Category Archives: health insurance

Getting American Health Care Straightened Out II. Medicare

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One of the major problems facing the United States today is the high cost of healthcare. We spend almost 18% of GDP on healthcare, both public and private, almost twice as much as any other developed country.  A big reason for the high cost is the low out-of-pocket consumer spending on health services in the U.S. 
My last post discusses a general plan, involving catastrophic health insurance and health savings accounts, for getting the overall cost of healthcare under control.

capture82Once we have a handle on the overall problem, we then need to focus on the cost of the Medicare entitlement program for retirees.  The problem here is easy to understand.  In just 15 years enrollment in Medicare will increase to over 80 million beneficiaries from 57 million today.  Likewise there are 3.1 workers per beneficiary today and there will be only 2.4 in 2030 (see above chart).

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The second chart demonstrates that Medicare will be the major component of increases in federal spending in the coming years (with the other entitlements of Social Security and Medicaid following right behind).
So the question is: how do we control Medicare spending within the context of overall health-care reform?  Here is a proposal from James Capretta of the American Enterprise Institute:

  • Medicare recipients would receive fixed payments toward the coverage option of their choice, based on their age, income and health status. The traditional Medicare program would be one of the choices. Enrollees choosing less costly coverage options would see a reduction in their premiums.
  • Premium payments would be comparable to subsidies and tax credits received from the reformed Affordable Care Act.
  • Privately run managed care plans provide benefits at far less cost than traditional Medicare. Beneficiaries would share in the savings.

Conclusion. It needs to be emphasized as strongly as possible that the point of Medicare reform is to lower costs to both individuals and the government, sa that Medicare can be preserved indefinitely into the future.

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Getting American Health Care Straightened Out

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Donald Trump was elected to be our next president because of the huge desire for change amongst the American electorate. Many things need changing, but among the most important is our healthcare system.  The problem is that we are spending 18% of our GDP on healthcare, twice as much as any other developed country.  The Affordable Care Act has increased access to healthcare but does very little to hold down costs.  This is one reason why it is so unpopular and needs to be substantially modified.
capture10President-elect Trump has nominated Representative Tom Price (R, Ga) to head up Health and Human Services in his cabinet.  Rep. Price is an expert on healthcare and is a leading advocate for replacing the ACA with something more workable.  He will soon be in position to lead the charge for healthcare reform.
The two American Enterprise Institute scholars, James Capretta and Scott Gottlieb,  have some good ideas for what needs to be done.

  • Provide a path to catastrophic health insurance for all Americans. The idea is that all Americans who do not get health insurance through employers, or Medicare or Medicaid, should be eligible for a refundable tax credit sufficient to pay for a basic level of catastrophic (i.e. with a high deductible) insurance coverage.
  • Accommodating people with pre-existing health conditions. Everyone who maintains continuous (catastrophic, as above) coverage would be allowed to move from employer coverage to the individual market without facing exclusions or higher premiums based on health status.
  • Allow broad access to health-savings accounts. There would be a one-time federal tax credit to encourage all Americans to open an HSA to pay routine medical bills. Families typically spend up to 22% less on healthcare after switching to an HSA.
  • Deregulate the market for medical services. Providers need freedom from regulation to provide packages of services better tailored to people’s needs. Such provider flexibility will further reduce costs through additional marketplace competition.

Conclusion. The major reason why our healthcare is so expensive is because we, as individuals, don’t have enough “skin in the game,” in the sense of paying for routine medical expenses directly out of our own pockets. The reforms outlines above would correct this very problem.

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Is Single-Payer Health Care a Good Idea?

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My last two posts, here and here, have discussed major intrinsic problems with the Affordable Care Act.  It has been set up in an actuarially unsound manner and the cost of insurance coverage through the exchanges is growing very fast.
CaptureThe rapidly rising cost of American health care, public and private, is in fact one of our country’s biggest problems.  It is an affordability issue for millions of American households.  Furthermore the rapidly rising cost of the entitlement programs of Medicare and Medicaid is the fundamental driver of our exploding national debt problem.
As I see it there are two different routes we can take to solve this problem.  One way is to move towards a true free-market approach where healthcare consumers (all of us!) have more “skin in the game” in the sense that we move away from third party payment for routine care.  It is quite interesting that this is already starting to happen under Obamacare!
The other way of getting costs under control is to adopt a single-payer system, like much of the rest of the developed world.  But this would necessarily involve stringent cost controls and severe rationing and would be a lot more difficult than just enrolling everyone in Medicare. For example:

