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Democrats Miscalculate on Health Care

Democrats Miscalculate on Health Care

By Robert Robb - October 30, 2009

My guess is that Democrats have badly miscalculated the politics of health care reform.

They were in a political bind to begin with.

Democrats are motivated by a sincere and deep desire to extend coverage to those without it and provide all Americans with much greater health care security. Politically, however, they felt that they could not disturb the employer-provided care with which Americans are generally satisfied. Hence the incessant promise: If you like what you have you can keep it.

But only if it still exists. And the way the Democrats are reshaping the incentives in the health insurance market, it is much less likely that the employer-provided health insurance people are satisfied with and want to keep will still exist.

Oddly enough, the reason why begins with the weakening of the mandate that individuals purchase health insurance. One of the pillars of the Democratic health care reform is the requirement that insurance companies accept all applicants regardless of pre-existing conditions.

If insurance companies have to accept all-comers, and if the penalty for not buying insurance is substantially less than the cost of getting it, then healthy individuals have the incentive to just pay the penalty and not purchase insurance until they are sick.

The insurance industry has been warning for weeks that the combination of guaranteed issue with a weak individual mandate will spike premium rates. Democrats have denounced the industry and stepped up punitive measures directed against it. But the industry's logic is irrefutable.

Some large companies actually like being in the health insurance business. The tax subsidy reduces their overall labor costs.

Most small businesses provide health insurance only because they feel they must to compete for workers. Partly because of the tax subsidy, group insurance is far less expensive than individual coverage.

But if there is a federally subsidized individual market for families with incomes of up to $80,000 or more, as Democrats are proposing, that substantially reduces the pressure on small businesses to provide group coverage.

Once again, incentives matter. If the penalty for not providing coverage is substantially less than the cost of providing coverage, many small businesses and some large ones will decide to shed the headaches and cost pressures of providing health insurance.

And then there's the resurrected public option. Just to keep the private insurance companies honest, claim the Democrats. But from the beginning, a government plan will have the advantage of implicit federal government backing, as with Fannie Mae and Freddie Mac. And undoubtedly ultimately explicit backing as well.

The government plan will crowd out private insurance. And that creates a Medicare problem. Right now, Medicare costs are held down through cost-shifting to private payers. But as private payers shrink, so will the ability to cost-shift. That will require cuts to Medicare or higher federal deficits.

In short, the change in incentives in the Democratic reform will turn the entire health care market topsy-turvy. Politically, this could be disastrous.

A very large number of people will have to change their health care coverage regardless of whether they want to. That's a hassle to begin with. The combination of a weak individual mandate, guaranteed issue and a public option will mean declining private sector options and a large increase in the number of people on some form of government health care.

Every health care provider, even the government, has to say no sometimes. Even Medicare says no. But now, rather than some demonic health insurance company saying no, it will be the government.

Republicans think the Democrats are engaged in a ruse, that they really want a government takeover of health care.

In their heart of hearts, Democrats do believe that health care should be a public good, provided by government irrespective of ability to pay. But I don't think they've purposely set out to achieve that by misdirection.

Instead, I think they honestly don't appreciate how fundamentally they are changing health care incentives and what the huge consequences of such changes will be.

Robert Robb is a columnist for the Arizona Republic and a RealClearPolitics contributor. Reach him at robert.robb@arizonarepublic.com

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