Trump Budget Facts and Falsehoods

02 Friday Jun 2017

Posted by pnuetz in Federal Budget, Government, Trump Administration

Tags

Administrative State, Baseline Budget, Budget Reconciliation, Deficit Reduction, Double Counting, Dynamic Scoring, Lawrence Summers, Math Error, Obamacare, Office of Management and Budget, Repeal and Replace, Revenue Neutrality, Ryan McMaken, Spending Priorities, Static Scoring, Steve Bannon, Tax Reform, Trump Budget, Welfare reform

The innumerate left is unhappy over cuts in various categories of spending in the budget proposal submitted by the Trump Administration last week. However, they have adopted “talking points” that are incorrect in an effort to rail against the budget. There is no reduction in overall spending in the proposal. Instead, there is a reduction in the growth of total spending. Ryan McMaken calls the mistaken assertions about spending “the media version of ‘cuts’“. The budget plan calls for an increase in total spending of 41% ($1.7 trillion) by 2027, versus 63% ($2.6 trillion) under the baseline (based on current law). Many of the actual cuts and growth reductions are in so-called discretionary spending. However, in one key mandatory component, Medicaid, spending increases by 39% under the plan, or $146 billion, versus 82% under the baseline. That is not a spending cut.

Another issue over which the Trump budget has been attacked is the so-called “math error,” or “double counting” of economic growth, to which former Treasury Secretary Lawrence Summers alluded with apparent delight. The gist of it is that the proposal somehow double-counted the salutary effects of growth in eliminating the projected deficit over the next ten years. In other words, the tax cuts proposed by Trump would be not just revenue-neutral due to stronger growth; they would result in an increase in tax revenue sufficient to eliminate the deficit by 2027.

Thus far, the Trump tax reform plan has been revealed in only a one-page summary released in late April. In static terms, it implied a loss of revenue of $5 trillion over ten years, though the summary left many features unclear. There could be additional provisions to broaden the tax base that might bring the ten-year static revenue loss down to somewhere between $3 and $4 trillion. In dynamic terms, however, the impact of the tax cuts would be smaller. The cuts would stimulate the economy (yes, they would!), but the precise impact on growth is unknown. In the budget, economic growth is assumed to increase from 1.8% to 3.0% annually over most of the ten year period. That has been criticized as unrealistic, but such a boost would likely be enough to make the tax cuts revenue neutral.

Here is a summary of the budget from the Office of Management and Budget (OMB). The tables at the back of the document, on pages 27 and 29, provide enough information on the cumulative ten-year changes to evaluate Summers’ double-counting claim. Keep in mind that his claim applies to changes expressed relative to a baseline. The proposed budget shows a total ten-year deficit projection of $3.2 trillion, compared to baseline of $6.7 trillion. So the deficits are reduced by a total of $3.5 trillion over the full ten years.

Individual and corporate income tax receipts are virtually unchanged over the ten-year period. There’s our revenue neutrality. Other receipts are down by $0.9 trillion, however. Most of that decline is attributed to a $1 trillion “allowance for repeal and replacement of Obamacare”, presumably elimination of taxes on such things as medical devices, Cadillac insurance policies, and fines for failing to comply with insurance mandates. So increased tax revenues do not account for the decline in the budget deficit.

Total cumulative outlays are reduced by $4.6 trillion in the budget proposal relative to the baseline. That more than accounts for the ten-year deficit reduction. Like the policies or not, the decline in spending is sufficient, relative to the baseline, to fully explain the deficit reduction. Yes, the budget assumes that some of the spending reductions are afforded by the faster assumed rate of economic growth, such as welfare payments, but that is not double-counting.

Revenue neutrality of the tax cuts is certainly an assumption worth questioning, especially because the summary of the tax plan gave every impression of abandoning neutrality. Neutrality was probably imposed on the budget plan as a matter of convenience. In a sense, it made the job of presenting the Administration’s spending priorities (like them or not) a cleaner exercise. For another, while budget reconciliation rules do not require the tax plan to be revenue neutral, Senate leaders have stated their strong desire for neutrality. The Trump budget proposal thereby allows Congress’ budget process to get underway while deferring the introduction of a more detailed and potentially controversial tax plan, one that is obviously still in flux and is likely to involve a loss of revenue, even in a dynamic sense.

