How to Improve the Affordable Care Act

 

The Affordable Care Act, aka Obamacare, has dramatically expanded access to healthcare in the United States. But it has done nothing to lower the cost of healthcare  which now exceeds 18% of GDP and is steadily increasing.


Warren Buffett, the Oracle of Omaha, refers to medical costs as “the tapeworm of American economic competiveness.”
An excellent plan for improving the ACA, “Transforming Obamacare” has been put forward by the medical economist, Avik Roy.  It has five main features:

  • Repeals the individual mandate and proposes universal tax credits for acquiring catastrophic insurance and setting up health savings accounts.
  • Repeals the employer mandate and sets up a capped standard deduction for employer sponsored coverage.
  • Reforms Medicaid by migrating the current system into the above universal (and refundable) tax credit plan
  • Reforms Medicare by migrating the current program into the same universal system.
  • Other reforms for veterans, medical innovation, hospital monopolies, drug pricing and malpractice litigation.

According to Mr. Roy, the American Health Care Act, recently passed by the House of Representatives, does a good job in relaxing many of the ACA’s onerous regulations.  However it falls down badly by including a flat tax credit rather than a means-tested credit based on income. Such an approach means that millions of low-income Americans, either near retirement or just above the Medicaid cutoff, will be priced out of the insurance market.  This is what the Senate bill needs to fix.

Conclusion. Mr. Roy’s plan will not only expand overall healthcare access beyond the level achieved by the ACA but will also dramatically cut the cost of healthcare in the U.S. and even goes a long way towards achieving a balanced budget. Let’s hope that the Senate gets the AHCA proposal back on track.

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The GOP Can Do Better on Healthcare Reform

 

The Congressional Budget Office has just released its analysis of the GOP Healthcare Reform Bill, the American Health Care Act, designed to replace the Affordable Care Act.  The Committee for a Responsible Federal Budget has summarized its main features as follows:

  • The AHCA would reduce federal deficits by $337 billion over the next ten years.

  • CBO estimates that there would be 24 million fewer Americans with health insurance under the AHCA as compared with the ACA by 2026, with 14 million fewer Medicaid beneficiaries (see the above chart). The decrease in individuals with employer coverage would result from dropping the employer mandate. The decrease in individual coverages would result from smaller subsidies under the AHCA.

I have previously summarized the AHCA pointing out its strengths and weaknesses:

  • Strengths: discards mandates, fewer regulations, turns Medicaid into block grant program to states.
  • Weakness: huge discrepancy between lavish tax treatment of employer-paid care (no upper limit on tax exemption) and much stingier tax credits for individuals

The U.S. now spends 18% of GDP on healthcare, both public and private, almost twice as much as any other developed country. Such high costs are a big drain on government revenue as well as a drag on economic growth.  The AHCA should take a much bigger step towards controlling the cost of healthcare.  Block granting Medicaid to the states, and giving the states more flexibility in implementation, definitely helps, but it is not enough.
But basic fairness as well as fiscal responsibility requires a major cutback in the tax exemption for employer provided care.  This is essentially a subsidy to employees.  It should have no greater value than the refundable tax credit provided to individuals who purchase health insurance on their own.

Conclusion. A free market healthcare system allows more individual choice and delivers more medical innovation. But our current system is too expensive to be sustainable for much longer.  Either the GOP fixes this problem or a single-payer system will be the inevitable result.

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The Strengths and Weaknesses of the GOP Healthcare Reform Bill

 

The American HealthCare Act, introduced in the House of Representatives on Monday, begins the process of looking for a replacement and improvement to the Affordable Care Act.  It moves in the right direction but also has some major shortcomings.


