November 2017, Auto Dealer Today - Cover Story
Health care reform has gotten a lot of attention of late, especially earlier this year, when several Republican efforts to revise or repeal the Patient Protection and Affordable Care Act failed. That law is called “ACA” by its fans and “Obamacare” by its foes. In an effort to offend all readers equally, I will use those terms interchangeably.
Here I will attempt to explain what is wrong with the current law and how it might be effectively reformed. But I will start with why dealers should care.
Like it or not, dealers have a particular dog in this fight. First of all, almost by definition, dealers are above the income threshold for the maximum tax surcharge to support Obamacare. And second of all, almost by definition, dealers are large employers. Per NADA, the average dealership has 68 employees. Health care benefits are a significant — and rising — part of the compensation picture. When costs go up faster than revenue, it’s a problem.
An even bigger problem is that people who don’t have money can’t buy cars. This is not hyperbole. Medicare, Medicaid, Social Security and other mandatory entitlements consume over 60% of the federal budget, and payroll taxes cover less than half the cost of those programs.
As Baby Boomers age, the stress on those programs increases while the number of workers supporting them decreases. By 2030, those programs will be bankrupt, and either the government defaults or tax rates will reach confiscatory levels, leaving no money for car sales.
What ACA Attempted to Fix
Getting sick is expensive, and many people cannot afford health insurance. Others have chronic diseases, referred to as “pre-existing conditions.” Under past law, insurance companies did not have to cover pre-existing conditions. This is not because insurance companies are inherently evil (though they may be, but that’s outside the scope of this article). Rather, insurance is in the nature of gambling. You place your bet that you will get sick during the period of coverage. We call that bet “premiums.” And insurance companies bet that you stay healthy, or at least that your premiums will exceed the cost of any covered illness.
So it isn’t a stretch to consider the insurance industry as one big casino. You walk up to the blackjack table to play. Pre-existing conditions are like being dealt a jack and an ace and then placing your bet. The house shouldn’t have to take that bet.
ACA also meant to reduce the cost of health insurance and reduce government expenditures on Medicare and Medicaid. As mentioned above, the latter two programs are becoming so expensive that they threaten to consume the entire federal budget. Something had to be done.
In a nutshell, ACA sought to reduce the number of uninsured Americans, provide coverage for those with pre-existing conditions, lower everyone’s insurance premiums, and reduce the cost of Medicare and Medicaid. Regardless of party affiliation, we should all agree that those are worthy goals.
What Went Wrong and Why
If Obamacare was passed to lower health insurance premiums, it failed in a very, very big way. Premiums have increased by 140% since 2013, when the Obamacare taxes kicked in. This trend is unlikely to reverse. For example, Medica — the sole Obamacare provider in Iowa — announced that it will hike premiums for “silver” plans in that state by 56.7% next year.
Iowa is not alone in its dearth of insurance choices. The U.S. Department of Health and Human Services (HHS) reports that nearly half of all counties in the United States could have only one insurer to choose from on the exchanges next year. When options decrease, guess what happens to cost?
And far from decreasing, Medicare costs are expected to rise another 7.1% in 2018 and 2019 as utilization rates rise. Medicaid costs are expected to go up by 5.9% in the same period due to increases in the use and intensity of medical services to meet the needs of an increasingly aged and disabled user base.
Against this background of unintended consequences, the need for reform is self-evident. But no reform can work if the causes of failure are not identified and understood.
Why did Obamacare fail? Not for lack of good intentions, nor the haste in which it was cobbled together and rushed through Congress. And to be fair, every government attempt to reduce the cost of health care while increasing coverage has failed. Medicare and Medicaid fail gloriously because they increase the demand for health care. When demand increases, so does cost. It’s Econ 101. But Obamacare failed because it attempted the impossible.
The ACA attempted to regulate accessibility, use and cost of medical services, and that is literally impossible to do effectively. Complex economies cannot be centrally planned. If you don’t believe me, please review the track records of Russia, North Korea, Cuba, Venezuela and, yes, China. (What success China has demonstrated flows from its tentative experimentation with capitalism, not its endemic socialism.) It is hard to think of a practice that has failed more spectacularly than central economic planning. Yet that is what we are attempting to apply to health care in the United States.
