One More Thing

Harry Reid needs every last Democratic vote, and don’t the Democrats know it. Reid opened the spigot this past weekend when he offered $100 million in direct aid to Louisiana in exchange for Senator Landrieu’s vote to open floor debate. (That’s a CBO estimate.) With trillions on the table, it is a wonder Landrieu didn’t get more. Spigot, heck. The floodgates are open. It would be political malpractice if any Senator did not demand dibs.

If you were hoping that our Senators would be asking how to fix the health care system, forget about it. The only question they will be asking from now on is one that has a familiar ring to anyone from Chicago: Where’s mine?

Individual Insurance Mandates

In a letter appearing in today’s Wall Street Journal, Dr. Charles Jackson criticizes Democratic proposals to mandate individual insurance purchases.  An obviously ardent opponent of regulation, Dr. Jackson states, “I thought insurance was a voluntary exchange in which I and an insurance provider estimate my risk” and goes on to state that mandates are not insurance but “a tax and a transfer.”

Mandates are indeed a transfer.  So too is insurance.  And both transfers serve the same purpose, to help individuals cover the cost of illness.  They are two very different sides of the same stone.  The key to understanding their similarities and differences is to consider timing.

Dr. Jackson takes a remarkably short term perspective.  It is true that in any given year, individuals can contract with insurers and if they fall ill in that year, their insurer will cover the cost.  This would represent a transfer from healthy enrollees to sick enrollees.  So far, so good.  Now consider what happens at the end of the year.  In an unfettered market, the insurer would raise the premium.   If the illness is serious and chronic, the individual may face a lifetime of higher premiums.  But these high premiums are just as much a cost of illness as the expenses born during the first year.  If free market insurance is supposed to limit individual exposure to financial risk, then free market insurance has surely failed.

Lifetime insurance contracts would solve this problem by essentially creating an intergenerational transfer between our young and old selves. Mark Pauly and others have shown, however, that adverse selection might make impossible for an insurer to turn a profit, which may explain why private lifetime health insurance does not exist.  Government lifetime insurance does exist, on the other hand – just ask any Canadian.  The purchase mandate (combined with other insurance market reforms) offers an alternative way to obtain lifetime insurance.  Just like lifetime insurance, the mandate would be an intergenerational transfer.  Much like Social Security, today’s young and healthy lose money but make it back as they age.  As long as the system endures, everyone ultimately benefits.  No one is penalized for getting diabetes or cancer or just growing old.

Without some insurance regulations, those who are ill through no fault of their own will continue to pay higher insurance premiums, thereby making a mockery of the notion of insurance.  Or they will go without insurance altogether and, once ill, throw themselves on the mercy of providers (and, eventually all of us.)   Of course, regulation is no panacea.  We will have to raise taxes to subsidize purchases by low income individuals and we may have to impose steep penalties to insure that everyone participates.  Will we actually enforce them?

No one knows if a regulated insurance markets will prove worse than the status quo.   But there is no use pretending that free market health insurance achieves some sort of textbook ideal.    That position and does an injustice to the serious issues in hand.  (Though it is no worse than some of the rhetoric spewed forth by single payer supporters.)  The fact is that the market screws things up and the government screws things up.  Let’s try to understand exactly what gets screwed up and find realistic ways to make things less screwed up.  Let the ideologues fight it out on cable and the op-ed pages of the Journal and the Times.  Maybe that will keep them out of the way while deeper thinkers find real answers to our problems.  There is too much important work still left to be done.

I’m Convinced

I want the Canadian healthcare system, with one proviso.  I want Canada to run it.

After last week’s vote in the House of Representatives, where the key issue in the health reform debate turned out to be coverage for abortion, it now seems that if Congress has its way, politics will infiltrate every corner of the healthcare system.  What services are covered, who can provide them, even how they are provided – the opportunities for meddling are endless.

The problem is not with the bold ideas that underlay the health reform proposals.  The problem is with our political system.  Party primaries in Gerrymandered Congressional Districts send political extremists from both ends of the spectrum to Washington, where they think that the issue of abortion rights is important enough to hold hostage an overhaul of a $2 trillion system.  In a parliamentary system, the parties need to govern from the middle.  The middle of the House of Representatives is an empty aisle.  We can only hope that the Senate keeps its sanity.

