How do you spell “R-E-F-O-R-M”?
Filed Under Big Ideas, Domestic Politics, Economics, Health, In the News, Jeremy, Uncategorized
On Saturday night the House of Representative passed the “Affordable Health Care for American Act” with a vote of 220-215. The following is a review of this bill (based on this summary) is taken from the prospective of how successful it is at addressing the issue of reducing the cost of health services, and thus, insurance premiums paid by Americans. I focus on this aspect because it is the “more central” and less “subjective” of the two key issues in the debate with the other being the provision of insurance to more Americans (the latter could more easily be achieved if the former was accomplished). In this bill there are good, bad and ugly “reforms” towards accomplishing this goal. It should be noted that in the introductory text of this summary, it declares the bill’s of bring insurance to 96% of the American population and the fact that it costs less than $900 Billion (some estimates of the bill actually passed put this at more than $1 Trillion) but says nothing about its success at reducing health care costs.
The Good:
Ending Anti-trust Exemption for Health and Medical Malpractice Insurers: Anytime a government grants an industry monopoly powers or exempts them from anti-competition rules, the prices in that industry WILL increase to some degree, without question. While there may be debates as to how much those prices will increase, the nature of these two particular industries leads one to expect rather inelastic demand curves resulting in rather larger price mark-ups so revoking the monopoly status should bring about large price declines. One factor, however, that could make this a “bad” reform is that most insurance regulations occur at the state level and it is possible that this reform could create a case of uncertainty regarding who is the regulator in charge of these insurance industries. Some argue that this problem helped facilitate the recent financial collapse by creating uncertainty between bank, insurance and investment regulators as to who was responsible for regulating resulting in little to no regulation at all.
Improvements in Medicare: While this could easily fall into the bad category, depending on how it is accomplished, the Part D coverage seems rather cumbersome and needlessly complex. Something a little more streamlined and simplistic could bring about some cost savings. Additionally, what MUST be part of this reform when it is carried out is allowing Medicare to negotiate drug prices rather than explicitly outlawing this practice as the current law does. Without this part of the reform, Medicare continues to be at the mercy of pharmaceutical companies who can easily pass on to Medicare the costs to cover discounts given to other insurance providers. Additionally, changing how Medicare, in general, pays for services might also bring down costs given that the current system encourages doctors to focus on quantity rather than quality and gives hospitals the incentive to classify all patients under more costly classifications so as to maximize their profits and minimize potential loses (of course these are issues with Parts A and B). It seems odd to me that insurance companies can set up pay systems that minimize waste while maximizing their profits, but the government can not (keep this in mind with regards to the public option).
Medicare Advantage: The Medicare Advantage idea is a good one; allow consumers who want more coverage than offered by Medicare Parts A and B to purchase insurance from a private provider and have the government pay the private insurer some amount to cover what Medicare would have paid so as make sure the consumer is not “paying twice” for medical services (once through foregone Medicare benefits and again through insurance premiums). The actual implementation of this problem, however, has been a resounding failure as private insurers game the system (as they should; they are in it to make money after all) resulting in huge over payments by the government. The original Medicare Advantage program planned to pay 95% of the average Medicare patent’s costs to the insurer; the actually payments are upwards of 120%. This results in something close to a “free lunch” for the providers and, indirectly, to those that choose to utilize the Medicare Advantage program. Bringing this waste under control will go a long way in helping a rather good policy idea remain financially feasible and lowering government’s costs of providing health care.
The Bad:
Individual Mandates: [This probably should be a "good" but could not bring myself to do it]. The bill also requires that everyone be covered by some source of insurance or else pay a penalty equal to 2.5% of their modified adjusted gross income (AGI). While mandates will lower the efficiency of the market by forcing people to purchase a policy even if they feel that they would be better served without one, there is an argument to be made that forcing everyone to have some type of coverage does lower costs (by spreading them out) and provides a positive externalize to others either through a lower probability of spreading illnesses or limiting the amount of cost sharing that hospitals must engage in to cover losses from those receiving care who are not covered. Additionally, mandates can work without creating huge market inefficiencies and a destruction of the economy…after all we must have auto insurance in order to drive and you see lots of competition in the auto market with few calls to regulate it (except maybe the desire to see a no-holds-bared fight between the Progressive lady and the Gecko….my money is on the reptile).
