Injecting Competition Into Health Care

12 Friday Oct 2018

Posted by pnuetz in competition, Health Care, Uncategorized

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Ameriflex, Anna Wilde Mathews, competition, Cross Subsidies, CVS, John C. Goodman, John Cochrane, MediBid, Medicaid, Medicare, MinuteClinic, Obamacare, Third-Party Payers, Transparent Pricing

Competitive pressures in U.S. health care delivery are weak to nonexistent, and their absence is among the most important drivers of our country’s high medical costs. Effective competition requires multiple providers and/or substitutes, transparent prices, and budget-conscious buyers, but all three are missing or badly compromised in most markets for health care services. This was exacerbated by Obamacare, but even now there are developments in “retail” health care that show promise for the future of competition in health care markets. The situation is not irreversible, but some basic policy issues must be addressed.

John Cochrane maintains that the question of “who will pay” for health care, while important, has distracted us from the matter of fostering more competition among providers:

“The discussion over health policy rages over who will pay — private insurance, companies, “single payer,” Obamacare, VA, Medicare, Medicaid, and so on — as if once that’s decided everything is all right — as if once we figure out who is paying the check, the provision of health care is as straightforward a service as the provision of restaurant food, tax advice, contracting services, airline travel, car repair, or any other reasonably functional market for complex services.”

We face a severe tradeoff in health care: how to provide for the needs of more patients (e.g., the uninsured, or a growing elderly population) without driving up the cost of care? As a policy matter, provider resources should not be viewed as fixed; their quantity and the efficiency with which those resources are utilized are responsive to forces that can be harnessed. Fixing the supply side of the health care market by improving the competitive environment is the one sure way to deliver more care at lower cost.

Fishy Hospital Contracts

Cochrane discusses some anti-competitive arrangements in health care delivery, quoting liberally from an article by Anna Wilde Mathews in The Wall Street Journal, “Behind Your Rising Health-Care Bills: Secret Hospital Deals That Squelch Competition“:

“Dominant hospital systems use an array of secret contract terms to protect their turf and block efforts to curb health-care costs. As part of these deals, hospitals can demand insurers include them in every plan and discourage use of less-expensive rivals. Other terms allow hospitals to mask prices from consumers, limit audits of claims, add extra fees and block efforts to exclude health-care providers based on quality or cost.”

Mathews’ article is gated, but Cochrane quotes enough of its content to convey the dysfunction described there. Also of interest is Cochrane’s speculation that the hospital contract arrangements are driven largely by cross subsidies mandated by government:

“The government mandates that hospitals cover indigent care, and medicare and medicaid below cost. The government doesn’t want to raise taxes to pay for it. So the government allows hospitals to overcharge insurance (i.e. you and me, eventually). But overcharges can’t withstand competition, so the government allows, encourages, and even requires strong limits on competition.”

The Role of Cross Subsidies

In this connection, Cochrane notes the perverse ways in which Medicare and Medicaid compensate providers, allowing large provider organizations to charge more than small ones for the same services. Again, that helps the hospitals cover the costs of mandated care, regulatory costs, and the high administrative and physical costs of running large facilities. It also creates an obvious incentive to consolidate, reaping higher charges on an expanded flow of services and squelching potential competition. And of course the cross subsidies create incentives for large providers to lock-in business from insurers under restrictive contract agreements. Such acts restrain trade, pure and simple.

Cross subsidies, or building subsidies into the prices that buyers must pay, are thus an impediment to competition in health care, beyond the poor incentives they create for subsidized and non-subsidized buyers. So the “who pays” question rears it’s head after all. When subsidies are necessary to provide for those truly unable to pay for care, it is far better to compensate those individuals directly without distorting prices. That represents a huge policy change, but it would also help restore competition.

Competitive Sprouts

John C. Goodman provides a number of examples of how well competition in health care delivery can work. Most of them are about “retail medicine”, as it’s been called. This includes providers like MinuteClinic (CVS), LASIK and cosmetic surgery, concierge doctors, and “retail” surgical services. Goodman also mentions MediBid, a platform on which doctors bid to provide services for patients, and Ameriflex, which matches employers with concierge doctors. These services, which either bypass third-party payers or connect employer-payers with competitive providers, are having a real impact on the ability of patients to obtain care at a lower cost. Goodman says:

“I am often asked if the free market can work in health care. My quick reply is: That is the only thing that works. At least, it is the only thing that works well.”

Conclusion

Some of the most pernicious Obamacare cross subsidies have been dismantled via elimination of the individual mandate and allowing individuals to purchase short-term insurance. Nonetheless, U.S. health care delivery is still riddled with cross subsidies and excessive regulation of providers, including all the distortions caused by third-party payments and the tax code. Many buyers lack an incentive for price sensitivity. They face restrictions on their choice of providers, they don’t know the prices being charged, and they often don’t care because at the margin, someone else is paying. Fostering competition in health care delivery does not necessarily require an end to third-party payments, but the cross subsidies must go, employers should actively seek competitive solutions to controlling health care costs, price transparency must improve, and consumers must face incentives that encourage economies.

Progressives: Paul Doesn’t Want Peter’s Money? What a Hypocrite!

