Friday, June 10, 2011

Third of employers may cancel coverage under Obamacare

In the year since President Obama’s health care reform was enacted health care costs have actually increased.  Likewise, five years since Mitt Romney’s similar reforms in Massachusetts, the cost of health care in Massachusetts is still one of the highest in the nation.

Now comes a new study that shows that as many as thirty percent of employers “definitely or probably” would eliminate their company health insurance programs when President Obama’s health care reform program goes into full effect in 2014.  The study, by McKinsey & Co. and reported in the Wall Street Journal, is much higher than previous estimates of how many employers would eliminate coverage as a result of the new law.   

It is likely that the increasing number of employers who are considering opting out is a factor of the rising cost health care, which is in turn linked to the Affordable Care Act’s new mandates on health insurance providers.  Since the ACA was signed into law last year, numerous companies have obtained waivers from the law’s mandates, but these waivers will run out when the law is fully implemented in 2014.  President Obama promised that if Americans liked their coverage they could keep it, but if their employer eliminates the company plan they won’t have that option.

An additional incentive for employers to drop coverage is that while companies must pay a fine if they do not provide insurance for their employees, the fine is not large enough to provide an incentive not to drop coverage.  At $2,000 per full-time worker, it is much less expensive for employers to simply pay the fine than to pay the health insurance premiums for their workers.  

The reason that the ACA has not and will not rein in health care costs is two-fold.  The first is that the law expands coverage and benefits.  When the law required that insurance companies cover preventive care at no cost, that dependents be offered coverage up to age twenty-five, and that children be covered regardless of pre-existing conditions those changes increased costs for the insurance companies which then passed along those costs to their policy holders. 

The second reason is that the reform law did nothing to make consumers more conscious of their health care spending decisions.  With many health insurance policies, consumers pay a flat fee regardless of the cost of the service.  This means that health care consumers have no incentive to shop for a better price or to slow their consumption of health care services.

The inefficiency of our current system can be seen by imagining that car owners would pay a flat fee for use their cars rather than paying for the actual usage of the car.  If a car owner in Atlanta wanted to go to the beach, they would be as likely to drive cross country to experience the famous beaches of Malibu, California as to take a shorter drive to Florida because the cost would be the same.  It is not any cheaper to drive to Malibu, but the cost difference is paid a third party, the car’s “insurer.”  Likewise, if a driver is not paying the full cost of operating his car, he is more likely to drive it more.

In the real world, driving to California from Atlanta would cost hundreds of dollars more in fuel, oil, and wear and tear than having our Georgia driver take the shorter trip to a neighboring state.  However, other than time to travel, these incentives do not exist if most of the cost is borne by a third-party “insurer.”  The consumer is not affected by the increased amount that the third party must pay out…  at least not until the rates increase the next year.

The same disincentives exist in our current health care system.  Because many health care consumers pay a flat fee for their health care rather than sharing proportionately in the cost they also have no incentive to contain their costs.  It is a rare consumer who will shop around for a better priced doctor.  Most consumers don’t even know what an office visit to their family doctor actually costs.  Conversely, the incentive is for consumers to flock to higher priced doctors because the perception is that they get a larger benefit by having the insurer pay more. 

As health care costs continue to rise, it is increasingly likely that more and more companies will choose to pay the fine and eliminate the health insurance policies for their employees.  This means that more people will lose their insurance coverage and will be forced into the market to purchase private health insurance plans or ignore the individual mandate and pay their own fines for not buying insurance.  

This will likely mean a renewed call by liberals for a single-payer health insurance system which would eliminate any choice and require that the government cover all Americans.  As in other countries, this would lead to even more incentives for unrestrained consumption of health care services and, eventually, rationing.  An alternative would be a free-market solution that would encourage competition and freedom of choice.  

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