THE UNINTENDED CONSEQUENCES OF BEST INTENDED LEGISLATION

I am not one of these conspiracy theorists.  I believe at their core most legislation is brought to a vote with absolute best intentions.  As a person that went without medical insurance in the past I fully realize the medical system we have is broken.  However, the reason I am against almost all government intervention is that even the best intentions in legislation are paved with many unintended consequences in application.   You just can’t stop people from finding the cheapest solution for them.  In practice very few will make the final decision based on the “greater good.”

If you are a big fan of the new Affordable Care Act be prepared for some unintended consequences.  If you think this doesn’t affect you or universally makes your life better – I encourage you to review the legislation beyond the intended benefit and look at it from a realistic implementation standpoint.  Contrary to the title of the law, things are going to get more expensive.  For everyone.  In the end this will help some, but at what cost?

I will post some thoughts today – not intended to be snarky – just my honest thoughts on some of the likely fallout that will affect many.

Affordable Care Act
Best Intentions Unintended Consequence #1:

All medium sized employers, defined as employing over 50 persons, must provide health insurance for their workers or face a penalty.  The tax penalty for not complying would be $2,000 per employee.

Real World Application:  A full service restaurant that employs 58 people would now have to comply.  Providing this insurance is a new expense, the money doesn’t just appear.  This business owner will analyze the cost of providing insurance against the tax penalty.   Let’s say for argument sake the private health insurance cost is about $300 per month per employee.  For 58 employee providing the insurance could be around $210,000 or the penalty would be $116,000.  Easy choice right?  Well the business owner will see that no matter what their current bottom line is affected by a minimum $116K without either significantly increasing business or raising prices.

Increasing revenue is difficult and prices are set by what the market will bear.  How do you think raising menu prices by 15% will affect people going out to dinner?  Their customer base will drop – people may still come out, but come out less.  That 15% increase isn’t just manufactured, that is put off to you and I as the consumer…  Additionally, if more people go out to dinner less often the business owner still sees revenue drop even with the menu price increase.  They are then forced to either lay off workers or go out of business.

What is even more likely to happen is that employers on the cusp of the 50 employee limit will cut their workforce to 49 persons and take themselves off the formal payroll.  Nine employees in this case were just laid off to no fault of their own.  The owner didn’t want to do it, but financial survival necessitates the decision.  Those nine employees were not only negatively impacted from a loss of income they are also now in the public care for health insurance thanks to this law.  We pay thrice – once in the loss of tax revenue, once in the increased cost of goods, and also in the increased cost to more people being on the assisted care.  Those same nine people once excited about getting health insurance are now not so excited about not having a job at all.

Do you think this cost doesn’t get passed onto the consumer?  A consumer that has less and less expendable income.  What will happen when the Fed stops artificially pushing down interest rates and we have real inflation to deal with all this debt?  Your money would be squeezed all the more.  The average person ends up being crushed financially, not the “big evil insurance companies”…

Affordable Care Act
Best Intentions Unintended Consequence #2:

Three major changes occurred in the legislation intending to correct an unfair practice; if you are already sick, you are screwed – no one will cover you.  Also in our previous system, if you are elderly your insurance will cost so much you can’t afford it.  The elderly overwhelmingly end up on Medicare, which limits your care and choices.  Private insurance companies to this because the elderly are a far bigger medical risk than say a 23 year old.  It sucks.  We all get that.

Per the Affordable Care Act: the elderly cannot be charged a premium higher than 3x what is charged a young healthy person, an insurance company may no longer deny coverage for a pre-existing condition, and anyone that does not carry insurance will be required to pay a $695 penalty.  These three things coupled together are intended to encourage all people to be on insurance and the added cost of the sick and elderly is “offset” by using the combination of a larger pool of customer + the young’s raised insurance premiums.

(NOTE: This tax penalty of $695 is intended to go to the government sponsored stop gap, Medicaid.  I’ll tell you that $695 doesn’t go very far when paying for a hospitalization…  That budget hole is something else we will have to deal with.)

The real issue is that young people don’t have any money and it isn’t like they are going to magically get paid more tomorrow to cover this added cost.  Many young people will figure out that it is far cheaper to pay the $695 penalty then pay for an insurance premium – which they already don’t pay and which is now going to increase to cover the cost of the elderly.  Also, since the law requires insurance companies to take all comers, regardless of medical condition, one can now sign up for insurance the moment after something occurs for which they require medical care.

So… what WILL occur in many cases is that one can choose to pay the penalty rather than the costly insurance, than IF something happens sign up for insurance care, which by law they have to provide.  After treatment is complete that person could then drop the insurance again.  It becomes a shell game.  Didn’t get sick this year – did just fine – next year got really unlucky and had a debilitating car accident – got signed up for insurance.

Insurance companies will find a way to manage their risk and make up this loss.  Once again, the money isn’t just manufactured out of thin air.  Where does the money come from to cover all these new expenses?  Ah… the real unintended consequence…  Once insurance rates rise to cover this potential loss the average person will be more and more willing to pay the penalty rather than these increased premiums.  The only possible way then for insurance companies to make up the difference after this shell game compounds is by passing on the added cost to the employers already providing health care for their workers.

Currently the second highest cost for businesses in the United States is Health Care Premiums, right behind salaries and above rent.  The cost of health care could overtake salaries in short order as the largest single expense for employers.  As stated previously, drastically increasing revenue to cover these huge new costs doesn’t come easy.  Something will have to give.  Remember that raise you thought you were entitled to?  It just went to cover the cost of your 11% premium increase.

This will slow the economy and job creation.  Two things we didn’t need right now.  Don’t think I’m right?  I hope you are correct then.  My viewpoint is that this is a bad law with the best intentions.