Single-Payer: Queue Up and Die Already

19 Sunday Jan 2020

Posted by pnoetx in Health Care, Health Insurance

Tags

Australia, Bernie Sanders, Canada, Catastrophic Coverage, Chris Pope, Competitive Payer, Dual Payer, Employer-Paid Coverage, France, Germany, Individual Mandate, Manhattan Institute, Medicaid, Medicare, Netherlands, Out-of-Pocket Costs, Portability, Premium Deductibility, Segmented Payer, Single-Payer, Switzerland, third-party payments, Uncompensated care, United Kingdom, Universal Coverage

I constantly hear this sort of naive remark about health care in “other major countries”, and while Chris Pope’s rejoinder below should chasten the ignorant, they won’t listen (emphasis is mine):

“[Bernie] Sanders recently argued that ‘our idea is to do what every other major country on earth is doing,’ but this claim is … fictitious. In fact, there is not a single country in the world that offers comprehensive coverage with an unlimited choice of providers, fully paid for by taxpayers, without insurer gatekeeping, service rationing, or out-of-pocket payments. In reality, there is a direct trade-off between ease of access to providers and the cost borne by individuals in out-of-pocket expenses.”

Pope’s statement pretty much strips bare the fiction of “universal” coverage, a concept too loosely defined to be of any real use except as a rhetorical device. It also highlights the non-monetary costs inflicted on consumers by non-price rationing of care. The presumption that government must provide universal health care coverage and that all other developed countries actually have that arrangement is incorrect.

Pope has another article at the Manhattan Institute site, written late last year, on the lessons we can learn on health care from experience abroad under various payer systems. This offers a more detailed comparison of the structure of the U.S. payment system versus seven other countries, including Canada, the U.K., Australia, and Germany. Single-payer tends to be the “gold standard” for the Left, but the only systems that “approximate” single-payer are in Canada and the U.K. Here is one blurb about Canada:

“Canadians have easy access to general practitioners, but getting an appointment to see a specialist is more difficult than in all the other nations studied in this report. The Canadian medical system provides the least hospital care, delivers consistently fewer outpatient procedures, and provides much less access to modern diagnostic technology.

Canadians also have limited access to drugs, according to Pope. And out-of-pocket (OOP) spending is about the same as in the U.S. At the first link above, Pope says:

“Canadians spend less on health care than Americans mostly because they are not allowed to use as much — not because they are getting a better deal. … Waiting lists are generally seen as the single-payer budgeter’s friend, as some patients will return to health by themselves, others will be discouraged from seeking treatment, and a large proportion of the most expensive cases will die before any money is due to be spent on them.”

Pope says this about the U.K. at the second link:

“U.K. hospitals often lack cutting-edge technology, and mortality after major emergency hospitalizations compares poorly with that of other nations in this report. Access to specialists is very limited, and the system falls well short of most other nations in the delivery of outpatient surgery.”

Waiting times in the U.K. tend to be long, but in exchange for all these shortcomings in care, at least OOP costs are low. Relative to other payment systems, single payer seems to be the worst in several respects.

The other systems described by Pope are:

“dual payer” in Australia and France, with public entitlements and the choice of some private or supplemental coverage;
“competing payer” in Switzerland, Germany, and the Netherlands, whereby subsidies can be used to purchase coverage from private plans (and in Germany some “quasi-public” plans; and
“segmented payer” in the U.S., with two public plans for different segments of the population (Medicare for the elderly and Medicaid for the non-elderly poor), employer-sponsored coverage primarily from larger employers, individually-purchased private coverage, and subsidies to providers for “uncompensated care” for the uninsured.

Here is what Pope says about the various “multi-payer” systems:

“Dual-payer and competitive-payer systems blend into each other, according to the extent of the public entitlement in dual-payer countries …

… limitations in access to care are closely tied to the share of the population enrolled in private insurance—with those in Britain and Canada greatly limited, Australians facing moderate restrictions, and those in the other countries studied being more able to get care when they need it.

The competing-payer model ideally gives insurers the freedom and responsibility to procure health-care services in a way that attracts people to their plans by offering them the best benefits and the lowest medical costs. While all competing-payer systems fall short of this ideal, in practice they consistently offer good access to high-quality medical care with good insurance protection. The competing-payer model is, therefore, best understood as an objective that is sought rather than yet realized—and countries including Germany, the Netherlands, France, and the U.S., which have experienced the most significant health-care reform over recent years, are each moving toward it.”

The U.S. has very high health care costs as a percent of GDP, but OOP costs are roughly in line with the others (except the Swiss, who face very high OOP costs). The U.S. is wealthier than the other countries reviewed by Pope, so a large part of the cost gap can be attributed to demand for health care as a luxury good, especially late in life. Insured U.S. consumers certainly have access to unrivaled technology and high-quality care with minimal delays.

