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Morning Jay: Don't Bet On Obamacare

6:00 AM, Jul 6, 2012 • By JAY COST
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The Hill reports:

Obama touted the Supreme Court’s decision to uphold his signature healthcare reform legislation to cheers from a crowd of his supporters.

“The law I passed is here to stay,” he told an audience composed largely of Ohio automobile manufacturing workers.

Obama’s comments are the closest he’s come to “spiking the football” on the Supreme Court’s decision, which surprised many observers. Chief Justice John Roberts joined the court’s liberal justices in ruling the healthcare mandate is constitutional because it is a tax. It’s the first time Obama has mentioned the ruling on the campaign trail.

This is obviously an overstatement. If Republicans win in November, Obamacare is finished. Surely, our sophist in chief knows that.

But even if President Obama manages to squeak out a victory in four months, the debate over Obamacare will not be over. In fact, I believe that Obamacare in its current form is doomed, regardless of who emerges victorious on November 6.

I have two reasons for this conclusion.

First, the bill is built on far too many questionable assumptions. If any one of them fails to hold, the entire thing could fall apart.

For instance, the Congressional Budget Office gave the authors of the bill a pretty good score on the efficacy of the individual mandate, declaring that only a small portion of the public would choose to go without health insurance. This is very important: If the mandate is too weak, too many people will forgo coverage until they get sick, insurance premiums will rise, more people will forgo coverage, and so on. It’s known as a “death spiral.”

CBO says it will not happen. But that is an assumption – one that not everybody agrees with. The insurance industry, for one. Though Democrats brutally demagogued insurers during the 2009-2010 drama to pass the bill, behind the scenes they worked assiduously to win their endorsement. They failed, but only because the mandate the Senate endorsed was so weak the insurers feared a death spiral. (There is also a chance that the mandate will lose some of its psychological teeth if people come to view it as a mere tax, which could increase the likelihood of a death spiral. Economics mingled with the realities of social psychology can produce some strange effects.)

There are plenty of other questionable assumptions like this scattered all throughout the bill. Consider:

-Will employers drop their insurance coverage en masse, knowing that their employees can get insurance on the exchanges? Democrats assume not, but there are signs that may not be the case.

-Can Medicare be cut by $500 billion without undermining quality of care? Democrats assume so, but the Centers for Medicare and Medicaid Services is doubtful. 

-Can Medicaid handle about 15 million new recipients? Democrats assume so, but doctors are already loath to accept Medicaid because it pays so poorly.

-Can you increase the number of people demanding medical services, without a corresponding increase in the supply of services, without a huge spike in prices? Democrats assume so, but common sense casts doubt on this proposition.

With every contestable assumption built into the bill, the odds that the whole package will fail in some way increase substantially. Suppose an 80 percent chance of success on each of these five guesses; in that case, the likelihood that all of them will be correct is only 33 percent.

And because the components of the bill are so intertwined, a failure of one assumption could lead to a catastrophic collapse of the entire scheme, like a house of cards.

Indeed, the apparatus may already be collapsing, thanks to the Supreme Court. The basic design of Obamacare was to increase coverage by 30 million people – with half of the newly insured getting coverage through Medicaid and the other half getting insurance through the exchanges. But last week the Supreme Court gave states the right to opt out of the new Medicaid program. Many of those who would have been eligible for Medicaid will now enter the insurance exchanges, and be eligible for generous subsidies.

This is a problem for the bill’s advocates, who promised that it would reduce the deficit; the insurance subsidies are more generous than Medicaid, meaning the price tag is going up. And there will be second-order effects. The law mandates a cap on exchange subsidies of 0.5 percent of GDP after 2018. If the Medicaid expansion collapses, and the exchanges pick up the slack, then we’re going to hit that cap much sooner than anybody anticipated.

Second, the bill is nothing like Social Security and Medicare, which seem to be the political template the Democrats believed they followed. The political genius of these programs was that they were designed to benefit everybody. Indeed, this is why FDR stuck with a social insurance model for Social Security, despite the fact that its design was clunky. He understood, correctly, that it would inoculate the program from future political blowback.

This is a big reason why these programs have withstood the test of time, even as other social programs like welfare have been substantially reformed. Because Social Security and Medicare do not discriminate between citizens, there has yet been no political coalition powerful enough to alter them. Everybody expects to benefit from them, so it has been impossible to implement even common-sense reforms.

Obamacare has no such insulation from reformers because it discriminates between classes of citizens. Indeed, Democrats played all kinds of favorites:

-People who make less money get a better deal on insurance than people who make more.

-People who acquire insurance from the exchanges get a better deal than people who get it through their employer

-Medicare recipients in Florida get a better deal than Medicare recipients elsewhere.

-People who receive an insurance subsidy get a better deal than people junked into the broken Medicaid program.

-People without insurance get a better deal than people who have it but are paying more than they can afford.

And on and on it goes. Worse, many of the winners in the Obamacare system are actually well heeled interest groups like the drug manufacturers. They spent hundreds of millions of dollars on lobbying, and they scored a substantial return on their investment.

Amazingly, Democrats do not understand the political ingenuity of the very social welfare programs they worship. Social Security and Medicare have stood the test of time, essentially unreformed, because nobody lost in those schemes (or, better put, nobody felt as though they lost). With Obamacare, the number of people made worse off is substantial.

This gives the ideological opponents of Obamacare an opening. Free market conservatives have wanted to reform Medicare and Social Security for generations. Accepting the premise of government-sponsored social insurance, they have been searching for ways to make these programs work better, but to no avail because they cannot build a political coalition large enough to reform them. But with Obamacare, there is definitely a political coalition waiting to be built, one large enough to topple the whole edifice.

This will remain the case even if Obama wins in November. That political coalition is not going to go away if the bill is implemented. Instead, it will only grow more potent as various classes of citizens begin to perceive how they have lost out. And their sense of loss will be greater if any of the many assumptions of the bill fail to hold.

So, presidential boasting aside, I wouldn’t bet on Obamacare, whatever may happen in November. Regardless of your politics or ideological disposition, there is a simple reality: The bill was badly designed from a policy and political standpoint. It will be a wonder if it survives the test of time.

Jay Cost is a staff writer for THE WEEKLY STANDARD and the author of Spoiled Rotten: How the Politics of Patronage Corrupted the Once Noble Democratic Party and Now Threatens the American Republic, available now wherever books are sold.

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