The Corner

The Law of Unintended Consequences, Obamacare Edition

Planning of large chunks of the economy is harder than pro-government advocates usually anticipate. People often respond to new laws or behave in ways that central planners never forsee. In this vein, over at the Cato Institute, Michael Cannon points to yet another factor that ”could make the roll-out of ObamaCare’s health insurance ‘exchanges’ even more of a train wreck.”

While, in theory, Obamacare requires that employers with 50 or more workers must offer coverage to their workers or pay a penalty, the law may only mandates the provision of what amounts to very light coverage. The Wall Street Journal explains:

Benefits advisers and insurance brokers—bucking a commonly held expectation that the law would broadly enrich benefits—are pitching these low-benefit plans around the country. They cover minimal requirements such as preventive services, but often little more. Some of the plans wouldn’t cover surgery, X-rays or prenatal care at all. Others will be paired with limited packages to cover additional services, for instance, $100 a day for a hospital visit.

Federal officials say this type of plan, in concept, would appear to qualify as acceptable minimum coverage under the law, and let most employers avoid an across-the-workforce $2,000-per-worker penalty for firms that offer nothing. Employers could still face other penalties they anticipate would be far less costly.

But you would have to read the law to know what’s inside:

Many employers and benefits experts have understood the rules to require robust insurance, covering a list of “essential” benefits such as mental-health services and a high percentage of workers’ overall costs. Many employers, particularly in low-wage industries, worry about whether they—or their workers—can afford it.

But a close reading of the rules makes it clear that those mandates affect only plans sponsored by insurers that are sold to small businesses and individuals, federal officials confirm. That affects only about 30 million of the more than 160 million people with private insurance, including 19 million people covered by employers, according to a Citigroup Inc. report. 

Those requirements applyng to the individual market would affect some 20 percent of the 160 millions of Americans with private insurance. 

Cannon lays out some of the unintended consequences of the law that ultimately could end up seriously jacking up its costs and be a serious challenge to the implementation of the health-insurance exchanges: 

  • To the extent ObamaCare’s employer mandate pushes firms to offer bare-bones plans, premiums for plans offered through Exchanges will rise. The healthiest workers will enroll in their employers’ bare-bones plans, but workers who have expensive illnesses (or with dependents who have expensive illnesses) will seek more-comprehensive coverage through the Exchanges. The influx of sick consumers will increase the premiums for Exchange-based plans. Many of these sick workers won’t receive any premium-assistance tax credits or cost-sharing subsidies because their employer’s bare-bones plan will likely satisfy ObamaCare’s definition of adequate – and because the statute forbids those entitlements in the 33 states that have declined to establish an Exchange.
  • Employers are also renewing their health-benefits contracts early (i.e., before January 1, 2014), which allows them to avoid many of ObamaCare’s regulatory costs for several months. That move could also increase premiums for Exchange-based plans by encouraging workers with high-cost illnesses to seek coverage through Exchanges while healthy workers stick with their employer’s plans.
  • Many employers are also considering self-insuring their health benefits, an arrangement in which the employer bears the risk that is usually borne by the insurance carrier and just hires someone (often an insurer) to administer the coverage. This strategy allows also employers to avoid many of ObamaCare’s regulatory costs and could also increase premiums in the Exchanges and small-group market.

But here is the most interesting part: In spite of overwhelming evidence that some people respond to laws that impose higher costs by trying to avoid them, some people are still surprised when this happens, as the Journal reports:

Several expressed surprise that employers would consider the approach.

“We wouldn’t have anticipated that there’d be demand for these types of band-aid plans in 2014,” said Robert Kocher, a former White House health adviser who helped shepherd the law. “Our expectation was that employers would offer high quality insurance.” Part of the problem: lawmakers left vague the definition of employer-sponsored coverage, opening the door to unexpected interpretations, say people involved in drafting the law.

The whole thing is here. Also, everything by Michael Cannon is worth reading, and you could do that here.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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