The Affordable Care Act (ACA) — Rombamacare

I guess I haven’t been receiving enough hate mail recently.  There’s no other logical reason why I’d write about the ACA.  So, let me start by disclosing my bias.  I recently spent some time studying the ACA (primarily reading some papers on both sides of the issues).  Ultimately, I’m in favor of the ACA.

I’m not writing in an attempt to convince you to support the ACA.  I believe that most of us have political or personal beliefs that result in us supporting or opposing this law.  (If you don’t believe this, ask why the Supreme Court justices could have different opinions on these issues.)  I think that my support for the ACA comes down to my twelve years of Catholic school that led me to judge issues by how they affect the weak and the poor.   These are my personal beliefs that affect my political beliefs.  I understand that many of you have personal and political beliefs that may lead you to oppose this law.

So then…what is the purpose of today’s blog?  In addition to generating hate mail, I want to give you some basic thoughts and I want to tell you some of the good and bad about the law.  Realize that this is a short piece – it is not intended to be a treatise that covers all of the issues.

The Basics of the ACA

The ACA is premised on three key ideas:

1. Insurers cannot turn anyone down or exclude people with pre-existing conditions.

2. Everyone must have health insurance (“the individual mandate”).

3. The government will subsidize health insurance for people who will struggle to afford it.  People who have income up to 400% of the poverty level will receive partial subsidies.

The Economic Reason for the Individual Mandate

Without the individual mandate, the ACA would likely fail.  Since insurers are not allowed to turn anyone down, healthy people could stay uninsured until they become sick (if there is no individual mandate).  Once they become sick, they would buy insurance (because they can’t be turned down).

If this is what happens, the pool of people who are being insured will be the “sick pool” and will not include the healthy people (who choose to stay uninsured until they actually need insurance).  If an insurer is only selling insurance to the “sick”, the cost will be high.  At that point, many people won’t be able to afford insurance and the system will fail.

The Individual Mandate Is a Republican Idea!

In the early-to-mid 1990s, the Republicans were opposed to the Clinton health plan.  One alternative was proposed by a Republican Senator and a Democratic Senator.  It included an individual mandate.  It was supported by 19 Republican senators (including Bob Dole).  If you don’t believe me about this, read this piece by PolitiFact.  Obviously, the Massachusetts plan (signed by then-Governor Romney) also has an individual mandate.

The Single Best Thing About Universal Health Insurance

Regardless of whether you support or are opposed to the ACA, there’s one thing that we should all be able to agree on.  The ability to obtain health insurance (without working for a large employer) will allow a larger number of people to take the risk of an entrepreneurial venture.  In other words, if I can obtain health insurance on my own, I’m more likely to take the risk of starting a business.   Hopefully, we can all agree that we want to support entrepreneurial activity.  We can argue about the cost of this law, but this benefit is great.

Other Reasons That I Like the ACA

1. We will insure approximately 32 million people who don’t currently have insurance.

2. Many of the people who are currently uninsured are still receiving treatment.  Unfortunately, much of this treatment is through emergency rooms – a very expensive way to get treatment.  We’re all paying for this already.  The hospitals and service providers ultimately pass these costs on to us.  We need to find a way to treat these people in a cheaper way.

3. The majority of people who will gain insurance are the working poor.  In other words, these are people who are working in jobs that don’t offer insurance or they are people who have previously made the decision to not participate in insurance.

4. A very similar plan has been successful in Massachusetts.  The “uninsured” rate is 2.6% (lowest in the nation) and they have kept costs low.  (This plan was developed under Governor Romney.)

5. The exchange (think of this as a simple, online market) will make it much easier to compare health plans.  It will also mean that people who are not obtaining insurance through their employer will be able to get affordable insurance that is more than just “catastrophic” insurance.

Reasons to Be Concerned About the ACA

1. Many of the cost assumptions are likely to be wrong.  We assume that we’re going to reduce payments to Medicare providers, that a review board will allow us to reduce costs, that tax laws will remain in place forever, etc.

2. In addition, we have already started collecting some of the ACA tax revenue even though most of the costs start in 2014.  That leads to distrust about the ten-year estimates (to reduce the deficit).  (In other words, as an exaggeration, if we collect revenue for ten years, but offer services for one year, it’s hard to say that this is reducing our deficit.  In the future, we’ll have ten years of revenue and ten years of costs.)  The flip side of this complaint is that estimates are that the second ten years will be more beneficial (to our budget) than the first ten years.