The assumed change in economic growth is not solely attributable to tax effects, however. It would be reasonable to expect some growth to be driven by deregulation and the “deconstruction of the administrative state“, as Steve Bannon described so eloquently. This intention is embodied in the budget proposal. In that sense, it was unnecessary for OMB to impose revenue neutrality of the tax plan to eliminate the budget deficit over ten years. The economic growth spurred by deregulation would generate some of the extra growth in tax revenue.

I happen to like many of the priorities expressed in the proposed budget, despite the document’s lack of specificity. This includes the deregulatory initiatives, Obamacare repeal and replacement (we’re waiting…), and some of the welfare reform proposals. I am not happy about the scale of the shift toward defense, and I am not happy that government continues to grow in the aggregate. And as for the still-incubating tax reform plan, I like many of the features originally described, though not all.

Many believe that the Administration’s economic growth assumptions are unrealistic, and many dislike the spending priorities. Those cannot be used as excuses for mischaracterizing the proposal, however. Reductions in some spending categories occur only relative to the baseline growth path. They are not real cuts in spending. Likewise, Summers’ double-counting allegation is false. The recovery of tax revenue via economic growth is not double counted, and there is no “math error”. The proposed reductions in spending relative to the baseline more than account for the deficit reduction. I suspect that Summers’ motives were strictly polemic and not grounded in a careful examination of the budget proposal. He is not innumerate. What’s worse, a number of economists swallowed the “double-counting” story hook, line, and sinker.

Musings On Health Insurance Reform

10 Wednesday May 2017

Posted by pnuetz in Health Care, Obamacare

≈ 1 Comment

Tags

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

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

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

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

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

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

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

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

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

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

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

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

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

The CBO’s Obamacare Fantasy Forecast

28 Tuesday Mar 2017

Posted by pnuetz in Health Care, Obamacare

≈ 3 Comments

Tags

American Health Care Act, Avik Roy, CATO Institute, CBO, Congressional Budget Office, Exchange Enrollment, Individual Mandate, Medicaid enrollment, Obamacare, Trump Administration

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

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

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

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

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

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

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

Cleaving the Health Care Knot… Or Not

18 Saturday Mar 2017

Posted by pnuetz in Health Care, Obamacare

≈ 2 Comments

Tags

AHCA, American Health Care Act, Avik Roy, Budget Reconciliation, CBO, Community Rating, Congressional Budget Office, John C. Goodman, Medicaid Reform, Michael Cannon, Michael Tanner, Obamacare, Patient Freedom Act, Rand Paul, Refundable Tax Credits, Rep. Pete Sessions, Se. Bill Cassidy, Universal Basic Income, Yuval Levin

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

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

Legislative Priorities

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

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

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

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

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

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

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

The CBO’s Report

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

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

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

Fixes

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

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

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

Alternatives

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

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

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

Where To Go?

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

Sins of American Health Insurance

22 Wednesday Feb 2017

Posted by pnuetz in Health Care

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Tags

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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Tags

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.

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

Toodle-oo, President Cool Fool

20 Friday Jan 2017

Posted by pnuetz in Government

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Barack Obama, Benghazi Attack, Black Lives Matter, Chelsea Manning, Chris Stephens, David Harsanyi, Donald Trump, Drone Attacks, Fast and Furious, Guantanamo, Hillary Clinton, Iran Nuclear Deal, Jeffrey Tucker, Joel Kotkin, Narcissism, Nobel Peace Prize, Obamacare, Oscar Lopez Rivera, Paris Climate Accord, Racial Healing, racism, Solyndra, Syria

The durability of Barack Obama’s achievements as President of the United States will go down in history as … an oxymoron. He will likely be remembered more for his failures in social, economic, foreign policy and political leadership. Obama has himself to blame for the lack of a durable legacy. From the beginning of his administration, Obama’s mentality with respect to policymaking was always “my way or the highway” (“The election’s over, and I won”), and his consequent failure to achieve legislative victories during his last six years in office was always Congress’ fault. He would share no blame. But it was cool, ’cause Obama had “a pen and a phone” and was willing to act by executive fiat to affect changes he desired. His hope, I suppose, was that his regulatory diktats would become so ingrained in our way of life that rescinding them would be political suicide, much like some of the programs of the New Deal and the Great Society. Well, that backfired! Most of Obama’s executive actions can be undone by executive or legislative action, and while it won’t be costless, it will happen.

