by Frederick Parker, NCSU Assistant Professor of Economics, published in News and Observer, January 7, 2014.
After decades of health care debates going back at least to the Nixon and Clinton administrations, Obamacare has arrived, though handling health care through private markets paid with insurance has long been recognized as unlikely to meet the needs of every American.
In fact, while developing Obamacare, some debated eliminating health insurance in favor of government’s paying agencies or health care cooperatives. During the debates, though, Timothy Geithner said something about a lack of political will to move away from insurance. It is the model we are accustomed to, despite mountains of evidence that it fails to provide satisfactory health care when people need it.
As Obamacare rolls out, perhaps we should remind ourselves why health insurance cannot be the solution.
It is about “fair premiums.” Fair premiums pay the proportional, per-person cost of all expected claims under an insurance plan, nothing more. For example, if a 100-home neighborhood expects one house to suffer $1,000 in lightning damage – but there’s no way to tell which house it might be – then the 100 homeowners each pay a per-person share of expected damages, essentially $1,000 divided by 100 homeowners for a $10 insurance premium each.
This fair premium covers the neighborhood’s and homeowners’ needs, and people generally like this model if individual premiums are affordable. This is the promise of Obamacare – that by spreading premiums over all Americans whether healthy or sick, young or old, wealthy or poor, then they will be affordable and everyone will receive satisfactory health care. However, individually affordable premiums are impossible for U.S. health care, as demonstrated by mere arithmetic:
Total U.S. health care is estimated to reach $2,825,000,000,000 in 2013 (euphemistically $2.8 trillion, perhaps because the actual number looks so scary). A “fair premium” divides this by the estimated 2013 U.S. population of 319,600,000 to get $8,839 per person for every single American. Calculate it yourself, although most calculators do not handle that many digits well.
For health insurance to work, every American would have to find $8,839 of after-tax income to pay for his fair premium – but the majority of Americans have no income.
This means that income-earners need to pay for those with no income, such as nonworking children and spouses, elderly family members, the disabled. For a family of five, that means $44,195 in after-tax premiums, requiring a minimum salary of $53,000 per year, which is higher than the median U.S. household income of $51,017. This means that more than half of U.S. households do not earn enough to pay a fair premium for a family of five, and because Obamacare is predicated on those with paychecks paying for those without, even smaller families or larger paychecks would have difficulty paying.
Obamacare proposes handling this with subsidies for low incomes, covered with larger premiums for higher incomes, so conceptually the fair premium should be divided over income-earners. There were 145,418,000 income tax returns filed in 2012, so $2,825,000,000,000 split evenly over only income-earners requires a fair premium of $19,427 per income tax return.
Again, a staggeringly large premium and beyond the smaller tax return incomes of retirees or working poor, so maybe the fair premium should be over wage earners. OK …
Total U.S. wage earners are estimated at 79,900,000, resulting in an after-tax fair premium of $35,357 per wage earner, requiring a minimum salary of $42,500 solely for the health insurance premium. In order to eat, domicile, drive,or anything else needs salary above this $42,500.
However, the median U.S. wage is lower than $42,500, except for those with graduate degrees, yet only 11 percent of the U.S. population has a graduate degree to meet the premium – apparently without also eating – not to mention that many of this 11 percent do not earn $42,500 by the definition of median anyway. These estimates may be off by 5 percent or 10 percent, but not by 50 percent, and even cutting premiums in half remains unaffordable to most.
Universal health care paid through affordable insurance premiums is impossible, simple as that. So why does Obamacare rely on it? Maybe Geithner tipped the administration’s hand – maybe failure is expected – maybe to build political will for something else? I guess we’ll see.