Thursday, September 30, 2010

There's No Such Thing As a Free Big Mac

Cross-posted from The Science Business on

Yesterday, I wrote about the coming health-insurance disruption that would be precipitated by Obamacare’s new regulations of insurers’ “medical loss ratios.” Today, the internets are atwitter with commentary around a Wall Street Journal report describing a memorandum sent by McDonald’s to the Department of Health and Human Services, stating that, without a waiver from HHS, the company will be forced to drop coverage of 29,500 hourly-wage employees due to the new MLR regulations.

McDonald’s, fearing the P.R. blowback, put out a statement asserting that “media reports stating that we plan to drop health care coverage for our employees are completely false.” This is your classic non-denial denial: the Journal didn’t say that McDonald’s was “planning” to drop its health coverage, but rather that it would be forced to do so if it wasn’t granted a waiver from the new MLR restrictions.

HHS Secretary Kathleen Sebelius, for her part, pointed out that HHS “can’t waive a regulation that doesn’t even exist”: the final MLR regulations won’t be available until late October at the earliest.

The later that date drags out, the worse it is for employees, as insurers and employers are forced to make decisions about their 2011 plans.

The problem for McDonald’s is pretty basic: the federal policy requires all insurance plans from large employers to spend 85% of their premiums on medical claims. The problem with Washington’s one-size-fits-all mandate is that not all insurance plans are the same. In the case of McDonald’s plan, the high turnover of its workforce results in unusually high administrative costs.

The problems that McDonald’s face apply to every similar employer with a large low-wage workforce, affecting as many as one million Americans.

The Journal’s report touched off a firestorm of often-defensive reactions from advocates of the new health law. Unfortunately, their arguments don’t hold up to scrutiny. Let’s go through them.

Aaron Carroll of The Incidental Economist implies that we shouldn’t get exercised about the Journal article because it’s old news. “Read it if you like. I enjoyed the story. I also liked it the first time I read it. In Politico. In June.” This isn’t a strong argument: because a (not-McDonald’s-specific) story was published once, on a web site for Washington insiders and political junkies, the problem shouldn’t be discussed more widely, as the real-life consequences of the law come closer to reality?

Jonathan Cohn of The New Republic, riffing off of Aaron, argues that it’s a good thing that limited-benefit or “mini-med” plans like McDonald’s are going away. Mini-med plans may be inexpensive—costing between $14 and $32 a week—but they only provide between $2,000 and $10,000 in insurance per year. “To call that ‘insurance’ is to distort the definition, since those policies would do very little to help people with even moderately serious medical conditions.”

But Cohn doesn’t explain why it make sense to throw people off of insurance for three years while we wait for Obamacare’s mandates to kick in. And not everyone agrees that mini-med plans are so terrible. “For those who didn’t have health insurance through their spouse, it was a life saver,” Jerry Newman, author of “My Secret Life on the McJob,” told the Journal.

There is an alternative to mini-med plans, one that has proven wildly successful at other companies. We can call it the Whole Foods approach, after the gourmet grocery chain that made it famous. At Whole Foods, the company funds 100 percent of the insurance premiums for hourly employees who sign up for their combination of high-deductible health plans and health savings accounts. On top of paying for health insurance, the company puts up to $1,800 per year into employees’ tax-free Personal Wellness Accounts, to spend on health care expenses as they see fit. If they are healthy in one year, they can save that money towards next year’s health costs. This kind of arrangement addresses Cohn’s objection to mini-med plans—without onerous federal regulation—and helps to bring down the cost of health care for everyone by reducing wasteful overspending.

By contrast, the Obamacare approach—forcing employers to cover everyone with lavish insurance benefits like the kind Cohn prefers—will dramatically drive up the cost of labor. The economic consequences of that mandate will be harsh: companies will hire less workers (because workers will become more expensive, and there is only so much money to go around). This will lead to more unemployment. The unemployed will in turn live off of Medicaid and other state-subsidized insurance plans, which will consign them to substandard health care, and cost taxpayers billions of dollars.

Those companies that try to hold onto their hourly employees, or feel forced to by the law’s employer mandate, will have to pass these costs onto consumers, in the form of higher prices: a $2 Big Mac will cost $4.

It’s one thing for consumers to choose to pay more. (My Forbes colleague David Whelan thinks those offended by McDonalds’ health plans should vote with their wallet by shopping at Starbucks.) But it’s quite another for the government to force higher costs and higher unemployment upon an already fragile economy.

For there is no such thing as a free Big Mac.

Wednesday, September 29, 2010

The Medical Loss Ratio Tornado

Cross-posted from The Science Business on

Imagine if you ran a business, and one day the government told you that you would be fined if you: (1) minimized unnecessary expenses; (2) hired workers to specialize in customer service; (3) invested resources in order to ensure you wouldn’t get victimized by fraud. What would you do? Think quickly: because three months from now, this very system will be the law of the land for our nation’s health insurers.

Last Friday, the National Association of Insurance Commissioners—the association of the 50 state insurance commissioners—issued its draft guidelines for how insurers will need to calculate “medical loss ratios,” or MLRs. Regular readers will recall that the medical loss ratio is loosely defined as the dollar amount that an insurer spends on the health care of its beneficiaries, divided by the total dollar amount the insurer collects in premiums. Section 2718 of our new health care law mandates that insurance plans sold to individuals and small employers must spend at least 80 percent of their premiums on health care, and plans sold to large employers must spend at least 85 percent.

But, like everything else with Obamacare, the devil is in the details: how do you define health care? How do you define “insurance plan”? Now that the NAIC has spoken, we have a good idea of how the final regulations will look. And the news is not good: the MLR regulations are likely to lead to a significant disruption of the health insurance market, with many insurers exiting the market, driving premiums up and choices down.

And this isn’t just my opinion. Maine Superintendent of Insurance Mila Kofman wrote a letter to HHS Secretary Kathleen Sebelius, asking Sebelius to waive the MLR rules for Maine until 2014. “One insurer has indicated its intent to pull out of individual markets (and has explicitly named one state where that decision has already been made),” wrote Kofman. “Prior to 2014, implementation of an 80% medical loss ratio requirement may destabilize the individual health insurance market in Maine.” Maine currently has a state MLR requirement of 65 percent; eliminating 15 percent of an insurer’s budget in three months is no small task.

Susan Voss, Iowa’s Commissioner of Insurance and the NAIC’s President-Elect, has also asked Sebelius for a waiver. “Our first goal as insurance regulators is to protect consumers,” wrote Voss. “Part of that protection is providing ‘choice’ in the market place. Without some form of ‘phase-in’ for these individual carriers, consumers in Iowa will be left with fewer choices.”

Unfortunately, the statutory language in PPACA gives regulators little flexibility in waiving the MLR requirements. Section 2718(b)(1) requires that the requirements must be in force “not later than January 1, 2011.”