Several countries, including the U.S., are plagued by a lack of competition among hospitals and other providers. Government regulations, hospital subsidies, and pricing rules are at the root of this problem. Third-party payments separate consumers from the pricing consequences of their health-care decisions, which tends to drive up costs. If that weren’t enough, the tax deductibility of employer-paid insurance premiums in the U.S. is an subsidy ironically granted to those best-able to afford coverage, which ultimately heightens demand and inflates prices.

Notably, unlike other countries, there is no longer an individual mandate in the U.S. or any penalty for being uninsured, other than the potential difficulty in qualifying for coverage with pre-existing conditions. Consumers who lack employer-sponsored or individual coverage, but have incomes too high to qualify for Medicaid or premium subsidies, fall into a gap that has been the bane of would-be reformers. There are a few options for an immediate solution: 1) force them to get insured with another go at an individual mandate; 2) offer public subsidies to a broader class; 3) let them rely on emergency-room services (which cannot turn them away) or other forms of uncompensated care; 4) allow them to purchase cheap temporary and/or catastrophic coverage at their own expense; 5) allow portability of coverage for job losers. Recently, the path of least political resistance seems to have been a combination of 3, 4, and 5. But again, the deficient option preferred by many on the Left: single-payer. Again, from Pope:

“Single-payer systems share the common feature of limiting access to care according to what can be raised in taxes. Government revenues consistently lag the growth in demand for medical services resulting from increased affluence, longevity, and technological capacity. As a result, single-payer systems deliver consistently lower quality and access to high-cost specialty care or surgical procedures without reducing overall out-of-pocket costs. Across the countries in this paper, limitations in access to care are closely tied to the share of the population enrolled in private insurance—with those in Britain and Canada greatly limited…”

Hospital Price Insanity

15 Sunday Dec 2019

Posted by pnoetx in Health Care, Health Insurance

≈ 2 Comments

Tags

Affordable Care Act, Allowable Amounts, Avik Roy, Certificate of Need, Chris Pope, Claims Repricing, Disproportionate Share Hospital Payments, Dr. Keith Smith, DSH Payments, EconTalk, First Amendment, John C. Goodman, John Cochrane, Mandated Price Transparency, Medicare, Robert Laszewski, Russ Roberts, Shoppable Sevices, Surgery Center of Oklahoma, Uncompensated care

Almost nothing is less transparent than hospital pricing. If you’re shopping for a procedure, you probably won’t hear about the negotiated prices worked out with large insurers…. you’re likely to be quoted something much higher. A high price is billed to an insurer, but the excess above their negotiated prices is “disallowed” via contractual adjustment. You and/or your small insurer might not get the same deal. As Robert Laszewski says:

“The chargemaster is complete nonsense that really doesn’t matter — unless you are an uninsured person and you’re getting these huge bills driving you toward bankruptcy. The biggest irony of the U.S. healthcare system is that only the uninsured — often people who don’t have a lot of money — are the only ones the hospital expects to pay these incredibly inflated prices!”

An uninsured patient might be billed at the higher rate, but of course few end up paying. But there is harm in this arrangement, and it extends well beyond the uninsured. You might not be surprised to learn that the government is right in the middle of it. Read on…

What a Racket!

There’s some slight of hand going on in hospital pricing that creates perverse incentives. Who has something to gain from a huge gap between the full price and the hospital’s allowable charge? The answer is both the hospital and insurers, and that’s true whether the hospital is for-profit or nonprofit. When the list price and the size of the discount increase, the insurer gets to brag to employer-plan sponsors about the great savings it negotiates. In an episode on EconTalk, Dr. Keith Smith, a partner in the ultra-competitive and cash-only Surgery Center of Oklahoma, says (only partly in jest) that the conversation between the insurer and hospital might go something like this:

“Now, what the insurers actually do is ask the hospital administrators, ‘Can you do a brother a favor and actually charge $200,000 for that, so that our percentage savings actually looks larger?‘”

This does two things for the insurer: it impresses employers as prospective plan sponsors, and it might also earn the insurer a bonus known as Claims Repricing, whereby the employer pays a commission on the discounts the insurer “negotiates”.

What about the hospitals? How do they benefit from this kind of arrangement? By inflating the “list price” of procedures, the hospital creates the appearance of a write-down or loss on a substantial share of the care it provides, despite the fact that its real costs are far below list prices and usually below the discounted “allowable amounts” negotiated with insurers as well. The appearance of loss serves to benefit the hospitals because they are compensated by the government on that basis through so-called Disproportionate Share Hospital (DSH) payments. These are, ostensibly, reimbursements for so-called uncompensated care.

