ObamaCare: What It Is, What It Isn’t, And Why It Will Fail

In the only debate of the 1980 Presidential campaign, Republican challenger Ronald Reagan turned to Democratic President Jimmy Carter and famously quipped “Well, there you go again”. Carter had just argued passionately for a National Health Insurance plan and an increase in government-run Medicare. Reagan used the quip to underscore the Democrats desire for yet another large government program that would accomplish little while ignoring more common-sense Republican approaches.

Well, it’s now 30 years later, and here they go again. But this time there’s no Reagan to come to our nation’s defense.

President Obama and the Democrats are about to enact a budget-busting bill that will “reform” health care. It will actually do nothing to change the basic delivery systems of health care, other than to drive some medical providers –especially those serving seniors - out of business. It does reform health care financing. It will cost taxpayers a fortune, and it will make most people’s health insurance premiums higher. The Democrats say these claims are not true and the bill won’t add to the deficit.

Let’s take a brief look at what the plan is:

1. Mandated Health Insurance for almost everyone. Through mandates and fines, almost all Americans will be forced to buy health insurance. Employers who don’t provide insurance will be fined. Individuals who don’t receive health insurance through their employer, or those who are unemployed, will be able to buy insurance through an exchange (or from a government run “public option” though this looks unlikely to make the final bill). For those who cannot afford it, the federal government will subsidize or wholly pay the premiums.

2. No pre-existing conditions exclusions. Insurance companies will not be allowed to deny coverage based on a person’s medical condition.

3. Government determines what is covered and what is not. The government will determine which medical conditions and treatments must be covered in insurance policies. These are termed “essential health benefits”. This has given rise to the debate over government run “death panels” as the government decides what treatments are insured. All the plans offered in the exchanges will have to abide by these rules; the Senate version also requires private individual and small group health insurance policies to offer the “essential health benefits”.

4. Best Practices. The government will fund lots of studies to determine which procedures achieve the best results for any particular disease. Once this is done, medical providers around the country will be encouraged to adopt those procedures. How this encouragement will actually happen is left unanswered. There’s also federal money to encourage the use and spread of electronic medical records. The goal is to make health care delivery more efficient.

Now let’s look at the ramifications of each of these:

1. Mandated Health Insurance.

We’ve all heard the claim, based on a Bureau of Labor Statistics and Census Bureau report, that there are 46 million uninsured people in America. That 46 million number may be accurate, but like many statements coming out of Washington, is wholly misleading. Let’s break that 46 million number down. The following comes from Keith Hennessey, who was director of the National Economic Council under President Bush, the position now held by Larry Summers under President Obama.

Total uninsured = 45.7 million Americans

Medicaid undercount = 6.4 million (people who are on Medicaid but mistakenly tell the census taker that they are uninsured)

Medicaid/SCHIP eligible = 4.3 million (people who are eligible for Medicaid but have not signed up. If they go to an emergency room or free clinic, they will be automatically enrolled by the provider after receiving care).

Non-citizens = 9.3 million (legal and illegal immigrants)

Over 300% of poverty level = 10.1 million (people who earn over 300% of the poverty level, which for a family of four equates to about $62,000 per year, and for whatever reason have not purchased health insurance. The assumption is these people have the financial means to purchase insurance if they desire).

Childless adults (18-34 yrs) =5.0 million (healthy young adults who may decide that insurance is not worth the cost)

Remaining uninsured = 10.6 million

Americans with insurance = 253.4 million

There are 10.6 million Americans truly in need of financial assistance to purchase health insurance. To that, one might add some of the other categories, or not. But clearly, the number is much smaller than the much ballyhooed 46 million number we hear about so often.

Now, let’s turn our attention to the cost of providing insurance for those who cannot afford it.

The Congressional Budget Office (“CBO”) estimates that the first 10 years of benefits in the legislation will cost approximately $1.5 trillion dollars. Yes, that’s trillion. That’s about $5,000 per US resident – and since only about half of Americans pay income taxes, it’s really about $10,000 per person in a tax-paying family. So this legislation will cost the average American family of four about $40,000 over its first 10 years. And the bill keeps growing from there.

But wait! The cost estimates you may have seen in the paper state the cost is between $900 billion and $1 trillion for the first 10 years, so where do I get my $1.5 trillion cost number? The Democratic spinmeisters are at it again. Many of the benefits – the subsidized insurance premiums for those who cannot afford insurance – do not kick in until 2014. So the first 10 year period only has 6 years of benefits, and thus the stated cost is lower. But the cost of all the benefits for 10 years – once all the benefits begin in 2014 – is $1.5 trillion.