The story gets worse. For in the areas where the NAIC did have latitude to make the MLR regulations less onerous, they made the onerous choice. To wit:
  • MLRs will be measured against individual state entities. Many insurance companies operate plans in multiple states across the country. If you add up all the plans and average their MLRs, you get close to the 80 percent and 85 percent thresholds. But, on a plan-by-plan level, some of those plans have MLRs as high as 170 percent (which the government deems to be good), whereas others have MLRs as low as 30 percent (bad). This has to do with case-by-case characteristics like how new or old the plan is (newer plans typically have younger, healthier policyholders who have less expenses and thus lower MLRs).
  • The higher 85 percent MLR threshold will begin at 50 employees. Insurance sold to “large” employers will be subjected to the higher 85 percent threshold, as opposed to “just” 80 percent for small groups and individuals. PPACA specified that the threshold for being counted as a large employer could be as high as 100 employees; the NAIC decided to bring that threshold lower for the next five years, to 50 employees, significantly expanding the group of employers who will be ensnared by the 85 percent requirement.
  • Important health care management activities will be curtailed. The NAIC explicitly excluded certain important activities from the MLR calculation, including: reviewing insurance claims to prevent unnecessary tests and procedures; fraud prevention activities; and doing due diligence and keeping tabs on hospitals and doctors to ensure they are performing high-quality, high-value medicine. The consequence of these restrictions will be to drive up the cost of insurance: if insurers can’t invest in reducing fraud and waste, they will have to spend more of their money on fraudulent and wasteful health care, driving up the cost of insurance. In addition, as Arnold Kling points out, since insurers will be financially penalized for investing in customer service, there will be less of it. If you thought your insurer was unsympathetic and unresponsive before Obamacare, just wait.
  • The status of health savings accounts remains unclear. By my reading, the NAIC draft guidelines are silent on the question of whether HSAs will count towards the MLR requirements. If HSAs do not count towards MLR, consumer-driven health plans will immediately become illegal. The Department of Health and Human Services, for its part, asserts that “nothing in the legislation would infringe upon the ability of an individual to contribute to a Health Savings Account.” If this is true, shouldn’t regulators explicitly say so?
The NAIC draft guidelines are open to public comment until October 4. The organization plans to submit its final recommendations to Secretary Sebelius later in the month. PPACA gives Sebelius the freedom to enact whatever regulations she likes on the MLR matter, though she is likely to accept the NAIC’s recommendations so as to avoid stoking further controversy. She is likely to wait until after the November elections to issue the final regulations, leaving insurers less than two months to radically reorder their businesses, or face crippling fines.

Residents of states whose insurance markets aren’t up to Washington’s snuff are in for a serious disruption of their health care. This situation has all the makings of a giant mess. And if a mess does indeed come to pass, let no one pull the wool over your eyes as to how and why it happened.

Tuesday, September 28, 2010

Mass. Insurer Abandons Medicare Advantage

Cross-posted from Critical Condition on National Review Online.

Remember those Andy Griffith Medicare ads suggesting that retirees wouldn’t lose their benefits? The Boston Globe is reporting that Harvard Pilgrim Health Care, the second-largest health insurer in Massachusetts, has decided to entirely drop out of the market-oriented Medicare Advantage Program (h/t Drudge):
Harvard Pilgrim Health Care has notified customers that it will drop its Medicare Advantage health insurance program at the end of the year, forcing 22,000 senior citizens in Massachusetts, New Hampshire, and Maine to seek alternative supplemental coverage.

The decision by Wellesley-based Harvard Pilgrim, the state’s second-largest health insurer, was prompted by a freeze in federal reimbursements and a new requirement that insurers offering the kind of product sold by Harvard Pilgrim — a Medicare Advantage private fee for service plan — form a contracted network of doctors who agree to participate for a negotiated amount of money. Under current rules, patients can seek care from any doctor.

We became concerned by the long-term viability of Medicare Advantage programs in general,” said Lynn Bowman, vice president of customer service at Harvard Pilgrim’s office in Quincy. “We know that cuts in Medicare are being used to fund national health care reform. And we also had concerns about our ability to build a network of health care providers that would meet the needs of our seniors.”
Readers will recall that the largest source of funding for Obamacare was eliminating $548 billion of funding for privately managed Medicare Advantage plans. Harvard Pilgrim will route its Medicare Advantage customers back into traditional, government-run Medicare, and seek to offer them “Medigap” plans, supplements to traditional Medicare that lack prescription drug coverage:
Harvard Pilgrim in a second mailing this week will urge customers to switch to a new Medicare Supplement plan it will begin offering in October. Unlike Medicare Advantage, which is overseen by the Centers for Medicare and Medicaid Services, the new Harvard Pilgrim plan will be overseen by the Massachusetts Division of Insurance.

It will be “slightly more expensive’’ than the Medicare Advantage plans, but competitive with supplemental insurance plans offered by rivals such as Blue Cross Blue Shield of Massachusetts, the state’s largest health insurer, Bowman said.

She said the Medicare Supplement plan will feature some benefits not covered by the current plan, such as fitness reimbursements, but won’t pay for prescription drugs, which are covered by some versions of the current plan. Instead, seniors can buy separate supplemental drug coverage through a partnership with Coventry Health Care, in Bethesda, Md.

Sebelius' Misleading Op-Ed

Cross-posted from Critical Condition on National Review Online.

Health and Human Services Secretary Kathleen Sebelius has an op-ed out today in the Wall Street Journal in which she attempts to defend herself from those who have pointed out her menacing, Chavistic attempts to intimidate the health insurance industry. Let’s go through her piece, point-by-point.
There's a long history of special interests using similar attacks to oppose change. In the mid-1960s, for example, some claimed Medicare would put our country on the path to socialism.
Ironically, Medicare is in far worse shape today, and done more damage to the fiscal stability of the country, than anyone could have predicted in 1965. 1960s-era critics could scarcely have imagined that, by 2010, the government would control more than half of all health-care spending; that our per-capita state spending would be higher than all but two countries in the world; and that Medicare would lead to tens of trillions of dollars of unfunded liabilities. Indeed, it is precisely the track record of Medicare and Medicaid that leads most Americans to view Obamacare with alarm.
But what is really objectionable about these comments is not who they're attacking, but what they're defending. These critics seem to believe that any oversight of the insurance industry is too much, and that consumers would be better off in a system where they have few rights or protections.
This is a ridiculous assertion. We already have extensive regulation of insurance at the state level—just ask anyone in Massachusetts. It is entirely appropriate for there to be a regulatory framework for the insurance industry, to ensure that insurers remain solvent, and to prevent genuinely fraudulent business practices. And there long has been one. But states’ (and now the feds’) overweening micromanagement of plan benefits and premiums is precisely why most Americans face higher prices and fewer choices.
Over the past decade, Americans have seen what happens when insurance companies have free rein. The cost of health insurance has more than doubled, while millions of hard-working Americans lost their coverage or drained their savings to keep up with premiums. Employers—big and small—have struggled mightily to absorb these cost increases and have been losing the fight.
Why has the cost of health insurance doubled? Because of unwise government policies: lobbyist-driven state mandates that force insurers to cover things like acupuncture and drug abuse; wage controls that favor employer-sponsored insurance over individually purchased plans; Medicare’s subsidy of wasteful and fraudulent care; and laws that prevent physician entrepreneurs from competing against hospital monopolies. Obamacare, rather than addressing these problems, makes them worse.
As insurance commissioner and governor of Kansas, I saw firsthand how these rate hikes burdened people. I spoke with families who watched their insurance go up 20%, 30%, even 40% a year without explanation. I met with small business owners who had stopped offering health insurance to their employees because they couldn't afford the annual double-digit premium increases.
It is Sebelius’ experience as Kansas’ insurance commissioner which makes it highly unlikely that she does not appreciate the misleading nature of her arguments. She knows that insurers have extremely slim profit margins, and that they are forced to either pass on the cost increases imposed on them by hospitals and doctors, or go bankrupt.
Yet even as our insurance markets have failed Americans time and time again, special interests successfully blocked reform.
Yes, special interests blocked reform: by supporting Obamacare. Corporate health care interests were more than happy to support a law that would force tens of millions of new customers to buy their products.
We are already seeing this new level of accountability pay off. Last week, North Carolina's largest insurer announced a "one-time refund that will return $155.8 million to more than 215,000 individual Blue Cross Blue Shield customers as a result of the Affordable Care Act." This rebate will put an average of $720 back into the pockets of each of those policyholders. In addition, thanks to diligent work by North Carolina's insurance commissioner, they'll see their premiums rise by less than 6% in 2011—the smallest rate increase in four years.
This is another misleading assertion by someone who knows better. As Hank Stern of InsureBlog points out, the rebates are funded by drawing down the plan’s active life reserves: a “rainy day fund” that, when it is not being raided, increases the stability of the plan and reduces the risk of future rate increases.
A day after Blue Cross Blue Shield's announcement, seniors with private Medicare plans got some news that most Americans haven't heard in years: Their premiums will actually go down 1% next year, even as many of them enjoy better benefits.
Is Sebelius seriously trying to argue that Medicare Advantage premiums are slated to go down, with better benefits, under Obamacare? When over $500 billion has been removed from the program? If she’s right, then maybe more people should leave traditional, government-run Medicare in favor of the privately-run Medicare Advantage program.
The Affordable Care Act is bringing some basic fairness to our health insurance market. So when I learned that a handful of insurers around the country are blaming their significant rate increases on the new law—even though the facts show that the impact of the law on premiums is small, just 1% to 2% declining over time—I let them know that we'd be closely reviewing their rate hikes.
They say that people aren’t entitled to their own facts. But unless the HHS has invented time travel, projections about the future aren’t facts. One can understand Secretary Sebelius’ desire to represent government forecasts as “facts,” but her desire does not make them so.
It's understandable that some insurance companies and their allies don't welcome this change. They've made large profits from the status quo. And it's not surprising—though still disappointing—that House Republicans have recently pledged to repeal the Affordable Care Act and get rid of these new consumer protections.
Insurance companies, like everyone else, are out for themselves: they support things like the individual mandate, which drive up their business, and oppose things like price controls, which limit their viability. But just because something is bad for insurers doesn’t mean it’s good for the public, nor vice-versa. Insurers are the messenger: passing on the high cost of health care to individual consumers. True health reform doesn’t involve demonizing the messenger, but addressing the underlying reasons for high costs.
If critics really want to go back to the days when insurance companies ran wild with no accountability, they should have the courage to say so openly instead of hiding behind distracting attacks. In the meantime, we're going to keep standing up for American families and small business owners who deserve a system that works for them.
American families and small business owners—and large business owners, for that matter—do deserve a system that works for them. That involves, first and foremost, repealing Obamacare, and minimizing the degree to which Washington makes our health care decisions. Kathleen Sebelius is essentially saying, “Trust us. We’re the government, and we’re here to help.” Her misleading op-ed makes her less worthy of that trust.

