Now that the Supreme Court has held President Obamas Patient Protection and Affordable Care Act (ACA) constitutional, mounting evidence suggests that the statute’s most ardent defenders may well come to rue the day. During the legal struggles over the ACA, its defenders both on and off the Supreme Court took for granted the proposition that the law would deliver on its major promise, which was to extend affordable coverage to the over 47 million people who now lack healthcare insurance, without disrupting the protection that others currently enjoy.

Unfortunately, these bold pronouncements failed to take into account the old and powerful economic law of unintended consequences. Sometimes these are positive, which is why the selfish actions of ordinary individuals in competitive markets prove socially beneficial. Adam Smith said that each individual “is led by an invisible hand to promote an end which was no part of his intention.” But those unintended consequences often turn bad in connection with the many forms of government regulation that limit the scope of contractual freedom, which the ACA does in a big way.

The result may turn into an Obamacare quagmire. Public officials, at both the federal and the state level, are grappling with the Herculean task of implementing the law. Its internal complexity and flawed design make it a program that was built to fail. The most recent evidence of the ACA’s administrative breakdown comes via The New York Times in a story by Robert Pear—no enemy of Obamacare—who reports that the fine print of the ACA could leave the dependents of millions of low-income employees without coverage from either their employers or the ACA’s insurance exchanges.

Health insurance by administration

The ACA commands that employees who receive “affordable” healthcare from their employers—defined as care that costs less than 9.5 percent of income—are not eligible to participate in either the ACA’s state or federal insurance exchanges. As Pear notes, these exchanges operate as insurance “supermarkets” that allow prospective enrollees to compare the benefits of the various healthcare plans they will receive a large federal subsidy to buy. But that task is not as easy as it sounds. The devil lies in the details.

The statutory language requires an employer to offer proper healthcare to “its full-time employees (and their dependents)” in order to avoid the ACA’s penalties. The status of “dependents” under this ruling is unclear, and the IRS lawyers, in the Obama administration no less, have interpreted this provision to say that so long as the cost of coverage to the individual employee is below that 9.5 threshold, the employee is not eligible to seek out family coverage under the exchanges. The cost of covering dependents is ignored in making these calculations.

For 2011, a Kaiser Family Foundation study reports that the average plan for single coverage costs $5,430. That figure is nearly three times as large for family coverage—about $15,070. On average, the employee share for individual coverage was $920, but ran to $4,130 for family coverage. The $920 is about 2.62 percent of average earnings for a person whose family income is $35,000; the $4,310 is about 11.8 percent of that $35,000 figure. Under the IRS’s interpretation, someone in this situation is not eligible to purchase insurance on the exchanges, which is estimated to provide a subsidy of about $6,000 per person, which could cover the financial shortfall.

The IRS has already been bombarded with howls of protest, which may lead it to back off its position. But the consequences of that choice are controversial as well. The additional burdens could disrupt many health plans, both state and private, that supply only limited coverage, forcing the United States Treasury, which is already handling huge federal deficits, to pay extensive financial subsidies that could run to thousands of dollars per year per family to fill the gap.

As Pear reports elsewhere, these exchanges may not even be up and running by the estimated January 1, 2014 implementation date. At this point, only 13 states have signed up to establish the exchanges. Other states, many with Republican governors or legislatures, have signaled that they don’t want to enter into this business at all. The final count of federal exchanges won’t be known until after the November presidential election, adding further uncertainty to the issue, which is likely to be mired in litigation for years. No one can even begin to speculate on how this program will run in the event of a Romney/Ryan victory in November.

This complex set of circumstances puts the unenviable task of setting up these exchanges into the hands of the federal government. Without the benefit of any road map, legions of federal officials will be required to set rules for widely divergent market settings, all in the face of underground resistance from many state officials who would rather see the ACA repealed. To cloud matters even further, through a glitch in the ACA’s statutory language, it appears that individual enrollees in the federal plan are not eligible for the federal subsidy, which can only complicate the administration of the law.

The problem with state-created exchanges

A similar pall of confusion is cast over the state-created exchanges, albeit for different reasons. Most state insurance offices are smallish operations that tend to operate on an informal basis in collaboration with their own elected officials. They have no experience in running virtually all of their decisions through the Department of Health and Human Services and the other federal agencies that, by law, oversee their operations.

All state-created exchanges operate under federal oversight, which puts cooperative states in the impossible position of not being able to proceed until they receive federal guidance or approval for key steps. Yet that approval may be long in coming because federal officials, out of a commendable sense of prudence, don’t want to commit themselves to a decision for one state without knowing how it will play out with other state exchanges that have yet to address similar problems.

