Tag Archives: Obamacare

Medicare For All … and Tax Hikes, Long Waits, Inferior Care

23 Thursday Jun 2022

Posted by in Health Care, Health Insurance

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Political humorist P.J. O’Rourke once quipped that if you think health care is expensive now, wait till it’s free! A Stephen Green post reminded me of the source of that wisdom. But there are many who say they don’t understand why we simply don’t offer the Medicare program to everyone … free! Well, the reasons are quite simple: we can’t afford it, and it would be bad policy. In fact, it’s too costly and bad policy even if it isn’t free! Medicare is technically insolvent as it is — broke, in plain language. According to the Medicare Trustees 2022 Report linked above, the Hospital Insurance Trust Fund will be depleted by 2028. That only means the Medicare system has authority to take funds the Treasury borrows to pay ongoing benefits through 2028, so the remaining trust fund balance is little consolation. The long-term actuarial deficit is $700 billion, but it’s possibly as high as $1.5 trillion under an alternative, high-cost scenario shown in the Trustee’s report.

Single Payer Medicare?

Extending free Medicare to the entire population would cost over $30 trillion in the first 10 years, and that’s a conservative estimate. And be forewarned: single-payer health care is government health care, which invariably leads to rationed access and protracted waiting times, poor quality, and escalating costs. For a detailed look at many of the quality problems suffered by Medicare patients, see this paper by Michael Cannon and Jacqueline Pohida. Don’t be deceived by claims that Medicare’s administrative costs are lower than private insurance: The real cost of Medicare is largely hidden through the imposition of low reimbursement rates to providers, while taxpayers get stuck with a significant bill.

Avik Roy has discussed variations on “Medicare For All” (M4A), most of which share very little with today’s Medicare. Not only would they fail to address its shortcomings; they would be much worse. Some do not include the range of private plans currently offered through Medicare Advantage. In fact, under the plans offered by Bernie Sanders and Elizabeth Warren, Medicare Advantage would be terminated, as would all other private insurance for the working-age population. Medicaid would also be eliminated. “Medicare”, in its surviving form, would be the single-payer system, “free” at the point of care and without premiums. Again, a free health care buffet would unleash gluttonous demand, so certain restrictions must be in place to limit pricing and access to care. Think rationing, which should sound ominous to those whose health is failing.

Physician reimbursement rates under traditional Medicare are now only about 60% of private reimbursements, and that filters down to the wages earned by other workers in the health care sector. Naturally, broadening Medicare’s reach will cause providers and their employees to drop-out or cut back. And again, services will be subject to various other forms of rationing. These are unavoidable failings of free or heavily-subsidized health care systems, not to mention the massive burden on taxpayers. And by the way, the “rich” are nowhere near rich enough to pay for all of it.

As to the overall effects, here’s what CBO Director Phillip L. Swagel told the Senate Budget Committee recently, as quoted in Reason by JD Tuccille:

“The increase in demand for personal health care would exceed the increase in supply, resulting in greater unmet demand than the amount under current law. The increase in unmet demand would correspond to increased congestion in the health care system, including delays and forgone care.”

The “increase in supply” mentioned by Swagel is something of a pipe dream.

Buy-Ins and Public Option

There are less drastic proposals than full-blown M4A, such as so-called Medicare buy-ins. For example, those age 50 – 64 might be given the option to “buy-in” to Medicare coverage. It’s not clear whether that would include a choice of Medicare Advantage plans. Many would find the coverage available through traditional Medicare and Medicare Advantage to be inadequate. It is often inferior to private plans, including the lack of dependent coverage and no out-of-pocket maximum for traditional Medicare. Supplemental coverage would be necessary for many individuals choosing the latter.

Another question is how employers would adjust to a segment of their work force in the 50-64 age group opting-out of sponsored coverage. Would the company be required to pick-up the Medicare tab? Would there be compensatory adjustments in wages? Fully compensatory changes are unlikely. Even with partial adjustments, how would an employer adjust company-wide wage scales for younger workers who perform the same or similar duties as those opting into Medicare. And what of the tax-free benefit for workers on employer-paid premiums? Medicare premiums are not tax deductible… at least not yet!

