Sunday, May 7, 2017

A Healthy Reform?

Holman Jenkins and Cliff Asness have worthy commentaries on the health insurance reform effort.

Jenkins has quite a few fresh thoughts. He also gets the incurable optimist award for viewing the bill as the "inklings of a salvation" for America’s health-care system. It's possible. Whether it is likely depends on your views of the political process.

Individual insurance:

Jenkins' freshest thought comes last:
We’ll say it again, now for the Senate’s benefit: Apply a few GOP-style fixes and ObamaCare, or something like it, becomes a solution to America’s health-care muddle. You could phase out every other federal program, including Medicare, Medicaid and the giant tax handout to employers, and roll their beneficiaries into ObamaCare.
This wisdom is exactly the opposite of most current commentary, and, here in grumpy-land, where it seems the political process may be heading.

Yes, if any memory of markets remains, the goal should be to get everyone on individual insurance -- functional, portable, individual, lifetime, guaranteed-renewable, competitive health insurance, married to mercilessly competitive innovative and disruptive health care supply. People who need help -- sick and poor -- get it by subsidies to buy that insurance. Period. (Newcomers, some of my many writings on this topic are here.)

I fear we are going in the opposite direction. I fear that the non-subsidized individual market is going to shrink more and more, to become more and more an insignificant, government run, dysfunctional waystation for a handful of unlucky self-employed and young people, on their way to employer care, a government program (medicare, medicaid, VA, etc.) or now to a miserly high-risk pool.

Most of the Obamacare expansion of coverage was into medicare, or by people getting premium subsidies on the exchanges, and by pressure for expanded employer-basded coverage. The market of people paying actual premiums for individual insurance remains tiny.  Commenters point out the apparent pathology that Congress is wasting so much time on a tiny sliver of the population, how most of us have "just fine" coverage through employers, medicare, medicaid, VA, government employee plans, retiree plans, and so on. As if this is the right way to run things.

Parts of the Republican bill do seem helpful towards reviving the individual market. The vision that we should all be there, as we are all in the individual home, auto, and life insurance market; as well as the vision that the central problem is a supply system made dysfunctional by cross-subsidies and resultant anti-competitive limitations, I don't see yet in the legislative proposals and surrounding commentary.  That is a bad sign for the politics of Jenkins' (and my) vision. It is not ignorance. My impression is that most people involved understand the promised land perfectly well, they just don't think it can get two votes in the senate, let alone 51 or 61.


Jenkins offers equally fresh thinking on the mandate
...In a world where individual insurance is fairly priced, a mandate would be less burdensome. As candidate Obama said in 2008, with a smidgen of hyperbole, if health insurance is a good deal, nobody would need to be forced to buy it. 
...The philosophical premises of the Republican and Democratic individual mandates could not be further apart. The original Republican mandate, hatched by the Heritage Foundation in 1989, was aimed at making sure would-be free riders paid their fair share, no longer transferring their financial risk to the taxpayer or other health-care consumers. 
ObamaCare turned the mandate into a tax—a way to overcharge the young, healthy and (let’s face it) male to generate funds to subsidize voter blocs Democrats wanted to subsidize.
The economic argument for a mandate of the Heritage type is pretty strong, as we have mandates for auto insurance. Given that we are not going to allow people to die in the gutter, then a mandate protects the finances of such government-provided charity care (or government mandated cross subsidies) to require that everyone has at least bare-bones catastrophic coverage, to cover... well, whatever it is that we are not willing to say "no" to when they show up on the hospital doorstep. Which is a lot.

Even that argument for a mandate is quite limited. We don't let people die, or suffer untreated illness. But there is much less case that we should not be willing to bankrupt the improvident. Even Sweden and Denmark do that. If you don't buy health insurance and get a heart attack, the government and hospitals should happily burn through your bank account.  And then you get the care you need. The economic mandate really is really only needed for people with few resources, or who can't get around to filling out forms (a lot of us).

And, yes, the economics of insurance is ex-post transfers. Those who turn out to be healthier than expected, ex-post transfer resources to those who turn out to be sicker than expected.

But, Jenkins' great insight is, look how these valid economic arguments utterly perverted in the political system.

Neither the economic mandate, nor insurance itself, is the basis for massive, completely predictable transfers from one group to another. Under Obamacare, individual mandates, insurance mandates, and "community" rating turned in to a massive transfer from (as he put it) "the young, healthy and (let’s face it) male to generate funds to subsidize voter blocs Democrats wanted to subsidize." That is clearer in this weekend's other commentary. See Ross Douthat in the Times review section, for example), focusing on "tax cuts for the rich;" and commentary focusing on how it will "hurt old people" -- both taxes and handout to old people, only enacted with Obamacare, now apparently baked in stone. All this unitentionally makes Jenkins' point. This isn't about health insurance anymore. It's just redistribution.