Health Insurance Exchange: The idea here is to create a “clearinghouse” for insurance packages where consumers can shop for the best rates that fit their insurance preferences (think a Progressive Insurance type site for health care). On its face, this is a great idea, it allows consumers to have full information which, as we show in economics, leads to lower prices and better quality. So why is this program in the “bad” section? A provision found latter in the bill creates an Advisory Committee made up of “health care experts” and chaired by the Surgeon General (finally given him/her something to do) that would create an “essential benefits package” that would act as a minimal package for an insurer to provide before being included in the exchange. The problem with this is that we have just ruled out an entire class of policies that people who believe themselves to be rather healthy and in need of little to no insurance would likely demand. How do I know that these next-to-nothing policies would be below the “essential benefits package”? I don’t, however it seems a safe bet given the makeup of the panel defining this basic package. This means that these people will either not purchase insurance, do so with limited information and thus higher than necessary prices (because they can not use the exchange) or be forced to buy a policy that provides them with more coverage than they truly demand.
Caps on Spending: There are two different proposals here; first is the cap on out-of-pocket spending being set at $5,000 for individuals and $10,000 for family and the second is the removal of lifetime caps on coverage. The caps on out-of-pocket costs are a bad idea because these should be set in the individual policies just like deductibles are set in auto and home policies. If you want a smaller deductible on your car insurance (or smaller out-of-pocket limit in health care), then you purchase that for a higher price. The larger out-of-pocket expense you are willing to pay, the less your policy costs. Again, this allows the consumer to purchase a policy that best fits their expectations about the future and thus not force less risk adverse and rather healthy people to pay large premiums to cover less healthy individuals. Might some individual expectations about the future be wrong; yes, but that is why we allow bankruptcies. The latter reform is not really such a bad idea except for the fact that it passes uncertainty costs on to others via higher premiums. Currently the insurers can set ceilings on their coverage (just like your life and auto insurance does) giving them a means to calculate the most they will loose if the policy is fully “cashed in.” I know there are people who max out their lifetime limits (even a few who have done so and are not even three years of age yet!), however if the goal is to lower costs, then these caps are necessary. Additionally, if people do not want these caps, then they should be willing to pay more for the policy.
Expanding Medicaid: Given that many States are strapped for cash, it seems like a bad idea to force them to increase their Medicaid coverage further. Yes, the federal government says it will pay the bill until 2015 when State funding phases in, however, given that the federal government is creating an entire “public option” in this bill, why not let these newly eligible consumers buy into the federal plan or have the federal government provide subsidies to allow them to purchase private insurance rather than pass the buck onto States. If States want to increase coverage or eligibility, great, but the idea of health care reform is to lower costs in general, not lower the federal government’s costs by passing them onto States. This is even more bothersome given that the bill does off such subsidies, however the only start at the 150% of the federal poverty level income which is the new cutoff for Medicaid eligibility.
Focus on Prevention: There is a section with reforms that “encourages prevention, wellness and public health” which, if they lives up to their billing, would help lower costs via a decrease in the demand for services. That said, the wording in the bill summary seem quite vague leading one to believe that this is just as likely the equivalent of a blank check for pork projects. As for the data collection clause, keep in mind that there is a large Medicare database outlining every patent’s care and doctor’s performance that is locked away from researchers behind a door heavily guarded by the AMA to “protect doctor/patient privacy.” How about letting us researchers into that room and do what we do best; analyze the data and offer some real, tangible suggestions to improvement the system and really lower costs?
Expanded Employer Mandate: The bill expands the employer mandate to offer coverage to any business with a payroll above $500,000 with companies having a payroll over $750,000 forced to pay an 8% penalty if they fail to offer coverage. My problem with this is NOT a “lets all help small business” argument because I am unsure as to where a “small” business ends and a “medium” business begins (a payroll of one half a million dollars seems awfully medium to me), but rather the argument that we already have an issue with job-lock in this country due to medical coverage being tied to employment. I understand that there are advantages to this (spreading out fixed costs and larger risk pools), but a lack of mobility in the labor market causes wages to stagnate and there is some evidence supporting this claim and its connection to employer provided health insurance.
The Ugly:
The Public Option: It seems odd to me that we want to encourage competition by allowing the government to enter the market. By its very nature, the government has advantages that other firms do not (for example, will the public option be tax exempt?) and these advantages tend to make government provision more attractive. The two biggest advantages are the ability to tax and the lack of a profit motivation. If a private plan wishes to increase the quality or reach of its product, it must raise its price to all buyers and face the fact that some may not renew their policy (i.e. pay the higher premium). The government does not have to worry about this because a citizen can not escape paying taxes (many have tried, however, but even Swiss bank accounts are not safe anymore). Additionally, the public sector is not motivated by profit in that confidence in the public sector is a factor of government stability and NOT the ability to produce normal returns on investments. The concern with the no profit motivation is discussed in the next point in more detail. With regards to using the ability to tax as a means of subsidizing the public option, the bill states “it will be self-sustaining.” Unfortunately this claim looses creditability later in the bill where it states that “the government is responsible for ensuring that every American can afford quality health insurance.” These two statements seem to be at odds with one another, especially if the equilibrium price of coverage is higher than most Americans can afford (or want to pay). There is also a logical inconsistency with the claim that government will “compete on a level playing field” in that to encourage competition the government option must be able to undercut the prices charged by private insurers, at least to some point, or else the public option becomes an irrelevant alternative. While the government may be able to initially undercut current plans without resorting to tax subsides (remember that monopoly protection thing under the good section above), it seems that firms will quickly eat away this advantage. Once the playing field is “level” at the market price for insurance, what if this price is still not enough to ensure affordable coverage for all Americans? Will the government be content with saying, “Hey, we tried?” Likely not as Congressmen, Senators and Presidents hunt for votes on promises of using the size of the government plan to bring down prices….thus putting all private plans at a disadvantage. So why not rid of the anti-trust protection (which should lower costs rather quickly and spur competition) and see how the unfettered market hashes it out first and then consider other alternatives to spur additional competition if needed. On a side note, there are several other government agencies that were proposed as self-sustaining…Social Security, Medicare, U.S. Postal Service and Amtrak just to name a few.