All of the other concerns about low provider reimbursement rates would apply to a Medicare buy-in. The supply of medical care, particularly to the segment buying in, might prove thin. The buy-in option would have very little impact on the number of uninsured individuals. However, several studies have found that the buy-in option would increase premiums for private plans on the individual market (see the last link). That’s largely because providers will try to stick private insurers and patients with the burden of cross-subsidizing Medicare buy-ins.

Another proposal is for a Medicare plan or similar public option to be made available to all in the exchange marketplace. This would take a more massive toll on taxpayers and health care access and quality than the buy-in approach. Moreover, because of pressure for cross-subsidies, private plans will struggle to stay in business. The destruction would be gradual, but the public option would slowly eliminate choice from the marketplace. Cannon and Pohida believe that offering a public option could lead to improvements if the private and public plans are allowed to compete on a level playing field, largely in terms of subsidies and regulatory hurdles, but that is highly unlikely.

Cuts Ahead?

A lesser known issue is the impact of spending caps put in place under the Affordable Care Act. These apply to Medicare and Medicaid as well as federal subsidies on policies purchased on the Obamacare exchanges. When those caps are exceeded, access becomes temporarily restricted, with some practices actually closing their doors for a period of days or weeks. Health economist John Goodman notes that seniors tend to eat into the allowable spending amounts much faster than younger cohorts. That means seniors might be denied costlier forms of care. To the extent that any variation on M4A covers a broader age range, there might be more pressure to curtail certain forms of care for seniors, which would be a most unfortunate case of policy-induced age discrimination.

As for Medicare as it stands now, Goodman describes the potential cuts that are coming. These include the possibility of reduced amenities (e.g., hospital wards with more patients per room and lower-cost meals), and as already mentioned, longer waits and restricted availability of costlier treatments. Goodman states that the necessary cuts to make Medicare whole would be equivalent to the loss of three years of coverage for a 65-year old, and the cuts will affect both traditional Medicare and privately-issued (but publicly subsidized) Advantage plans.

Conclusion

There’s no chance any form of M4A would reduce the cost of care or improve access to care. An expanded Medicare would bear the hallmarks of central planning that have accelerated the monopolization of health care under Obamacare. And like Obamacare, the final form of any M4A plan will be the product of negotiations between self-interested politicians, corporatists and regulators. Big pharmaceutical companies, insurers, large hospital systems, and other interest groups will wrangle for the rents that “reform” legislation might bring. Costs will rise and access to care will be restricted. Taxpayers will be saddled with a large chunk of the cost.

In the end it’s likely to be a mess. Far better to adopt reforms that would bring more innovation, choice, and competition to the markets for health insurance and health care. That includes expanding the range of options available under private Medicare (Advantage). At the same time, Obamacare should be scrapped in favor of a range of a greater range of private options with income-dependent subsidies, including catastrophic coverage only, as well as reduced regulation of insurers and providers.

Health Insurance Profits Are Not the Problem

08 Thursday Jul 2021

Posted by in Health Insurance, Profit Motive

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My dentist said, “Oh well, these days it’s really only about whether the insurance company makes a profit….” A giant appliance was in my mouth at the time, propping it open, so I couldn’t respond. But I made a mental note because it reminded me of the hypocrisy so common in how people regard the concept of profit. That’s especially true of the Left, and I happen to know that my dentist, whom I personally like very much, stands well to my left. 

Profit Is Income

It’s worth pointing out that profit is merely compensation. My dentist collects revenue, often paid to him by insurers. If he runs an efficient practice, then he earns an income after paying staff, office rent, various suppliers, and for equipment, including interest on any debt outstanding. You wouldn’t be wrong to call that profit, and he does pretty well for himself, but somehow he thinks it’s different.

My dentist probably feels locked into an adversarial position with my insurer, and of course he is in the short run. He says his price is $750; the insurer says, “Sorry Charlie, you get $250”. So as far as he’s concerned, it’s a zero-sum game. Not so in the long run, however. He needs to partner with insurers to get and keep patients, so the exchange is mutually beneficial. And while he might do some picking and choosing among insurers, he’s essentially a price taker. His “price” of $750 is something of a fiction, as he’s clearly willing to do the work for the insurer’s reimbursement. 

I think the key qualitative difference between my dentist’s income and that of any wage earner is that his income is always at risk. After all, profit is often regarded as a return to entrepreneurial risk-taking. As it happens, he’s taking a loss on my new crown because it cracked as soon as he put it in. Then, he had to start from scratch with new impressions, after painstakingly removing the cemented, cracked pieces with what felt like a tiny circular saw.