08 Thursday Feb 2018

Posted by pnuetz in Big Government, Federal Budget

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Blue States, Federal Transfers, Medicaid, Medicare, Megan McArdle, Mortgage Interest Deduction, Progressive Income Tax, Red States, Social Security, State and Local Tax Deduction, Tax Cuts and Jobs Act

I’ve heard the following assertion over and over: blue states are “doners” of federal tax revenue and red states are donees. In other words, states dominated by Democrats contribute more than they take from the federal budget, while Republican states take more than they contribute. But the facts are somewhat ambiguous. And to the extent that it is true, policies that would improve the net position of blue states would be very unpopular with the progressive Left. Furthermore, progressives expose their confusion regarding the ethics of sound governance by calling the red state opposition to an expansive federal government “hypocritical”.

The relative positions of red and blue states in terms of federal dollars is the topic of an excellent article by Megan McArdle, whom I haven’t featured on this blog for a while. Originally, the claim that blue states “gave” to red states via the federal budget was based on data from 2005, but a lot of fiscal water has passed under (and over) the bridge since then. Also, the original presentation used state totals of federal outlays minus revenues without accounting for differences in the size of state populations. Many blue states are relatively populous, so some the state rankings may shift when expressed on a per capita basis. McArdle reproduces a chart from a report by the New York State Comptroller using 2013 data:

“… deep-blue New Jersey is the biggest donor state. But red-blooded Wyoming is the next biggest, and North Dakota makes the list too. There is certainly a preponderance of blue states at that end of the spectrum, but it’s not a clear ‘Donor states are blue’ story. And if we match the 2013 data to the closest election (2012) we find that New Mexico, the biggest net recipient, went for Obama in 2012, as did Virginia, Maryland, Maine and Hawaii. What’s driving the net subsidies isn’t anything as simple as political identification.“

Wyoming and North Dakota contributed lots of federal revenue from taxes arising from the fracking boom.

McArdle goes on to consider policies that would reduce the flow of budget dollars to donee states:

“Most of the transfers do not come from ‘red state welfare’ like agricultural subsidies. They derive from Social Security, Medicare, Medicaid, unemployment insurance, food stamps, welfare, the maintenance of the national highway system, the purchase of goods and services for the federal government, and the operation of federal facilities and lands.

If blue state liberals consider this out of whack, what do they want to change?

Do they want to move toward a flatter, less progressive federal tax code?
Do they want to cut Social Security, Medicare and Medicaid?
Do they want to return unemployment insurance and similar entitlement programs entirely to the states?
Do they want to hand over the national parks to the states, or privatize them?
Would they like to downsize the federal workforce?
Should we redistribute military bases from red states to blue? (Those relocations might meaningfully alter the state electorate, making it easier for Republicans to get elected. …)“

Of course not! But like McArdle, I’m of the opinion that many of the policy changes on that list, or at least reforms of existing policies, are in order. Perhaps the allure of steeply progressive federal taxes has faded for blue state Democrats with the new reality of the Tax Cuts and Jobs Act. The law restricts deductions for mortgage interest, a hit on those borrowing against high-end homes. It also limits deductions for state and local taxes, eliminating a federal tax subsidy to high-earners living in states with high taxes. State and local politicians who support high taxes will no longer receive a “discount”, courtesy of taxpayers in other states, on the natural political liability of high taxes.

The categorization of blue states and red states as federal donors and donees is not quite as unambiguous as most Leftists imagine. Be that as it may, the flows of revenue and spending between the federal government and states is a consequence of demographics, regional business environments, and many other factors, but most of all the set of policies promulgated over the years in Washington DC. An objective assessment of the federal government’s largess indicates that most of those policies are in need of drastic reform, yet statists resist, demand more, and act as if “red states rubes” should be grateful for the dysfunction and the federal cash it brings. To progressives, it is hypocritical to oppose an expansive federal government on this basis. The absurdity of that claim is self-evident, but such is the confused state of progressive discourse. Perhaps a better adjective for red state opposition to federal profligacy would be “principled”.

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

25 Wednesday Oct 2017

Posted by pnuetz in Health Insurance, Markets, Obamacare

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Association Health Plans, Avik Roy, Barack Obama, Bill Cassidy, Cost-Sharing Subsidies, Donald Trump, Exchange Markets, Health Status Insurance, Insurer subsidies, Jeffrey Tucker, John C. Goodman, John Cochrane, John McCain, Medicaid, Medicare, Obamacare, Patient Freedom Act, Pete Sessions, Pre-Existing Conditions, Short-Term Policies, Tax-Credit Subsidies, Universal Health Allowance

“… 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.

Musings II: Avik Roy on Health Insurance Reform

12 Friday May 2017

Posted by pnuetz in Health Care, Obamacare

≈ 1 Comment

Tags

Actuarial Value, AHCA, American Health Care Act, Avik Roy, Benefit Mandates, CBO, Community Rating, Congressional Budget Office, Dylan Scott, Essential Benefits, Exchange Market, Interstate Competition, Medicaid, Risk corridors, Vox

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:

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;
a rollback in the required minimum actuarial value (AV) of an insurance plan (the ratio of plan-paid medical expenses to total medical expenses);
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!

