How health care might evolve beneficially (in my opinion)

1. Business mandates are not strong enough so more and more business drop health care coverage and more people are put on the exchanges. This weakens the employer-provided healthcare problem.

2. Individual mandates are not strong enough either, which means the young and healthy pay a fine instead of joining up.

3. This creates a large market of individuals who are potentially profitable customers. Insurance companies innovate by creating new types of less expensive plans to get them to join. This likely will happen first at the state level if a few states change insurance regulations such that minimal insurance is pretty minimal and individuals can choose their coverage. Currently, most states mandate large, expensive and comprehensive coverage. If those states allow that innovation and see prices drop with more customer satisfaction, we’re in business.

4. I imagine this innovation only works if people voluntarily submit to health screening which means those who don’t get screened are assumed to be sick and pay higher prices.

5. Guaranteed Issue (where insurance companies cannot deny coverage) starts to be more expensive, perhaps the answer is more subsidies or a government backstop for the sickest (i.e. those who refuse to be evaluated). If it is subsidies, they are likely never enough and this group continues to pay a lot for health care. If a government plan, it is less expensive/free but not very good, along the lines of public education.

6. Those currently healthy don’t want to get stuck paying huge claims when they are sick (or in a government program) so they opt for something like health-status insurance which pays the difference in premium for comparable coverage in the event of a major health status change (i.e. you get cancer).

The key step is 3. If insurance companies lobby government for higher fines or more subsidies instead of innovating and creating new insurance products to win customers, then we head toward socialized medicine. This is also true if the government continues to mandate thorough, comprehensive coverage as a baseline, which is common now.

And I’m not sure there is a good outcome here for people who are currently low income and quite sick. I think they get a baseline of affordable coverage but again, the metaphor would be the type of education low income kids get at public schools – and this to me will be the case regardless of whether the larger market becomes more private or more public.

mandates again

Everyone who advocated for coverage of everyone with no regard to pre-existing conditions always included an individual mandate. I’ve blogged on this before, but can’t find it now. The idea is that if you don’t allow an insurance company to charge people different rates for varying health conditions, you must have the whole population in the insurance pool to keep the average cost down. This is because the healthy, who are by definition charged more to pay for the sick, won’t do it otherwise. So keeping them insured and paying premiums is vital to keeping costs from ballooning. More on that effect here.

So, the efficacy of mandates is quite important. Of primary importance is the individual mandate – this is getting the young and healthy individuals who are not currently insured into the pool. Austin Frakt has done some in depth analysis and thinks the mandates are sufficient. I hope he’s right because if not, this thing is going to come apart fast. He compares the mandates to Massachusetts where they seem to be effective (in the sense that north of 97% of the population has insurance and people are not gaming the system).

Tyler Cowen rightly brings up the enforcement issue – i.e. how will it be enforced. It seems that it will be tied to your tax return, but will not have the same collection mechanisms (i.e. wage garnishments, interest payments, etc.) as tax payments. That seems pretty strong. Then, finally, there is the cultural issue – i.e. does skipping the mandate somehow become a cultural norm (i.e. ‘cool’) or does it become looked down upon. The mandate is strong enough, that if there is cultural pressure as well, then it might just work.

Now, even this is no paradise. Massachusetts, even with it’s mandates “working” has seen it’s health care costs rise faster than the national average since it’s reform packages was passed.

Now, the business mandate is another story. It seems totally inadequate, according to John Cassidy:

Take a medium-sized firm that employs a hundred people earning $40,000 each—a private security firm based in Atlanta, say—and currently offers them health-care insurance worth $10,000 a year, of which the employees pay $2,500. This employer’s annual health-care costs are $750,000 (a hundred times $7,500). In the reformed system, the firm’s workers, if they didn’t have insurance, would be eligible for generous subsidies to buy private insurance. For example, a married forty-year-old security guard whose wife stayed home to raise two kids could enroll in a non-group plan for less than $1,400 a year, according to the Kaiser Health Reform Subsidy Calculator. (The subsidy from the government would be $8,058.)

In a situation like this, the firm has a strong financial incentive to junk its group coverage and dump its workers onto the taxpayer-subsidized plan. Under the new law, firms with more than fifty workers that don’t offer coverage would have to pay an annual fine of $2,000 for every worker they employ, excepting the first thirty. In this case, the security firm would incur a fine of $140,000 (seventy times two), but it would save $610,000 a year on health-care costs. If you owned this firm, what would you do? Unless you are unusually public spirited, you would take advantage of the free money that the government is giving out. Since your employees would see their own health-care contributions fall by more than $1,100 a year, or almost half, they would be unlikely to complain. And even if they did, you would be saving so much money you afford to buy their agreement with a pay raise of, say, $2,000 a year, and still come out well ahead.