Middling Profitability

But what about those profit-hungry health insurers? In fact, they are not known for outrageously high profits, and their earnings are typically not valued as highly by the market as those of other industries, dollar for dollar. Competition helps restrain pricing and enhance performance, of course. And since the advent of Obamacare, profits have been subject to a loose “cap” (more on that below).

The profitability of health insurers improved in 2020, however, because so many tests and elective procedures were postponed or foregone due to the coronavirus pandemic. That also prompted the government to make more generous subsidies available to consumers to pay COBRA insurance premiums.

Profits Drive Efficiency

I’ll put aside concerns about the crony capitalism inherent in the health system-insurer-regulator nexus, at least for a moment. The profit motive is the fundamental driver of efficiency in the production of insurance contracts and pooling of risks, as well as efficient servicing and administration of those contracts. Absent the possibility of profit, these tasks would become mere bureaucratic functions with little regard for cost and resource allocation. Furthermore, managing risk requires a deep pool of capital to ensure the ability of the insurer to meet future claims. Reinvestment and growth of the enterprise also requires capital. That capital is always at risk and it is costly because its owners demand a return as fair compensation. 

Poor Alternatives

Eliminating profit from the insurance function implies that resources must be put at risk without compensation. That’s one of the reasons why non-profit insurers, over the years, have tended to be thinly capitalized and unstable, or limited in their offerings to “health maintenance” benefits, like primary or preventative care, as opposed to insuring against catastrophic events. Capital grants to non-profits (private or governmental) usually come with strings attached, which can severely limit the effectiveness of the capital for meeting existing or future needs of the operation. Growth requires reinvestment, so a profit margin must be earned in order to grow with internal funds. Where non-profits are concerned, you can call the “margin” whatever you want, but it is functionally equivalent to a profit margin. 

On the other hand, insurance provided by the public sector puts the taxpayer at risk, and the potential liability to taxpayer “capital” is never rewarded nor indemnified. But it is not free. Now, you might insist that we’d all benefit from government-sponsored health insurance because of the broader risk pool. The problem with that perspective is that it turns the pricing of risk into a political exercise. We’ve already seen the destructive effects of community rating. Younger, healthier, but budget-constrained individuals tend to opt out due to excessive premiums, leading to a systemic “death spiral” of the pool.

Administrative Costs

A puzzling contention is that private insurers drive up administrative costs, presumably when compared to a single-payer system. Obamacare regulations limit the so-called Medical Loss Ratio of a health plan. To simplify a bit, this requires rebates to customers if premiums exceed claims by a certain threshold, which varies across individual, small, and large group markets. This regulation obviously places a loose cap on profits. It is also arbitrary and probably has hampered competition in the individual market. And of course there have always been suspicions that the ratio can be “gamed”. 

Nevertheless, under a single-payer system, it would be shocking if economies of scale were sufficient to reduce administrative costs to levels below those incurred by private insurers (especially if we exclude profit!). After all, scale is seldom a prescription for government efficiency, and that’s largely due to the absence of a profit motive and any semblance of competition! What administrative savings might be achieved by a monopsony public payer are likely to derive mainly from “one-size-fits-all” decision-making and product design, with little heed to consumer preferences and choice.

I’ll Take the Profit-Maker’s Coverage

There is plenty to criticize about the health insurance industry. In important ways, it has already succeeded in shifting risks to taxpayers with the help of its policy-making cronies. The insurers are further protected by a flow of government premium subsidies to the individual market; and the largest insurers have benefitted from Obamacare regulations, which encourages increased market power by large hospital networks, which are happy to negotiate charges that benefit themselves and insurers. All else equal, however, I’d rather have a few choices from profit-making health insurers than a single, community-rated choice from the government. I’d rather see risk priced correctly, with direct subsidies made available to individuals in high-risk segments unable to afford their premiums. And I’d rather see less government involvement in health care delivery and insurance. We’d all be better off, including my dentist!

Barrett v. Obamacare

04 Sunday Oct 2020

Posted by in Health Insurance, Obamacare

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Obamacare’s survival has emerged as the democrats’ big talking point against Amy Coney Barrett’s nomination to the Supreme Court, especially since a case challenging the health care law is scheduled be heard by the Court on November 10th. I’m certainly no a fan of the Affordable Care Act (ACA, or Obamacare). It is anticompetitive and it is a regulatory and pricing nightmare. However, the chances it will be struck down in its entirety are slim to none, whether Barrett is confirmed or not.