The fact of the matter is that Obama’s policies were not productive and not popular. Not only did they contribute to the election of Donald Trump, but they helped fuel the massive losses suffered by Democrats in state houses and governorships over the past eight years. But Obama was always right as rain.

The Planner’s Conceit: A big believer in the power and goodness of government, Obama attempted to usher in a great wave of new regulation and social planning. Here is David Harsanyi in Reason:

“The president’s central case for government’s existence rests on the notion of the state being society’s moral center, engine of prosperity and arbiter of fairness. Obama speaks of government as a theocrat might speak of church, and his fans return the favor by treating him like a pope.“

Obama is a man who lacks any understanding of the causes of prosperity: personal and economic freedoms, individual initiative, and healthy private markets. Jeffrey Tucker makes this point eloquently in “Why Obama Failed“:

“Despite his vast knowledge on seemingly everything, and endless amounts of charm to sell himself to the public, he missed the one crucial thing. He never understood wealth is not a given; it must be created through enterprise and innovation, trade and experimentation, by real people who need the freedom to try, unencumbered by a regulatory and confiscatory state. This doesn’t happen just because there is a nice and popular guy in the White House. It happens because the institutions are right.“

Obama’s results underscore his ignorance regarding the fundamental drivers of material well-being: economic growth during the post-recession years has been very sluggish, and while the unemployment rate has declined, it is not as impressive as it might appear: many workers have been forced into part-time jobs, and the decline in the jobless rate was exaggerated with declines in labor force participation to levels not seen since the late 1970s. Perhaps not coincidentally, the number of workers claiming Social Security disability benefits happened to soar as employment prospects remained grim. Slow growth in the economy and budget sequestration (an action Obama blames on republicans despite having proposed it himself as a cudgel) have reduced the annual budget deficit, but the nation’s outstanding debt under Obama has increased by $10 trillion, doubling the total outstanding over his eight years. Future annual deficits are projected to soar under his policies, according to the Congressional Budget Office.

Two factors that would contribute to ballooning deficits, if allowed to stand, are the Paris Climate Accord, signed by Obama without the Senate’s consent, and Obamacare. The climate treaty would do little to change global temperatures, but would impose heavy costs on the U.S. in terms of subsidies for foreign energy projects, regulatory burdens, and energy bills.

Failing Health Care: The future budget impact of the Paris Accord could be minor compared to Obama’s greatest source of pride: the Affordable Care Act (ACA), a.k.a. Obamacare. Recent scare stories have softened public opinion regarding the ACA, but so unpopular was this “landmark” legislation that Donald Trump was elected in part because he promised, along with congressional republicans (who played no part in its passage) to “repeal and replace” the law. The failures of the ACA were covered in my last post, “Death By Obamacare“.

Foreign FUBARs: The foreign policy foibles of the Obama Administration are legend. From Benghazi to the Syrian “red line”, from the botched deal on nuclear weapons development by Iran to the weak stand on Russian expansionism, American foreign policy has never been such an embarrassment. Obama, the recipient of a dubious Nobel Peace Prize, has been an avid drone warrior, collateral damage be damned. Our continued involvement in Afghanistan and the reentry of U.S. forces into Iraq must be sorely disappointing to the anti-war constituency Obama once courted. He has alienated our longstanding allies and cooed in the ears of avowed enemies. His grants of clemency in recent days to the likes of the treasonous Chelsea Manning and terrorists like Oscar Lopez Rivera are symbolic of the contempt in which he holds the lives lost at their hands. Our weakness abroad has led to a loss of respect for the U.S., signaled vividly by our exclusion from peace talks in Syria. Recent events have increased public awareness of our vulnerability to cyber-attack from foreign enemies, but Obama has failed to provide leadership on the issue.

Scandalous: Obama’s tenure as president has been marked by a number of scandals, contrary to what his admirers would have us believe. The Fast and Furious operation by ATF agents put guns in the hands of criminals and drug cartels, resulting in the death of a border control agent, but the Obama Justice Department sought to obstruct an investigation. The massacre at the U.S. consulate in Benghazi, Libya led to the death of four Americans, including Ambassador Chris Stephens. The White House and State Department sought to create a misleading story line, claiming an anti-Muslim video was responsible for a protest gone-wrong, when in fact they were well aware that it was a planned terrorist action. A deeper question is whether Stephens was in Benghazi attempting to arrange arms sales to “Syrian rebels”. Then there are the attempts by the IRS to target opposition to Obama, and conservative groups generally, and an apparent effort to conceal that activity, as well as cases in which it appeared that the administration was targeting members of the press whom they considered unfriendly. There were a number of other scandals and events such as the Solyndra subsidies, which suggested high corruption and cronyism. Here is an excellent discussion of a variety of dubious antics by the Obama Administration, and the shady efforts to keep them quiet.