Sins of American Health Insurance

22 Wednesday Feb 2017

Posted by pnuetz in Health Care

≈ 1 Comment

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COBRA, competition, Cross Subsidies, Employer Coverage, Future Insurability Coverage, health care costs, High-Risk Pools, Individual Coverage, Insurability, John Cochrane, Medicaid, Obamacare, Portability, Tax Deductibility, Wage controls

Health insurance in the U.S. suffers from many dysfunctions, but a couple of basic steps in its institutional evolution lie at the root of its worst shortcomings. I say this after coming across another great post by John Cochrane the other day, this time with some of his thoughts on fashioning an Obamacare replacement. He lays out a few basic principles, one of which is that “health insurance is not a payment plan for small expenses“, or shouldn’t be.

The best parts of Cochrane’s post, I think, relate to two longstanding features of the health insurance market in the U.S.:

“The original sin of American health insurance is the tax deduction for employer-provided group plans — but not, to this day, for employer contributions to portable individual insurance. ‘Insurance’ then became a payment plan, to maximize the tax deduction, and then horrendously inefficient as people were no longer spending their own money.

Worse, nobody who hopes to get a job with benefits then buys long-term individual insurance. This provision alone pretty much created the preexisting conditions problem.”

The last two sentences are insightful commentary on the inadequacy of coverage for pre-existing conditions, though “creating the pre-existing conditions problem” should probably read “foreclosed any easy solution to the pre-existing conditions problem“. During World War II, the government authorized the tax deduction for employer-provided health plans as a concession to labor interests frustrated by war-time wage controls. Cochrane should be forgiven for making this sound like a deal with the devil. Today, employer-provided coverage is almost always limited to one’s job tenure (plus 18 months under COBRA, since 1985). In the 1940s, the benefits might have been generous, but portability was probably the last thing on their minds, especially in light of the long job tenures of the day and the fact that many employers, at that time, offered coverage to vested retirees. The dominance of employer-provided coverage after WW-II pretty much ruled out lifetime insurability in a world with relatively high job mobility.

The tax deduction also helped to institutionalize the faulty notion that “good” health insurance should cover a panoply of services involving small, recurring expenses that are properly considered normal health upkeep. Instead, insurance should cover large, unexpected expenses for services necessary to treat injuries or severe illness. In addition, the coverage and the premium should, at the buyer’s option, include a guarantee of future insurability at standard rates. This option should not be mandated, but a refusal to opt-in must come at the risk of potentially large future health care obligations.

Cochrane also says:

“Cross-subsidies are a second original sin. Our government doesn’t like taxing and spending on budget where we can see it. So it forces others to pay: It forces employers to provide health insurance. It forces hospitals to provide free care. It low-balls Medicare and Medicaid reimbursement.

The big problem: These patches and cross-subsidies cannot stand competition. Yet without supply competition, costs increase, the number of people needing subsidized care rises, and around we go.”

Competition and choice must exist in health care delivery and in the health insurance market to keep costs under control. But if person A is an identifiable health risk and person B is not, and if healthy B is forced to pay the same premium for health coverage as sickly A, then A is cross-subsidized by B. Competition will encourage B to bail out of the risk pool. If B is prohibited from doing so, costs will soar because the cross-subsidies create incentives for A to over-utilize services, even making allowance for A’s greater need. Thus, forcing A and B into the same risk pool ultimately exacerbates the plight of both A and B by raising costs. That’s where we find ourselves today.

Enabling competition and dismantling cross-subsidies can only occur if all consumers are able to purchase not just health insurance, but long-term health insurability. To avoid a painful transition, publicly-funded high-risk pools might be necessary for the existing type As of the world, who are already burdened by poor health and might not be able to afford the premium necessary for insurance. Going forward, those who refuse a future-insurability option must understand that if they fail to opt-in prior to developing a serious health condition, they will have to rely on Medicaid, private charity, or a risk-rated policy, if they can afford it.

Will Republicans abolish the ill-founded tax deduction? Almost certainly not. They are likely to extend it to the individual side of the market, despite the fact that this will have an additional inflating impact on health care costs. At least it will reduce the current advantage of employer-paid coverage, potentially broadening the market faced by individuals. Also, Republicans might take steps to restore choice, promote competition, and eliminate cross-subsidies. As Cochrane notes, there are also ideas in play to improve portability. Questions remain about many of the details, however, including Medicaid reforms. On the whole, I’m hopeful that we’ll see most of Obamacare’s short-sighted provisions and rules rolled back and replaced by legislation to encourage the development of the market for insurance coverage and for future insurability.

