Tag Archives: Affordable Care Act

Does ACA Legislation Prevent or Induce Market Failure?

The cornerstone of our presidents legacy rests solely on the success or failure of his oft-publicized, debated about, & seemingly misunderstood health care policy. I have recently taken the time to learn a little more about some of the provisions and general ideas that exist in the bill and if I may not have been totally sold on the bill before, I have even more questions now.

The ACA is designed as a “multi-faceted” plan (with over 1000 pages in the law its not a stretch to believe this) that tries to deal with both small group and non-group individuals who may have fallen through the cracks of the health care system before; some may have been too young to enter into medicare or too close to the poverty line to qualify for medicaid, etc. The law fights to extend medicaid benefits to more people as well as make an effort to drive down other insurance costs due to its marketplace style reduction of informational asymmetries present in the old style health care system. (US Dept. of Health & Human Services).

It is not my goal here to explain the law in its entirety but rather to point out a couple of the parts of the law that aim to fight against market failure and maybe cast a light as to their effectiveness. One of the most interesting and recently written about issues is the promotion of preventative care as a tool to help drive down future costs for healthcare companies due to the fact that they now theoretically will be insuring those that have much larger future expected costs.

Thusly, it seems prudent to take a look at whether or not the logic behind the pushing of preventative care is actually sound despite what we may think at first glance. The first issue that comes to mind with the focus on preventative care is the new potential for the abuse of this care. A study in Oregon dating back to 2008 that simulated the extending of Medicaid benefits to include more people in the low income bracket as well as expanding coverage to make it more affordable to use a primary care doctor shows the problems that seemingly defy logic. Those people who won the lottery for expanded Medicaid benefits went to the emergency room a whooping 40% more than the part of the group who did not enjoy the benefits of expanded primary care coverage (NYTimes).

Another interesting facet of the cost/benefit focus of preventative care again comes from the New York Times, once again the thought that a focus on preventative care would deal with problems now in a more cost effective manner than would be used later does not seem so clear. Canadian women were separated into two different groups; one that would have regular mammograms and breast examinations and the other that would only have routine breast examinations and no mammograms. The doctors found at the end of the trial (which appeared in the British Medical Journal) that the death rate between both groups was in fact the same, which leads some researchers to question the cost effectiveness of this preventative approach to medical health. In fact, the researchers took things even further and hypothesized that the unnecessary treatments administered to women while obviously did not lead to lower healthcare costs, could also lead to harmful health effects from routine surgery as well as the fact that some cancers that are benign can turn malignant and spread after being biopsied. The article talks more specifically about the meaning of thing in the medical world and how treatment may or may not change, but I think its worth thinking about on a much broader level. If one of the main points of the Affordable Care Act is to reduce costs to both insurers as well as the insured, then it should probably be the case that it actually happens.

At first glance the focus on preventative would seem to be a good thing for insurance companies, but if stories like Oregon’s and Canada’s are true then it is the exact opposite. The focus on preventative care has the potential to create an entirely new segment of moral hazard that will have to be dealt with all of the while trying to deal with another.

Mankiw: The Scientist is also the Philosopher

In his New York Times post today, Harvard economics professor Gregory Mankiw wrote that the “dirty little secret” of economics is that policy recommendations nearly always include political viewpoints as well as economic analysis. While this should come as no surprise to Michigan economics students, it does present a serious discussion of how economic data is presented.

Mankiw brings up the Democratic position as being for societal good. Decisions are made that may not be beneficial for all, but can help a majority. To demonstrate this, he gives two moving examples.

“Imagine that you are on a bridge and see a runaway trolley car below you, hurtling toward three children playing on the tracks. A fat man is standing next to you. You can push him off the bridge and into the path of the trolley, killing him but saving the children. What do you do?”
– Mankiw (2014)

In this scenario, with relatively clear protagonists (innocent children) and what Mankiw paints as an antagonist (a fat man – note that including the description of being fat does nothing but decrease the value Mankiw wants to portray on this man’s life), Mankiw argues that many wouldn’t hesitate to save the children. However, he gives a second example that makes the decision cloudier.

