Category Archives: Obamacare

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.

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.

Deconstructing the Health Care Administrative State

14 Monday Aug 2017

Posted by in Health Care, Obamacare

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A leftist friend chided me early this year for my foolish optimism about repeal and replacement of Obamacare. I have to give her credit. She said the GOP did not have a viable plan — I’m sure she meant that both as a matter of policy and politics. I pointed to the several “plans” that were extant at the time, and even some that I thought might soon be formalized as legislation. I wrote off her skepticism as a failure on her part to understand an approach to health care policy less statist than the Affordable Care Act (ACA). Like so many on the left, she probably has trouble conceiving of any plan not relying on centralized control. Apparently, quite a few Republicans share that blind spot. Nevertheless, I was certainly naive about the prospects of getting anything through Congress quickly.

But the battle is not lost, even now. It should be obvious to everyone, as Michael Tanner notes, that the health care debate is far from over. The individual insurance market is in bad shape, reeling from the unfavorable balance of risks created by community rating, mandated coverage and guaranteed issue. As Robert Laszewski notes, the attrition in the individual market is dominated by individuals not eligible for Obamacare subsidies. While legislation is a much longer shot than I imagined back in January, there remain a variety of ways in which Obamacare’s most deleterious provisions can be neutralized and replaced to create a more market-oriented environment. And though it’s too bad that it might come to this, as the situation continues to devolve, new legislation might gain viability.

Tanner mentions a variety of administrative decisions sitting squarely in the hands of the Trump Administration: insurance company subsidies? congressional exemption from Obamacare? promotion of open enrollment? enforcing the individual mandate? And there are many others. Tim Huelskamp provides a link to The Heartland Institute‘s “complete healthcare reform toolbox“. He says:

“During congressional testimony in March, my former House colleague and HHS Secretary Tom Price pointed out that the law offers him multiple opportunities to do just that: ‘Fourteen hundred and forty-two times … the secretary ‘shall’ or the secretary ‘may” make changes to the Affordable Care Act. The Price is right! Under Obamacare, he has tremendous power and latitude not only to dismantle the ACA but to replace it with health care options that enhance individual freedom.

Let Americans pick their doctors, choose a ‘skinny’ health insurance plan, or even purchase a plan from a company based in another state. The Trump administration can waive penalties on individuals and businesses who simply can’t afford Obama’s mandates.  HHS can give a green light to any state that wants to begin restoring choice and freedom for their citizens without federal bureaucrat interference.“

Another productive avenue is deregulation of health care providers themselves. One of the worst aspects of the ACA is its reliance on so-called Accountable Care Organizations (ACOs), which were intended to encourage greater cooperation and efficiency among providers. The reality is that the ACO rules imposed by HHS are leading to higher costs, greater financial risk and increased concentration in the provision of medical care. Patients, also, are often penalized by the monopolizing effects, and because they might not be able to continue seeing the doctor of their choice under the limits of the health plans available. Moreover, the ACA infringes upon the doctor-patient relationship by restricting the doctor’s authority and the patient’s choices about tests and treatments that can be provided. Many of these rules and restrictions can be undone by administrative action.

Finally, before we completely dismiss the possibility of a legislative solution, there is a new Republican health care bill to consider in the Senate. However, it is just as limited in its reforms, or more, than the bill that passed in the House and the one that failed in the Senate. It’s unlikely to go anywhere soon. There could be later opportunities to consider various pieces of reform legislation, especially if the Trump Administration makes good on its promises to roll back administrative rules put in place to implement the ACA. Sadly, for now we wait in vain for legislators and President Trump to overcome the intellectual failure at the root of the inaction on ending Obamacare. The lesson is that in human affairs, central planning doesn’t work!

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.

 

 

Musings II: Avik Roy on Health Insurance Reform

12 Friday May 2017

Posted by in Health Care, Obamacare

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Vox carried an excellent Dylan Scott interview with Avik Roy this week. Roy is a health care policy expert for whom I have great respect. Among other health care issues, I have quoted him in the recent past on the faulty Congressional Budget Office (CBO) projections for Obamacare enrollment, which have consistently overshot actual enrollment. In this interview, Roy explains his current views on the health care insurance reform process and, in particular, the American Health Care Act (AHCA), the bill passed by the House of Representatives last month. The interview provides a good follow-up to my “musings” post on Sacred Cow Chips earlier this week.

Roy provides good explanations of some of the AHCA’s regulatory changes that have merit. These include:

  1. relaxation of Obamacare’s community rating standards, meaning that insurers have more flexibility to charge premia based on age and other risk factors, thus mitigating the pricing distortions caused by cross-subsidies on the individual market;
  2. a rollback in the required minimum actuarial value (AV) of an insurance plan (the ratio of plan-paid medical expenses to total medical expenses);
  3. elimination of federal essential benefits requirements.