Also, the trope of how millions will now be "denied access to health care" (once again confusing insurance and care). Actually, 10 million of the CBO scoring that the Republican plan would lead to millions losing coverage came down to the mandate. 5 million of that are  people eligible for Medicaid who, the CBO thinks, will simply not bother to sign up even for free insurance without the mandate.
ObamaCare went out of its way to be a bad deal for the young and healthy, who didn’t sign up. The GOP fix [5:1 premiums, much less mandated coverage], if adopted in the Senate, would go a long way toward letting individual premiums be fairly and attractively priced to these people.
It would. Sadly, coverage of what's going on in the Senate, covered say in the same WSJ issue "Senators tackle heath bill rewrite" will undo modest progress:
Among the provisions senators are tackling is one that allows insurers to charge older Americans five times as much as younger people and lets states obtain waivers that could make that disparity even larger. 
That old people are more expensive to care for than young people is not an insurable risk. Old people per se are not necessarily deserving of cross-subsidies. Old, poor people are, but because they're poor not because they're old. Most non-poor old people own a house, which they have paid off, and substantial assets.  Most wealth in the economy is owned by old people. Old people have lower expenses.  Limiting the ratio of young to old in mandated insurance is just one huge cross-generational transfer of wealth. (On top of, I might add, social security, which is an enormous transfer from the current young to the current old. The current young are not going to get such generosity when they get old.) The supreme court had it half right -- the mandate is a tax. The big tax is the "community rated" overpriced insurance.

Jenkins again: If we had universal individual insurance, and helped people by subsidizing its purchase,
Congress could start making rational judgments about whom to subsidize and whom not to subsidize. Do all seniors need a handout, or only the poor ones? [Or only the sick ones?] And surely no Congress would re-up to the current employer tax benefit, which gives its biggest handout to the highest earners while producing all the pathologies the employer-centric payment system is heir to.
Is that a typo? Surely no Congress should reup, or perhaps could, but I see no signs that no Congress  would.  The tax deduction for employer provided health payment plans seems as rooted as the equally silly and damaging tax deduction for mortgage interest.  (And kudos to WSJ for coming out against that one in the lead editorial.) The proposal to also exempt individual insurance payments from taxes at least undoes some damage by putting both on the same footing.

Why cross subsidize wealthy seniors so much? Well, they vote. And they vote Republican. Given that, it's amazing that the house even tried to put in 5:1 in favor of Bernie-Sanders voting youth.

In case you missed it, the tax deduction for employer provided group coverage, but not for employer or employee contributions to an individual portable plan, really is the original sin, or the fly that the little old lady swallowed on her way to death from horse. Preexisting conditions follow entirely from that -- who will pay for lifelong guaranteed renewable insurance if they plan to get a job and throw it away? People who get sick and leave their jobs are stuck. Well, solve that with community rating, guaranteed issue, forced cross-subsdies, limits to competition.. and here we are.

Preexisting conditions. 
In principle, this should be a transitional problem in a world where everyone has access to attractive, fairly priced health insurance. By giving new options to the states, the House bill would make subsidizing pre-existing conditions a general obligation of the taxpayer as it always should have been.
So far so good. To amplify, in a portable, individual, universal, guaranteed-renewable competitive market, there is no preexisting conditions problem. But to get there, especially after Obamacare wiped out the existing guaranteed-renewable individual insurance, people currently sick are going to need an on-ramp. In Jenkins' optimistic view, the state high risk pools are such a transitory device. Jenkins is absolutely right that we need some transitory device.  By forcing cross-subsidies to give the illusion we are not taxing and spending, we achieve less at much greater cost.

I would prefer (as he might) a vibrant unconstrained competitive insurance market; that market would have guaranteed issue, but because insurers are allowed to charge any price so they will happily serve and compete for any customer without coercion. Then high risk pools subsidize the high premiums that people already sick have to pay, until we realistically can expect everyone to have bought guaranteed-renewable insurance before they got sick.

A good principle is that transitory devices need not be perfect. Another good principle is that imperfect transitory devices should be transitory.

However, with the portable, individual, universal, guaranteed-renewable competitive market nowhere in sight, I fear that this "transitional" problem is going to be semi-permanent.