The Case Before the Court

The case at hand is California v. Texas, in which 21 democrat state attorneys general appealed a decision by a lower court that the ACA’s individual mandate is unconstitutional. The case against the ACA was originally brought by 20 republican state attorneys general based on Congress’ earlier repeal of the “tax” levied on violations of the law’s individual mandate. With that repeal, the mandate itself became unenforceable because it effectively disqualified the mandate as a matter of congressional intent. More background on the case can be found here.

The reinterpretation of the ACA penalty as a tax was the key turning point in an earlier case, National Federation of Independent Business v. Sebelius, in which Chief Justice John Roberts’ deciding vote upheld the ACA’s individual mandate under Congress’ taxing power. Now, in California v. Texas, a District Court ruled for the plaintiffs that the entire ACA is unconstitutional, not just the individual mandate. Subsequently, however, an Appeals Court ruled only against the mandate. Thus, the case before the Supreme Court is primarily about the standing of the states that originally brought the suit and the status of the individual mandate. The case is unlikely to involve other components of the law, such as the list of minimum essential benefits and protections on pre-existing conditions.

Severability

The Appeals Court decision can be upheld by the Supreme Court without striking down the whole of the ACA. This rests on the doctrine of severability, which holds that a law’s unconstitutional provision(s) do not invalidate other provisions within the same law. The Court has often applied this doctrine in deference to the intent of legislation, to the extent that other parts of a law can stand on their own. Jonathan Adler, who has filed a brief with the Court in California v. Texas, writes that the individual mandate is clearly severable from the rest of the ACA:

“When part of a statute becomes unenforceable, a court usually must ask whether Congress would have preferred what remains of the statute to no statute at all. Typically, it is a court that renders a provision unenforceable, and the court must hypothesize what Congress would have intended in that scenario. Courts also will sometimes assess whether the statute functions without the provision— a proxy for legislative intent.

But this case is unusual. It presents no need for any of these difficult inquiries because Congress itself—not a court—eliminated enforcement of the provision in question and left the rest of the statute standing. So congressional intent is clear; it is embodied in the text and substance of the statutory amendment itself.”

Furthermore, contrary to the claims of the republican plaintiffs in the case, the ACA does not contain an inseverability clause. The Court is likely to invoke the severability doctrine, so Amy Coney Barrett’s (ACB’s) confirmation prior to the hearing would not lead to a ruling against the whole of Obamacare. The Court seems to like small steps.

What She Said

ACB has written that the Court’s original interpretation of the penalty for violating the mandate as a tax was flawed. Again, the argument was attributable to the opinion written by Chief Justice Roberts in NFIB v. Sebelius. The ACA never used the term “tax” in the context of an individual’s failure to comply with the mandate. Instead, it referred to the “penalty” multiple times. In the law’s original form, the clear legislative intent was to penalize certain behavior: failing to buy a product. ACB wrote the following of Roberts’ opinion in 2017:

“He construed the penalty imposed on those without health insurance as a tax, which permitted him to sustain the statute as a valid exercise of the taxing power. Had he treated the payment as the statute did—as a penalty—he would have had to invalidate the statute as lying beyond Congress’s commerce power. … One would be hard-pressed to find many originalists who think that a court should find a way to uphold a statute when determinate text points in the opposite direction.”

Recusal

Josh Blackman says ACB need not recuse herself from hearing California v. Texas. First, the case is not a reconsideration of NFIB because the “tax” no longer exists; second, the current challenge to the mandate does not hinge on the plausibility of Roberts’ opinion in that case; and finally, recusals at the Supreme Court typically require a higher bar than lower courts in order to avoid a short-handed Court. Jonathon Adler discusses a recent moot court on California v. Texas in which ACB participated, and he seems to agree that recusal is unnecessary.

So ACB said the penalty was a penalty, not a tax, but the penalty no longer exists in any case. Congress left the individual mandate with no enforcement mechanism, a clear signal of its intent to set the mandate aside. The severability of the mandate from the ACA, and the “tax vs. penalty” focus of ACB’s remarks on the NFIB decision, offer little rationale for the view that ACB would argue to overturn the entirety of the ACA in California vs. Texas.

