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GHEI: Obamacare, a low-yield political investment

The smartest move would be to cut the losses and scrap it

- - Thursday, November 14, 2013

The rocky start of the healthcare.gov might be in the headlines, but the system that Obamacare is trying to put into place is fundamentally unsustainable. The website could become functional within the next several months, but that in itself does not change the calculus of the poor return on the vast investment project. If this were a private company undertaking an investment, now would be the time to kill the project, before incurring further losses. President Obama's backtracking on Thursday to give insurance companies the option of restoring their canceled plans only underscores the law's flaws.

No business can survive if the returns to its investment projects don't exceed costs. Legislation even, and perhaps especially, as far-reaching as Obamacare can be viewed as investment of a sort — one that is undertaken with imperfect knowledge of conditions and returns. Just as investment is undertaken only when the expected returns exceed costs, legislation should be implemented only when the expected benefits exceed the costs. If this likelihood is in doubt, there is value in waiting.

The scale of Obamacare, with its vast investment of resources, increases the degree of uncertainty. The law is effectively the equivalent of a multistage investment project. This means that there are many chances to evaluate the benefits against costs as more information becomes available, and determine whether it is worth making further investments in the project. This sort of evaluation is both necessary and useful, and standard in private investment projects, where a company's survival can depend on making the right call. In terms of legislation, the choices made by lawmakers could prove faulty. The costs of implementation can be higher than initially projected, and hoped-for benefits may not materialize.

Unfortunately, it is becoming increasingly apparent that Obamacare is an investment that will not yield returns to justify the billions being sunk into the project and the disruption it is causing in the lives of millions of Americans. As the stories of millions of people who will be stranded without insurance and lose access to their doctors come flooding in, it seems that the effect of the law, at least for now, is the opposite of the one intended. While some people might gain access to health insurance, a staggering number are losing theirs or face sharply higher costs. Viewed as an investment, this is not a good deal.

Obamacare restricts choices and, in doing so, has resulted in sharp increases in the price of health insurance for individuals, particularly young singles. These so-called "young invincibles" are critical to making the law work, because their higher premiums will subsidize older, sicker people. The glitchy rollout of the website has almost certainly kept away these young people, who already have strong incentives to pay the relatively modest "penalty" instead of signing up for expensive insurance, which leaves them with substantial out-of-pocket expenses. The people who will persist are the sick, who are being subsidized. This is not sustainable. It is not the glitches in the website that are the problem, but its fundamental economic unsustainability. That's what makes Obamacare a poor legislative investment.

Pieces of the law have already been abandoned or delayed. Among the earliest to be discarded was the Community Living Assistance Services and Supports (CLASS) program, which was designed to establish a national, voluntary insurance program for people in need of long-term care. The CLASS program was projected to generate $80 billion in savings, but failed to attract enough healthy participants to make it fiscally viable and was killed about two years ago. More recently, the employer mandate was delayed for a year, removing the threat of penalties to employers who fail to provide legally adequate health insurance. In between have been handfuls of exemptions and waivers, seemingly awarded on the basis of favoritism rather than rules.

Largely ad-hoc implementation of legislation, as seems to be the case with Obamacare, created additional uncertainty in the economy, potentially reducing the expected return to all other investment projects. Thus, the law is not only a poor legislative investment, it potentially has a detrimental effect that is not visible, but is nonetheless real. Just as troubling is the disincentive for businesses to expand beyond 50 employees, at which level the employer mandate will become effective.

The costs of Obamacare are rising, and the expected benefits are yet to materialize. The increased premiums and canceled policies that leave Americans stuck in no man's land with no health insurance at all are real costs in these early stages of implementation. The returns to this investment are too low to continue. It's time to scrap the project.

Nita Ghei is policy research editor at the Mercatus Center at George Mason University.