What happened to portability, the long promise that you can buy insurance across state lines?
State-based high risk pools are going to make it even harder for people to move from state to state. State-based insurance already does this to some extent. Under Obamacare the conceit was, with guaranteed issue and community rating, anyone could move, and just get insurance in the new state. That was never easy in practice. (Actually trying to buy individual insurance that covers anything, as we did for a daughter over 26, is a salutary exercise.)

In sum, I worry as advertised at the outset, that we are headed to a permanent state that the government runs ever expanding mediare, medicaid, VA, and so forth; employer-based group coverage is forever ensrhined, and the market for individual insurance of people actually paying premiums becomes completely dysfunctional, now really providing only catastrophic coverage for a tiny group of people who are essentially uninsured until they become sick, at which point they are transferred to a government provided high risk pool. The transitory has a way of becoming permanent.

Here I think Jenkins makes one tiny mis-step:
Republicans...wussed out with a semi-mandate, in which anybody who lets coverage lapse and then tries to re-enter the system will pay a penalty.
No, that is not a semi-mandate! That was one good step on the way to guaranteed renewable coverage. You buy health insurance not so that "someone else" will pay for your predictable expenses, and not so much for the chance that you might have a catastrophe this year. You buy health insurance so that if you get sick, you can still buy health insurance next year!  You should face a healthy incentive to stay insured. The imperfection of the Republican plan is that it limited the penalty (insurers would charge larger penalties for those who lapsed coverage, and could not charge more than 5:1) not that it imposed a penalty.

However, sometimes half step may not work half as well as a whole step. In a true GR system, if you drop out, and fail even to purchase the option to buy insurance later, then you get sick, you will be charged the full newly rated price. That's the only way to have insurers voluntarily cover you, without cross-subsidizing from someone else, and thus without banning competition. In that case you always have an incentive to sign up, quick, before you get even sicker. With a fixed and capped penalty for signing up again, now you have no incentive to hurry. You're going to pay the same penalty no matter how sick you get or how long you wait. So critics are right that a new group of people waiting to get really sick before they sign up again and pay the penalty will crop up.


If all of this is depressing you and you want a good old romp through free market heath care and reform, read Cliff Asness 

Myth #2:  The pre-ObamaCare system was ‘insurance’ 
It was not a system of insurance. Insurance, as practiced everywhere else but healthcare, is about catastrophes. What we had was a government-subsidized payment plan funneled through insurance companies. 
... Due primarily to the tax subsidy given to employer-provided healthcare (a bipartisan, so-far-untouchable disaster), catastrophic health insurance is not Americans’ norm. Rather, employers provide essentially all healthcare from basic health maintenance and symptom relief to the most expensive life-saving procedures, and they do it because the government massively subsidizes this approach. 
This is odd. You don’t go to your car insurer to fill your car with gas or to your homeowner’s insurance company to change a light bulb. Why do you go to your health insurance company for everyday medical services? That is not insurance, it is tax-subsidized provision of all your healthcare needs, and it causes two of our system’s biggest problems. 1) Health coverage is not portable, as it’s employer-provided, and 2) consumers are insulated from the cost of basic healthcare because they don’t pay directly for services. Educated consumers spending their own money would be far better shoppers for healthcare. ...Paying $5 for a prostate exam is demeaning to both parties. 
Myth #3: Stopping insurance companies from charging based on pre-existing conditions is the one good part of ObamaCare 
Even many Republicans fall for this one, perhaps because it polls well. In these days of horrible discord, partisanship, and uncivil discourse (actually very much like the other 200+ years of the Republic) it is nice to know we can all still get together to rally around a really dumb idea....
It goes on like this. Go read the original.

Final political thoughts

You will notice that I'm not really getting in to the weeds on the Republican plan, and you may be disappointed by a lack of close analysis.  I've written here at length about how health insurance and health care (for the last time, not the same thing!) should be fixed. There is no point in repeating that.  The plan has lots of steps in the right direction.  But to score it by economic purists' standards is unfair and unproductive.  The Republican plans are clearly crafted by what the leaders think they can get through politically. Score them as such -- and from my limited knowledge of politics, they strike me as bloody brilliant given the current situation of a narrow majority in the Senate, "resistance" close to "rebellion" from the other side, and nobody really in fear of the President or party discipline. This really isn't an economic issue at this point. If they can get a few steps in the right direction, show they can govern, and set the stage for more comprehensive reform later, there is hope.

Jenkins adds
P.S. Don’t kid yourself that Democrats have a plan other than blindly defending more and more subsidies for more and more health-care consumers. Single-payer is not a plan. It’s an invitation for the health-care industry—doctors, hospitals, the research establishment—simply to turn their full attention to serving the self-paying rich.
As so much of America, the veneer of government concern for common people leads instead to private schools, gated communities, private jets, and soon concierge doctors and hospitals for the 1%, those with connections, and the Washington elite. And lousy public schools, public transport, and coming soon lousy health care for the rest.