The Bill’s strengths are:

  • The Bill discards the ACAs web of mandates and regulations in favor of incentives to buy health insurance in a deregulated market.
  • The Bill replaces the ACA exchanges with refundable tax credits for individuals not covered by employer provided health insurance.
  • The Bill turns Medicaid into a block grant program for states with much flexibility for the individual states to run their own programs. This reverses the current system whereby the federal government matches each state’s spending on Medicaid and is thereby expensive for both state and federal government

The Bill also has major weaknesses:

  • There is no upper limit on the tax exemption for employer-paid premiums. This tax exemption amounts to a total drain of nearly $300 billion a year on U.S. tax revenues and is the biggest single reason why healthcare is so expensive in the U.S.
  • The inadequacy of financial support for the lowest income individuals and families. A $2000 annual tax credit for a minimum wage worker is simply not enough for her/him to be able to afford health insurance.
  • This huge discrepancy between the lavish tax treatment of employer-paid care and stingy tax credits for individuals is a matter of fundamental inequity as well as unsound tax policy. It would be much fairer to give all Americans the same equal tax credit roughly equivalent to the cost of catastrophic healthcare insurance.

Conclusion. The ACA increases access to healthcare insurance but does nothing to control costs. It is imperative for the Republican replacement plan to fix this glaring deficiency.

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Fixing Obamacare: Keep it Simple and Low Cost

 

Straightening out healthcare insurance is a high priority for the new Trump Administration and Congress as it should be. The U.S. spends 18% of GDP on healthcare, public and private, twice as much as any other developed country and this percentage is likely to keep on increasing without major changes.

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Republican thought is converging, see here and here, on a plan with these broad features:

  • Repeal of both the individual and employer mandates so that health insurance can be individually tailored and purchased at a much lower cost than under the ACA.
  • A Universal (and refundable) tax credit sufficient to pay for catastrophic insurance coverage.
  • Health Savings Accounts to pay for routine healthcare expenses up to the deductible for catastrophic insurance. Such HSAs could be funded, at least initially, with (refundable) tax credits.
  • High risk pools and coverage for pre-existing conditions. It is estimated that 500,000 people with pre-existing conditions would need protection if the ACA is repealed. This would cost about $16 billion annually, much less than the full cost of the ACA.

Conclusion. Such a plan will insure coverage for all Americans who want it. The high deductibility feature, coupled with HSAs, will strongly encourage healthcare consumers to shop around for the best price on routine care.  Such price consciousness by consumers is the only way (short of a single payer system with severe rationing) to get our national healthcare costs under control.
A modification of such a plan, proposed by Senator Bill Cassidy (R, LA) and Senator Susan Collins (R, ME) would give each state the choice of either keeping the ACA or replacing it with a version of the above plan.  This is a poor idea because the ACA has no cost control and this is what is sorely needed.  In other words, the above plan should be made universal, identical for all states.  Let the states provide and pay for supplemental coverage if they wish.

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A Major Difficulty of True Healthcare Reform

 

As my regular readers know I am focused primarily on two major national problems:

  • Speeding up economic growth to create more jobs and better paying jobs, and
  • Getting our national debt under control by reducing our annual budget deficits so that our debt will shrink over time as a percentage of GDP.

The evidence continues to persuade me that entitlement spending in general and the cost of healthcare in particular will play the biggest role in solving these two problems. My last post points out that healthcare, higher education and housing are all drags on family expenses but that the cost of healthcare has by far the largest negative effect on our economy.
The United States spends 18% of GDP (and climbing) on healthcare, both public and private, twice as much as any other developed country.  This enormous expense must be reduced but how will it happen?  The Affordable Care Act has increased access to healthcare but has not bent the cost curve.
Now the Republicans (President-elect Trump and Congress) want to repeal the ACA and replace it with something less restrictive and less expensive.   A popular alternative is health insurance which has:

  • High deductibles typical of catastrophic coverage in order to hold down the cost of insurance.
  • Tax credits to defray the cost of insurance.
  • Tax preferred health savings accounts to pay for routine expenses below the deductible.