The Vagina Subsidies

08 Wednesday Feb 2017

Posted by pnuetz in Health Care, Subsidies

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Abortion, Carl Anderson, Elective Abortions, Essential Benefits, Family Planning, Gender Rating, Generaal Accounting Office, Hadley Heath, Hyde Amendment, Identity Politics, Insurance Mandates, Maternity Care, Medicaid, Obamacare, Planned Parenthood, Public Health Service Act, Reproductive rights, Title X Grants, Women's March on Washington

Many believe that women are entitled to taxpayer subsidies by virtue of “reproductive rights”, or simply gender disparities in health care costs. Is this reasonable from an economic perspective? Is it fair? Some components of this claim on public resources are highly controversial. I discussed these issues last week in the following post, originally titled “Spite and the ‘Right’ To Subsidies”:

The Women’s March on Washington on January 21st was not precise in communicating its real objectives. But the costumes were cute, and some critics felt that more of the men in attendance should have worn them. Anyway, the leaders and organizers fell short in terms of articulating a coherent agenda. Unless, of course, you just “got it”. These women were angry, but it’s not as contagious as they think: a great many circumspect women recognize the unmatched freedoms, privileges, and prosperity enjoyed by women (and men) in the U.S. The inherent divisiveness of identity politics is simply not appealing to everyone.

There are a number of reasons why those marching unfortunates might feel put upon, and it must have felt cathartic to wail and gnash teeth. The dissatisfaction is mostly related to the fact that Donald Trump is the president, but if I had to guess, I’d say a quarter of the marchers weren’t registered to vote. Probably a third of the remainder did not vote, despite their registration.

All that aside, what sort of policy purpose did the marchers hope to achieve? For one thing, they do not want to lose federal funding and cross-subsidies for support of women’s health issues, including reproductive rights or family planning (terms of art for preventing pregnancies). That’s a passable translation of “stay away from my vagina!” There are several avenues through which the federal government arranges payments or subsidies for women’s health services such as childbirth, maternity care, and birth-prevention products and services:

Medicaid reimbursements account for the bulk of direct federal funding for family planning services; states are responsible for a major share of reimbursements as well.
Federal funding also occurs under Title X, the Public Health Service Act of 1970, which authorizes federal grants for family planning services.
Indirect funding occurs through cross-subsidies inherent in the structure of the Affordable Care Act (ACA), or Obamacare:
- The ACA requires health insurance to include a set of “essential benefits”. Premium payments from those for whom such benefits are superfluous subsidize those who require those benefits.
- The ACA prohibits “gender rating”, so that men effectively subsidize the higher cost of care and coverage for women (up to roughly middle age).
Those purchasing coverage on the Obamacare exchanges may be eligible for federal subsidies on their premium payments.

Both Medicaid and Title X grants are intended to serve the family-planning needs of low-income women. Likewise, the federal subsidies (#4) for insurance covering family planning services, including contraceptives, are designed to assist low-income women. The cross-subsidies inherent in the structure of Obamacare premia confer family planning benefits (and penalties) across a broad range of incomes.

Reproductive Rights and Family Planning

Many taxpayers object to the use of tax dollars to pay for contraceptive services on religious or moral grounds. This is unrelated to a woman’s right to use contraceptives; it has to do with coerced payment for anyone’s contraceptives. The Supreme Court’s Hobby Lobby decision relieved private employers of the obligation to pay for abortifacients on religious grounds, however.

Even more controversial is the idea that federal tax dollars might be used to fund abortions. In fact, that is outlawed by the Hyde Amendment, a temporary provision routinely attached to budget appropriation bills each year. This amendment restricts the use of federal and state funds for abortion to cases of rape, incest, and when the mother’s life is in danger. Elective abortions, however, are not eligible for taxpayer funding. Unfortunately, Hyde and a related executive order issued by President Obama have not been wholly effective at preventing premium cross-subsidies and taxpayer subsidies from paying for elective abortions. That’s because of the limited choices of insurance plans available in many states and the failure of insurers and public authorities to monitor compliance. Carl Anderson in National Review explained these issues in “Obamacare’s Taxpayer-Funded Abortions“. Anderson points to the findings of a 2014 report from the federal General Accounting Office (GAO):

“Twenty-eight states have a legal environment that allows insurance plans within these exchanges to cover abortion. Among these 28 states, they found that 1,036 plans include abortion coverage, including every plan in New Jersey, Connecticut, Vermont, Rhode Island, and Hawaii. More than 95 percent of the plans in Massachusetts, New York, and California also cover abortion.

… The GAO report makes clear that those who want to find a plan that does not cover abortion will have a very difficult time. In some cases, the information is available in the Summary of Benefits. In other cases, it is only available on the insurer’s website. In other cases, the information is available only by calling the insurer.”

The ACA also required insurers to account and bill separately for abortion coverage, but compliance is spotty:

“… the GAO found that, of the 18 insurers it investigated, none of them charged separately for abortion coverage, and none of them even itemized the coverage on their bills.”

Planned Parenthood

It’s also quite likely that Title X grants and even Medicaid are funding abortions, despite prohibition by the Hyde Amendment. Medicaid is rife with mismanagement, with tens of billions of dollars of improper payments each year. Title X grants, if not tied to specific procedures, are used to cover overhead costs, some of which undoubtedly support the abortion practices of certain health service providers. Planned Parenthood (PP) is the largest abortion practice in the country, in furtherance of Margaret Sanger’s eugenic vision. Abortions have been declining nationwide in recent years, but PP’s abortion count has been fairly stable. Between 2009 and 2014, several other prominent PP services declined by half to two-thirds, such as cancer screenings, breast exams/breast care, and pap smears, while PP’s total income grew.

