Obamacare – The COVID-19 Virus of U.S. Healthcare Insurance

It tricks its way in and infects the vital organs.

Obamacare promised to reduce the cost and improve the availability of health care services in the U.S. without reducing the quality, generally considered the world’s best. By traditional metrics, e.g., the health of the American public, the cost, and the share of national resources devoted to healthcare, Obamacare is a total bust. As with any government program targeted to a single metric, a higher percentage of the population has insurance, whatever the cost or coverage, but even that has been declining since the enforcement mechanism, a grossly excessive individual mandate, was eliminated.

Obamacare made some households feel more financially secure, others less so. But it’s an illusion from a broader perspective as federal, state, and local finances are virtually all unsustainable. The federal government spent about $1.5 trillion on health care in 2019 and states about $300 billion. Handing out stacks of newly printed $100 bills to assist households with medical bills would have been a much cheaper and simpler solution.

The current Rube Goldberg monstrosity reflects the attempt to achieve the universal coverage and uniform quality of national health systems while maintaining private medical services and private health insurers under the misleading banner of “insuring the uninsured.” Many analysts believed Obamacare was purposely designed as a Rube Goldberg contraption intended to end with a “bang,” paving the way for “single payer” or “Medicare for all” – the current progressive goal. But like virtually all failed government programs, Obamacare whimpers on.

To repeal and replace would admit the obvious. But the “single payer” and “Medicare for all” proposals aren’t an actuarial insurance fix, merely a progressive federal tax. Their perceived merit is eliminating insurance company administrative costs (and administration), profits and actuarial premiums with political premiums – payroll taxes that contribute to total Treasury tax revenue. Politicizing the premiums will further politicize provider payments, two steps toward nationalized healthcare, the likely goal of many proponents.

Socialized national healthcare may be preferable to it. But politicians deny and mis-represent the European national healthcare systems’ inferior medical performance and deny the totalitarian necessity even while issuing multiple mandates and threats under Obamacare. The original separation of the private and public healthcare systems in the U.S. the original “public option” – is another, arguably better option.

The Winding Road to the Obamacare Dead End

In a competitive market economy health expenses would largely be paid from personal precautionary savings or medical insurance, the premiums sufficient to cover actuarial claims according to the “law of large numbers” for unpredictable claims, with insurance reserves for worse than predicted experience, e.g., due to a pandemic. All insurance requires a degree of “assurance” to mitigate avoidable claims, a “moral hazard that the insured will take greater risks.

The U.S. health insurance industry in the early twentieth century followed the path of the savings bank industry of the prior century. Individual not for profit (mutual) firms (Blue Cross and Blue Shield) started appearing during the Great Depression for employees (initially teachers). The big expansion came when during WW II, FDR, no stranger to fascist business methods, capped wages but not benefits creating a loophole for un-taxed employer health insurance benefits that persists today, an advantage over individual plans paid mostly with after tax income.

Health care needs of the poor were addressed by a variety of public, civic and religious institutions. During the first half of the 20^th century, driven largely by public health concerns, municipal hospitals provided health services but with independent fee for service doctors, whereas housing policies followed the fascist Wehrmacht model, paying private developers and builders to construct public rental housing.

Public healthcare, like public housing, was definitely below average. But the World Health Organization (WHO) Constitution of 1946 declared “enjoyment of the highest attainable standard of health”—defined as “a state of complete physical, mental and social well-being and not merely the absence of disease or infirmity””is one of the fundamental rights of every human being,” reaffirmed in the 2020 Democratic Party Platform.

Similarly, in market economies housing structures are considered a capital investment financed with debt or equity, owned or rented. But the United Nations identifies adequate affordable housing and secure tenure as a “fundamental human right.”These assertions followed the destruction of WW II and rise of European “democratic socialism,” but were foreshadowed by FDR’s New Deal policies during the Great Depression and his Second Bill of Rights in 1944.

European national Healthcare systems reflected this uniformity, with one standard for all under Britain’s system, whereas the French system allowed about 10% of the population to opt for higher quality care with private insurance.