Kevin Williamson, in his book, “The End Is Near and It’s Going to Be Awesome,” explains how failure is baked into the DNA of Obamacare:
Imagine a radically simplified health care system, one in which any medical problem could be solved by taking one of 50 pills, but you can have only one pill a month, so you have to prioritize. That presents each individual with 58,150,627,116,341,760,000 (that’s “58 quintillion”) — the number of ways to rank 12 choices out of 50 options — and political managers would have to do so for every American.
Since there are 300 million Americans, we would have to do a calculation for each one, meaning that we have to consider 1.74 x 1,028 options, one of those number so large that we don’t have a common name for it. And since we’ll assume that people’s needs will change over time … we’ll want to review everyone’s plan once a year. As they say in the political speeches, we’re going to consider all of our options and take all of the information into account.
Except we pretty obviously aren’t.
As proof that Mr. Williamson knew what he was talking about, note that ACA requires doctors to computerize all medical records. This requires the use of 140,000 billing codes, and it’s driving doctors nuts. Hurt while crocheting? There’s a code for that. Walked into a lamppost? There’s a code for that, too. But what code do you use if you walked into a lamppost while crocheting?
In other words, health care is a very, very big pencil.
What Reform Needs to Look Like
Any reform needs to begin with a frank acknowledgement that real reform must happen. This shouldn’t be a partisan issue. Those who are pushing for a change should not accused of heartlessness. They are realists, and we need more of them.
Some immediate reforms do not require congressional action. For example, the Department of Health and Human Services has authority over more than 1,400 Obamacare provisions. The secretary could, for example, loosen Obamacare’s coverage mandates, which limit choice and drive up costs.
HHS could also expedite the process of granting states waivers from certain costly regulations under ACA Section 1332. This would slow cost growth and allow more discretion at the state level to restructure their local health care markets. Expanding the number of regulations states can opt out of should lead to more affordable options for consumers.
Then there’s Obamacare’s “minimum actuarial value requirement.” This requires that insurers pay at least 60% of the cost of covered services. In practice, this sets a price floor on the affordable plans insurers are allowed to offer, and consumers are allowed to choose. If you want to keep something expensive, make a cheaper alternative illegal. While the 60% threshold is written into the ACA, HHS has the authority to increase the “allowable variation” (or “wiggle room”) that expands the range around that number at which insurers may offer plans.
Another provision the secretary could eliminate is the “medical loss ratio” rule, which limits what insurers may spend on certain administrative costs. If administrative costs (including marketing — essential to new players entering the market, or credentialing of new doctors) are too high, the law requires the insurer to raise premiums.
But all of these are just nibbling around the fringes. What is necessary is a wholesale revision of our approach to health care. Obamacare must go because the thinking that unpins it is detached from reality. Rather than requiring the worst of the Soviet Union (central planning), we need to embrace the best of free enterprise (competition). Take, for example, one area of American health care where the quality has gone up while prices have plummeted: boob jobs.
It’s true. The costs of elective plastic surgery have gone down precisely because most insurance policies won’t cover them. People must spend their own money, and that requires price transparency and thus price competition. Free people spending their own money tend to spend it well, and this drives costs down.
What if prices — and outcomes - were published and people had to spend their own money, at least until a catastrophic policy threshold was met? What if health savings accounts could be funded with tax deductible dollars? What if large, interstate risk pools (including those with pre-existing conditions) were the norm? What if we weren’t required to purchase coverages we don’t want and don’t need (like women having to obtain coverage for prostate cancer)?
But this is not a question of philosophical purity. Free markets will help those who are in the market. It will not help the homeless. There will always be a need for something like food stamps for the indigent. Health stamps? Why not? The services they purchase would be at the lower costs the free market produces. The benefits of competition can flow to those unable to compete on their own.
At its core, health care reform must be about reforming our politics. Politicians on both sides of the aisle have promised too many too much for too long in exchange for the votes that keep them in power. Could (short) term limits be part of this overall reform? It may be necessary.
It is time to pay the piper. The longer we kick the can down the road, the bigger the can gets. And that’s bad for everyone, dealers and customers included.
James S. Ganther Esq. is the cofounder and CEO of Mosaic Compliance Services. He is a dealer compliance expert and a prolific writer and speaker. Email him at email@example.com.