What Exactly Is So Objectionable About Obamacare?

by: Shareholders Unite

We don't want to meddle into domestic policy debates, but now that these are threatening economies and investment portfolios worldwide, outside observers and investors have a right to ask some questions. What is so objectionable about Obamacare that some of the critics want to shut it down no matter what? We have a hard time understanding. And we're not alone:

For most of the world, a government shutdown is very bad news - the result of revolution, invasion or disaster. Even in the middle of its ongoing civil war, the Syrian government has continued to pay its bills and workers' wages. [BBC]

And here is The Economist:

The furore over Obamacare is baffling to the rest of the world. Most rich countries have universal coverage; developing countries are trying to introduce it. Yet in America, home to the world's biggest health system, the fight over insurance is vicious enough to bring government to a halt.

And we're not even mentioning the possibility of a default here, which would mean that all bets are off in financial markets. Now, we realize that each country suffers from their own particular brand of dysfunctional political folklore (our own country, the Netherlands, very much included, although it's too insignificant for anybody to take notice). But all this because of the introduction of a healthcare law that aims to insure more people?

So let's have a look at that and see what the problem is. Some argue that it's socialized medicine like they have in Europe. This is odd. In essence, Obamacare sprouted from a conservative idea. The idea of an individual mandate started in the Heritage Foundation(!) and morphed into Romneycare in Massachusetts, where it seems to be working fine. There is little socialized about it, healthcare continues to be provided by private insurance companies, hospitals and doctors.

While we're at it, "socialized" medicine isn't necessarily a disaster. Sweden has mostly socialized healthcare:

The United States spends more than $8,000 a person per year on health care, well more than twice what Sweden spends. Yet health outcomes are far better in Sweden along virtually every dimension. [Robert H. Frank]

Most developed countries have universal coverage and spend roughly half of their GDP on healthcare compared to the US, whilst having no worse, or even better health outcomes.

Click to enlarge

This isn't an accident, basic insurance economics shows that the larger the insured pool, the lower the premiums, so universal coverage is cheaper, in principle. But there are other reasons for the huge differences. US healthcare prices and salaries are huge relative to other developed countries:

Largely overlooked in these discussions has been the elephant in the room: the extraordinarily high prices Americans pay for health care. However, as a group of us noted in a paper in 2004, "It's the Prices, Stupid," it is higher health spending coupled with lower - not higher - use of health services that adds up to much higher prices in the United States than in any other member nation of the Organization for Economic Cooperation and Development. Aside from a few high-tech services, Americans actually use less health care and rely on fewer real health-care resources than do residents of other industrialized countries. [Uwe Reinhardt]

And so are administrative costs:

More than 20 years ago, two Harvard professors published an article in the prestigious New England Journal of Medicine showing that health-care administration cost somewhere between 19 percent and 24 percent of total spending on health care and that this administrative burden helped explain why health care costs so much in the U.S. compared, for instance, with Canada or the United Kingdom.

An update of that analysis more than a decade later, after the diffusion of managed care and the widespread adoption of computerization, found that administration constituted some 30 percent of U.S. health-care costs and that the share of the health-care labor force comprising administrative (as opposed to care delivery) workers had grown 50 percent to constitute more than one of every four health-sector employees. [Jeffrey Pfeffer]

A main reason for the excessive US healthcare cost is the Balkanisation of the system, responsible for smaller (and therefore more expensive) risk pools and administrative layers everywhere. Also, doctors have every incentive to provide many procedures (even doubtful ones) and insurance companies have little incentive and are too small to exert much, if any, downward pressure on prices:

An estimated 30 percent of all healthcare spending in the United States is pure waste, according to the Institute of Medicine. [Robert Reich]

A single buyer would be able to exert buying power, end the inefficient Balkanisation, enjoy the economics of a larger risk pool and be able to exert pressure to reduce unnecessary procedures. So it isn't terribly surprising that Medicare is much cheaper than the rest of US healthcare:

In fact, we'd do better to open Medicare to everyone. Medicare's administrative costs are in the range of 3 percent. That's well below the 5 to 10 percent costs borne by large companies that self-insure. It's even further below the administrative costs of companies in the small-group market (amounting to 25 to 27 percent of premiums). And it's way, way lower than the administrative costs of individual insurance (40 percent). It's even far below the 11 percent costs of private plans under Medicare Advantage, the current private-insurance option under Medicare. [Robert Reich]

We also know that emergency care for uninsured is a terribly inefficient way to provide healthcare (apart from the health hazards). In Texas, the state with the highest uninsured population (25%):

Families USA, a nonpartisan health care advocacy group, estimated that in 2010 an average family in Texas paid an extra $2,786 in premiums to cover care for the uninsured [Eugene Robinson, RCP]

And a significant part of the cost is simply a reflection of a lack of an integral approach and the failure of other social services.