Sunday, September 26, 2010

Podcast: Obamacare at 6 Months; The Republican Health Care Agenda

If Republicans seek to repeal Obamacare, what should they replace it with?

On Friday, I debated Jonathan Cohn, Senior Editor at The New Republic, on Public Radio International’s “To The Point,” hosted by Warren Olney. The program covered the six-month anniversary of the passage of Obamacare, and the Republican health care agenda as defined by the Pledge to America.

The health care segment of the broadcast begins at the 7:30 mark. Olney first brings on Noam Levey, Congressional reporter for the Los Angeles Times, to discuss the PPACA provisions that went into effect last week. Then, Molyann Brodie, pollster for the Kaiser Family Foundation, discusses her polls that suggest that Americans aren’t interested in repealing the law. (These Kaiser surveys suffer from methodological flaws because of the tendentious manner in which they pose their questions; the weekly Rasmussen Obamacare poll does a much better job in this respect.)

At the 23:30 mark, I first appear, along with Jonathan Cohn. I discuss why the “consumer protections” in PPACA will drive up the cost of health insurance, and what Republicans should advocate in PPACA’s place: eliminating the employer tax exclusion, and allowing individuals to buy health insurance for themselves.

Here is the audio of the full 51-minute broadcast (you can fast forward by clicking on the text in the player and dragging the grey bar around):

“To The Point” is broadcast five days a week by KCRW, the public radio station in Santa Monica, California. You can freely subscribe to their podcast via iTunes.

Friday, September 24, 2010

My Rotting Brain

Cross-posted from The Agenda on National Review Online.

Brad DeLong, the Berkeley economist, is concerned that “writing for National Review has rotted Avik Roy’s brain.” I’ll take it as a compliment, as that would at least imply that I once had a brain to begin with. I just hope that Rich Lowry reads DeLong’s stuff and decides to pick up my bar tab (or perhaps my cable TV bill).

DeLong is irked that I described the President as having “not shown a serious interest in entitlement reform.” To prove my ignorance, he cites figure A-3 from the Congressional Budget Office’s Long Term Budget Outlook. In this figure, from the CBO’s “extended baseline scenario,” the long-term projections the CBO issued this year are improved from those from last year. Hence, per DeLong, our long-term budget outlook is improved:
Why? Because of two "entitlement reforms" by Obama: the IPAB that puts a brake on the growth of Medicare costs, and the excise tax on high-cost health plans that raise revenue.

Rather than saying "the President has not shown a serious interest in entitlement reform," it would be closer to the truth for Avik Roy to say: "Obama did entitlement reform through the PPACA, and I did not notice."

Indeed, the fact that Avik Roy—and lots of other people—did not notice what current law plus PAYGO implies is what leads Doug Elmendorf at the CBO to fear that the policies enacted in the PPACA will not stand, and leads him to present an Alternative Fiscal Scenario in which the cost-containing and revenue-raising portions of the bill are repealed in fairly short order.

It is a fair criticism of Obama to say that his entitlement reforms may not last. It is not a fair criticism to claim that they were not done--or that he has "not shown a serious interest."

Why oh why can't we have a better press corps?
I would challenge nearly every sentence in there, including the last one (I’m no more a member of the press than is Prof. DeLong). He obliquely refers to the CBO’s Alternative Fiscal Scenario, implying that it only exists because reckless conservatives will repeal the fiscally responsible aspects of PPACA. So let us review the differences between the CBO’s “extended baseline scenario” and its “alternative fiscal scenario,” as described by the CBO’s Douglas Elmendorf (emphasis added):
[Under the extended-baseline scenario], the expiration of most of the tax cuts enacted in 2001 and 2003, the growing reach of the alternative minimum tax, and the way in which the tax system interacts with economic growth would result in steadily higher average tax rates. Those rising rates, combined with the tax provisions of the recent health care legislation, would push total revenues to 23 percent of GDP by 2035--much higher than has typically been seen in recent decades--and to larger percentages thereafter. At the same time, government spending on everything other than the major mandatory health care programs, Social Security, and interest on federal debt--activities such as national defense and a wide variety of domestic programs--would decline to the lowest percentage of GDP since before World War II…

The budget outlook is much bleaker under the alternative fiscal scenario, which incorporates several changes to current law that are widely expected to occur or that would modify some provisions of law that might be difficult to sustain for a long period. In this scenario, CBO assumed that Medicare's payment rates for physicians would gradually increase (which would not happen under current law) and that several policies enacted in the recent health care legislation that would restrain growth in health care spending would not continue in effect after 2020. In addition, under the alternative scenario, spending on activities other than the major mandatory health care programs, Social Security, and interest would fall below the average level of the past 40 years relative to GDP, though not as low as under the extended-baseline scenario. More important, CBO assumed for this scenario that most of the provisions of the 2001 and 2003 tax cuts would be extended, that the reach of the alternative minimum tax would be kept close to its historical extent, and that over the longer run, tax law would evolve further so that revenues would remain at about 19 percent of GDP, near their historical average.
A huge driver of the assumptions of the “extended baseline scenario” is that physician reimbursements hew to Medicare’s Sustainable Growth Rate and that Congress refuses to pass any future “doc fix” legislation. Republicans passed “doc fix” legislation when they were in power, and Democrats have repeatedly done so in this Congress. We can debate whether or not this is a good thing, but it is factually incorrect to deny that both parties are responsible. PPACA claims, preposterously, that “doc fixes” won’t happen in the future, and counts this toward its alleged budget savings.