  • American doctors and nurses are very well paid. The average family physician in the U.S. earns $207,000, double the rate for general practitioners in Great Britain, which has a single-payer system. Are we going to arbitrarily chop doctor salaries in half in order to control costs?
  • The State of Vermont recently backed away from implementing its own single-payer system because the needed tax increases would have more than doubled Vermont’s annual budget. Colorado will vote in November on a petition-supported single-payer proposal, ColoradoCare, which would be paid for by a $26 billion annual state tax increase, and is therefore unlikely to pass. For a state to implement its own single-payer system at least requires budget honesty, since all states are required to balance their budgets. There is no such requirement for our federal government and so a single-payer system would be financed just like Medicare, with deficit spending. Bad idea!

Conclusion. American healthcare needs radical reform but adopting a single-payer system is not the best way to do it.

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How to Improve Obamacare and Lower It’s Costs

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I have been making the case for some time now that the rapidly increasing costs of U.S. health care, especially for the entitlement programs of Medicare and Medicaid, is the fundamental cause of our exploding national debt, and therefore these costs must be curtailed.  The only way to fix this problem is for Americans to have more “skin in the game” regarding these costs.
Capture10My last post, “The Inherent Instability of Obamacare,” discusses the separate but related problem that the Affordable Care Act is actuarially unsound because it misprices the basic risks involved in health insurance.  This is why costs on the exchanges are going up so fast which, in turn, leads to fewer enrollees.
A good way to address this double whammy of problems is to use a plan developed (mostly) by the American Enterprise Institute in December, 2015.  The main features are:

  • ACA Mandates, for both individuals and employers, would be abolished.
  • Retain tax preferences for employer-paid premiums, with an upper limit comparable to the cost of catastrophic health insurance.
  • Provide refundable tax credits to households without access to employer coverage, gradually replacing subsidies provided by ACA exchanges.
  • Persons with pre-existing conditions would have continuous coverage protection.
  • Medicare would migrate to a defined contribution, refundable tax credit model as above, with eligibility gradually rising to age 67.
  • Medicaid would be financed with block grants to the states and would supplement the refundable tax credit model.
  • Health Savings Accounts, to accompany high deductible plans, would be encouraged with a one-time federal tax credit matching enrollee contributions.
  • Health Care for Veterans would be integrated into mainstream care.

Summary. Abolishing the mandates means that coverage levels and price would be actuarially determined in the market place. Equal tax credits for insurance and help in setting up health savings accounts ensure fairness and widespread accessibility.  The overall free market model will guarantee both low cost and the greatest possible degree of flexibility, innovation and quality of care.

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The Inherent Instability of Obamacare

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The recent announcement by Aetna Insurance Company that it will exit the health insurance market in most of the states where it now operates raises a fundamental question about the stability of the Affordable Care Act. As shown by the following map  from yesterday’s New York Times, it appears that at least five states with 17% of the American population will have only one health insurer to choose from next year.
Capture33As the Wall Street Journal’s Greg Ip points out in a recent article, “the problem isn’t technical or temporary, it is intrinsic to how the law was written”  Specifically:

  • Insurance is supposed to price risk but the ACA changed this. Insurers can no longer charge or exclude coverage for pre-existing conditions, charge men and women different rates, or charge older customers more than three times as much as the young.
  • For example, a 64-year-old consumes six times as much health care as the average 21-year-old. Adhering to the 3-to-1 maximum ratio, the insurer would have to greatly overcharge the 21-year-old than his actual cost and/or greatly undercharge the 64-year-old.
  • The rational response for unsound pricing is for young and healthy customers to stay away and sick, older customers to flock to the exchanges. ACA mechanisms to prevent this type of behavior aren’t working very well.Capture32
  • One example of this is that the ACA exchanges, which provide income-based subsidies for those without employer provided health insurance, are mainly attracting those people just slightly above the poverty line who get the biggest subsidies (see chart).

I have pointed out many times that the cost of health care, especially for the entitlement programs of Medicare and Medicaid, is the fundamental driver of our exploding national debt and therefore must be curtailed.  But now, in addition to the cost problem, we are discovering that the ACA also has a fundamental access problem as well. Big changes are clearly needed in the ACA.  More details later!

