Let’s say Congress passed a law requiring every American to buy a bicycle. The law was justified on the grounds that it would reduce greenhouse gas emissions and improve public health. Climate scientists and health care experts had reached a consensus about the need for mass bicycle commuting, and lawmakers took action through the Affordable Bike Act (ABA).
It was a complex piece of legislation, but the key provisions were an individual mandate coupled with federal subsidies: everyone had to buy a bike or pay a penalty, but there were federal tax credits available for other people based on household income.
Not all bikes qualified for subsidies, of course, only those that met minimum essential performance standards set by the U.S. Consumer Products Safety Commission—features like high-performance carbon wheels, electronic shifting, and power meters.
Some feared that all this mandated hi-tech gear would drive up the price of bikes, but proponents of the law argued that subsidies would offset rising costs and that if large numbers of people bought bikes it would actually drive the price down. One high-ranking member of Congress mused that some Americans didn’t even own a bicycle before the ABA, so “the value of what you get for the cost that you pay is a reduction in cost to you.”
Ahead of full implementation, respected think tanks came out with studies showing that the average price of an ABA-approved bike would be less than what the Congressional Budget Office predicted it would be in 2016. Supporters pointed to the study as proof of the law’s success but ignored other studies that showed the price of bicycles was about to skyrocket relative to what they were before the law.
Inevitably, there were unintended consequences. Pre-ABA, “bares bones” bikes were not eligible for subsidies, so despite the promise that “if you like your bike, you can keep your bike,” companies stopped manufacturing pre-ABA models once the law took effect. Whether you wanted one or not, everyone had to purchase a hi-tech bike—no matter how much it cost.
In the end, not enough people bought ABA-approved bikes and instead just paid the $95 penalty. The law eventually collapsed under its own weight.
Different demand, same problem
Of course, no one would ever pass such a law because it would never work. And yet this is precisely what Obamacare attempts to do with health insurance. Beginning October 1, people without coverage can go to a health insurance exchange and buy coverage directly from an insurance company. If they don’t, next year they’ll have to pay a penalty of about $95 or 1 percent of household income, whichever is greater, to be deducted from their income tax return.
For the exchange scheme to work as planned, Obamacare supporters are counting on two things: 1) plans offered on the exchange will be affordable; and 2) a lot of people will sign up for coverage and pay their share of the premium.
For Obamacare boosters, the idea that uninsured people would choose not to buy insurance, and instead simply pay for health care costs out-of-pocket, is unfathomable. But the reality is that people do this all the time. A U.S. Census Bureau survey released this week shows that more than 4.7 million Americans who earn more than 400 percent of the federal poverty level ($46,000 for an individual or $94,200 for a family of four) are nevertheless uninsured. It’s not that they can’t afford some kind of insurance; it’s that they’ve decided they don’t want it. Most of those people are probably young and healthy. They might have never been to the doctor in their life and they don’t feel like insurance is worth it.
On the exchanges, it definitely won’t be worth it. In some states, exchange plans will be far more expensive than what is on the market now, so if you earn more than $46,000 a year and you didn’t think health insurance was worth the cost before Obamacare, chances are you’ll stay away from the exchange.
That hasn’t deterred some employers from touting the exchange as a good option for employees while seeking to offload health care costs on taxpayers. Take the grocery store chain Trader Joe’s. The company claims the exchanges are a good deal for some of its employees, which is why it’s dropping coverage for part-timers. In an email forwarded to The Washington Post’s Sarah Kliff, Trader Joe’s explained that one of its employees, “a single mom with one child who makes $18 per hour and works about 25 hours per week,” currently pays $166.50 a month for the company health insurance plan. On the exchange, however, this employee would only pay $69.59 a month for a comparable plan after accounting for Obamacare tax credits.
But the company’s claim rests on the price of monthly premiums on the exchange, which will depend on the employee’s age and state of residence, among other things. If we’re talking about a 27-year-old Trader Joe’s employee in Albuquerque, New Mexico, the average monthly premium on the exchange could be as high as $172 a month—a 146 percent increase from the average individual plan in New Mexico right now.
Subsidies will offset those costs for some people, but not everyone. In the same email, Trader Joe’s admits this, citing another employee whose spouse makes $200,000 a year as a contract consultant, which means the couple will not qualify for tax credits on the exchange.
But you don’t have to make that much not to qualify. According to the email, the employee worked an average of 20 hours per week, which comes out to about $18,000 a year. If this person’s spouse only made, say, $45,000 a year as a contractor, as a couple they would make more than 400 percent FPL and therefore wouldn’t qualify for a subsidy.
Like the fictional and absurd Afforadable Bike Act, Obamacare asks large numbers of people to buy something they don’t think they need while preventing them from keeping “bare bones” catastrophic plans they might currently have. Unlike the bike mandate, however, the financial pain inflicted by the exchanges is not a one-time event; the price of exchange insurance will likely rise, and the amount Americans are asked to pay every month will rise along with it.
So the entire exchange scheme comes down to a question of incentives. What are people more likely to do? Will large numbers of young, healthy Americans agree to shell out hundreds of dollars a month for exchange coverage? Will most people who chose not to buy health insurance prior to Obamacare suddenly change their mind? Don’t count on it.
Mr. Davidson is a writer based in Austin, Texas, and a health care policy analyst at the Texas Public Policy Foundation.