But wait! The Democrats and CBO state that this legislation will not increase the deficit. It will pay for itself! Let’s take a look.

The government proposes to fund the stated $1 trillion cost as follows:

1. About half - $500 billion - will come from higher taxes. The Senate bill primarily taxes employers who offer generous health insurance plans to employees, while the House bill primarily raises taxes on high-earning Americans. No matter which version becomes law, many are going to pay higher taxes. And those taxes get passed on to employees in the form of lower salaries and to customers in the form of higher prices for the things we buy.

2. The remaining half - $500 billion - will come primarily from cuts to Medicare medical providers. This is a douzy. Doctors who provide services to Medicare patients are reimbursed by the government. They are paid a lot less by the government for Medicare patients than they are paid by private insurers. Many doctors actually lose money every time they treat a Medicare patient. They do it, however, as a public service and because they in essence “overcharge” private insurers (who then raise premiums) to make up for the losses on Medicare patients. This is the “cost shifting” that you may have heard about. If their reimbursement is cut by hundreds of billions of dollars, how many doctors will continue treating Medicare patients? The answer is, many won’t. And as doctors drop out of the system, many seniors dependent on Medicare will find it much harder to get treatment.

Just last week, the Mayo Clinic – hailed by Obama as a national model for efficient health care – announced that it would no longer treat Medicare patients at its Phoenix facility. Mayo’s hospital and four clinics in Arizona lost $120 million on Medicare patients last year. A Mayo spokesman stated that Medicare’s payments only cover about 50% of the cost of treating elderly primary-care patients at the clinic. So the clinic can no longer afford to accept Medicare patients. And this is before the reimbursement rates are cut under the Democrats bill! Interestingly, a White House spokesman for health care declined comment on Mayo’s decision.

2. No pre-existing exclusions. Obviously, this is good news for people with pre-existing conditions (and I happen to be one of them). But what are the ramifications? Insurers will now accept customers who will likely consume many medical services because of their conditions. This will cost the insurers more money than their average customer. So what will the insurance companies do? They will raise their rates. The Democrats will not allow insurers to charge people with pre-existing conditions the true cost of the insurance. So insurers will have to be spread the increased cost to the existing customer base of the insurance company. This means, for people already with insurance, your premiums will go up. And you thought your premiums were already too high.

3. Government determines what is covered and what is not. Since Congress or a government panel will decide what must be covered in many insurance plans, every special interest group will lobby Congress to make sure that their disease or their treatment is covered. Since Congress has such a tough time saying “no”, the insurance plans are likely to be very generous. This will cause health insurance costs and premiums to rise even faster.

It’s also an encroachment on our freedom. Shouldn’t individuals have the right to decide what benefits they want in their plans, and not be forced into plans whose benefits are dictated by the government?

4. Best Practices. This is the one (and as far as I can tell, only) part of the proposed legislation that makes sense.

It is clear that electronic medical records will make health care delivery more efficient. For example, most people who rush to a hospital Emergency Room don’t have their medical records with them. Thus, Emergency Room doctors often must perform a battery of tests to aid in their diagnosis and treatment. Many of these tests may be repeats of tests already done. Electronic medical records can help reduce these unnecessary costs.

Spreading best practices may also help. Some hospitals and doctors treat certain conditions one way, while others treat with different methods. It would be helpful if good data were available on a timely basis so medical providers would know which treatments worked best. The problem is, it’s not clear how ObamaCare will actually determine what the best practices are, nor how they will be disseminated. And there’s no precedent of our government being able to determine and spread best practices in any industry in the past. The best we can say at this point is at least it’s a worthy goal.

Conclusion:

When Obama laid out his goals for health care reform in the early summer of 2009, he stated the legislation must:

1. lower costs

2. improve quality and coverage

3. protect consumer choice

4. and not add to the budget deficit

The proposed legislation fails on all counts.

The plan will not lower costs, it will likely significantly raise costs. There is nothing that changes incentives for doctors or patients to provide or consume health care more rationally. There is nothing meaningful regarding medical liability tort reform. So this bill won’t change the ever-increasing rise in costs. The only change in costs will be increased premiums for the people who do not receive government subsidies.

Individuals who today do not have health insurance will become insured, and thus likely have better health care coverage. But everyone else – especially seniors – will have fewer choices as medical providers react to lower reimbursement rates.

As Senator Jon Kyl (R-AZ) recently said, the bill will “cut Medicare, raise taxes, raise premiums, and still leave many people uninsured. It won’t work”.

What it will do is lay yet more debt on the American people.

Well, here we go again.

In my next article, I will lay out what I see as the fundamental flaws in how health care services are delivered in our country, and how to correct them.