Obamacare’s hidden costs are rapidly surfacing

Gary Becker, Nobel laureate in economics, says that while America’s health system needs some reform, Obama's health-care legislation was “a bad bill.” Becker says it fails to address any of the real problems and merely “adds taxation and regulation. It’s going to increase health costs—not contain them.”

The legislation was sold to the nation by low-balling its costs and exaggerating its benefits. Many supporters think it provides health benefits to all. It doesn’t. It merely makes it illegal for an American not to purchase his own insurance. Only those at the bottom of the economic ladder would receive benefits, but they already qualify for those without the bill. Individuals who don’t have insurance will be fined by the government and turned into criminals, even though they have harmed no one, perhaps not even themselves.

A second feature of the bill requires insurance companies to cover pre-existing conditions. This strips insurance of the very thing that makes it insurance and not welfare: the ability to charge based on risk. The fact that risk will no longer be taken into account reveals another prevarication about the legislation—that it will lower the cost of insurance because everyone will be forced to buy it. What it ignores is that all pre-existing conditions will now have to be covered and that measure can do nothing other than drive up the cost.

Those most hurt by the legislation will be the young—who tend to be healthier than average, but poorer. They often make a rational decision to forgo health insurance because they are at low risk. They will be forced to purchase insurance and their premiums will subsidise older customers who tend to be less healthy, but much more wealthy. In this sense it will transfer wealth from lower-income individuals to higher-income individuals.

Over the short term, insurance companies will see income increase—as unwilling individuals will be forced to purchase policies. But as the companies start paying out for pre-existing conditions rates will be driven up. As rates increase lower-income policyholders will be forced to abandon their insurance and pay the fines instead.

This will create political pressure to expand the definition of “poor” to allow them to qualify for government insurance. Something the politicians will no doubt wish to accommodate. However, with fewer people paying premiums to the insurance companies rates will have to escalate again. Over the long term private insurance will diminish

Already some of the hidden costs of the Obama plan are coming to light. Telecommunications giant AT&T announced that they would be forced to take a $1 billion writedown because of the costs inflicted on them by the legislation. And the Wall Street Journal reports they are not alone. Deere & Co., said they would take a writedown of $150 million, Caterpillar, $100 million, and 3M, $90 million. All these companies cite the new costs of the Obama legislation as the reason.

Worse yet, health benefits, which private companies offer retired ex-employees, will be cut back because tax breaks previously offered will be abolished. AT&T wrote: “As a result of this legislation, including the additional tax burden, AT&T will be evaluating prospective changes to the active and retiree health care benefits offered by the company.” The Moran Group, a consulting firm, has estimated the “reform” could negatively impact drug coverage for 1.5 to 2 million retirees, forcing them into state-provided care, even though these individuals have private coverage today.

Other measures in the bill will increase taxes on insurance companies. But those taxes will be paid through higher insurance premiums, expanding the government-induced pressure on people to drop out of private insurance plans. In addition the Obama measure plans to increase the-already-high taxes on pharmaceutical companies—meaning higher costs for drugs thus pushing up health care costs even further. Since the drugs produced by these companies are used world-wide those costs will be passed on to consumers outside the US as well, unless, of course, the company moves outside US jurisdiction. These new taxes will put pressure on companies to leave the US and take jobs with them. Companies that don't leave will have less capital for research meaning less innovation in drugs, a hidden cost that is never taken into account by government.

Congressional Democrats are furious that companies announced the negative impact the Obama legislation would have on company financials and sent stern letters to them telling them they would be required to come to Washington and explain why they are mentioning these costs. But federal regulations require these announcements for publicly-traded companies. To keep the Democrats happy, the companies would risk being penalised by the Securities and Exchange Commission.

According to the Democrats the new reforms will provide care for millions more people yet cost less than it does today. Although, government will hand out subsidies, its costs will go down. The reforms will bring millions of new patients into government-funded programmes, miraculously creating a budget surplus, even though all the new patients are dead losses. And for those companies that simply are not cooperating with the fantasy, the Congressional Democrats want them to know that that is just not acceptable. Realistic perhaps, but not politically acceptable.

Author: James Peron is the president of Laissez Faire Books in the United States and the author of several books. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

FMF Feature Article / 6 April 2010

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