Roy provides context for these proposed changes relative to Obamacare. For example, regarding AV, he says:

“[In] the old individual market, prior to Obamacare, the typical actuarial value of a plan was about 40 percent. Obamacare drives that up effectively to 70 percent. That has a corresponding effect on premiums; it makes premiums a lot more expensive. In the AHCA, those actuarial value mandates are repealed. Which should provide a lot more opportunity for plans to design more affordable insurance policies for individuals.“

Even with Obamacare’s high AV requirements, an insurer could make money by virtue of the law’s “risk corridors”, which were intended to cover losses for insurers as they adjusted to the new regulations and as the exchange market matured, but those bailouts were temporary, and development of the exchanges did not go exactly as hoped. Insurers have been ending their participation in the exchange market, leaving even less than the limited choices available under Obamacare and little competition to restrain pricing.

On essential benefits, Roy reminds us that every state has essential benefit regulations of its own. These mandates create an unfortunate obstacle to interstate competition, as I discussed in March in “Benefit Mandates Bar Interstate Competition“. Nevertheless, the federal mandates have created additional complexities and added costs to cover risks that a) are not common to the risk pool, or b) cover benefits that are not risk-related and therefore inappropriate as insurance.

Roy also defends the AHCA’s protection of individuals with pre-existing conditions. One fact often overlooked is that burdening the individual market with coverage of pre-existing conditions made Obamacare less workable from the start, simultaneously driving up premiums and sending insurers for the hills. These risks can and should be handled separately, and the AHCA offers subsidies that should be up to the task:

“… if you look at Obamacare, the mechanisms in Obamacare’s exchanges that served as a way to fund coverage for sick people, they were spending $8 billion a year on that program. If you look at it that way, if $8 billion was enough under Obamacare, then maybe $15 billion a year is enough. I really don’t think that’s the problem with this bill.“

Roy contends that the big weakness in the AHCA is inadequate assistance to the poor in arranging affordable coverage. While highly critical of the CBO’s wild estimate of lost coverage (24 million), he does believe that the AHCA, as it stands, would involve a loss. He favors means-tested subsidies as a way of closing the gap, but acknowledges the incentive problems inherent in means testing. With time and a growing economy, and if the final legislation (and the purported stages 2 and 3 of reform) is successful in reducing the growth of health care costs relative to income, the subsidies would constitute a smaller drain on taxpayers.

As for Medicaid reform, Roy defends the AHCA’s approach:

“You start with the fact that access to care under Medicaid and health outcomes under Medicaid are very poor, far underperforming other health insurance programs and certainly way underperforming private insurance. Why does that problem exist? It exists because states have very little flexibility in how they managed their Medicaid costs. They’re basically not able to do anything to keep Medicaid costs under control, except pay doctors and hospitals less money for the same amount of care. As a result of that, people have poor access. By moving to a system in which you put Medicaid on a clear budget and you give states more flexibility in how they manage their Medicaid costs, you actually can end up with much better access to care and much better coverage.“

One point that deserves reemphasis is that a final plan, should one actually pass in both houses of Congress, will be different from the AHCA. From my perspective, the changes could be more aggressive in terms of deregulation on both the insurance side and in health care delivery. The health care sector has been overwhelmed by compliance costs and incentives for consolidation under Obamacar. Nobody bends cost curves downward by creating monopolies.

I’ve hardly done justice to the points made by Roy in this interview, but do read the whole thing!

Musings On Health Insurance Reform

10 Wednesday May 2017

Posted by in Health Care, Obamacare

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An acquaintance of mine is a cancer patient who just made the following claim on Facebook: the only people complaining about Obamacare are hypocrites because they don’t have to purchase their health insurance on the exchanges. That might be her experience. It certainly isn’t mine. I know several individuals who purchase their coverage on the exchanges and complain bitterly about Obamacare. But her assertion reveals its own bit of hypocrisy: it’s apparently okay to defend Obamacare if you are a net beneficiary, but you may not complain if you are a net payer. Of course, I would never begrudge this woman the care she needs, but it is possible to arrange for that care without destroying the health care industry and insurance markets in the process. Forgive me for thinking that Obamacare was designed with the cynical intent to do exactly that! Well, at least insurance markets. The damage to the health care industry was brought on by simple buffoonery and rent seeking.

Depending on developments in Congress over the next few months (3? 6? 9?), Obamacare could be a thing of the past. We’ve all probably heard hyperbolic claims that the new health care bill “will kill people”, which is another absurdity given the law’s dislocations. That was the subject of “Death By Obamacare“, posted in January on Sacred Cow Chips. AHCA detractors base their accusations of murderous intent on a fictitious notion of reduced access to care under the plan, as well as a Congressional Budget Office (CBO) report that viewed the future of Obamacare through rose-colored glasses. I discussed the CBO report at greater length in “The CBO’s Obamacare Fantasy Forecast“.

