Obamacare, rebates, and the “endowment effect”

If the people due health-insurance rebates this August under Obamacare know they have checks coming to them, the Supreme Court might find it harder to overturn the law, and the Republicans in Congress harder to hew to the “no piece of Obamacare” line. Let’s get the word out!

During his visit to UCLA to give the Marschak Lecture (which was terrific) Robert Frank asked me a question for which I didn’t have a very good answer. Bob reminded me that during the Obamacare debate I predicted that the law would become much more popular once it passed, because the beneficiaries would feel a stronger stake in keeping the new benefits the law had given them than they felt in gaining those new benefits initially: an example of the well-known “endowment effect.”

That doesn’t seem to have happened, perhaps because the benefits are still mostly prospective. The main reform – the availability of community-rated insurance without existing-condition exclusions to everyone though the exchanges – doesn’t arrive until 2014. So a Supreme Court decision striking down the law wouldn’t mean taking something from people that they already have, but rather depriving them of something they might have expected to gain.

That’s not, of course, entirely true. Some of the benefits have already arrived, most notably the coverage of people up to 26 under their parents’ health insurance: especially valuable given the current state of the post-college labor market. If Roberts & Co. strike down the law, some hundreds of thousands or millions of twenty-somethings will suddenly find themselves in the market for individual insurance, which is a very bad place to be, and they and their parents are likely to be angry about it.

The same is true of seniors with Medicare Part D coverage who will once again face the “donut hole” without the substantial discounts provided in the bill.

A marginal case is the $1.3 billion in rebates due to about 15 million people this August from insurers that paid out less than 80% of their premiums in medical expenses. Insofar as those people know they have checks due them, they’re likely to be outraged if five oligarchs in black robes take those checks away. But I doubt that many of them are aware of what they have coming. If I were in the Obama Administration, or a supporter of reform, I’d want to spread that knowledge as widely as possible among the beneficiaries.

The more people regard overturning the law as taking from them something they had, the more uncomfortable will be the position of John Boehner in defending the idea that no part of Obamacare should be retained.

Given how fanciful the arguments are that a penalty for not buying insurance is unconstitutional while an entirely equivalent tax on being uninsured would be uncontroversially constitutional, I assume that Roberts and the rest of the Tea Party caucus will be deciding the case entirely on its political, as opposed to its legal, merits. They will be asking themselves whether overturning the whole law, overturning the mandate and leaving the rest intact, or making the correct legal decision would be more advantageous to the larger project of placing the country under Republican rule for the benefit of the top tenth of one percent of the income distribution.

If that’s right, an aggressive campaign to tell people about those rebate checks might influence not only the political consequences of the Supreme Court decision but also its content.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com

31 thoughts on “Obamacare, rebates, and the “endowment effect””

  1. The decision to delay community rating until 2014 is one of the most feckless political blunders of all time.

    1. The motive, remember, was to make the whole reform deficit-neutral, and establish the Obama Administration’s credentials for being Serious and Responsible. Look what it’s bought them. As some Polish economic reformer (Leszek Balcerowicz?) said, you don’t cross a burning bridge slowly.

      1. James: We have an independent Congress with its own power, not a Parliament. Presidents can’t just write legislation according to their own views and then pass it by fiat, particularly not in a case when you need 60 of 60 senators in one party to all vote for it. What was done in the ACA gave 30 million Americans health insurance, the approach you implicitly propose would have been dead on arrival in the Congress.

        1. The way I recall it, budget neutrality was a self-imposed framing decision by the Administration, not a response to Blue Dog pressure like the dropping of the public option. Bringing forward some of the costs would have been good economic policy and in line with the stimulus package. I agree with Anonymous to the extent that I still think a more aggressive timing was a real option and should have been on the table at the beginning. Maybe Obama would have had to trade it to get his 60 votes, or some other desirable feature like the early opt-in to Medicare. Who knows? But these outcomes are path-dependent: the result depends somewhat on the initial bids. It’s widely accepted on the left that Obama’s initial bid on the stimulus was too low, as the Snowes and Liebermans and Nelsons were interested in “moderation” relative to the proposal, and didn’t have an alternative economic analysis or policy. Were they any more principled on health care?

