How healthcare will evolve – an optimistic take

We all know that even though we often analyze things as if other things are held constant (for simplicity), those other things will not, in fact, be constant. So, what are the dynamics likely to be? Tyler Cowen, assuming that the fines/penalties are sufficient to induce everyone (or most everyone) to be insured, has the following take:

Many Americans will receive subsidies for insurance, from what I understand roughly in the range of 6k to 12k.  Many other Americans — namely those who already have health insurance — will not receive direct subsidies of this nature.  Yet the subsidy-receiving and non-subsidy-receiving Americans will very often belong to the same income classes.

This is because some will be employer-insured (no subsidy) while others will be self-employed or employed by a small business and thus get a subsidy and use the insurance exchanges. He continues:

This disparity does not bother me personally (I have other worries about the subsidies), but I believe it will be very unpopular once it is publicly understood.  One way or another, the “firewall” between the exchanges and the employer-supplied system will break down.  Some people will want to spread the subsidies, others will want to limit them.  Yet the former is budgetarily problematic and the latter will be politically difficult.

Now, he continues to address the reality that we have three systems of healthcare:

A second and related issue is that the differences in reimbursement rates — across private insurance, Medicare and Medicaid (highest to lowest) — will become a more pressing issue.  For one thing, Medicaid patients will be crowded out by those buying private insurance on the exchanges, plus they will be crowded out by the growing number of Medicaid (and Medicare) patients.  There will be pressure to fix this problem and the difference in rates will lead to growing supplier gaming, queues, quality differentials, and so on.

Reimbursement rates are what insurance pays doctors. What he means when he says “Medicaid patients will be crowded out” is that since they have the lowest reimbursement rates, they will (on average and over time) have a harder time getting healthcare – longer waits, more distant appointment times. Some doctors will decline to accept Medicaid (some do already).

Over time, reimbursement rates across programs (insurance subsidies, Medicare, Medicaid) will converge to an increasing degree.  Subsidies will be increasingly determined by income class rather than previous insurance history.

In the limiting case (I’m not suggesting we will get there), everyone will receive means-tested subsidized vouchers for regulated private insurance.

I also think a limiting case could be one of government provided insurance – the “socialized medicine” everyone fears along the lines of the public school system. I prefer the vouchers.

In this strange way, Medicare and Medicaid could end up partially privatized and Ezekiel Emanuel — a voucher advocate — will end up being more influential than his brother Rahm.  We will have to live with the problems of means-testing to a higher degree than today, but we will have something closer to a unified system, as do most other countries with universal coverage.  There will be political pressure for compulsory health care savings, as they have in Singapore, to lower costs of finance.It would be good if such vouchers could evolve in the direction of emphasizing catastrophic care and eventually they will have to.

Massive pressure will be put on such vouchers if either health care consumes 30-40 percent of gdp or income inequality continues to rise.  In the former case, subsidies become increasingly expensive and involve extraordinarily high implicit marginal tax rates (earn more, your subsidy declines in value).  In the latter case, it becomes increasingly difficult to ensure “near-equal” levels of health care access at feasible subsidy levels.  Those pressure points are not unique to the Obama bill, but they become especially critical under the evolutionary scenario I am outlining.  Perhaps we would give up the ideal of near-equal access, but that day is a few decades away.

He mentions “high implicit marginal tax rates” which is the same thing I discuss here. The idea is that if you get a large subsidy due to your low income, if your income rises and you lose your subsidy, you could actually be worse off in terms of net benefit= (higher salary – subsidy you lost).  This effect is a disincentive to attempt to move up in terms of salary, job, etc.

I’ll post again on a scenario where the fines/mandates are not enough to induce the healthy to get insured and employers to provide healthcare. This scenario is less optimistic.

Health Care – Economic Implications

$800B of the $900B cost of the health care bill is subsidies – i.e. payments from the government to individuals or families to help pay for health care. This is necessary for the mandate part of the bill to be remotely feasible. Most people want health care, they simply can’t afford it, so fining them won’t help. They need subsidies to pay for expensive health care.

The problem is that subsidies cause higher spending on the thing subsidized as we all worry about the burden of higher health care costs. We’ve done nothing to lower costs, we’ve simply shifted them from the uninsured and underinsured to the government (i.e. all of us taxpayers who fund the government’s operations).

Remember Cash for Clunkers? How about the first time homeowners tax credit? Both are subsidies – the government handing out money to assist people in buying cars and houses. What was the goal? To increase purchases of cars and homes. So, we now subsidize health care without cost controls means we ease the pressure on doctors and hospitals to lower costs: the government is now helping all sorts of folks get health care. But this was the point, wasn’t it?