Before anyone gets too excited about what they like or dislike about the health care bill passed by the House of Representatives last week, remember that a final health care bill, should one actually get through Congress, is unlikely to bear a close resemblance to the House bill. The next step will be the drafting of a Senate bill, which might be assembled from parts of the House’s American Health Care Act (AHCA) and other ideas, or it might take a different form. It could take a while. Then, the House and Senate will attempt to shape a compromise in conference committee and bring it to a vote in both houses. President Trump, looking for a “win”, is likely to sign whatever gets through, even if he has to bargain with democrats to win votes.

So relax! If your legislators are democrats, tell them to participate in the shaping of new policies, rather than throwing petulant barbs from the sidelines. First, of course,  you’ll have to face up to the fact that Obamacare is a failed policy.

Another recent post on Sacred Cow Chips, “Cleaving the Health Care Knot… Or Not“, covered some of the most important provisions of the AHCA. By the time of the vote, a few new provisions had been added to the House bill. The McArthur Amendment allows states to waive the Obamacare essential benefits requirements. Fewer mandated benefits would allow insurance companies to offer simpler policies covering truly insurable health care events, as opposed to predictable health maintenance costs. Let’s face it: if you must have insurance coverage for your annual checkup, then it is not really insurance against risk; either the premium or the deductible must rise to cover the expenses, ceteris paribus.

The other change in the AHCA is an additional $8 billion dollars allocated to state high-risk pools for pre-existing conditions, for a total of $138 billion. These risks are too high to blend with standard risks in a well-functioning insurance market. (In a perfect insurance market, there would be no cross-subsidies between groups on an ex ante basis.) As a separate risk pool, these high-risk individuals would face very high premia, so the idea is to allow states the latitude to subsidize their health care costs in ways they see fit. This is a federalist approach to the problem of subsidizing coverage for pre-existing conditions, and it has the advantage of restoring the ability of insurers to underwrite standard risks at reasonable rates, correcting one of Obamacare’s downfalls. However, some GOP senators are advocating a combination of standard risks and those with pre-existing conditions, which obviously distorts the efficient pricing of risk and exaggerates the need for broader subsidies.

And what about the uninsured poor? A major focus of health care insurance reform, now and in the past, has been to find a way for the poor to afford coverage. Obamacare fell far short of its goals in this respect, as any enthusiasm for subsidized (though high) premia was dampened by shockingly high deductibles. This week, Tyler Cowan reported on some research suggesting that low-income individuals place a low value on insurance. Their responsiveness to subsidies is so low that few are persuaded to pay anything close to the premium required. Cowan quotes the authors as saying that even 90% subsidies for these individuals would leave about 25% of this population unwilling to pay for the balance. Cowen quotes the study’s authors:

“‘We conclude that the size of uncompensated care for low-income populations provides a plausible explanation for their low [willingness-to-pay].’ In other words, many of the poor do not value health insurance nearly as much as many planners feel they ought to, in large part because they are already getting some health care.“

This has several implications. First, these individuals are not without health care, regardless of their coverage status. One of the great misapprehensions among Obamacare supporters is that the poor had no access to care before the law’s passage. Never mind that emergency room utilization is still quite high. Uninsured individuals can go to a public hospital and get treatment in the emergency room and get admitted if that is deemed medically necessary. If the illness causes a loss of income, the individual might qualify for Medicaid if they hadn’t before, and Medicaid has no exclusion for pre-existing conditions. In fact, I’m told the hospital staff might even help you apply right there at the hospital! So who needs insurance before a health crisis?

Many of the poor have continued to do what they did before: go without coverage. Obamacare’s complex system of subsidies is almost beside the point, as is almost any other effort to sign up everyone prior to the onset of major health care needs. Eventual enrollment in Medicaid will pay some of the hospital bills, though it’s true that not all can qualify for the program. Either way, the hospital will swallow a share of the cost — that is, the taxpayer will. Providers would rather not rely on low Medicaid reimbursement rates or perform charity work. This coalition will grapple with the failure of many low-income individuals to arrive at their emergency room doors with coverage as long as we rely on direct subsidies as an inducement to purchase insurance. Unfortunately, a policy offering a separate guarantee of financial health for providers would create another set of awful incentives.

The unfortunate truth is that Medicaid is unsustainable at current funding levels. The AHCA would convert the federal share of the program to one of block grants to states, wnich have always managed the program under federal mandates. The AHCA would free the states to manage the program more flexibly, but caps on the grants would create pressure to manage costs. It is not yet clear whether the Senate will offer a different approach to Medicaid reform, but it was the primary driver of increased health care coverage under Obamacare.

