Obamacare: Unintended Consequences

According to Martin Feldstein, the healthcare bill just passed will have the unintended effects of increasing the cost of insurance, and decreasing the number of insured.

Why?

One of the key features of the bill prevents insurance companies from denying coverage for pre-existing conditions. This is a well-intentioned feature, but it provides a strong incentive for a healthy person to drop insurance coverage. After all, they can easily obtain coverage if they become seriously ill. As healthy people drop coverage, the insured population becomes sicker and sicker, requiring higher premiums to cover the cost. The higher premiums encourage even more people to drop coverage, leaving an even sicker insured population, requiring even higher premiums... until premiums spiral out of control and only people with cancer have insurance.

In an attempt to prevent this death spiral, the bill requires companies to provide insurance, and requires individuals to obtain insurance. But the consequences of not complying are insignificant, compared to the costs of complying.

For example (my example, not Feldstein's), an employer who doesn't provide insurance must pay a tax equal to 8% of payroll. But my employer currently spends 12% of my salary on insurance. It would be much less expensive for him to drop my coverage and pay the tax. He could even give me a substantial raise and still come out ahead.

Feldstein does the math for families and individuals without employer-provided coverage, and shows that they come out substantially ahead by paying the tax instead of buying insurance. And there's no risk, since they can always purchase coverage if they become ill.

Rational consumers will respond to these incentives in the predictable way, leading to ever-increasing costs and more uninsured.