This would not be such a travesty if the prices approximated real costs, but they don’t, and the arrangement creates incentives to inflate. The DSH payments to hospitals are used in a variety of ways, as Smith notes:

“Yeah; and before we get to feeling too sorry for the hospitals, all of the ones I know of claiming to go broke have a crane in front of them building onto their Emergency Room. …

So, I don’t know: again, the hospitals that are complaining about this, they are buying out physician practices, they’re buying out competitors. They seem to have a whole lot of money. They’re not suffering. Now, what they have done is used the situation you described–the legitimate non-payer–they’ve used that as a propaganda tool, I would argue, to develop a justification for cost shifting where they charge us all a whole lot more to make up for all the money that they’re losing. But they really need a lot of this red ink to maintain the fiction of their not-for-profit status.”

Non-profit hospitals are also entirely tax-exempt (income and property taxes), despite the fact that many use their “free cash flows” in ways similar to for-profit hospitals. The following describes a 2015 court ruling in New Jersey:

“The judge stated ‘If it is true that all non-profit hospitals operate like the hospital in this case… then for purposes of the property tax exemption, modern non-profit hospitals are essentially legal fictions.’ Judge Bianco found that the hospital ‘operated and used the property for a profit-making purpose’ by, in part, providing substantial loans, capital, and subsidies to for-profit entities, including physician groups.“

The bad incentives go beyond all this. Smith adds the following:

“Waste in a big hospital system is actually encouraged, many times because hospitals are paid based on what they use…. So, to the extent that the hospital uses a lot of supplies, that typically raises and increases the amount of revenue that they receive.”

Hospitals have been shielded from competition for years by the government. As Chris Pope explains, hospital pricing is designed “to accommodate rather than to constrain the growth of hospital costs“. This encourages hospitals that are inefficient in terms of costs, quality of care, and over-investment in equipment. Conversely, duplicated facilities and equipment simply add costs and don’t encourage competition given the cost-plus nature of hospital pricing and government efforts to prevent entry by more efficient operators. These restrictions include “Certificates of Need” for new entrants, and the ban on physician-owned hospitals in the Affordable Care Act (ACA). At the same time, the ACA encouraged hospital consolidation by rewarding the formation of so-called Accountable Care Organizations, which are basically exempt from anti-trust review. In the end, any reductions in administrative costs that consolidation might offer are swamped by the anti-consumer force of monopoly power.

Mandated Transparency?

The lack of price transparency really isn’t the root problem, in my view, but it is undesirable. Can government action to create transparency foster a more competitive market for the services hospitals offer? A recent Trump Administration Executive Order would require that hospitals publicly post prices for 300 “shoppable” services or procedures. The effective date of this order was recently delayed by a year, to January 2021. Hospital trade groups have challenged the order in court on the grounds that the First Amendment protects private businesses from being compelled to reveal details of privately-negotiated deals for complex services. While I try to be a faithful defender of constitutional rights, I find this defense rather cynicical. I’m not sure the First Amendment was intended to aid in concealing dishonest schemes for private benefit at the expense of taxpayers and consumers.

Avik Roy likes the price transparency rule. It would require the posting of gross charges for procedures as well as specific negotiated prices. The executive order would also require Medicare to pay no more to hospital-owned clinics than to independent clinics for the same procedure, which is laudable. Roy is sanguine about the ability of these rules to bring more competition to the market. He predicts a more level playing field for small insurers in negotiating discounts, and he thinks the order would spur development of on-line tools to assist consumers.

John C. Goodman is mildly skeptical of the benefits of a transparency mandate (also see here). Consumers with decent levels of coverage aren’t terribly motivated to make hospital price comparisons, especially if it means a delay in treatment. Also, Goodman points out a few ways in which hospitals try to “game” transparency requirements that already exist. John Cochrane worries about gaming of the rules as well. Competition and price discipline are better prescriptions for price transparency and might be better addressed by eliminating the incentives for third-party payment arrangements, like the unbalanced tax deductibility of health insurance premiums, but that kind of reform isn’t on the horizon. Goodman concedes that many procedures are “shoppable”, and he does not minimize the extent to which pricing varies within local hospital markets.

Conclusion

The most insane thing about hospital revenue generation is its reliance on fictitious losses. And hospitals, profit and non-profit, have a tendency to spend excess cash in ways that fuel additional growth in cost and prices. Sadly, beyond their opacity, hospital prices do not reflect the true value of the resources used by those institutions.

In my view, the value of price transparency does not hinge on whether the average health care consumer is sensitive to hospital prices, but on whether the marginal consumer is sensitive. That includes those willing to pay for services out-of-pocket, such as those who seek care at the Surgery Center of Oklahoma. Third-party payers lacking significant market power would undoubtedly prefer to have more information on pricing as well. Mandated price transparency won’t fix all of the dysfunctions in the delivery and payment for health care. That would require more substantial free-market reforms to the insurance and health care industries, which ideally would involve replacing price subsidies with direct payments to the uninsured. The transparency mandate itself might or might not intrude on domains over which privacy is protected by the Constitution, a question that has already been brought before the courts. Nonetheless, transparency would lead to better market information for all participants, which might help rationalize pricing and encourage competitive forces.