Finally, there are certain individuals with higher incomes who can afford to pay for coverage but prefer to freeload. Those who experience catastrophic health problems will be a burden to others, not necessarily through distortions in insurance pricing, but via taxes and deficits. To an extent, the situation is a classic problem of the commons. In this case, the “commons” is an invention of government and the presumed “right to health care”: there is no solution to the freeloader problem faced by taxpayers short of denying the existence of that right to those who can afford catastrophic coverage but would refuse to pay. Only then would the burdens be internalized to the cost-causes. Charity can and should go partway to relieving individuals of the consequences of their bad decisions, but EMS will still arrive if called, providers will render care, and a chunk of the costs will be on the public dime.

 

The CBO’s Obamacare Fantasy Forecast

28 Tuesday Mar 2017

Posted by in Health Care, Obamacare

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The Congressional Budget Office (CBO) is still predicting strong future growth in the number of insured individuals under Obamacare, despite their past, drastic over-predictions for the exchange market and slim chances that the Affordable Care Act’s expansion of Medicaid will be adopted by additional states. Now that Republican leaders have backed away from an unpopular health care plan they’d hoped would pass the House and meet the Senate’s budget reconciliation rules, it will be interesting to see how the CBO’s predictions pan out. The “decremental” forecasts it made for the erstwhile American Health Care Act (AHCA) were based on its current Obamacare “baseline”. A figure cited often by critics of the GOP plan was that 24 million fewer individuals would be insured by 2026 than under the baseline.

It was fascinating to see many supporters of the AHCA accept this “forecast” uncritically. With the AHCA’s failure, however, we’ve been given an opportunity to witness the distortion in what would have been a CBO counterfactual. What a wonderful life! We’re stuck with Obamacare for the time being, but this glimpse into the CBO’s delusions will be one of several silver linings for me.

Again, the projected 24 million loss in the number of insured under the AHCA was based on an actual predicted loss of about 5 – 6 million and the absence of an Obamacare gain of 18 – 19 million. Those figures are from an excellent piece by Avik Roy in Forbes. I drew on that article extensively in my post on the AHCA prior to its demise. Here are some key points I raised then, which I’ve reworded slightly to put more emphasis on the Obamacare forecasts:

  1. The CBO has repeatedly erred by a large margin in its forecasts of Obamacare exchange enrollment, overestimating 2016 enrollment by over 100% as recently as 2014.
  2. The AHCA changes relative to Obamacare were taken from CBO’s 2016 forecast, which is likely to over-predict Obamacare enrollment on the exchanges by at least 7 million, according to Roy.
  3. The CBO also assumes that all states will opt to participate in expanded Medicaid under Obamacare going forward. That is highly unlikely, and Roy estimates its impact on the CBO’s forecast at about 3 million individuals.
  4. The CBO believes that the Obamacare individual mandate has encouraged millions to opt for insurance. Roy says that assumption accounts for as much as 9 million of total enrollment across the individual and employer markets, as well as Medicaid.

Thus, Roy believes the CBO’s estimate of the coverage loss of 24 million individuals under the AHCA was too high by about 19 million!

In truth, Obamacare will be watered down by regulatory and other changes instituted by the Trump Administration, which has said it will not enforce Obamacare’s individual mandate. Coverage under the “new” Obamacare will devolve quickly if the CBO is correct about the impact of the individual mandate.

The CBO’s job is to “score” proposed legislation relative to current law; traditionally, it made no attempt to account for dynamic effects that might arise from the changed incentives under a law. The results show it, and the Obamacare projections are no exception. In the case of Obamacare, however,  the CBO seems to have applied certain incentive effects selectively. The supporters of the AHCA might have helped their case by focusing on the flaws in the CBO’s baseline assumptions. We should keep that in mind in the future with respect to any future health care legislation, not to mention tax reform!

 

 

 

 

 

Cleaving the Health Care Knot… Or Not

18 Saturday Mar 2017

Posted by in Health Care, Obamacare

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Republican leadership has succeeded in making their health care reform plans in 2017 even more confusing than the ill-fated reforms enacted by Congress and signed by President Obama in 2010. A three-phase process has been outlined by Republican leaders in both houses after the initial rollout of the American Health Care Act (AHCA), now billed as “Phase 1”. The AHCA was greeted with little enthusiasm by the GOP faithful, however.

As a strictly political matter, there is a certain logic to the intent of “three-phase plan”: limiting the provisions of the AHCA to issues having an impact on the federal budget. That would allow the bill to be addressed under “budget reconciliation” rules requiring only 51 votes for passage in the Senate. Phase 2 would involve regulatory rule-making, or rule-rescinding, as the case may be. The putative Phase 3 would require additional legislation to address such unfinished business as allowing health insurance competition across state lines, eliminating anti-trust protection for insurers, and medical tort reform. How the sponsors will get 60 Senate votes for Phase 3 reforms is an unanswered question.