Racial Muckraking: Ironically, Obama’s greatest failing might well have been the racial discord that boiled up during his two terms. As the first African-American president of the U.S., there was a considerable expectation that his legacy would be one of racial healing. Instead, it was as if he deliberately sought to encourage discord. Here is Joel Kotkin’s description of the president’s missteps on race relations:

“Whenever race-related issues came up — notably in the area of law enforcement — Obama and his Justice Department have tended to embrace the narrative that America remains hopelessly racist. As a result, he seemed to embrace groups like Black Lives Matter and, wherever possible, blame law enforcement, even as crime was soaring in many cities, particularly those with beleaguered African American communities.

Eight years after his election, more Americans now consider race relations to be getting worse, and we are more ethnically divided than in any time in recent history. As has been the case for several decades, African Americans’ economic equality has continued to slip, and is lower now than it was when Obama came into office in 2009, according to a 2016 Urban League study.“

The Liar: Obama is an unrepentant liar. Even the Washington Post felt it necessary to catalog some of the Obama lies that made it into their headlines (through many did not). There was the infamous Benghazi deception; the “Like Your Plan, Keep Your Plan” fib; he quoted enrollment numbers on the Obamacare exchanges that were greatly exaggerated; he publicly denied that domestic surveillance was a reality; he claimed that he was not responsible for our withdrawal from Iraq… what? There were efforts to cover and dissemble regarding details of all the scandals referenced above. By now, Obama’s insistence that his would be the “most transparent administration in history” is rather humorous. Most of Obama’s lies were motivated by ideology, and that might make it worse in my book. What’s particularly galling is the lie that Obama has any respect for the Constitution. He has attempted to subvert it with regularity.

I, Barack Obama: Another common trait among politicians is narcissism, but few are as obvious about it as Barack Obama. He has a habit of self-referencing that may be unequaled in political oratory. In fact, last July at the Democratic National Convention, he mentioned himself 119 times in a speech about Hillary Clinton. He is always eager to invoke his personal story as a possible source of inspiration for others. He is seemingly preoccupied with his legacy, going out his way to issue additional executive orders in the waning days of his term, and giving a “final” address in which he glorified his accomplishments. And then there was a final-final press conference at which he did the same. He has always encouraged the perception that Barack Obama is the “smartest guy in the room”. Of course, he is never wrong, and everything is cool. Obama seems to believe that he can make reality conform to his every assertion –oh yeah, I already talked about lies!

Did Obama’s narcissism contribute to his failed presidency? It’s plausible because he invested too much in his own ability to teach, influence others, and control events. Collaboration with important stakeholders was unnecessary, and indeed, it was often better to demonize anyone who stood in the way of the world according to Barack. That world was a sad self-delusion.

Death By Obamacare

18 Wednesday Jan 2017

Posted by pnuetz in Health Care

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

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

The ACA Disaster

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

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

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

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

Replacement Bills

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

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

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

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

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

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

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

Opportunities and Minefields

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

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

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

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

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

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

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

Markets Can Save Lives

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

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

Gains From Medicare Trade

08 Thursday Dec 2016

Posted by pnuetz in Medicare, Privatization, Profit Motive

≈ 2 Comments

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ACA, American Enterprise Institute, CMS, Donald Trump, Health Savings Accounts, HHS, IPAB, John C. Goodman, MACRA, Medicare, Medicare Advantage, Medicare Part C, Medigap, Obamacare, Original Medicare, Premium Support Plan, Privatization, Tom Price

Here’s a bit of zero-sum ignorance: private profits are robbed from consumers; only non-profits or government can deliver full value, or so this logic goes. Those who subscribe to this notion dismiss the function of private incentives in creating value, yet those incentives are responsible for nearly all of the material blessings of modern life. What the government seems to do best, on the other hand, is writing checks. It’s not really clear it does that very well, of course, but it does have the coercive power of taxation required to do so. Capital employed by government is not a “free” input. It bears opportunity costs and incentive costs that are seldom considered by critics of the private sector.

