Category Archives: health insurance

The Quality of American Health Care

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One of the most common themes on this website is the high cost of American healthcare. What I am saying is that our annual deficits are way too high and that our accumulated debt is increasing too fast.  Furthermore, the only way to get the cost of healthcare entitlements, Medicare and Medicaid, under control, is to get the overall cost of private healthcare under control as well.  And, of course, I support specific policies to do just this.
CaptureIt so happens that I have just had a major interaction with the American healthcare system in Omaha NE where I live.  I go jogging first thing in the morning, five days a week, all year around.  I have done this all my life and have never had a problem – until last Monday morning when I slipped on some ice, fell down and fractured my wrist.  What I did then was:

  • Call off my 8:00 A.M. Calculus class
  • My wife, Sharon, took me to a Minor Medical facility at 8:00 A.M. just as it opened.
  • The facility x-rayed my wrist and determined that I had broken several bones.
  • They then located an orthopedic surgeon who could see me the same day at 2:50 P.M.
  • The surgeon scheduled me for surgery the very next morning.
  • The surgery was successful and I am now recovering.
  • In other words, 30 hours after my accident occurred, I had had an intense inter-action with American medicine and came through with flying colors.
  • To say the least, I am very impressed with the quality of the facilities and healthcare professionals with whom I interacted.

It may cost an arm and a leg for this superb medical treatment but then I have excellent health insurance which I have seldom had to make use of.
Conclusion: Although we must make significant changes in healthcare delivery in the U.S., to make the system more cost efficient, we should try hard to do this without affecting the high degree of quality inherent in the system.

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Health Care Spending is Driving Budget Deficits

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In my last post, “Annual Deficits are Starting to go Back Up,” I refer to a new report from the Congressional Budget Office to show that it is the large annual increases in federal healthcare spending (Medicare, Medicaid, CHIP and Obamacare) which is the main driver of our annual deficit spending which is going to start increasing again unless we do something serious about it.
CaptureThe basic problem is, as shown by the above chart, that Americans, in general, don’t have enough skin in the healthcare game, i.e. we don’t pay enough of our health care expenses out of our own pockets, and therefore we don’t directly feel the pain of high and rapidly increasing health care costs.
A group of policy experts from the American Enterprise Institute have come up with a practical plan to address this problem.  Its elements are:

  • Retain employer provided coverage. This is how half of Americans get health insurance. The only change would be an upper limit on the tax preference for employer-paid premiums so that only the most expensive plans would exceed it.
  • Tax Credits. Individuals without employer coverage would get a tax credit with no strings attached to pick any state-approved plan that meets their needs.
  • Continuous coverage protection. As long as people stay insured, they cannot be denied enrollment based on health status.
  • Medicaid reform. The federal government would give states fixed, per-person payments based on historical spending patterns. Able bodied adult and their children could combine Medicaid and the (refundable) federal tax credit to enroll in a private insurance option.
  • Medicare reform. Medicare would provide a fixed level of assistance which seniors would use to purchase a health plan of their own choosing.
  • Expanded Health Savings Accounts. These are intended to be used with catastrophic insurance with a high deductible. HSAs could be established with a one-time $1000 tax credit and unused funds rolled over from one year to the next.

Such a system does not repeal, but rather improves the Affordable Care Act. It keeps the ACA exchanges and introduces cost controls in a flexible manner, i.e. without mandates.  It is the type of system the U.S. needs to get health care costs, and therefore overall deficit spending, under control.

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Lowering the Cost of American Healthcare III. Single Payer?

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My last two posts, here and here, argue that the high costs of American healthcare, almost double what other developed countries pay per-capita, has two fundamental causes which must be addressed:

  • Very low out-of-pocket costs as a result of the tax exclusion for employer provided care.
  • The very expensive, and rapidly growing, government entitlement programs of Medicare and Medicaid.
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It is often suggested that the best way to get these high costs under control is for the U.S. to adopt a single-payer, government run, healthcare system, like many other developed nations have done. Writing in yesterday’s Wall Street Journal, the policy analyst, Nathan Nascimento, makes a persuasive, and well referenced, counter argument to this suggestion:

  • The State of Vermont recently backed away from implementing a single payer system because of the very high tax increase which would have been required, more than doubling Vermont’s annual budget.
  • The State of Colorado will vote a year from now 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.
  • In Canada, which has a single payer system, the average wait between a general practitioner’s referral and delivery of treatment was more than four months in 2013.
  • Our own Veterans Affairs hospital system, a single payer system on an annual budget, is failing thousands of veterans who often die while waiting for treatment.
  • Medicare, an open ended single payer entitlement system, now costing almost $600 billion per year, is one of the main causes of our burgeoning, out of control, national debt.