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Our Dire Fiscal Situation: A Summary

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We are currently living in a high risk fiscal bubble. Low interest rates mean that our enormous and rapidly growing national debt is virtually “free” money.  When interest rates return to historically normal (much higher) levels, interest payments on the debt will explode putting us in a precarious fiscal situation.
As I have pointed out in the last few posts, it is the cost of entitlements and, in particular, health care entitlements, i.e. Medicare and Medicaid, which is driving our debt problem. The most effective way to control these entitlement costs is to control overall health care costs by insisting that all of us have more “skin in the game,” meaning that we must pay more of our health care costs directly from our own pockets as opposed to having them paid by third party insurance companies.
Capture20The latest report from the Congressional Budget Office, just a few days ago, shows that our debt problem is even worse than was projected just a year ago (see above).
Capture21The second chart (just above) shows the magnitude of the effort it will take to get our debt under control.  Just to stabilize the debt, i.e. to keep it from getting any worse than it is right now, will require a combination of spending cuts and/or revenue increases of 1.7% of GDP which amounts to $330 billion in 2016 dollars.
Conclusion. We have a huge national debt problem which is only going to keep getting worse until we make somewhat painful changes in federal policy.  We have to either restrain spending increases and/or increase taxes by significant amounts.  Health care entitlements are the biggest problem area and Medicare is worst of all.
Our two presumptive presidential candidates, Hillary Clinton and Donald Trump, are completely ignoring this grave problem.  And indeed their proposed policy initiatives will only make it worse!
Do we have the strength to deal with this dire problem short of another crisis?

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Reforming U.S. Health Care to Control Costs

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My last two posts, here and here, have made the case that:

  • Our national debt is now 74% of GDP (for the public part on which we pay interest), the highest since WWII, and steadily getting worse. This will create a huge problem in the not so distant future, as soon as interest rates return to normal (higher) levels.
  • Entitlement spending is the main driver of our increasing debt. The best way to control Medicare and Medicaid spending is to control the cost of health care spending in general.
  • The overall cost of health care, public and private, in the U.S. is now 17.4% of GDP, much higher than for any other developed country, and is steadily increasing.
  • The main reason our health care costs are rising so rapidly is that Americans do not have enough “skin in the game.” Health insurance pays for close to 90% of our health care costs so that we pay for very little directly out of our own pockets. This means we have little incentive to pay close attention to these costs.

Christus Health in Dallas and Privia Medical Group in Washington, DC  are causing disruption by shifting health care delivery from hospitals to outpatient settings.  They are putting in place a number of lower-cost and more consumer friendly options which reward collaboration, performance and a focus on cost and quality on the part of both management and front-line providers.
Capture18As I have pointed out in previous posts, here and here, several policy changes would help speed up this process of needed change:

  • The tax exemption for employer provided health insurance should be limited to the cost of high deductible catastrophic insurance with an equal (refundable) tax credit for those without employer coverage. Health Savings Accounts would be encouraged for routine health care expenses.
  • Affordable Care Act exchanges would continue to operate as at present but without any mandates.
  • Medicare would provide a fixed level of assistance with which seniors would purchase a private health plan of their own choosing, rather than being open ended as at present.
    Medicaid. The federal government would give states fixed, per-person payments. Low-income individuals could combine Medicaid and the (refundable) tax credit to enroll in private insurance.

Conclusion. The whole idea is to make everyone, rich and poor, young and old alike, responsible for their own health care expenses.  Only with such a consumer-oriented, free-market system will we be able to preserve the high quality of American health care and rein in excessive costs at the same time.

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The High Cost of U.S. Health Care

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As I indicated in my last post, ”Entitlement Spending and the National Debt,” our national debt is much too high and steadily getting worse.  Furthermore, it is entitlement spending, especially Medicare, which is the fundamental driver of our increasing debt.  If we don’t solve this problem relatively soon, we will have another financial crisis on our hands, much worse than the last one in 2008.  When interest rates go up, as they will sooner or later, then interest payments on our accumulated debt will rise precipitously and threaten to bankrupt the nation.
CaptureThe only effective way to control Medicare costs, however, is to control the overall cost of healthcare in the U.S., i.e. for private healthcare.  The above chart shows the nature of this problem.  Right now we are spending 17.4% of GDP on healthcare, public and private, and this is predicted to reach 19.6% of GDP by 2024.  This is almost twice as much as for any other developed country.
Capture6The Omaha World Herald had an article on Sunday, “Bending the Curve,” purporting to show that cost increases for total national healthcare spending are dropping (see just above).  The problem is that these supposedly low price increases in recent years are still twice the rate of inflation which is now averaging under 2% per year.  This means that even 4% – 5% price increases per year are much too high and need to be curtailed even further.
Capture10The fundamental reason why U.S. healthcare is so expensive is that Americans do not have enough “skin in the game.”  The above chart shows that our direct out-of-pocket costs for healthcare have been steadily dropping for the last fifty years as the role of health insurance has expanded.  This means that we simply don’t have enough personal incentive to hold down healthcare spending on our own.
Conclusion: We have to control entitlement spending, especially for Medicare, to get our national debt under control.  But this can only be done by limiting the steep spending increases in overall healthcare, public and private.  How will we be able to do this?  Be patient, we’re getting there!

