Category Archives: Health Insurance

Insuring Health Insurability

22 Saturday Dec 2018

Posted by in Health Insurance

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The latest blow to Obamacare went down just before the holidays when a federal judge in Texas ruled that the individual mandate was unconstitutional. The decision will be appealed, so it will have no immediate impact on the health-care law or insurance markets. But as Eugene Volokh noted, the mandate itself became meaningless from an enforcement perspective after the repeal of the penalty tax for non-coverage in 2017, despite the fact that some individuals might still opt for coverage out of “respect for the law”. What will really matter, when and if the decision is upheld, is the nullification of the complex web of regulations created by Obamacare, officially known as the Affordable Care Act or ACA. Perhaps most important among these is the requirement that buyers in good health and those in poor health must be charged the same price for coverage. That is “community rating” and it is the chief reason for the escalation of insurance premiums under Obamacare.

One Size Misfits All

Community rating means that everyone pays the same premium regardless of health. Those in good health must pay higher than actuarially fair premiums to subsidize the sick or high-risk with premiums that are less than actuarially fair. Two provisions of the ACA were intended to make this work: first, the individual mandate required everyone to remain in the game (and paying the subsidies) rather than going uninsured and paying the “tax” penalty. But the penalty was so light that many preferred it to actually buying insurance. Now, of course, the penalty has been repealed. Second, individuals with incomes below 250% of poverty line receive premium subsidies from the federal government to offset the high cost of coverage. That means low-income buyers do not have to confront the high premiums, which was hoped to keep them in the game.

Community rating caused premiums in the individual insurance market to increase dramatically. This was compounded by the law’s minimum coverage requirements, which are more comprehensive than many consumers would have preferred. Lots of younger, healthier consumers opted out while the sick opted in, or even worse, opted in only when they became sick. This deterioration in the “risk pool” is the so-called insurance “death spiral”. The pool of insureds becomes increasingly risky, premiums escalate, more healthy consumers opt out, and the process repeats. At the root of it is the distortion in the way that risk is priced by community rating.

Tailored Coverage

The coverage and pricing of risk is better left to markets. That means consumers and insurers will reach agreement on policy provisions that are mutually beneficial ex ante. Insurers will offer to cover risks up to the point at which the expected marginal cost of underwriting is equal to value, or the buyer’s willingness to pay. An insurer who offers unattractive policies or charges too much will find its business undercut by competitors. But when risk is priced by government fiat and community rating, this natural form of market information discovery is impossible.

Tax vs. Premium Subsidies

Many in the high-risk population will be unable to afford coverage in the absence of community rating. There are only two general options: they pay what they can for care but otherwise go without insurance coverage, accepting charity care if they are willing; or, taxpayers pay, as under Medicaid. Most lack coverage because they simply cannot afford it, even when they earn too much to qualify for Medicaid.

That situation can be resolved in the long-term (as I’ll describe below), but an overhang of individuals with pre-existing conditions in need of subsidies will persist for a period of years. Under Obamacare, subsidies were paid by charging higher premia to healthy individuals through community rating. Again, that distorted signals about risk and value, creating unhealthy incentives among insurance buyers. The death spiral is the outcome. Subsidies funded by general taxation do not create these price distortions, however, and should be relied upon for assisting the high-risk population, at least those who are determined to qualify.

Health Status Insurance

The overhang of individuals with pre-existing conditions requiring subsidies can never be eliminated entirely—every day there are children born with critical, unanticipated health needs. However, the overhang can shrink drastically over time under certain conditions. A development that is already receiving meaningful attention in the market is the sale of health insurance options, as described by John Cochrane. I have written about this method of protecting future insurability here.

Cochrane raises the subject within the context of new HHS rules allowing insurance companies to offer “temporary” insurance coverage up to a year, but with guaranteed renewability through a total of 36 months of coverage. Unfortunately, if you get sick before the end of the 36th month, you’ll have to give up your policy and pay more elsewhere.  But Cochrane speculates:

“Unless, perhaps, they really are letting insurance companies offer the right to buy health insurance as a separate product, and that can have as long a horizon as you want? If they haven’t done that, I suggest they do so! I don’t think the ACA forbids the selling of options on health insurance of arbitrary duration.”

Cochrane links to this earlier article in which John C. Goodman discusses the ruling allowing the sale of temporary plans:

“The ruling pertains to ‘short-term, limited duration’ health plans. These plans are exempt from Obamacare regulations, including mandated benefits and a prohibition on pricing based on expected health expenses. Although they typically last up to 12 months, the Obama administration restricted them to 3 months and outlawed renewal guarantees that protect people who develop a costly health condition from facing a big premium hike on their next purchase.

The Trump administration has now reversed those decisions, allowing short-term plans to last up to 12 months and allowing guaranteed renewals up to three years. The ruling also allows the sale of a separate plan, call ‘health status insurance,’ that protects people from premium increases due to a change in health condition should they want to buy short-term insurance for another 3 years.”

That is far from permanent insurability, but the concept has nevertheless taken hold. An active market in health status insurance would reduce the pre-existing conditions problem to a bare minimum. The financial risks of deteriorating health would be underwritten in advance. Once stricken with illness, those unlucky individuals would then have coverage at standard rates by virtue of the earlier pooling of the risk of future changes in health status. At standard rates, relatively few high-risk individuals would require subsidies in order to afford coverage .

Will healthy, temporarily insured or uninsured individuals buy these options? Some, but not all, so subsidies will never disappear entirely. Still, the population of uninsured individuals with pre-existing conditions will shrink drastically. In the meantime, a healthy market for health insurance coverage should flourish, reestablishing the authority of the consumer over the kind of health care coverage they wish to purchase and the kinds of financial risks they are willing to bear.

