The Democrats and the Republicans are in a stalemate over the proposed Obamacare- Barack Obama’s health care reform. The Republicans oppose it wholeheartedly and want Obama to kill his biggest achievement (apparently). As the deadline for the Budget approached, they scaled down their demand that Obamacare should be delayed for a year, earlier asking to defund it. Obamacare essentially aims at universal coverage in the U.S. like in some of the European economies and mandates individuals to buy health insurance or pay a fine .With everyone on Capitol Hill blaming everyone else, U.S. is yet again on the edge of a fiscal cliff. Unable to pass a unanimous resolution on the budget led to the imminent shutdown of the America’s government. The Republicans are recklessly using the debt ceiling as a bargaining chip to repeal Obama’s health care reform. The Democrats say Obamacare marks the beginning of a new era for health care and makes it affordable for all. The Republicans accuse it of bringing unaffordable, socialized medicine.
October 17 is the day the US Treasury Department expects to exhaust its measures to keep paying the country’s bills though the officials in Washington and the traders on Wall Street have a second direr deadline: November 1st. Before getting into the catastrophic details of what the consequences of debt default can be and whether it will be an encore of the demise of Lehman, let’s look closely at what exactly Obamacare has to offer and why the Republicans are so vehemently opposing it.
Obamacare is loosely based on a health reform in Massachusetts passed by the state’s then governor Mitt Romney-Romneycare. Some regarded it as a success as only 4% of the state’s residents did not have an insurance last year. America spends almost 18% of its GDP on health care. The U.S. insurance companies charged high rates from the people who were already ill or refused to cover them at all. If the companies are barred from doing so, due to adverse selection the healthy will drop out as they would be facing a high price and funding the sick, partially. This would make coverage unaffordable without vast subsidies and the insurance companies would go bust. So, the two rules go together: mandate for individuals to buy insurance and insurance firms barred from charging more from those who are already ill. The law includes subsidies to help people with low incomes comply with the mandate. The US health industry is dominated by mergers: there were more than 200 mergers in 2011 and 2012. Also the present way of doing business is that the more services the doctors provide, whether medically necessary or not, the more they are paid by the hospitals. Charges are astoundingly high- replacing a hip in America costs more than three times what it does in Britain. Obamacare is an attempt to address these issues. It includes experiments to pay hospitals for providing effective care rather than lots of it. The Congressional Budget Office projected that the Obamacare will lower both future deficits and Medicare spending.
The Republicans are cynical about whether Obamacare would be able to meet its targets. They feel that it will drain the public finances and as History suggests, such entitlements, once granted, are politically impossible to take away. They argue that Obamacare is bound to fail. There is a risk that young and healthy people will not sign up. The penalty proposed for not buying insurance-$95 or 1% of income, whichever is greater-is barely a slap on the wrist. So if healthy people don’t buy insurance in 2014, the pool of ill people insured will be expensive. This would encourage the insurance companies to raise the price, leading to an even more skewed distribution of the people buying insurance. This will push prices further. Such a spiral could doom Obamacare.
If the Democrats concede to the demands of the Republicans (which has a probability of almost zero point zilch if someone called Obama is still in the White House), it will condemn America to chronic uncertainty. The precedent set by the Republicans is a threat to the politics in the US and makes it ungovernable. Now, what might happen if America’s debt ceiling is not raised on time? Remember that failure to raise the debt ceiling will stop US from borrowing more to pay for old spending. It can still borrow to finance its new spending. America enjoys the privilege of printing the world’s reserve currency. Making the US government securities the safest haven to the extent they are used as collateral. This makes borrowing easy and cheap for the Americans. So unless the two parties can work together, America will soon be unable to pay its bills. It will have to choose which of the obligations not to honor. This would slash spending so deeply that it might just trigger the next recession. Or of course it could default on its debt which would have even worse impact on the financial markets world over.
What needs to be done? In the short term, House Republicans need to get their priorities straight. They should pass a clean budget resolution and find a better way to keep on fighting the old battle over Obamacare. Can the consequences of a failed Obamacare be worse than the catastrophic consequences of a US debt default? It is time for less cliff hanging, and more common sense.