Essential Benefits

ACB has had another beef with the ACA, however, which has to do with certain items on the list of minimum essential benefits mandated by the law. The purpose of the list was much like that of the individual mandate: to force payment by all parties to cross-subsidize those who desired certain benefits. The list included contraceptives, abortifacients, and sterilization, and the requirements applied to individual policies as well as plans offered by private organizations, including those having moral and religious objections to the use of these products or services. Those individuals would be forced to offer and pay for the objectionable benefits just the same. In 2012, ACB signed a statement that called the requirement an “assault on religious liberty and the rights of conscience“. That argument seems even more compelling with today’s availability of cheap contraceptives over-the-counter. But the point raised by ACB is now irrelevant: this summer, the Court ruled against the requirement on contraceptives, but the Court didn’t say the whole list is unconstitutional. That aside, the list of essential benefits impedes the objective of offering low-cost coverage to the broadest swath of the population, and it is one of the reasons for the astonishingly high deductibles on Obamacare health policies.

Conclusion

The ACA has many flaws and has prompted a large number of legal challenges. It will continue to do so. Seven of those cases have already risen to the level of the Supreme Court, and there could be more. The ACA is a terrible law: it has driven up the cost of health insurance coverage through community rating and benefits mandates. It has driven up the cost of care through excessive regulatory measures and incentives for providers to consolidate. But while I am no fan of the law, the appointment of Amy Coney Barrett to the Court does not presage its complete overturn. That will almost certainly have to wait for legislation on a complete replacement for Obamacare, which doesn’t seem imminent.

Health Reform and Pre-Existing Confusion

24 Wednesday Apr 2019

Posted by in Health Care, Health Insurance

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Several Democrats vying for the party’s presidential nomination are pushing Medicare For All (MFA) as a propitious avenue for health care reform. They make the dubious claim that universal government health insurance would broaden real access to health care. As we know from experience with Medicaid, Medicare, and Obamacare, broader coverage does not necessarily imply better access. Even more dubious is the claim that MFA would reduce the costs of insurance and health care.

Single-Payer Perils

MFA appeals to the Democrats’ extreme leftist flank, a segment likely to have an out-sized influence in the early stages of the nomination process. Their fixation on MFA is borne of leftist romanticism more than analytics. Democrats have long-championed less ambitious plans, such as a public option, but those are stalling in “blue” states precisely due to their costs.

MFA would demand a massive transfer of resources to the public sector and would completely decimate the private health insurance industry, upon which 90% of Americans rely. As John C. Goodman explains, MFA would lead to less choice, misallocated health resources, long waiting times to obtain care for serious illnesses, and even greater inequalities in access to care because those who can afford private alternatives will find them.

Goodman also discusses a new health plan proposed by House Democrats that is more of an effort to save Obamacare. It won’t, he says, because among other issues, it fails to address the narrowing in-network choices faced by people with chronic conditions, and it would aggravate cost pressures for those who do not qualify for subsidies.

Outlining A Plan

There are many obstacles to a health care deal. Democrats are bitter after the effective repeal of the individual mandate, but despite their assertions, subsidized coverage of pre-existing conditions is not a principle about which most Republicans disagree. Really, the question is how to get it done. MFA is pretty much dead-on-arrival, despite all the bluster. But those who wish to protect choice and the efficient allocation of risk prefer to leverage a combination private insurance and targeted subsidies to achieve broad coverage.

Capitation: Goodman suggests an approach to high-risk patients that has proven successful in private Medicare Advantage (MA) coverage. These plans are structured around “capitated” payments to the insurer from the Centers for Medicare and Medicaid Services (CMS): per patient fees that cover in-network costs above the patient’s out-of-pocket limit. The insurer bears the risk of a shortfall. Assuming that the capitated payment makes coverage of high-risk patients a fair risk, insurers will compete for those buyers. That competition is what makes MA so appealing. Patients with pre-existing conditions under an MA-like system, which I’ll call “Mediprex Advantage”, or just Mediprex for short, would be pooled in “special needs” plans with relatively large capitations.

Risk-Shifting: The other major issue addressed by Goodman is the need to eliminate incentives for risk-shifting from the employer-paid, group insurance market to the individual market. The population of employed individuals in the group market is less costly, on average, and the sickest individuals often have to stop working. Goodman recommends state-level premium taxes on group policies, dedicating the proceeds to subsidies for individuals who must migrate from the group to the individual market. Employers could avoid the tax by offering full portability.