You are a doctor with four dying patients. One needs a new liver, one needs a new heart, and two need a new kidney. A perfectly healthy patient walks into your office for his annual checkup. Are you still willing to pursue the utilitarian course of action? – Mankiw (2014)

In this second example, Mankiw argues that it is harder to make the decision to sacrifice one person’s life for others due to his natural rights. So how can we translate these sensitive personal decisions into a person’s economic beliefs? Mankiw references the Affordable Care Act, which ended many people’s perfectly good health insurance plans in order to make insurance available for others. For some, especially in rural areas, insurance costs have increased by more than 100%. Small businesses have had to significantly add to their expenses by offering insurance to their full-time workers. Overall, the question for what to look at comes back to whether the ACA was a utilitarian decision – helping Americans get access to previously inaccessible coverage – or unfair to people perfectly happy with their coverage.

With so much data, it is more important than ever to understand the motives behind the numbers. Has the data been “cooked” to fit the argument? One example that I believe is a perfect example is the argument for increasing the minimum wage. Even in our class blog, articles have been posted which reference data supporting both sides. My own prior post references that a raise to $10.10 would reduce the quantity of low-wage jobs by 16%. This recent revised post, on the other hand, argues that the same increase wouldn’t reduce the amount of jobs available. In both cases, Mankiw is spot on when he stresses the importance of understanding the purpose of the data before interpreting the results.

‘Obamacare’ presents new challenges for rural Americans

Middle-class Americans, who can’t afford to pay $500+ per month for their health insurance but don’t qualify for the generous government subsidies, have been deemed the losers from the Affordable Care Act. I’ve previously written on the inequalities of American healthcare in this blog post from January. However, the Wall Street Journal reported today additional disparities between health insurance premiums for residents of urban versus rural counties. This discrepancy of rates could further damage the effectiveness of the ACA in America.

The reason for higher rates in rural counties comes back to the supply side of health insurance – or the insurers. Having less demand (or fewer people) to serve is the first and foremost reason that insurance providers are not entering these markets. The second, equally important aspect is the increased risk that rural populations bring. In rural counties, household income is generally much lower than in urban areas.

“In the 515 counties with only one insurer participating in the federally run marketplace, average household earnings were $56,766 in 2012, more than 20% below the national level, census data show.” (WSJ)

In addition, lifestyles in rural areas tend to lead to worse health conditions for residents than in urban areas (I won’t get into the reasoning for this discrepancy, but for more information see this study). This means a greater chance of cashing in the insurance to pay for health care and thus less profit for insurers. These conditions are causing providers to simply stay out of markets with low profit potential.

With fewer providers and less competition in the market, suppliers can dictate prices within the market. This means that rural counties with only one provider – Blue Cross Blue Shield, in particular – will have much higher prices due to monopolistic market effects. One example of this discrepancy comes from a rural Florida resident, Rebecca Stephens.

“Rebecca Stephens, an office manager from Wauchula, Fla., recently discovered there was only one health insurer offering coverage in rural, low-income Hardee County, and the midlevel plan she wanted to buy cost about $200 more a month than a similar plan in nearby Tampa.” (WSJ)

The “marketplace,” as government website HealthCare.gov was meant to be, can benefit consumers if providers have to compete for their business. The key to success moving forward will be finding ways to increase the number of available options. ‘Obamacare’ will have to find a solution to the rural versus urban issue by ensuring companies are entering rural markets, as well as the higher income, urban ones. While subsidies are helping some middle-class Americans afford these higher premiums, others are being completely overwhelmed by up to a 500% increase in their health insurance plans. Most Americans simply can’t afford that.

What should we think about the new CBO report?

The Congressional Budget Office released a report earlier this week stating that the benefits awarded from the Affordable Care Act will reduce the labor force by about 1.5% – 2.0% over the next ten years.

First, two important things: the first is that  people choosing to leave the labor force is a very different thing than people being forced out of jobs, or people being unable to find jobs. I have noticed people mistakenly calling this increased unemployment; on the contrary, a decrease in the labor supply will generally decrease unemployment. Now, that doesn’t mean that the loss in the labor force isn’t bad. But we should all be making sure we are using our terms right and that this is something different than unemployment.

Also, let’s remember that CBO projections are just that — projections. And none of us need to be reminded how susceptible economic forecasts are to error. We should be skeptical of any numbers they put out.

Still, we should take the projections seriously because they are the best estimates we have. Indeed, the net is already abuzz with economists giving their input.

On one hand, there are those like University of Chicago Economist Casey Mulligan who, as Joseph Rago of the Wall Street journal describes, see this as a vindication of the idea that “when you pay people for being low income you are going to have more low-income people,” so you obviously shouldn’t pay people to be poor. This is a fair point — a lower labor force is going to mean less output in the economy.