PP has aborted more than 300,000 pregnancies every year since 2007, yet the organization claims that those procedures account for only 3% of its activity. The 3% figure is derived by treating an abortion as the equivalent of a pregnancy test, or an STD test, or a breast exam, a PAP smear, or any other “discrete clinical interaction”. This renders the 3% claim meaningless, or much worse, a deception. Abortion is a costly procedure relative to most of the other services counted by PP as equivalent. “Prenatal care” services can be complex, but the small count of such services delivered (about 19,000 annually) indicates that it does not account for a major part of PP’s budget.

It is difficult to find information on PP’s fee revenue by service; one analysis concluded that abortions accounted for about 52% of PP’s fee income in 2010. But it is impossible to know exactly how the organization allocates public funds. Of course, fees from some services might cross-subsidize others. But almost half of PP’s annual budget is funded by taxpayers. Therefore, at a minimum, PP should be required to provide more auditable information on the question of how it allocates taxpayer funds.

Gender Rating

Another major source of cross subsidies is the absence of gender rating in insurance coverage under Obamacare and other law. Health care costs are higher for women than men for a variety of reasons: First, of course, there is childbirth and maternity care. Women also tend to utilize clinical services at higher rates than men. Perhaps women are more careful about attending to their health needs, as they are more likely than men to have regular checkups. They tend to have more stress fractures and other musculo-skeletal injuries. And they live longer than men, creating higher costs in their senior years. In the past, gender rating by insurers in the individual market led to premium disparities between women and men of 25%-85%. Some states have prohibited or restricted gender rating for years, however, and employer plans nationally have been prohibited from gender rating since 1978.

Prohibitions against gender rating, like other forms of community rating, are ill-founded from an economic perspective. Hadley Heath put it well in 2013 in “Women Should Pay More for Health Insurance“:

“Pregnancy and childbearing aside, women seek preventive care and visit doctors more often. But these additional screenings cost money, and the person receiving the care should pay for it, not other members of her insurance pool (community-rated or not). After all, women may reap the benefits of this behavior by living longer lives; they should also take on the costs. …

A better, more equitable solution would be for both men and women to pay for more noncatastrophic health expenditures outside an insurance plan. This is the only way to ensure that individuals — not pools of people — pay for what they consume. … If our premiums don’t reflect our risk, our claims or our costs, then some people will be overcharged and others undercharged. The overcharged parties will underinsure, and the undercharged parties will overinsure, perpetuating the problems in our current system.”

Those who over-insure, or who have access to services at prices below cost by virtue of mandates and cross subsidies, will over-utilize scarce health care resources. Eliminating the prohibition on gender rating would not foreclose the opportunity to obtain reasonably-priced health care coverage, however. In fact, eliminating over-charges to men would give them an incentive to remain in the risk pool, which would restrain pricing in age ranges through which women experience higher costs. The elimination of cross subsidies to women would ease cost pressure in the delivery of services as well. And interstate competition among insurers would give women a better set of choices and prices. Heterosexual married couples would split the difference in gender-rated premium levels, of course, but lesbian couples would probably bear higher costs. In general, allowing choice in selecting coverage levels would focus costs on cost-causers, a requirement for economic efficiency. For example, to the extent that many pregnancies are intended, maternity care actually fails to meet the definition of an insurable risk. Requiring others to pay those costs creates an incredibly arbitrary and unfair burden, though insuring against complications is a different matter.

Assisting Low-Income Women

Again, much of the federal funding at issue is directed at low-income women. This includes Medicaid, Title X grants, and Obamacare subsidies on policies purchased through the state exchanges. Current discussions regarding an ACA replacement plan would subsidize low-income individuals via refundable tax credits, which are free of the nasty incentive effects of coverage mandates combined with cross subsidies. While some contend that Medicaid is under threat, the most “extreme” plans discussed thus far are limited to replacing current federal funding practices with block grants to the states, who manage the program. The grants might be frozen at current funding levels. In view of the Medicaid waste identified by the GAO, there is a need to create incentives for states to manage the program more effectively.

The rules prohibiting taxpayer-funded abortion payments are unlikely to change, though they might be given a more permanent form than by Hyde, and compliance efforts might be tightened. It is mistaken to argue in this context that denying funds to a poor woman for an abortion is the equivalent of burdening society with more dependency. One error is in thinking that somehow life is for sale by taxpayers. It is not. The second is in assigning a negative value to a person with untold potential. Those individuals should be thought of as sentient human assets to be nurtured under policies that promote family stability, effective educational institutions and incentives for self-reliance. The third mistake is in selling short the charitable motives of pro-lifers, most of whom know that true charity has nothing to do with the state.

Your Vagina, My Money

The marchers on the 21st of January were motivated in part by possible changes in the availability of federal tax money for women’s health care under the Trump Administration. There are several avenues through which that support is provided as aid to low-income women. The funding mechanisms and management of these programs must be improved, and they must be made more accountable to taxpayers. Moreover, subsidies to women are provided through the structure of premiums under Obamacare, which distort economic incentives, misallocate resources, and undermine the stability of health care costs and insurance premia. An end to “one-side-fits-all” insurance mandates and gender rating would go far in improving the efficiency and equity of health insurance.

