A brief analysis of Obama's health care plan

Buried on page 8 of the President’s 11 page health care reform proposal¹, is the key to resolving the protracted debate: “insurers have little incentive to lower their premiums”. 

Positioned as a middle ground between the House and Senate bills, the White House proposal nevertheless does nothing economically to provide incentives.  The very next sentence in that section is: “The Senate bill includes a tax on high-cost health insurance plans.”  The President’s proposal endorses this tax (although it postpones the year of inception from 2013 to 2018 and raises amount of premiums exempt from the tax).  This, then, is what our elected officials in the Senate and the White House consider “incentive”—the equivalent of trying to lower the average price of cars by taxing luxury vehicles.

It is an axiom of economics that taxing something results in less of it.  Some insured who need the high-cost health plans for severely ill or difficult cases in their families will no doubt continue to buy them out of necessity.  They will be forced to pay the tax, which will leave them with less to buy products and services, say for college education, or to invest in a business that creates jobs.  Others may drop their high cost plans because of the tax.  In that case the insurance companies will try to raise their premiums toward, in the extreme, $1 less than the government exemption to make up for their lost revenue without triggering the tax.  All other things being equal, taxing part of the stream of insurers’ incomes will thus raise rates, not lower them.

The President’s plan endorses a $67 billion “assessment” (read: tax) on insurers because they “stand to gain as more Americans get coverage”.  A second axiom of economics is: corporations do not pay taxes; individuals pay taxes.  There is a proposed excise tax of $20 billion on medical devices and a $23 billion “revenue increase” (notice in how many ways government can say “tax”?) from the pharmaceutical industry.  Taxes will do absolutely nothing to give “incentive” to produce more medical devices and drugs.  There is also a new “fairness tax” (an oxymoron if there ever was one) for Medicare Hospital Insurance on income from “passive income”—dividends, annuities, royalties, and rent—the very types of income upon which seniors rely to supplement Social Security income.  Health care reform has thus become instead a complex tax bill.

The words “oversight”, “mandate”, “require”, “review” appear 15 times in the plan, as in oversight by the Department of Health and Human Services (HHS) of State insurance authorities, or oversight of insurance premium increases: a geometrically disproportionate shift of power to Washington.  As The Wall Street Journal reported², Massachusetts, which passed the precursor to ObamaCare under then-governor Mitt Romney, has started down the treacherous path of price controls, oversight presumably having failed.  This should be sufficient evidence to disqualify Romney from his Party’s presidential nomination, as the GOP struggle now to illume the same inevitable result at the national level.  Price controls constrict supply, as the energy price controls of the 1970s proved, precisely the antithetical effect to the objective of increasing access to and consumer choice of products and services.

The un-Constitutional mandate to force the uninsured to buy insurance or to force the recalcitrant to “make a payment to offset the cost of care they will inevitably need” is an amusing exercise in government's attempt to over-engineer an industry.  The minimum penalty tax in 2015 is proposed as $325 or 1% of income whichever is greater.  This means that an individual earning $40,000 in adjusted gross income may pay only $400 a year and be covered by government insurance.  And if he can prove “hardship”, he is exempt from paying even that.  Why would anyone buy private insurance under such a scheme?

There is more.  Under the Democrat’s proposal, the government will pay insurers directly between 70% (for a maximum income $88,000) to 94% (for a minimum income of $29,000) of a family’s "total health care costs"; i.e., 85% of all American families will receive some sort of subsidy—making this plan a massive entitlement program under the rubric “cost sharing”.

The underlying assumptions about insurance and medical care in this proposal are: government can 1) increase supply; 2) reduce prices; and 3) eliminate waste, fraud, and abuse in programs like Medicare and Medicaid.  If (1) and (2) were true, (3) would be unnecessary, as otherwise government would have been proven competent to run an industry.  The good bulk of the President’s plan addresses (3), however, because they concede, “Medicare currently overpays private plans by 14% … and has also done little to reward quality”.  Hence, government cannot increase supply, or they cannot reduce prices, or both.  Which is why polls show³ between 52% and 58% of Americans are opposed to the President's plan.

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[1] http://www.whitehouse.gov/sites/default/files/summary-presidents-proposal.pdf

[2] “Back to the ObamaCare Future”, The Wall Street Journal, 2 March 2010, http://online.wsj.com/article/SB10001424052748703444804575071294139286892.html

[3] “Health Care Reform.” Rasmussen Reports, 1 March 2010, http://www.rasmussenreports.com/public_content/politics/current_events/healthcare/september_2009/health_care_reform