Post-Keynesian Observations

Understanding the Macroeconomy

Health-Care Economics: Part Four

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Review of Parts One through Four

This will be my last post on this topic (though doing these has made me think about writing a couple of social security–which cannot logically go bankrupt–and the greatly-misunderstood national debt). Before I go into the current reforms, let me review posts one, two, and three.

Post One: The question of whether to employ a market or non-market solution (or some combination thereof) should not be fraught with philosophical, moral, and religious implications any more than the choice of whether to use a Phillip’s-head or flat-head screwdriver. Policy should be a function of pragmatic decisions made with a clear goal in mind, and we should be willing to experiment. In a democratic society, one of our constant goals is that social systems be accountable to the people. Markets do not guarantee this any more than elections do. Strangely enough, however, we appear to spend much more effort defending markets than we do democracy in this nation. In fact, given the horrible fear of government power and the general lack of consciousness of the very real threat of market power, you would think that we lived in a dictatorship. I am not saying that we should trust government because we elect them, but that we should not trust business simply because we have “free” markets.

Part Two: There are industries, like restaurants and retail trade, where market-based solutions work extremely well because they are competitive enough to guarantee accountability. Other than for health and safety concerns, there is little pragmatic need for government intervention. Others are not nearly so competitive, however, which unfortunately includes health care. The AMA has been arguing for many years that consumers don’t actually have much choice when searching for health insurance. It is a highly concentrated (i.e., uncompetitive) industry.

Part Three: A pragmatic approach requires the specification of a goal. If we, as a nation, believe that our goal should be universal health care, then a market solution does not make sense, particularly one based on health insurance. Health insurers must make a profit, and therefore have an incentive to insure only those who don’t need really need insurance and to avoid paying claims. This not only conflicts with the goal of universal health care, but it means that insurers create a large and expensive overhead to manage these risks. A private option would be useful alongside the core, public system, but otherwise health care–if we are assuming it should be universal–should be treated like national defense, police protection, fire protection, and education.

Part Four: If we want an accountable and universal system, do the new reforms get us there, or at least a little closer?

Current Reforms: Do They Achieve the Goal?

Let me emphasize something here: I am not an expert on health care. My research specialities include exchange rates, macroeconomics (which basically means unemployment, inflation, GDP growth, and fiscal and monetary policy), and the economics of John Maynard Keynes. I feel pretty confident of everything I’ve written so far as it’s just basic economics. However, as I drift into more specific issues, I’m on thinner ice. I can speak in generalities, but I’m ignorant of exactly how specific parts of the regulations will have an impact. On the other hand, I’m not sure anyone is entirely sure! Here is my best effort…

I think we should start by making goals very clear. You can’t pragmatically evaluate a solution without knowing what you want to achieve.

GOALS

1. Universal health care: some minimum standard of health care, including preventative medicine, for all Americans. What level should we specify here? I honestly don’t know, but if we think we are the greatest country in the world, then surely we can achieve something along the lines of our peers: Canada, UK, Germany, France, Sweden, etc. Let’s at least move from the bottom of the infant mortality and life expectancy lists. Is top five or ten too much to ask? We already pay more than anyone else, surely we can get more for our dollar.

2. Eliminate Perverse Incentives: this is really a part of #1, but I thought it might be useful to separate it out specifically. If you are going to achieve universal health care, then you have to have a system that does not try to avoid covering those who most need insurance and to avoid paying when people do make claims. This is not consistent with providing universal care.

3. Accountability: If we, as a nation, are dissatisfied with some aspect of the system, there must be a means of addressing. Any reform should give us something that is at least superior to what we have now.

I wish I had hours and hours to peruse all the discussions of the reform that can be found online, but I don’t. So I hope you don’t mind if I just pick out a list of features and discuss how they would affect the two goals above. I selected a Reuters story posted on InsuranceJournal.com as it appeared to lean toward reporting facts rather than expressing an opinion. I’ll repost the article below (the original can be found here http://www.insurancejournal.com/news/national/2010/03/22/108331.htm), and I’ll intersperse it with comments focusing on achieving goals #1, #2, and #3.

The U.S. House of Representatives approved a sweeping $940 billion healthcare overhaul Sunday in a two-step process that sends a Senate version of the bill to President Barack Obama for his signature and a package of changes sought by Democrats to the Senate bill.

The package of changes now go to the Senate for approval. The Senate is expected to take it up this week. If it passes unchanged it will then go to Obama for his signature. If any changes are made by the Senate, the package of changes will have to go back to the House for further action.

The legislation aims to extend coverage to 32 million uninsured people. Here are key provisions of the Senate-passed legislation and the proposed changes.

INSURANCE MARKET REFORM

The legislation would require substantial insurance market reforms that would bar insurers from excluding people for pre-existing medical conditions and prevent them from arbitrarily dropping policy holders.