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The Challenges of American Health Care

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America is facing great challenges in healthcare. Our national health expenditure is $3.1 trillion per year, 17.4% of GDP, and is projected to reach 19.6% of GDP by 2024.   Some 34% of Americans are obese (BMI>30), far more than in any other country. Their medical expenses will soar in the years ahead.  Medicaid now covers over 70 million low-income people at a cost of $500 billion per year.  Medicare spends $615 billion per year on the 42 million Americans over age 65.
CaptureThe Hoover Institution’s Scott Atlas has just published “Restoring Quality Health Care: a six-point plan for comprehensive reform at lower cost.”  He claims that his plan will save $2.75 trillion over a decade for private healthcare and an additional $1.5 trillion per decade for federal healthcare programs such as Medicare, Medicaid and the Affordable Care Act.
The elements of his plan are to:

  • Expand Affordable Private Insurance by allowing all insurers to offer high deductible, limited-mandate catastrophic coverage (LMCC) to all citizens, which would be owned by individuals and portable.
  • Establish and Liberalize Universal Health Savings Accounts (HSA) for all citizens, individually owned and portable.
  • Instill Appropriate Incentives with Rational Tax Treatment of Health Spending equal for all, whether individual, self-employed or employer-based, requiring LMCCs for all.
  • Modernize Medicare for the 21st Century by establishing a private insurance option with defined-benefit premium support based on regional benchmarks featuring cash rebates to individual HSAs if premium is less than benchmark, otherwise additional cost paid by enrollee.
  • Overhaul Medicaid and Eliminate the Two-Tiered System for Poor Americans by permitting all insurers to offer LMCC plans to entire state population as well as setting up government seeded HSAs for all Medicaid enrollees.
  • Strategically Enhance the Supply of Medical Care While Ensuring Innovation by stimulating private retail clinics and loosening practice restraints on nurse practitioners and physician assistants.

 

A plan along these lines would go a long way towards both improving the quality and lowering the costs of American healthcare.

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The Fundamental Driver of Our Debt Problem: the Cost of Healthcare

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How to grow the economy faster. How to get our rapidly growing national debt under control.  These are the two main problems facing our country which I address over and over again on this blog.  Finding satisfactory solutions to these two problems will determine our future strength and prosperity as a nation.  Today’s discussion is about the major cause of our debt and deficit problem.
CaptureI recently came across the above chart showing the steady rise of overall American healthcare spending (public and private).  In 1960 it was less than 6% of GDP.  Now it is approximately 18%, a tripling, compared to the overall size of the economy, in just 55 years. Of course it is the cost of public healthcare programs such as Medicare, Medicaid and the Affordable Care Act which directly contribute to our growing deficits and to the accumulated debt.
However we will never be able to limit the cost increases of these public programs until we get the fundamental drivers of private healthcare costs under control. As pointed out (in the chart below) by several scholars from the American Enterprise Institute, the basic reason for the high cost of private American health care is that “we don’t have enough skin in the game” as shown by the chart just below.  We are paying less and less of total healthcare costs out of our own pockets because more costs are paid directly by third party insurers.  This means we have less incentive to control our own healthcare costs.
Capture2The AEI has suggested several reform measures to improve this situation such as:

  • Placing an upper limit on the tax exemption for employer-paid insurance premiums.
  • Expanding the use of Health Savings Accounts to be used in conjunction with high deductible plans.

We have a stark choice in front of us. Either we move in this direction in the near future or we will face another, much worse, financial crisis.  In the latter case we will end up with an inferior healthcare system, much less responsive to our wants and desires.

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