Good Profits and Bad Profits

18 Thursday May 2017

Posted by Nuetzel in Health Care, Profit Motive

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ACA, Affordable Care Act, Big government, Corporatism, Cronyism, Economic Rents, Health Insurance, Opportunity cost, Profit Motive, Regulatory Capture, Reinsurance, rent seeking, Risk corridors, Supra-Normal Profit

Toles-on-Regulatory-Capture

There are two faces of profit. It’s always the fashion on the left to denigrate profits and the profit motive generally, as if it serves no positive social function. This stems partly from a failure to examine the circumstances under which profits are earned: is it through competitive performance, innovation, hard-won customer loyalty, and the skill or even luck to spot an underpriced asset? Such a “good” profit might even exceed what economists call a “normal profit”, or one that just covers the opportunity cost of the owners’ capital. On the other hand, profit can be derived from what economists call “rent seeking”. That’s the dark side, but the unrecognized spirit of rent seeking seems to lurk within many discussions, as if the word profit was exclusively descriptive of evil. The “rent” in rent seeking derives from “economic rent”, which traditionally meant profit in excess of opportunity cost, or a “supra-normal” profit. But it’s impossible to know exactly how much of any given profit is extracted by rent seeking; a high profit in and of itself is not prima facie evidence of rent seeking, even though we might argue the social merits of a firm’s dominant market position.

Rent seeking takes many forms. Collusion between ostensible competitors is one, as is any predatory attempt to monopolize a market, but the term is most often associated with cronyism in government. For example, lobbying efforts might involve favors to individuals in hopes of swaying votes on regulatory matters or lucrative government contracts. Sometimes, a rent seeker wants lighter regulation. At others, a rent seeker might work the political system for more regulation in the knowledge that smaller competitors will be incapable of surviving the heavy compliance costs. Government administrators also have the authority to change fortunes with their rulings, and they are subject to the same temptations as elected officials. In fact, in the aggregate, administrative rule-making and even enforcement might outweigh prospective legislation as attractors of intense rent-seeking.

Rent seeking is big-time and it is small-time. It takes place at all levels of government, from attempts to influence zoning decisions, traffic patterns, contract awards, and even protection from law enforcement. When it’s big time, rent seeking is the very essence of what some call corporatism and more generally fascism: the enlistment of coercive government power for private gain. A pretty reliable rule is that where there’s government, there is rent-seeking behavior.

Otherwise, the profit motive serves a valuable and massive social function: resources are attracted to profitable uses because they signal the desires of potential buyers. In this way, profits assure that resources are drawn into the most-valued uses. The market interactions between new competitors, drawn by the prospect of profits, and willing buyers leads to a self-correction: supra-normal profits get competed away over time. In this way, the spontaneous actions of voluntary market participants lead to a great achievement: all mutually beneficial trades are exhausted. Profit makes this possible in the short-run and it assures that trades evolve optimally with changes in tastes, technology and resource availability. By comparison, government fares poorly when it attempts to plan outcomes in the short- or the long-run. Rent seeking is an attempt to influence and even encourage such planning, and the profits it enables impose costs on society.

Good and Bad Profits In Health Insurance

I’ve written a few posts about health insurance reform recently (see the left margin). Health care is scarce. If relying on government is the preferred alternative to private insurance, don’t count on better access to care: you won’t get it unless you’re connected. Profits earned by health insurance carriers are roundly condemned by the left. It is as if private capital utilized in arranging coverage and carrying the risk on pools of customers deserves zero compensation, that only public capital raised by coercive taxation is morally acceptable for this purpose. But aside from this obvious hogwash, is there a reason to question the insurers’ route to profitability based upon rent seeking?

