One of the good things about working at the Cato Institute is that there’s never any pressure to put your thumb on the scale to help any political party.
Our loyalties are to libertarian principles, many of which are reflected in the Constitution, so we’re free to criticize or praise politicians based on their ideas rather than their partisan affiliation.
That’s why we criticized President Bush’s pro-centralization No Child Left Behind education scheme just as much as President Obama’s pro-centralization Common Core education scheme.
It’s also why I criticized Bush for being a big spender like Obama (indeed, Bush was a bigger spender, even for domestic programs!).
I’m giving this background because today I’m going to say something nice about Obamacare.
Not because I like the overall law, but because honesty is the best policy.
Regular readers know that our healthcare system is screwed up by bad government policy. More specifically, spending programs such as Medicare and Medicaid, combined with tax preferences and regulations that encourage over-insurance, have created a giant third-party payer problem.
Only 11 percent of health care spending in America is directly financed by consumers. The rest is paid for by taxpayers, insurance companies, and other third parties.
This has eviscerated the normal working of a competitive market. When people are spending their own money, they are careful and prudent. When they spend other people’s money, however, they are not overly concerned about cost.
As a result, we have a needlessly expensive system. And because third-party payer requires lots of administration and paper work, bad government policies also have caused absurd levels of inefficiency.
Well, there’s one small piece of Obamacare that actually is helping to mitigate this problem. The law includes a so-called Cadillac tax that caps the special tax preference for fringe benefits (if your employer provides you a health insurance policy as part of your compensation, that type of income isn’t taxed, unlike your cash wages).
And that reform is having a positive impact. Here are some passages from a Bloomberg story.
Large employers are increasingly putting an end to their most generous health-care coverage as a tax on “Cadillac” insurance plans looms closer under Obamacare. Employees including bankers at JPMorgan Chase & Co. (JPM) and college professors at Harvard University are seeing a range of moves to shift more costs to workers. …The tax takes effect in 2018, and employers are already laying the groundwork to make sure they don’t have to pay the 40 percent surcharge on health-insurance spending that exceeds $27,500 for a family or $10,200 for an individual. Once envisioned as a tool to slow the nation’s growing health-care tab, the tax has in practice meant higher out-of-pocket health-care costs for workers.
The last sentence in the excerpt, by the way, is economically illiterate.
The Cadillac tax will restrain health spending because it means higher out-of-pocket costs for consumers. They are going to have more authority and responsibility of how to spend their own money.
Think of this analogy. Will you eat more if I give you $25 to buy a meal or if I give you a pre-paid voucher for a $25 all-you-can-eat buffet?
If you’re a normal person, you’ll take the $25 cash, buy a meal for less than that amount, and save the extra money for something else.
But if you’re given a pre-paid voucher for the buffet, you’ll pig out because there’s no additional cost for consuming more items.
And the Bloomberg story includes evidence that giving consumers more control over their income is having the predicted positive effect.
The tax on Cadillac plans — named after the luxury vehicle to denote their lavishness — is one reason the growth in health-care premiums has slowed since the Patient Protection and Affordable Care Act took effect in 2010. …The tax “is having the effect that was intended, which is the cost of these plans are being reduced,” Christopher Condeluci, a former Senate Republican aide who helped design it, said in a phone interview. …Premium increases for employer-provided health insurance, which covers about 48 percent of Americans, “slowed markedly” in 31 states since 2010, the year the Affordable Care Act became law, the New York-based Commonwealth Fund reported today. Nationally, premium growth fell by about a percentage point after the law, to 4.1 percent a year on average, the report said.
By the way, I should hasten to add that I’m not happy about the way the Cadillac tax was adopted, for a major reason and a minor reason.
The major reason is that it was part of a law that is otherwise a very expensive disaster.
The minor reason is that, for reasons of both good tax policy and good health policy, I want to eliminate loopholes and tax preferences only if we can use every penny of revenue to finance lower tax rates.
And that’s exactly what you get with a flat tax, which is a system where you don’t even need a Cadillac tax because there’s no healthcare exclusion.
Under Obamacare, by contrast, the Cadillac tax limits the healthcare exclusion, but politicians used the money to finance bigger government.
Now let’s say something bad about Obamacare.
John Goodman of the Independent Institute has a column in today’s Wall Street Journal. He points out that the law is hurting many of the people it was supposed to help.