The role of private profit and the zero-sum fallacy come up in the context of proposals to privatize government services. In what follows, I discuss a case in point: privatization of Medicare. Rep. Tom Price, the Chairman of the House Budget Committee, is Donald Trump’s nominee to head HHS. In November, Price said Congress would attempt to pass legislation overhauling Medicare in the first year of the Trump Administration. James Capretta of the American Enterprise Institute (AEI) explains some of the features of the possible reforms. Price has supported the concept of a premium support plan whereby seniors would purchase their own coverage from private insurers, paid at least in part by the government (also see here).

Medicare and Its Ills

The Medicare program is beset with problems: it has huge unfunded liabilities; it’s cash flows are being undermined by demographic trends; fraud and bureaucratic waste run rampant; it’s unpopular with doctors; and the regulations imposed on healthcare providers are often misguided.

Writing checks to health care providers is really the primary “good” created by the federal government in the administration of Medicare. The Centers for Medicare & Medicaid Services (CMS), a branch of the Department of Health and Human Services (HHS), also performs regulatory functions mandated by legislation, such as the Affordable Care Act (ACA).

More recently, CMS has been implementing the Medicare Access and Chip Reauthorization Act of 2015 (MACRA), which will introduce changes to the payment formulas for physician compensation under the plan. Economist John C. Goodman offers a cogent explanation of the ill-conceived economic planning at the heart of Medicare regulation and its implementation of MACRA in particular:

“…the government’s current payment formulas create perverse economic incentives — to maximize income against the formulas instead of putting patient welfare first. The goal is to change those incentives, so that providers will get paid more if they lower costs and raise quality.

But after the new formulas replace the old ones, provider incentives in a very real sense will be unchanged. They will still have an economic incentive to maximize income by exploiting the formulas, even if that is at the expense of their patients.“

After describing several ways in which Medicare regulation, now and prospectively, leads to perverse results, Goodman advances the powerful argument that the market can regulate health care delivery to seniors more effectively than CMS.

“If the government’s metrics are sound, why not allow health plans to advertise their metrics to potential enrollees and compete on these quality measures. Right now, they cannot. Every communication from health plans to Medicare enrollees must be approved by CMS. … Under MACRA, health plans profit by satisfying the government, not their customers. … Better yet, why not let the market (rather than government) decide on the quality metrics?“

Private Medicare Exists

Wait a minute: profit? But isn’t Medicare a government program, free from the presumed evils of profit-seekers? Well, here’s the thing: almost all of the tasks of managing the provision of Medicare coverage are handled by the private sector under contract with CMS, subject to CMS regulation, of course. That is true even for Part A and Part B benefits, or “original Medicare”, as it’s sometimes called.

Under “original” Medicare, private insurers process “fee-for-service” claims and payments, provide call center services, manage clinician enrollment, and perform fraud investigations. Yes, these companies can earn a profit on these services. Unfortunately, CMS regulation probably serves to insulate them from real competition, subverting efficiency goals. Goodman’s suggestion would refocus incentives on providing value to the consumers these insurers must ultimately serve.

Then there are “Medigap” or Medicare Supplement policies that cover out-of-pocket costs not covered under Parts A and B. These policies are designed by CMS, but they are sold and managed by private insurers.

And I haven’t even mentioned Medicare Parts C and D, which are much more significantly privatized than original Medicare or Medigap. The Part C program, also known as Medicare Advantage, allows retirees to choose from a variety of privately-offered plans as an alternative to traditional Medicare. At a minimum, these plans must cover benefits that are the equivalent to Parts A and B, as judged by CMS, though apparently “equivalency” still allows some of those benefits to be declined in exchange for a rebate on the premium. More optional benefits are available for an additional premium under these plans, including a reduced out-of-pocket maximum, a lower deductible, and reduced copays. Part C has grown dramatically since its introduction in 1996 and now covers 32% of Medicare enrollees. Apparently these choices are quite popular with seniors. So why, then, is privatization such a bogeyman with the left, and with seniors who are cowed by the anti-choice narrative?

What’s To Privatize?

Not privatized are the following Medicare functions: the collection of payroll-tax contributions of current workers; accounting and reporting functions pertaining to the Trust Fund; decisions surrounding eligibility criteria; the benefit designs and pricing of Part A (hospitalization) and Part B (optional out-patient medical coverage, including drugs administered by a physician); approval of provider plan designs and pricing under Parts C; regulation and oversight of all other aspects of Medicare, including processes managed by private administrative contractors and providers of optional coverage; and regulation of health care providers.