3. Massachusetts is different than the US.  They started with a much lower rate of uninsured people than the U.S. (8% vs. 15%), they have higher income than the U.S. (so more of the bill could be put on the citizens rather than the government), they had resources (from a federal government plan) that were used to fund their insurance law and (most importantly) their law had bipartisan support.

4. This law does a little to “bend the cost curve”, but not a lot.

Conclusion

Again, my goal is not to convince anyone of anything…and this is not intended to be a treatise.  This is a difficult issue and we have no idea of how the numbers will turn out.  But, regardless of how you feel about it, the politics should bother you.  The partisanship is absurd.  We have a problem – we pay more for health care than all other developed countries, we have higher mortality rates than most developed countries and we have less access to healthcare for a larger percentage of our citizens.  The Democrats took a Republican solution and now the Republicans are being forced to argue against it.  This is really “Romneycare” not “Obamacare.”  Maybe we can all get along and call it “Rombamacare.”

More on Student Loans

There continues to be more discussion about student debt.  There was a great article a week ago in Barron’s, titled “What a Drag!”  Below, I’ve listed some of the key numbers and ideas (taken straight from the article).  The big takeaway seems to be that the amount of debt is large, it’s impacting the lives of graduates, but it’s unlikely to blow up like mortgages did.  It will be a hindrance on our economy and the lives of the debtors – it’s like having a second car loan (and for some people…it’s a really big, fancy car loan).  Here’s what the article said:

SIZE OF DEBT

  1. The Fed stated that there is $870 billion of student loans carried by 37 million people.  This is greater than total auto loans.  It’s also greater than credit card debt.
  2. The Consumer Financial Protection Bureau asserts that the debt is over $1 trillion when you include interest that has been capitalized (added to the outstanding balance).
  3. Two-thirds of the college seniors who graduated in 2010 had student loans averaging $25,250.
  4. Student debt borrowing by the 34-to-49 age range has soared by more than 40% over the past three years (the fastest of any age group).  This may be due to bad economic times that prompted many to seek more training.
  5. The 30-to-39 age group owes more than any other age decile, with a per-borrower debt load of $28,500.  The 40-to-49 age decile is next with a balance of $26,000.
  6. Loans to parents have increased 75% since the 2005-06 school year, to an estimated $100 billion in federally backed loans.
  7. Pell grants allow students to borrow up to $5,550 per year.  Federal undergraduate loans are capped at an aggregate of $57,500.

RISING TUITION

  1. There is research that argues that tuition has increased as a result of the availability of these loans.
  2. Private four-year college tuition and fees have increased 181% over the past 30 years.  Public four-year college tuitions have risen by 268%.
  3. In-state tuition at public universities averages $8,244.  Private tuition averages $28,500.
  4. Ivy League schools led the increase in prices during the 1980s.  They knew that there was demand for a limited number of seats.  There was also a signaling effect.
  5. State governments know that there is a large gap between private and public tuition.  This may mean that state governments will continue to cut appropriations to schools.
  6. For-profit schools derive 90% of their revenues from government loans (and the GI bill).
  7. For-profit schools account for 40% – 50% of all student-loan defaults.
  8. Schools often lack cost controls and have to pay for high-salaried professors, expensive presidents and provosts, huge administrative bureaucracies and lavish physical plants.

OTHER PROBLEMS

  1. Delinquencies are reported at 10% but may be double that when you properly account for things like loan-payment deferrals.
  2. Tuition is rising and income is stagnant.  That means that people need to borrow more (and that it’s harder to pay back).  Tuition and fees at four-year schools increased 300% from 1990 – 2011.  Over the same period, overall inflation was 75% and health care costs increased 150%.
  3. High debt levels (and weak job prospects) make graduates reluctant to buy cars, homes or spouses.  Weak family formation is not a promising sign for the housing market.

THIS IS NOT THE MORTGAGE MARKET

  1. Student loans are just one-tenth of the size of the home-mortgage market.  Subprime mortgages (including alt-A and option ARMs) were bundled into $2.5 trillion worth of securitizations at their peak.  In addition, all of this was amplified by credit default swaps.
  2. The bulk of the student debt is guaranteed by the federal government.
  3. The government has particularly strong collection powers.  They can garnish wages, take income-tax refunds or Social Security payments.
  4.  Student debt is generally not dischargeable in bankruptcy.
  5. The government claims to recover 85 cents on the dollar from defaulters.  Contrast this with credit card recoveries that tend to be closer to ten cents on the dollar.