On the other hand, Paul Krugman weighs in with a fascinating theoretical exercise that shows that it is possible that the reduction in the labor supply could actually be a good thing:

In this [theoretical] situation, policy changes that subsidize insurance for those not getting it through their employers could lead to lower work hours, not by introducing distortions of incentives, but by reducing the distortion created by the notch; the result could be an economy with less labor input, lower GDP, and higher welfare.

The “notch” he refers to is a notch in a worker’s budget constraint which comes from the fact that health benefits are, in many situations, only given to those who work a certain number of hours. My main problem with Krugman’s point is one that he himself recognizes — that is, that everyone is different, meaning that overall welfare effects in the entire economy could be quite ambiguous. Still, I like that he points out that a lower GDP does not necessarily mean lower welfare. Indeed, as Krugman points out in another post, there are massive benefits associated with ACA, namely that, as predicted, millions more people will have signed up for health insurance, and that itself has the effect of increasing welfare.

So, what should we make of all this? I think both economists make a good point. Mulligan is right to point out that production will be harmed, but Krugman reminds us that welfare is a function of more than output. The benefits of everyone being covered with health insurance may well outweigh the output costs.

More Obamacare Means More Unemployment

According to the Congressional Budget Office, the Affordable Care Act (aka Obamacare) will reduce the labor force by 2 million workers by 2017.  And it’s not because employers aren’t hiring.  The CBO explicitly states that the Affordable Care Act will “reduce the total number of hours worked, almost entirely because workers will choose to supply less labor – given the new taxes and other incentives they will face and the financial benefits some will receive.”  Interestingly, the same analysis performed by the CBO in 2011 showed a mere 800,000 person reduction in the labor force by 2017.  Why is this estimate so different now?

The reason is the newly implemented structure of Obamacare.  Under the Affordable Care Act, Americans are provided with a certain amount of free health care given the amount they work.  In the reverse fashion of our progressive tax system, as you work more (generating more income and contributing more hours), the amount of free coverage you receive declines.  According to CBO Director Douglas Elmendor, in this way Obamacare imposes an “implicit tax on additional work.”  In response to this implicit tax, the CBO estimates that significantly more workers will choose to work part time instead of full time, as doing so maximizes their level of free coverage.

Specifically, the law works as follows. First imagine an American supporting a 4 person family.  This American can choose between a part-time job paying $36,000 a year or a full-time job paying $42,000 a year.  If he chooses the part-time job, he will qualify for about $10,000 more of free coverage each year relative to the full-time job.  Assuming consumers treat health care coverage as a type of income/compensation (I feel safe making this assumption because health care coverage is now legally required.  If you’d like to challenge this assumption, please do so), the part-time job is clearly the better choice.

Now consider another American support a family of four.  He is choosing between a job paying $54,000 a year and a job paying $72,000 a year.  Given the reverse-progressive (regressive?) coverage rates of Obamacare, this individual would only lose out on $7,000 of free coverage by choosing the higher paying job.  As such, this American, who is in in a higher income range, will not distort his behavior based on Obamacare’s coverage rules.

What this example shows is that Obamacare does distort employment decisions, and that it does so on the low-end of the income spectrum.  The benefits for low-wage employees are so high, that Obamacare encourages them to remain low-wage employees.  For high-wage employees, while losing out on free coverage is certainly disappointing, the free coverage is not significant enough to alter indivdiual behavior.

At a time when income inequality and a lack of income mobility are such key issues in this country, it seems that Obamacare is fighting against our end goal: making the American Dream easier.  At least for the poorest Americans, Obamacare seems to encourage individuals to give up on the American Dream, because if the government will pay your expenses for you, why go out and get a higher paying job.  Personally, I think that in this way, the Affordable Care Act is hurting America.  And while I think health care is extrememly important, maybe Obamacare should focus more on helping businesses pay their full-time employees healthcare (which would likely encourage employment as it is a requirement for coverage) instead of bypassing businesses and going straight to consumers…

Lost in (Health Care) Legislation

I don’t get it. I’m really, truly at a loss. And I’m hoping that someone here will be able to help me make sense of things.

What I’m referring to is the ACA/Obamacare/US Health Care System/pick your favorite acronym, nickname or other designation. And by “I don’t get it”, I mean all of it. Its design, the overly complicated way of implementing it, and the strange enrollment complications going along with it.