Legislative Priorities

Yuval Levin wrote a great analysis of the AHCA last week In which he described the structure of the House bill as a paranoid reaction to the demands of an “imaginary parliamentarian”. By that he means that the reforms in the bill conform to a rigid and potentially flawed interpretation of Senate budget reconciliation rules. Levin’s view is that the House should not twist itself up over what might be negotiated prior to a Senate vote. In other words, the House should concern itself at this stage with passing a bill that at least makes sense as reform, without bowing to any of the awful legacy provisions in Obamacare.

Medicaid reform is one piece of the proposed legislation and is reasonably straightforward. It imposes caps on federal funding to states after 2020, but it grants more flexibility to the states in managing the program. It also involves a tradeoff by allowing Medicaid funding to increase over the first few years, in line with the expansion under Obamacare, in exchange for capped growth later. The expectation is that long-term costs of the program will be reduced through a combination of the caps and better management at the state level.

The more complex aspects of the AHCA attempt to effect changes in the individual market. Levin offers a good perspective on these measures. First, he describes the general character of earlier Republican reform proposals from which the AHCA descends:

“Those various proposals all involved bringing premium costs down by enabling insurers to sell catastrophic coverage plans (along with more comprehensive plans) and enabling everyone in the individual market to afford at least those catastrophic coverage plans. This would enable far greater competition and let anyone not otherwise covered by insurance enter the individual market as a consumer.  …

The House proposal bears a clear resemblance to this approach. It involves some deregulation from Obamacare, it includes a refundable tax credit for coverage, it gestures toward incentives for continuous coverage. But it is also fundamentally different from this approach, because it functions within the core insurance rules established by Obamacare, which means it can’t really achieve most of the key aims of the conservative reforms it is modeled on.”

The rules established by Obamacare to which Levin refers include the form of community rating, which is merely loosened somewhat by the AHCA. However, the AHCA would impose a 30% penalty for those who fail to enroll while still healthy. This is a poorly designed incentive meant to substitute for Obamacare’s individual mandate, and it is likely to backfire. Levin is clear that this feature could have been avoided by scrapping the old rules and introducing a new form of community rating available only to the continuously insured.

The AHCA also fails to cap the tax benefits of employer-provided coverage, which retains a potential imbalance between the incentives for employer versus individual coverage. Levin believes, however, that some of these shortcomings can be fixed through a negotiation process in either the House or the Senate, if and when the bill goes there.

The CBO’s Report

As it is, the bill was “scored” by the Congressional Budget Office (CBO) with results that are widely viewed as unsatisfactory. The CBO’s report states that the AHCA would reduce the federal budget deficit, but the ugly headline is that relative to Obamacare, it woud cause 24 million people to lose their coverage by 2024. That number is drastically inflated, as Avik Roy demonstrated in his Forbes column this week. Here are the issues laid out by Roy:

  1. The CBO has repeatedly erred by a large margin in its forecasts of Obamacare exchange enrollment, overestimating 2016 enrollment by over 100% as recently as 2014.
  2. The AHCA changes relative to Obamacare are taken from CBO’s 2016 forecast, which still appears to over-predict Obamacare enrollment substantially. Roy estimates that this difference alone would shave at least 7 million off the 24 million loss of coverage quoted by the CBO.
  3. The CBO also assumes that all states will opt to participate in expanded Medicaid going forward. That is highly unlikely, and it inflates CBO’s estimate of the AHCA’s negative impact on coverage by another 3 million individuals, according to Roy.
  4. Going forward, the CBO expects the Obamacare individual mandate to encourage millions more to opt for insurance than would under the AHCA. Roy estimates that this assumptions adds as much as 9 million to the CBO’s estimate of lost coverage across the individual and employer markets, as well as Medicaid.

Thus, Roy believes the CBO’s estimate of lost coverage for 24 million individuals is too high by about 19 million! And remember, these hypothetical losses are voluntary to the extent that individuals refuse to avail themselves of AHCA tax credits to purchase catastrophic coverage, or to enroll in Medicaid. The latter will be no less generous under the AHCA than it is today. The tax credits are refundable, which means that you qualify regardless of your pre-credit tax liability.

Fixes

Despite Roy’s initial skepticism about the AHCA, he thinks it can be fixed, in part by means-testing the tax credits, rather than the flat credit in the bill. He also believes the transition away from the individual mandate should be more gradual, allowing more time for markets to being premiums down, but I find this position rather puzzling given Roy’s skepticism that the mandate has a strong impact on enrollment. Perhaps gradualism would convince the CBO to score the bill more favorably, but that’s a bad reason to make such a change.

It’s impossible to say how the bill will evolve, but certainly improvements can be made. It is also impossible to know whether Phases 2 and 3 will ultimately bring a more complete set of cost-reducing regulatory and competitive reforms. Phase 3, of course, is a political wild card.