 

 

Perspective on U.S. Health Care Spending & Outcomes

05 Sunday Aug 2018

Posted by in Health Care, Health Insurance

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The U.S. spends a lot on health care, and our health care system is frequently criticized for poor health outcomes. The chart below is an example of evidence used to buttress this argument. It shows combinations of health care spending and life expectancy over time for the OECD countries. The U.S. appears to be a severe outlier and inferior to the other countries. A variation on this chart appeared on the home page of The Wall Street Journal this week. It accompanied (but was not part of) a good article by Joseph Walker in which he used 12 other charts in an effort to explain why the U.S. spends so much on health care. (Sorry, this link is probably gated.) Walker discusses several important cost factors, including third-party payments, tax treatment, and the deployment of expensive technology in the U.S. However, the claim that the U.S. is really an outlier is worth examining on other grounds.

The chart’s construction suggests that a reliable link should exist between health care spending and life expectancy, but there are several reasons to question whether that is the case. U.S. life expectancy has been held down historically by high rates of smoking, but reduced smoking rates should help moderate the U.S. life expectancy gap in coming years. Obesity in the U.S. is a more persistent problem, especially for the poor, and an even bigger contributor to low U.S. life expectancy than smoking at present. (See this report for evidence on the contributions of smoking and obesity to shorter life expectancy for older adults.) Other contributors to low life expectancy in the U.S. include high motor-vehicle deaths and homicides, the latter attributable in large part to the war on drugs. All of these factors contribute to higher health care spending and directly reduce life expectancy.

The status of the U.S. as an outlier in terms of health care spending is questioned on the Random Critical Analysis blog (RCA). The author’s detailed analysis includes the following points among many others of interest:

  • Health care is a superior good: as income rises, spending on health care rises faster;
  • The U.S. has a much higher standard of living than any of its peer nations;
  • U.S. consumption spending relative to GDP is an “outlier”, like health care spending relative to GDP;
  • Consumption is a stronger predictor of health care spending than income;
  • Relative to consumption, health care spending in the U.S. is not an outlier, nor is spending on pharmaceuticals, physician/nursing compensation, and the levels of health price indices.

Take a look at the following sequence from the RCA blog linked above (the animation might not be visible on a phone):

So the argument that the U.S. health care system is inferior to peer countries based on cross-county spending comparisons and life expectancy, to the extent that it holds up at all, is subject to strong qualifications. Inferior lifestyle choices, diets, and lack of exercise might be problematic in the U.S., but the healthcare system cannot be faulted based on spending levels relative to other OECD countries.

In fact, the superiority of the U.S. health care system in many areas is not even in dispute. As Mahdi Barakat points out, wait times for care, cancer survival rates, and stroke mortality are all clearly better in the U.S. than in many peer countries:

“Lives are indeed saved by the many types of superior medical outcomes that are often unique to the US. This is not to mention the innumerable lives saved each year around the world due to medical innovations that are made possible through vibrant US markets.”

Barakat compares dubious progressive claims that up to 45,000 American lives are lost each year due to a lack of insurance with the likely incremental lives lost if various performance measures in the U.S. were equivalent to those in other countries:

  • 25,000 additional female deaths per year with Canada’a wait times for care (no estimate for additional male deaths is given by Mahdi’s source);
  • 64,000 additional stroke deaths each year with the UK’s overall stroke mortality;
  • 72,000 additional cancer deaths each year with the UKs survival rates.

Theoretically, the national spending figures could be adjusted for the cost of queuing, i.e. wait times. While Obamacare certainly increased wait times in the U.S., the adjustment would likely reduce or eliminate the spending advantages that several OECD countries appear to have over the U.S.

The performance of health care systems in many countries with single-payer systems or universal care is subject to challenge, as some of the statistics offered by Barakat demonstrate. In “The Truth About SwedenCare“, Klaus Bernpaintner expresses his dismay at the romanticized view of health care in Sweden among so many Americans. His effort to convey the truth about Sweden’s stultifying health care bureaucracy is illuminating. There are few private physician practices in Sweden. Care is generally rationed and waits are lengthy, and it is delivered by disinterested, centrally-assigned providers.

“For non-emergency cases in Sweden, you must go to the public ‘Healthcare Central.’ This is always the starting point for anything from the common flu to brain tumors. You must go to your assigned Central, according to your healthcare district. Admission is by appointment only. Usually they have a 30-minute window every morning, when you call to claim one of the budgeted slots. Make sure to call early or they run out. Rarely will you get an appointment for the same day. You will be assigned a general practitioner, probably one you have never met before; likely one who does not speak fluent Swedish; and very likely one who hates his job. If you have a serious condition, you will be started on a path of referrals to experts. This process can take months.”

Bernpaintner calls this Sweden’s health care “bread line”, where people go to die. He mentions several other nightmarish features of health care in Sweden that Americans should hope to avoid. In particular, we should resist calls for a single-payer system, like Bernie Sanders’ Medicare-For-All proposal. An analysis by Charles Blahous of the Mercatus Center at George Mason University has shown that it would increase federal spending by $32.6 trillion over ten years. This estimate is basically in-line with others mentioned by Blahous. Much of the additional federal spending would represent a transition away from private spending, a process that would be massively disruptive. However, the study gives the plan the benefit of several doubts by accepting the assumptions made by Sanders: 1) a huge saving in prescription drug costs; 2) a huge saving in administrative costs; 3) providers will happily accept Medicare reimbursement levels; and 4) new immigrants will not be attracted by an essentially free health care program. Fat chance. But given all of these questionable assumptions, total health care spending would fall even as the government takes on the massive new outlays. Take away just fantasy #3 and total national health care spending would rise, a swing of $700 billion by 2031.

