INSIGHTS: OBAMACARE – IF THEY EVER GET THE ACA WEBSITE FIXED, THE WORST MAY BE YET TO COME
By Guest Columnist Robert F. Graboyes:
Senior Research Fellow, Mercatus Center and Professor of Health Economics at Virginia Commonwealth University, the University of Virginia, and the George Washington University.
Editor’s note: A version of this piece first appeared at Forbes.com.
Despite deserved scrutiny over the Affordable Care Act’s health insurance website, the ACA’s weakest cog is perhaps the individual mandate. Its purpose is notoriously simple: to compel tens of millions of healthy young people to overpay for health insurance so that older, sicker, and often wealthier people can underpay. To pass the law, Congress stripped this cog of its teeth, and the Supreme Court later removed its linchpin.
All You Really Need to Know, You Learned in Day Care
In the bestselling book Freakonomics, the authors describe a problem day care centers in Haifa, Israel, had with parents retrieving their children after closing time, forcing staff overtime. Some economists suggested monetary penalties to discourage parents from being tardy. For four weeks, they imposed no penalties and observed an average of eight late pickups per day care per week. Afterward, they hit tardy parents with a $3-per-incident penalty. Once the fines were imposed, however, the late pickups shot up to 20 per week, since parents felt a “small fine implies small inconvenience.” Tardiness previously carried an indeterminate magnitude of guilt, but the cost was now an explicit $3 in place of guilt.
The Freakonomics authors concluded that $3 was too small of a penalty, and speculated that a $100-per-day fine might work but could engender ill will. With the experiment in ruins, the day cares dropped the fines, but the number of late arrivals never dropped back down as notion that tardiness was trivial lingered on.
Kentucky Rain Keeps Pouring Down
In 1994, Kentucky tried its own ACA and failed dramatically: Insurers could neither refuse purchasers, drop them for health reasons, nor differentiate premiums based on gender, health status, or claims experience. Premiums could only vary on geography, family composition, benefit package, and cost-containment provisions within narrow rating bands. Kentucky had no individual mandate, but if the ACA’s mandate fails, the resemblance to Kentucky is spot-on.
Insurers fled the state by the dozens. Those remaining lost money and warned enrollees that plans would raise premiums and limit coverage. By 1996, state government panicked and retracted pieces of the law—but the young refused to sign up, and the preponderance of older, sicker enrollees drove the plan out of business.
Morality Reduced to Liver
Before the ACA passed, Congress considered other bills, including one in which failure to observe the individual mandate carried an extreme $25,000 fine and one year in prison. But in 2014, the penalty for not buying insurance is only $95 or 1 percent of household income. By 2017, the figures rise to $650 or 2.5 percent of income, but that pales next to a policy costing over $5,000. And the government has virtually no way of punishing scofflaws for noncompliance. The only tool will be skimming the person’s income tax refund the next year—if they are owed a refund.
As such, some people might have purchased insurance to avoid being labeled as miscreants, but in 2012, the Supreme Court transmogrified the fines into taxes. With the moral implications stripped away, failing to buy insurance is no more immoral than declining to eat a plate of liver.
Day Care + Kentucky + ACA Mandate = Doom
The day care experiment showed how experts who misjudge human behavior can worsen a problem rather than lessen it. Without a mandate, Kentucky’s reforms flew apart. Combine these two lessons and you have the ACA, where the young and healthy see the tax as an attractive alternative to insurance and insurers are already raising premiums, limiting coverage, and fleeing altogether. If they ever fix the website, the worst may be yet to come.
ON THE ECONOMY: 100 Million
I spend about a 100 million dollars – 100 million dollars – 100 million dollars. And I came from da ghetto (ghetto) and I came from da ghetto (ghetto). If ya ghetto hold ya hood up If ya ghetto hold ya hood up raps Bryan Williams (a.k.a. Birdman) from the song 100 Million off his 2007 Album 5 * Stunna.
While I don’t know a whole lot about Mr. Birdman, I am familiar with $100 million dollars. This is the price of an 8,000 square foot penthouse apartment in Manhattan’s City Spire apartment building. It is what Tampa Bay Rays third baseman Evan Longoria is being paid for a 6-year contract, it is what it cost the taxpayers to send the President and his family to Africa last summer, and it is 100 times as much as Dr. Evil’s ransom demand when he held the world hostage. It is also the cutoff point where federal regulations can be enacted without first undergoing a thorough cost-benefit analysis.
In February of 1981, President Regan signed Executive Order 12291 which required that any “major rule” which was defined as any regulation likely to result in (among other things) an annual effect on the economy of $100 million, would have to undergo a regulatory analysis. This analysis included a description of the potential benefits and costs of the rule, a determination of the net benefits of the rule, a description of alternative approaches that could substantially achieve the regulatory goal at lower cost, and an explanation of why those approaches were not selected. This language has been standard in cost-benefit analysis practice and the $100 million threshold has been reenacted by every subsequent president and is a part of the Office and Management and Budget’s rulemaking requirements. Importantly, however, the rule does not apply to independent regulatory agencies like the Federal Communications Commission or the Food and Drug Administration, except when Congress specifically mandates cost-benefit analysis as part of a specific rule or proposed regulation.
The Independent Regulatory Agency loophole is large enough to drive a truck through. As such, agencies like the FDA can issue rules banning margarine simply on a whim, without taking into account their impact on the economy, or whether or not the stated goal of the rule can be accomplished is a less aggressive way. On the other hand, the requirement has helped to limit – or at least slow down – misguided rules and panic policy making out of other agencies.
It is not difficult to determine the economic impact of a proposed rule on an industry. A baseline economic impact study needs to be conducted, and the economic structure then needs to be shocked with the proposed regulatory change. If the resulting impact calculated in terms of economic output is larger than $100 million, then the agency needs to conduct a full cost-benefit analysis. This process can take from 9-months to 2-years depending on the agency and the complexity of the modeling involved. Such a delay can provide the time needed to quell whatever public relations issue was leading to the policy in question, or can help a business or trade association gather the votes necessary to legislatively stop or modify the regulation in question.
This non-traditional use of economic impact analysis can be extremely valuable and should be considered as part of the regulatory affairs process. Here at JDA we have worked with our trade association clients to modify and substantially delay regulations pertaining to a number of different products and processes, all of which were initially ill designed not well thought out.
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