The U.S. went in the opposite direction in the 1950s and 1960s. Federal expenditures for housing and health services were increasingly directly subsidized with federal progressive taxation, less intrusive to the private sector than prior methods or European systems, albeit more so than subsidizing income directly. The advent of federal Medicaid and Medicare subsidized insurance led to the decline of public hospitals (as did the movie “One Flew Over the Cuckoo’s Nest.” ) But the Budget Act of 1974 making expenditures more transparent shifted lobbying efforts to less transparent tax subsidies and to regulation by the Administrative State.

So progressives targeted finance and insurance, where the subsidies are often opaque. The objective became achieving a socialist incidence of both cost and delivery of health services by subsidizing and manipulating the private insurance market. The problem with FDR’s freely granting of multiple “rights” including healthcare and housing during this “fireside chat” was that they were not his to dispense. Progressive “rights” are nothing more than meretricious socialist promises implemented with a totalitarian stick that violate the unalienable rights in America’s Declaration of Independence that are the cornerstone of a market system, the reason for multiple conflicting and confused Supreme Court decisions regarding Obamacare.

The Clinton Administration first proposed Hillarycare, the precursor to Obamacare, in 1993. When that failed, it turned to housing, where it was too successful. These latent New Deal viruses later turned deadly. Some three and a half years ago I argued that the two legislative centerpieces of the Obama Administration, the “Dodd-Frank Act” (the Wall Street Bank Bailout) and the “Affordable Care Act” (Obamacare) had the same fatal flaw. Politicians basically intervened in finance and insurance markets to provide equality of home ownership and medical care across all incomes without transparently paying the price. The effects spread like a deadly virus, distorting all the incentives, checks and balances that kept the private system afloat, replaced by universal one-size-fits-all mandates. The sub-prime lending debacle, like the Wehrmacht, lasted a decade, the current age of Obamacare (see Appendix).

The Building of a Rube Goldberg Contraption: Doubling Down on “Pre-Existing Distortions”

About three quarters of the uninsured are U.S Citizens, mostly low income employed by small businesses with no healthcare plan. If they do not get their healthcare from public, civic, or religious institutions, they generally underpay hospital bills (by almost $100 billion in 2013), made up mostly from public sources. So subsidizing insurance premiums to an affordable level could in theory raise their level of care with no additional public expense.

Obamacare expanded Medicaid to cover those with earned income up to 138% of the poverty line ($24,000 for a family of 2, not counting the value of any other subsidies), providing subsidies (mis- labeled “refundable” tax credits) to lower middle income households above this threshold for private insurance premiums on individual plans purchased through the Health Insurance Marketplace. The problem is that premiums for individual plans were already seriously inflated due to pre-existing distortions in medical insurance that were made worse by Obamacare.

This employer tax distortion was relatively benign until labor unions bargained for “Cadillac” insurance plans that arguably pay for procedures where costs far outweigh the medical benefits. The focus changed to getting insurance companies to cut coverage, but rather than eliminating the tax free benefit Obamacare proposed a Cadillac excise tax, never implemented due to ongoing political opposition.

Tying benefits to the employer has had an effect similar to that of state enterprises in the formerly socialist centrally planned countries. When leaving a job, even if you stay with your current provider as an individual or with a new employer, you are considered a new customer to that plan subject to a “pre-existing conditions test.” This legal glitch morphed into insuring the self-(un) insured after they became ill. Paying for pre-existing conditions isn’t insurance, it’s a cost of health care. Shifting this cost from the self insured who have exhausted or do not want to use personal resources and from government assistance programs to insurers created a massive unmanageable moral hazard. People would simply wait until they had claims to join and pay the premium.

In true Wehrmacht fashion, the federal government negotiates below cost arrangements with medical providers for its Medicare and Medicaid insurance, one way to limit quality that also invites massive fraud to make up part of the difference. This means providers have to charge employee insurers about two and a half times the Medicare allowance to make up the rest.

Nevertheless, the premium for employer plans (including contributions of employer and employee) are generally less than for individual plans, even before considering personal income tax differences. Over 90% of large companies (with over 5000 employees) self insure, and over 80% of all participants are in totally self insured (46%) or partially self insured (37%) employer plans. In addition to greater flexibility with insurance (e.g., the use of stop loss insurance) and benefits, self insurance has the regulatory advantage of avoiding state regulation (which includes coverage mandates, taxes and capital requirements) in favor of less restrictive ERISA requirements.