John Cochrane makes a useful distinction between two conceptions of universally-accessible coverage: one that all must use vs. one that all can use. (He calls them both forms of single-payer systems, though that usage sounds a bit awkward to me.) The voluntary form is preferable for several reasons: it can preserve choice in terms of coverage and providers; while the public-payer’s share must be funded, it demands little or nothing in the way of cross-subsidized pricing; and it does not imply that government must act as a single “price setter”. Cochrane warns of the possible consequences of a universally-mandated single payer:

“Not only is there some sort of single easy to access health care and insurance scheme for poor or unfortunate people, but you and I are forbidden to escape it, to have private doctors, private hospitals, or private insurance outside the scheme. Doctors are forbidden to have private cash paying customers. That truly is a nightmare, and it will mean the allocation of good medical care by connections and bribes.”

The presumption that universal health care will improve quality and save lives is unsupported by any real evidence. Its proponents incorrectly assume that the uninsured do not get care at all. Providers might go uncompensated, but the uninsured can often get needed care with more immediacy than they could with the lengthy wait times typical of many single-payer systems. The quality of care is likely to deteriorate under a single-payer system given the stresses placed on providers, the highly regulated conditions under which they would be forced to operate, and restricted treatment options. And of course a single-payer system would suspend the price mechanism and any semblance of competition in the health care marketplace.

The health care system in the U.S. has massive problems, but they were created and exacerbated by a series of governmental intrusions on the marketplace over many years. A flourishing market requires choice for consumers and competition between providers—in both health care delivery and insurance coverage. It also requires a roll-back of regulation on providers and insurers. But as Cochrane emphasizes, such a marketplace can exist apart from a voluntary, tax-funded payer-of-last-resort.

The Destructive Pooling of Risks and Outcomes

29 Friday Jun 2018

Posted by in Health Insurance, Obamacare, Uncategorized

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Forcing health insurers to cover pre-existing conditions at standard rates is like asking home insurers to cover homes in flood plains at standard rates. If the government says home insurers must do so, standard rates will rise as well as the cost of homeownership. Lenders generally won’t accept homes as collateral unless they are adequately insured against flooding, and by raising the cost of insurance, the government requirement that all must share in the burden of high flood risk would discourage homeownership generally. But you’ll get a break if you’re in a flood plain! Coercive government regulations like rate regulation and coverage mandates have destructive (but predictable) consequences.

The difference between flood plains and health conditions is that sooner or later, a lot of us will be burdened with the latter. The trick is to get underwritten for health insurance before that happens. If the government says that health insurers must offer standard rates to those already afflicted with serious health conditions, à la Obamacare, standard rates will rise, which will induce some potential buyers to opt out. In fact, it will lead the youngest and healthiest potential buyers to opt out. This is the genesis of the so-called insurance death spiral.

Some then ask why the government shouldn’t prevent opt-outs by requiring all individuals to carry health insurance… an individual mandate. Perhaps doubling down on government coercion via compelled coverage might rectify the ill effects of rate regulation. However, requiring low-risk individuals to pay rates that exceed their willingness to pay cross-subsidizes individuals who belong in a different risk pool. Aside from it’s doubtful constitutionality and infringement on individual liberty, this policy forces low-risk individuals to insure and pay as if they are high-risk, and high-risk individuals to pay as if they are low risk, and it leaves the task of pricing to the arbitrary decisions of bureaucrats. It may also lead to massive distortions in the use of medical resources.

Direct Subsidies Are Better

There is a better way to provide coverage for individuals with pre-existing conditions, one that does not destroy the risk-mitigating function of health insurance markets. High-risk individuals can be covered through a combination of self-paid standard premiums and a direct public subsidy that does not distort the market’s social function in pricing risk. Such a subsidy would be funded by individuals in their roles as taxpayers, not as premium payers. Now, I’m the last person to advocate big-government solutions to social and economic problems, but this approach requires only that government serve as a pass-through entity. Government need not play any role in providing or regulating health care, and it should not interfere with the pricing of risk in private markets for health insurance.

Insurability Protection

The high-risk segment’s reliance on subsidies can be minimized over time with certain innovations. In particular, healthy individuals should be able to purchase riders protecting their future insurability at standard rates. Their premium would include a component reflecting the discounted expected costs of developing health conditions in the future. The additional premium could even be structured as level payments over time. People will develop health conditions, of course, a few much sooner than others, but without an incremental impact on their future premiums, as the additional risk  would be covered by the cost of the rider for future insurability.

To see how the situation would evolve, suppose that the standard risk pool includes everyone free of pre-existing conditions, young and old, with guaranteed future insurability. The high-risk segment is already afflicted with conditions and mostly reliant on the direct subsidies discussed above, but that segment will shrink over time as the population ages and mortality takes its toll. Therefore, the proportion of individuals reliant on subsidies will decline. Meanwhile, the standard risk pool transforms into a combination of healthy and sick, but it is actuarily sustainable without subsidies. Of course, some fraction of individuals will always be born with serious health conditions, though one day prospective parents could conceivably purchase future insurability protection for their children at conception… well, perhaps just a little after. The point is that the initial level of subsidies should be transitional. For a permanently small share of individuals, however, it will be a part of the social safety net.