When Elmendorf refers to the “several [other] policies that would restrain growth in health care spending,” he is primarily referring to the Cadillac tax. Insofar as the Cadillac tax is a simulacrum of ending the employer tax exclusion, conservatives like me favor it, and we must note for the record that within PPACA it was watered down not by Republicans but by labor unions.

Another big driver of the CBO’s alternative scenario is the assumption that discretionary spending would “fall below the average level of the past 40 years relative to GDP, though not as low as under the extended-baseline scenario.” Based on the Pledge to America, it is Republicans who favor the more aggressive domestic spending reductions, not Democrats.

On the tax side, DeLong is apparently arguing that taxation should go up from the historical average of 19 percent of GDP up to 23 percent: a 21 percent tax increase on every tax-paying citizen and business in America. If that’s his position, that’s fine, but surely he can accept that others aim to reduce the deficit with a greater emphasis on spending cuts, and that it is realistic to assume that the public will resist a 21 percent tax increase. Let’s not forget that the Democratic Congress is in favor of extending the Bush tax cuts to everyone except those making more than $250,000 a year, significantly slimming the fiscal disagreement between the two parties on that issue.

So, where exactly is the entitlement reform in PPACA? DeLong refers to Medicare’s new Independent Payment Advisory Board, but that board only has the limited power to cut reimbursement to doctors and physicians, and not to restructure or reform Medicare benefits. Similar efforts to restrain costs, such as the aforementioned Sustainable Growth Rate, have failed miserably, and there’s no reason to believe the IPAB will succeed where these other efforts have failed. For what it’s worth, the CBO scores the savings from IPAB at $28 billion over the first ten years of the law—a paltry sum, given the Board’s alleged centrality to entitlement reform.

Puzzlingly, DeLong refers to the “Cadillac tax” as entitlement reform: but this tax applies only to private insurance, not to Medicare or Medicaid, and therefore has nothing to do with curbing entitlement spending. Sure, it raises taxes, but those taxes will be raised not to pay down Medicare or Medicaid, but instead to fund an expansion of Medicaid and an entirely new individual insurance subsidy.

If DeLong means to include things like Don Berwick’s “Center for Medicare Innovation,” well, the law is spending a whopping $10 billion on this program over ten years, and the CBO projects savings of a less-whopping $1.3 billion for its work. Finally, if he is counting the $500 billion in savings from eliminating Medicare Advantage subsidies as “entitlement reform,” he will once again need to explain why that money is being used to create new entitlements and expand Medicaid, rather than for improving Medicare’s solvency. He doesn’t mention these things, so one could just as easily conclude that he agrees with conservative skeptics.

If PPACA had eliminated Medicare Advantage subsidies, and raised taxes, without spending all of the savings on the Medicaid expansion or the new exchange subsidies, DeLong could justly claim that the law was a major advance in fiscal responsibility, and pillory Republicans who opposed it. But instead, the law contains trillions of dollars in permanent new spending obligations: the mirror image of entitlement reform.

Thursday, September 23, 2010

The Pledge's Health Care Critics

Cross-posted from Critical Condition on National Review Online.

The Republicans’ Pledge to America has come under a fair amount of criticism from both the left and the right. (On Wednesday night, I gave its health care provisions a 7 out of 10.) Some of these criticisms are fair, some are unfair, and some are based on a faulty understanding of what the Republicans are proposing. Let’s go through the criticisms.

First, let’s swing our eyes to port. Igor Volsky of the Center for American Progress put out a detailed post arguing that “the document provides almost no specifics about what the party would do to control health care spending, improve quality, or pay for its reforms. And at least 7 of the GOP’s ideas on health care are already included in the health care law.” I disagree with him on both counts.

As to the first point, the Pledge does propose measures that would curb health-care spending and improve quality. Malpractice reform would curb defensive medicine and reduce wasteful health spending. Legalizing the purchase of health insurance across state lines would dramatically reduce the cost of insurance. Expanding health savings accounts will incentivize more people to migrate to consumer-driven health plans, which will also lower costs and improve quality. Of these measures, the first two would cost the government zero; HSA expansion might reduce tax revenues somewhat (because HSAs are tax-free), but not by much given their currently low penetration.

Ezra Klein advances the argument (as does Igor) that repealing Obamacare will increase the deficit, since the CBO scored PPACA as reducing the deficit by $143 billion. Even if you believe in the omniscience of the CBO (I do not), we all know that CBO scores are heavily gamed by legislators. It is far from clear that a Republican Congress in 2013 trying to repeal the law would garner the same score from the CBO as the Democratic Congress did in 2009. Remember also that the CBO, in its scoring of PPACA, did not have time to consider the costs of most of the new discretionary spending that the law requires. Suffice it to say that deficit hawks are the ones who most dearly desire the repeal of Obamacare.

Returning to Igor, there are superficial similarities, but serious substantive differences, between the Pledge’s health-care proposals and those of PPACA. Let’s take them one by one:
  1. Insurance across state lines. Republicans advocate the full liberalization of health-insurance consumption: just as I can order a laptop from California, even though I live in New York, so too can I buy health insurance. PPACA “allows” state governments to do something they could pretty much do already: enter into compacts with each other to allow for cross-border insurance sales. These compacts aren’t going to happen, especially between states with significantly different regulatory structures. The whole point of buying insurance across state lines is to liberate insurance from the lobbyist-driven mandates that drive insurance costs skyward.
  2. High-risk insurance pools. The PPACA-sponsored high-risk pools are seriously underfunded and have essentially no chance of succeeding. In addition, for PPACA, they are temporary measures meant to tide patients over until the guaranteed-issue mandate (requiring coverage of preexisting conditions) goes into effect. For Republicans, high-risk pools are an alternative to guaranteed issue.
  3. Pre-existing conditions. PPACA requires that insurers accept everyone who applies, regardless of preexisting conditions. This is a recipe for skyrocketing health costs, because it encourages people to wait until they are sick before buying insurance. (PPACA’s individual mandate, even if it manages to pass constitutional muster, doesn’t go into full effect until 2018.) The Republican proposal echoes pre-PPACA law: requiring insurers to cover those with prior coverage and a preexisting condition. (Jonathan Cohn objects to the Pledge because he doesn’t believe high-risk pools work: but that’s more of a philosophical objection.)
  4. Lifetime and annual caps. This is the one area where PPACA and the Pledge are basically identical. This aspect of the law will increase the cost of insurance, but not by much: my actuarially knowledgeable colleagues put the cost increase at 1-2 percent.
  5. Rescissions. The rescission provisions in both PPACA and the Pledge are mostly symbolic. It is already illegal for insurers to dump patients simply because they get sick: it is a violation of the insurance contract. If applicants for insurance knowingly misrepresent their health status, however, it is the beneficiary who has violated the contract. There is only a small bit of room in between these two situations for tweaking regulations.
  6. State innovation. PPACA allows states to receive waivers, if the HHS secretary is so kind as to grant them, to slightly stray from PPACA’s blizzard of unfunded state mandates. Republicans favor a far more decentralized approach. PPACA clearly constrains the latitude of states to cover the uninsured; this is indeed an area in which the Republican and Democratic approaches are diametrically opposed.
  7. Abortion. It is the consensus of abortion activists on both sides of the aisle that PPACA allows federal funds to pay for abortion. Republicans seek to restore the Hyde Amendment principle that taxpayer money can’t be used to fund abortions.
I should here mention that there is some confusion about exactly what Republicans are proposing. Peter Suderman, in an otherwise excellent piece, is worried that the Pledge’s promise to require insurers to cover those with preexisting conditions will lead to the famed “adverse selection death spiral.” But as I explained above, the Pledge only requires coverage for those with prior insurance, preventing healthy people from gaming the system, and thereby avoiding the death spiral. Moreover, what the Pledge is advocating has been a part of federal law since the passage of the Health Insurance Portability and Accountability Act in 1996. (For a thorough treatment of this topic, see Jim Capretta and Tom Miller’s piece in the Summer 2010 issue of National Affairs.)

