Change Is Obamacare's Only Certainty

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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I said in my last post that our newly implemented health-care law "is undoubtedly going to change in the near future, in ways that will make it more or less stable than it is now." To see what I mean, take the individual mandate. When the administration announced that it was delaying the individual mandate for folks whose insurance had been canceled, Yuval Levin wrote:

I would now assume that no one will pay the individual mandate fine for 2014. The administration may give up on the mandate in the course of the ongoing enrollment period if the political pressure is great enough, or they may keep up the pretense of it through the end of the enrollment period in March (when it will have finished its work, so to speak, since its purpose is to influence choices made during that period) but then exempt everyone from it as they did with the employer mandate for this year. Having now exempted from the fine people whose policies were canceled and who haven't spent the money to get more expensive and less appealing new coverage, the politics of still applying the fine to everyone else who is uninsured this year will probably just not be sustainable, and the politics of exempting people from it (especially if they can hold out on doing so until after March 31) will be far too appealing for this White House to resist.

I think that's right. Sometime after March 31 -- probably not very far after -- I would expect the administration to announce that after careful thought, it has decided not to enforce the individual mandate for 2014. As we've already seen, the individual mandate is very politically vulnerable. And I suspect we're not done with the emergency fixes.

To see why, consider a fictional middle-class family. Call them the Petersons. Mom, Dad, two swell kids. Dad has his own landscaping business, and Mom works part time as a massage therapist. Together, they pulled in $90,000 in family income in 2013, and that's about what they expect to get in 2014, so that's what they put into the system when they go to buy health insurance. They're pleasantly surprised to find that they can get a Silver plan for $688 a month. That's a lot of money, to be sure, but it comes with a substantial subsidy and they're happy to get it.

Over the year, Mom picks up another regular massage client, and Dad gets a few more landscaping jobs than he had last year, and at the end of the year, good news: Their family income is now $95,000! The recession is over for this family.

Or is it just beginning? When their family income passed $94,000, the Petersons moved from just under 400 percent of the federal poverty line to just over. Which means that they no longer qualify for subsidies on their health insurance, and the Internal Revenue Service would like that $8,500 back, please.

Note that this means that by making an extra $5,000, the Petersons have cost themselves $8,500, for an effective marginal tax rate of 170 percent. For people who start out with incomes closer to 400 percent of the poverty line, the marginal tax rates can be even more extreme.

In future years, small-business owners will manage their income more carefully in order to avoid popping the subsidy cap. But in 2014, many people just won't know. They'll find out in spring 2015, and shortly thereafter we'll find out, when they contact a local television station.

How many people are we talking about? They're hardly the majority. But they will be a very telegenic minority, and it's hard to see the administration sticking to their guns and demanding that these folks pay back so much money. Indeed, it's hard to see the Department of Health and Human Services letting the situation get to that point without some more creative emergency rule making.

That's not the only potential public relations disaster embedded in the law; just the one that came most readily to mind as I commenced year-end tax planning. The administration has amply demonstrated how it prefers to deal with problems like this: change the rules to minimize the number of unhappy voters complaining to reporters and members of Congress.

If the administration had been resolute in the face of early complaints, and had stuck to the rules it wrote before October, then it would be in a stronger position to deny the next round of complainers. But it hasn't. And each round of special exceptions makes denying the next one harder: "The president was willing to help them, but not us! What's wrong with us? Doesn't the president care about people like me?" When you stick to the rules for everyone, you are not making any particular statement when you enforce them in an individual case. But when you start carving out exemptions on the fly, each individual case becomes a referendum on how much the Barack Obama administration cares about [the middle class/small-business owners/writers/early retirees/insert your group here]. And the president cannot afford to tell anyone that he doesn't care about their problems. So I find it hard to believe that the mandate, or the clawback of overpayments, or any other rule that might upset people, will be enforced for 2014. And of course, that makes it more likely that none of them will be enforced, ever.

In other words, the emergency fixes that the administration has already implemented have made the long term less stable, even as they shored up the law in the short term. At this point, asking whether Obamacare's fate is more secure than it was in October is sort of a metaphysical question. What is Obamacare? Over what time period are we measuring stability?

All of Obamacare is unlikely ever to be repealed: I can't see anyone rolling back the rule letting parents keep their kids on their insurance until the age of 26, for example. So in some sense, Obamacare is here to stay.

But could Medicare subsidies be cut, or block-granted, giving states incentives to pare back enrollment? Of course. Could the mandate be effectively dismantled? Absolutely. Could the employer mandate be "delayed" indefinitely? Sure. In 2018, when the temporary "risk corridor" adjustments have gone away, and subsidies are capped, could adverse selection start driving people (and insurers) out of the market? Undoubtedly. And at that point, might guaranteed issue and community rating become vulnerable? That's basically what happened in Washington state.

At that point, something called Obamacare would still exist, but it wouldn't be anything like the comprehensive universal coverage its designers imagined. It would basically be a Medicaid expansion in some blue states, plus trivial tweaks to some insurance regulations.

Or the emergency fixes might stabilize the law enough to give it time to buy popular support. Either scenario is plausible -- and which you find more plausible probably depends on your initial opinion of the law.

But we should all be able to agree that the next months and years are going to see more changes, many of them unexpected, and all with the potential for far-reaching effects on the eventual form that this program will take. About the only thing we can really predict is that the future still holds a lot of surprises.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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