Tax Treatment: The bifurcation of health insurance coverage between employer and individual markets might not have lasted were it not for the favorable tax treatment afforded to employer plans. Deductibility of premiums on employer plans has inflated both premiums and health care costs, much to the detriment of those in the individual market. I would be happy to see deductibility repealed. An obvious alternative to.repeal, extending deductibility to the individual market, would balance incentives, but it would also tend to inflate costs somewhat. Still, the status quo is probably inferior to either repeal or deductibility for all.

Future Insurability: The concept of insuring future insurability is highly attractive. That is precisely what employer guaranteed-portability does, and the actuarial cost could be funded at employer/employee initiative, by a premium tax, or simply mandated. Voluntary action is preferred, but there are reasons why it is not a natural progression in the group market. First, renewability is usually guaranteed for the duration of employment, though job tenures have declined substantially since the early years of employer-based coverage. Nevertheless, health coverage is a retention tool that full portability would nullify. Second, employer coverage is itself a creature of government intervention, a result of the wage controls put into place during World War II. Since then, the features of health coverage have partly been driven by the tax-deductibility of premiums, which makes the cost of coverage cheaper after-tax. That, in turn, has encouraged the extension of coverage into areas of health maintenance and preventative care, but that increases the burden of paying for portability.

Plan Migration: If you’re not already covered under a group plan, another mechanism is needed to insure your future insurability. For example, Obamacare requires guaranteed issue and renewability in the individual market with a few exceptions related to non-payment, fraud, and product availability. Lower-income premium payers are eligible for subsidies. The suggestion here is that a guaranteed issue, renewable contract must remain available in the individual market with subsidized premiums for some individuals. This might also apply when an individual’s employment terminates. An individual who has fallen ill might be placed into a different risk class via the sort of “Mediprex Advantage” program outlined above, perhaps with subsidies to fully cover the premium and capitation.

Catastrophic Plans: Affordable catastrophic policies with guaranteed renewability should be available in both the individual and group markets. But what becomes of an individual seeking a change to broader coverage? They’ll pay a higher premium to cover the actuarial cost as well as the greater level of future insurability they choose to insure. But if they are not eligible for broader coverage, then it’s on to Mediprex.

Belated Signups: Finally, under guaranteed-issue Mediprex, individuals who refuse coverage but then get sick might or might not be entitled to the same panoply of services available to other insureds. It is reasonable to expect that late-comers would pay a penalty premium and higher out-of-pocket costs, assuming they have the income or resources to do so, or they might face a curtailed set of benefits.

Conclusion

The ability to “insure future insurability” should be a key component of any health insurance reform plan. That means portability of group insurance, which requires funding. And it means premiums in the individual market reflecting the actuarial cost associated with future insurability. A healthy individual entering the individual market should have competitive insurance options from which to choose. A sick individual new to the individual market might have access to the portable coverage provided by their former employer, other risk-rated private plans, or they might need access to an individual plan that covers pre-existing conditions: what I have called Mediprex Advantage. A certain percentage of these individuals will have to be subsidized, but the cost will be supported, at least in part, by the premiums paid by healthy individuals to insure their future insurability. Finally, individuals should be free to opt-out of traditional insurance coverage, choosing concierge providers for various aspects of their health care.

 

Insuring Health Insurability

22 Saturday Dec 2018

Posted by in Health Insurance

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

One Size Misfits All

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

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

Tailored Coverage

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

Tax vs. Premium Subsidies

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

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

Health Status Insurance

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

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

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

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

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

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

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

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

 

 

Injecting Competition Into Health Care

12 Friday Oct 2018

Posted by in competition, Health Care, Uncategorized

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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.

The Destructive Pooling of Risks and Outcomes

29 Friday Jun 2018

Posted by in Health Insurance, Obamacare, Uncategorized

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

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

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

Direct Subsidies Are Better

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

Insurability Protection

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

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

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

Mandates

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

Dumb Intervention

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

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

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

08 Friday Dec 2017

Posted by in Health Insurance, Taxes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

25 Wednesday Oct 2017

Posted by in Health Insurance, Markets, Obamacare

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Deconstructing the Health Care Administrative State

14 Monday Aug 2017

Posted by in Health Care, Obamacare

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

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

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

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

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

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

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