Now, let’s turn to the Right. Conservative critics of the pledge are disappointed that the Pledge didn’t do more to tackle entitlement reform. Philip Klein describes the document as “reinforcing [Republicans’] timidity.” Erick Erickson calls it “perhaps the most ridiculous thing to come out of Washington since George McClellan.” Et cetera.

I share their basic disappointment that the Pledge doesn’t say much about entitlement reform. However, the news isn’t all bad. If National Review’s editors are right, that a “full accounting of Social Security, Medicare, and Medicaid” means “putting their long-term unfunded liabilities on budget,” this would be a huge breakthrough in honest fiscal accounting, and help build popular support for broader entitlement reform. Today, the deficits run by the big entitlements are not counted toward our official deficit and debt totals, even though we have to pay them off with the same borrowed taxpayer dollars.

And another of my NR colleagues, Kevin Williamson, is an actual fan of the Pledge: “You guys do appreciate that this would be more than President Reagan managed on the spending front, right?” Kevin is the fiercest deficit hawk I know — his blog, Exchequer, is singularly devoted to the subject — and his words should be weighed accordingly. “As a matter of politics,” writes Kevin, “entitlement reform is going to be a long and complex fight, and difficult to summarize in a short campaign document.”

Let’s remember that, even if Republicans take the House, they are facing a likely Democratic Senate and certain Democratic White House. There is only so much they can get done. Their approach, it would seem, is to bite off today what they can chew, regain the trust of the electorate, and build upon their successes in 2012. We’ll find out soon enough if that was a wise strategy — but it can certainly be called a plausible one.

How Medicaid is Burying the Empire State

Cross-posted from National Review Online.

Medicaid is, first and foremost, a humanitarian disaster. Studies have repeatedly shown that the program fails so badly that indigent patients fare no better than, and often worse than, those with no insurance at all.

But there is, of course, another Medicaid-driven crisis: the one in which skyrocketing spending on Medicaid is annihilating state budgets all across the country, a problem that Obamacare makes significantly worse.

The State of New York is a poster child for how decades of irresponsible management of Medicaid can drive a state treasury into a ditch. On Monday, New York lieutenant governor Richard Ravitch published a thoughtful and distressing report that details the depth of the problem. Medicaid is “the largest single driver of the State’s growing expenditures,” writes Ravitch. “The current State budget crisis,” in turn, “is threatening New York’s ability to handle the growth of this program without dramatically raising taxes or cutting other essential government services.”

Ravitch notes that nearly one-quarter of all New York state residents — 4.5 million people — are on Medicaid. In the 2010 fiscal year, local, state, and federal parties spent more than $50 billion on Medicaid in New York, far more than any other state in the union, and nearly 40 percent of New York’s 2010 budget of $132 billion. New York spends more on Medicaid per capita than any state — double that of neighboring New Jersey and Connecticut, and 2.3 times that of California, the second-largest state in total Medicaid expenditures.

But the near future makes 2010 seem paradisiacal by comparison. Over the next four years, as the federal bailout of spendthrift states expires, Albany expects its Medicaid spending to increase by 18 percent a year. Then, in 2014, Obamacare forces the state to increase the number of people who are eligible for Medicaid, expanding the state’s fiscal liabilities and constraining its latitude to institute needed reforms.

In his 17-page report, Ravitch traces the recent history of how New York’s Medicaid program came to this pass. Most important, New York has been one of the most aggressive states in taking advantage of federal matching funds in order to expand its Medicaid program, making it one of the most lavish in the country. Unfortunately, it has been politically easy to expand Medicaid during good times, but impossible to rein it in during bad times; indeed, during the financial crisis of 2008–09, the state actually expanded its Medicaid coverage, and Medicaid enrollment increased by 600,000.

Another problem, the transformation of Medicaid from a welfare program to an entitlement program, was a result of the passage of federal welfare reform in 1996. When Medicaid was first instituted in 1965, nearly everyone eligible for Medicaid was already on welfare: that is, they were receiving direct cash assistance. After 1996, New York’s welfare rolls shrank dramatically, while its Medicaid rolls continued to expand. “Today,” writes Ravitch, “only one out of six New York children and adults receiving Medicaid services also receives cash assistance,” because most people on Medicaid are employed, albeit with below-average incomes.

A third problem is that Medicaid provisions such as “spend-down” rules and the doctrine of “spousal refusal” allow higher-income individuals to game the system and gain Medicaid eligibility, by rearranging their assets. (John Hood discusses this problem in the Summer 2010 issue of National Affairs.)

A fourth problem is that New York’s methods of reimbursing doctors and hospitals for Medicaid services is specified line-by-line in state law. Ravitch writes:
For most areas of Medicaid payment in New York — in-patient hospital care, freestanding ambulatory care centers, home health agencies, nursing homes — the basic formulas for reimbursing Medicaid providers are set directly by the State legislature as part of the annual negotiations over the budget. Even minor adjustments require legislative action. As a result, the State has found it exceedingly difficult to control Medicaid costs by improving and updating payment methods.

For example, until recently the State was required by law to reimburse hospitals for most in-patient care under a complex inflation-adjusted formula devised in 1981. Since that time, there have been revolutions in hospital operations, staffing, and technology — changes for which the inflation rate is a grossly inadequate proxy. But because the formula was embedded in statute, it took almost 20 years, until 2009, for the methods to be updated.
This is a key issue with government-run health insurance, both at the state and federal levels: Government insurance is inherently politicized, and reacts slowly, if at all, to innovations in health-care delivery and technology.

A fifth problem is administrative fragmentation: In New York, responsibility for coordinating Medicaid is spread out between the Office of Health Insurance Programs, the Department of Health and Mental Hygiene, and the Office of Long Term Care. In addition, administration of Medicaid in New York is divided between the state government in Albany and 57 county governments. This allows clever patients to game the system, and leaves others in need to fall through the cracks.

So: what to do about it? Ravitch offers some sensible proposals for incremental improvement. Notably, he advocates tort reform:
Any serious Medicaid cost control effort requires reform of the State’s expensive and inequitable malpractice system, which exerts significant cost pressure on the program. Reform should aim at significant premium relief for physicians, reduced coverage costs for hospitals, and promotion of patient safety. The legislative components of a reform package should include tort reform measures such as a cap on non-economic damages, a neurologically impaired infant fund, and specialized courts.
He also advocates reform of New York’s spend-down and spousal-refusal rules, administrative consolidation, and outsourcing of reimbursement decisions to a board of experts. He favors transitioning Medicaid’s fee-for-service patients into a managed-care model. He advocates a tax on sugary soft drinks. He also encourages Albany to lobby Washington for more money.

The most effective state-based Medicaid reforms, however, are notably absent from Ravitch’s report: introducing consumer-driven health plans into Medicaid, as Mitch Daniels has in Indiana; converting the Medicaid program over to a cash assistance or premium-support model that allows lower-income individuals to buy private insurance; and closely matching New York’s Medicaid-eligibility requirements to those of federal law.

Richard Ravitch deserves credit for bringing thoughtful attention to New York’s biggest fiscal problem. But his deck-shuffling recommendations for reform won’t do enough to solve the underlying problem. The approached favored by many in Albany — tax increases on the wealthy — won’t work either, since New York’s richest can easily relocate to neighboring states.