The health insurers played a role in shaping the Affordable Care Act (ACA, i.e., Obamacare) and certainly had hoped to benefit from several of its provisions, even while sacrificing autonomy over product, price, coverage decisions, and payout ratios. The individual and employer mandates would force low-risk individuals to purchase extensive coverage, and essential benefits requirements would earn incremental margins. Sounds like a nice deal, but those policies were regarded by the ACA’s proponents as necessary for universal coverage, stabilizing risk, and promoting adequate coverage levels. There were other provisions, however, designed to safeguard the profitability of insurers. These included an industry risk adjustment mechanism, temporary reinsurance to help defray the cost of covering high-risk patients, and so-called risk corridors (also temporary).

As it turned out, the ACA was not a great bet for insurers, as their risk pools deteriorated more than many expected. With the expiration of the temporary protections in Obamacare, it became evident that offering policies on the exchanges would not be profitable without large premium hikes. A number of carriers have stopped offering policies on the exchanges.

It should be no surprise that health insurance profitability has been anything but impressive over the past three years. The average industry return on equity was just 5.6% during that time frame, and it was a slightly better 6.2% in 2016, about 60% of the market-wide average. It’s difficult to conclude that insurers benefitted greatly from rent seeking activity with regard to the ACA’s passage, but perhaps that activity had a sufficient influence on policy to stabilize what otherwise might have been disastrous performance.

The critics of insurance profits are primarily interested in scapegoating as a means to promote a single-payer health care system. While some are aware of the favors granted to the industry in the design of the ACA, most are oblivious to the actual results. Even worse, they wish to throw-out the good with the bad.

The left is almost universally ignorant of the social function served by the profit motive. Profits stimulate supply, competition and innovation in virtually every area of economic life. To complain about profits in general is to wish for a primitive existence. Unfortunately, the potential for government to change the rules of the market makes it a ripe target for rent-seeking, and it creates a fog through which few discern the good from the bad.

Musings II: Avik Roy on Health Insurance Reform

12 Friday May 2017

Posted by Nuetzel in Health Care, Obamacare

≈ 1 Comment

Tags

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Hillary’s “Fix”: Obamacare Squared

26 Wednesday Oct 2016

Posted by Nuetzel in Obamacare

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Health Care Devolution and Monopoly

02 Thursday Jun 2016

Posted by Nuetzel in Health Care, monopoly, Obamacare

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Accountable Care Organizations, Adverse Risk Pools, Affordable Care Act, Bend the Cost Curve, Bronze Plan, Death Spiral, ER Utlization, Health Care Monopolization, Insurer Attrition, Insurer Consolidation, Non-Profit Monopoly, Obamacare, Provider Consolidation, Risk corridors, Subsidies, United Health Care

Risk Pool

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

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

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

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

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

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

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

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

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

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

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

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

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

Obamacare’s Left-Handed Monkey Wrench

20 Tuesday Oct 2015

Posted by Nuetzel in Central Planning, Obamacare

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ACA, Accountable Care Organizations, Bending the Cost Curve, central planning, David Henderson, Exchange Enrollment, Ezra Klein, John C. Goodman, Medicare Advantage, Megan McArdle, Michael Schaus, Obamacare, Obamacare Coops, Obamacare Replacement, Pay For Performance, Risk corridors, Wharton ACA Study

Distorted overtures celebrating the great success of Obamacare continue, but no one who cares about the facts is buying the blather. Megan McArdle reminds us that even if we stipulate that the 9.9 million now enrolled on the exchanges have gained something, Obamacare has delivered far less than promised. McArdle also notes the high-risk skew of the population within the risk pools. That’s why insurers are losing money on Obamacare coverage, though their losses have been covered via government “risk corridors” thus far. In “Obamacare Bear Market” at wsj.com (links to a Google search result to get around the paywall — or just search “wsj Obamacare Bear”), we hear about the dismal financial performance of the Obamacare coops, which sell plans on the exchanges. The WSJ also reflects on a new working paper from Wharton economists:

“They conclude that, ‘even under the most optimistic assumptions,’ half of the formerly uninsured take on both a higher financial burden and lower welfare, and on net ‘average welfare for the uninsured population would be estimated to decline after the ACA [Affordable Care Act] if all members of that population obtained coverage.’