Insurance exchanges would be created in which small businesses and individuals without employer-sponsored coverage would be able to shop for coverage. Plans offered on the exchange would have to meet minimum benefit requirements.

The proposed changes would allow dependent children to remain on their parents’ health policies until age 26.

The Senate bill also requires insurers to spend at least 85 cents of every premium dollar on medical care in small group markets and 80 cents in large group markets. The proposed changes also would require Medicare Advantage insurers to spend at least 85 percent of revenues on medical care.

Most of this seems consistent with the goal of universal health care. It bars insurers from dropping folks with pre-existing conditions (note that currently, you can be dropped even if you have a previously undiagnosed preexisting condition–that’s a mighty big window). It also makes sure that children have an option well through their college years, when other options would be difficult to find. To help folks pay for this, it will establish exchanges where risks can be pooled. Furthermore, it forces firms to spend 80 to 85% of premiums on medical care rather than overhead or as profit.

It seems to help #1(though I’m not sure it can entirely achieve it), but what about the perverse incentives? So long as these are private companies, they are still there. We can’t blame them–they have to eat, too. But by what mechanism will the most expensive patients be allocated among the companies? This is a problem because whichever one gets more of them as a percentage of total subscribers, they’ll have lower profits. They’ll be out competed and their subscribers will have to move to another company. This creates even more concentration in the industry, interfering with goal #3, accountability. If this is true, is it any wonder that the stocks of insurers, hospital companies, and drug makers rose after the reforms? Rather than the bill representing us giving power to the government, as the Tea Party folks argued, it’s more to the private sector. That would be great if free market = competition, but it doesn’t. My conclusion regarding these aspects of the reform: they help with goal #1, but don’t properly address goals #2 and #3.

COVERAGE MANDATES, SUBSIDIES AND MEDICAID

Individuals would be required to obtain health insurance. Those who fail to obtain coverage would face fines of up to 2.5 percent of income by 2016.

Firms with more than 50 workers who do not offer medical coverage could face fines of $2,000 per full-time employee.

Federal subsidies would be provided to help people with incomes up to 400 percent of the poverty level purchase coverage on the exchange. Proposed changes would sweeten those subsidies for lower income people.

Medicaid, the government health insurance program for the poor, would be available to everyone with incomes up to 133 percent of the poverty level, which stood at $10,830 for an individual and $22,050, for a family of four. Many states have eligibility requirements below those levels.

The proposed changes would get rid of a special deal in the Senate bill that would have provided more money to Nebraska to cover costs of increased Medicaid coverage.

In terms of goal #1, I guess it’s a good thing but it’s hard to see. On the one hand, being forced to buy insurance (like you do with your car, for example) sounds like a good idea if decent options are available, but if the industry stays as concentrated as it is then it just sends more money to those companies. That subsidies are being offered is extremely important, but I still can’t get past the idea that we are just subsidizing the highly-concentrated insurance industry that continues to have no incentive to cover anyone but the healthy and to impeded claims. How do we decide which companies get the expensive patients? And we should really try to completely cut the link between health insurance and employment, as it’s an unnecessary burden on employers. A state-run health care system would do that. No longer would the budding entrepreneur have to become an expert on health insurance in addition to their chosen area of focus. Employers don’t offer house or car insurance–why health? They shouldn’t. On the plus side, the subsidies mentioned above may help address a deep structural issue that has evolved over the past 20-30 years, that is the increasing inequality of income. But, in general, these aspects of the bill strike me the same way the first ones mentioned did: reform: they help with goal #1, but don’t properly address goals #2 and #3.

P.S. Is it constitutional to require folks to buy health care? Personally, I don’t really care. If it’s a good idea and it’s not constitutional, we should change the Constitution; if it’s a bad idea but it’s constitutional, don’t do it! Pragmatism argues that “it says it in this book” is not a valid means of supporting an argument.

FINANCING

The final proposal makes some adjustments to the revenue measures in the Senate-passed bill.

The Senate bill included a 40 percent excise tax on high-cost health insurance plans. The proposed changes would delay implementation of the tax until 2018 instead of 2013. The tax would kick in on plans costing $10,200 for individuals and $27,500 for family coverage. A higher threshold is allowed for plans covering mostly women, older workers and retirees as well as those in high-risk professions.

The bill calls for raising the payroll taxes for Medicare, the government health insurance plan for the elderly and disabled, to 2.35 percent from the current 1.45 percent for individuals earning $200,000 or more and for couples earning $250,000 or more. The proposed changes would apply the tax at a rate of 3.8 percent to some investment income for those high-income groups.

The bill imposes fees on medical device manufacturers, insurance providers and brand-name pharmaceuticals. The proposed changes would delay implementation of those fees.

It also puts a 10 percent tax on indoor tanning services that use ultraviolet lamps goes into effect on July 1.