          1. Budget neutrality may have been adopted by the administration immediately. It may even have been exactly what they desired. However, it is absolutely the case that, even if the administration didn’t have that as a goal, it would never have passed Congress without it. The fight over the stimulus demonstrates the Congressional obsession with budget numbers that are essentially arbitrary. The centrist/conservative wing of the Democratic party would never have gone for something that was not at least deficit neutral.

          2. James “It’s widely accepted on the left”

            Yes it is, which does not in any way prove the case. White Houses don’t make up policy in a vacuum, they are in constant contact with Congress. Even “Administration proposals” that have arrived in Congress 30 seconds ago have been shaped by backchannel discussions in advance with the Congress. The challenge for all the people who say an option was viable (whether yours or single-payer) is to list the 60 senators who were going to vote for it. Until you can do that, you are Monday morning quarterbacking and might as well blame the President for not saving the Euro, ending war for all time, and getting rid of artificial turf in professional baseball.

            The health care expansion was a progressive dream for over 60 years, President after President failed..and then when someone succeeds, the reaction of too many people is “That was easy, he should have gotten more”. Monster ingratitude and naive beyond belief.

  2. Mark: I think donut hole issue for seniors on Medicare is more promising as a target– there are tens of millions of them, they vote and are well-organized politically. We don’t know if any of these things is true of those who will get a rebate, even if we could get them to understand that it is coming.

    1. Speaking of the “donut hole”

      It’s no secret that pharm companies have been raising prices parabolically since the ACA was introduced, in part to offset the lost revenues they would suffer under Part “D.” The “donut hole” feature, whereby the beneficiary pays the full price of the meds for one month is universally hated by recipients. However, politicians, for self serving interests if nothing else, have instituted a program where the out-of-pocket moneys clients must pay is gradually coming down, with the goal of eliminating it altogether. Today, the out-of-pocket is approximately 50% If ACA is retired by the SCOTUS they will be back to paying 100% For many people that means over $4000, a very unhappy surprise for millions of seniors on limited incomes.

  3. I have a brother who had to quit his career in his early 40’s when his wife was stricken with a debilitating stroke, and has been living off his retirement savings and her very small disability stipend ever since (about 10 years). They have a somewhat developmentally-challenged daughter of 19 years of age living in the household, who has been learning to drive for a year now, but is still not ready to get her full license. He has to stay within a few miles of his home at all times in case his wife needs to use the bathroom or has any other need come up, so driving his daughter to whatever sort of insurance-providing job she might be capable of holding is extremely limited. Last year his daughter needed extensive (and expensive) spinal surgery to correct a severe case of scoliosis which would have put her in a wheelchair within a few years if not corrected. The Obamacare extension of dependent coverage to age 26 was the only thing, short of charity, which made her surgery possible. They’ll be lucky if 7 more years is enough time to get their daughter on her own health plan.

    I realize this is an edge case, but without Obamacare this family would require some sort of (probably government-provided, at least to some extent) subsidy to continue to exist instead of being able to continue paying their own way through benefits they have earned. My brother is solidly Republican, and is horrified at the thought of accepting (especially government) charity. He is firmly behind Obamacare, for obvious reasons. Even Republicans are capable of willing, enthusiastic support for Obamacare once they understand how it affects them and their ability to provide for their families. The hard part (as always) is getting them to understand.

  4. So, you’ve gone from, “It will be too popular to touch!” to, “Eventually it will be too popular to touch!” With any luck, a year from now you’ll have moved on to, “It would have gotten too popular to touch, if only we’d had a little more time!”

    I am no more impressed with the legal reasoning than the prognostication.

    The real argument between those thinking the Court might strike it down, and those predicting it being upheld, is not on the legal merits, but in some sense, on what constitutes “legal merits”. From a purely originalist standpoint, the ACA is an utter abomination. From a purely living constitution standpoint, nothing that’s popular and/or a good idea can be unconstitutional. (Where how you decide that something is popular and/or a good idea, and which wins in a conflict, is where all the rubber hits the road.)

