Category Health Policy

Do Obama’s Higher Ed Reforms Have a Chance in Congress?

Danny Vinik Leave a comment

Jonathan Chait is pessimistic:

But the comparison raises the question of whether his higher-education agenda will repel Republicans just as his health-care agenda did. Finding ways to get the government to spend less on education sounds pretty conservative.

…

If you put more weight on the ideological explanation [for Republican opposition to the ACA] , then Obama’s higher-education agenda stands a chance of attracting Republican support. Republicans might even take some visceral pleasure in making their cultural enemies in the academy squeal. If you put more weight on the political explanation, then Republicans will convince themselves that Obama’s plan is evil no matter what. Republicans will find themselves believing that free-market principles require that whatever money the government spends on college access must have absolutely no conditions attached.

Josh Barro is more optimistic:

I view scorched-earth Republican opposition to health care reform as having been driven mainly by neither ideology nor animus toward the president. I think the key was a desire to protect Republican constituencies who benefit from the health policy status quo: doctors and Medicare recipients.

In the case of higher education, the constituency getting its ox gored by cost control will be college professors and administrators, hardly a fixture of Republican fundraisers or Tea Party town halls. That bodes well for bipartisan compromise on this issue.

Hmm, I want to side with Barro here, but I can’t for one big reason: Republican rejection of the Medicaid expansion. A quick refresher: Obamacare expanded Medicaid to cover all individuals with income up to 133% of the federal poverty line. Since Medicaid is a state-run program, the government agreed to cover the full costs of the expansion until 2017. From 2017 to 2020, the federal government covers 95% of the costs and thereafter it’s 90%. It’s a great deal for states. But the Supreme Court ruling last summer allowed states to opt out of the expansion. This leaves a gaping hole in Obamacare. Individuals with incomes between 100 and 133 percent of the federal poverty line will still be eligible for tax subsidies, but those with incomes below 100% of the federal poverty line who aren’t eligible for Medicaid already will not receive coverage.

Why does this matter to whether Obama’s higher ed plan has a chance of passing in Congress? Because, as Barro and Chait write, it depends on whether Republicans will immediately reject the plan out of opposition to anything President proposes or whether they will be open to it. Barro’s optimism is based on the fact that Republican opposition to Obamacare was not just pure nihilism, but was also a play to protect their favored constituencies. Except Republican rejection of the Medicaid expansion shows that it was more nihilism than anything else.

That’s because rejecting the expansion will hurt one of Republicans favored constituencies: hospitals and doctors. Obamacare discontinues Disproportionate Share (DSH) payments, which were used to offset uncompensated health care costs of the uninsured pre-Obamacare. When Obamacare expanded Medicaid, those payments became unnecessary. Medicaid would now cover everyone up to 133% of the federal poverty line so uncompensated costs would basically disappear. Thus, there was no need for DSH payments to continue. Except hospitals in states that rejected the Medicaid expansion are still going to face significant costs of treating uninsured patients and now they receive no DSH payments to recoup those expenses. That’s why hospitals have been aggressively lobbying Republican states to expand Medicaid. There’s a lot of money on the line for doctors and hospitals.

But that lobbying has proved ineffective so far. Twenty one states have already rejected the expansion with six still debating it. It’s a great deal from the federal government that allows millions of poor Americans to receive health care coverage. Even more, hospitals are crying out for the expansion. Nope, Republicans are dead set against it. No matter how much hospitals and doctors favor them, Republicans aren’t budging. Republican opposition to Obamacare is less based on protecting Republican constituencies than rejecting anything the President proposes. I don’t see Republicans treating Obama’s education proposal any differently.

Obamacare is a Good Deal for Young People in the Long Run

Danny Vinik 18 Comments

The Washington Examiner’s Phillip Klein wrote an article this morning outlining the financial incentives for young people to forego insurance. This is a hotly debated part of the law because if young people don’t sign up for health care, the law will almost certainly fail. The Obama Administration has focused its outreach efforts on young people for precisely that reason. In Klein’s article, he links to a recently released study by the National Center for Public Policy Research, which calculated how much better off 18-34 year olds would be if they didn’t sign up for the exchanges and paid the penalty instead. Here are their findings:

 About 3.7 million of those ages 18-34 will be at least $500 better off if they forgo insurance and pay the penalty. More than 3 million will be $1,000 better off if they go the same route. This raises the likelihood that an insufficient number of young and healthy people will participate in the exchanges, thereby leading to a death spiral.

This isn’t surprising. Obamacare is set up so that the young and healthy pay more to offset the high costs of the old and sick. After all, those young and healthy people are going to be old and sick some day. They pay extra now, but save on costs in the future. This gets to a problem with studies like the one above: it only examines the financial incentives for young people in the short-term, not overall.

In the next ten years, the average young person will likely face minor medical costs. Insurance will be unnecessary. Young people may look at the money they are paying for a bronze plan each month and decide to drop their health insurance. As the Center above calculated, this will save them money each year (barring an unlucky health catastrophe – something the study ignores as well).

Let’s say an individual doesn’t get sick throughout his 20s and when he turns 35, he figures the risks are high enough now that he should purchase insurance. Over the next 30 years, he will likely come down with some illness. It may even be so serious that insurers would not cover him in the pre-Obamacare age. Under those circumstance, he’s very thankful that insurers can’t deny him coverage for having a pre-existing condition. Suddenly, he finds that Obamacare isn’t so bad after all. He paid a modest fee in his young years for not purchasing insurance and now that he’s older, he can buy reasonably priced coverage to cover his health bills. And those bills are paid for by the new young “suckers” who aren’t following in his footsteps and foregoing insurance.

