The Destructive Pooling of Risks and Outcomes

29 Friday Jun 2018

Posted by pnuetz in Health Insurance, Obamacare, Uncategorized

Tags

Benefit Mandates, Catastrophic Coverage, Death Spiral, Flood Planes, Free Riders, High-Risk Pool, Individual Mandate, Insurability Rider, Obamacare, Portability, Pre-Existing Conditions, Rate Regulation, Social Safety Net

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.

Musings On Health Insurance Reform

10 Wednesday May 2017

Posted by pnuetz in Health Care, Obamacare

≈ 1 Comment

Tags

AHCA, American Health Care Act, Block Grants, Catastrophic Coverage, Congressional Budget Office, Cross Subsidies, Essential Benefit Requirements, Health Care Freeloaders, High-Risk Pools, Mandated Benefits, McArthur Amendment, Medicaid Reform, Obamacare, Pre-Existing Conditions, Right To Health Care, Tyler Cowan, Uncompensated care

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.

Death By Obamacare

18 Wednesday Jan 2017

Posted by pnuetz in Health Care

≈ 3 Comments

Tags

A. Barton Hinkle, ACA, Affordable Care Act, Avik Roy, Ben Shapiro, Cadillac Tax, Catastrophic Coverage, David Brooks, Harry Reid, Health Savings Accounts, HSAs, John C. Goodman, Medicaid Block Grants, Minimum Essential Coverage, Obamacare, Obamacare Repeal, Paul Ryan, Private Medicare, Refundable Tax Credit, Rep. Pete Sessions, Rep. Phil Roe, Rep. Tom Price, Repeal and Replace, Sen. Orin Hatch, Sen. Richard Burr, Universal Access

People will die if we don’t repeal and replace Obamacare! That right, and I’ll tell you why: First, the “Affordable” Care Act (ACA) creates terrible incentives for physicians. Among other provisions, it has chopped reimbursement rates on Medicare and Medicaid. As a result, physicians are declining patients under those plans, exposing the “access” myth under Obamacare as one of several cruel deceptions. Second, “physician feedback” reports and hospital “performance scores” reward providers who avoid the sickest and neediest patients. Third, provisions of the ACA encourage the monopolization of health care delivery and consequently inflate costs. That makes it less likely that needy individuals will insure or seek care, especially given the high deductibles they face. And greater market concentration in health care delivery often means patients have nowhere to go when they are denied care. Fourth, Obamacare has increased the regulatory burden on providers, which invariably reduces the quality of care. Other ACA regulatory burdens placed on employers have forced them to reduce employees’ hours and new hiring in order to control costs. This has limited the number insured under employer plans, leaving them to grapple with the exchanges, or on government plans from which physicians feel stiffed, or to be uninsured. All of these developments lead to undesirable health care outcomes. And there is more.

The ACA Disaster

Obamacare was a complete sham and destined to fail from the start, but the law’s now certain demise is greeted with indignance by the economic illiterati of the left. There are many counts upon which the law has failed: almost 29 million remain uninsured; millions of others in the individual market lost the coverage and doctors they preferred; only a single insurance option is available on many exchanges; the individual mandate is widely-ignored; the exchanges are serving a sickly risk pool; insurance premia are skyrocketing; health care delivery has trended toward monopoly; low Medicaid reimbursement rates have reduced actual access to providers; negative employment effects have arisen as firms adjusted to the employer mandates; and the law has imposed stiff regulatory compliance costs on providers of health care. Obamacare is also a significant budget item, despite early claims to the contrary (also see here): according to the Congressional Budget Office (CBO), the law’s contribution to the federal budget deficit is expected to be almost $2 trillion over the next ten years. What a law! It’s many invasive tendrils are destroying the vitality of the health care and insurance sectors, and it must be eliminated.

There are better ways to achieve the goals originally put forward under the aegis of the ACA. Those who fear repeal either believe that the law will not be replaced, which is unlikely, or that the replacement plan will lead to the loss of health care coverage for a large number of individuals. My contention is that the ACA can be replaced with a plan that would correct its massive deficiencies without creating other death traps.

The single truthful claim that supporters of Obamacare can make is a reduction in the number of uninsured since its implementation, but the numbers reported are exaggerated. A typical quote is that 20 million have gained coverage, an estimate, but we’ll go with that. The link gives a rough but meaningful accounting. Most of the increase in the number of insured, about 13 million, came from expanded Medicaid enrollment. That could have been accomplished without the ACA, and most of those enrollees were already eligible for Medicaid before the ACA’s expansion in eligibility. Perhaps the law had some beneficial effects on the awareness of individuals who were previously eligible but unenrolled.

The quoted gains in the insured population also include several million who were forced off their previous coverage in the individual market by the ACA. These do not represent net increases in the insured population. There have also been gains among young adults who remained on their parents policies. And yes, there have been gains in coverage among those with pre-existing conditions, but this totals less than half a million even counting those already covered under state “high-risk pools”. Needless to say, outright repeal of the ACA without replacement would not lead to a 20 million increase in the uninsured population, as many have argued. With replacement, it is conceivable that losses in coverage could be zero or negative.

Replacement Bills

What are the likely features of an ACA replacement bill? There are as many as nine different proposals or bills introduced by republicans, including one from Rep. Tom Price, who has been nominated to serve as President-Elect Trump’s Secretary of Health and Human Services (HHS). Rep. Pete Sessions and Sen. Bill Cassidy have introduced a bill endorsed by economist John C. Goodman. Rep. Phil Roe introduced a bill just last week. Sen. Orin Hatch and Sen. Richard Burr have proposed health care legislation. House Speaker Paul Ryan has also proposed a plan that received muted praise from noted health-care expert Avik Roy. These plans have some commonalities. In broad strokes, the proposed legislative actions call for less regulation, greater choice in the design of health insurance policies, more patient-centered care, a shift to market orientation, efforts to equalize the tax treatment of insurance premia for employer and individually-sponsored plans, retention of the ACA’s continuance of family coverage for young adults, and tax credits to support universal availability of insurance coverage.