    So, we’re really arguing over where the Court, at this particular moment in time, has arrived, on that journey from strict enforcement to, “Constitution? Eh, whatever.” Defenders of the ACA were assuming the Court had already arrived at a point where they’d blow off the constitutional infirmities of this law, while opponents where hoping that the Court hadn’t quite reached that point.

    But, as admitting that one’s foes might have a point isn’t good rhetoric, this gets described as law vs politics.

    1. Passed by a Congress the majority of which participated in the drafting of the Constitution:

      = = =

      With July,1798
      CHAP. [94.] An act for the relief of sick and disabled seamen.

      § 1.
      Be it enacted, Sfc.
      That from and after the first day of September next, the master or owner of every ship or vessel of the United States, arriving from a foreign port into any port of the United States, shall, before such ship or vessel shall be admitted to an entry, render to thecollector a true account of the number of seamen that shall have been employed on board such vessel since she was last entered at any port in the United States, and shall pay, to the said collector, at the rate of twenty cents per month for every seaman so employed ; which sum he ishereby authorized to retain out of the wages of such seamen.
      § 2. That from and after the first day of September next, no collector shall grant to any ship orvessel whose enrollment or license for carrying on the coasting trade has expired, a newenrollment or license, before the master of such ship or vessel shall first render a true account tothe collector, of the number of seamen, and the time they have severally been employed on boardsuch ship or vessel, during the continuance of the license which has so expired, and pay to suchcollector twenty cents per month for every month such seamen have been severally employed asaforesaid ; which sum the said master is hereby authorized to retain out of the wages of suchseamen. And if any such master shall render a false account of the number of men, and the lengthof time they have severally been employed, as is herein required, he shall forfeit and pay onehundred dollars.
      § 3. That it shall be the duty of the several collectors to make a quarterly return of the sumscollected by them, respectively, by virtue of this act, to the secretary of the treasury ; and thepresident of the United States is hereby authorized, out of the same, to provide for the temporaryrelief and maintenance of sick, or disabled seamen, in the hospitals or other proper institutionsnow established in the several ports of the United States, or in ports where no such institutionsexist, then in such other manner as he shall direct:
      Provided, that the moneys collected in anyone district, shall be expended within the same
      = = =

        1. = = = “Although the naval character of the health provisions is not obvious from the statutory texts,…” = = =



        2. = = = From a purely originalist standpoint, the ACA is an utter abomination. = = =

          I would be curious to hear your justification of the ACA as an “utter abomination” from “an originalist standpoint”. Regardless of where in the Constitution the authority for the Maritime Act of 1798 originates, it is clear from its very existence that those who actually wrote the Constitution didn’t consider the fundamental concept inconceivable. I’m sure they argued over it (the record is clear that those guys love to argue), I’m sure they argued over where the authority to do it was located (they loved to argue over that too), and I’m sure some voted against it, but the Act did pass as written.

          Again, it was passed by the original authors of the documents; can’t get more originalist than that.


          1. Elhauge seems to blow the Hamburger argument out of the water here:


            It’s interesting that, per Hamburger, the ability to raise a militia is seen as justifying the ability to force people to buy something, when there’s no argument being used against Obamacare that wouldn’t also apply to the militia situation. The whole counter-Obama argument is: You can’t force people to buy something, given the lack of explicit constitutional permission to do so. How does that not apply in the militia case?

  5. I also thought after passage the law would become more popular after passage. The delays were a mix of reasonable policy based decisions and calculations related to CBO scores. The ACA is not perfect, but a good step, because it is a step toward expanding coverage and has seeds of ideas that could speed process of addressing costs (if they are actually tried). Bottom line was it was what could get 218 votes in House, 60 in Senate and 1 in WH.