These logistical difficulties are especially hard to master because the ACA does not contemplate a set of garden-variety state exchanges where potential healthcare insurance providers can just show up to sell their wares. Given the ambition to provide not just coverage, but good coverage, extensive federal regulations specify the kinds of coverage that any health insurance carrier has to supply. The ACA lists a set of “essential healthcare benefits” that must be covered under its set of “metallic” plans (platinum, gold, silver, bronze) with their different levels of copay for those insured.

The act itself identifies the many areas in which this coverage must be supplied: ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance abuse disorder services, prescription drugs, rehabilitative and habilitative services and devices, laboratory services, preventive and wellness services, chronic disease management, and pediatric services.

The drafters of the statute showed as much restraint as the proverbial kid in a candy store. The elusive reference point for such generous coverage is the “typical employer plan” within the state, which, even if identified, may not offer some of the goods and services included in the essential benefits plan. The scope of coverages under each of these headings must be determined by regulations, which are apt to contain as many surprises as the IRS’s regulation on coverage. As Paula Stannard and I have written at great length, it is not possible to assess the budgetary implications of the act until the regulations are finally resolved. But one point is clear: The ACA cannot reduce costs by simultaneously increasing the level of coverage and the number of individuals covered

A rigged game

The situation is further complicated because the basic design of these plans is intended to create major cross-subsidies between user groups, which are enforced by the guaranteed issue and non-discrimination rules that apply to all health coverages on the exchanges. Those requirements mean that it is impossible for insurance companies to deny coverage to any applicant except on very narrow grounds that relate to oversubscription. One major threat to standard insurance coverage is that the insured has more information about his or her condition than the insurer. In traditional insurance law, the insurer was therefore entitled to require full disclosure about the relevant risk in order to price the coverage appropriately, or to decline it altogether.

As those options are stripped from insurers, they may well find that their costs turn prohibitive as prospective customers flock to those health insurers whom they think will supply them with the best coverage, only to withdraw when their medical needs are satisfied. But it is an open question whether the premiums that they will be permitted to collect will be sufficient to cover the risks. The only other remedy the ACA allows insurers is limited to recovery from rival healthcare insurers that face smaller risks, assuming that this could be administratively determined. Yet, even here, that solution risks spreading the total loss throughout the industry. It does nothing to stop reduce the aggregate financial burden.

To make matters worse, the current law stipulates that once the administrative expenses go above a government-set minimum threshold, usually 15 or 20 percent of total costs, the insurance companies must make refunds to the payers. But just who are the payers? In the first instance, they are often those who, under the complex statutory scheme, may not have to make the refunds to their employees. The upshot has been immense confusion especially because these employers may be entitled to credit these payments against future employee premiums, leaving those employees without a much-desired cash refund.

Why, one might ask, would any health insurer want to participate in a game that seems rigged against it from the outset? The explanations here are several, and none of them are particularly reassuring. The first point is that these carriers have received a huge windfall from the ACA, which may well funnel millions of new customers into their ranks, all of whom will have their payments fortified by the government. More business could spell more profits, at least in the short run.

Those guarantees, however, could easily prove hollow if the federal government clamps down on payments in their regulations. But, at this point, it is far from clear that this will happen. The federal government does not want, for starters, to set rates so low that it will drive the private plans out of business, especially before the statutory exchanges are up and running. Forcing individuals seeking care into Medicaid could bankrupt that program.

Faced with these unappetizing choices, the federal government has chosen to adopt a course of action that I have previously called, in a National Affairs article, “government by waiver.” Quite simply, the federal government has already told key plan operators—more Democratic than Republican, more labor than business—that they need not meet these requirements. These waivers have already been offered to more than 1,000 employers covering over three million employees. It could well be that the path of least resistance in these cases is to continue a waiver policy to avoid a massive institutional breakdown.

None of this should come as a surprise. The ACA was sold with a set of promises that were not sustainable. President Obama trumpeted his program with reassuring words in June 2009: “No matter how we reform health care, we will keep this promise: ... If you like your healthcare plan, you will be able to keep your healthcare plan. Period. No one will take it away. No matter what.” He has repeated that vow since. As David Hyman and I have shown, the ACA violates that promise in multiple ways.

The act’s potential disruptions are not just confined to people who are forced into the exchanges; it extends to all individuals regardless of how they procure their healthcare insurance. All that can be said with confidence is that, thus far, the ACA has not been able to defeat the law of unintended consequences. Whether this nation will be able to extricate itself from the Obamacare quagmire remains to be seen.