Tag Archives: Affordable Care Act

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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Disruption Involves Taking Chances

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I am a fiscal conservative (I want to balance the budget) and a social moderate. I voted for Hillary Clinton for president because Donald Trump is a sleazy person and has such a volatile temperament.  But I’m also in favor of making big changes and Mr. Trump will certainly do this.

capture79As the Economist points out, “his voters took Mr. Trump seriously but not literally, even as his critics took him literally but not seriously.”  The Economist goes on to point out some of the risks involved in making the kinds of changes Mr. Trump is talking about:

    • If Obamacare is repealed, 20 million Americans will lose their health insurance. Yes, but it’s not going to happen this way. Obamacare will end up being modified and improved, not abolished.
  • His tax cuts would chiefly benefit the rich and would greatly increase our national debt. Yes, but the House of Representatives has a much better plan to do this and it is Congress, not Mr. Trump, which will develop a detailed plan.
  • Even if he does not actually deport illegal immigrants, he will foment the divisive politics of race. The illegal immigration problem needs to be solved and Mr. Trump is likely to get this done, with or without a wall.
  • Mr. Trump has demanded trade concessions from China and NAFTA. If he causes a trade war, the fragile world economy could tip into a recession. Blue collar workers, his strongest base of support, have had stagnant incomes for years and deserve some help. If he can increase our exports, blue collar workers will benefit.
  • He wants to reverse the Paris agreement on climate change which would harm the planet and undermine America as a negotiating partner. Global warming is real but the Paris accord does essentially nothing to slow it down. Increased coal use in China and India will more than negate what the U.S. and Western Europe are doing to cut back on fossil fuels.
  • Mr. Trump has demanded that other countries pay more towards their security or he will walk away. NATO members should be doing more on their own and if he can prod them to do this, then NATO will be stronger as a result.

 

Conclusion. Mr. Trump’s expressed views should be interpreted as initial bargaining positions. They are likely to have the effect of leading to progress on many serious problems which need to be addressed.  The risks involved in the negotiation process are worth taking

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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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The Challenges of American Health Care II. Specific Problems to Overcome

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My last post, “The Challenges of American Health Care,” describes the huge demographic and cost pressures facing American healthcare  and lays out a comprehensive reform plan by the Hoover Institution’s Scott Atlas to address them.  Today I will give more details about these pressures on both private care as well as care subsidized by the Affordable Care Act.
Capture6For example:

  • The cost of providing health care to an average American family surpassed $25,000 for the first time in 2016, $1,155 higher than last year, and triple the cost in 2001.
  • A significant cost driver is the rapid growth in what health plans and insured people are paying for prescription drugs, now comprising $4,270 annually, or 17% of the total.
  • 80% of healthcare costs come from just 20% of the population.
  • The insurance company United Healthcare announced that it is withdrawing from most ACA exchanges because it lost $475 million on plans sold in 2015 and expects to lose another $650 million in 2016.
  • Overall $2.5 billion was lost by insurance companies on the exchanges in 2014. The government’s “risk corridors” program is insufficiently funded to reimburse these losses to the insurance companies involved.
  • The fundamental problem is politicization of the marketplace. Insurers were pressured to set premiums low initially to ensure that the rollout was not a flop. Now premiums are increasing rapidly to cover the initial losses. Households with income over 250% of poverty already find the plans offered on the ACA exchanges unattractive.

Conclusion: The overall rapid increases in the cost of healthcare, public and private, is unsustainable for individuals, families, employers and government. Something has to give.  We need a total reform of healthcare spending in the U.S.  Many good suggestions have been made for how to do this.  Now is the time to act!

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The Obama Legacy

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I have no antagonism for Barack Obama. He was elected because of the unpopularity of the Iraq War and George Bush who started it.  He inherited the Financial Crisis and pulled us out of it without another depression.  He has put us on the road to universal healthcare even though the structure of the Affordable Care Act does little to control costs.
Capture  But overall, the negatives of his presidency outweigh the positives.  Consider the situation we are currently in:

  • Stagnant Economy. The annual rate of growth of GDP since the end of the Great Recession in June 2009 has been an anemic 2% compared to our historical growth rate of 3% since the end of WWII. Although the official unemployment rate is down to a respectable 5%, there are millions of unemployed and underemployed people who have stopped looking for work. Obama and the Democrats in Congress have little interest in the tax reform and deregulatory measures which would boost economic growth.
  • Massive Debt. Our public debt (on which we pay interest) has doubled to over $13 trillion on Obama’s watch. As the Federal Reserve begins to raise interest rates to ward off inflation, interest payments on this debt will increase enormously. It is absolutely imperative to begin to substantially shrink our annual budget deficits. The Democratic Party, under his leadership, has expressed no willingness to do this.
  • Chaotic Middle East. The rise of ISIS in Syria, Iraq and North Africa, and the resulting refugee crisis in Europe is the result of weak U.S. leadership in the Middle East. Peace and stability depends on a strong U.S. presence in all trouble spots around the world. We neglect this responsibility at our peril.
  • Hyper-partisan Political Atmosphere. Stalemate in addressing these and other serious problems has led to the rise of extremist presidential candidates like Bernie Sanders and Donald Trump. Moderate candidates with successful experience in elected office are unable to gain political traction.

Our country is in a big mess. We are being guided by ideology rather than common sense.  I am optimistic by nature.  But it’s awfully easy to be pessimistic about our future.

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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!

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.