I remember one of the provisions of Clinton’s healthcare reform proposal that scared me stiff.  Clinton proposed his own version of the health insurance exchange in which consumers could choose from approved insurance plans.  The catch was that local appointed boards would be charged with granting approval.  So if you lived in Chicago, you would get to choose from insurers approved by the Mayor, the Governor, and the Cook County Board President.  I can see it now – the Combine Insurance Company.  And I can see even worse once Congress decides that since it is spending “its own” money on healthcare, it deserves to call the shots.

I want to thank the House of Representatives for shaking me out of my doldrums.  I am now convinced about the Canadian system.  If we tried it here, it would be a catastrophe.

Second thoughts about single payer?

Last week I promised to critique the single payer approach.   There is no shortage of criticisms and you probably know them by heart:  Who sets the budget and what are their priorities?  Do you trust politicians to set the rules and won’t they lead to rationing?  Do you believe the public sector will fight against fraud, abuse, and corruption?

My guess is that if you support single payer, these questions don’t concern you.  And if you oppose single payer, these questions are enough to justify your opposition.  But let me offer two more things to consider.  First, the increment in marginal income tax rates required to fund single payer will have a chilling effect on economic activity.   Second, single payer will almost surely have to rely on reductions in payments for medical technology to be successful.  And like it or not, the entire world free rides off of the profits made by R&D companies here in the U.S.   Cutbacks in U.S. spending could cause cutbacks in R&D, with potentially profound consequences.

My colleagues often say that medical R&D is the most important long run driver of the health system.  I would not support any major overhaul such as single payer without hearing advocates articulate the implications of their proposal for the future of medical R&D.

Who really pays for employer mandates?

The rhetoric is flying over a key proposal in the newly unveiled House Democrats healthcare bill.  The bill would require businesses to provide employer sponsored health insurance or pay a hefty payroll tax of up to 8%.  The Democrats say this is a matter of fairness.  Businesses that do not offer insurance have an unfair cost advantage over their larger, more conscientious rival firms.   Why not force them to pay for their sins and level the playing field?  Republicans say this is a tax on small business and could not come at a worse time for a struggling economy.

As is the norm for this sort of thing, they are all wrong.

The main problem with the fairness argument is that it assumes workers are somehow duped into taking inferior benefits-challenged jobs at small firms.  The reality is that any employer must offer a competitive package of wages and benefits or workers will take their labor elsewhere.  (This argument is weakened a bit during a deep recession but small business offer rates are low even during boom times, suggesting that this is not about the business cycle.)  So what might a firm offer if not insurance?   Higher wages?  Possibly, though firms that offer health benefits tend to offer higher wages as well.  More flexible hours?  Perhaps.  A friendlier work place?  Maybe?  They might even be willing to accept less qualified workers.  Whatever the case, firms that do not offer insurance (and these tend to be smaller firms) still manage to offer a work environment that attracts workers.

Now suppose we force all firms to buy insurance or pay the tax.  If nothing else changes, jobs at firms that previously did not offer insurance will be much more attractive, because workers will be able to obtain valuable health insurance coverage through the firm or through the government.  But bear in mind that these firms could have voluntarily made themselves more attractive to workers before the tax but did not choose to do so.  There is no reason to expect them to be so attractive now.   It is more likely that these firms will cut wages (or make other changes) so as to make the jobs about as attractive as they used to be.  For example, if employees valued health insurance at $5000, the firms may cut wages by $5000.  The House tax is really a tax on workers.

This is not necessarily a bad thing.  In exchange for lower wages, more workers get insurance, and the value of their wage/insurance bundle remains about the same.  On top of that, we minimize the possibility of uninsured workers falling ill and becoming free riders.  So far, so good.    But this analysis makes two assumptions.  First, the workers value insurance by at least as much as the tax.  Second, firms are not constrained by minimum wage laws.

What if workers do not value insurance at the amount of the tax?  Then the firm cannot cut wages enough to offset the tax and still keep its workers happy.  The firm will have to limit pay cuts and, as a result, at least some of the tax burden will fall on the firm.  This problem is minimized if the government can offer health insurance at a much lower cost than firms can buy insurance in the market.  If this is the case (a big if), workers may value the insurance much more than the amount of the tax, even though they did not obtain insurance on the job, and firms can offset this value through a pay cut.

Unless firms are constrained by minimum wage laws.  I see this as a big problem.  Uninsured workers tend to be low paid workers and the minimum wage recently jumped to $7.25 per hour.  It may be impossible for some firms to cut wages enough to make up for the cost of insurance.

