Obama's Health Care Problem

This past Tuesday, American voters from the bluest of blue states sent a message to Washington D.C.: “We don’t like what you’re doing. Stop now.” The message was clear and it sent shock waves through Washington DC. The problem for President Obama is that he must ignore it.

President Obama has put himself in a very difficult position. He has made health care his number one domestic agenda item. Health care is the wealth transfer method of choice for this President and that makes it very difficult, if not impossible, to walk away. Obama has poured much of his political capital into the health care glass and Scott Brown smashed the glass.

Soon after the election, Obama stated that the Democrats and Republicans should work together to coalesce around the points of the health care bill that they agree upon and start working from there. There’s are big problems with that approach. So big in fact that I predict that the President and Congressional Democrats will ignore Massachusetts and being pushing the bill they’ve spent the last nine months buying. Why you ask? Let’s take a look.

Assuming the President was being intellectually honest when he made his “lets work together” statement, it would be fair to think that the starting point would be the topic of guaranteed issue. This provision prohibits insurance companies from denying or dropping coverage for the sick. If that’s the case, it means that insurance companies will be forced to insure people that they wouldn’t otherwise do business with. This will increase risk for the insurance companies and thus increase the insurance premiums for all of their customers.

As premiums rise, it creates an incentive for healthy people who hold policies to drop their coverage. Since the legislation makes it illegal to deny coverage, these “policy droppers” will be able to purchase coverage again in the future should they become ill. Dropping coverage will save them a lot of money.

As healthy people drop out of the plan, premiums will rise even higher as the ratio of sick to healthy people continues to rise. This spiraling process is called adverse selection and it will eventually get to the point where only the sick are covered and premiums are sky high. Clearly not the intended outcome.

To solve this problem, another part of the existing legislation is needed, the individual mandate. By legally forcing all Americans to purchase health insurance, the insurance companies can maintain the number of people needed in order to keep prices in check. This assumes of course that people will follow the law. If it is more economical to break the law and pay a fine this could be another failure point.

Including the individual mandate is by far the most costly aspect of the bill and will instantly produce citizens who won’t be able to afford purchasing health insurance. This would require that the government subsidize those who cannot afford it either via a 40% tax on “Cadillac plans” or a surtax on “The Rich.”

And so, President Obama is back where he started.

  1. Guaranteed issue is required which means…
  2. The individual mandate is required which means….
  3. Subsidizes are required for the people who cannot afford insurance which means….
  4. Taxing existing Cadillac health plans or creating new taxes on the rich are required

Anyway you slice it, President Obama is stuck. He can’t walk away from any provisions in the health care bill….and he isn’t going to. He is acting as though he has heard the American people. He must put forth the image that he’s listening all the while knowing that he must ignore them if he has any chance of getting health care passed.

Keep a sharp eye on this President and Congress in the days and weeks ahead. The health care fight is far from over.

crossposted to The Ritz Report