For better or worse, Richard Ravitch isn’t running for governor this year. Andrew Cuomo, who is, echoes only the most Democratically palatable of Ravitch’s proposals: consolidating Medicaid’s administration in Albany; outsourcing reimbursement decisions to an expert panel; etc. (Reliably, Cuomo’s 252-page agenda contains not one word on tort reform.)

By contrast, Cuomo’s Republican opponent, Carl Paladino, seeks to reduce the state Medicaid budget by $20 billion “by eliminating optional programs that special interest lobbyists purchased from the Albany ruling class with huge campaign donations.”

Paladino’s proposal, though lacking in detail, is a promising start, for it at least reflects the political courage needed to get Medicaid’s balances in order. Ultimately, though, altering the trajectory of Medicaid spending requires fundamental reform. Such reform will certainly require leadership from New York’s next governor, but also a fiscally serious state legislature and a rollback of Obamacare. New York’s voting taxpayers have their work cut out.

Wednesday, September 22, 2010

The Pledge to America on Health Care

Cross-posted from The Agenda on National Review Online.

CBS News and other outlets have published a draft version of House Republicans’ “Pledge to America,” to be formally unveiled tomorrow in Virginia. As far as its health care provisions are concerned, on a scale of 1 to 10, I give it a 7. Given the political constraints a GOP-controlled House would face, that’s not terrible. It’s a reasonably substantive document, much more so than the 1994 Contract with America. For better or worse, the Pledge is designed to reach the broadest possible consensus, and therefore avoids some of the thorniest questions in health care policy.

We knew that repealing PPACA would be a core component of the House Republican agenda, and indeed it is. The outstanding question was: in the “repeal and replace” formulation, what would “replace” look like? The “replace” part takes special importance given that the President is certain to veto any repeal measure.

The planks of the House GOP health care platform, aside from repealing Obamacare, are: reforming medical malpractice; legalizing interstate purchasing of health insurance; expanding health savings accounts; “strengthening the doctor-patient relationship”; ensuring access for those with pre-existing conditions; and permanently prohibiting taxpayer-funded abortion. It’s a sensibly modest platform that is nearly identical to that which Republicans proposed as an alternative to PPACA throughout 2009. If enacted, it would certainly represent several steps in the right direction.

I put “strengthening the doctor-patient relationship” in quotes because it’s not clear that, other than by repealing PPACA, what the Pledge to America does to strengthen the doctor-patient relationship. The document is no more specific than stating that Republicans seek to “replace [PPACA] with common-sense reforms.”

The pre-existing conditions plank is the most detailed of the seven. This clearly suggests that Republicans were sensitive to the question of access for those with pre-existing conditions. The document advocates expanding state high-risk pools and reinsurance programs. It states that “we will make it illegal for an insurance company to deny coverage to someone with prior coverage on the basis of a pre-existing condition”: but this was already illegal prior to Obamacare. Same goes for the desire to “prevent insurers from dropping your coverage just because you get sick.” I guess it’s simpler to say that you’re in favor of these things than to explain that they are already ensconced in federal and state law.

The single best solution to the pre-existing condition problem is to eliminate the employer tax exclusion that subsidizes employer-purchased health insurance at the expense of an efficient individual market. Unfortunately, the President is opposed to such a measure, and Republicans are understandably uninterested in advocating a tax increase that the President will hammer them on.

It’s notable that abortion is the last of the seven planks, something that was true throughout the pledge: social issues were consistently listed at the back end of the various policy proposals. To me, this is tonally appropriate.

Actually, the most interesting and consequential health care proposal in the Pledge is one that appears elsewhere in the document: a promise to “require congressional approval of any new federal regulation that has an annual cost to our economy of $100 million or more.” If Republicans were ever able to get such a provision signed into law, it would have a significant impact on the regulatory implementation of PPACA, along with being an all-around excellent check upon the metastasis of the regulatory state.

Importantly, the Pledge says almost nothing about the biggest and most difficult questions in health policy: Medicare and Medicaid reform. It criticizes PPACA’s “massive Medicare cuts” without offering an alternative solution for putting the program on stable long-term footing. The fiscal section of the Pledge promises that Republicans “will make the decisions that are necessary to protect our entitlement programs for today’s seniors and future generations. That means requiring a full accounting of Social Security, Medicare, and Medicaid, setting benchmarks for these programs and reviewing them regularly, and preventing the expansion of unfunded liabilities.” About as bracing as a glass of milk.

But perhaps it would have been unrealistic to expect more. Democrats have engaged in their fair share of entitlement demagoguery, which is likely to intensify as we get closer to the election. Up to this point, the President has not shown a serious interest in entitlement reform, and so Republicans surely feel that they’re better off speaking in generalities.

It’s hard, however, to imagine serious entitlement reform taking place until politicians come forth to seek a popular mandate for reform, as Paul Ryan has tried to do. Oh well; there’s always 2012?

(Here's the full text:)

Time To Make the Donuts

Cross-posted from Critical Condition on National Review Online.

One of the dumbest provisions of PPACA is the one that eliminates the Medicare “donut hole.” This feature of the Medicare prescription drug benefit was designed to encourage seniors to be wise about their pharmaceutical spending, while giving them insurance against catastrophic drug bills. It was one of the main reasons that spending on the program came in at 45 percent below government projections in 2009, saving taxpayers over $50 billion. Cost sharing works.

Now, from the Washington Post, comes word that—surprise, surprise—the elimination of the donut hole may result in a “[steep] increase in the price of drugs”:
Some of the most expensive drugs taken by people in the doughnut hole face minimal competition from generics or brand-name alternatives, making them particularly susceptible to price inflation, said Brit Pim, vice president of government programs development at benefits manager Express Scripts. Those include "specialty medications" for complex diseases, he said.

Express Scripts found that in 2009, the average price for specialty medications rose 13.5 percent.
Why? Now that Medicare beneficiaries will have no incentive to care about the cost of the drugs they buy, pharmaceutical companies have every incentive to raise prices. More importantly, seniors will have much less incentive to use cheaper generic drugs instead of more expensive, branded ones. If you wondered why the pharmaceutical industry lobbied for Obamacare, here’s your answer.

The donut hole, a.k.a. the Medicare Part D coverage gap, was incorporated into the Medicare prescription drug benefit when it was enacted in 2003. It required that, in a given year, retirees must pay themselves for drug spending above a certain level ($2,830 in 2010) and below a certain level ($6,440 in 2010). Below those levels, Medicare paid about 65% of the costs; above them, Medicare paid 95%. The thresholds were designed by actuaries who mined actual drug usage statistics to identify the optimal price points.

PPACA, on the other hand, eliminated the donut hole for political reasons: it allowed Democrats to soften the political blow of eliminating $500 billion in Medicare Advantage subsidies. In other words, the most cost-effective aspect of the Medicare drug benefit was eliminated in order to wipe out the most market-oriented aspect of Medicare’s traditional benefit. Awesome.

Tuesday, September 21, 2010

Health Wonk Review Review: In Which the Wonks Review Other Wonks

Cross-posted from The Agenda on National Review Online.

The latest edition of Health Wonk Review, hosted by Louise Norris of Colorado Health Insurance Insider, contains a number of interesting items in which health care bloggers review policy articles by other authors.

John Goodman asks the “question that is rarely asked”: given that everyone complains that we spend too much on health care, exactly how much should we be spending?
When it is asked, the answers are almost never sensible…To an economist, the titular question has a straightforward answer, at least at the theoretical level. We should spend on health care until, at the margin, a dollar’s worth of health care is equal to a dollar’s worth of anything else money can buy.