The marchers’ concern also revolves around subsidized access to contraceptives and federal support for organizations that provide abortion services. Even complete removal of that support would have no bearing on fundamental “rights” in any true sense. It has nothing to do with the existence of a right to abort children, only the question of who pays. Ultimately, your reproductive decisions, and your non-reproductive decisions, should be your own financial responsibility, your insurer’s, or that of others who might wish to assist you. Private donors give many millions of dollars to Planned Parenthood every year, and presumably could give more. Don’t ask for taxpayers to be involved with your vagina in any way.

How We Hinder Mobility

06 Monday Feb 2017

Posted by pnuetz in Labor Markets, Mobility

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CityLab, David Schleicher, Defined Benefit Vesting, Fannie Mae, Freddie Mac, Geographic entry barriers, Geographic exit barriers, Immigration policy, Joel Kotkin, Medicaid, Mobility, Mortgage Interest Deduction, Occupational Licencing, Rent Controls, Richard Florida, Ronald Bailey, SNAP, Structural Unemployment, TANF, Tax Revaluation, Transfer Taxes, Zoning laws

A plethora of regulations and subsidies established by governments at all levels is making it more difficult for Americans to move, especially from one state to another. Yale Law Professor David Schleicher identifies these barriers to mobility and writes that they compromise the nation’s ability to match jobs with workers. Thus, these laws beget economic immobility as well. His paper, “Stuck in Place: Law and the Economic Consequences of Residential Stability“, describes a number of the barriers:

“Land-use laws and occupational licensing regimes limit entry into local and state labor markets; differing eligibility standards for public benefits, public employee pension policies, homeownership subsidies, state and local tax regimes, and even basic property law rules reduce exit from states and cities with less opportunity; and building codes, mobile home bans, federal location-based subsidies, legal constraints on knocking down houses and the problematic structure of Chapter 9 municipal bankruptcy all limit the capacity of failing cities to ‘shrink’ gracefully, directly reducing exit among some populations and increasing the economic and social costs of entry limits elsewhere.“

To get a sense of the magnitude of declines in mobility over the past three decades, see Figure 3 in this discussion about mobility by Richard Florida at CityLab. The percentage of homeowners who move declined from almost 10% annually in the late 1980s to about 5% in 2016. The biggest declines occurred during the periods of economic weakness in 2001 and 2008. For renters, the percentage of movers declined from just above 35% in 1988 to less than 24% in 2016.

Workers who might otherwise migrate to jurisdictions with better economic opportunities often cannot do so. Schleicher notes that low-income workers suffer the most from these obstacles, which he divides into entry and exit barriers. Most of the obstacles he cites are compelling, though at times his emphasis veers toward enabling more effective government management of the macroeconomy, which is very unappealing to my libertarian instincts.

Entry Barriers

Schleicher emphasizes two major ways in which entry barriers are created. One is the spread and severity of land use restrictions such as zoning and construction laws, which have become so severe in some areas of the country that they have led to drastic inflation in housing prices. In a review of Schliecher’s paper, Ronald Bailey at Reason.com illustrates the disparities created by this process:

“According to the Trulia real estate market analysis, the median house price in San Francisco is $1.2 million, with a median rent of $4,100 a month; in Youngstown it’s $93,000, with a median rent of $650. In other words, a Youngstown worker who sold his home for full price would receive enough money to rent a place in San Francisco for 22 months.“

The contrast in the economies of these two cities is stark. The San Francisco Bay Area has experienced vibrant job growth over the past several years, while Youngstown has been struggling for decades. Given the difference in housing prices and rents, it would be almost impossible for a worker from Youngstown to pursue an opportunity in the Bay Area without a accepting a severe decline in their standard of living. Joel Kotkin makes a similar point in discussing the high cost of housing in some areas, but his focus is on the difficult prospects for economic mobility and homeownership among Millennials.

The second major entry barrier discussed by Schleicher takes the form of occupational licensing laws. They differ across states but have multiplied since the 1950s. According to Richard Florida (linked above), the share of American workers subject to some form of licensing requirement rose from just 5% in the 1950s to 25% by 2008. Schleicher cites low rates of interstate mobility among professions that typically require a license to practice. Veterans of those occupations tend to have an established book of business, however, so it’s reasonable to expect fewer distant moves. Nevertheless, the cost of obtaining a license in a new state and differing licensure requirements are likely to inhibit the mobility of licensed professionals.

Exit Barriers

One of the most interesting sections in Schleicher’s paper is on exit barriers. Locations are always “sticky” to the extent that local ties exist or develop over time, both between people and between people and local institutions. But some institutions create ties that are severely binding. For example, state and local government employees are often enrolled in defined benefit plans with lengthy vesting periods. Remaining in one system throughout a career can be a huge advantage. Other exit barriers involve differences in eligibility and levels of aid under federal programs managed by states such as Medicaid, Temporary Assistance to Needy Families (TANF), and the Supplemental Nutrition Assistance Program (SNAP — food stamps). Beyond the actual benefits at stake, administrative costs and delays in re-enrollment might hinder a needy family’s attempt to make an interstate move.

