Why the stink over 'Obamacare'?

published 7 October 2013

What is it?

The Patient Protection and Affordable Care Act (dubbed 'Obamacare' first by opponents and now by everyone) was passed by Congress in 2010.Its core provisions are being phased in from now until the end of this year.

There are three main planks: 'guaranteed issue' ending discrimination in insurance markets so that insurers can't deny cover to those who are already sick; the 'individual mandate' obliging those not already covered by an employee programme, or state programme such as Medicare or Medicaid, to buy private health insurance; and finally subsidising that coverage for the poor, and expanding Medicaid to cover more poor people.

Who does this affect?

Together with workers who receive health insurance from their employers, these groups account for the vast majority of Americans who have health insurance and they'll scarcely be affected by the changes.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Obamacare is designed to help 32 million of the estimated 50 million Americans who don't currently have any form of insurance and are effectively shut out of the market.

Why are they shut out?

In others, such as New York, insurers instead had to offer similar coverage regardless of medical history, a system known as "community rating". But this is vulnerable to what economists call the 'adverse selection problem'.

If all applicants are treated the same, it's the already sick who are more likely to sign up driving premiums ever higher while the currently healthy take the chance of going without.

As Cornell economist Robert Frank wrote recently in The New York Times, this problem "explains why almost no countries leave healthcare provision to unregulated private insurance markets".

So what's the solution?

To facilitate this, states now have to set up online 'health exchanges' so that individuals and small businesses can band together and get better deals on insurance, the way big firms do already.

In New York, for example, this has led to premiums falling by an astonishing 70% (according to The New York Times). But it is the element of coercion (as well as a fear that premiums will ultimately rise) that has made Obamacare unpopular, according to polls.

"Yes, many Americans lack decent health coverage, but there are plenty of wealthier youngsters who just don't want it," says Justin Webb in The Times. "Do you remember being young? Did you think much about health? Exactly."

Are businesses affected?

Obviously, employee insurance is popular with workers but it makes labour markets less flexible because workers, especially unhealthy ones, are much less likely to move jobs.

To encourage more employers to offer insurance, Obamacare includes a so-called 'employer mandate', which forces firms that employ more than 50 full-time workers but do not offer insurance to pay a contribution (or fine, depending on how you look at it) if the government has to subsidise a worker's healthcare insurance. That, say critics, could destroy jobs, by raising costs for firms.

There is already lots of anecdotal evidence that small firms are cutting full-timers and taking on part-timers so as to fall under the threshold of 50 full-timers. Consultants Mercer found that 10% of firms will cut workers' hours due to Obamacare rising to 20% in retail and hospitality.

Will it hurt the economy?

What the critics say

Casey Mulligan of Chicago University predicts that such labour-market distortions will outweigh any growth from lower healthcare costs, and Americans will work 3% fewer hours in 2015 than they otherwise would have done.

The truth is no one really knows how Obamacare will affect the US economy. But "when the final diagnosis is done", reckons The Economist, it may turn out to have "nasty side effects".

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.