To extend the foregoing, there is considerable latitude in the composition of “standard risks” and the willingness of individual buyers to pay premiums that might reflect interpersonal differences. For example, individuals should be free to self-insure, foregoing participation in the insurance market altogether. If they do so, the insured risk pool will e of lower quality. Some people might prefer to purchase insurance covering catastrophic health events only, paying for health maintenance out-of-pocket as well as care for conditions less immediately threatening. Health maintenance is not really a risk anyway, but more of a constant, so excluding it from insurance contracts is sensible. In fact, less “comprehensive” insurance coverage keeps the cost of coverage down, encouraging wider participation and enhancing the quality of the risk pool.

Mandates

These insurability riders might not accomplish much under a regime of mandated comprehensive benefits. That would increase the cost of coverage as well as the cost of the insurability rider, making it more likely that healthy individuals would opt-out. That brings us back to the “elephant in the room”: whether a so-called individual mandate is required to ensure that 1) the “standard” risk pool is of high quality; and 2) the uninsured don’t “free-ride” by capturing the public subsidy once their health deteriorates for any reason. But again, the availability of less comprehensive coverage will keep premiums low and help to accomplish both objectives. Moreover, free-riders whose health fails could always be denied the public subsidy if they had been uninsured over a period of any length prior to their diagnosis. That would leave them with several less attractive alternatives: pay high-risk-pool premiums out of their own pockets, or rely on assistance from family, friends, charitable organizations and providers.

Dumb Intervention

Requiring insurers to cover pre-existing health conditions at standard rates is destructive to insurance markets. It imposes liabilities for more certain, costly events in a market for which sustainable operation depends on the pooling of events of similar risk. It harms consumers directly by increasing the cost of mitigating those risks. It worsens the uninsured free-rider problem, causing additional deterioration in the risk pool and adding more cost pressure. It also may lead to increases in out-of-pocket deductibles and copayment rates as insurers attempt to manage high claim levels. And it invites further regulatory intervention, as policymakers engage in misguided attempts to “fix” problems created by the original intervention (while blaming the market, of course).

A further question is whether the alternative I have outlined would involve federal subsidies or state outlays funded in part by federal block grants. I prefer the latter, but either way, it is less costly and distortionary to pay for insuring against the costs of pre-existing conditions via direct subsidies to needy individuals as part of the social safety net than by destroying insurance markets.

Liar-Left, Daft-Left Bellow: It’s the Unkindest Tax Cut of All

08 Friday Dec 2017

Posted by in Health Insurance, Taxes

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A misapprehension of progressive leftists is that the tax reform bills under debate by the GOP will revoke something from the needy: the poor, cancer patients, the working class, the aged, you name it. Well, that is a misapprehension held by many earnest leftists, but it amounts to deceitful rhetoric from others. David Harsanyi, in an article about the Left’s penchant for corrupting the English language, attempts to set the record straight:

“Whenever the rare threat of a passable Republican bill emerges, we learn from Democrats that thousands, or perhaps millions, of lives are at stake. …

… the most obvious and ubiquitous of the Left’s contorted contentions about the tax bill deliberately muddles the concept of giving and the concept of not taking enough. This distortion is so embedded in contemporary rhetoric that I’m not sure most of the foot soldiers even think it’s odd to say anymore. …  Whatever you make of the separate tax bills the House and Senate have passed, though, the authors do not take one penny from anyone. In fact, no spending is being cut (unfortunately). Not one welfare program is being block-granted. Not one person is losing a subsidy. It’s just a wide-ranging tax cut without any concurrent spending cuts.“

The Left may have a basic math incompetency, or maybe they know better when they insist that the GOP plans will inflict a new burden on the middle class. The middle class actually receives larger reductions in taxes than higher strata. Veronique de Rugy highlighted this point recently:

“President Trump’s intention to give a real tax break to the middle class is counter-productive considering the middle class barely shoulders any of the income tax as it is. The top 10 percent of income earners—households making $133K [or more], not $1 million as most assume—currently pay more than 70 percent of all income tax revenue. The middle quintile pays, on average, 2.6 percent of the federal income tax.

And yet, in both the House and Senate plans the middle class receives the largest tax relief by reducing their marginal tax rates, increasing the child tax credit and doubling the standard deduction. The result is fewer taxpayers would be paying income tax at all, problematic from a small government perspective. It also means a more progressive income tax code than it already is.

The House plan also effectively jacks up the top marginal rate for some high earners by using a 39.6 percent bubble rate on the first $90K earned by single taxpayers making $1 million and married taxpayers making $1.2 million and a 12 percent rate like everyone else.“

I have listened to horror stories about school teachers who, in the past, were able to deduct supplies they purchased for their students. Now, the cruel GOP is trying to take that away! This argument neatly ignores the doubling of the standard deduction. Many teachers will find that it no longer makes sense to itemize deductions, and they will come out ahead. But for the sake of argument, suppose a teacher earning $50,000 itemizes and spends $2,500 on unreimbursed supplies for their students every year. At the Senate plan’s new rate in that bracket, the lost deduction will cost the teacher $550, but about $300 would be saved via rate reductions for every $10,000 of taxable income. The teacher is likely to come out ahead even if he unwisely passes on the improved standard deduction.