Local and state law on property transfers can also impinge on mobility. Real estate transfer taxes in some states certainly create an incentive to stay put. Also, while tax reassessments occur with regularity in most jurisdictions, some impose limits on the amount of the annual change in valuation, requiring a full tax revaluation on resale, so a seller must forego such a tax discount. Rent controls reward renters who stay in place, creating another exit barrier. And rent controls prevent entry as well, as they invariably reduce the supply of quality housing, thereby inflating the rents of vacated apartments available to new residents.

Finally, federal policies designed to encourage homeownership create exit barriers across the country. Ownership of a residence increases the “stickiness” of any locale, but the loss of a mortgage interest income-tax deduction adds to the sacrifice of a move to a rental unit in a more expensive location. So does the interest rate subsidy inherent in the implicit federal guarantee against default on mortgages securitized by Fannie Mae and Freddie Mac. Finally, when local economies are in a state of decline, home prices usually follow. Consequently, owners are likely to suffer reduced or negative equity in their homes and may be “locked in”, unable to pay off their mortgage on a sale, and therefore unable to leave their current residence.

Rent Seeking and Good Intentions

Some of the policies discussed above are the handiwork of those powerful enough to enlist government power in their own self-interest. That includes zoning laws, by which property owners can prevent land uses they deem undesirable. It also includes occupational licensing, a political avenue through which established business interests limit competition by new entrants. Of course, licensure is typically sold to voters as consumer protection, a claim that is often dubious.

Other policies that hinder mobility can be characterized as well-intentioned, like the old-style, defined benefit plans still in use by many state and local governments, or federal subsidies for homeownership. Many such policies are, or have been, promoted on the basis of the obvious gains they create for individuals, with little thought given to the “unseen” but damaging economic consequences. Rent controls fall into this category as well, but are very damaging in the long-term.

The Labor Market Ossified

All of the mobility-limiting policies discussed by Schleicher have a detrimental effect on the performance of labor markets. Workers tend to get stuck in depressed areas, where their value as human resources is diminished even while employers in other markets face limited supplies of qualified labor. This leads to higher structural unemployment, lower growth in output, and more difficulty for the private sector in meeting the needs of consumers than otherwise be possible.

I haven’t dealt with one other national policy dealing explicitly with geographic mobility: immigration. Restrictions on legal immigration and the issuance of green cards are often sought by interests hoping to protect Americans from competition for jobs. Suspending competition is never a good idea, however, as it leads to higher prices and undermines consumer interests. To the extent that businesses face a shortage of qualified talent to fill particular jobs, as is often the case, such restrictive policies are unequivocally damaging to the economy for the same reasons as barriers to interstate migration. Liberalized immigration allows more foreigners with peaceful, productive and often entrepreneurial intent to contribute to the country’s ability to create wealth.

Prescriptions

What can be done to promote interstate mobility? Here is a list that is undoubtedly incomplete: encourage state and local governments to end rent controls; liberalize zoning laws; reevaluate construction restrictions; liberalize occupational licensing; reduce real estate transfer taxes and smooth the timing of tax revaluations. Governments should also transition from defined benefit to defined contribution benefit plans, a step that would also allow them to avoid persistent overoptimism about their ability to meet future pension obligations. As long as states manage federal aid programs and have leeway in setting eligibility requirements and their share of benefits, there will be exit barriers to low-income recipients. Perhaps states should be required to coordinate benefits, with strict time limits, when recipients move interstate to pursue employment opportunities. Finally, subsidies encouraging homeownership should be phased out, including the federal tax deduction for mortgage interest and full privatization of Fannie Mae and Freddie Mac. A neutral stance with respect to homeownership would allow the market to seek an optimal balance in residential property ownership without creating excessive locational anchors.

Schleicher devotes a large part of his paper to the implications of reduced mobility for macroeconomic stabilization policy. In particular, he contends that measures intended to stimulate the economy cannot be as effective when labor supplies are inflexible. That might be true, but I’m loath to endorse Keynesian activism. Still, there is no doubt that geographic stasis of the kind described by Schleicher contributes to immobility in incomes as well. The main conclusion I draw from his paper is that governments ought to be very cautious about interfering in market transactions, even when convinced that their cause is noble. The law of unintended consequences has a way of foiling the best laid plans of social engineers.

Spite and the “Right” to Subsidies

02 Thursday Feb 2017

Posted by pnuetz in Health Care, Subsidies

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The Women’s March on Washington on January 21st was not precise in communicating its real objectives. But the costumes were cute, and some critics felt that more of the men in attendance should have worn them. Anyway, the leaders and organizers fell short in terms of articulating a coherent agenda. Unless, of course, you just “got it”. These women were angry, but it’s not as contagious as they think: a great many circumspect women recognize the unmatched freedoms, privileges, and prosperity enjoyed by women (and men) in the U.S. And the inherent divisiveness of identity politics is simply not appealing to everyone.

There are a number of reasons why those marching unfortunates might feel put upon, and it must have felt cathartic to wail and gnash teeth. The dissatisfaction is mostly related to the fact that Donald Trump is the president. But if I had to guess, I’d say a quarter of the marchers weren’t registered to vote. Probably a third of the remainder did not vote, despite their registration.