Conclusion: For the U.S. to move to a national single payer system would be very risky and very costly. It is far better to wait and see if Colorado or some other state is willing to take such a leap of faith and then see how it works out in that context.

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Lowering the Cost of American Healthcare II. Entitlements

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My last post emphsizes that any solution to our nation’s long term debt problem must include reining in the cost of American healthcare.  There are two major drivers to this problem as is made clear by a new report from the American Enterprise Institute, “Improving Health and Health Care: An Agenda for Reform.”
Capture1First of all, out-of-pocket consumer spending on healthcare has been steadily declining for many years. The less we pay directly for our own healthcare, the less incentive we have to control costs.
Capture2Secondly, the cost of healthcare entitlement spending, for Medicare and Medicaid , is growing rapidly as a percentage of GDP.  Such a rapid increase is unsustainable and must be curtailed. Here is what the AEI report recommends for doing this.

  • Medicaid. It serves two groups of people: 1) able bodied adults and their children and 2) the disabled and elderly. The federal government should make fixed, per-capita payments to the states based on historical spending patterns for these two groups. The able-bodied adults and children would get the same (refundable) federal tax credits as everyone else supplemented by Medicaid payments. The states would be totally responsible for the second group.
  • Medicare. The current system would be gradually migrated to a premium support system which would provide enough to pay for a choice of competing insurance options. The eligibility age would gradually rise to 67, consistent with Social Security.
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  • Health Savings Accounts. HSAs are tax-preferred vehicles for saving for medical expenses until the (perhaps high) deductible amount is reached. Their use is growing rapidly. A one-time $1000 federal tax credit for establishing an HSA would increase their number even more. Their use should be expanded into Medicaid and Medicare as well.

Such reforms as these can significantly lower the cost of providing healthcare to the poor, the elderly and everyone else as well. If we don’t do something along these lines, we will eventually end up with a government run single payer system much to our detriment.

 

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Lowering the Cost of American Healthcare

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It is well understood that entitlement spending (Social Security, Medicare and Medicaid) is the biggest driver of our very serious long term debt problem.  Furthermore the high costs of Medicare and Medicaid can’t be separated from the high cost of American healthcare in general.  In other words, getting the cost of national health spending  under control is a fundamental fiscal and economic issue.
Capture1A major reason for this high cost is the tax exclusion of employer provided healthcare.  American out-of-pocket spending on healthcare is only 11% of the total as compared to 26% in Switzerland or 52% in Singapore, two examples of countries with efficient free-market systems.  Americans have little incentive to hold down the cost of their own care because it is mostly paid for by third party insurance companies.
The Affordable Care Act (aka Obamacare) expands access to healthcare but does nothing to control overall costs.  This means that any changes made to the ACA should be aimed at preserving access but making healthcare much more cost efficient.  This can be accomplished by

  • Keeping the Exchanges. The exchanges were set up to expand access for the uninsured and provide subsidies for those who couldn’t otherwise afford health insurance. This is the best feature of the ACA and should be retained.
  • Repealing the mandates for both individuals and employers. Mandates mean that benefits have to be strictly defined, uniform for all, and therefore more expensive. Employers are burdened by extra regulations which affect hiring and growth decisions.
  • Replacing the employer tax exclusion with a uniform tax credit for all. The credit would be about $2500 per person, the cost of high deductible catastrophic care. Employers could still provide insurance to employees but the tax deduction would be limited to the amount of the tax credit. The self-employed would get the same tax credit and it would also be refundable for those with low-incomes.

The American Enterprise Institute’s James Capretta describes how a transition could be made from the current ACA to such a new system.