    I think if you trace all the failures of reform to pass over the decades, a constant theme is the inability of proponents (like me) to make the case to middle class folks with good insurance about why it (reform) was in their best interest. The change with ACA was that many medical/insurance interests went along, but we still didn’t do great job arguing self interest case of moving to expand insurance coverage

    1. Don Taylor: Bottom line was it was what could get 218 votes in House, 60 in Senate and 1 in WH.

      This really cannot be emphasized enough. It took some fairly heavy convincing to get the right-leaning Democratic senators to vote for the PPACA, and Nancy Pelosi just barely managed to marshal a razor-thin majority for it in the House.

      Don Taylor: I think if you trace all the failures of reform to pass over the decades, a constant theme is the inability of proponents (like me) to make the case to middle class folks with good insurance about why it (reform) was in their best interest.

      Personally, I am inclined to put a fair amount of blame on the shoulders of the American electorate. If voters are willing to be deceived, then that gives liars a distinct advantage over serious policymakers. I have snarked before that the difference between European and American social policymaking is that European voters understand the principle of TANSTAAFL, while Americans don’t, but there is some actual truth to it. American voters, if polled for the provisions of the PPACA individually, like them a lot, but they also want their welfare state without an individual mandate and with tax cuts on top (and, presumably, a pony, too).

      For example, I’ve recently been struck again by how differently direct democracy works in California and Switzerland. Californians provide themselves with an ever bigger pie out of the spending cake via voter initiatives while denying the Californian legislature the power to raise taxes. The Swiss do overall use their referendum power far more responsibly (bloopers such as the minaret ban notwithstanding).

      1. Personally, I am inclined to put a fair amount of blame on the shoulders of the American electorate. If voters are willing to be deceived, then that gives liars a distinct advantage over serious policymakers.

        The problem is that in the modern era, lying to people is an industrial process practiced by professionals. We call it “advertising.”

  6. It’s at times like this it becomes important to remember that all “reform” means is “change”, and whether the change is for the better or worse is often a matter of opinion. That’s why I always mentally replace all instances of “reform” with “change”… I highly recommend that everyone adopt this practice, “reform” being so loaded a word.

    Sometimes you fail to make a case because the case isn’t very good, not because you did a bad job of it. Talking about the endowment effect, and people becoming invested in their gains from Obamacare, it’s easy to forget, (Intended that you forget!) that a lot of people are invested in what they had before Obamacare, and won’t like losing what they used to have.

    And that nobody would lose their existing coverage due to this “change” was always a load of fertilizer.

    1. = = = and won’t like losing what they used to have.

      Yeah, I really love that 3-6 months of medical expense terror I experience every time I change jobs, and I’ll really hate losing it.


  7. “That doesn’t seem to have happened, perhaps because the benefits are still mostly prospective. The main reform – the availability of community-rated insurance without existing-condition exclusions to everyone though the exchanges – doesn’t arrive until 2014.”

    Congratulations! You have summed up the primary reason Obama actually as a competitive race on his hands with as patently ridiculous a candidate as Mitt Romney: Political fecklessness of a very high order (h/t Anonymous). And no, I don’t believe Medicare-for-all was necessarily doable. But how you lose important battles matters more than a half-assed “win,” which defines ACA. The Public Option he ran on, but abandoned immediately on January 20, 2009 (if not before) would have been more than a half-assed win. And the “base” that got him elected? It would still be as energetic as ever. Now, after years of gratuitous dissing, not so much. I’m glad I don’t live in a swing state. My vote doesn’t matter in this political slough of despond, and he is certainly not going to get it this time.

    As for the 26-year-old thing, meh. While it is true that in some cases this is a very good thing, those cases are very few (e.g., Freeman’s example). All that did was provide free money to the insurance companies, since people in their early-mid 20s rarely have need of any expensive health care at all. And to get with the times, what good does that do my 27-year-old daughter who has gone back to graduate school? Umm, that would be nothing.

  8. “All that did was provide free money to the insurance companies, since people in their early-mid 20s rarely have need of any expensive health care at all.”

