Wednesday, March 31, 2010

The Perverse Incentives of Obamacare

The Obama administration carefully crafted a piece of legislation that is meant to destroy private insurance and health care over the long-run. Consider how they have created a system of incentives that rewards you for canceling any health insurance you are currently paying for. Yes, that's right, the Obama "reform" makes you better off if you cancel your health insurance.

In normal insurance markets your incentive is to buy insurance before you are ill because pre-existing conditions are not covered. You pay $X per month for protection against conditions that may develop in the future. There is a very strong incentive to purchase insurance prior to such a condition developing.

Obama ends that incentive. Insurance companies will no longer be allowed to exclude pre-existing conditions. So why buy insurance?

Obamacare puts in penalties if you don't have insurance. But the penalties will be lower than the cost of the insurance itself. The money you will save on insurance will not be eaten by the penalties so you win. And, if you do get sick, no insurance company can turn you down for a policy and you're covered again.

Most of the time we aren't sick. Most of the time we pay for care we aren't using as an investment for when we will need it. But under Obamacare you can pay much less now, and still get the rewards later.

Companies that stop providing insurance will pay a penalty for doing so, but again under the cost of providing the care, especially as private rates increase. What alternative exists for Obamacare then? Obviously it will have to get more heavy-handed in punishing people. So the iron boots of government will have to be put on to deal with people who actually act according to the perverse incentives of Obamacare.

It should also be noted that some of the bad consequences of Obamacare have already materialized.

Publicly traded companies are supposed to announce any significant moves in their value. As the Wall Street Journal noted: "Black-letter financial accounting rules require that corporations immediately restate their earnings to reflect the present value of their long-term health liabilities, including a higher tax burden."

And that is what some companies have done. They announced the anticipated effect of Obamacare on their company. While Obama was claiming the measure would bring down health-care costs the companies that would be paying the bill said their costs would go up. According to the Journal: "AT&T announced that it will be forced to make a $1 billion writedown due solely to the health bill, in what has become a wave of such corporate losses." But AT&T wasn't alone:
On top of AT&T's $1 billion, the writedown wave so far includes Deere & Co., $150 million; Caterpillar, $100 million; AK Steel, $31 million; 3M, $90 million; and Valero Energy, up to $20 million. Verizon has also warned its employees about its new higher health-care costs, and there will be many more in the coming days and weeks.

The Democrats were hoping for some more time to pass before they were discovered to have lied to the public about costs. So they are hopping mad. Democrats "announced yesterday that they will haul these companies in for an April 21 hearing because their judgment 'appears to conflict with independent analyses, which show that the new law will expand coverage and bring down costs.'" Of course, we can all get more for less. Well, that was the promise.

The Journal asks: "Should these companies have played chicken with the Securities and Exchange Commission to avoid this politically inconvenient reality? Democrats don't like what their bill is going in the real world, so they now want to intimidate CEOs into keeping quiet."

The Journal notes precisely what the Democrats were trying to do:

Gradually introduce a health-care entitlement by hiding the true costs, hook the middle class on new subsidies until they become unrepealable, but try to delay the adverse consequences and major new tax hikes so voters don't make the connection between their policy and the economic wreckage. But their bill was such a shoddy, jerry-rigged piece of work that the damage is coming sooner than even some critics expected.
Nobel laureate Gary Becker called the Obama legislation "a bad bill" which actually doesn't address any of the real weaknesses of American health care but "adds taxation and regulation. It's going to increase health costs—not contain them." But Becker thinks it will become difficult to repeal this bad legislation because "interest groups group up around it."

Politicians, especially Democrats, are quite capable of setting up systems of perverse incentives. It has happened repeatedly. Of course, when things get screwed up the politicians claim it was caused by private business, not by their actions. They are blameless, always, because they are looking out for our interests. If you believe that,let me know, I have a bridge I want to sell real cheap.

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