October 10, 2012 Leave a comment
John C. Goodman of The Independent Institute has written as essay entitled ACA: An Impossible Mandate, in whichhe makes some interesting observations regarding “crowding out” of consumption, wage increases and jobs by the Affordable Care Act aka ObamaCare. (1)
Consumption being crowded out by escalating insurance premiums based on, “the normal consumer reactions to rising premiums are going to be disallowed. For example, most people would react to unaffordable premiums by choosing a more limited package of benefits, or opting for catastrophic coverage only, or relying more on Health Savings Accounts. But these and other responses are limited or barred altogether under the new law.” (2)
That is to say, the consumer can’t adjust his health insurance premium by changing plans to reduce cost, as the freedom to choose is basically eliminated. Hence, consumption of other items must be reduced. Since adjusting the health insurance premium is limited or nonexistent, more consumer dollars flow into health premium, meaning less consumer dollars flow into other consumption items.
The crowding out of wage increases is explained as follows:
“Most people will continue to obtain health insurance through an employer. The Congressional Budget Office estimates the average annual cost of a minimum benefit package at $4,500 to $5,000 for individuals and $12,000 to $12,500 for families in 2016. Thus, the minimum cost of labor will be a $7.25 cash minimum wage and a $5.89 health minimum wage (family), for a total of $13.14 an hour, or about $27,331 a year.
Imagine you are an employer. You certainly aren’t going to pay an employee more than his value to the organization, and competition from other employers will tend to prevent you from paying less. If the government forces you to spend more on health insurance, you will spend less in wages in order to pay for the mandated benefits.
For above-average-wage employees, this is all straightforward. Expect wage stagnation over the foreseeable future, as employers use potential wage increases to pay for expanded (and mandated) health benefits instead. At the low end of the wage scale, however, the effects of this new law are going to be devastating.” (3) (4)
The crowding out of jobs:
“Ten-dollar-an-hour workers and their employers cannot afford $6-an-hour health insurance. If they bought it, only $4 would be left for cash wages and that would violate the (cash) minimum wage law. This is not a small problem. One-third of uninsured workers earn less than $3 above the minimum wage.
Further, although health economists have known for decades that these are the workers that most need help in obtaining insurance, there are no new subsidies to help employees at Wal-Mart or McDonald’s or Denny’s or any other restaurant chain, buy health insurance. These workers and many others are at risk of losing their jobs.” (5) (6)
The “crowding out” described by Goodman is along the same lines as the “crowding out” that occurred with the advent of Social Security. That is, the crowding out effect of Social Security, the funding mechanism thereof, affected consumption, wage increases and jobs in the Great Depression and the crowding out effect is one of many reasons pointed to that prolonged The Great Depression. History repeats itself -or- does history purposely repeat itself? (7) (8)
The last paragraph of the essay is public choice theory: “Why is it good not to have a mandate? Because once the government tells us what insurance we must have, every special interest imaginable will lobby Congress to become part of the mandated benefit package. This has already happened at the state level, where insurance plans in various states are required to cover providers ranging from acupuncturists to naturopaths and services ranging from in vitro fertilization to marriage counseling.”
Goodman is exactly correct about special interests lobbying for more mandates. It will be a federal level circus supplanting the previous state level special interest circus surrounding “mandates.“ How so?
Generally speaking, on the state level, special interests have come forward over the years wanting expanded coverage or inclusion of coverage, in many cases, for very narrow items of extremely low frequency yet high severity. In other cases, special interests have lobbied for items of high frequency and extremely low severity e.g. contraceptives that are best handled outside the realm of the insurance mechanism.
Rather than the special interest items being lobbied for on a rider basis that you can purchase or turn down depending upon your needs/wants, they become all inclusive. Why do the lobbied items become all inclusive? Politicos through the mechanism of government give away incremental coverage items via the incremental cost phenomena based on other people’s money as a political constituency-building exercise. How does this phenomena work?
Politicos side with the special interest and the special interest’s particular constituency to gain such constituency as an additional political base by passing on the incremental cost of the now inclusive coverage to a wide base of insurance premium payers. The politico knows that it is highly unlikely that any serious and organized group will lobby against, for instance, a $1 per month increase. However, $1 per month times twelve months times millions of insured people adds up to tens of millions of dollars focused on the interest of the special interest and their particular political constituency. Hence your money is used for political constituency-building. Problem is, over time, the summation of the incremental increases for mandate A, B, C,…Z represent a huge premium increase and in many cases a continuous cost increase driver.
Finally, Goodman makes an interesting observation regarding the “free rider”:
“The idea of a health insurance mandate has seemed reasonable to many people on the right as well as the left because of the free-rider problem: those who remain willingly uninsured will have extra money to spend, and if they become sick and need care they cannot pay for, they will look to everyone else to provide that care for free. Are we not rewarding them for being irresponsible and allowing them to be free-riders on the rest of society?
That argument seems persuasive until we ask this question: if we require everyone to have health insurance, what is the appropriate punishment for someone who doesn’t? The only practical way to enforce a mandate is with a fine. And if that is all we have in mind by way of enforcement, we do not need a mandate. All we need is a system that fines people who don’t purchase insurance.
In fact, the income tax already provides this “fine.” Middle-income families who have employer-provided health insurance (as opposed to higher wages) receive a generous tax subsidy. The flip side of that subsidy is a penalty: People who don’t have employer-provided insurance pay higher taxes as a result of that fact.”
Prior to ObamaCare the cost of the free rider was pegged at $125 billion per year (legislated requirement to provide care and the consequential costs). The free rider effect in this case is considered a negative (the uninsured cost of providing health care is passed on to those insured). However, in this particular case the free rider cost begs a question: is the free rider less costly than the alternative of supposedly eliminating the free rider through Obamacare? Stated alternatively, is the cost of the free rider less than the cost of an elaborate price-fixing scheme, where price is removed as the rationing agent and replaced by time and quantity as the rationing agent, further administered by a huge bureaucracy and the consequential bureaucratic forms and red tape? (9) (10)
(1) ACA: An Impossible Mandate
Many people will opt for more comprehensive plans. See Douglas W. Elmendorf, “Letter to Honorable Olympia Snowe,” Congressional Budget Office, January 11, 2010.
(5) ACA: An Impossible Mandate
Katherine Baicker and Helen Levy, “Employer Health Insurance Mandates and the Risk of Unemployment,” Risk Management and Insurance Review 11 (2008): 109–132. doi: 10.1111/j.1540-6296.2008.00133.x.
(7) New Deal or Raw Deal, Burton Folsom, Jr.
(8) FDR’s Folly, Jim Powell
(9) The Kaiser Commission on Medicaid and the Uninsured.
(10) Free Rider:
Bill Heasley, a local economist, writes an occasional column for the Guardian.