As a practical matter, I have no idea what tradeoffs you’re willing to make between health care and other uses of money. And you have no idea what tradeoffs I’m willing to make. That’s why, whenever possible, we should favor institutions that allow individuals to make these decisions on their own. People will reveal their preferences through their actions…

In the current system, however, people rarely have the opportunity to trade off a dollar’s worth of care against a dollar of other goods and services. In general, every time we spend a dollar on health care, only 12 cents is coming out of our own pockets. This means we have an incentive to overconsume care — until it’s worth only 12 cents on the dollar, at the margin. To the degree that we act on these incentives, we will spend until 12 cents worth of care would have provided  a dollar’s worth of other consumption — if only we were free to allocate where our money goes.
Unfortunately, plenty of policy experts people believe that it’s better if...experts determine on Americans’ behalf what the optimal amount is to spend on health care. Goodman observes:
Medicaid, for example, was designed by people who think precisely this way. Suppose a single mother with children loses her job and is temporarily unemployed. She has difficulty putting food on the table for her children and is in danger of becoming homeless if she doesn’t pay the rent. Her automobile is about to be repossessed if she misses another car payment. Yet if she is on Medicaid, she has (at least on paper) access to everything the health care system has to offer, with no copayment or deductible. Even most members of Congress don’t have coverage this generous.

Normal people in this situation would trade in their gold-plated health plan for a silver or a bronze, and use the savings to buy food, pay the rent, etc. But Medicaid makes these choices impossible. If we applied the Medicaid mentality to housing, poor people would be forced to live in a luxury abode, even if their children were starving.

Medicare was also designed by the social engineering mentality. Enrollees can spend an unlimited amount of taxpayer money on end-of-life care, but they are not allowed to spend those same dollars to avoid the foreclosure on a home, provide home care to prevent nursing home confinement for a spouse, or make a bequest to their kids.

How would you like the government dictating to you how you must spend 40% of your disposable income?  Not a pleasant thought?  This is what the government routinely does to the elderly, the disabled and the poor. (And under ObamaCare, it will do it to many, many more.) Medicare insurance, at an average of $11,000 per enrollee, is as much a part of the income of the elderly as Social Security is. Yet while seniors can spend Social Security dollars without restriction, the $11,000 benefit they get from Medicare can be spent only on health care.
Read the whole thing.

Aaron Carroll of The Incidental Economist takes on the health cost issue, from another perspective. He criticizes the recent report by the Congressional Budget Office assessing the impact of obesity on health care costs. He cites a 2007 McKinsey Global Institute report that argues that obesity isn’t a significant contributor to health care costs. McKinsey employs a lot of smart people, and the report contains a fair amount of useful data, but it repeatedly reminds us of the danger of a little knowledge. As the report acknowledges, it isolates obesity from many of the cardiovascular, metabolic, and respiratory diseases that are closely correlated with obesity. Regardless of what obesity costs our system, however, it’s not obvious that less obesity would lead to lower costs. After all, we all have to die of something.

While many people are confounded by the rise in health costs, the central cause is quite simple. As John Goodman points out above, widely held, heavily subsidized health insurance incentivizes people to spend money on things they don’t need.

Hank Stern of InsureBlog points out one of the popular misunderstandings of health insurance, as repeated by Reed Abelson of the New York Times. Abelson writes, “Instead of sharing the pain, as they have generally done in the past, employers chose to keep their costs steady by passing the higher costs onto workers.” Except that this sentence implies that, if employers don’t pass those costs on, that insurance is somehow “free.” It’s not: it comes directly out of employees’ paychecks and gets sent directly to the insurers. Employers are simply the unseen intermediary. Rich Elmore of Health Technology News notes the recent number-crunching by the Kaiser Family Foundation, which analyzes the other ways in which employers are striving to control costs.

Joe Paduda of Managed Care Matters approvingly notes the latest issue of Health Affairs, the influential health policy journal, which is focused on tort reform. A study published in the issue argues that the costs of medical liability, “including defensive medicine, are estimated to be $55.6 billion in 2008 dollars, or 2.4 percent of total health care spending.” There are some problems with this study, which I will address in a future post. But even if we accept the study’s methodology, which I don’t, is $55.6 billion a year something to sneeze at? That money would have paid for more than half of Obamacare’s $1 trillion in new spending.

Paduda goes on to argue that lousy medicine is the real cause of high costs. We can all be against lousy medicine, but until consumers have the ability to control their own health care dollars, there can be no effective accountability in the practice of medicine.

Brad Flansbaum of The Hospitalist Leader, an admirer of Don Berwick, laments that Berwick’s recent op-ed in the Washington Post more resembled “a Whitehouse press release, not the scribing of an innovative clinician and scholar.” The politicization of policy is one of the inevitable consequences of government control, something that we free-market types have been pointing out repeatedly.

Jaan Sidorov of the Disease Management Care Blog points out the new study from our friends at the Dartmouth Atlas, in which the authors conclude “that the local availability of primary care may have little relationship with local health care quality.” Given that left-of-center policy analysts have long sought to increase the prevalence of primary care physicians at the expense of specialists, the Dartmouth study is provocative.

David Williams of Health Business Blog notes that many insurers are trying to tamp down on the usage of out-of-network hospitals and doctors as a way of keeping a lid on costs. This is exactly what insurers should be doing—and, notably, what traditional Medicare is barred from doing.

And finally, Jason Shafrin of Healthcare Economist is back with another post in his series on health care systems around the world, this one on Australia. The Australian system is heavily, but not completely, socialized, with 68 percent of national health expenditures funded by the government.

Friday, September 10, 2010

Matthew Yglesias on Health Care Reform

Cross-posted from The Agenda on National Review Online.

Yesterday, in the interests of reaching a compromise solution to the budget deficit, I proposed a $300 billion tax increase—by eliminating the federal subsidy for employer-purchased health insurance—and asked for suggestions from the other side for corresponding spending cuts. In response, Matthew Yglesias pointed out to me that there are no $300 billion-a-year programs that one can simply eliminate in the same way that one can raise taxes.

That is true, and it is one of the main reasons that we should have an extremely high bar for launching new government programs (like PPACA) that are very difficult to unwind, should they later prove inefficient or ineffective. Nonetheless, we will need to come up with ways to reduce spending, and I continue to welcome suggestions in that regard.

Yesterday, Yglesias published a constructive post on health care reform. The most interesting paragraph is the final one:
Meanwhile, I think the real issues are obscured by continuing conservative obsession with repealing the Affordable Care Act. In a big-picture sense, what ACA is doing is transitioning American health care for the 64-and-under set into a means-tested voucher program. Meanwhile, the big conservative proposal is to transition American health care for the 65-and-over set into a means-tested voucher program. That doesn’t necessarily strike me as an unbridgeable chasm of principle. What if all Americans, regardless of age, got their health care through a means-tested voucher program that included a public option?
It would be great if all Americans, regardless of age, got their health care through a means-tested voucher program (though I will part ways with Yglesias on the beneficence of the public option). As I have pointed out in the past, this is what the Swiss do, and it works remarkably well. The Swiss do not offer any government-run insurance options, but they do require that participating private insurers are non-profit entities. The key feature of the Swiss system is that everyone purchases insurance for himself, rather than having it purchased on his behalf by employers or government agencies. The elimination of the employer tax exclusion is an important part of bringing such a system to the United States.

If liberals and conservatives are able to come together around such a framework, we could make great strides both for the health care system and our precarious fiscal situation.

Thursday, September 9, 2010

A Tax Increase Conservatives Should Support

Cross-posted from The Agenda on National Review Online.

We often hear that a bipartisan compromise on the federal deficit will require both spending reductions and tax increases. Conservatives, in their ideal world, would eliminate the deficit entirely by reducing spending. From what I read, though I could be misunderstanding their position, many liberals don’t believe that the deficit is a serious concern; those that are concerned would certainly emphasize tax increases over spending reductions. Hence, those in the “sensible center” seek to split the difference and combine tax increases with spending reductions.