Rather than eliminate all these tax and regulatory distortions affecting employer plans, Obamacare doubled down, requiring businesses with 50 or more employees to provide health insurance. Too small to self-insure, this led to a significant decline in small business formation.

Obamacare could have reduced costs of malpractice risk estimated at over $50 billion annually at the time, untouched in deference to a major political constituency. Rather than limit excessive care, Obamacare focused on expanding mandatory coverage (e.g., maternity, abortion) to some favored political constituencies.

Hospitals historically over-charged the uninsured in response to the high rate of charge-offs and insurers typically actuarially over-priced individual plans for healthy individuals to compensate for discounts to public and private employer plans. But Obamacare mandates caused premiums for individual policies to skyrocket to multiples that actuarially necessary to cover their risk. Paying the “tax” penalty for the “individual mandate” until filing a claim for a pre-existing condition was the better choice.

Progressive politicians wailed about excessive profits in the health insurance industry, but U.S. healthcare insurers had a somewhat lower return on equity (ROE) than other lines of insurance, probably partly related to the competition from mutual insurers. Fearing a massive actuarial loss implied by Obamacare mandates, the insurance companies resisted until they got the promised quid pro quo of administrative fees for Medicare and a promise of a bail-out should that prove insufficient, which it received in 2020.

Obamacare coverage mandates pressured for profit insurers and providers to achieve greater efficiency through consolidation. The insurance industry consolidation paralleled that of the banking industry, resulting in a similar monopsony too-big-too-fail relationship with the federal government. As with community banks, consolidation also contributed to the disappearance of many not for profit community and religious hospitals into for profit too-big-too-fail hospital chains.

As with mortgage finance, health care consolidation provided greater efficiency, but commissioned brokers stand between the consumers, the insurers and health care providers, creating huge incentive conflicts and moral hazard. What could go wrong?

All these crony capitalist price distortions left medical insurer ROE about where it started. The after tax return to investors for hospitals shows: “Urban locations generate a 12% return to equity holders, while rural locations generate a 5% return.” But the resulting opaque pricing structure is more distorted than it initially was and likely more than that of the Wehrmacht before it collapsed.

Obamacare’s earned epithet: “Here’s another nice mess you’ve gotten me into”

Back to the Future

The Constitution clearly left such issues as public health and housing to the states, which were much closer to the needs and more accountable for the cost. Progressive reforms started at the end of the 19^th century from the bottom up, at cities and states. But by the time of the Great Depression, it was competing with other national ideologies that were imposed from the top down.

But Obamacare is purportedly modeled after Romneycare, a “Republican” plan in a heavily blue state. There are scale economies in government programs. Massachusetts ranks 15^th in population, the middle of the pack among European states. Smaller states could easily form regional plans to achieve scale economies. Competition among states and trial and error would be self-correcting, unlike any national plan.

The only “advantage” the federal government has over states is even less fiscal accountability due to a presumed constitutionally privileged monopoly on printing money, which it has been doing to meet Social Security obligations for a decade and will soon have to do for Medicaid/Medicare as well. This too will end, probably with a bang. States have more pressure to face economic reality sooner, and many may have already reached the limit of unfunded liabilities. The federal government faces an enormous moral hazard in bailing out profligate states, especially opaquely as was tried with the CARES Act. Obamacare tried to entice states to expand Medicaid by front-loading federal subsidies that bottomed out at an overly generous 90%. But states outsmarted the feds by shifting their existing medical insurance liabilities to Obamacare, another reason for states to run their own plans.

Romneycare quickly learned that most of those who signed up already had insurance. Getting all the uninsured low income (above the medical threshold) to sign up was extremely difficult unless mandated. Any premium represents a bigger sacrifice for low income, although people with less had accumulated precautionary savings in prior generations. The existence of a safety net however uncertain created a moral hazard discouraging plan participation.

What if, instead of the complex Medicaid and Obamacare insurance, states and municipalities look back to their original approach. They may find it most effective to contract with existing non-profit HMOs or sponsor new ones that cater to the poor, or work through their municipalities to do the same. Copayment based on income would be set to discourage any substitution from employer plans, while providing a safety net for the uninsured. Limiting the federal role to simple block grants or matching grants would undoubtedly cost less than the current Medicare and Obamacare does, while the level of benefit would reflect state resources.