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Why Obamacare Should Be Fixed and not Repealed

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The Supreme Court will soon render an opinion in King v. Burwell challenging the implementation of the Affordable Care Act.  If the Court agrees with the plaintiffs, then anyone receiving health insurance through one of the federal exchanges operating in 33 states is not eligible to receive a subsidy.  Several Committees in the House of Representatives are proposing to take such an opportunity to make improvements to the ACA.
CaptureIn addition, the Congressional Budget Office has just released a report on the “Budgetary and Economic Effects of Repealing the Affordable Care Act,” indicating that repeal of the ACA would add $137 to the deficit over 10 years.  This is because the loss of ACA imposed new tax revenues and spending cuts to Medicare would exceed the amount of money spent to expand insurance coverage.
The economist John Goodman has an excellent new book, “A Better Choice: Healthcare Solutions for America,” describing several basic changes which would greatly improve the ACA.  In summary they are:

  • Replace all of the ACA mandates and tax subsidies with a universal (and refundable) tax credit which is the same for everyone. This is the fairest way to subsidize healthcare for all and it also removes the huge market distortion provided by employer provided health insurance which is tax exempt. The tax credit would be about $2500 per individual and $8000 for a family of four, the approximate cost of catastrophic health insurance and also the average cost of Medicaid.
  • Replace all of the different types of medical savings accounts with a Roth Health Savings Account (after-tax deposits and tax-free withdrawals).
  • Allow Medicaid to compete with private insurance, with everyone having the right to buy in or get out.
  • Keep the ACA exchanges which would be required to provide change-of-health status insurance for the protection of the chronically ill.

Changes such as these would dramatically lower the cost of American healthcare by making all of us directly responsible for the cost of our own healthcare.  They would also virtually eliminate the perverse market effects of the ACA which encourage companies to cut back on numbers and working hours of employees.  This in turn would speed up the growth of our stagnant economy!

An Off-Ramp from Obama Care

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The Supreme Court will soon render an opinion in King v. Burwell, challenging the implementation of the Affordable Care Act which stipulates that subsidies can only be paid “through an Exchange established by the State.”  If the plaintiffs are upheld, it will mean that anyone receiving health insurance through one of the federal exchanges operating in 33 states is not eligible to receive a subsidy.  It will be necessary for Congress to intervene to fix a problem like this.
CaptureThree committee chairs in the House of Representatives, John Kline, Paul Ryan and Fred Upton, are proposing to take such an opportunity to improve the Affordable Care Act along the following lines:

  • First of all, making health insurance more affordable by ending both the individual and employer mandates, and giving choices back to the states, individuals and families.
  • Secondly, supporting Americans in purchasing the coverage of their choosing. For example, people could save money by buying insurance across state lines.
  • Finally, many existing features of the ACA would be retained. Children could stay on their parents policies until age 26. Lifetime limits on benefits would be prohibited. People with existing conditions would be protected. Renewability would be guaranteed. Insurance would be decoupled from employment by offering equal (perhaps, age adjusted) tax credits for all.

There remains the practical problem of providing immediate assistance to the approximately 5 million people currently receiving subsidies through the federal exchanges, while larger scale changes are being worked out by Congress.  The American Enterprise Institute has proposed a simple way for Congress to do this as follows:

  • Enact a short-term extension of subsidies for current enrollees.
  • States with federal exchanges could immediately set up a state exchange if they wished.
  • People with preexisting conditions and/or continuous coverage would be protected.

Both quality control and cost control are badly needed to make the ACA sustainable for the long run.  Given the right decision in King v. Burwell, these two plans outline a possible way to accomplish this.

How Can We Achieve a Free Market in Healthcare?

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My last post, “Why Is American Healthcare So Expensive?” suggests that we don’t have enough “skin in the game” because most costs are paid for by third party insurance companies.  One way to alleviate this problem is to subsidize insurance coverage only for catastrophic care with a high deductible and to encourage health savings accounts to pay for routine healthcare expenses.
CaptureBut the University of Chicago’s John Cochrane points out in “After the ACA: Freeing the market for health care” that getting to a true free market in healthcare “will be a long hard road” because “both supply and demand must be freed.”

  • Health care supply. Cost reduction only comes from new entrants into a business, not reform of old businesses. But in 36 states, for example, every new hospital or even major purchase requires a Certificate of Need issued by Hospital Equalization Boards which have explicit mandates to defend the profitability of existing hospitals.
  • Health care demand. True “need” is simply not a well-defined concept when a third party is paying the bills. The consumer must pay a lot closer to the full marginal cost of healthcare, or perhaps receiving the full financial benefits of any economies which he is willing to accept.

