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Obamacare is a Classic Case of Bad Economics From Conception to Implementation
Raymond Richman, 11/18/2013

The Patient Protection and Affordable Healthcare Act of 2010 (commonly called “Obamacare”) is a classic case of a misguided and badly implemented government program from an economic point of view. It restricts freedom of choice and imposes a series of bad new taxes. While taxes are needed to subsidize those Obamare participants who do not pay the full cost of their Obamacare insurance, the selected taxes violate the accepted principles of taxation in every instance. Moreover, the Act mandates coverages that increase the cost to those who do not want those coverages.

Not a single Republican voted for the Act. No wonder since so many provisions violate traditional American values such as financing the abortion of healthy fetuses, the provision of contraceptives, et al., not to speak of the Act’s prohibition of free choice among health insurance plans and health savings plans, and the numerous tax increases to finance the legislation. Obviously, the Democrats who controlled both houses of the Congress at the time did not need or even want any Republican support for it. They wanted full credit for it and are now getting it!  

From an economist’s point of view, the major defects of the law are:

  1. Its discouragement of competition in the health care industry.
  2. The inequitable taxes it imposes to finance the health care system and its disregard of the principles of taxation developed by economists over many decades.
  3. Its numerous fascist-like interventions in private sector decision making.
  4. The fact that it increases the cost of health care now and even more in the future.
  5. Its negative effects on employment particularly in a depressed economy.
  6. Its negative effect upon medical advances, research, and productivity.

Because it prescribes what the insurance policies must cover, consumers have little choice in selecting a plan. As a result, insurance companies cannot compete by offering alternative policies. Consumer freedom of choice is non-existent.

Some of the taxes it imposes are the following:

a. A 2.3% Tax on Manufacturers of Medical Devices. The tax, while paid by manufacturers, will raise the cost of producing the product, the prices manufacturers charge for the product, and be passed on to the consumers of the product by the process economists call tax shifting. It is the consumer who will bear the burden of the tax through higher insurance premiums. It will raise insurance premiums and raise the cost of health care.

b. A 10% Tax on Indoor Tanning Services 2014. This is a punitive tax on tanning services to discourage what the government believes to be an unhealthful practice. None of the insurance policies cover such services. Too much exposure to ultraviolet rays may induce melanoma. That is true of all sun-bathing. Are we to expect a tax on bikinis? A law requiring wearing hats, shirts, and pants outdoors? 

c. An Excise Tax on Charitable Hospitals which Fail to Comply with Obamacare. This apparently is directed against Catholic hospitals and those of other denominations that oppose abortions and providing contraceptives. 
 
d. A Tax on Brand Name Drugs. No doubt this is to encourage the use generic drugs. We haven’t read the provision but would it not be simpler to pay no more that the cost of a generic equivalent? Do we want to discourage invention of new drugs?

eA Medicare tax of 3.8%. This tax is imposed on investment income over $200,000 for single persons, $250,000 for married couples fining jointly. The tax appears to us to be a concession to highly paid Hollywood and Silicon Valley to gain or retain their political support. If your income is primarily derived from rents, interest, and dividends, you are subject to this tax. It is revealing of Pres. Obama’s and  leftist contempt for private investment, the only real source of productive jobs. The tax also applies to home sales over a certain amount. The 3.8% homes sales tax typically doesn't apply to one’s primary residence. It doesn't apply to homes owned for over 5 years or on profits of less than $300,000 from such sales.  

f. A Medicare Part A Tax increase of .9% imposed on incomes over $200k/$250k. This is similar to the 3.8% tax except that it does not exempt earned incomes!

g. A 40% Excise Tax on "Cadillac" plans. This tax is imposed on high-end Premium "Cadillac" Health Insurance Plans beginning in 2018. Pres. Obama and the “progressive” Democrats cannot abide diversity of outcomes. Everyone should be equally poor since they cannot be equally rich under socialism. Everyone must suffer alike. And, of course, individuals should not be permitted to decide how to spend their money.

h. End of the Over-the-Counter Deduction. Over the counter medicines no longer will qualify for the medical deduction nor will expenses for flexible spending accounts (FSAs), health reimbursement arrangements (HRAs), health savings accounts (HSAs), and Archer Medical Saving accounts (MSAs).