There are several ways in which an ACA replacement plan can reduce the cost of health care delivery and the cost of health care insurance. The low-hanging fruit, as it were, involves steps to reduce the regulatory burden on health care providers, eliminating the ACA’s Minimum Essential Coverage and Essential Heath Benefits requirements (and allowing wider choice of coverage types and levels), and allowing competition among insurers across state lines.

The reduction in costs and subsidies that can achieved by allowing simple catastrophic-only policies in both the individual and employer markets is obvious. These policies would have low premia and correspondingly high deductibles. Regular checkups and routine health maintenance would not be covered under such basic policies. Those benefits would be optional, along with others like mental health coverage, maternity and reproductive health. The basic policies would represent real insurance, not paid-in-advance services. It’s more difficult, however, to anticipate the magnitude of cost savings and efficiency gains from eliminating regulatory requirements, encouraging competition among providers, and legalizing interstate insurance competition. That means the total gain from “low-hanging fruit” is hard to quantify, but it is real. Here are comments by David Brooks in The New York Times on the promise of market-oriented reforms.

Several of the GOP plans seek to provide universal availability of health insurance coverage by allowing refundable tax credits on insurance costs combined with expanded availability of Health Savings Accounts (HSAs). These steps would help to equalize the tax benefits of health insurance across the employer and individual markets. This is a crucial step due to the historically damaging effects of employer-provided coverage, as noted by A. Barton Hinkle here. Several of the GOP plans would allow non-employers like church groups, fraternal and professional associations to offer coverage.

Here is Avik Roy on the handling of high-risk individuals under the Ryan plan:

“Obamacare-style guaranteed issue and community rating would be gone and replaced by high risk pools, guaranteed issue for continuously held coverage, and a default requirement that insurers had to price their plans for older enrollees no higher than 5 times how they price them for younger enrollees (a significant improvement from Obamacare’s stricter 3:1 ratio).“

Other proposals in some of the GOP plans involve reform of the FDA, more support for private Medicare plans, and a change in the federal portion of Medicaid funding to block grants to states (who actually manage the program). The latter will be the subject of a future post.

Opportunities and Minefields

The kinds of steps described above can lead to greater reductions in the number of uninsured, and at a lower cost, than Obamacare. However, many partisans are agitating to convince republicans that this is impossible. Here is Roy’s opinion (he refers to his 2014 book, Transcending Obamacare):

“… many would-be reformers have convinced themselves that no Republican replacement for Obamacare can cover as many Americans as Obamacare will. Put simply, this is flat-out wrong. As Transcending Obamacare showed, you absolutely can achieve universal coverage with less spending and less government intervention, because we spend way too much subsidizing health coverage for the wealthy, and because our government-driven employer-based health care system inflates wasteful spending across the board.“

John C. Goodman discusses four “minefields” that republicans should avoid, the first of which seems obvious:

Don’t repeal and delay: All indications are that congressional republicans have avoided this minefield, and Trump has stated that he won’t accept anything short of “simultaneous” repeal and replace.
ACA revenue should not be “given away”: Goodman lists negotiated fee reductions from the AMA under the ACA, AARP’s agreement to Medicare cuts, and taxes on pharmaceutical companies, insurers, big labor and big business. Eliminating these sources of savings and tax revenue can be afforded only by reducing other costs. I’m dubious that the fee reductions and taxes haven’t had counterproductive effects, but point taken.
Don’t impose a Cadillac tax: The Cadillac tax applies to expensive plans offered by employers. This point is an exception to #2 above, but Goodman says several GOP plans impose forms of Cadillac taxes despite widespread opposition.
Don’t ignore employers: Here is Goodman on employers:

“Virtually all of the new government spending for private health insurance under Obamacare is going to what has become the most dysfunctional part of the healthcare system – the individual market. This is where premiums are spiraling and there is a race to the bottom on quality and access to care. Almost every Republican plan to replace Obamacare makes the same mistake. But why throw good money after bad?

Almost 30 million Americans are still uninsured (largely because the products in the Obamacare exchanges are so expensive and unattractive) and 85% of these live in a household with someone in the labor market. A tax credit that could be used by employers to help employees enroll in a group plan would give them access to lower premiums and better coverage.“

Goodman strongly endorses the replacement plan put forward by Rep. Pete Sessions and Sen. Bill Cassidy. It is the only GOP plan advanced thus far that avoids the four pitfalls identified by Goodman.

Markets Can Save Lives

My statement at the top of this piece might strike some as outrageous, but it is less outrageous than statements by Sen. Harry Reid and others that “people will die” if Obamacare is repealed. Of course, my assertion would be hard to defend unless conditioned on a replacement plan to improve access to quality care. But it is wrong to say that repeal will lead to incremental deaths without reference to a replacement plan. The claim that there is unlikely to be a replacement is disingenuous.

The usual defense of the ACA is grounded in the increased number of insureds it has achieved, combined with appeals to the expense of catastrophic health events. A weaker defense is the presumption that Obamacare codifies a “right” to health care. Even if we stipulate that such a right exists, there are better ways to accomplish the ends desired by the ACA’s proponents. The alternatives now under consideration are encouraging, as they are largely geared toward leveraging the efficiency of the market with less reliance on information-deficient government planners and rule-makers.