Liberal thought-whisperers have goaded their minions into believing that the GOP intends to cut Medicare funds by $25 billion a year going forward. The bills under discussion would do no such thing. However, in a rare gesture of fiscal responsibility, President Obama in 2010 signed the Statutory Pay-As-You-Go Act (Paygo), which may require automatic reductions in outlays when spending or tax changes lead to an increase in federal debt. The act has never been enforced, and Republican leadership in both houses insists that Paygo can and will be waived. Clearly, the GOP’s intent is not to allow the Paygo cuts to take place. Even the left-leaning Snopes.com is reasonably neutral on this point. But if Paygo takes hold, the lefties will have themselves to blame.

At the last link, Snopes also touches on one actual provision of the Senate tax plan, the repeal of the Obamacare individual mandate, or rather, the repeal of the “penalty tax” imposed by the IRS on uninsured individuals. The Supreme Court ruled that it is a tax in 2012, at the time giving rise to a mixture of delight and embarrassment on the Left. The ruling saved Obamacare, but the Left had been loath to call the penalty a tax. The supposed rub here is that repeal of the mandate will be greeted enthusiastically by many young and healthy individuals. Freed from coercion, many of them will elect to go without coverage, leading to a deterioration of the exchange risk pools and causing premiums paid by the remaining exchange buyers to rise. However, the critics conveniently ignore the fact that Obamacare individual subsidies will automatically ratchet upward with increases in the premium on the Silver Plan. So the panic related to this portion of the Senate tax bill is misplaced.

One other point about the mandate: because it coerces the payment of cross-subsidies by the young and healthy to higher-risk insurance buyers, the mandate distorts the pricing of risk, the incentives to insure, and the use of resources in the provision of health insurance and health care itself. This is how the proper function of a market is destroyed. And this is how resources are wasted. Good riddance to the mandate. The high-risk population should be subsidized directly, not through distorted pricing, at least until such time as a market for future insurability can be established. As Jeffrey Tucker has said, repeal of the mandate is a very good first step.

The loss of the medical expense deduction is not a done deal. While the House plan eliminates the deduction, the Senate plan reduces the minimum medical expense requirement from 10% to just 7.5% of qualified income, so it is more generous than under current law. I’ve seen bloggers commit basic misstatements of facts on this and other provisions, such as confusing this limit with a total limit on the amount of the medical deduction. This deduction tends to benefit higher-income individuals who itemize deductions, which will represent a higher threshold under the increased standard deduction. Of course, this deduction appeals to our sense of fairness, but like all the complexities in the tax code, it comes with costs: not only does it add to compliance costs and create a need for higher tax rates, but it subsidizes demand for medical care, much like the tax breaks available on employer-provided health care, and it therefore inflates health care costs for everyone. To the extent that these deductions and many others are still in play, the GOP plans fall short of real tax reform.

The GOP tax bills certainly have their shortcomings. I hope some of them are rectified in conference. The bills do not offer extensive simplification of the tax code, and they would not be truly historic: in real terms, an earlier version of the House bill would have been the fourth biggest cut in U.S. history relative to GDP, and I believe the version that passed the House is smaller. However, many of the arguments mounted by the Left against the bills are without merit and are often deceitful. The Left strongly identifies with the zero-sum philosophy inherent in collectivism, and the misleading arguments I’ve cited are plausible to the less-informed among that crowd. That brings me back to David Harsanyi’s point, discussed at the top of this post: “intellectuals” on the progressive Left find value in corrupting the meaning of words and phrases like “budget cuts”, “giving” and “taking”:

“Everyone tends to dramatize the consequences of policy for effect, of course, but a Democratic Party drifting towards Bernie-ism is far more likely to perceive cuts in taxation as limiting state control and thus an attack on all decency and morality.“

“There is a parallel explanation for the hysterics. With failure comes frustration, and frustration ratchets up the panic-stricken rhetoric. It’s no longer enough to hang nefarious personal motivations on your political opponents — although it certainly can’t hurt! — you have to corrupt language and ideas to imbue your ham-fisted arguments with some kind of basic plausibility.“

Choice, Federal Exchange Failure, and a Path to Health Insurance Reform

25 Wednesday Oct 2017

Posted by in Health Insurance, Markets, Obamacare

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“… a government program that is ruined by permitting more choice is not sustainable.“

That’s Jeffrey Tucker on Obamacare. Conversely, coercive force is incompatible with a free society. Tucker, no fan of President Donald Trump, writes that the two recent executive orders on health coverage are properly framed as liberalization. The orders in question: 1a) eliminate federal restrictions on the sale of so-called association health insurance plans, including their availability across state lines; 1b) remove the three-month limitation on coverage offered under temporary policies; and 2) end insurer cost-sharing subsidies for policies sold to low-income (non-Medicaid) segments of the individual market.

The most immediately impactful of the three points above might be 1b. These temporary policies became quite popular after Obamacare took effect, at least until the Obama Administration placed severe restrictions on their duration and renewal in 2016 (see Avik Roy’s post in Forbes on this point). Trump’s first order rescinds that late-term Obama order. The short-term policies are likely to become popular once again, as things stand. Small employers can avoid many of the Obamacare rules and save significantly on premiums using temporary policies.

Association plans are already sold to small businesses having a “commonality of interest”, but Trump’s order would expand the allowable common interests and permit association plans to be sold across state lines. Avik Roy doubts that this will have a large impact, but to the extent that association plans avoid both state and federal benefit mandates, they could prove to be another important source of more affordable coverage for employees than the Obamacare exchanges. In any case, as Tucker says:

“In the words of USA Today: the executive order permits a greater range of choice ‘by allowing more consumers to buy health insurance through association health plans across state lines.’  … The key word here is ‘allowing’– not forcing, not compelling, not coercing. Allowing.