i. Penalizing Distributions. Health savings account or an Archer medical savings account distributions are penalized when they  spend money on what the administration considers non-qualified medical expenses. The penalty is 10 to 20% in the case of an HSA and 15% to 20% in the case of an MSA. Contributions to FSAs are reduced to $2,500 from $5,000.

j. Income Tax Deduction Reduced. The deduction of medical expenses under the income tax is reduced. Instead of being able to deduct medical expenses over 7.5% of income, under Obamacare only medical expenses above 10% can be deducted.

k. Tax Penalty for Not Buying Insurance. Starting in 2014, anyone not buying "qualifying" health insurance must pay an income tax surtax at a rate of 1% or $95 in 2014 to 2.5% in 2016. The total penalty amount cannot exceed the national average of the annual premiums of a "bronze level" health insurance plan on ObamaCare exchanges. This provision was alleged to be unconstitutional because individuals were being forced to buy one of the government-approved health insurance plans. It was alleged that nothing in the Constitution of the U.S. gives Congress the authority in the name of the commerce clause to compel citizens to buy anything. The U.S. Supreme Court said 5-4 that Congress was imposing a tax, not a penalty, and it could constitutionally levy a tax even though it could not force citizens directly to buy anything.

The interventions in private sector functioning include:

  1. A $500,000 Annual Executive Compensation Limit for Health Insurance Executives. Does the administration really believe this will affect insurance prices or is it simply revealing of the administration’s contempt for private enterprise. It should be noted that none of the crony capitalist firms in favored unproductive industries like the highly subsidized wind and solar firms and heavily subsidized electric automobiles and hybrid vehicles, have no such limits!
  2. The requirement that all businesses with over 50 full-time equivalent employees must provide health insurance to full-time employees. Obamacare imposes a fine of $2000 per employee if the firm fails to enroll its employees.
  3. Insurance companies will be required to spend 80% of premium dollars (85% in large group markets) on medical care and quality improvement activities. Insurance companies that do not meet this standard will be required to provide rebates to their consumers.
  4. Obamacare limits the ability of insurance companies to tailor their plans to the customers’ needs. The law requires them to include children up to the age of 26 in every policy, to insure against the cost of having an abortion, to provide free of charge contraceptive drugs, to provide an annual medical examination free of charge, and to insure people with existing diseases and disabilities, etc.. These provisions add to the cost of Obamacare. Every policyholder will have to pay the costs of these and other mandatory coverages and the insurance of the millions receiving subsidies.  The average cost of health plans had to increase for most healthcare policy holders because of the huge subsidies to individuals and families earning less than five times the poverty level and because of the higher taxes that we listed above.  

Some idea of how much these subsidies will cost is indicated by the premiums paid by families of four. If the family income is $31,900 or 133% of the poverty level, the premium is $992 or a premium savings of $10,345; at $44,100 (200% of poverty level, $1323, a premium saving of $8,366; at $88,200 (400% of poverty level), $8,379 or a premium saving of $2,395. Multiply the premium savings by the millions in each Obama category gives you an idea of the hundreds of billions of dollars of the increased cost of Obamacare.

Obamacare is having a severe negative effect on the economy. Its obvious anti-private enterprise biases mentioned above and its enormous cost is making this country less attractive for private investment. The economic recovery under Pres. Obama has been very weak. Big and small business investment has been weaker that in any previous recovery. Small businesses are affected in two ways. Those with 50 full-time employees or more must enroll their employees in Obamacare and it is costly. But small businesses that have fewer than 50 full-time equivalent employees are under no obligation to provide health care insurance. This is an incentive to small business to remain small and to keep the number of their employees below 50 or the equivalent. Many have deliberately hired many of their workers half-time. To induce them to avoid hiring part-time workers, they are given a tax credit to reduce the cost of enrolling their employees in health plans.

The BLS reported in its monthly survey of employment for October, 2013 in its Household Survey, an increase in number of workers employed part-time for economic, not personal reasons. The increase in the number of part time employees grew, from September, 2013 to October 2013, from 7.52 million to 7.70 million, or by 178,000. While this increase was not due entirely to the influence of Obamacare, the increase was substantial. And the press reported a lot of anecdotal evidence of businesses hiring larger numbers of part-time workers to avoid the costly impact of Obamacare.

The character of Obamacare with its anti-free market biases and its mandated coverages affect adversely private decisions to invest and innovate, the primary forces that create jobs, increase productivity and raise living standards

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