Obamacare's Perverse Incentives

One can predict how people will respond to economic incentives with a reasonable degree of certainty.  In terms of public policy, that means that, in general, when you want less of something, you tax it.

For example, DOE Secretary, Steven Chu, proposed high gas taxes to give Americans an incentive to drive their gas-guzzling SUVs less.

When you want more of something, you subsidize it.  That's why governments subsidize "green" energy.

So, what incentives does Obamacare provide?

A key Obamacare incentive is an “employer mandate” that asks businesses to sponsor health insurance (or pay a penalty) if they have more than 50 full-time employees. It defines a full-time worker as one serving 30 or more hours per week. So a firm can avoid the mandate by having fewer than 50 people working full-time. 

Investor's Business Daily compiled a list of 363 employers that decided to cut their employees' hours to less than 30/week to avoid paying for their insurance.  Before you rail against those greedy, evil Capitalist pigs, please note that over 100 of them are public school districts, colleges and universities.

According to the CS Monitor...

• Some 31 percent of franchise businesses and 12 percent of non-franchise businesses say they have already reduced worker hours because of the law.

• About 27 percent of franchise businesses and 12 percent of non-franchise businesses have already replaced full-time workers with part-time employees because of the law.

• Some 41 percent of the non-franchise firms say they already see health-care costs rising because of the law. 

• As the franchise firms look toward the future, 28 percent of them say they’ll stop offering health coverage in 2015 because of the law. One-third of franchise businesses already do not offer health insurance.

Speaking of franchises, Papa John told us so.  Remember?  The following exchange is from an opinion piece John Schnatter wrote for the Huffington Post.

Reporter: "Do you think your -- you know -- franchise owners... are going to cut people hours back to make them part time instead of full time?" 

Me: "Well, in Hawaii there is a form of the same kind of health insurance and that's what you do, you find loopholes to get around it. That's what they're going to do." 

Reporter: "My understanding is that if you're a full time employee, which is 35 hours or over, you'd be covered. Or if you're part time then you wouldn't be. So wouldn't some business owners just cut people down like 34 hours a week so they wouldn't have to pay for health insurance?" 

Me: "It's common sense. It's what I call lose-lose."

Mr Schnatter was wrong about one thing; it's not common sense.  It's logic, but there isn't enough of it in circulation to consider it "common".

Another perverse incentive of Obamacare is that it encourages some middle class folk to earn less money so they qualify for a subsidy.

So what is Hammack going to do? If his income were to fall below four times the federal poverty level, or about $62,000 for a family of two, he would qualify for subsidies that could lower his premium cost to as low as zero. If he makes even one dollar more, he gets nothing. 

That’s what he’s leaning toward — lowering his salary...

There is yet one more perverse Obamacare incentive we must consider.

Cathy Wagner says she isn’t political and has never written a lawmaker, much less the

president, but with Obamacare she felt compelled. 

“I really just wanted him to know … I was so hopeful that this plan was going to move us forward, but in fact I think it’s moving us backward,” Wagner said.

Ah, yes.  The audacity of hope!

Wagner and her husband retired early. She was a nurse for 35 years and championed Obamacare, until she received a letter from her insurance company saying it was canceling her policy.

That sounds familiar.

“I was really shocked … all of my hopes were sort of dashed,” Wagner said.

There's that word again.

“’Oh my gosh President Obama, this is not what we hoped for, it’s not what we were told.’ “ 

And again!

She was shocked further to learn that for the same coverage she would pay 35 percent more and have a higher deductible. 

“Our premium for next year is going up to over $1,000 a month for two of us and we’re two fairly healthy individuals,” Wagner said. 

So, where is the perverse incentive?

For the first time she’s considering going without health insurance. 

“The whole plan was to get everyone enrolled so there’s a larger risk pool and our costs go down,” she said. “Wow, not at all what we’re seeing.” 

By making health insurance more expensive (the opposite of what it was supposed to do), Obamacare encourages many people (especially the young and healthy) to forego insurance and pay the fine instead.  Worst of all, Obamacare can't function without young, healthy people subsidizing the old and sick.

This is why the argument over the website - though entertaining - is futile.  The law is rotten to its core.  Fixing the website won't change that.

There's just one question left.  Is the rot a bug... or is it a feature?

UPDATE: I somehow forgot the most obvious - and potentially worst - perverse incentive Obamacare provides - the tax on medical devices.

Bloomberg columnist Megan McArdle calls this one of the big open questions. In her piece “Is Obamacare Pulling the Plug on Medical Innovation?” she noted: 

The only way to find out, of course, is to wait (though really, we’ll still end up arguing: If medical innovation falls, the law’s supporters can always say it would have fallen anyway; if it goes up or stays steady, the opposition can always argue that it would have risen further). But here’s one sign to watch: Venture-capital investment in medical technology seems to be falling fast. 

Is this related to Obamacare? Frustratingly, it’s hard to tell… [But] a tax on medical devices and a more stringent cost-control environment could hardly help. 

As a practicing physician, I’m deeply troubled by the possibility of any slowdown in innovation, especially because we’re on the cusp of a new round of potentially game-changing medical advances. Some recent examples include: 

* 3D printing of replacement body parts 

* Personalized medicine using individuals’ genetic data 

* New diagnostic tests that can detect lung cancer with a breath 

* “Spleen on a chip” to fight infection 

* Real-life tricorder 

* Bionic eyes 

As McArdle notes in a separate piece, other innovations may be less glamorous but still vitally important in preserving quality of life, such as a new bladder control prosthesis that helps prevent urinary infections in patients with spinal cord injuries and neurodegenerative diseases. 

But many medical device manufacturers run on extremely thin margins. Small differences in the tax and regulatory environment can mean the difference between a product coming to market — or being abandoned as not worth the effort. 

It’s easy to see the lives saved by products that exist. But it’s almost impossible to know which lives would have been saved by innovations that never made it to market. This is just an application of Frederic Bastiat’s old principle of “the seen vs. the unseen.”

Remember, when you want less of something, tax it.  Why would we want fewer medical innovations?  Is there some advantage I don't see?