Michael Tanner notes a few other advantages to the AHCA. Even the CBO says the cost of health insurance would fall, and the AHCA will bring greater choice to the individual market. It also promises over $1 trillion in tax cuts and lower federal deficits.

Alternatives

The GOP faced alternatives that should have received more consideration, but those alternatives might not be politically viable at this point. Some of them contain features that might be negotiated into the final legislation. Rand Paul’s plan has not attracted many advocates. Paul took the courageous position that there should be no entitlements in a reform plan (i.e., subsidies); instead, he insisted, with liberalized market forces, premium costs would decline sufficiently to allow affordable coverage to be purchased by a broad cross-section of Americans. Paul is obviously unhappy about the widespread support in the GOP for refundable tax credits as a replacement for existing Obamacare subsidies.

John C. Goodman has advocated a much simpler solution: take every federal penny now dedicated to health care and insurance subsidies, including every penny of taxes now avoided via tax deductions on employer-provided coverage, and pay it out to households as a tax credit contingent on the purchase of health insurance or health care expenses. This is essentially the plan put forward by Rep. Pete Sessions and Sen. Bill Cassidy in the Patient Freedom Act, described here. While I admire the simplicity of one program to replace the existing complexities in the federal funding of health care coverage, my objection is that a health care “dividend” of this nature resembles the flat tax credit in the AHCA. Neither is means-tested, amounting to a “Universal Basic Health Insurance Benefit”. Regular readers will recall my recent criticism of the Universal Basic Income, which is the sort of program that smacks of “universal state dependency”. But let’s face it: we’re already in a state of federal health care dependency. In this case, there is no incremental cost to taxpayers because the credit would replace existing outlays and tax expenditures. In that sense, it would eliminate many of the distortions currently embedded in federal health care policy.

A more drastic approach, at this point, is to simply repeal Obamacare, perhaps with a lengthy phase-out, and attempt to replace it later in the hope that support will coalesce around a reasonable set of measures leveraging market forces, and with accommodations for high-risk individuals and the economically disadvantaged. Michael Cannon writes that CBO estimated a simple repeal would increase the number of uninsured by 23 million over ten years, slightly less than the 24 million estimate for the AHCA! Of course, neither of these estimates is likely to be remotely accurate, as both are distorted by the CBO’s rosy assumptions about the future of Obamacare.

Where To Go?

Tanner reminds us that the real alternative to Republican legislation, whatever form it might take, is not a health care utopia. It is Obamacare, and it is collapsing. That plan cannot be effectively reformed with additional subsidies for insurers and consumers, or we’d find ourselves in a continuing premium spiral. The needed reforms to Obamacare would resemble changes contemplated in some of the GOP proposals. While I cannot endorse that AHCA legislation in its current form, or as a standalone reform, I believe it can be improved, and the later phases of reform we are told to anticipate might ultimately vindicate the approach taken by GOP leadership. I am most skeptical about the promise of subsequent legislation in Phase 3. I’ll have to keep my fingers crossed that by then, the path to additional reforms will be more attractive to democrats.

Hillary’s “Fix”: Obamacare Squared

26 Wednesday Oct 2016

Posted by in Obamacare

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One of Hillary Clinton’s “public positions” is that Obamacare needs a few “fixes”, a considerable understatement. Meanwhile, Wikileaks has revealed that she has “privately” rooted for the failure of Obamacare. For that reason, Bill Clinton’s recent slip-up, in which he portrayed Obamacare as a “crazy” system, had a certain Freudian quality. Indeed, Obamacare looks crazier every year, especially in the middle of premium-hike season.

One of Hillary’s so-called “fixes” is the creation of a “public option”, or health insurance offered by the government to compete on exchanges with private insurance. Private health insurers, with the expiration of the so-called “risk corridors”, do not have continuing access to the public purse to cover their losses; going forward, they must price coverage at rates covering the cost of their respective risk pools. The government, on the other hand, is likely to have pricing flexibility. If exercised, there will be little hope for private insurers to “compete” without bailout money. Health insurance coverage, then, is likely to devolve into a single-payer monopoly, and control over health care delivery will be increasingly monopolized as well.

Sally Pipes says the “public option” is a politically attractive way to make a single-payer system inevitable:

“But progressives face the same problem pushing single-payer they always have — the public won’t stand for it. So they’re dusting off an old idea that will get them to single-payer without using those words.“

So the path from Obamacare to a single-payer system is likely to involve a public option in one form or another. John C. Goodman points out that expanding Medicaid is one way to create a broad public option. Medicaid reimbursement rates are low, however, which is why many doctors refuse to accept patients with Medicaid coverage. Such might be the quality of future coverage under an “affordable” public option. And if Medicaid is enhanced so as to appeal to middle class families, it will be correspondingly more expensive. But for whom? More than likely, the tab will be paid by a combination of insureds and taxpayers. And more than likely, the number of competing Medicaid plans (most of which are now privately offered and managed (e.g., Centene Corporation)) will dwindle.

