How to judge Obamacare

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"Obamacare is saving lives!"

"Obamacare is ruining the country."

It's hard to go a day without seeing some version of those comments in public.

As a result, I spend a fair bit of time thinking about how we can judge whether Obamacare, as it actually plays out in the marketplace, is successful or not.

It’s not an easy thing to do.

That’s because health care in America was a mess long before Obamacare—and on a path to getting messier. So here’s how I think about it.

If, after Obamacare, U.S. health care actually is less of a mess than before, then we absolutely should call Obamacare a success.

If health care merely remains equally messed up, but no worse than before, then I will gladly declare Obamacare a success.

If health care gets messier—even messier than it would have been without Obamacare, then I think we have to say the law is a failure.

The really TOUGH case is if health care gets worse, but the mess isn’t any bigger than it was on pace to be before Obamacare. That’s more of a judgment call.

For me, passing a complicated law with lots of new rules and new taxes should have a payoff at the end of that process. That was clearly the goal with Obamacare. But if the law ends up having no real effect, then I think it's at least fair to judge the law a failure.

It's that "no real effect" kind of failure that I suggested would happen in a controversial post earlier this month. That post did not focus on whether Obamacare would succeed long-term in reducing the number of uninsured Hoosiers and Americans (early evidence suggests it is), although I'll touch on that related topic at the bottom of this post.

Here’s what I said, in a nutshell:

1. Most of Obamacare’s new rules are designed to make private health insurance companies offer better benefits, with stronger consumer protections, for less money—after generous federal tax subsidies, of course.

2. However, across the country, only two of every five people are even covered by the kind private health insurance that Obamacare reforms. In Indiana, it’s just one of five.

So how is everyone else getting insurance? Through their employers, which operate something called “self-funded health plans.”

How are self-funded health plans different from private health insurance?

Actual health insurance means my company pays money every month—called premiums—to Anthem. That money buys three things: the discounts Anthem has negotiated with doctors and hospitals, the handling of medical bills racked up by employees and, finally, for Anthem taking the risk that those bills might actually cost more than the total amount of premiums we pay that year.

A self-funded health plan hires Anthem for only the first two of those three things—the discounts and the handling of the bills. But in a company that self-funds its health plan means, the company actually writes checks every month to cover the amount of medical bills its employees have wracked up.

If those bills go higher than expected, the company is on the hook, not Anthem.

Self-funded companies then buy a different kind of insurance—called stop-loss or reinsurance—which says that if your medical bills run higher than a large amount, say, $50,000, then we’ll pick up the rest. But everything below $50,000, the company has to pay out of its own coffers.

Why is this important for Obamacare? Because most of Obamacare’s new rules do not HAVE TO BE followed by self-funded plans. Self-funded health plans can still, if they want to, exclude coverage for some of the 10 “essential benefits” that Obamacare requires to be in all real health insurance plans. Excluding coverage of those benefits would, certainly, cut costs for an employer.

What are these essential benefits? Here you go:

1.    Doctor’s office visits
2.    ER care
3.    Hospitalization
4.    Maternity and newborn care
5.    Mental health and substance abuse care
6.    Prescription drugs
7.    Rehab services and equipment
8.    Lab tests
9.    Preventive and wellness care
10.  Pediatric care, including dental and vision care

One comment to my post came from Sally McCarty, the former commissioner of insurance for Indiana, who also worked in the Obama administration, helping to some of the regulations flowing out of the Affordable Care Act. She is now a senior research fellow at Georgetown University's Center on Health Insurance Reforms. (As an aside, let me say that I love it that Sally reads and responds to my blog. Her comments always add a lot of depth and make the whole discussion smarter.) Sally ponited out that Obamacare indirectly pushes self-funded health plans to cover the essential health benefits, or EHBs, as she calls them.