Medicaid reimbursements account for the bulk of direct federal funding for family planning services; states are responsible for a major share of reimbursements as well.
Federal funding also occurs under Title X, the Public Health Service Act of 1970, which authorizes federal grants for family planning services.
Indirect funding occurs through cross-subsidies inherent in the structure of the Affordable Care Act (ACA), or Obamacare:
- The ACA requires health insurance to include a set of “essential benefits”. Premium payments from those for whom such benefits are superfluous subsidize those who require those benefits.
- The ACA prohibits “gender rating”, so that men effectively subsidize the higher cost of care and coverage for women (up to roughly middle age).
Those purchasing coverage on the Obamacare exchanges may be eligible for federal subsidies on their premium payments.

Reproductive Rights and Family Planning

The ACA also required insurers to account and bill separately for abortion coverage, but compliance is spotty:

“… the GAO found that, of the 18 insurers it investigated, none of them charged separately for abortion coverage, and none of them even itemized the coverage on their bills.”

Planned Parenthood

Gender Rating

Assisting Low-Income Women

Your Vagina, My Money

Hillary’s “Fix”: Obamacare Squared

26 Wednesday Oct 2016

Posted by pnuetz in Obamacare

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Avik Roy, Bill Clinton, Block Grants, Christopher Jacobs, competition, Health Insurer Bailouts, Hillary Clinton, John C. Goodman, Marketplace Regulation, Medicaid, monopoly, Obamacare Exchanges, Obamacare Fixes, Pharmaceutical Patents, Public Option, Reimbursement Rates, Risk corridors, Sally Pipes, Single-Payer System, Wikileaks

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.

Medicaid and Value Mislaid

12 Friday Jun 2015

Posted by pnuetz in Obamacare

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Amy Finkelstein, Earned Income Tax Credit, Erzo F.P. Luttmer, Implicit insurance, Marginal Revolution, Medicaid, Megan McArdle, Moral Hazard, Nathaniel Hendren, Obamacare, Oregon Health Insurance Experiment, Redistribution, Relative Value Units, Uncompensated care, Welfare value

A new paper on the MIT Econ department web site finds that the “welfare benefit to recipients from Medicaid per dollar of government spending range from $0.2 to $0.4, depending on the framework ….” Those estimates are from “The Value of Medicaid: Interpreting Results from the Oregon Health Insurance Experiment” by Amy Finkelstein, Nathaniel Hendren, and Erzo F.P. Luttmer (Hat Tips: Marginal Revolution, John Crawford). A major share of the increase in the number of insured individuals under Obamacare stems from Medicaid enrollments, so the efficacy of the program is of great interest as the nation considers possible changes to the health care law.

The value of Medicaid to recipients is low in part because the coverage is incremental to the uncompensated medical care they would have received without coverage. So perhaps it’s not too surprising that if “… Medicaid recipients had to pay the government’s average cost of Medicaid, they would rather be uninsured.” That’s why I think some of the commentary on this result is a little unfair, such as the way it’s presented by Megan McArdle. There are clearly other reasons why Medicaid receives a low valuation by recipients, however. For example, the authors find that the program entails substantial costs of moral hazard, which may mean that recipients are in poor health relative to reimbursement levels, take risks that they would avoid in the absence of coverage, or simply over-utilize services for which they would be unwilling to pay, even if the cash were made directly available. While it doesn’t receive much focus from the authors, low reimbursement rates discourage providers from accepting Medicaid patients. That would certainly reduce one’s willingness to pay for the coverage.

Finkelstein, Hendren and Luttmer estimate that 40% to 80% of Medicaid’s welfare value derives from “a transfer component, as opposed to its ability to move resources across states of the world.” The transfers go to providers who, in the absence of Medicaid coverage, would offer “implicit insurance” in the form of uncompensated care. As noted above, that’s a good thing. Providers should be compensated rather than relied upon as a charities, though there are strong indications that compensation is inadequate.

The authors also estimate the value of Medicaid as a “redistribution tool” relative to the earned income tax credit (EITC). At best, they find that recipients would slightly prefer Medicaid cuts to equivalent reductions in the EITC (though the comparison suffers from some conceptual shortcomings). Unsurprisingly, the outcome depends upon how highly the “transfers” to health care providers are valued by enrollees. So the program seems to do poorly in the eyes of recipients, who would likely prefer outright transfers of cash. I would speculate that many recipients would prefer a voucher with which they could purchase coverage levels of their choice, retaining any excess not spent.

The “Value of Medicaid” study suggests that the program is unsuccessful in delivering value to recipients and taxpayers. Obamacare reform should include fundamental changes to the Medicaid program, measures that restore individual choice and the private market for health coverage, and provisions to increase competition in the health care and insurance markets. Eliminating prohibitions on the sale of health insurance across state lines would be a good start. Reforms should also combat excessive regulation of health care providers, such as eliminating the electronic health records mandate and reforming the inflexible system of compensation based on relative value units. Market-oriented reforms and competition can reduce costs and make health care more affordable, aiding in the delivery of greater benefits to all segments of society.