Christopher Jacobs says that when Obamacare became law, health insurers had every expectation that they’d be bailed out by the government indefinitely. Continuing reimbursement for losses was never guaranteed, however. The pressure to backstop the insurers’ profitability will be stronger as the debate over “fixing” Obamacare advances. But as Jacobs warns, ongoing bailouts mean that these insurers are essentially controlled by the government. The private insurers would essentially become heavily-regulated entities managing the operational details of a de facto single-payer system.

So, there are three distinct possibilities under a Hillary Clinton presidency, assuming she can get any of them though Congress: 1) a public option with no private bailouts; 2) a public option with ongoing bailouts; and 3) no public option with ongoing bailouts. Ultimately, all of these scenarios are likely to devolve toward a de facto single-payer system. So we will have monopoly, central control of health care, and/or bailouts. Who was it that said government is the way we wreck things together?

Hillary has some other “fixes” in mind. Some of these involve more regulation of coverage and pricing, such as mandatory provision of three free “sick” visits with a provider each year and in-network pricing for emergency procedures. These steps will add to the cost burden on private insurers.

Regulating drug companies more heavily is another favorite Hillary Clinton theme, but regulation is perhaps the primary reason why the drug development process is so lengthy and costly. The theory that government will be more effective at negotiating drug prices than insurers is suspect. Outright price regulation is likely to mean reduced availability of various medicines. Patent reform and an expedited drug approval process would be a more effective approach to reducing drug prices.

Clinton has also proposed a tax credit for out-of-pocket health care costs exceeding 5% of income. We’ll need higher tax rates, lower deductions and credits elsewhere, or higher deficits to pay for this one.

Finally, Hillary wants to expand eligibility for Medicare to anyone 55 and older, but as Goodman explains, the kind of Medicare Advantage plans that would be made available to “near seniors” under this proposal are similar to those already offered by private insurers, and at lower cost, and premia for these plans are often payable with pre-tax dollars, or the buyers may be eligible for tax subsidies. This proposal might sound appealing, but it is unlikely to accomplish anything except to create more administrative overhead, regulation and diminish existing offerings.

Obamacare has injected a high degree of central planning into the health care system with disastrous results. It has fallen far short of its own objectives for reducing the number of uninsured, “bending the cost curve” downward, and avoiding disruptions to existing coverage and patient-doctor relationships. Choices have narrowed in terms of coverage options and within networks. Obamacare has imposed unnecessary costs on providers and encouraged a monopolization of health care delivery, hardly a prescription for affordability. And Obamacare has proven to be a budget buster, contrary to the advance hype from its proponents.

I remember standing in a pharmacy shortly after Obamacare was enacted, and I heard a sharp-voiced leftist telling a clerk that Obamacare was just a bridge to single-payer health care. I tried to mind my own business, thinking it unproductive to engage such an individual in public. This fellow was quite pleased with the clever deception that was Obamacare. It was never a secret that the progressive left hoped single-payer would be the ultimate outcome, but it’s interesting to witness their discomfort with the way things are unfolding. Surely they must have known that if “fixes” were necessary, something would have to be broken. Perhaps they thought the politics would get simpler, but the shortcomings of the health care law have inflicted too much pain and shame.

I’m tempted to say that the health care system can be improved only by doing precisely the opposite of everything Clinton has proposed. There’s some truth in that, but it’s not quite that simple. The path to better and more affordable health care is to end the dominant role of third-party payers, placing responsibility on price-sensitive consumers, allowing a variety of choices in coverage, ending tax preferences, reducing regulation and encouraging real competition in the markets for coverage and medical care. Reform of the patent system could introduce more competition to markets for pharmaceuticals. The Medicaid system will have to be relied upon to cover those who otherwise can’t be insured at affordable rates. Proposals for federal funding of Medicaid through block grants to the states is an avenue for achieving greater efficiency and better health care outcomes.

Hillary Clinton’s “fixes” are all likely to exacerbate the worst failings of Obamacare for consumer-patients and taxpayers. More federal spending commitments will not solve the structural problems embedded in the health care law. It will magnify them. The hope among the progressive left remains that single-payer health care will evolve out of the Obamacare system once it is “fixed”. And what will we get? More complete monopolies in coverage and care, higher prices, central regulation, narrowed choice, waiting lists, denial of care, and some combination of higher taxes and deficits. In other words, a more radical version of Obamacare.