“Please note, that even though self-funded plans aren't required to provide the essential health benefits—not exactly something to be celebrated by those covered under those plans—they ARE subject to many of the protections that apply to EHBs if they offer the same benefits," Sally wrote. As examples, she mentioned, Obamacare's prohibition on waiting periods over 90 days, required dependent coverage up to age 26, prohibition on discrimination based on health status, prohibition of pre-existing condition exclusions, prohibition of annual and lifetime dollar limits on essential health benefits, limits on out-of-pocket expenses for essential health benefits, and coverage of preventive services with no patient cost-sharing.

The key phrase in her comment is, “if they offer the same benefits.” I expect, as I think Sally does too, that most self-funded employers will offer those essential health benefits.

But where I think Sally and I disagree is whether to credit Obamacare for employers' offering these benefits and adhering to Obamacare’s new restrictions around them. This gets back to our discussion of how to judge Obamacare's effect.

Even before Obamacare took effect, most self-funded employers already had generous health benefits. For two reasons:

1. Because they compete with every other company for talented workers. And health benefits can be vital to attracting and keeping good workers.

2. Because there are huge tax benefits to spending money on health benefits, as opposed to other things. The tax credit for employer spending on health benefits is the single largest tax break in the entire federal tax code, valued at about $250 billion per year.

Those reasons haven’t changed under Obamacare. So my approach to judging whether the law succeeds or fails is not whether it adds protections for consumers who were already protected by these other two forces in the marketplace, but whether it successfully moves more consumers under the umbrella of those protections.

Right now, however, instead of seeing employers embrace Obamacare’s new rules, we see more and more of them seeking out self-funding as a way to dodge those rules—or at least to dodge the cost of them. That’s not a good sign that Obamacare is going to increase the number of people in employer plans covered by these protections.

Obamacare leaves plenty of loopholes for employers that are getting into self-funding as a money-saving move—as is certainly the case with the wave of small employers that have moved to self-funded plans recently.

For example, Obamacare says self-funded companies can’t place a dollar limit on how much their plans will pay for a specific benefit in a year or for one of their worker’s lifetimes.

But there is nothing stopping employers from using other kinds of limits. A company could say, We’ll cover knee surgeries—but only one per year, or only two per lifetime. An employer could say, We’ll cover fertility services, but only one per lifetime. I've not heard of employers doing these things, but these are ways self-funded plans could trim their costs.

Much more significantly, self-funded health plans will avoid Obamacare’s "community rating" rules. Those rules say all small employers and individuals buying from a given insurer will be charged whatever it takes to cover their bills—BUT the oldest person can’t be charged any more than three times as much for coverage as the youngest member.

That helps companies that have lots of older workers—because before Obamacare, health plans charged older members about five or six times more money than the youngest members.

But those rules will hurt companies with younger workers. So those companies might become self-funded, because then their costs will hinge only on the actual medical bills racked up by their own employees—not by anyone else.

Since younger folks tend to be healthier, and since healthier folks consume a very small amount of health care, their costs are likely to be quite low.

If all the companies with young and healthy workers become self-funded, who will be left buying actual health insurance? People with lots of medical bills, which could cause insurance in that marketplace to become very expensive.

This isn’t right-ring fear-mongering. Listen to this quote from a November 2012 report produced by the Commonwealth Fund and the Urban Institute—two organizations that are full-throated supporters of Obamacare:

“Many industry experts are concerned that if low-risk stop-loss plans are available to small employers … the fully insured market (that’s the industry term for what I called real health insurance) could end up being a magnet for bad claims risk with healthier risks diverted to self-insurance. As a result, we could see higher premiums and decreased stability in the fully insured market.”

Translation: Buying health insurance that actually follows all the rules in Obamacare could get really expensive—even after accounting for those generous Obamacare tax subsidies—leading fewer and fewer people to do it.

If fewer people buy coverage in the Obamacare markets, it could seriously hamper Obamacare's goals of reducing the number of uninsured—despite the early positive trends in that area. It could also hinder Obamacre's effort to reduce the costs of health insurance coverage and to increase the amount of protection offered to insurance consumers.

So if we see more employers and their workers take advantage of the self-funding loopholes in Obamacare, then it is at least plausible that Obamacare could fail to improve our messy health care situation.

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