“Regardless of government healthcare mandates or other regulatory policies, market forces are always at work…Obamacare is a bad idea that may only get worse.”
By Holly A. Bell
Regardless of government healthcare mandates or other regulatory policies, market forces are always at work and will mold the healthcare market to adjust to the new regulatory environment. If governments are unable to regulate away market forces, what impacts might the full implementation of the Affordable Care Act have on the healthcare market twenty years after full implementation? Using a basic economic principle, we can make some predictions about costs and demand and infer how the healthcare market and regulators might respond.
Third party payer systems
The primary goal of the Affordable Care Act is to ensure all American’s have affordable healthcare by creating a system of available and affordable health insurance. By doing so the government is creating a universal third party payer system—defined as a system in which the person paying for the service is different from the person receiving the service—and economists largely agree that third party payer systems increase demand. Why? Because consumers are not bearing the full cost of the service and will demand more because they perceive it as “free” or “near free”. In fact, some economists argue that the advent of health insurance is part of the cause of rising healthcare costs we see today.
So let’s assume demand for healthcare services rises under the Affordable Care Act (ACA), what will happen? To control demand, healthcare providers will have to raise prices—this is basic supply and demand as there are only so many doctors to go around. If healthcare costs rise, insurance companies will be forced to raise premiums for everyone. As the Act promised to make healthcare “affordable” rising costs will not be something either consumers or the government will be willing to tolerate for long. So how will the healthcare industry and legislators seek to lower costs and what might some likely outcomes be?
The luxury tax
One additional cost the ACA is adding immediately is placing a “luxury tax” on what they call “Cadillac” health care plans—described as those with certain high premiums. When the government placed a luxury tax on yachts over $100,000 and other luxury goods in 1990, consumers stopped buying yachts made in the U.S. and started buying yachts from producers in other countries registering their newly purchased boats in those countries to avoid paying the tax. The tax did not “harm” the wealthy individuals who could afford yachts; they found a way around the tax, but it destroyed jobs for U.S. workers who made yachts in the process. Plus, the government saw a decrease in total tax revenue from yacht sales rather than an increase.
In the case of health insurance, the luxury tax is likely to decrease the overall quality of health insurance for those who are already insured. Employers may begin offering insurance plans that do not meet the “Cadillac” standards in order to avoid the rising costs associated with taxation. Those individuals who have been enjoying excellent heath insurance coverage may lose it either because employers stop offering it or because the resulting employee share of premiums will increase to a point they can no longer afford it. This is strong market evidence to support that you may not be able to keep your current health plan long-term. An alternative scenario is that if premiums begin to rise overall, increasing numbers of the insured might start to hit the premium thresholds that trigger the tax. This tax might start to have the same problems with “creep” that the Alternative Minimum Tax has had.
The changing healthcare environment
Once prices begin rising, either due to the luxury tax or the demand issues discussed earlier, consumers and providers will begin seeking cost reductions. The market may respond to the limited supply of doctors, growing demand, and increasing costs by shifting primary care to Physician’s Assistants (PAs) and Nurse Practitioners (NPs). In this scenario General Practitioners will serve as supervisors, but will not routinely treat patients. Rising costs will also likely lead to some form of rationing of services. For example, the ACA only requires preventative services with a USPSTF rating of “A”. This means no preventative mammograms prior to age 50 and an elimination of the PSA blood test as a screening for prostate cancer (Forbes had a great article on this available here). While not directly stated, it could also lead to policies that disallow cancer treatments that extend life, but don’t have a high probability of offering a cure.
Rising costs might also lead to policies intended to limit the amount of money doctors can earn. This could be accomplished through universal caps on the prices that can be charged for office visits, tests, and procedures essentially creating a “socialized” price structure. Under an extreme scenario (that results in a nationalized healthcare system) doctors could become salaried government employees. To socialize the premium structures of insurance companies, limits could be placed on the amount of profit insurance companies are allowed to make (this has already been proposed). These policies would create economic disincentives for entering the medical or insurance fields making shortages even greater.
Other potential cost saving scenarios could be one of two types of “two-tiered” benefit systems. In a government mandated two-tiered system, everyone will be required to pay health insurance premiums at some minimum rate, but benefits will be determined based on income. Lower income households would receive greater benefits and higher income households would be required to pay more out of pocket.
If the healthcare system remains more market based, a different two-tiered system could emerge. In this system higher income households would buy the least expensive policy they can and then find alternative cash options for healthcare. What prevents the best U.S. doctors from developing medical ships to be kept in international waters just off the U.S. coast? Cash patients could be ferried to the ships for tests and medical procedures they can’t get in the U.S. because of USPSTF restrictions. Cash consumers could also shop these “ship hospitals” for the least expensive services and highest quality physicians.
Another potential market driven option that could emerge to reduce costs would be to allow foreign “health insurance exchanges” to operate in the U.S. undercutting premiums of U.S. insurance companies essentially offshoring the health insurance industry. In an extreme scenario, if costs are rising too much in the U.S. due to high demand and shortages of doctors, foreign exchanges could require that major medical procedures be done in their home country. It might still be less expensive to have hip replacement surgery in India, for example.
Impacts to other areas of the economy are also important to consider. There will be little incentive for organizations to hire more than 50 full-time employees as doing so triggers benefit requirements. This will result in a continued or increasing trend in part-time and temporary workers leading to the exacerbation of underemployment and income gap problems.
The adjustments the healthcare market or legislators will need to make to compensate for the market distortions created by the ACA are unpleasant and fail to meet the goal of providing affordable healthcare for all Americans. Ultimately, the cost increases, shortages, and lack of sustainability will have consumers clamoring for a single payer national healthcare system funded through the income tax system, which may be the real goal of the ACA architects. While there is much debate surrounding what “Obamacare” will look like, how it will be administered, and the potential negative impacts on the U.S. healthcare industry at the time of its full implementation in 2018, it is important to consider how it might evolve over the first 20 years. The discussion above is designed to consider some possible scenarios that could emerge over that time as rising demand and costs are inevitable from an economic perspective. If the ACA is fully implemented in 2018, the future of the U.S. healthcare industry looks grim. Obamacare is a bad idea that may only get worse.
Holly A. Bell is an Associate Professor teaching business and economics in the University of Alaska system. She’s also an author, analyst, manager, and blogger who lives in the Mat-Su Valley of Alaska. You can visit her website at www.professorhollybell.com or follow her on Twitter at @HollyBell8