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Unfortunately it’s not this simple. Today’s New York Times has a credible Op Ed by Drew Altman, CEO of the Henry Kaiser Family Foundation, “The Health Care Plan Trump Voters Really Want,” which reports on a series of focus groups set up by Kaiser after the election to quiz Trump voters about healthcare. What Kaiser learned about Trump voters is that:

  • In the pre-ACA market, they liked their ability to buy lower-cost plans which met their needs.
  • They want lower drug costs and improved access to cheaper drugs.
  • The very last thing they want in healthcare reform is higher out-of-pocket costs.

Conclusion. What Trump voters are looking for in healthcare reform is quality healthcare at a low cost. This is also the Republican ideal.  But the high deductible plus health savings account combination is going to be a hard sell to many Trump voters.

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What Is Slowing Down Today’s Economy? II. Three Culprits

 

My last post, “What Is Slowing Down the U.S. Economy,” reports on an interesting analysis by the Gallup economist, Jonathan Rothwell, making an excellent case that three of the biggest drags on the U.S. economy are the costs of:

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  • Healthcare. By far the biggest drag, healthcare costs have increased from 9% of GDP in 1980 to 18% in 2015. Mr. Rothwell notes that the average U.S. physician spends $83,000 per year to process claims and interact with insurance companies compared to $22,000 in Canada which has a single payer system. The solution, in my opinion, is to change the tax treatment of employer provided health insurance (to cover catastrophic coverage only) in order to give individuals more “skin in the game.”
  • Education. Although education costs have risen only from 6% to 7% of GDP over the past 35 years, education overall is 8.9% more expensive in 2015 than in 1980 and higher education is 11.1 times more expensive. Considering the ever increasing need for highly trained workers in today’s high-tech and globally competitive economy, such rapidly increasing cost presents a huge impediment to progress. Foundational K-12 education is also failing to close the achievement gap between low-income minority students and middle-class students. Such disparity in educational outcomes bodes ill for future social harmony. Even overall cognitive performance in math and literacy is now declining (see chart). These are tough problems to solve.

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  • Housing. Again, only a 1% increase (from 11% to 12%) in GDP from 1980 to 2015 but this translates into a rental cost increase of 19% of GDP in 1980 to 28% of GDP in 2015. Also mortgage payment costs increased from 12% of GDP in 1980 to 16% of GDP today. Mr. Rothwell attributes these increases to a tightening of local zoning restrictions. There does not appear to be any general policy solution to such a problem.

Conclusion. The costs of healthcare, education and housing are eating up greater and greater amounts of family income and therefore are retarding economic growth and social progress. What can be done about these problems?  Stay tuned!

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What Is Slowing Down Today’s Economy?

 

We will soon have a new President and, even though his election was somewhat of a fluke, he will obviously want to help the blue-collar workers who elected him.  The best way to do this is to make the economy grow faster.
The Gallup economist, Jonathan Rothwell, has just issued an excellent analysis of some of the major reasons for our current slow economy, “No Recovery: an analysis of long-term U.S. productivity decline.”

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Says Mr. Rothwell:

  • The problem is severe. U.S. GDP growth per capita has declined from 2.6% in 1966 to .5% today. Small differences expand into vast gaps in potential living standards. 1% growth for the next 35 years would expand household income from $56,000 in 2015 to $79,000 in 2050 (inflation adjusted), whereas 1.7% growth would raise household income to $101,000 in 2050.
  • Changes in living standards are fundamentally linked to changes of how the quantity of goods and services relate to their cost. Deterioration in the quality-to-cost ratio for healthcare, housing and education is dragging down economic growth. These three sectors alone have increased from 25% of GDP in 1980 to 36% of GDP in 2015.capture92
  • The cost of healthcare is 4.8 times as high today as in 1980, the cost of education is 8.9 times as high today as in 1980 and the cost of housing is 3.5 times as high today as in 1980. These compare to an overall cost increase of all items of 2.5 times today compared to 1980.
  • These three sectors have all gotten more expensive (without getting more productive), thereby absorbing more of families’ incomes, making it harder to satisfy other wants.

Conclusion.  We all want schools that work, adequate housing, and quality healthcare.  The problem is how to achieve these ends in a much more affordable manner.  Stay tuned!

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