…the law is already hurting some of the people it was intended to help. By this time next year, we may find that many workers who earn within a few dollars of the minimum wage have less income and less insurance coverage (as a group) than they did before the mandate began to take effect.
How does John justify these assertions?
Because he did some real-world research, surveying 136 fast-food restaurants with 3,500 employees.
The results are not encouraging, at least for the workers.
Before 2014 about half the employees were “full time” as defined by ObamaCare; that is, they worked 30 hours or more a week. The potential cost to the employers of providing mandated health insurance to their full-time staff would have been about $7 million a year. But by the time the employers took advantage of all their legal options they were able to reduce their cost to less than 1% of that amount. The first step was to make all hourly workers part time. …workers in the survey whose hours were reduced to part time…can get subsidized insurance through an exchange, but they will be asked to pay up to 9.5% of their income for what is unattractive coverage. Some of them previously had mini-med plans, but this kind of insurance is no longer available to them. …Those few remaining full-time employees will get mini-med insurance for themselves, but they are unlikely to be able to afford coverage for any dependents they have. They will not get an ObamaCare bronze plan unless they fork over about one-tenth of their take-home pay, and they won’t be able to get bronze coverage for other family members unless they forfeit more than half their income. Out of 3,500 employees, only one that we know of got the kind of insurance that the architects of the Affordable Care Act wanted everyone to have.
One out of 3,500? Sounds like the typical success rate for a government program.
But we shouldn’t joke. It’s not funny that low-income workers are being hurt. Just like it’s not funny that young adults, retirees, and kids are being disadvantaged by Obamacare as well (on the other hand, it is somewhat amusing that politicians, IRS agents, and Harvard professors are upset about the law).
The bottom line is that an overwhelming percentage of Obamacare provisions make the healthcare system more expensive and less effective.
Yes, there are some positive effects of the Cadillac tax, but those are easily offset by all the features of the law that increase the size and scope of government.
P.S. Since I mentioned that third-party payer has messed up our healthcare system and caused prices to rise, I should point out that there are a few sectors where consumers are still in charge. And in those areas, such as cosmetic surgery and abortion, prices are falling in relative terms.
P.P.S. The folks at Reason TV put together a must-watch video on how a hospital can be more efficient and affordable in the absence of third-party payer.
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In my comment above, the $3,000 could not be lost by earning additional income, so there is no dis-incentive to work, as under the current “free healthcare for the poor” approach, which creates a benefit cliff when income limitations are exceeded.
While it is clear that Medicare-Medicaid-Obamacare and employer paid healthcare all have major flaws the question is what alternative makes the most sense?
Dan’s example of $25 to buy a meal presents an alternative. As part of a “Progressive Flat Tax”, every adult citizen could be given $3,000 for their Health Savings Account. [This could be paid by reducing current subsidies and eliminating the healthcare deduction.]
For those with no income, funds would be available to buy health insurance. For those with income, the cash would take the place of the healthcare deduction. [At a 25% flat tax rate, $3,000 would be the equivalent of a $12,000 deduction.] However, there would be no tax incentive to spend more than $3,000, similar to buying a cheaper meal with the $25 and pocketing the difference.
There is a benefit to all, of having Universal Healthcare, BUT let’s keep government out of the management of the process. There will be a need for continued support of those with pre-existing conditions and those dependent on Medicare, but their numbers will dwindle the longer Universal Healthcare is in place.
While government should not mandate the purchase of healthcare [in my view violating the constitution], it should not bail out those who elect not to use the funds in their HSA’s. We must make people accountable for their actions and in-action.
Dan, You steer me more libertarian every day, so I ask:
– Would gays even care about marriage if there were not some regulatory/tax advantage to being so engaged- or would we care as well? At that point, it just becomes a civil thing, and it is between them and God.
– Would companies provide health care if it was not a loophole? How much cheaper would healthcare be if it were paid directly to the doctor who provides it by the consumer who receives it?
– Would people buy houses they cannot afford if the tax system did not make it attractive? How stabilizing would that effect be on our economy if we did not have to see “bubbles” that were cause essentially by tax loopholes.
– Would anybody really care what somebody else made if we were all really paying the same percentage?
In the latter case, I think everybody would stand in line to reduce the size of government if we all paid the same percentage of our income to the body that wants to control our lives.
Do I think this can happen? All I can say is that liberals are leaving their adversely-effected states in the Northeast and migrating to the Conservative/Libertarian south- places like Texas. Unfortunately, they are also bringing their voting patterns with them. So, like a parasite upon the nation, they move from one destroyed area to the next and systematically begin to destroy it with their big-government preference.