    That was the point of the mandate, too: If you’re forced to buy insurance, the insurance doesn’t have to be at a market rate, it can be too expensive, providing the insurance companies with a cash cow. But this wasn’t so much a favor to them, as a way to keep them from instantly going under due to the added expenses that were being imposed on them.

    As I’ve remarked before, it’s rather as though, instead of running soup kitchens, or providing food stamps, the government decided to order grocery stores to give food away free to poor people. And then mandated that people shop there, so that the stores could rip off everybody else enough to not go bankrupt under the load. The whole scheme is essentially just a way of moving a welfare program off budget, so that taxes wouldn’t have to be raised enough to pay for it. Instead the insurance companies would get the blame for raising their rates.

    Most transparent administration in history? Maybe, but not in quite the way they meant for us to think.

    1. Brett: If you’re forced to buy insurance, the insurance doesn’t have to be at a market rate, it can be too expensive, providing the insurance companies with a cash cow.

      This is false. This is why the PPACA instituted a minimum MLR, so that when insurance companies charge too much money, they have to pay the excess money back. This is where the rebates that Mark mentioned are coming from. MLR minimums require insurances to be within a certain percentage of the market rate.

  9. The obvious problem with the concept of “affordable care” is affordable for who? Although the AMA fiercely resisted Medicare/Medicaid legislation in 1965, its members were soon being rewarded handsomely for “charity” cases they once treated for nothing. However, the millions of federal tax dollars also had an unanticipated effect: by fertilizing the growth of high tech interventions they made Medicine more expensive and more effective: people began living longer, thus government, was soon an interested party; they had to “control” costs without calling it rationing. The Carter Administration tried (with little success) to limit expensive specialty units. In 1982, the Reagan administration changed insurance regulations to allow various “provider” organizations to bargain directly with hospitals and insurance companies. The ultimate result has been gridlock, but with insurance companies, in control of reimbursement and the unemployed/working poor excluded Since the medical Insurance Lobby frustrated Hilary Clinton in ’93, the Republicans have avoided the issue like the plague,but Cheney’s LVAD and donated heart do show the advantage of being well-heeled). That the Supreme Court may yet decide who has access to medical care (and survival) seems like an indicator that the American experiment with representative government is failing.

  10. On the comment thread on a related post, Don Taylor allows, “you can’t pick the other sides position.” I’m afraid you cannot pick either sides’s position. Fantasizing about Obama’s campaign messaging won’t change the reality of his policies or his politics.

    At its core, the political conflict over health care is like an industrial union’s negotiation with a federation of employers over wages and working conditions, but one where the union leaders are corrupt. It is more complicated, to be sure, since there are many more, and more diverse, interested parties. But, it is conflict, over the production and distribution of medical care and its benefits, which might be resolved in a positive-sum game, a zero-sum game, or a negative-sum game. (Is “negative-sum” an accepted term? I mean that it is possible that some parties would be strategically willing to make a deal, which reduces the total production/benefits available, in order to achieve a larger share for themselves.)

    It is generally true in the American economy, today, that the financial sector is forcing more and more of the economy into negative-sum territory. There’s no other way, really, for money to make money, without investment in real capital and durable goods. Usury and casino capitalism are the only options, for purely financial capital to “earn” a “return”. Our politics has settled into an equilibrium of rapid disinvestment. Disinvestment in public goods capital is particularly visible, as the infrastructure ages, and higher education becomes a passage to debt peonage, but private disinvestment has been a feature for some time, driven by globalization and financialization, as well as rapid technology progress (cum obsolescence) in computing and communications. One of the candidates for President made a highly profitable career as a vulture capitalist, aka private equity, investor. (And, some Democrats question whether it is relevant as a campaign issue — see Cory Booker)

    It would be a better country, if Romney represented the plutocracy, the 1%, and Obama represented the People, the 99%, in this “negotiation”. Alas, and alack, Obama also works for the corporate plutocracy — his Administration is thoroughly dominated by people with ties to the financial sector, and their policies have been very protective of the looting and the looters. That’s not to say that Obama is not better than Romney for the 99%; it is to say that Obama behaves as a man, who has to convince the 1%, that he’s better for them, for the 1%, in order to win office. That might entail policy being better for the 99%. An implicit part of Obama’s message has always been the counsel that there are limits, or should be limits in the long-run, to how far the 1% goes in exploiting and oppressing the 99%. Greed can go too far. Obama poses as the man standing between the 1% and the pitchforks, and he’s very clearly protecting the 1%, not the putative carriers of pitchforks.

