The markets have hummed along over the past few years, but there have been many problems lurking beneath the surface. “60 Minutes” recently did a piece on China’s housing bubble, which could have an adverse impact on the world economy. It’s also no secret that the eurozone nations are still struggling, and it’s plausible that a nation like Spain or Italy could eventually exit the currency union. My belief, however, is that the Affordable Care Act (a.k.a. “Obamacare”) might actually be the biggest obstacle to economic growth in the US in the upcoming years.
There are several issues in the ACA that could hamper economic growth moving forward. For this series, I want to focus, in particular, on five issues:
(5) Restrictions on high-deductible insurance plans
In my first article, I looked at some of the direct taxes implemented by the ACA and how historical tax increases had harmed private domestic investment and consumer spending. In my second article, I examined how the ACA’s subsidies could create a cost-spiral, and lead to large stealth taxes on many people purchasing insurance. In my last article, I examined the employment related provisions of the act and how they might impact the restaurant industry.
For this article, I want to look at the act’s prejudice against high-deductible plans.
The Evolution of Employer-Provided Insurance
Our system of employer-provided insurance was somewhat of an accident. It resulted from price controls in World War II, which artificially capped wages. Since employers desperately needed labor, they decided to pay employees with large benefit packages that included healthcare. This allowed them to bypass the war-time wage controls.
Once employers got into the business of providing insurance, the US government helped codify this practice into law, via the US tax code which allowed employers to claim healthcare expenses as a deduction. The result is that now we have a system where most employer-provided health insurance will cover 80% – 90% of the costs for all medical expenses, even basic services like a routine doctor’s visit, or prescription drugs. Unfortunately, this has helped create a pattern of overconsumption.
Imagine if auto insurance were similar to health care insurance in the United States. What if your auto insurance covered oil changes and routine maintenance? Right now, you can go out and get a basic oil change anywhere from about $20 – $35. However, if you’ve ever been to Jiffy Lube or any other oil change service companies, you’ve likely noticed that most have premium offerings that can cost anywhere up to $100.
If your auto insurance only required you to make a 10% – 20% co-pay for oil changes, do you think you’d opt more often for the premium offering? If you’re only paying 10%, that $20 oil change turns into a $2 oil change, while that $100 oil change becomes $10. $10 versus $2 creates a much different set of incentives for the consumer than $100 versus $20. For only eight extra bucks, you get a lot of value. This misaligned incentive showcases one reason (though there are numerous others) why healthcare consumption in the US is too high.
High-Deductible Plans and the ACA’s Restrictions
To help solve this problem, we’ve seen more Americans switch over to high-deductible insurance plans [“HDIPs”]. These are normally coupled with the use of tax-exempt healthcare savings accounts [“HSAs”]. Indeed, the growth of the HDIP / HSA model over the past 6-8 years has been absolutely phenomenal!
In 2005, only 1 million Americans used HDIPs. By 2011, that number had grown all the way to 11.4 million. That’s an annualized growth rate of about 50%!
The growth in the large-group insurance market for HDIPs has been particularly spectacular. Only 162,000 Americans were covered by high-deductible large group plans in 2005. By 2011, that number has skyrocketed to 6.3 million, an 84% annualized rate of growth.
It’s become clear that due to the rapid growth in healthcare costs in the US, many individuals and employers have turned to high-deductible plans, coupled with HSAs to try to lower insurance costs. This certainly makes sense, and as I’ve noted before, I’d consider Singapore to have one of the most successful healthcare model in the world, and its universal healthcare system is modeled more along the lines of a HDIP / HSA system.
Oftentimes, when I’ve mentioned Obamacare’s cost issues, many people have intelligently responded that more Americans will simply shift into high-deductible plans. The only problem with that thesis is that the ACA may effectively outlaws many of those plans. Obamacare’s calculations of actuarial value are rather unfavorable for HDIPs and HSAs.
In other words, if you want to rely on HDIPs, you may still have to pay the 2.5% mandate income tax. Which re-emphasizes the main thrust in my last article on how Obamacare will turn into a stealth tax for many Americans. And this stealth tax is very likely to harm both consumer spending and private investment, which will ultimately harm GDP growth.
More Info and Upcoming Articles
This is my last article on particular issues associated with Obamacare. Even though this is Part 4 of my series, I’ve really only skimmed the surface on the economic problems inherent in the ACA. If you want to read more, I keep an updated lists of articles on the ACA on my blog:
I will try to write one final article summarizing the problems with the US healthcare system and Obamacare from the bigger-picture perspective.