Now, this could also be a feature, not a bug. Basically, what this means is that for most firms, starting with the smallest, will have pretty strong economic incentives to drop their health coverage and put people on the exchanges. What this does is create an individual market for health care insurance. Since, the employer-based care was one of the biggest problems with the system, this could be a pathway out.

The evolution of health care: a less optimistic take

By Bryan Caplan. His concern is with problems around fines and mandates, and his source is the 7 page summary document put forth by the White House.

Issue 1: “Immediate Access to Insurance for Uninsured Individuals with a Pre‐Existing Condition.” Most see this as a benefit, but it may not be so. If insurance companies cannot use your health information to set premiums, then rates go up for everyone. Imagine if the car insurance company was not allowed to pull your driving record to set your car insurance rates. They’d have assume you were an average-to-bad driver (health) and charge you accordingly. Then what? Since the good drivers (health people) are overcharged, they are the most likely to try to go without (they are, after all, good drivers). So, the healthy opt to pay the fines. That means the average population seeking insurance are actually more sick the the population at large. As the insurance company figures this out, they charge higher premiums. Now, the moderately healthy are getting a bad deal, so they opt out and pay the fine. Repeat. This is a classic adverse selection problem which people claim was present in the insurance industry, but it is only present when you cannot (or are forbidden to) determine the actual health of the insured (or driving ability of the driver). Note that while the coverage is mandated in 2010, the fines for not buying health insurance don’t arrive until 2014. So, the healthy are actually incentivized to skip insurance now (too expensive), pay no fine, and once/if  they get sick, and then get it, since they can’t be denied.

Issue 2: The fines are not high enough. The bill:

Requires most individuals to obtain acceptable health insurance coverage or pay a penalty of $95 for 2014, $325 for 2015, $695 for 2016 (or, up to 2.5 percent of income in 2016), up to a cap of the national average bronze plan premium. Families will pay half the amount for children, up to a cap of up to a cap of $2,250 per family. After 2016, dollar amounts are indexed. If affordable coverage is not available to an individual, they will not be penalized.

I guess we’ll see if these fines are enough. I’m guessing that $95 per year is not likely going to do much. 2.5% of income sounds closer, but it depends on how much the alternative costs – i.e. how much health care costs (even with the subsidies).

Issue 3 I let Bryan take:

3. While new regs penalize firms that don’t offer insurance, the penalty seems to asymptote to $2000/employee:

Requires employers with 50 or more employees who do not offer coverage to their employees to pay $2,000 annually for each full‐time employee over the first 30 as long as one of their employees receives a tax credit. Precludes waiting periods over 90 days. Requires employers who offer coverage but whose employees receive tax credits to pay $3,000 for each worker receiving a tax credit up to an aggregate cap of $2000 per full‐time employee.

I have a feeling that post-recession jobs are going to be a lot less likely to offer health insurance.

Remember, employers don’t get subsidies. So, assuming annual premiums costs something like $12,000 for a business to provide, even with the tax deduction, I don’t think it will compare with paying a $2,000 fine for not providing it. Now, I doubt large businesses will opt out en masse, but I do expect firms in the 50-500 employee range to seriously consider simply dropping coverage and paying the fine.

Finally, issue 4:

4. The “Cadillac tax” doesn’t kick in until 2018.  But given the regulation-induced adverse selection problem, plus many other provisions to hobble discount insurance, I wouldn’t be surprised if half of the insured ended up paying it:

based on this from the White House doc:

Tax is on the cost of coverage in excess of $27,500 (family coverage) and $10,200 (single coverage), increased to $30,950 (family) and $11,850 (single) for retirees and employees in high risk professions. The dollar thresholds are indexed with inflation…

The key thing is that the tax is indexed to inflation but health care costs have been rising much, much faster than inflation. Inflation is typically 2% per year, health care costs have been rising at close to 10% per year (loose estimate. A lot more than 2%). Either way, what this means is that more and more plans will be considered “Cadillac” plans and be taxed even as these “Cadillac” plans become the average coverage most Americans use.

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.

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?

Baby denied insurance for being “obese”

This is a couple weeks old, but worth keeping in mind. I know the horror stories abound on all sides of any issue, but still.