Don’t get me wrong here: I’m convinced that a public health care system is the way to go. There are plenty of reasons to have one: mandatory insurance will lead to a lower average premium than private insurers can provide. That means that even if some people have to pay a higher premium under a public system, you could compensate them (say through income tax credits). Another way to go is to simply have the system paid for by taxes (think the NHS in Britain). Sure, those systems are run by governments. And yes, there are plenty of opportunities there for people to do a poor job and be inefficient. But there’s no reason why a good system of checks and balances (something the US prides itself on having) wouldn’t be able to do away with those. And remember, you’re going to be cutting total health care spending by cutting the average premium.

Is there any empirical foundation for these claims, anything beyond economic reasoning that supports a public system? Why yes, for one thing, the US has the third highest health expenditures as a percentage of GDP in the world! Now some have argued that this is in fact all because in the US, medical personnel are paid more than in other places. This attracts the most highly skilled people (provided that they can get into the country and are allowed to work) and thus gives US citizens the best health care that money can buy. In theory, this argument has some merit to it. However, PwC finds that 30% – 50% of the States’ total health care expenditure is, in fact, ‘wasteful’ spending (and this is before the ACA with all its bureaucratic, clumsy government interference – i.e. there were massive inefficiencies in the system as it was before the ACA). I don’t expect a public provider to be able to do much worse, unless they try really, really hard to do an exceptionally bad job (and whatever you think of the competence of state bureaucrats, I don’t think it’s fair to assume that they’re actively working to the people’s detriment).

So the ACA is a public system, right? So things will change for the better; why the rant, you might ask. Well, apparently the ACA has a problem with getting young people to enroll. And with getting the uninsured to enroll (especially the young ones). And that’s what I don’t get. Why does it have to have these troubles? It would have been extremely easy to simply create one single, state-run (so no monopoly issues) provider. Everyone’s enrolled automatically. Payments are deducted together with your income tax. That also makes it easy to give people tax breaks dependent on income (or age, or whatever you deem necessary).

Sure, getting the unemployed to enroll would be a little harder in the US than, say, in most Europeans countries, where you can get indefinite unemployment insurance. But you would’ve saved yourself the trouble with the working population. Perhaps you think that’s all crazy socialist nonsense, and you need private providers. And you can’t force people to enroll in health care either, because that infringes upon their personal liberties. So you make them pay a fine in order to get them to enroll anyways, although in theory they could just cop the fine and never enroll. But why would you make the fine lower than the premiums these people have to pay? Of course that’s an easy way to opt out!

Note here that I’m not saying you need to crank up the fine and force people to enroll. Lowering their premium and letting them enroll would be just as easy. Now if the government provided health insurance, guess what, they could simply lower the amount people pay. But of course under the ACA, that’s out of the question.

And yes, I know that the subsidies are supposed to make health care affordable for everybody. They also provide an easy way for health care providers to charge those with the lowest incomes a lot more than they could without the subsidies, because the government basically provides a baseline reference income for everybody for the purposes of buying health insurance (and then some people don’t get subsidies and still can’t afford the insurance, so there’s that).

So all told, I’m confused here. There was an easy way to do this. Several, in fact. Europe and Japan have public health care. There were plenty of blueprints to choose from. Why all the trailblazing?

The Inequal State of Healthcare in America

When the Affordable Care Act (ACA) was passed, it’s major objective was to get every American insured. “Obamacare” was aimed at creating health care equality for all by offering a variety of insurance policies – one that could be affordable for each and every American. In her speech this morning on the Martin Luther King Jr. holiday, Secretary of Health and Health Services Kathleen Sebelius stated , “Of all the forms of inequality, injustice in health care is the most shocking and inhumane.” (Neff, 2014) Sebelius again was adamant on her support on the ACA; yet, even ignoring the ACA’s turbulent introductory phase, it still appears as if the policy may bring more harm than good.