Free market not efficient in healthcare
Many of the opponents seem to clamor for a free-market solution, but fail to appreciate that none really exist in healthcare. We've already demonstrated that the economics of risk pooling benefits from a larger pool. But adequate pricing of risk is hampered by non-transparent information (people don't really know their own health risks, and neither does an insurance company).

The biggest market failure is known as adverse selection. The healthiest people have the least incentives to insure themselves whilst they are the most desired customers for insurance companies. Under a free market, insurance companies would end up with the worst (highest risk) customers (adverse selection), which tends to self-reinforce as premiums would rise, giving low risk people even less incentives to join.

In order to deal with this situation, insurance companies use ploys to limit their exposure, but this leads to a situation in which some of the very persons who need it most (the sick and poor) either face sky-high premiums, limits to the amounts they can claim, or can't insure themselves at all. Apart from personal tragedies, this adds costs in myriad ways to society:

  • Emergency room as healthcare of last resort
  • Medical bills are the single biggest reason for individual bankruptcies
  • The inability to get health insurance at anywhere near reasonable premiums is a significant barrier to setting up one's own company

Obamacare tries to deal with that by making it illegal to refuse people with pre-existing conditions (which seems to be very popular, 66% in favor), but the necessary corollary is the individual mandate (which is the one feature that is unpopular). While this might be a particularly coercive form of socialism to some and generating most of the hostility, under closer inspection it seems the corollary to a garden variety market failure to us.

With the mandate, the ACA is projected to increase health insurance coverage by a bit over 25 million Americans when phased in. Without the mandate, this number falls to just over 11 million. With the mandate, each new enrollee will cost the federal government $3,912. Without the mandate, each new enrollee will cost almost double this much-$7,638. [EPI]

Some effects of Obamacare
Some fear that Obamacare is a job killer by limiting companies hiring to 50 full-time employees (after which they're obliged to provide healthcare insurance, the so called employer mandate).

Orrin Hatch has said that Obamacare will be "devastating to small business." Ted Cruz argues that it is already "the No. 1 job killer." [James Surowiecki]


But the overwhelming majority of American businesses-ninety-six per cent-have fewer than fifty employees. The employer mandate doesn't touch them. And more than ninety per cent of the companies above that threshold already offer health insurance. Only three per cent are in the zone (between forty and seventy-five employees) where the threshold will be an issue. Even if these firms get more cautious about hiring-and there's little evidence that they will-the impact on the economy would be small. [James Surowiecki]

Another argument of the critics is that it will lead to an increase in part-time work as employers will be required to provide insurance to workers who work for more than 30 hours a week (and providing they have more than 50 of such workers). Since this requirement has been postponed for a year, this isn't yet visible in the figures, although some argue it is.

The Congressional Budget Office (CBO) expects some downdraft here:

The CBO estimates there may be 0.5% fewer jobs than without Obamacare, mostly because some people will choose to work less, as they will no longer need a job to get cheap health insurance.

But this would be a personal choice so we have a hard time seeing a problem with that. The same CBO predicts that Obamacare will shrink the deficit by $109 billion from 2013 to 2022, although rising healthcare costs remain the single most important long-term threat to America's finances.

Another objection is that Obamacare would lead to rising insurance premiums. This depends where you live as differences from state to state vary considerably. However, there seems little reason for immediate concern, although it depends where you live and what your situation is:

Overall, according to HHS, the premium bids are lower than government actuaries had predicted when the law first passed. That's good news for taxpayers, because it means the subsidies will be less expensive than budget projections had suggested [TNR]

A main objection we would have is that it doesn't do enough to curb cost in US healthcare (see here for an overview), but this isn't something you generally hear from the ardent critics.

Some argue that Obamacare is such a mess that it won't work and indeed it got off to something of a rocky start. However, looking at Massachusetts is encouraging and going about this in myriad ways to defund and obstruct and discourage people (especially young healthy ones, which are essential to keep it affordable) to sign up doesn't seem to improve the chances that it will. Here is what The Economist noted dryly:

The main challenge, however, has been political. It is hard to implement a law when opponents want it obliterated.

Especially if they hold power in states:

In Florida and Texas alone, more than two million people won't get health insurance because conservatives won't allow the states to join the Medicaid expansion [TNR]

The latter is part of Obamacare, offering Medicaid to people making less than 133% of the poverty line. As with any law, there are some costs and disadvantages to some people but we should not forget that there are benefits as well, like:

While Obamacare is far from perfect, we fail to see why it stirs such heated passions as to endanger economies and investment portfolios around the world. The most passionate objections seem to come from ideology, rather than any dispassionate cost-benefit analysis. Obamacare seems to be seen as some form of intolerable state intrusion or socialism.

This is unfortunate. The simple truth is that a free market in healthcare is not efficient, due to the existence of market failures like the adverse selection problem. The US system is by far the most expensive in the world whilst leaving tens of millions uninsured and producing no better outcomes than systems that cost half as much, but which usually have considerably more government involvement.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.