Alex Lange is a chubby, dimpled, healthy and happy 4-month-old. But in the cold, calculating numbered charts of insurance companies, he is fat. That’s why he is being turned down for health insurance. And that’s why he is a weighty symbol of a problem in the health care reform debate.

Insurance companies can turn down people with pre-existing conditions who aren’t covered in a group health care plan. Alex’s pre-existing condition — “obesity” — makes him a financial risk. Health insurance reform measures are trying to do away with such denials that come from a process called “underwriting.”

“If health care reform occurs, underwriting will go away. We do it because everybody else in the industry does it,” said Dr. Doug Speedie, medical director at Rocky Mountain Health Plans, the company that turned down Alex.

The good news is the insurance company in question did amend their policies after this story got national attention.

Medical malpractice reform

One of the more conciliatory overtures (alternated between more partisan sniping) the president made in his address to Congress was on the topic of medical malpractice tort reform.

I don’t believe malpractice reform is a silver bullet, but I have talked to enough doctors to know that defensive medicine may be contributing to unnecessary costs. So I am proposing that we move forward on a range of ideas about how to put patient safety first and let doctors focus on practicing medicine. I know that the Bush administration considered authorizing demonstration projects in individual states to test these issues. It’s a good idea, and I am directing my secretary of health and human services to move forward on this initiative today.

Whether this is will amount to anything is, of course, an open question. But I think the president is genuinely interested in pursuing malpractice reform as a compromise. Mainly because he’s a pragmatist and, well, it makes sense.

Because part of the reason victims of malpractice are awarded sums of money that can be catastrophic for physicians (thus leading physicians to practice defensive medicine and carry large amounts of insurance) is not just for the suffering they’ve experienced. It’s to pay for the increased medical costs they may face in the future, for the rest of their lives. If medical care is more affordable and accessible, that rationale for extremely large monetary awards dries up.

That doesn’t mean there isn’t a place for punitive damages or recompense for suffering. There is. But some kind of cap on those damages should be much more palatable in a society wherein a malpractice-related injury or illness doesn’t price you out of the insurance market, or make you uninsurable, thus putting you on the hook for potentially millions of dollars in medical bills for the forseeable future.

setting the stage for Obama’s talk next week

So, what will the next phase of the Health Care debate look like? Megan McArdle breaks it down:

At this point, all the remaining items on the table:  mandate, guaranteed issue, community rating, subsidies–are pretty much a package deal.  If you take out the mandate, guaranteed issue and community rating will make insurance very expensive, driving all but the very sick, and relatively affluent, out of the market.  If you take out guaranteed issue, the mandate is nonsensical.  Take out community rating, and you lose the main point, which is to have young healthy people pool their premiums with those of the old and sick.  And if you lose the subsidies, you will be in effect commanding people to buy something they can’t afford.

We’ve not discussed the current legislation on the table, so I’ll break down some of the terms:

Mandate: pretty obvious, the requirement that everyone purchase health insurance. This is to get the young healthy to participate to help subsidize the older and sicker.

Community Rating: This is what makes insurance companies treat everyone the same, i.e. can’t charge different premiums to people who are sick.

Guaranteed Issue: This means that if a person wants to purchase insurance, the insurance company has to sell to them.

Subsidies: This means the government will give money to lower/middle class folks who can’t afford the cost of health insurance.

I’m also quite interested to see what Obama has to say next week. The joint session of Congress is pretty rare (GWB and WJC only used it twice each in 8 years) and so everyone will be watching.

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.

RomneyCare?

From this CNN article:

“Seven in 10 people in the state support the program, and no more than one in 10 would repeal it.” said Robert Blendon with the Harvard University School of Public Health.

Unlike Democratic proposals that would give Americans the choice of joining a government-run health care plan, Massachusetts has no public option. Instead, people in the state are required to buy private insurance, and the poor get subsidies.

…

And under the 2006 legislation, there are several requirements for insurance companies.

According to Brian Rosman of Health Care for All, a nonprofit based in Massachusetts, the requirements include:

Minimum benefits, such as preventive care, mental health care and hospitalization

A ban on gender discrimination

Limits on total out-of-pocket costs

A prohibition on pre-existing conditions as a qualifier for health coverage

No medical underwriting, so insurers can’t ask an individual about his or her health status in order to determine coverage

Limits on age restrictions, which means what is charged for an older individual cannot be more than double what is charged the youngest.

Analysts say “Romney care” is basically “Obama care” minus the public option.