The problem with most tax increases, especially the ones large enough to make a dent in the deficit, is that they hinder economic growth, and thereby growth in tax revenue. Hence, over the medium-to-long term, one dollar in tax increases does not reduce the deficit as well as one dollar in spending reductions. And, of course, some taxes do more to hinder growth than others.

This gets me to the one tax increase that conservatives should support: the elimination of the tax break given to employers for purchasing health insurance for their employees. This tax break costs the Treasury over $300 billion a year—real money—and is one of the biggest reasons why health care is so expensive. Not only would eliminating this tax break reduce the deficit, but by unleashing an individual market for health insurance, it would slow down, and possibly reduce, the amount the government spends on health care, further reducing the deficit.

Because most of us (under 65) get our insurance through our employers, we have little to no choice in what kind of insurance we get. Instead of buying insurance for ourselves, like we do with every other kind of insurance, your employer’s human resources specialist does it for you. You may not even know the HR specialist personally: how is she supposed to know what kind of insurance is right for you?

There are other inefficiencies that flow from this system. Employers save money by buying insurance in bulk: one-size-fits-all plans for all of their employees. If you want to change jobs, or if you lose your job, your insurance doesn’t go with you, creating significant economic insecurity. Losing your insurance this way is especially bad if you have a chronic disease, because a new insurer will lose money insuring someone with a preexisting condition.

A one-page bill, eliminating the tax break, would have improved our health care system far more than Obamacare’s 2,300 pages ever will. Unfortunately, when John McCain proposed just that in the 2008 campaign, Barack Obama attacked it as a tax increase (which it is).

And the President kept his campaign promise. Obamacare, instead of eliminating the employer tax break, doubled down on the employer-sponsored system, by forcing employers with 50 or more workers to provide health insurance for all of their employees.

Imagine if, instead of PPACA, we had passed that one-page bill. Not only would we have made a huge dent in the deficit, but we would have dramatically improved the ability of those with preexisting conditions, and those between jobs, to keep their insurance. We would have unleashed torrents of innovation into the design of affordable health insurance products for young and healthy people.

One criticism of the one-page law is that it would be too disruptive to existing insurance arrangements. But there are ways to address this, such as by phasing out the tax break over time, or by creating a transitional period during which individuals could purchase, without penalty, the same policies they had previously obtained through their employers.

The good news is that many mainstream liberals are open to eliminating the employer tax exclusion. Last year, before PPACA had been written down, Ezra Klein wrote, “If you want to pass health care reform, it probably has to be done.” And to be completely fair, PPACA does contain a provision that weakly simulates such a reform: the “Cadillac tax” on high-cost health plans, the one that labor unions forced Democrats to substantially water down, so that it doesn’t kick in until 2018 (if ever).

So, to those like Matt Yglesias who write that conservatives don’t care about the deficit, or those like Jonathan Chait who compare Republican budget proposals to the Special Olympics, I say: Here’s a $300 billion tax increase that conservatives should rally behind. Is there a $300 billion spending cut, excluding national defense, that liberals could support in return?

Wednesday, September 8, 2010

Misconceptions About Consumer-Driven Health Care

Cross-posted from The Agenda on National Review Online.

Consumer-driven health plans, or CDHPs, are a relatively new concept. In the United States, they were basically nonexistent until 2003, when the Medicare Modernization Act—the one that added the prescription drug benefit to Medicare—legalized them (with significant constraints).

Since 2003, the growth of CDHPs has been explosive. Prior to the passage of the Medicare Modernization Act, several hundred thousand people were on such plans. In 2009, over 10 million people were enrolled in consumer-driven health plans. Barring a PPACA-driven regulatory strangle, the rising cost of health care will continue to drive both employers and individuals into these popular, cost-effective plans.

The novelty of CDHPs has led to many misconceptions about their qualities and flaws. One is that CDHPs place a greater burden on individuals for the cost of their medical care (i.e., increased cost-sharing). Here’s Austin Frakt on the topic:
Many suggest that the solution to our health care system’s problems is to be found in a more market-based approach. Consumer-directed health plans are at the center of this concept. If you make people spend more of their own money, they’ll be more prudent users of care and seek better value at lower prices…About now you’re thinking I disagree with the notions I just expressed. Actually I don’t. They have merit, which I recognize, accept, and support. Where I take issue is that they are not solutions to all the problems in our system.
Certainly Austin is right that CDHPs are no cure-all. And it is true that many free-market types, myself included, advocate more cost-sharing, especially in situations where the government is subsidizing health care (e.g., Medicare and Medicaid).

But it is important to understand that CDHPs do not increase the cost burden to the individual. Rather, they increase the degree to which individuals control their own health care spending.

Take your plain-vanilla, everyday, traditional employer-sponsored health insurance plan. Such a plan might be designed so that of every $100 that the insurer spends on the beneficiary’s health care, the beneficiary has to spend $18, through a combination of deductibles (i.e., dollars spent before the insurance kicks in), co-payments (dollars spent on an individual service before the insurance kicks in), and co-insurance (dollars spent, on a percentage basis, for a particular claim).

What CDHPs do is transfer control of much of that $100 to the beneficiary. Instead of the individual paying $18 and the insurer paying $82, in a CDHP, the individual (by way of lower premiums) or his employer (by way of a direct contribution) puts a portion of that $82—say $30—in a tax-free health savings account. The degree of actual cost-sharing, at $18, can remain the same. So in a CDHP that is actuarially identical to our traditional plan, there might be $18 of cost-sharing, $30 in a health-savings account, and $52 paid out directly by the insurer.

There are three critical differences, in our example, between a traditional plan and the consumer-driven one. First, that $30 is controlled by the individual, giving him an incentive to shop for high-value, low-cost care. Second, if the beneficiary remains healthy over the course of the year, he gets to keep that $30 and roll it over to the next year. (In traditional insurance, those savings are simply handed to the insurance company.) Third, individuals can invest the savings they accumulate in their health savings accounts, harnessing the power of compound interest.

A plan that seeks to increase cost-sharing, whether a traditional plan or a new-age CDHP one, would increase that $18 to a higher amount, say $25. But there is nothing inherent in CDHPs that requires increased cost-sharing. Indeed, because CDHPs save money even with equivalent cost-sharing to traditional plans, one could in theory offer more generous insurance through the CDHP approach for the same expense.

There are other misconceptions about CDHPs, e.g., they will motivate people to forego necessary care in order to save money. The actual experience of insurers who administer CDHPs rebuts these fears. What we see instead is substantial increases in preventive care (by 4 to 23 percent), increased prescription drug use (especially of generic drugs), and better compliance with evidence-based medicine (i.e., medicine’s best practices as established by the largest, best-run clinical trials).

My praise for CDHPs should not be taken to mean that such plans are perfect. As with any innovation, technical issues have arisen with some plans (read these blog posts by John Graham and the gentlemen at InsureBlog for more detail). The market, if allowed to function, can help shake these issues out over time. More problematic is the fact that the Medicare Modernization Act, the very law that legalized CDHPs, places significant restrictions on the way these plans can be designed, constraining the degree to which insurers can tweak plans and increase their efficiency. By law, a consumer-driven plan must have a deductible floor ($1,200 for an individual in 2010), a cap on annual out-of-pocket expenditures ($5,950), and a limit on HSA contributions per year ($3,050). In effect, these rules constrain the degree to which health savings accounts can drive value-oriented health care consumption.

Congress should lighten these constraints; instead, Obamacare added further ones. Worse still, the fracas about medical loss ratios under PPACA is critical to the future of consumer-driven health plans. The Department of Health and Human Services has yet to rule on whether or not health savings accounts will be counted toward the law’s MLR targets. If they are not, consumer-driven health plans will become de facto illegal. We can only hope that Secretary Sebelius takes a sensible approach.