    Both Presidential candidates, and the political parties they represent, are negotiating on behalf the corporate plutocracy — the 1%. The 99% are severely underrepresented in this negotiation. The differences between Obama and Romney are real enough, but they are differences of opinion among the corporate plutocracy and among the privileged elites that serve them.

    I happen to think Obama aims for a negative-sum game, but a less egregiously negative-sum game than Romney would. In his heart, he may wish that a positive-sum game was politically possible — I cannot see into his heart — but he acts as if he thinks mass organization of the electorate in opposition to the plutocrats is not feasible. Obama clearly understands politics way better than I do. He doesn’t think a full-throated populism can get him elected, and he’s almost certainly right. The structure of the Media and campaign finance, and the dearth of mass-membership organization among the 99%, make a successful populism an idle dream in the short-run. The allergy of Obama’s base among the bobos to either the real greens or to populist appeals to what used to be called the working classes, is a further handicap.

    The ACA may be an improvement on the whole, though the continuing rise in health-care costs, coupled with discouraging evidence on health-care outcomes (life expectancy and height might actually be declining! since the GFC), is itself an clear indicator that the game is continuing to move dynamically in a negative-sum direction. Those are simply the facts. Rallying mass support for the ACA, would lend a populist edge to Obama’s campaign that he’s been studiously avoiding since his first election. We can wish for a different course, but we should recognize the course we are on, for what it is.

    I doubt that a severely negative-sum game is a country I will much like. I don’t like it now. Numerous third-world countries demonstrate that such regimes can continue for long, long periods, so my inclination to anticipate instability may be idle, as well as perverse, wishfulness, for a more forceful “negotiation”. I expect Obama’s policies will eventually usher in a fascist regime, and good luck to the plutocrats in retaining their “wealth” (aka their financial claims to exploit the peons), then, though the powerless 99% may suffer what they must.

    1. Very cogent analysis, if you ignore what the discourse from both sides does ignore: ACA embodies a $200 per year billion downward redistribution of income. It’s obvious why the plutocrats hate it. It would require a psychiatrist to understand why the opponents of plutocracy insist on treating it as being mostly about health care finance rather than mostly about redistribution. You’re right that Team Obama seems to have decided that calling this particular spade a spade is bad politics. But that really shouldn’t prevent the Left from noticing the distributive impacts of the law.

      1. I truly wish I had your confidence that that will be true in actual operation and on net. There’s a lot of variables in motion, and many of them are moving in negative-sum territory, where even an improvement leaves a seriously dysfunctional and unfair deal eroding welfare as well as confidence in the integrity of the society and its governance.

        1. In other words, you refuse to believe that the President has done something good, even when the evidence is right there in the law. Have you asked yourself why you prefer to believe, and say, things that help Mitt Romney get elected? The main “variable in motion” is the attempt to overturn the law.

          1. “In other words, you refuse to believe that the President has done something good, even when the evidence is right there in the law”

            Emotional barriers to being able to acknowledge reality are not unique to the Birthers

  11. Mark, the Republicans are running against the mandate and plan to use it to win the next election (along with other things.) They will say they are going to replace the good stuff after the mandate is shot down.

    What they will actually do is try to kill the entire program, then proposes laws piecemeal which return some of the benefits the voters already have. But they will offer those bills with poison pills so that the Democrats have to vote against them.

    After that the Republicans will blame the Democrats for killing the “positive” aspects of the health care law and use that the win the 2014 elections.

    That’s the basic Republican health care program. Other than the Ryan budget, of course.

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