Musings on the Incidence of ObamaCare

Over at Equitable Growth: The scarily-sharp Josh Barro tweets:

Walker and Rubio plans show the dream of repealing Obamacare is dead; now we’re just haggling over price.
— Josh Barro (@jbarro) August 19, 2015

And he sends me to an interesting, but I think largely-wrong, piece from Megan McArdle:

Megan McArdle: Republicans’ Obamacare Alternative, Finally: “Republicans have been saying ‘repeal and replace’…

…[but] the party has conspicuously failed to… [offer] a plausible replacement… giv[ing] these words the hollow sound of a Southern matron greeting a mortal enemy over mint juleps…. [Now] both Walker and Rubio are endorsing… converting Obamacare to a simpler, flatter tax credit… Obamacare is now setting the terms of the debate. And that debate will ultimately be fought over who Obamacare is for…. Obamacare promised that it was for the middle class. In practice, it has overwhelmingly been a program for the poor and near-poor… Medicaid… exchange policies… popular among… [the] heavily subsidized, but… with anyone who has to pay a significant chunk of the bill…. Republicans [will] become the party of universal, but lean, benefits that won’t be enough to lift people out of poverty, while Democrats become the party of generous benefits for the poor…. Who wins that debate will tell us a lot about what kind of government we’ll have in 50 years.

First of all, I think McArdle is somewhat off on the incidence of Medicaid. As best as I can tell, Medicaid dollars ultimately stick with one-third benefitting the disabled, one-third benefitting the non-disabled poor, and one third going to hospitals and practices.

The one-third of Medicaid dollars that wind up ultimately sticking to the disabled wind up making the lives of the disabled — both young and old — much better. The disabled are poor. But the disabled are not the poor. This part of Medicaid expansion is, as we tend to think of things, largely distributionally neutral. Only the truly rich can afford to pay for any prolonged period of disability out of their own resources. The rest — poor, working class, and middle class; young and old — become poor when they become disabled.

The one-third of Medicaid money that flows to the disabled makes their lives less harsh, and makes the risk of future disability less catastrophic for everybody. This is of big benefit to those current members of the middle class who are the future disabled, but do not know it yet. To say “Medicaid = the poor” is simply not right.

As best I can tell, a second third of Medicaid dollars wind up in the hands of nurses, doctors, and hospitals. They will be made richer as a result. The hope is that this money flow will diminish the amount of financial three-card-monte the medical system has to engage in. It is thus supposed to lead to a system of medical finance which is less of a cost-covering and more of a market-seeking-efficiency process.

We will see.

This shift from cost-covering to market-seeking-efficiency in health-care finance has, however, been a big — I would say the big — right-wing priority in health-finance reform for decades. And either something like Medicaid expansion — or pushing the sick poor to die in ditches — is a necessary prerequisite for it. To claim that you want a market-driven health care system while being opposed to both Medicaid expansion and pushing the sick poor to die in ditches is, at best, confused and incoherent.

It is only the third third of Medicaid dollars that winds up truly sticking to those whom McArdle’s readers think of when they think of the poor that would ever count as a redistribution. And it is not really a boost to your income — you do not, after all, spend your Medicaid benefit on riotous living. Your Medicaid benefit means that if you are poor and become sick you have a good chance of not dying, or of being poor and sick for a shorter time, or of being poor and less sick. McArdle writes of how generous health benefits that “lift people out of poverty”. This doesn’t lift anyone out of poverty the way we usually think of poverty: people in ICUs are receiving huge amounts of medical care, and if they are on the government’s dime they are the beneficiaries of enormous social-insurance transfers. But they are not thereby “lifted out of poverty” — at least, not the way most people understand “lifted out of poverty” to mean. They get more and better health care when sick. Full stop.

But that is not all!

McArdle also, I think, somewhat misses the mark when she talks about how exchanges are only attractive to the subsidized.

Who are those who would not be subsidized if they purchased on the exchanges? They are, predominantly, those who have the option of buying employer-sponsored insurance. And employer-sponsored insurance comes with its own big honking subsidy through the tax code — a subsidy that is not conditioned upon their being low- or moderate-income.

No subsidy if you purchase through the exchange.

A big subsidy if you pick up benefits through your employer.

Is it any surprise that exchange policies and pick-up among those with incomes too high to be eligible for exchange subsidies has been low? The middle class has already gotten its big health-care insurance subsidy via the combination of employer-sponsored coverage and the tax code. The exchanges simply equalize the social insurance benefit to some degree.

Moreover, the availability of the exchanges is of massive benefit to the middle class in terms of the extra freedom it provides. Families, especially families with some members subject to a pre-existing condition or that suffer some serious health problem, now know that losing your employer-sponsored insurance job no longer leaves you exposed to catastrophe. A serious medical problem is still a crisis — but not a catastrophe. This is social insurance doing what it is supposed to do. And this is of immense benefit to the middle-class right now.

Moreover as Obamacare implementation rolls forward, the balance of benefits may shift more towards the middle class. We will see choice-of-system operating at two margins: At one margin, people and employers will be choosing to take up and offer employer-sponsored coverage or resort to the exchanges. If projections that employers will continue to drop employer-sponsored health insurance are accurate, the availability of the exchanges will turn out in the long run to be of massive benefit to the middle class as employer-sponsored insurance ebbs away.

At the other margin, states and the federal government will be trying to figure out where to set the Medicaid-exchange line.

We are unlikely to wind up with employer-sponsored insurance for nearly everyone. But it could be that the exchanges will prove more attractive than Medicaid. And it could be that Medicaid will prove more attractive than the exchanges. We could, ultimately, wind up with single-payer under guise of Medicaid, with universal exchanges, or with some stable division of systems. The ObamaCare structure is very flexible. It is much more a structure to provide options for the future evolution of social insurance and private payment in health financing than in any once-and-for-all-time distribution of benefits.

Stepping back, the major argument against a relatively-generous social insurance system is always that it encourages featherbedding and idleness. But slimmer health benefit packages will not solicit greater market labor supply. It is only to a small degree that we control whether we get sick, and how sick we get — and when we do make decisions that are bad for us anyway, making those decisions even worse for us is unlikely to have much impact on behavior unless the nudges are very carefully and expertly designed.

Thus slimming down the benefits package for those who get sick seems an extraordinarily bizarre place to concentrate your energy on, if you are indeed worried about promoting featherbedding or idleness.

The only benefit for slimming down the benefits package for those who get sick is that they will allow for lower taxes on the upper middle-class (who if they get sick will then find themselves caught by the slimmer benefits package), and on the rich (who have the resources to insulate themselves from threadbare social insurance).

Originally published at