Obamacare is a good deal for young people in the long run.

Obamacare is a good deal for young people in the long run.

But what if those new young people aren’t suckers? What if everyone looks at the world as he does and forgoes insurance? Well, Obamacare will descend into a death spiral and collapse under its own weight. How does that young person’s lifetime costs look now? Well, he saves a bit more money by not having to pay the fee for ignoring the now-defunct individual mandate. He grows older and suddenly finds himself with a pre-existing condition and insurers refuse to cover him. He racks up huge health care costs and can do nothing about them. Suddenly, he realizes how much better off he would be under Obamacare and regrets the choice that he and all his friends made to forego coverage. If only they had paid the $1,000 extra so that the law didn’t collapse, he would be covered right now.

There’s an even deeper problem here though. All young people understand the financial incentives they have to forego insurance. If they believe that everyone else is going to listen to those incentives and not purchase coverage, then they don’t have a reason to purchase it either. After all, if I’m the only one buying health insurance, the law is going to fail anyways and I’m just wasting my money. This is a classic collective action problem. All young people are better off in the long run if they all agree to purchase insurance. But they all have individual financial incentives in the short-run to forego it. The individual mandate is supposed to correct this, but the penalty ramps up over time so the incentives still exist next year to not purchase insurance.

This is why Klein is wrong in his article. On an individual level, each person has a financial incentive in the short-run and long-run to not purchase insurance. In the short-run, the person saves money. In the long-run, the collective action problem will cause the law to collapse anyways. But, in aggregate, young people should purchase insurance. It may not be financially beneficial in the short-run, but in the long-run it almost certainly is. Klein misses this distinction in his piece:

It’s worth keeping in mind that purchasing health insurance, in aggregate, is a bad deal for younger Americans. This isn’t even very controversial. The design of Obamacare rests on the very assumption that windfall profits from selling younger and healthier Americans more insurance than they need will be enough to subsidize older and sicker Americans.

In aggregate over the long-term, young Americans will face higher costs at the beginning, but significantly lower ones later in their life – and for those who develop a pre-existing condition, they will save a huge amount of money. This part of the law is tough to explain to young people. No one my age is thinking about how Obamacare will save them money 40 years from now. But that’s exactly how they should be thinking about it. Klein’s article only looks at the short-term financial incentives and this obscures the long-term benefits that young people gain as well. In aggregate, it is a good deal for them. It just requires a longer time horizon to see it.

Purchasing Health Insurance Right When You Get Sick

Danny Vinik 1 Comment

This is more of a question than a comment, but Ramesh Ponnuru brings up a point that’s been bugging me a bit in his column in Bloomberg today. He quotes a piece by Kevin Drum who sarcastically asked if FreedomWorks would pay the health care costs of anyone who was convinced by the organization to forego health insurance and then contracted leukemia. Ponnuru responds:

The other thing Drum misses is that people who “contract leukemia” will be able to buy insurance once they’re sick at the same rate they could have gotten it for when they were well. That’s the part of the Obamacare law that its defenders are usually most keen to emphasize. People who go without insurance while they’re healthy may have to pay a tax — although even at that the Internal Revenue Service will be limited in its methods of collection — and may, if they get sick, find their options for getting insurance limited for a few months.

Since insurers can no longer refuse to cover people with pre-existing conditions, that means that if I don’t have health insurance, but get sick, I immediately can purchase a plan that covers my costs. Thus, I avoid paying for health insurance when I’m healthy, but as soon as I need it, I buy it. But does that really work in practice?

Obamacare is supposed to make purchasing health insurance easier through the online exchanges, but that doesn’t mean it will be a straightforward process as you’re sitting in a hospital. And what about all the costs that accrue before you purchase your plan, but while you’re being diagnosed? Or what if something happens that requires a visit to the ER? Or a serious injury that requires immediate surgery and gives you no time to purchase a plan?

You’re going to be left with some major bills at the end. So I don’t think it’s fair to say that people shouldn’t wait to purchase coverage until right when they get sick. Because it won’t always be possible to do so quickly enough to cover the costs. There is a risk in postponing buying health insurance. It’s certainly much less than it was when insurers could refuse to cover you if you had a preexisting condition. But there is some risk still.

Is that risk enough to make it economically sound to purchase coverage? Well that depends. Purchasing a bronze level plan will cost a certain amount depending on your state. Not purchasing a plan will cost you in two ways: the penalty for not paying the individual mandate and the risk-adjusted amount you’ll pay if you get sick and can’t purchase coverage in time to cover all your costs. Now, that’s not a calculation many people will make. That risk-adjusted amount is incredibly hard to determine. But economic theory has demonstrated that people are loss averse – meaning that when the risk of losses exist, people act in risk-averse fashion.

This is an aspect of the law that I haven’t seen get any coverage. I have seen few people challenge the idea that people will be able to buy coverage immediately and not accrue any costs in the meantime. But that is unlikely to be the case. Ponnuru admits as much in his article and proponents of the law would be smart to point it out as well. After all, if people don’t sign up for health insurance (particularly young people), then the law will fail. Showing people that they can still face substantial costs if they decide to purchase coverage just when they get sick is a good way to convince them to sign up.