Ex Ante Agreements, Ex Post Gripes

23 Tuesday May 2017

Posted by pnoetx in Health Insurance, Profit Motive

≈ Leave a comment

Tags

Charity, Contracts, Health Insurance, Nonperformance, Policy Limit, Profit, Public Aid, Solvency, Uncompensated care

Anyone signing a contract better know the terms to which it binds them. They sign voluntarily and do so because they believe it has value. They are presumed to understand what they are obligated to pay and when; what they are entitled to receive, when, and under what circumstances; what actions (and non-actions) are required of them to “perform” under the contract; and what recourse they have should the counter-party fail to perform. The value they perceive upon signing is always based on an expectation. Sometimes, that expectation summarizes risks they are paying to avoid, even as a counter-party is more than willing to carry the risk. The contract is signed and everyone is happy… enough.

Health insurance is an example to which I’ve dedicated ample space over the past couple of weeks (see the links in the left margin). Obviously, one buys health insurance before knowing an entire series of outcomes. The contract specifies what kinds of expenses the insurer is obligated to pay. Insurance is a highly complex product, and so an insurance policy or contract must be relatively complex, as the cartoon above suggests. In a well-functioning market, however, the insured pays a premium no higher than they consider worthwhile. Everyone would like to pay less, but absent a government mandate (heh!), no one is obligated to buy.

The ink is dry and life goes on. The premium is paid, health needs arise, costs are incurred, and sometimes those costs exceed a limit (the deductible) above which the insurer is obligated to pay at least a portion.

A calamitous health event typically brings heavy costs, and this possibility is exactly why people buy coverage, and it is exactly why insurers demand sufficiently stiff premia. These things happen to a fairly predictable percentage of an insurer’s customers, but with enough variance to make the cash flows risky. As a backstop, insurance contracts sometimes include limitations on total lifetime benefits or on payments for certain kinds of treatments. Pre-existing conditions are a prominent example of limiting the risks that enter the risk pool, but there are other possible limitations on treatments and other aspects of care. While these are known upfront, disastrous health outcomes and their financial consequences are not.

An increasingly common refrain is that no one should profit from an individual’s acute health care needs, and that health insurers do just that. For logical consistency, this same complaint should be leveled against doctors, nurses, paramedics, hospitals, medical equipment manufacturers, and pharmaceutical companies. They all earn income by providing for health care needs, whether medical or financial, and income is income, after all. Whether that income is a wage or a profit is irrelevant. They are both forms of compensation for the use of resources. The major difference between insurers and the other income-earners is that insurers handle the financial risk of potential health care needs and pay when those needs arise, within and up to policy limits.

The crux of the complaint, however, is that insurers can deny claims, thus protecting their profits. Certainly there are claims denied for which the rationale can be disputed. Just as certainly, a financially prudent insurance company must impose some limits on the benefits offered by their policies. These limitations might preserve profitability, but they also protect the contingent benefits of other insureds as well as the solvency of the carrier. Those objectives are not independent.

The insurance buyer reveals the value of the contract ex ante, but sour grapes are easily conjured ex post if a claim is denied, no matter the agreed-to provisions of the insurance contract. The insurer is under no greater obligation to pay costs in excess of policy limits than the doctor, the nurse, or the man in the street. Yet insurers take special blame when inadequate coverage is an issue, whatever the reason.

Hospitals and physician practices sometimes provide uncompensated care. There are also a number of support organizations for severely-ill but inadequately insured patients. So, private charity is one answer to the dilemma of extreme health-cost outcomes. Public aid is another, and the appropriate breadth of the state’s role in cases of pre-existing conditions and extreme individual health care costs is a legitimate question.

In the end, private health insurers provide a valuable service by pooling and carrying the financial risk of health care events faced by individuals. Health insurance profits as a share of owner’s equity have fallen well short of market-wide averages in recent years (see my last post), though I regularly hear outrageous claims about excessive profits in the industry.

It’s not unusual for a buyer to feel remorse after signing a deal, but in cases of health coverage shortfalls, one could say that the insured bet too little or qualified for too little, or one could say that society doesn’t set aside enough resources to adequately care for the sick. However, one cannot say that the resources dedicated to arranging private coverage deserve no reward, or that the business should be pillaged on account of certain policy limitations, or that the future claims of other policyholders should be hijacked. Those who proclaim such nonsense are guilty of severe ethical misjudgment.

Musings On Health Insurance Reform

10 Wednesday May 2017

Posted by pnoetx 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.

Medicaid and Value Mislaid

12 Friday Jun 2015

Posted by pnoetx in Obamacare

≈ 1 Comment

Tags

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

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

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

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

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

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