A Wall Street Journal article today indicated that early reports show that the people signing up for new policies were the ones already covered before the ACA. A recent survey by McKinsey & Co. estimated that only 11% of new policies were being purchased by someone previously uninsured. (Weaver & Mathews, 2014) It is still very early in the sign-up process, but the low number is a serious red flag when considering the chances at achieving healthcare equality in the U.S. First, are Americans in poverty (Medicaid eligibility is set at 138% of the poverty line) getting information and the opportunity to sign-up for health insurance plans? Most signs point towards no. One comedic example is a recent Jimmy Kimmel segment. He went to the streets to expose many Americans who were in favor of the Affordable Care Act yet were opposed to “Obamacare.” (Obamacare is a common nickname for the ACA). But Americans aren’t all to blame for their confusion over the policy. Much can be pointed at the lack of transparency for the ACA, as the “condensed” version of the law is over 1,000 pages long and incomprehensible for the average American. As the details of law do become uncovered, it is becoming clear that providing health care equality to all Americans is not going to come without serious costs.

America’s middle class, initially expecting to benefit from “Obamacare,” have been hit the hardest. They are having to fund insurance subsidies for the poor through higher premiums and larger deductibles; paying for the “free lunch” of others while often struggling to pay their themselves.

“What is a surprise to some people are the higher insurance premiums that ordinary, middle class Americans suddenly face so that other ordinary Americans can enjoy lower prices.” (Dorfman, 2013)

Today, America is still facing the problem of health care inequality. For now, the uninsured for whom the ACA policy was meant for have yet to sign up, while the average American is seeing his health care premium increase while deductibles go up and coverage gets worse. I certainly hope the best is yet to come.

Featured articles:

Dorfman, Jeffrey, “The High Costs of Obamacare Hit Home for the Middle Class,” Forbes. October 31, 2013. Link

Neff, Blake, “Sebelius makes MLK-themed ACA pitch,” The Hill. January 20, 2014. Link

Weaver, Christopher, and Anna Wilde Mathews, “Exchanges see Little Progress on Uninsured,” The Wall Street Journal. January 20, 2014. Link

Health care spending and Econ 401

I believe it is safe for me to say that most of people in our class have heard about the terms like ObamaCare or Affordable Care Act without me presenting tangible evidences. This is because those terms are written in everywhere. You can hear about them in the news, radio, and classes. Why is this so prevailing? I wonder. Can this be because I pay $110 per month for my health insurance and I never go to hospital?

As an international student in the University of Michigan, I am obligated to buy a health insurance which I think it is forced upon me. In addition, it is also very difficult for me to change my current health insurance and substitute with a cheaper insurance, which by the way, I really tried and wanted. This is because the university has set very high standards relates to the health policies for the international students.  Perhaps little bit too much.

Like what the university thinks about the importance of having a good health insurance, everyone living in the United States of America is bounded by health care policies. This can mean that health-care policy can play influential roles in our life and it has been since the first health insurance came out. You can find an interesting story by clicking the link, and it is very accidental.

Briefly I have pointed out that health care policies and insurances are very important in our lives, yet how many of us understand the effects of change in health care policies in the economy? According to the recent Wall Street Journal article, Health-Care Spending Grew at Modest Pace in 2012, it states that

“Health spending is rising at a slower pace than a decade ago and making up a slightly smaller portion of the U.S. economy”

It is very vague, even with carefully reading the fact that U.S health-care spending in 2012 was $2.8 trillion dollar and this is 3.7% increase than the previous year. What is this mean in terms of microeconomic scales? We learned in ECON 401? I do not know. Can spending less and seeing a slower pace of increasing in health-care spending it be a huge problem for the U.S economy? I do not know. As I mentioned in my previous blog inside ECON411 class blog, What is behind Mr.Draghi’s mind? How do I know?, I wish news is easier and self-explanatory so laypeople can understand better.This time, however, I decide to give a response to the one of economists’ comment presented in the article and ask the readers about my responses.

A Harvard University health economist and former adviser to the Obama administration said,

“This and more recent data are pretty profound. What is says is that even as the economy is rebounding, health spending is not. It looks less and less like a hangover from a recession and more like a change in the nature of the health-care system.”

I believe his words means is perhaps that the decreasing trend in the national health expenditures as a share of U.S GDP since the 2008, economy recession, is not due to the recessions but the changing nature of our health care system, right? So I did a quick reading about the new changes in health care policies and law. According to the White House’s webpage on Medicare, President Obama has signed the Affordable Care Act into law in March, 2010. One of the new benefits from the Affordable Care Act is aimed to have an affordable coverage for more people.

For example, new policy favors small business by providing them tax credits because they have been paid more premiums than larger employers which I think is the main reason that has reduced the share of health care spending in the U.S. GDP. Do you think this can be applied to one of the reasons that a Harvard professor had in his mind?