The problem is that by releasing this pressure, we will see costs rise again. Markets work like this: if prices rise, many people get priced out of the market, which causes demand to drop. This drop in demand means that less gets sold at those higher prices. Competition then rewards the innovator who can provide the same service for less – they get no only those who have exited the market due to higher costs, but will also get some switching who were paying more. Thus prices go down. This competition mechanism is what is broken in the current system – we only see the cost of healthcare via monthly or annual premiums, not each time we go to the doctor, so the cost-consumer link is separated by space and time. And this bill continues to separate them for those who are assisted by it:

The second part of the subsidies, estimated to cost $466 billion during the next decade, would limit out-of-pocket expenses for deductibles and co-payments. This help, for individuals with salaries of $27,000 and families with income of $55,000, would be significantly more generous than any version of the legislation Congress has considered.

What we now know is that 50 million uninsured and premiums at $10-12K per year (or whatever they are now) is a socio-political breaking point. The current legislation will provide subsidies to ease this tension by reducing that annual cost with subsidies and reducing the uninsured to about 20 million or so. But, what happens now? With no cap on the cost and no incentive with copayment or coinsurance to say ‘no’ to procedures, the cost of healthcare will continue to rise until the costs after subsidies are once again $10-12K per year and we again have 50 million uninsured, but now we’re spending billions each year, let’s say the subsidy is $8K per family, so now the total cost is $18-20K. What happens now? Those same folks are again priced out of the market, and Congress is forced to increase the subsidy. Or, perhaps, they do this:

One part of the subsidies would consist of tax credits to help Americans afford insurance premiums, guaranteeing that they would not spend more than a specific portion of their income for them, ranging from 3 percent to 9.5 percent.

Which guarantees that nobody is priced out of the market, but guarantees that as the costs continue to skyrocket, the government picks up the increase, year after year.

And then what? Remember, Medicare and Social Security are mandatory spending on entitlements, just like this health care bill. In 1965, they accounted for about 25% of federal expenditures, now they are around 55% of spending and growing. Defense spending? About 50% in 1965 and about 20% now.  All other spending has been basically flat.

The problem is that Medicare, Medicaid, Social Security, and now this Health Care entitlement are all mandatory (in that no politician will touch them), mostly tied to an aging baby boomer population, and highly linked to rapidly escalating health care costs. I do not see how this ends well for us as a country. If the debt markets start losing faith in the US and the interest we pay on our growing debt starts going up, this will go from ‘bad – we should do something’ to ‘terribly awful – our government may default on it’s debt’ really fast. Things like hyperinflation or a massive dollar devaluation (both basically the same thing) follow. We are not that different from Greece.

Politics and Politicians

There has been a lot of angst and anger amongst liberals and progressives following the defeat of Susan Crowley in the Massachusetts Senate race. It seems that the Health Care bill is now on its death bed. But that is not the topic today.

First, we start with Tyler Cowen, “A Simple Theory of Political Jobs“:

Political jobs would be torture for most people.  You have no freedom.  You are underpaid and over-bugged.  You lose a lot of your privacy.  You have to stop writing emails or saying what you think.  You don’t get to read many good books or go for many quiet walks.  It’s hard to be a non-conformist.  And so on.

Yet it’s really hard to get top political jobs.  So who gets them?  People who truly, deeply love the power.

Plus “doing what the voters want” very often feels like, or can be described as, “doing the right thing.”

I have a keen interest in politics and the idea that government, done well, can truly help. But I will never be a politician because of the environment described above. He didn’t even mention the bureaucratic junk you have to deal with every day.

I think regardless of how you slice it, you have politicians who care primarily about getting power, then staying in power. And herein lies the problem. Things like Health Care and Climate Change, in particular, are things that need to be addressed, but require short term pain in order to get the long term benefit. The Health Care bill the Dems tried to pass we a massive giveaway that was pretty transparent to all. Most liberal/progressives supported it on the grounds that the uninsured need help no matter what, conservatives and libertarians opposed it on the grounds (primarily) that it was vastly unaffordable in even the medium term. To pass health care reform, it will be necessary to reduce the amount and type of care we all get. The question is who will do it an how? The current bill doesn’t do that – or rather it claims to, but anyone looking at the recent past knows that the “medicare reform” was never going to happen because as soon as the AMA opposes it, congress backs down like they do every year with the medicare reimbursement reduction that they suspend annually. And “evidence-based medicine” was never going to fly either as we saw with the very simple case of mammograms. The fact is, Congress is not willing to stand in between a patient and their doctor.