  1. “Among the provisions senators are tackling is one that allows insurers to charge older Americans five times as much as younger people and lets states obtain waivers that could make that disparity even larger.”

    I would argue that the elderly should pay less not more because they have contributed so much more to health insurance companies than young people.

    The elderly pay into the health insurance companies for years and then when they are older and need more health care, then health insurance companies want to charge them 5 times as much as they charge a younger person. Shouldn’t the elderly get credit for all the money they paid in to insurance companies over their lifetime?

  2. I don't really understand how guaranteed renewable policies would work exactly.

    I think that in a guaranteed reneable policy the insurance company is required to offer renewal, but is free to change the premium within certain parameters.

    Since no other company will offer a policy as good as the current provider (as the guarantee would be worthless otherwise), doesn't this mean that you are stuck with a single provider for all time? How do you encourage competition in such a situation?

    It would also seem fairly simple for insurance companies to game this system as well: as your pool gets less attractive (too many expensive cusotmers), just open another one and engineer people to switch by reducing benefits. Only accept healthy people in the new pool and let the other die by reducing benefits.

    I think the main problem with health insurance is that costs are serially correlated to a much higher degree. If you get diabetes, your lifetime health expenses have just shoot up, not just this year. A one year coverage is okay for other insurance markets, but totally irrelevant for health. Maybe it could work if insurance paid out on diagnosis of illness the expected lifetime cost of treatment in a health saving account. It would be a nightmare to manage though, since treatment cost could be highly variable (diagnosis is not perfect).

    Life-insurance (which has a similar problem) is mostly non-cancellable I think. You purchase insurance only once in your life pretty much. I don't think that would work for health insurance.

  3. I think that the lack of need for the pre-existing conditions clause (in your post-transition steady state is more of a problem than you perceive.
    Even the median income households have limited incomes and a lot of households bouncing up and down around that median. Many will fall behind on their bills, especially when having health problems (insurance pays care but not lost income from dealing with the symptoms). Insurers who are your described guaranteed renewable market will be quick to drop high-use households who fall behind on premiums. Then we will end up with a lot of pre-existing condition households when they try to get back into the market.

  4. ”...the goal should be to get everyone on individual insurance -- functional, portable, individual, lifetime, guaranteed-renewable, competitive health insurance, married to mercilessly competitive innovative and disruptive health care supply. People who need help -- sick and poor -- get it by subsidies to buy that insurance. Period."

    Yes what a wonderful America that might be. It's true that if we could turn back the clock to an America where most Americans don't get their health insurance from their employer that would be better for the prospects of market based health insurance. And it's true that tax exempting employer provided health insurance benefits strengthens the bias towards employer provided health insurance. But that is the world that we Americans live in and the reality is that it is not politically possible to change that world too drastically. Witness the plight of the so called tax on the so called employer provided Cadillac health care plans that has been postponed to 2020.
    Obamacare was an attempt to tweak the American system to move it closer to an America where all Americans were covered by health insurance policies with comprehensive health care coverage. Does it have flaws? Of course it does. But political realism would be to as much as possible fix the flaws, not to pursue some unrealistic dream of a " functional, portable, individual, lifetime, guaranteed-renewable, competitive health insurance, married to mercilessly competitive innovative and disruptive health care supply.”

  5. I would be really interested to know if anyone has any opinion on Australia's healthcare model.

    It does features a government-run insurance program called Medicare covering all citizens from cradle to grave, but it does contain two features which I think address many of the concerns John has raised on this blog and in his papers.

    First, Medicare doesn't set prices, its provides subsidies. Medicare pays a certain amount for every proceedure, but providers are free to charge patients whatever copayment they wish on over and above that subsidy. Some providers charge no co-payment and rely on seeing a large volume of people, others rely on seeing a smaller volume of people but charge them each a higher price. Like in, you know, a market. Further, every provider is in Medicare's network, since there is no real reason not to be.

    Second, Medicare members can access public hospital services for free. Not just the emergency room - every service that the public system offers. One of the problems with US hospitals is that going low cost is a fools game as it merely results in leaving money in the pockets of insurance companies. There is no market reward for lowering price. But if every US citizen had the option of getting their operations free from the public sector - even if it were second rate VA care - I would imagine that private hospitals would have control their costs quick smart. At the very least, I would image that if they have to persuade people to pay for what they could eventually get for free, they would at least feel pressured to provide ballpark quotes.