In other words, ObamaCare harms the people it is supposed to help. This is not a prescription for a healthy, durable program.“

Health economist John C. Goodman gives more detail on the Wharton study in “Obamacare is bad for the middle class“. Even Ezra Klein admits that the health plan is a failure. Whether Klein really gets it or not, the result is just another failure of central planning. Here’s a quote from Michael Schaus from the last link:

“The same people who failed miserably at launching a website will soon be regulating the sophisticated day-to-day decisions of hospitals, insurers and doctors.“

Anticipating another year of disappointing enrollments ahead, the White House now is low-balling its enrollment target for 2016. This an apparent attempt to present a better face to the public when the bad numbers roll in.

Another piece by Goodman explains that “bending the cost curve” with Obamacare was always a fool’s errand. Again, it has a lot to do with the folly of central planning:

“In a normal market, the entrepreneurs wake up every morning and ask themselves: How can I make costs lower, quality higher, and access to my product better today?

But in a bureaucratic system – where revenues are determined not by customer satisfaction, but by complicated payment formulas – they tend to wake up and ask: How can I get more money out of the payment formulas today?“

Goodman explains that an insurance firm providing coverage through Medicare Advantage would have nothing to gain by introducing cost-saving innovations: all of the extra profit would be turned over to Medicare. Incentives matter, but bureaucrats often fail to understand incentives and their power to improve performance. Goodman also describes the poor results of the so-called Accountable Care Organizations, the futile pilot programs and demonstration projects related to the practice of medicine, and the gaming that has taken place within the hospital “pay-for-performance” program. Ironically, the most certain outcome of any attempt to impose central planning on an industry is that there will be unintended and undesirable consequences.

Goodman has written a book proposing an Obamacare replacement, entitled “A Better Choice: Healthcare Solutions For America“. Here is David Henderson’s favorable review, in which he focuses on the negative labor market effects of Obamacare, including poor incentives for employers and work effort, among other things. To close, here’s an excerpt from Henderson’s introduction:

“If you think that the Patient Protection and affordable Care act (ACA, also known as Obamacare) is bad because of its expense, the distortions it causes in the labor market, its failure to provide people what they really want, and its highly unequal treatment of people in similar situations, wait until you read John C. Goodman’s A Better Choice: Healthcare Solutions for America. You will likely conclude that the ACA is even worse than you thought.

That’s the bad news. The good news is that Goodman … proposes reforms that would do more for the uninsured than the ACA does, and at lower cost, and also would make things better for the currently insured. and it would do all this while avoiding mandates, creating more real competition among insurers, and making the health care sector more responsive to consumers….“

More Unpleasant Obamacare Arithmetic

15 Monday Jun 2015

Posted by Nuetzel in Obamacare, Uncategorized

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adverse selection, Affordable Care Act, Death Spiral, Expanded Medicaid eligibility, Forbes, Obamacare, Political Calculations, Reinsurance program, Risk corridors, Robert Laszewski

States with expanded Medicaid eligibility may be more vulnerable to adverse selection, hastening the death spiral of their Obamacare insurance exchanges relative to states without expanded Medicaid. This is because 1) the expanded, eligible Medicaid population is young, and 2) pricing (net of subsidies) and benefits on the exchanges encourage sicker individuals to purchase plans with richer benefits. The Political Calculations blog presents this case in “How Medicaid’s Expansion Tips the Scales Against Obamacare“:

“… we observe that the states that did not expand their Medicaid programs have a much larger share of their ACA-enrollment occurring in the lower-tier metal plans that would tend to be favored by healthier individuals. Meanwhile, in the states that expanded the enrollment of their Medicaid programs under the law, we find that a significantly larger portion of their ACA enrollments were in the plans that would be favored by less healthy individuals.