I’m torn on this. I have nothing against taxing the rich at a higher rate to subsidize the poor (and on a personal level, I’d come off worse on that deal), but, once again, this is no way addresses goals #2 and #3. All we are doing is finding a way to subsidize the poor’s premiums for a concentrated industry that has little incentive to pay out claims. We’re just finding a way to make life easier for the insurance company, not the people of the US. I’m afraid I have to repeat this: they help with goal #1, but don’t properly address goals #2 and #3.

P.S. I’ll go into this more when I get a chance to do the social security post (several weeks from now, I assume), but, yes, we can afford to do this. We are already wasting money now. It is more efficient to have one big insurer who care better spread the risk of insuring the unhealthy. Of course, if this one firm were in the market, they’d have a monopoly and the consumer would not get to realize the efficiency gains.

MEDICARE

The legislation would freeze payments to insurers that provide coverage to Medicare patients in 2011 and begin reducing the subsidy in 2012.

It would also gradually close the gap in drug coverage for Medicare beneficiaries by 2020. Those who enter the coverage gap, the so-called doughnut hole, in 2010 will get a $250 rebate. In 2011 they would get a 50 percent discount on brand-name drugs.

Based on my very quick reading about the doughnut-hole issue, this one is a positive. Medicare is done properly, so this one is avoiding the insurance companies completely (except for those who’d like to supplement Medicare, of course). Recall the quote from James Galbraith (in The Predator State ) in the third post in this series:

Public health insurance entities such as Medicare do not evaluate risk because they are universal. Therefore, they save the major cost associated with private health insurance. They pay their personnel at civil servant salary scales and are under no obligation to provide a return to shareholders via dividends or meet a target rate of return. Insurance in general is therefore intrinsically a service that the public sector can competently provide at lower cost than the private sector, and from the standpoint of the entire population, selective provision of private health insurance is invariably inferior to universal public provision.

Hence, we can count these aspects fo the bill as all win: goals #1, #2, and #3 are addressed

Summary Analysis of Reform

It falls short, but not for the reasons the (sometimes-violent) detractors have mentioned. Far from giving up power to the government, we are keeping it in the hands of the insurance companies, and perhaps even concentrating it. If we believe that some minimum standard of health care (comparable to that offered in our peer nations) should be available to all Americans, then, while it is certainly a step in the right direction, it falls well short in terms of eliminating perverse incentives and making those providing the services accountable. It may mean, however, that more people are covered, and that’s not a bad thing.

But, I have this nagging fear (fueled by what Marshall Auerback and Randy Wray have been writing) that this simply operates to channel funds to insurance companies. The problem is that when we have a service we want to provide to everyone–national defense, police protection, fire protection, education, etc.–the market is not the most efficient means of distribution. Hence, we need to make the market supplemental in this industry, not central, or we will never achieve our goals. And it’s not as if we are doing a good job now. I will repeat once again that, among developed countries, we have the most expensive health care system with dead-last rankings in infant mortality and life expectancy.

A public option completely eliminates problems associated with goals #1 and #2, though #3 clearly remains. We would absolutely have to be careful to make sure that accountability was created (don’t forget, by the way, that it really isn’t there now). As we are able to accomplish that in other areas dominated by government, I’m not sure why we can’t do so here. The overwhelming majority of people who carry guns in our country are government employees with no market incentives guiding their behavior. Does this mean that soldiers, marines, sailors, airmen, police, and FBI and CIA agents run amok, with no accountability? Certainly not, because we have other guidelines in place. And while there are times when they abuse their authority, that is at least equally true of firms with market power. Even if we were unsuccessful in raising the level of accountability with the government over that we have now with private insurance, we’d still achieve goals #1 and #2: everyone is insured and there are no perverse incentives. That’s one helluva long way towards making ours a more civilized society, one in which it would no longer be true that roughly 2/3rds of all personal bankruptcies are associated with health issues.

I don’t know how to feel about where we stand today. Our core problems remain because, so far as I can see (and I’m happy to consider other options), we can’t address universal health care, perverse incentives, and accountability via the market. Reforms have not addressed this. Worse still is the fact that the very intense opposition to what we have done so far is completely misguided. It is based on the assumption that there is some inherent superiority in market-based over non-market solutions. If that is the case, then those same individuals should be working hard to privatize the armed forces, police departments, fire departments, libraries, parks, roads, etc. They aren’t of course, and that’s because they really aren’t clear on the core issues. Were I a conspiracy theorist, I’d say that they were being manipulated by the corporate interests that stand to gain from continuing our current practices. But, I don’t believe that. I think these are just well-meaning people who have simplistic but strongly-held views of the way the world works. And so, despite the fact that the overwhelming majority of them would gain from reform and that ours would be a stronger country because of it, they wrap themselves in American flags, put on tricorn hats, and unwittingly march in favor of corporate power. Maybe what happened on March 21, 2010 was the best we can hope for at the moment. Let’s hope it’s not the best we can get.

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Written by rommeldak

March 28, 2010 at 4:20 pm

Posted in Uncategorized

Tagged with , ,

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