June 28, 2013

Professor Daniel P. Kessler, an expert on health policy and health care finance, attended the Adapting to an Aging Workforce Conference in April 2013. He is a professor at the law and business schools, and a senior fellow at the Hoover Institution, at Stanford University. In a recent interview, he discussed the implications of the Affordable Care Act (ACA) and his opinion on potential Medicare reforms.

What did you take away from the conference?

What I got out of it was a better understanding of the employment and benefits issues facing large employers.

Were you surprised by lack of discussion of the ACA?

No, because the conference agenda didn’t highlight that. Of course, that’s an area of interest to me, but that doesn’t mean that it needs to be the focus of every conference. The ACA is one issue among many of concern to large employers.

Do you get the sense that employers are concerned about the ACA?

Absolutely.  There are a lot of questions about whether you offer people insurance, what you charge them, and what kind of packages you offer. There are a lot of actuarial consulting companies that are trying to help companies answer these questions.

You recently wrote in the Wall Street Journal that “employment opportunities will suffer because of disincentives under Obamacare.” What are the disincentives that you see?

There are two key employment disincentives in the ACA.  First, you get your exchange subsidy reduced as you earn more money. So, if you are buying insurance in an exchange and you’re with an employer that doesn’t offer insurance, when you earn a dollar more, your exchange subsidy is reduced by about 25 cents. That means if you’re a middle income person, you’re facing a marginal tax rate of more than 50% — the implicit tax from getting your subsidy reduced, plus Social Security and Medicare taxes, plus state and federal income taxes. When faced with marginal tax rates above 50%, people will work less.

Second, on the employer side, the act essentially charges employers a couple thousand dollars or so per worker if they don’t offer them insurance. What that means is that either the worker’s wage will go down by the amount of the penalty or the worker’s pay will go down as the employer buys insurance.   For people who don’t earn much money, it’s effectively raising the minimum wage, which imposes a floor on the part of compensation that is paid as salary rather than benefits. How much of an effect will there be on employment? There’s debate. But, for sure, if you raise the minimum wage a lot, there will be some reduction in the employment of low-wage workers. You can’t demand that employers provide health insurance and provide an income-based subsidy and expect that there won’t be some employment effects. It will affect wages and employment.

Have we started to see this yet?

I think we have. What’s for sure is that you’re going to get a shift from full-time to part-time work and you’re going to get part-time people being cut back under 30 hours a week. That’s because there’s a threshold; there are no penalties for anyone who works under 30 hours a week. Employers will substitute technology for labor. There was an article in the newspaper about fast food places installing kiosks where you place your own orders (like kiosks at the airport). It didn’t use to be worth it to buy those kiosks but now employers are going to try it as labor gets more expensive. That’s a logical consequence of the law.

You could say, “I would rather live with a little more unemployment and lower take-home wages in exchange for having more people with subsidized insurance.” But that’s not how the law has been sold; the marketing has been that we can have it all.  There will be some downside. How big? It’s hard to say. The basic message is: if you think you can get something for nothing, that’s not how the world works.

Let’s switch to Medicare reform. Why do you favor premium support?

Two reasons. First, there’s increasing evidence that Medicare Advantage plans – and, by implication, a well-designed premium support program – do a better job at managing people’s care than traditional Medicare. It’s not uncontroversial to say that but I think it is generally accepted by most of the health policy community.

The other reason is somewhat more controversial. In the absence of top-down spending controls like global budgets, which we have so far been unwilling to adopt, the only way to manage Medicare costs in the long run is to make people somehow responsible for the spending that they generate. That’s tough because if someone doesn’t have much money, society is going to have to help them pay for their health care. But there are lots and lots of Medicare beneficiaries who could be more responsible for their own spending, and premium support would accomplish this goal.

What are the potential challenges and downsides of premium support?

The most persuasive reason not to do it is that it leaves beneficiaries and the Medicare program more open to doctors and hospitals exploiting their market power. That’s an important concern. There’s a tradeoff. There are ways to deal with the market power problem, but these are also imperfect. I think people who think that premium support is a good answer (like I do) really should focus more on how to deal with this.

The whole field of anti-trust law is all about how to deal with provider pricing power. The challenge is whether you can get a good enough solution on the market power side to outweigh the harm from just leaving the Medicare program as it is.

What do you think about raising the Medicare enrollment age, which has been proposed as a potential solution to Medicare’s funding problem?

I think that’s a perfectly fine thing to do. But that’s not going to get you very far. You can’t really save much money by raising the Medicare enrollment age. You’re not going to make Medicare solvent by raising the enrollment age.

You’re an academic, not a politician, but can you venture a guess as to whether any of these reforms will happen?

If nobody does anything, Medicare will eventually become more like Medicaid. The government will keep lowering the reimbursement rates that it pays doctors and hospitals and that will make Medicare beneficiaries less desirable. They will be treated like Medicaid beneficiaries are now – which is, not really that great. I think that’s an inferior solution because it’s basically sweeping the problem under the rug. But maybe that is the only way. There are some people who think the problem is going to solve itself, that health care spending is going to slow down on its own. I think the evidence for that is a little shaky, but it could be true.