We see a similar pattern in Climate Change. Until I hear a majority of congressmen saying “This bill will raise the price of energy – that is the whole point” I won’t really be paying all that much attention. There are lots of shenanigans about cap-and-trade, and “frameworks” for progress, etc. but right now, the vast majority of Americans are not willing to pay more for gasoline (for their cars or indirectly in the price of virtually everything we buy that is shipped via truck) to avert climate change. Until they are, this one isn’t going anywhere. The infrastructure for burning fossil fuels gives them such a huge head start on alternative energy that all the subsidies in the world are not going to help in the short to medium term. And so, I predict nothing will happen in the US for a while on climate change. Things will have to get a lot worse before that happens.

And you know what? This is, on the whole, good. I think the Democrats vastly overestimated their “mandate” when Obama was elected because there is no such thing as Blue/Red and all that stuff is really overblown. Many moderate locations (Congressional Districts and States) very slightly crossed from R to D in 2008 and the Dems threw a party. Well, the new folks weren’t that different from the old folks, they just had (D) after their name. They still represent the same set of people. And I think on Health Care, the majority of Americans are not willing to pay a ton of money for an incremental extending of care to uninsured – it was not the reform they wanted. And now congress responds.

What to do about health care? I like this from Megan McArdle:

Raise the Medicare tax by half a percentage point, and eliminate the tax-deductibiity of health insurance benefits for people making more than $150K a year in household income, $100K for singles.  Then make the federal government the insurer of last resort.  Any medical expenses more than 15% or 20% of household income, get picked up by Uncle Sam.

It is incremental change in the right direction, while reducing the life-dislocating problems of massive health care bills. Because it the federal insurance is a % of income and health care costs are not related to income (directly) it will disproportionately help low income folks who find themselves very ill. But the threshold is high enough that it won’t be too attractive to people to skip insurance altogether.

And so it goes…

Soundbites on why the current health care bill is not going to help

When you increase the demand for something without increasing the supply, you either get price increases, or shortages.

That is from Megan McArdle. Why? Because we are providing much more access to health care – a good thing by itself – without addressing any of the underlying issues. The Dean of the Harvard Medical School agrees:

In discussions with dozens of health-care leaders and economists, I find near unanimity of opinion that, whatever its shape, the final legislation that will emerge from Congress will markedly accelerate national health-care spending rather than restrain it. Likewise, nearly all agree that the legislation would do little or nothing to improve quality or change health-care’s dysfunctional delivery system.

A few excerpts:

As the dean of Harvard Medical School I am frequently asked to comment on the health-reform debate. I’d give it a failing grade.

…

Speeches and news reports can lead you to believe that proposed congressional legislation would tackle the problems of cost, access and quality. But that’s not true. The various bills do deal with access by expanding Medicaid and mandating subsidized insurance at substantial cost—and thus addresses an important social goal. However, there are no provisions to substantively control the growth of costs or raise the quality of care. So the overall effort will fail to qualify as reform.

…

In effect, while the legislation would enhance access to insurance, the trade-off would be an accelerated crisis of health-care costs and perpetuation of the current dysfunctional system—now with many more participants. This will make an eventual solution even more difficult.

 

Uh-oh. Evidence from Maine.

From the New York Times:

Maine is the Charlie Brown of health care. The state’s legislators have tried for decades to fix its system, but their efforts have always fallen short: health insurance premiums are still among the least affordable in the nation, health care spending per person is among the highest and hospital emergency rooms are among the most crowded. Indeed, many overhauls to the system have done little more than squeeze a balloon — solving one problem while worsening another.

…

To conservatives, Maine proves that government efforts to strictly regulate the nation’s health insurance market are doomed. Many of the reform proposals circulating on Capitol Hill have already been tried in Maine…To others, Maine’s failures show why some reforms can be tackled only on a national level.

I’m not sure I buy that. They are basically arguing that Maine, as a population, is too poor, old, and sick to control costs. So I guess what they are saying is that they need young, healthy people from elsewhere to pay for their healthcare as a state. I thought large populations were supposed to help with some of that. How skewed could the distribution be? It turns out, they’ve tried:

… the state is one of 17 that limit how much insurers can charge people for being older, and it does not allow exclusions for previous illnesses — both policies that are part of national reform proposals.

But one result is that premiums for younger people are relatively high. Although national proposals would require that nearly everyone get coverage or pay a penalty, Maine’s Legislature rejected such a mandate so many young people do not or cannot buy insurance — further skewing the insured pool to sicker and older people and making premiums that much higher.