So who does the House bill harm?  Workers who do not highly value insurance and firms paying near the minimum wage.   A surprising outcome, considering that the Democratic party is supposed to favor progressive legislation.

Stop Presses: Free Market Economist Says Nice Things about Single Payer System

Like a lot of academics, I sometimes find it easy to find the faults with other people’s arguments but have a much harder time being positive. This may be why I am so quick to jump on supporters of a single payer system. Indeed, some of the arguments on behalf of single payer make me cringe. The most facile of these is that we shouldn’t trust anything as important as healthcare to the “greedy” private sector.  If living in Illinois has taught me anything, it is that opposition to greed is no basis for supporting government involvement in anything.

Yet single payer has many virtues and those who quickly dismiss it because “the government can’t be trusted” do a disservice to an important debate.  So let me offer what I believe are the strongest arguments in favor of single payer.  Next week I will put things back into balance.

The best case for a single payer system?  That’s easy.  An unregulated health insurance system will not cover everyone.  Not even close.  Some folks who could easily afford insurance will simply choose not to buy it.  If they fall seriously ill, they might free ride off the largesse of providers (and, eventually, all of us.)  Most of the uninsured, however, will find that they would rather spend money on rent and food.  And who could blame them?  They will still receive care if illness strikes, again free riding on the system.  Perhaps most troubling is that the seriously ill uninsured often face premiums so high as to defy the very meaning of the term “insurance.”

It is possible to dramatically reduce the number of uninsured in a market system through a combination of tax credits, mandates, and insurance market reforms.  But all rules carry baggage including  administrative costs and taxes.  And tax credits for low income individuals that are big enough to make mandates workable will entail increases in effective marginal tax rates (because tax credits decline as income increases.)  At the same time, insurance market reforms drive up premiums for the healthy while rules designed to encourage insurers to sign up high risk enrollees, such as risk corridors and reinsurance, also discourage insurers from trying to reduce spending by the chronically ill.

The second strongest case for a single payer system?  That is even easier.  A single payer system has direct control over the purse strings – the payer writes whatever size check it wants.  HMOs were the private insurance’s last best chance at containing costs, but these were savaged from folks across the political spectrum.  Under single payer, the political process is the final arbiter on the size of the health sector.   If the public doesn’t support the government’s cost containment efforts, it can replace the government.

The third case is tied to the second.  Get rid of private insurance and you get rid of private insurance administrative costs, executive compensation, and profits.  The latter two are not that big in the grand scheme of things, but expenses for medical underwriting, sales and marketing are enormous – perhaps 5 percent of total health costs. (Other costs, such as for claims processing, do not go away with single payer but could be substantially reduced thanks to the simplicity that comes with having just one payer.)

Let me make one more case that comes in the form of a sort of counter-argument.   One of the strongest arguments for free market anything is that markets are usually terrific at rewarding innovation.   In principle, we should support free market insurance for the same reason.  Except when you try to find great innovations in health insurance, you come up fairly empty.  Payment reform?  The government started that in the 1970s. Disease management?  Ditto, and again in the 1970s.   Report cards?  Medicare in the 1980s.   There are exceptions –HMOs and integrated delivery systems developed without government help and were embraced by private insurers.  But the track record on private insurance innovation is spotty at best.

These are sound arguments that do not go away just because the government is, well, the government.  A single payer approach would not be the end of the world.  At least I hope not, because once we have it, we almost surely wouldn’t go back.

The other side next week.   One nice thing about debating myself – I can’t lose!

Save the Health Economy: Be Like Barack!

Here is an offer you may have never received before: Suppose someone is willing to give you an extra $1000 a year for the rest of your life. On top of that, you get to live 10 more years. There is just one catch; you have to give up your favorite vice. Sounds tempting. Our health policy experts hope that it is very tempting, because this is precisely the kind of deal that they are offering as a way to lower health care spending.

Under several of the proposals on Capitol Hill, including the Baucus bill, insurers can offer discounts of hundreds of dollars or more to nonsmokers and others who engage in good health behaviors. Some employers have already gone this route, although enforcement is proving to be difficult as monitoring of smokers is largely on the honor system. Through such discounts, policy makers hope to encourage Americans to make healthy lifestyle choices (so we can all be as trim and fit as Barack and Michele!)