Well taken but these are minor details, akin to looking for lady bugs and flies in a room while ignoring the 400lbs gorilla.
The pivotal effect of Obamacare on long term American prosperity is:
“
American citizen,
You no longer have to worry about ever producing enough in exchange for your medical care, at any point in your life. Just make sure that you don’t produce enough and we’ll make someone else pay your costs ”
It is a terrible flattener of the effort-reward curve. Once enough people jump on the ObamaCare boat it will have permanent long term and intergenerational effects on US workforce motivation, hence productivity, hence marginal worldwide competitiveness, hence long term prosperity. What you see now is just the beginning – the incubation period.
The law is institutionalizing a more progressive and redistributionist environment even compared to most European healthcare systems. It makes others pay for your healthcare, only so long as you are not productive, hence giving you some strong incentives to not bother ever becoming productive, or choosing a lifetime trajectory that will make you productive. At least most European healthcare systems tend to be less progressive in that they guarantee healthcare for all, productive or not. Yes they are more massive and more statist but overall less redistributionist.
The only saving grace for now is that only about 3% of the population is participating as receivers in ObamaCare (though almost everyone is participating as a taxpayer giver and as a regulatory target). But the program is set to grow. Give it a couple of decades and I see 50% of the under 65 year old population being on government healthcare. Historical experience from all over the world almost guarantees that these effects on American motivation to work will NOT be reversible.
To understand the inevitability of the vicious cycle, remember that once Americans are surrounded by a state based on European-like welfare institutions, they will also start voting like Europeans. They will start electing Democratic Hollandes and Republican Sarcozys. This process is just unfolding in America. This is only the beginning stage — the euphoria stage where free goodies are starting to roll in, seemingly without perceived effects on the long term growth trendline of the nation.
Still having doubts about America’s ultimate trajectory?
In the Obama years, Americans not only did they fail to reform the two old and intractable entitlement programs of Medicare and Social security — which are on autopilot to drive American society into European style effort-reward environments — but they ALSO voted themselves a brand new irreversible third entitlement in the form of ObamaCare, which in short time will rival Medicare and Social Security in terms of fiscal burdens. Some still hope that ObamaCare will somehow have a different politico-economic trajectory than Social Security or Medicare. Really?? In 2008 you got nailed by the left folks. This is just the incubation period. The stage is set for Americans to start voting like European lemmings across the Atlantic.
Recently, the waters have simply stopped rising as fast on the American Titanic. Many will go back to the music hall. The more prudent, and those who can, will keep an eye on the salvage boats. It is impossible for the general population to pick up structural decreases in baseline growth amongst the typical fractal behavior of the economy (heck! Europeans STILL haven’t figured out yet!! They fail to comprehend that a demotivating welfare state leads to lower motivation, lower productivity, loss of marginal worldwide competitiveness, and Euro-style decline – they are still hoping that one day their growth will match average worldwide growth and thus avert decline – they have abolished the simple arithmetic of exponents to sustain their dream of prosperity through coercive collectivism).
A one percent systemic decrease in American annual growth rate could very well manifest itself as suppressed post crisis rebound growths of only 3% and deeper recessions. You think the general population will be able to discern this all important and pivotal decrease in baseline growth rate? It will get lost in the various narratives of statism that politicians have every interest in selling to the public. Actually, we, the public, we find and ferret out politicians with those narratives and elect them into office. We like free lunch narratives, narratives of magical Keynesian Rube-Golbergs that produce prosperity with less effort.
The growth rate is the only decisive determinant of long term prosperity, long term importance, long term worldwide relevance, long term military might etc. Almost everything else flows from long term growth. Unable to understand it and support it, dear Americans? You will simply decline like many nations and cultures before. Endowed with individual liberty at a historically serendipitous moment two centuries ago, and then you blew it. You can summon all the buts and ifs but reality takes no prisoners.
Or you can hope that all this will happen after your lifespan. But in that respect the world is becoming more fair. The world as a whole is moving faster than ever and irreversibly accelerating. Going forward, voter-lemmings will increasingly experience the consequences of their choices in their own lifetimes. The slow moving world where consequences could be passed to future generations is gone. Gone forever.
[…] Before 2014 about half the employees were “full time” as defined by ObamaCare; that is, they worked 30 hours or more a week. The potential cost to the employers of WAIT, THERE’S MORE… […]