Asymmetrical Information - Megan McArdle

10.02.12

The Rube Goldberg Policy Machine

More legal challenges to Obamacare are in the works. Obamacare's complexity makes it extremely vulnerable to those challenges.

When the Obamacare decision came down, I'm sure most of us thought that the matter was settled.  And this is true--for the matters that were before the court.  But the lawsuits are not over.  Another one is working its way through the courts, and there's a real chance that it will eliminate most of the subsidies for buying health insurance.  Ramesh Ponnuru has an excellent summary

Obama’s plan makes tax credits available to people who get health insurance from exchanges set up by state governments. If states don’t establish those exchanges, the federal government will do so for them. The federal exchanges, however, don’t come with tax credits: The law authorizes credits only for people who get insurance from state-established exchanges. And that creates some problems the administration didn’t foresee, and now hopes to wish away.

Legislative debate over the law didn’t go into great detail about these provisions. We can surmise what happened, though. Supporters of the legislation wanted to encourage states to set up the exchanges. So they offered the states a deal: If they did so, they would get to write their own rules, and their citizens would be able to get the tax credit. The states would also gain extra flexibility on Medicaid spending. The law’s supporters also expected the health-care law to become more popular over time.

That hasn’t happened. Many states are determined in their opposition, and few of them have set up exchanges. If they don’t do so, the tax credits don’t go into effect and the federally established exchanges won’t work: People won’t be able to afford the insurance available on them without the subsidy.

States have another incentive to refrain from setting up exchanges under the health-care law: It protects companies and individuals in the state from tax increases. The law introduces penalties of as much as $3,000 per employee for firms that don’t provide insurance -- but only if an employee is getting coverage with the help of a tax credit. No state exchanges means no tax credits and thus no employer penalties. The law also notoriously penalizes many people for not buying insurance. In some cases, being eligible for a tax credit and still not buying insurance subjects you to the penalty. So, again, no state exchange means no tax credit and thus fewer people hit by the penalty.

That gives businesses standing to sue if the administration creates subsidized insurance where the law does not provide for it.  And that is exactly what the administration has done, directing the IRS to ignore the distinction between state exchanges and federal exchanges.  “The statute was very poorly drafted if the intent was to cover federal exchanges,” Kevin Outterson, a Boston University professor who focuses on health policy and who previously worked as a tax attorney, told Sarah Kliff. “If I had a client who had recently lost some money on a provision like this, I’d say you have a pretty good chance to win that case."  

If the subsidies go down, the law becomes even more of a mess than it already is.  The law's supporters have been counting on a lock-in effect to make the law hard to repeal.  But if subsidies only exist in some states, it I'm not sure it will be that hard for those states to gang up on the others and repeal or reduce the subsidies.  And if the subsidies go away, the law is toast.  I don't see much support for forcing people to buy insurance they can't afford.  Nor do I think that the GOP is going to cooperate in changing the language to help Democrats salvage their law.  

Don't be so confident that they can pass a fix through reconciliation, either.  Even if Democrats keep the senate, restoring the subsidies would be a costly new expenditure that needs to be offset, because you can't increase the deficit outside the ten year window.


This is the danger of Rube Goldberg legislation: vast policy apparatuses that have hundreds of moving parts all working in concert towards some longed-for reform.  If any of those pieces stop working, the whole machine grinds to a halt--or worse, starts wreaking havoc on the machines nearby.  

The Rube Goldberg aspect of health care reform was a positive feature for many of the policy wonks I listened to while ObamaCare was being designed and passed.  Like one of those products you see on late night television, it did everything--it's a floor wax!  and a dessert topping! and it gets your whites whiter!  

Health care IT: encouraged!  Cost curve: bent!  Patient homes: created!  Adverse selection: cured!  And all for the low, low price of -$118 billion over ten years!

As with so many things, Adam Smith described the process two hundred years ago:  

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.  

Rube Goldberg legislation is most dangerous when you do not have buy-in from the public and the opposition party.  "It's not our fault if the Republicans screw it up!" the program's supporters will say, and fair enough, but if you know the opposition is apt to try, then it behooves you not to pass a program which can so easily become so screwed up that it is worse than not having passed anything at all.  Especially when the public doesn't like it, and therefore will not pressure the opposition to cooperate.

Had they settled for a Medicaid expansion, they would have gotten more than half the coverage gain in less than half the time, focused on the most vulnerable members of society.  There would have been little threat of legal challenges, or danger that they would be left without a workable system to replace the private insurance markets they just sledgehammered.  But no one was interested in a piddling Medicaid expansion.  They wanted Landmark Legislation that promised to fix every complaint anyone ever had.  They may end up with something that is, even from an avid reformer's perspective, worse than doing nothing at all.