The problem here, of course, will be that even if Congress enacts a penalty, it will have to almost as high as the cost of insurance. If the cost of insurance is $10,000 per year (not a crazy number) then fining people $1,000 per year for not having health insurance won’t work. If they are young and healthy, they’ll pay the $1,000 and save nine grand. Raise your hand if you think Congress will impose fines on the order of $10,000 on young, healthy people who don’t get insurance.

As I’ve been saying: If we bring the costs down, all of this becomes more doable.  Here is another fun quote:

To compensate for such expensive care, the state pays doctors and hospitals relatively skimpy fees for treating Medicaid patients. As a result, doctors are closing solo practices and joining hospitals, which then have the market power to jack up rates to private insurers in a common problem called cost-shifting.

yet, we conclude with this:

After years of studying and suffering from these trends, Mr. White, the mechanic from Bar Harbor, said he has concluded that Maine’s last best hope is a national health care overhaul.

What evidence do we have that something that we know doesn’t work at the state level will suddenly be better when it is enacted at the Federal level?

Meanwhile, Congress chugs along with a health care bill

Highly recommended article from David Leonhardt, Econonics correspondent at the NYT.

Since I’ve resigned myself that something like one of the two bills in Congress is going to pass, I hope it does something related to costs, like at least keep the “cadillac” tax in place to stop the maddening growth of tax-subsidized employer-based health care.

He seems optimistic about the Senate bill. I’m not, but it is better than the bill that just passed the House.

Left wing confessions on health care

This, I fear, is true.

The U.S. government is making a costly and open-ended commitment to help provide health coverage for the vast majority of its citizens. I support this commitment, and I think the federal government’s spending priorities should be altered to make it happen. But let’s not pretend that it isn’t a big deal, or that it will be self-financing, or that it will work out exactly as planned. It won’t.

The Obama Administration, like the Bush Administration before it (and many other Administrations before that) is creating a new entitlement program, which, once established, will be virtually impossible to rescind. At some point in the future, the fiscal consequences of the reform will have to be dealt with in a more meaningful way, but by then the principle of (near) universal coverage will be well established.

and this

expanding health-care coverage now and worrying later about its long-term consequences is an eminently defensible strategy.

Remember the results from Brookings: “Medicare, Social Security and Medicaid – along with interest on the debt threaten to crowd out all other spending in a few decades.” So, what we’re doing is accelerating this process, adding more government commitments with no ability to pay for them. The US already has the highest debt and still maintaining a AAA rating. The only two western countries with more debt (as a % of GDP) are Italy and Japan, both of which have AA ratings.

To put this in personal terms, we are close to getting our credit rating cut and what we are planning to do is vastly expand our spending with no real commitment to paying for it – we’re just going to borrow more and more. I know there is much talk about the moral obligation to provide health care, but we cannot afford to do it this way.

Here’s the thing: If we address costs, we address the current Medicare problem and make covering the uninsured affordable at the same time. We must address health care costs.

health care fatigue

So, I’m officially tired of talking about health care. I didn’t get much from Obama’s speech (except the tort reform, which Travis already mentioned – I agree with him on that). So, I think I have a few “scenarios” where I advocate a position:

1. Realistic but really long term. Also really different from anything really being considered now.

• Mandatory insurance with a very high deductible (minimum $10K) which covers minimum catastrophic care, including things like car accidents and results from car accidents, cancer, and other early-onset chronic diseases. The goal here is to cover the unlucky, either due to accident, genetics, or whatever. There may need to be a rescission clause or something, or at least a legal process which mandates care while proceedings continue (so someone can’t die waiting for their court date). I’ve intentionally left out community rating here because I don’t think it should be needed for this type of care, at least not yet. I may be convinced otherwise later.
• Healthcare Savings Accounts along the lines of a 401k. Money can only be withdrawn for qualified medical expenses, similar to the way they work now. Those below the poverty line get $10K per year put into this account by the government, and there could be a sliding scale of some sort after that – like from poverty to 200% of poverty get $7500, etc. or, better, just a  % of income (like a negative income tax).
• Free Annual Preventative Care – this could either just be free, or vouchers, or something. We know people won’t want to pay for it, so we can do this to make it as easy as possible.
• The HSA should rollover and hopefully be saved most years. There should be no caps on the amounts; employers may even want to contribute to it. The idea is that the HSA also serves the purpose of providing a large amount of cash for old-age. In fact, people should be encouraged to save money in their HSA for retirement medical costs. Then, Medicare can become more vanilla (i.e. provide basic needed senior care) and people can make their own choices about more advanced treatments.
• Insurance regulation at the state level should be removed. Any firm in any state can sell to anyone in any state.
• The tax deduction for employer based insurance should be removed. Probably phased out slowly so we don’t shock the system. An alternate, but less good option would be to simply give the same tax deduction to individuals so there is no longer an advantage to employer-provided care. This is necessary to decouple healthcare from employment.
• Somehow figure out a way to pay doctors a simple salary, not based on per-procedure. Medicare is a primary player driving this, so perhaps medicare simply starts reimbursing a flat fee per patient based on patient status plus some premium for any accidents or other “catastrophic” events for seniors. I’ve not fully thought this one out yet – more market forces may blow it up anyway, but right now with third party payment, it won’t go away without some major change in Medicare, I don’t think.