Why would this be a problem? Because allowing choice defeats the core feature of Obamacare, which is about forcing risk pools to exist that the market would otherwise never have chosen. … The tenor of the critics’ comments on this move is that it is some sort of despotic act. But let’s be clear: no one is coerced by this executive order. It is exactly the reverse: it removes one source of coercion. It liberalizes, just slightly, the market for insurance carriers.“

The elimination of insurer cost-sharing subsidies might sound like the most draconian aspect of the orders. Those subsidies were designed to keep the cost of coverage low for consumers with low incomes, but the subsidies are illegal because the allocation of funds was never authorized by Congress. And contrary to what has been alleged, eliminating the insurer subsidies will have virtually no impact on low-income consumers. First, a large percentage of them are on Medicaid to begin with, not the exchanges. Second, tax-credit subsidies for low-income consumers are still in place for exchange plans, and they will scale based on the premium charged for the “silver” plan (also see Avik Roy’s link above). Taxpayers will be on the hook for those increased subsidies, as they were for the insurer cost-sharing payments.

The exchange market will be weakened by the executive orders, but it has been in a prolonged decline since its inception. Relatively healthy consumers will have opportunities to buy more competitive coverage through short-term policies or association plans, so they are now more likely to exit the risk pool. Higher-income, unsubsidized consumers are likely to pay more for coverage on the exchanges, particularly those with pre-existing conditions. As premiums rise, some of the healthy will simply forego coverage, paying the penalty instead (if it is enforced). Of course, the exchange risk pool was already risky, coverage options have thinned, and premiums have been rising, but the deterioration of conditions on the exchanges will likely be hastened under Trump’s executive orders.

Dismantling some of the restrictions on health insurance choice, which were imposed by executive order under President Obama, could prove to have been a stroke of genius on Trump’s part. As a negotiating ploy, Trump just might have maneuvered Republicans and Democrats into a position from which they can agree … on something. The new orders certainly give emphasis to the deterioration of the exchange markets. The insurers probably viewed the cost-sharing subsidies as a better deal for themselves than having to recoup costs via risky and controversial rate increases, so they are likely to pressure Congress for relief. And higher-income consumers with pre-existing conditions will face higher premiums but won’t have new choices. They will be a vocal constituency.

Democrats just don’t have any ideas with legs, however: single-payer and Medicare-for-all are increasingly viewed as politically unacceptable alternatives by most observers. As John C. Goodman notes at the last link, Medicare is already an actuarial and financial nightmare. Another program of the like to replace existing coverage that most voters would like to keep is not a position likely to win elections. Here is Goodman:

“So, the Democrats’ dilemma is: (1) they are not getting any electoral advantage from Obamacare, (2) they can’t afford to criticize it for fear of upsetting their base and (3) they don’t have an acceptable solution in any event.“

So perhaps we have conditions that might foster a compromise, at least one that could win enough votes to fix the insurance markets. Goodman contends that a plan originally attributable to John McCain, and now in the form of the Pete Sessions/Bill Cassidy-sponsored Patient Freedom Act, could be the answer. It would create something like a Universal Basic Health Allowance, in the form of a tax credit, funded by eliminating all current federal spending on health care (excluding Medicare and Medicaid). Those with pre-existing conditions would purchase coverage the same way as others, but the plan would give insurers a strong incentive to retain them. According to Goodman, a “health status risk adjustment” would assure actuarially-fair pricing by forcing an existing insurer to pay the adjustment to a new insurer when sick individuals change their insurance plans.

The Sessions/Cassidy plan (and Goodman) describes a particular implementation of a more general concept called health status insurance, a good explanation of which is offered by John Cochrane:

“Market-based lifetime health insurance has two components: medical insurance and health-status insurance. Medical insurance covers your medical expenses in the current year, minus deductibles and copayments. Health-status insurance covers the risk that your medical insurance premiums will rise. If you get a long-term condition that moves you into a more expensive medical insurance premium category, health-status insurance pays you a lump sum large enough to cover your higher medical insurance premiums, with no change in out-of-pocket expenses.“

It would be a miracle if Congress can successfully grapple with the complexities of health care reform in the current legislative session. However, Trump’s executive orders have improved the odds that some kind of agreement can be negotiated to address the dilemma of the failing exchanges and coverage for pre-existing conditions. Let’s hope whatever they negotiate will leverage consumer choice and free markets. Trump’s orders are a step, but only one step, in reestablishing the patient/insured as a key decision maker in the allocation of health care resources.

Can Health Care Bill Get GOP Off the Schneid?

29 Thursday Jun 2017

Posted by in Health Insurance, Obamacare

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health insurer bailout

For those who are “woke” to Obamacare’s failures, the Senate GOP’s health insurance reform bill has plenty to hate and maybe some things to love. There are likely to be some changes in the bill before it goes to a vote, which now has been delayed until sometime after Congress’ July 4th recess. Known as the Better Care Reconciliation Act of 2017 (BCRA), the bill is another mixed bag of GOP health care reforms and non-reforms. It is the Senate Republicans’ effort to improve upon the bill passed by the House of Representatives in May. The non-reforms are tied to an inability to repeal all aspects of Obamacare (the Affordable Care Act, or ACA) within the context of budget reconciliation, a process which permits a simple majority for approval of changes linked in some way to the budget (the so-called Byrd rule). Yuval Levin offers an excellent discussion of the bill and the general motivations for the form it has taken:

“They are choosing to address discrete problems with Obamacare within the framework it created and to pursue some significant structural reforms to Medicaid beyond that, and they should want the merits of their proposal judged accordingly. Their premise is politically defensible — it is probably more so than my premise — and the proposal they have developed makes some sense in light of it.“