The economist in me can’t understand why this should work. Consider that there is an important branch of the health economics literature that puts the dollar value of a year of live at $100,000 or more. If this is true, then bad health behaviors can cost individuals the equivalent of a million dollars.  If individuals are willing to forego this much just to enjoy their favorite vices, then why would a paltry $1000 a year get them to behave differently?  Either economists have this valuation thing all wrong, or the use of financial incentives to change health behaviors hasn’t got a chance.

I am betting against the economists. I fully expect people to take better care of themselves in order to save a few bucks.  But this kind of saddens me.  Is it too much to expect people to take care of their health because, well, health is kind of an important thing?   Do we really have to bribe people to make sensible choices?   And if so, can we really say that our lives are so precious?

This new policy of paying for good health behaviors raises many other issues.  Should we financially punish those who by dint of genetics are at risk for obesity or alcohol abuse? And do we really want our government and our employers to become behavior cops, deciding how much exercise we should have, how many drinks we can imbibe, and, horror of horrors, how much chocolate is too much?

Yes, we all pay when one of us requires expensive medical care.  But smokers, heavy drinkers, and chocolate addicts* already pay a steep enough price for their unhealthy behaviors.  Do we need to rely on them to prop up the health economy?

*I am fully aware that dark chocolate is that rarest of rarities — something that is sinfully delicious and good for you!

Setting the Record Straight on Medical Bankruptcies

For the past few months, I keep reading and hearing about medical bankruptcies. Newspapers, NPR, politicians, even President Obama.  First it was “half of all bankruptcies are caused by medical spending.”  Then it was seventy percent.  And it didn’t matter if you had health insurance – medical bankruptcy was always just around the corner.  The Democrats even want to cap out of pocket payments in private health insurance so that Americans don’t go bankrupt. Some think we need a single payer system to eliminate the threat of medical bankruptcy.

Stuff and nonsense, that’s what this is.  Of all the myths that have permeated the health reform debate, this may be the worst.  And my new research shows the dangers of myths that originate in academia.

Some background: A few years ago, a lawyer and a couple of doctors from Harvard were dabbling in empirical social science research and managed to publish a rather poorly designed and executed study of bankruptcies.  Confusing cause and effect – well, not really establishing either – they concluded that half of all bankruptcies were “medical bankruptcies” and that health insurance didn’t prevent them. The authors, notorious supporters of a single payer system, have since updated their work and increased the medical bankruptcy rate to 70 percent.

Many social science researchers have repudiated these studies, and for good reason.  The Harvard researchers found that folks who go bankrupt spent thousands of dollars annually on medical care and used this as the basis for their policy prescriptions.  But they cannot determine how many of these folks would have gone bankrupt if they had spent nothing on medical care.  Perhaps all of them, perhaps none.  There is no way to know.  And thus, there is no way to know how many bankruptcies would be averted if we increased health insurance coverage, capped out of pocket payments, or moved to a single payer system.

I was one of the leading critics of the Harvard study.  Working with Michael Millenson, an adjunct professor at Kellogg, I published a critique in the same journal that the original Harvard study appeared. (Full disclosure:  In the process of writing this critique, Michael and I accepted small honoraria from an insurance industry lobbying group.  The group paid for our time but not our opinions. We insisted that our work be peer reviewed and we did not allow the lobbying group to edit our work.)  It seems that Chicken Little got all the attention. The highly questionable findings of the Harvard study have become the stuff of legend.  The critiques have been all but forgotten.

It is well enough to criticize someone else’s research.  It is far better to tackle the same study with better methods and set the record straight.  This is what I have been trying to do.  A new study by Keziah Cook, Andrew Sfekas and myself, funded by the independent Robert Wood Johnson Foundation, uses the methods that I outlined in my critique of the Harvard study.  Our study has just been published by the journal Health Services Research. Examining household assets (comprehensive data on bankruptcies that would be usable for this type of study were not available), we find that it really does stink to be uninsured and get sick. Uninsured Americans who have major illnesses stand to lose 40-50 percent of their life savings.  This is reason enough to try to expand coverage to all Americans. Of equal importance, we also find that insured Americans who have a major illness do not dip into their savings.  In other words, private health insurance is doing its job and protecting Americans from financial catastrophe. If our goal is to prevent bankruptcies, we don’t need a single payer system.  And we don’t need to cap copayments.  In fact, capping copayments will eliminate one of the most effective tools we have for containing costs.