Health Care Devolution and Monopoly

02 Thursday Jun 2016

Posted by in Health Care, monopoly, Obamacare

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Risk Pool

Obamacare and its boosters are trying to come to grips with several new blows. Last month, United Health Care (UHC) announced that it would not participate in the Obamacare exchanges in the 2017 plan year. The announcement offers confirmation that the Affordable Care Act (ACA) is plagued by adverse selection on the exchanges it authorized, and the spiral will only get worse. This is emphasized in “Five Things ACA Supporters Don’t Want You To Know“: other carriers are struggling and will be forced to accept UHC’s adverse risk pool;  premiums must increase; more carriers will bail out; and quality of coverage will continue to decline because the ACA effectively punishes more comprehensive coverage.

Those insurers would have bailed sooner if not for subsidies they’ve been receiving from the federal government on individuals with incomes up to various multiples of the poverty line. However, the funding of a portion of those subsidies was ruled unconstitutional in federal appeals court in May. A deposition from a senior IRS official indicates that the Obama Administration was warned in early 2014 that it had no authority to make the payments, advice that it summarily dismissed. That’s on top of new lawsuits by insurers who say they were shorted by a wide margin on “risk corridor” payments owed to them by the federal government under Obamacare. The risk corridors, which supposedly cover a portion of aggregate losses on health exchange business, will expire after this year, just one the reasons to expect large premium hikes for next year.

As insurers drop out of the Obamacare exchanges, consumers will be forced to deal with a less competitive landscape. About half of the so-called coops on the exchanges had failed by the end of last year. A consequence of this attrition is that the range of coverage available to consumers will shrink:

“One BlueCross BlueShield subsidiary in Virginia has already filed plans to get out of the bronze plan, according to Inside Health Policy, and other insurers will follow suit if BCBS succeeds. That will destabilize the markets further, as one analyst told Leslie Small at Fierce Health Payer, because most of the younger and healthier participants in these risk pools have chosen bronze plans – and would likely bail out rather than pay higher premiums for insurance that they hardly ever use.“

Obamacare also fosters monopolization in the delivery of medical care. A pernicious effect is that local health-care markets are increasingly dominated by a single so-called “non-profit” hospital organization:

“Researchers at Johns Hopkins and Washington and Lee Universities report that seven of America’s 10 most profitable hospitals are officially not for profit. … That status entitles them to huge state and federal tax breaks — whose value has doubled in recent years — for ‘charity care and community benefit.’ …  A for-profit outlet will pay taxes and returns to investors. Nonprofits wind up paying huge sums to executives — and plowing cash into gaining more market share.“

Non-profit status does not preclude monopolistic behavior. These institutions possess:

“… enormous leverage when setting prices and negotiating reimbursement from private insurers — whose hands are tied because they need those hospitals to be part of their network to attract paying customers. … As Dr. Marty Makary of Johns Hopkins wrote in The Wall Street Journal back in 2014: ‘When you’re the only game in town, you call the shots.’“

It’s no coincidence that Obamacare rewards consolidation of health care providers through so-called Accountable Care Organizations (ACOs). That’s helped to drive the disappearance of independent physician practices in recent years. Those physicians are Increasingly employed by hospitals at which they can meet standardized quality measures more easily. The medical establishment maintains that ACOs will “bend the cost curve”… someday. But in the meantime, it’s not happening: the quality measures don’t provide good measures of health outcomes, and they inhibit innovation.

“For one thing, outcomes themselves are not easy to measure. An 80-year-old goes to the doctor with back pain. What is the best outcome? No pain? That’s probably impossible to achieve with even the highest quality care. Less pain? Maybe. But what does that mean and how do you measure it from patient to patient?

Then there is the matter of adjusting those scores for the severity of the disease and the social and economic status of the patient. This matters because low-income patients often struggle to manage their follow-up care or may be unable to afford medications. Such ‘risk adjustment’ is even harder to do with older adults with multiple chronic conditions.“

Even worse, while Obamacare seeks to broaden the market for health care to include those for whom good health coverage is otherwise out of reach, there is evidence that it is not truly improving access to health care. First, the kinds of policies that have been mandated provide relatively “thin” coverage, with high deductibles and copayment rates. Even when subsidized on the exchanges, many of the insured find actual health care payments to be prohibitive. Little wonder that emergency room utilization (where care must be provided regardless of ability to pay) has climbed under Obamacare, contrary to the early assertions of proponents. Second, many of the newly insured are covered by Medicaid, but low physician reimbursement rates have diminished the number of physicians willing to serve that market. Finally, while Obamacare increases the demand for provider services, it does not bring forth its own supply. A provider shortage is expected to continue to grow more severe over the next ten years.

The dual markets for health coverage and health care itself are becoming less competitive under Obamacare. The central planning inherent in the law effectively tossed the most potent forces available for reducing health care costs and expanding coverage: market competition and innovation. Higher prices represent only one avenue for the release of pressures created by mandates; shortfalls in access and the quality of care are others. While the medical establishment and regulators insist that safeguards are in place, it’s a safe bet that monopoly and central planning will have their usual dire effects.