It’s necessary to get one thing out of the way at the outset: the CBO’s scoring of the Senate bill is flawed in a massive way, like the earlier score of the House bill. The estimate of lost coverage for 22 million individuals is based on the CBO’s errant predictions of Obamacare coverage levels. (See here and here, and see Avik Roy’s latest entry on this topic.) Does anyone believe that enrollment on the exchanges will decline by 15 million in 2018 due to the elimination of the individual mandate? That’s over 40% more than total enrollment in 2017, by the way. Even if we attribute the CBO’s prediction to the elimination of both the individual and employer mandates, it would be an incredible plunge, especially given the means-tested tax credits in the BCRA. Does anyone believe that coverage levels under Obamacare would increase by 18 – 19 million by 2026 (mostly on account of the individual mandate)? That is the baseline assumed by the CBO in its scoring of the BCRA, which is laughable. A more realistic estimate of lost coverage under the BCRA might be 2 to 3 million, but remember that many of those coverage losses would not be “forced” in any sense. Rather, they would be purposeful refusals to take coverage with the demise of the individual mandate. But they would tend to be the healthiest of the current, coerced enrollees.

A related point has to do with hysterical claims that the BCRA will “kill thousands of people”. Someone cooked-up this talking (screaming?) point to rally the ignorant left and perhaps frighten the ignorant right (including a few GOP Senators). As Ira Stoll explains, there are several reasons to dismiss these assertions, not least of which is its tradeoff-free conceit. More ugly detail on the basis of these claims can be found here.

Will the BCRA “gut” Medicaid, as Charles Schumer, Nancy Pelosi and other have claimed? Program spending would not decline by any means, only its growth rate. Enrollment would decline with tougher eligibility rules, but as noted above, tax credits more generous than the Medicaid savings (relative to Obamacare) would help replace lost Medicaid coverage with private insurance. Steve Chapman has contributed one of the most nitwitted commentaries on Medicaid reform that I have seen. Not only do critics consistently ignore the proposed tax credits for coverage at low incomes, but they never address the monumental waste in the program., something that would likely improve under the budgeting requirements and additional discretion given to states by the BCRA.

An even crazier scare story going around is that the Senate bill will cut Medicare benefits. That is not the case, though the bill repeals an Obamacare Medicare tax increase on the self-employed.

Getting back to the broader BCRA, here are some of the major provisions:

  • Medicaid reform to replace the budgetary disaster of federal matching with per capita caps or block grants, and state program control.
  • Means-tested tax credits for insurance purchases would extend to low-income individuals who might otherwise lose their expanded Medicaid eligibility. According to Levin, this group is heavily weighted toward the unmarried and childless.
  • Greater state authority over regulation of the individual insurance market. This is accomplished through the availability of state waivers from many Obamacare regulations, including essential health benefits.
  • Almost all Obamacare tax provisions would be repealed. One exception is the “Cadillac” tax on high-cost employer plans starting in 2026 (after a temporary hiatus). Many of these repeals would benefit individuals broadly as taxpayers, employees, business people, and patients.
  • Expanded allowable age rating to 5/1 from 3/1. This helps limit adverse selection by pricing more risk where it exists, and the means-tested credits would help offset higher premiums for older individuals with low incomes.
  • Provides about $130 billion in “stabilization” funds for insurers over a three-year period. This is an attempt to keep premiums down during a transition over which the GOP probably hopes to enact additional deregulatory measures. Is this a practical maneuver? Yes, but it also reflects a bit of “corporatism-when-it’s-convenient” hypocrisy.
  • Eliminates funding for Planned Parenthood. Presumably funding could be restored later were the organization to split off its abortion services into a financially distinct division, which the Hyde Amendment would seem to require.
  • Retains coverage for pre-existing conditions.
  • Elimination of the individual and employer mandates, including the tax penalty. However, individuals who go without coverage for two months would face a six-month waiting period before they could re-qualify for coverage.

Eliminating the mandates is great from a libertarian and an economic perspective. The coercion inherent in those requirements is bad enough. In practice, the individual mandate has proven less effective in encouraging enrollment than Obamacare’s architects had hoped, which makes the CBO’s conclusions all the more puzzling. The employer mandate gives firms an incentive to reduce hours and employment, so it has extremely undesirable labor-market implications.

Most criticism of the BCRA from the right has centered on its failure to fully repeal Obamacare insurance and health care regulations. The continuation of Obamacare community rating is a major shortcoming of the bill, as it distributes the financial risks of medical needs in ways that do not correspond to the actual distribution of health risks. The result is the very same adverse selection problem we have witnessed on the Obamacare exchanges. Unfortunately, this raises the specter that we’ll be stuck with some form of community rating in the long-term, along with employer-provided coverage and the ill-advised premium tax deductions, which tend to inflate premium levels.

Michael F. Cannon of the CATO Institute calls the BCRA an Obamacare rescue package. John C. Goodman is largely in agreement with Cannon, stating that Republicans have no real desire to repeal Obamacare. Peter Suderman at Reason has many of the same concerns. In addition to community rating, Cannan (and Senator Rand Paul) are unhappy that Medicaid spending continues to grow under the bill with a new program of subsidies (tax credits) to boot! They also condemn the so-called “stabilization” or “cost-sharing” subsidies that would be paid to insurers under the bill. While a broader range of plans would become available, there is little confidence that insurers will be able to  bring down premiums and/or deductibles substantially without the added subsidies.