2. Realistic Short Term. I don’t think big-bang will work, so what I’m proposing above won’t work as one big bill; people will barf on it. We have to get there incrementally. So here is what I think we can do now:

• Create Healthcare Savings Accounts just like 401k accounts. Make them tax deductible, also. But they should be primarily in more liquid investments, not equities, because people may need it at any time and wouldn’t want to be forced to liquidate.
• Fund the HSA with some amount for those at or near poverty – the $10k above was for the deductible, but that’s not a bad place to start. This money could be used to buy “Medicaid Advantage Insurance” in the same way seniors augment Medicare.
• Eliminate the state supervision of insurance to create a national market. This will do more than the Public Option to create competition.
• Simultaneously reduce the employer tax credit and create/increase an individual tax credit together such that they move in equal and opposite directions. The idea is to equilibrate the tax incentives slowly.
• Increase the qualification level for Medicaid. My hope with my above plan is that Medicaid can be phased out, but in the meantime these are people who are most at risk.
• Expand Medicaid or Social Security to handle the “Uninsurable” who are currently uninsured but have a chronic disease.

As I’ve said, I’m more concerned with costs than the uninsured because if we only cover the uninsured without controlling the costs, then we have big budget problems. If we control the costs, many of the uninsured will now simply be able to afford insurance, and those that still can’t we can cover at lower cost. My basic belief is that the American public is not ready to totally reform one sixth of the US economy (I’ve heard that as an estimate of health care % of GDP) in one fell swoop. So whatever we do has to be incremental. I think my plan is somewhat modest and would help, though I admit it moves in almost the exact opposite direction as the current legislation.

Now, if I were a moderate Democrat or Republican (which I would be if I were in Congress – not sure what party, though), I may be able to back something with the Mandate-Guarateed Issue-Community Rating-Subsidy if the mandatory coverage were mostly catastrophic with a high deductible. I may have to come down to something like $3000, though, with HSAs. And in return, I’d want to even out the tax incentive problem and a national insurance market.

Al Franken at the State Fair

I post this video not so much for the content of the arguments, as to demonstrate the fact that reasonable people can disagree respectfully and engage this issue. I found this clip to be a welcome antidote to the continuing reports of town hall craziness. I should note that I’m not crazy about the title of the video; “angry mob” does not fairly characterize these folks.

Medicare and the Public Option

Medicare may be the crux of the whole health care debate in my view for a few reasons.

1. There is a large, voting group (those over 60 make up a disproportionately large percentage of voters – I don’t have the numbers in front of me) which has pretty limitless health coverage right now. It’s not means tested, and simply pays for whatever doctors prescribe. So it’s pretty popular. And expensive.

2. Those who claim that the Public Option will reduce costs have the burden of explaining why Medicare has not been able to or why they can’t use Medicare as it stands to do so. Medicare accounts for some 25-30% of most Hospital’s revenues. Surely they have some power to affect pricing. From Megan McArdle:

Much has been made of the government’s ability to batter down prices.  But in fact Congress has a history of passing health care cuts and then undoing them…There’s also the automatic cuts in physician reimbursement, which are ritually repealed in an annual kabuki ritual, because physicians say that they will stop taking Medicare, and/or voting for politicians who support the reimbursement cuts.

This is why I won’t let go of the costs. We can’t simply pass a bill that covers everyone because at the current cost level and given all the money spent already on bailouts and such, we will bankrupt ourselves.

But – the beauty of focusing on costs is that it leads to universal coverage. Many of the uninsured choose to be uninsured simply because it is too costly. If we can simply bring the cost down, they will voluntarily join up. I understand that won’t cover people with pre-existing conditions who are uninsurable in the current regime, but if we lower the costs for the healthy masses, it sure makes the higher costs of the fewer sick people more manageable.

Those who support a Public Option with a public mandate and community rating (no denying for pre-existing conditions) need to show how that lowers costs. Massachusetts costs went up faster than the national average. I don’t know about San Fran.