The Independent Payment Advisory Board (IPAB) was created under the Affordable Care Act (ACA), aka Obamacare, to achieve Medicare costs savings under certain conditions, beginning in 2015. Its mandate is rather confusing, however, as IPAB is ostensibly restricted by the ACA from meddling with health care coverage and quality. Proposals from IPAB are expected to cover such areas as government negotiation of drug prices under Part D, a Part B formulary, restrictions on the “protected status” of certain drugs, and increasing incentives for diagnostic coding for Part C plans. Note that these steps are confined to optional or already-private parts of Medicare. They are extensions of the administrative and regulatory functions described above. Despite the restrictions on IPAB’s activities under the ACA, these steps would have an impact on coverage and quality, and they mostly involve functions for which market solutions are better-suited than one-size-fits-all regulatory actions.

The opportunities for privatization are in 1) creating more choice and flexibility in Parts A and B, or simply migrating them to Parts C and D, along with premium support; 2) eliminating regulatory burdens, including the elimination of IPAB.

Impacts On Seniors Now and Later

Privatization is unlikely to have any mandatory impact on current or near-future Medicare beneficiaries. That it might is a scare story circulating on social media (i.e., fake news), but I’m not aware of any privatization proposal that would make mandatory changes affecting anyone older than their mid-50s. Voluntary benefit choices, such as Part C and D plans, would be given more emphasis.

There should be an intensive review of the regulatory costs imposed on providers and, in turn, patients. Many providers simply refuse to accept patients with Medicare coverage, and regulation encourages health care delivery to become increasingly concentrated into large organizations, reducing choices and often increasing costs. Lightening the regulatory burden is likely to bring immediate benefits to seniors by improving access to care and allowing providers to be more patient-focused, rather than compliance-focused.

Again, the most heavily privatized parts of Medicare are obviously quite popular with seniors. The benefits are also provided at lower cost, although the government pays the providers of those plans extra subsidies, which may increase their cost to taxpayers. Enrollees should be granted more flexibility through the private market, including choices to limit coverage, even down to catastrophic health events. Consumers should be given at least limited control over the funds used to pay their premia. That would include choice over whether to choose lower premia and put the excess premium support into consumer-controlled Health Saving Account (HSA) contributions.

Other Reforms

Pricing is a controversial area, but that’s where the terms of mutually beneficial trades are made, and it’s what markets do best. Pricing flexibility for private plans would be beneficial from the standpoint of matching consumer needs with the appropriate level of coverage, especially with fewer regulatory restrictions. Such flexibility need not address risk rating in order to have beneficial effects.

Regulations imposed on physicians and other providers should be limited to those demanded by private plans and the networks to which they belong, as well as clear-cut legislative rules and standards of practice imposed by professional licensing boards. The better part of future contributions to the Trust Fund by younger workers (i.e., those not grandfathered into the existing program) should be redirected toward the purchase today of future benefits in retirement, based on actuarial principles.

Perhaps the best cost-control reform would be repeal of the tax deductibility of insurance premia on employer-paid insurance plans. This provision of the tax code has already inflated health care costs for all consumers, including seniors, via demand-side pressure, and it has inflated their insurance premia as well. If extended to all consumers, tax deductibility would be less discriminatory toward consumers in the individual market and most seniors, but it would inflate costs all the more, with unevenly distributed effects. Unfortunately, rather than eliminating it entirely, qualification for the tax deduction is very likely to be broadened.

Conclusions

The Medicare program is truly in need of an overhaul, but reform proposals, and especially proposals that would put decision-making power into the hands of consumers, are always greeted with reflexive shrieks from sanctimonious worshippers of the state. The most prominent reform under consideration now would offer more of what’s working best in the Medicare program: private choices in coverage and costs. Solving the long-term funding issues will be much easier without a centralized regime that encourages escalating costs.

Earning a profit is usually the mark of a job well done. It is compensation for the use of capital and the assumption of risk (i.e., no bailouts). Physicians, nurses, chiropractors, insurance agents and customer service reps all earn compensation for their contributions. Providers of capital should too, including the owners of health insurance companies who do well by their customers. And if you think the absence of profit in the public sector creates value, remember the damage inflicted by taxes. Capital isn’t “free” to society just because it can be confiscated by the government.