Avik Roy has defended the Senate bill for its proposed reforms to Medicaid, replacement of Obama’s Medicaid expansion with tax credits for private coverage, and transitional tax credits to smooth jumps in premium levels as income rises from low levels. This is an improvement over the House bill. However, marginal tax rates would be high under the BCRA for individuals in the range of income over which the credits phase out, which is a legitimate “welfare trap” criticism.

David Harsanyi also believes the bill is a good start:

“If Republican leadership had told conservatives in 2013 that they could pass a bill that would eliminate the individual and employer mandates, phase out Obamacare’s Medicaid expansion, cut an array of taxes, and lay out the conditions for full repeal later, I imagine most would have said ‘Sign me up!’“

Naturally, most critics of Obamacare have strong misgivings about a bill that would leave major components of the ACA’s structure in place. That includes Obamacare’s regulation of health care delivery itself, not just health insurance coverage. The BCRA might incorporate signifiant changes before it goes to a vote, however. One can only hope! Rand Paul has suggested breaking the bill into two parts: repeal of the ACA and other spending provisions, though it’s not clear how a repeal bill would qualify under the Byrd rule. Either way, the GOP intends to follow-up with additional health care legislation and administrative changes. Were a bill enacted soon, there is some chance that additional legislation could garner limited bi-partisan support. Long-term stability of the health insurance and health care markets would be better-served by a stronger semblance of political equilibrium than we have seen in the years since Obama was elected.

 

 

Ex Ante Agreements, Ex Post Gripes

23 Tuesday May 2017

Posted by in Health Insurance, Profit Motive

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Anyone signing a contract better know the terms to which it binds them. They sign voluntarily and do so because they believe it has value. They are presumed to understand what they are obligated to pay and when; what they are entitled to receive, when, and under what circumstances; what actions (and non-actions) are required of them to “perform” under the contract; and what recourse they have should the counter-party fail to perform. The value they perceive upon signing is always based on an expectation. Sometimes, that expectation summarizes risks they are paying to avoid, even as a counter-party is more than willing to carry the risk. The contract is signed and everyone is happy… enough.

Health insurance is an example to which I’ve dedicated ample space over the past couple of weeks (see the links in the left margin). Obviously, one buys health insurance before knowing an entire series of outcomes. The contract specifies what kinds of expenses the insurer is obligated to pay. Insurance is a highly complex product, and so an insurance policy or contract must be relatively complex, as the cartoon above suggests. In a well-functioning market, however, the insured pays a premium no higher than they consider worthwhile. Everyone would like to pay less, but absent a government mandate (heh!), no one is obligated to buy.

The ink is dry and life goes on. The premium is paid, health needs arise, costs are incurred, and sometimes those costs exceed a limit (the deductible) above which the insurer is obligated to pay at least a portion.

A calamitous health event typically brings heavy costs, and this possibility is exactly why people buy coverage, and it is exactly why insurers demand sufficiently stiff premia. These things happen to a fairly predictable percentage of an insurer’s  customers, but with enough variance to make the cash flows risky. As a backstop, insurance contracts sometimes include limitations on total lifetime benefits or on payments for certain kinds of treatments. Pre-existing conditions are a prominent example of limiting the risks that enter the risk pool, but there are other possible limitations on treatments and other aspects of care. While these are known upfront, disastrous health outcomes and their financial consequences are not.

An increasingly common refrain is that no one should profit from an individual’s acute health care needs, and that health insurers do just that. For logical consistency, this same complaint should be leveled against doctors, nurses, paramedics, hospitals, medical equipment manufacturers, and pharmaceutical companies. They all earn income by providing for health care needs, whether medical or financial, and income is income, after all. Whether that income is a wage or a profit is irrelevant. They are both forms of compensation for the use of resources. The major difference between insurers and the other income-earners is that insurers handle the financial risk of potential health care needs and pay when those needs arise, within and up to policy limits.

The crux of the complaint, however, is that insurers can deny claims, thus protecting their profits. Certainly there are claims denied for which the rationale can be disputed. Just as certainly, a financially prudent insurance company must impose some limits on the benefits offered by their policies. These limitations might preserve profitability, but they also protect the contingent benefits of other insureds as well as the solvency of the carrier. Those objectives are not independent.

The insurance buyer reveals the value of the contract ex ante, but sour grapes are easily conjured ex post if a claim is denied, no matter the agreed-to provisions of the insurance contract. The insurer is under no greater obligation to pay costs in excess of policy limits than the doctor, the nurse, or the man in the street. Yet insurers take special blame when inadequate coverage is an issue, whatever the reason.

Hospitals and physician practices sometimes provide uncompensated care. There are also a number of support organizations for severely-ill but inadequately insured patients. So, private charity is one answer to the dilemma of extreme health-cost outcomes. Public aid is another, and the appropriate breadth of the state’s role in cases of pre-existing conditions and extreme individual health care costs is a legitimate question.

In the end, private health insurers provide a valuable service by pooling and carrying the financial risk of health care events faced by individuals. Health insurance profits as a share of owner’s equity have fallen well short of market-wide averages in recent years (see my last post), though I regularly hear outrageous claims about excessive profits in the industry.

It’s not unusual for a buyer to feel remorse after signing a deal, but in cases of health coverage shortfalls, one could say that the insured bet too little or qualified for too little, or one could say that society doesn’t set aside enough resources to adequately care for the sick. However, one cannot say that the resources dedicated to arranging private coverage deserve no reward, or that the business should be pillaged on account of certain policy limitations, or that the future claims of other policyholders should be hijacked. Those who proclaim such nonsense are guilty of severe ethical misjudgment.