In fact, we see that in Medicaid expansion states, 13.2% of their ACA enrollment occurred in the highest-tier Gold and Platinum level plans, while non-Medicaid expansion states saw 7.7% of their enrollment for these highest tiers of health insurance coverage.

The seemingly small 5.5% difference between these two figures becomes exceptionally significant when you consider how extremely concentrated health care expenditures are in the United States, where just 5% of U.S. patients are responsible for generating 50% of all health care spending in the nation.“

It will be difficult to confirm this hypothesis using data on premium increases, or actual exchange failure, until the temporary risk corridors and transitional reinsurance program expire. However, this year, several of the states in which proposed premium increases are the largest have expanded Medicaid eligibility. Robert Laszewski has a good discussion about some the reasons for the large premium increases in Forbes. It’s early and there are signs that it will get worse.

As noted last week on this blog, Medicaid itself does not stack up well in terms of how highly it is valued by recipients and the moral hazard inherent in the program. Here we see an additional bug: expanded Medicaid appears to siphoning away younger potential enrollees from the exchanges in those states, worsening the problem of adverse selection, which will negatively affect their claims experience.

Heal, You Dogs!

26 Tuesday May 2015

Posted by Nuetzel in Obamacare, Shortage, The Road To Serfdom

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Band the cost curve, Classical Values, Death Spiral, federal subsidies, Joel Winberg, King v. Burwell, Medicaid reimbursement, Obamacare, Rand Paul, Risk corridors, SCOTUS, Shortage

In bondage to the State: The Classical Values blog has this interesting quote from Dr. Rand Paul:

“With regard to the idea of whether or not you have a right to healthcare, you have to realize what that implies….I’m a physician, that means you have a right to come to my house and conscript me, it means you believe in slavery. It means you’re going to enslave not only me, but the janitor at my hospital, the assistants, the nurses…There’s an implied threat of force, do you have a right to beat down my door with the police, escort me away, and force me to take care of you? That’s is ultimately what the right to free healthcare would be.”

It would be “free” only in nominal terms to the patient, and greatly degraded. The gap between the need for health care and the available supply cannot be solved via “conscription” of providers. And caring for the sick is one thing, but granting a “right” to well-care or health maintenance makes the gap much larger. Inadequate compensation to providers is an important subtext here, and it goes to the heart of the conflict. Basic economics tells us that the gap in access will expand if buyers are subsidized and providers are penalized by artificially low prices. The expanded eligibility for Medicaid in many states under Obamacare only exacerbates shortages, as physician reimbursements remain generally low.

Obamacare may have improved access to health care for a small minority of individuals, but only at the expense of penalizing many others, including providers. The program has fallen far short of its goal of covering the uninsured and has failed to “bend the cost curve” (despite false claims to the contrary, which attempt to take credit away from the Great Recession for slowing costs). Obamacare still looks to be unsustainable, as many have predicted. Insurers are now seeking large rate increases in many states, and going forward, they will not have the cushion of government-funded “risk corridors” when premiums fail to cover claims.

A Supreme Court ruling in the King v. Burwell case is due next month. The case has been discussed on this blog twice this spring. The plaintiffs have challenged federal subsidies in states relying on federal insurance exchanges in direct contradiction to the “plain language of the law”. The subsidies were intended to be an inducement to states to set up their own exchanges, but a number of states chose not to do so. A ruling for the plaintiffs would severely damage the Obamacare program, since the subsidies are key to making the relatively extravagant mandated coverage affordable to low-income individuals. However, Joel Zinberg insists that ending federal subsidies will not cause a death spiral.

Still, such a ruling would seem to give Congress and the Republicans an opportunity to craft legislation to replace Obamacare with a more viable program. Republicans seem have been unable to craft a strategy for dealing with this contingency, but their best strategy might be to wait, pass an extension of subsidies until 2017, and dare Obama not to sign it into law.