Reminiscences

As captain of the BC High debate team in 1964, I argued against that year’s debate topic:””¢ 1964 Resolved: That Social Security benefits should be extended to include complete medical care.”My debate adviser and uncle, Fred Maloof, a general practitioner at the nation’s first municipal hospital Boston City Hospital (1864) and, following in the footsteps of Paul Revere as Boston Public Health Deputy Commissioner, spent a lifetime assisting the less fortunate with healthcare. But as a WW II Navy Captain he also understood the dangers of the various socialist ideologies. I lost that debate: Medicare was signed by LBJ the next year, and I’m now a card carrying member.

My first hospital stay was in a 4 bed ward that looked a lot like my subsequent college dorm. But US real per person GDP has tripled since 1964 (in spite of the tremendous growth of government). Just as dorms became luxury student housing as federal money poured into college education, non profit Kaiser Permanente now offers Medicare members Platinum hospitals with all private rooms.

Boston City Hospital is now part of Boston Medical Center. National improvements in healthcare since 1964 with “federal government help” are truly astounding. But just think how much more could have been achieved without it.

Kevin Villani

Kevin Villani, chief economist at Freddie Mac from 1982 to 1985, has held senior government positions, has been affiliated with nine universities, and served as CFO and director of several companies. He recently published Occupy Pennsylvania Avenue on the political origins of the sub-prime lending bubble and aftermath.

Appendix: The Pennsylvania Avenue Sub-prime Lending Debacle: Prequel to the Obamacare Dirge

Progressive market incentive distortions and mandates directed millions of mortgage loans to households that didn’t meet traditional underwriting criteria, resulting in trillions of dollars in credit losses and a sharp global recession. Progressives then spent tens of millions of taxpayer dollars on the Financial Crisis Inquiry Commission Chaired by Democratic operative Phil Angelides to deny the obvious causality, with a final Report that no Republican member would sign.

One of my favorite economist colleagues Marvin Phaup posed the question whether the federally insured mortgage lending industry would “go out with a bang or a whimper” some four decades ago. That deposit-funded system and its successor capital market system both went out with a bang, but the reason why isn’t obvious. The systems of the 1980s and 2000s were both nominally private but totally politicized. Their regulators forced them to recognize hypothetical mark-to-market accounting losses (arguably some illusory losses in the 1980s) that forced their closure.

The U.S. Banking system could often have been declared technically insolvent by that method, especially in the 1980s. Instead, the Fed and federal deposit insurance regulators colluded to let banks defer loss recognition until subsequent profits and implicit opaque tax and regulatory subsidies restored their solvency. Bureaucrats, like their political masters, don’t admit systemic failure on their watch.

The transparent recognition of losses served the Fed’s purpose of forcing most depository institutions under its umbrella. Politicians were put in the dock, but as experienced masters of illusion blamed “greedy” managers in the former and Wall Street and market capitalism in the latter. In the last half century over five thousand savings banks and savings and loans – almost all – have disappeared, some merged with banks. Today there are only about a sixth as many deposit institutions, with a greater concentration in the top five banks. The post 2008 Bernanke bailout also put the investment banks under the Fed’s protective cover for commercial banks.

The two government sponsored mortgage oligopolies that controlled about half the mortgage market when they went bust in 2008, Fannie Mae and Freddie Mac, went into government conservatorship with a whimper, where they remain doing essentially the same thing they always did subject to the same progressive regulations.

The nationwide oligopoly structure produced a wide separation between the borrower and ultimate source of funds, with commissioned brokers in the middle. This created huge incentive conflicts and what insurers call “moral hazard” that mis-priced risks leading to risky behavior, a primary cause of the prior sub prime lending debacle. By preventing the occasional “bang” due to flaws in the system Dodd-Frank made the entire financial system more prone to systemic failure.

Taxpayers paid the bill opaquely, but the burden fell transparently on the millions of lower income households induced to buy homes that were subsequently foreclosed, leading to eviction and in some cases homelessness. Politicians again blamed the bankers.