Obamacare’s Fatal Flaw

CAMBRIDGE – Obamacare, officially known as the , is the health-insurance program enacted by US President Barack Obama and Congressional Democrats over the unanimous opposition of congressional Republicans. It was designed to cover those Americans without private or public health insurance – about .

Opponents of Obamacare have and, more recently, in Congress. The program was therefore formally launched on October 1. Although it has been hampered by a wide range of computer problems and other technical difficulties, the program is likely to be operating by sometime in 2014.

The big question is whether it will function as intended and survive permanently. There is a serious risk that it will not.

The potentially fatal flaw in Obamacare is the very same feature that appeals most to its supporters: the ability of even those with a serious preexisting health condition to buy insurance at the standard premium.

That feature will encourage those who are not ill to become or remain uninsured until they have a potentially costly medical diagnosis. The resulting shift in enrollment away from low-cost healthy patients to those with predictably high costs will raise insurance companies’ cost per insured person, driving up the premiums that they must charge. As premiums rise, even more relatively healthy individuals will be encouraged to forego insurance until illness strikes, causing average costs and premiums to rise further.

With this in mind, Obamacare’s drafters made the purchase of insurance mandatory. More specifically, employers with more than 50 employees will be required after 2014 to purchase an approved insurance policy for their full-time employees. Individuals who do not receive insurance from their employers are required to purchase insurance on their own, with low-income buyers receiving a government subsidy.

But neither the employer mandate nor the personal requirement is likely to prove effective. Employers can avoid the mandate by reducing an employee’s workweek to less than 30 hours (which the law defines as full-time employment). But even for full-time employees, firms can opt to pay a relatively small fine rather than provide insurance. That fine is $2,000 per employee, much less than the current average premium of $16,000 for employer-provided family policies.

Not providing insurance and paying the fine is a particularly attractive option for a firm if its employees have incomes that entitle them to the government subsidies (which are now available to anyone whose income is below four times the poverty level). Rather than incur the cost of the premium for an approved policy, a smart employer can pay the fine for not providing insurance and increase employees’ pay by enough so that they have more spendable cash after purchasing the subsidized insurance policy. Even after both payments, employers can be better off financially. News reports indicate that many employers are already taking such steps.