Forced Profit Controls: With regards to profits, the bill includes a provision that will force the medical loss ratio to be no lower than 85% for private companies; a measure that is equivalent to a profits tax on insurance firms. The medical loss ratio is the ratio of actual medical payouts to premium revenues and is used as a measure of a company’s profitability and efficiency. Currently a “healthy” firm has a medical loss ration of about 75%. One example cited in the above link defining medical loss ratios is where a company increased their loss ratio from just under 75% to just over 79% and their stock price dropped by 20%. If the public option is going to create so much great competition, then why is this provision needed at all since competition will drive the loss ratio up to the whatever the market will sustain (i.e. where the firms can still make normal profits)…that is what competition does! Additionally, will the public option also adhere to this loss ratio? In other words, will it allow itself to make a profit? If not, then the playing field is no longer level, but rather shifted in the government’s favor. Private companies must turn in profits in order ensure investors that they are a viable company (note that the medical loss ratio does not account for administrative costs). Without profits and investor confidence, a private company either goes bankrupt or the way of GM or AIG…government ownership.
Forcing Companies to Insure Anyone: Must of the remaining provisions in the reform regulate how insurance companies can choose their clients and how they determine the prices for their policies. There are two key elements of these regulations that tend to fly in the face of the lowering costs argument. The first is the elimination of the preexisting condition restriction. While I understand the “fairness” of this regulation, it will raise the cost of insurance, not reduce it! Additionally, we already live with variations of the preexisting conditions clause as it exists in almost all other insurance markets in some form. With auto or homeowners insurance, you are going to face higher rates the more claims you have and, if you have enough claims, you will likely find it very difficult to purchase insurance at all. With life insurance, if you smoke and base jump you are going to pay higher rates or even have your policy dropped. The preexisting condition clause exists because private insurance companies are in business to make money, not to pay my hospital bills for me. As a way of protecting their profitability they want to make sure they limit the risk just as you or I try to limit our risk by buying insurance to begin with. Firms need to know the risk they are facing by using as much information as possible about the consumer to determine what kind of person the consumer is (thus trying to solve the asymmetric information problem which leads to higher prices) and how likely they are to file a claim. One way to do this is to consider the past of the patient which includes preexisting conditions. The House’s bill also prohibits companies from consider a whole range of consumer information by banning them from “charge[ing] higher rates due to health status, gender, or other factors.” If only we had the same protection in the auto insurance market! Premiums, according to this reform, can only differ based on age, geography and family size; three very uninformative indicators as to whether a person is a high or low risk to insure. This regulation in and of itself could quite likely lead to the demise of the private health insurance industry and the absolute need for a public option.
In summary
While there are many other aspects of this bill that could be addressed, it seems that most of the remaining proposals are either fluff (various subsidies, grants, and other empty comments about providing for better workforce training) or are purely political aspects with little to do with real health care cost controls or insurance reform (such as the amendment banning insurance of abortions). Also note that this is only based on the summary of the bill as the actual bill is over 2,000 pages in length. Given that disclaimer, do I think this bill will limit the costs of health care? I am inclined to say NO. While there are attractive features of the bill that may accomplish lowering costs, there are also several aspects of the bill which will do just the opposite. Will the bill increase access to health care insurance to more Americans? Likely YES, although that may end up coming along with higher premiums or a collapse to a single-payer, government ran system. The real fault of this legislation is not any of the individual proposals, but the fact that it is trying to solve two very different problems that tend to be at odds with one another with the one pen stroke. Lowering costs and expanding coverage are more like fire and ice than coffee and doughnuts. Therefore the correct question is which reform do we really want; lower costs or near universal coverage. Otherwise we are destined to make a mess of things.
-J
P.S. 3231 words….Biggest Entry Ever??