What are the objections to establishing a free market system?

  • The homeless and mentally ill, etc. Charity will always be needed for those who fall through the cracks. This doesn’t require a nanny state for the rest of us.
  • Adverse selection. In a free market sick people are more likely to buy insurance and healthy people to forgo it. Sick people would pay more but “health status” insurance and guaranteed renewability will mitigate this problem.
  • Shopping paternalism, i.e. people faced with serious illnesses are incapable of making cost-based decisions. These people and their families will simply have to learn to shop around. In a competitive market, a hospital which routinely overcharges cash customers will be “creamed by Yelp reviews.”

Conclusion.  There are only two ways to get health care spending under control.  A single payer system with rigid regulations and severe rationing or else a deregulated free market system where individuals have primary responsibility for their own care.  Americans are likely to prefer the second option if given a clear choice.

Why Is American Healthcare So Expensive?

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The U.S. spends almost 18% of GDP on healthcare costs, double what any other developed county spends.
CaptureThere are many reasons for our excessive healthcare spending.  For example:

  • As illustrated in the above chart, many medical procedures are far more expensive here than in other countries.
  • Profit levels in the healthcare industry are often very high, for example: 16.4% for pharmaceuticals, health-care information 9.4%, home healthcare firms 8.5%, medical labs 8.2% and generic drug makers 6.5%.
  • Health insurers, on the contrary, have a very low profit margin, (2.2% in 2009), and so can hardly be blamed for the high cost of healthcare.

The Affordable Care Act greatly expands access to healthcare but does very little to control costs.  The Manhattan Institute’s Avik Roy has outlined a plan, “Transcending Obamacare: A Patient Centered Plan for Near-Universal Coverage and Permanent Solvency” which would reform Obamacare by making it more like two very successful and low cost consumer-driven plans, those in Switzerland and Singapore.
These two countries feature government sponsored health savings accounts, backed up by insurance for catastrophic care.  What happens is that out-of-pocket spending for healthcare per individual is higher in Switzerland and Singapore than it is in the U.S., as indicated in the chart below.
Capture1In other words, the real reason for our high cost of healthcare is that Americans don’t have enough “skin in the game.”  We have very little incentive to hold down the cost of our own care because it is mostly paid for by third party insurance companies.
As the cost of healthcare continues to climb, such changes are already beginning to creep into the health insurance market place.  Private companies are raising the deductibles on the insurance plans which they subsidize.  The bronze, silver, gold and platinum plans on the ACA exchanges differ largely by the level of the insurance deductible.
Avik Roy’s plan referred to above in essence speeds up the process of converting the ACA into an efficient, consumer-driven healthcare system by making it more flexible and therefore more adaptable to market forces.

What Will True Healthcare Reform Look Like?

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My last post, “Progress on Medicaid Reform,” discusses innovations that several states have adopted to improve the delivery of Medicaid and to make it more cost efficient. But what we really need is a complete overhaul of American healthcare, including the Affordable Care Act, as I have also recently discussed, in order to eliminate perverse marketplace incentives as well as to achieve real cost control.
CaptureAn excellent discussion of what real healthcare reform would look like is given by John Goodman in, “Healthcare Solutions for Post-Obamacare America.” Mr. Goodman gives six principles for commonsense reform:

  • Choice. People should be free to choose a health plan that fits individual and family needs, rather than one designed by bureaucrats in Washington. This means no mandates, either for individuals or employers.
  • Fairness. Any subsidy should be in the form of a fixed sum tax deduction or credit and everyone should get it as long as they obtained credible private health insurance. The amount of the subsidy would be comparable to the cost of Medicaid enrollment.
  • Universal Coverage. Since some people will turn down the offer of a tax credit, unclaimed credits can be used to reimburse safety net healthcare institutions.
  • Portability. Portability insurance should be available to employees in case they change jobs or become self-employed.
  • Patient Power. Health Savings Accounts need to be made more available and also more flexible so that they can wrap around any third-party insurance plan, as indicated in the above chart.
  • Real Insurance. Under ACA millions of people are losing access to out-of-network providers. People should be allowed to purchase “change-of-health-status insurance” in case they develop expensive-to-treat conditions.

The ACA addresses the access problem for healthcare but has little effect on the cost problem.  American healthcare, both public and private, is way too expensive.  This is why fundamental change is still needed.