I realize that the concept of medical bankruptcies is captivating and my research confirms that the uninsured can face severe financial hardship when illness strikes.  But the Harvard studies are so poorly designed that it is impossible to tell from their work just how serious the problem is, and the conclusion that private health insurance does not protect against bankruptcy appears to be totally misguided.  Even worse, the Harvard studies are leading to bad policy.  Other than outright fraud, I cannot think of a worse thing to say about academic research.

I have said it before: It is vitally important that academics get the numbers right.

AHIP and Cost-shifting: A Ready-Made Smokescreen

AHIP (America’s Health Insurance Plans) is lobbying hard in advance of tomorrow’s Senate vote on Senator Baucus’ health plan.   AHIP claims that proposed cuts in Medicare payments will add to private health insurance costs due to “cost shifting,” as hospitals raise their prices in order to make up for Medicare shortfalls.  If AHIP is correct, then a lot of policy advisors on both sides of the political aisle are awfully stupid.  Hospitals have more or less agreed to these cutbacks in exchange for seeing more folks with health insurance. It is simple horse-trading – hospitals get more money from new insured patients and get less from those with Medicare.  But if hospitals can cost-shift, as AHIP claims, then they aren’t making any concessions at all.  What they give to Medicare they take from private insurers, and the policy makers who view this as a zero sum game for hospitals have been bamboozled.  I find that unlikely.  Instead, I think that AHIP is trying to bamboozle us.

Cost-shifting is one of the oldest ideas in health economics.  Old enough to die from natural causes.  But it refuses to die, kept alive by flat-earthers and other folks who can’t come to terms with reality.  The idea has some intuitive appeal:  If someone cuts payments to a provider, that provider makes it up by raising prices on someone else.  But it raises a simple question:  why wasn’t the provider charging higher prices all along?  To believe in cost-shifting, we have to believe that these “greedy” hospitals are only greedy part of the time.   Perhaps there was a time, back before health care markets displayed even a smidgeon of competition, when nonprofit hospitals might not charge all the market could bear.  But today’s hospitals negotiate to get the best prices they can all the time.  They have to; anything less could spell financial ruin.  And it would take an extraordinarily generous insurance company (oxymoron alert!) to say to hospitals, “normally we wouldn’t give you a pay increase but we feel sorry for you because of Medicare and all that.”

Here is a good gut check.  If cost-shifting was so easy, why are urban hospitals that depend on Medicaid patients struggling to survive?  Couldn’t they just shift the costs onto private patients?  The answer is that they can’t cost-shift.  And claiming that they can only belittles the efforts of hospital executives to cope in a difficult reimbursement environment.  The empirical evidence is mostly dismissive of cost-shifting — if it occurs at all, it is rather small.

Perhaps I should give AHIP credit for subtlety.  If the scale of Medicare cutbacks exceeds the scale of new enrollments, some providers could fail, allowing others to increase their bargaining clout.  This could eventually have the same effect as AHIP’s cost-shift.    But this would require total capitulation by both hospitals and America’s seniors.   AHIP may have more clout than do hospitals, so I could see the hospitals losing out.  But AARP holds a candle to no one.  So this scenario seems unlikely.

If the cost-shifting argument is just a diversion, as I suspect, then what exactly is AHIP’s game?  It seems to me that AHIP’s real agenda is simple – it doesn’t want any government intervention.  The status quo looks pretty good to the insurance industry.  Why take chances?  But why admit the truth when there is a ready made smokescreen?

Time Out: A Brief Word about the Olympics

Yesterday I gave a speech on health reform to a group of executive spouses. The group was organized by Shirley Ryan, whose husband Pat led Chicago’s bid to host the 2016 summer Olympics. Before introducing me, Mrs. Ryan described the failed bid and concluded that Rio was the inevitable winner because the IOC wanted to put the Olympics in South America.

If Rio had this built in advantage, then the Chicago bid team pursued a strategy that was doomed to fail.  The USOC presented  Chicago as America’s city.  This was a colossal mistake, as the IOC has clearly grown tired of American nationalism.

But Chicago could have won. The city should have positioned itself as the world’s city.  Chicago has incredible ethnic diversity, with large communities from literally scores of different countries.  Athletes from nearly every nation would have found comfort and support here in Chicago.  The message would have been clear: the Olympics belong to no nation. They are for the world.  Putting the world’s diversity ahead of partisan nationalism — that would be Chicago’s legacy.

Rio would not have stood a chance.