. In many cases the same parties may be both winners and losers – it’s called a process of trade-offs. Some of the winners:

• Corporations will be better able to cap and plan for health care benefit costs.

• Employees will no longer be captives to a health care benefit shackle tying them to one employer.

• All seeking health care coverage can optimize what they buy to fit their individual needs.

• Insurance companies will gain millions of new premium payers greatly increasing their revenues.

Here are some of the losers – the list looks similar:

• Corporations will have to compete more vigorously to staff their most demanding positions because talent will be more mobile.

• Employees will no longer have a “sugar daddy” paying for their health care.

• All seeking health care coverage will have to put forth effort to get the best individual coverage.

• Insurance companies will be subjected to more competition for cost effectiveness as tens of millions of customers shop for the most cost effective coverage.

Bottom Line

The “socialized medicine” legislation known as Obamacare may unleash private market forces that will be cheered by today’s opponents and are probably feared by many present-day proponents. The cost curve for health care may be bent and the CBO projections may turn out to be way off the mark. Remember federal surpluses “forever” (2000) and trillion dollar deficits “as far as the eye can see” (2009)?  The CBO has a record of projecting poorly from past records into the future.

Rather than the first step to socialized medicine with everything offered through central planning, we may be seeing the first step toward distributed health care determined by 150 million consumer housholds. Which path has the greater likelihood of resulting in the most efficient delivery of health care and the best chance to “bend the curve”?

Single payer may offer a path to holding down the growth of health care costs.  But couldn’t 150 million payers also curtail that growth?  And which process has the best chance of optimization for each household?

An Aside to Ron Paul

Ron Paul recently reviewed Obamacare and concluded it was merely a waypoint before we got a single payer.  He criticized the Obama administration as “corporatist” and criticized the structure of the health care delivery system.  Mr. Paul suggested that the most efficient system would be for everyday health care to be paid for by patients directly, with insurance used only for coverage of catastrophic events.  This aligns with my arguments more than four years ago.

However, I propose a glass half full view of Obamacare and suggest it could be a step closer to our shared view. Mr. Paul views the glass as half empty and envisions a future moving away from the free market forces I suggest may hold sway.