    To my mind (which is admittedly lacking in healthcare economic training) this would be the best of both worlds. Those willing to pay for the absolute best and fastest treatment can do so using the private sector; those who can't afford it wait their turn until the public sector gets around to doing it for free. Some may die in line, but at least they will have a line.

    I would be really appreciative of anyone who could point out flaws or benefits of this idea; healthcare reform is such an interesting topic.

    1. I forgot to add that the type of insurance I have described scores well on most of the dimensions John has described. It is functional, portable, lifetime, guaranteed-renewable. Further, having free public hospitals competing against fee charging private should theoretically encourage innovation and disruptive supply. Indeed, we have seen in Australia the rise of the bulk-billing GP and pathology labs (i.e. they don't charge more than the Medicare subsidy level).

      Really, the only two dimensions Australian Medicare falls down on are individual (since there are no premiums and it all comes from taxes) and competitive. Private health insurers are permitted to provide benefits that Medicare does not and to a limited extent provide additional subsidies on top of Medicare's subsidies, so there is that.

      Also, this all has to be balanced against the fact that everything is in Medicare's network; you keep your insurance even if you are retired, have lost your job, cannot work due to illness etc; Medicare doesn't require patients to ring and ask for authorisations (they require approval for managing chronic conditions, but other than that, a GP referral is sufficient authorisation for them).

      Yes, I imagine that interest groups want to influence Medicare's rates, but that is balanced by Government's desire to curb medical costs. Further, it works the other way too - doctors can recommend proceedures and drugs that should be covered but are currently not. We can have a public discussion about that in a way that cannot occur when you have hundreds of insurers offerring different plans.

      Further, because Medicare subsidies rather than completely covers, it saves on cost because their rates don't need to cover everything. In many cases, Medicare only covers about 85% of what it deems to be a reasonable cost, leaving providers to make up the rest in copays. That makes it easier to sustain because if costs grow, you can simply freeze the subsidy rates and depend on providers to increase their costs if necessary.

      Perhaps a free market might be better but if you must have government intervention, this seems a pretty good way to go about it.

  6. I'm most dismayed by the lack of long term thinking by the GOP. The GOP should have proposed something that would have been acceptable to Democrats (under normal circumstances). It should have been a compromise that looked something like the Swiss system where everyone is required to have coverage, individuals by plans, suppliers compete ("managed competition"). ACOs aren't "bending the cost curve".

    The reason why I favor a compromise is that Medicare is unsustainable. Employer costs are eating wages and jobs as well. I'd rather take a hit and embrace a "smarter" entitlement program in order to avoid the forthcoming taxes, deficit spending, and drag on job/wage growth that will be needed to sustain Medicare/Medicaid/employer insurance.

    I think a Swiss model is ultimately better than a single payer option, which is exactly where we are headed during the next Democrat Administration/Congress. That could be a dual whammy of higher taxes, higher costs, and worse care (for those outside the 1% of course).

    1. Unfortunately I think that the Swiss system was what Obama was aiming for.

  7. I think some percentage of Dems would be ok with Swiss but probably 50%+ are for Canada/U.K. style single payer. Here in CA our legislators wanted to study single payer and went to Toronto.

  8. I have a different idea. It comes from Spain. They have community health centers. Their locations were picked in such a way so people did not have to travel more than 15 miles to reach them and anyone who shows up is taken care of and not even asked about his/her insurance, income, wealth, etc. I would like to expand on it. You go to any hospital, clinic, doctor. No questions asked, you are taken care of. It is funded from general tax revenues. If you are rich, poor, it does not matter at all. Better than single payer health care! (It takes care of John's concern about the rich getting better care :)

  9. Professor - I wonder if you have read "Catastrophic Care" by David Goldhill? ( It seems to me to absolutely nail what is wrong with the system, and prescribe what would actually work. It may fall into the category you mentioned, that of the proper solution, impossible to get to practically. I don't know. I only ask about the book because I find many people, even those who are pretty well versed on the subject, haven't read it, and I'm doing my best to get as many people as possible to do so!

    In short: remove all tax advantage for employer provided care, return the system to cash-pay for everything, with mandatory catastrophic care and tax-advantaged health savings. Add in state/federally subsidized high risk pools and there you go. Make everyone consumers again, and make all providers compete on quality, price, speed, etc.

    I may come back to comment on the Australia mentions. I lived there for 7 years.

    PS - You are missed at Chicago Booth

    Jake Hartmann
    The College, AB '02
    Chicago Booth, XP-86


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