Jon Gruber and the Massachusetts Referendum

I don’t know if my friend and colleague, MIT economist Jon Gruber, enjoys being in the frying pan, but that is right where he has landed. What started several years ago as a good faith effort to expand health insurance coverage in his home state of Massachusetts has combined with Tuesday’s special election to replace Senator Edward Kennedy to become the single most important political event in the history of health reform. While no election is ever about a single issue, Tuesday’s vote is, more than anything else, a referendum on Gruber’s brainchild, the Massachusetts Health Plan. Gruber now hopes to take his ideas nationwide, with the President’s blessing. But if residents of Massachusetts decide that the experiment has failed, or if they think that Congress’ perverse rewrite of the plan will only make things worse, Republican Scott Brown will upset Democrat Martha Coakley and national health reform will be dead once again.
I suspect that most of you know Jon Gruber. He is a brilliant public finance economist — maybe the best of his generation. (He is also a really nice guy.)  His work on the impact of health insurance costs on labor markets is seminal. Massachusetts could not have chosen more wisely when it asked Gruber to play a lead role in designing a reform plan. It has been a noble experiment. But Gruber has come under attack from some circles for failing to “properly” disclose a $300,000 contract with Health and Human Services to evaluate the impact of national health reform. Yes, there is the potential for conflict of interest, inasmuch as Gruber is more or less evaluating his own proposal. But no one has accused Gruber of fabricating numbers and they shouldn’t – I have never known a more careful researcher. The fact is that Gruber is the most qualified person out there to conduct this research. Yet given the circumstances, perhaps HHS should have asked someone else to conduct the study (or at least ponied up a little bit more money to have some independent validation.)

(Memo to the Wellpoint, whose study showing that health reform could raise premiums by as much as 100% and is praised by the Wall Street Journal: Perhaps you could submit your study to an academic journal and get some serious feedback that would help sharpen your analyses and generate more accurate predictions. The peer review process is a wonderful thing.)

While I think the world of Gruber, I am not sold on his reform proposal and it seems that many in Massachusetts share my skepticism. The state appears evenly split between supporters, those opposed, and the undecided. The plan has sharply reduced the number of uninsured, but taxes have soared and so have premiums. The plan has no serious cost controls and taxpayers appear fed up with having to pay more for their own healthcare while subsidizing health care for others. The national plan is no better, now that the Democrats in Congress have eviscerated the one semi-serious cost containment mechanism by granting favorable tax status to unions and government workers. Add to that the perverse bribes offered to Nebraska’s Ben Nelson and others and the Massachusetts plan looks far more attractive than what Congress will give us.

Economists rarely have the national spotlight shined on them. It is Gruber’s time. The vote on Tuesday is a referendum on his ideas. But if the Republican wins, it may also have been a referendum on the corruption that now pervades Congress. The Democrats are subverting Gruber’s good faith efforts. Maybe it is time for him to respond. Either fish or cut bait.

The Health Insurance Mandate

Two news stories about the proposed health insurance mandate caught my attention this weekend. The Wall Street Journal ran an opinion piece questioning the constitutionality of the mandate. The author argued that Congress cannot mandate that Americans purchase anything. I will leave that one to the lawyers. The Chicago Tribune ran a front page article stating that neither liberals nor conservatives like the mandate. Liberals think it is too expensive for low income folks and conservatives think it violates free market principles. This is ideologically-driven nonsense. Of all the aspects of health reform that are worth debating, this is not one of them.

To understand why the mandate makes sense, bear in mind that sick people in America do receive health care regardless of ability to pay. Doctors and hospitals usually treat first and ask questions (about insurance) later. Okay, sometimes providers ask questions first but enough of them treat patients that no one (well, almost no one) who is uninsured is left on the street to die.
There just isn’t enough charity out there to cover all the costs of the uninsured, so the rest of us feel the pinch.

Conservatives who oppose insurance mandates need to answer the following questions: Are you going to mandate that providers stop treating the uninsured? Or are you going to mandate charity? If neither, then the uninsured are going to receive care and free ride on the rest of us. Government has every right to act on the behalf of the majority and limit the free riding. Look at it this way. Conservatives endorse the right of the government to raise taxes to pay for the national defense, lest those who do not want to pay their share free ride on the rest of us. Just as the national defense protects all of us, so do our medical providers. The parallel to health care is close to exact.

What about the liberals who think that the mandate is too costly? Providing health insurance without some means-tested contribution is just another form of wealth redistribution, and this at a time when all levels of government are looking to raise marginal tax rates on the wealthy just to balance budgets. Why don’t the liberals just tell us how much redistribution they want?

A means-tested insurance mandate will limit free riding and permit a politically negotiated level of wealth redistribution. It ought to be a central component of any market-based health reform.

Legislative Minimalism

The great minimalist architect Ludwig Mies van der Rohe described the virtue of his unadorned high rise steel and glass boxes by coining the expression “less is more.” Compositions by John Cage, Steve Reich and Philip Glass bring the same aesthetic to minimalist music. And the lines and boxes of Barnett Newman and Mark Rothko breathe life into minimalist art. Less is more indeed.

It has taken a half century for our government to catch up, but yesterday Harry Reid and the Senators gave us the first pure expression of minimalist legislation. Here is what we get:

• Restrictions on insurance industry practices such as preexisting condition exclusions. Many states have these. This will help those with chronic conditions but will drive up insurance costs for first time purchasers.
• A health insurance exchange. This could help individuals and small businesses, but only if the subsidies for joining and penalties for opting out are large enough to create a meaningful risk pool. Otherwise the exchange is just another version of the existing marketplace.
• “Savings” from reductions in Medicare provider payments. We will never see these. Similar reductions were written into legislation last decade. Every year Congress has passed legislation to increase Medicare payments and wipe out any savings.
• A tax on expensive health insurance plans.

That’s about it. The feds nationalize widespread state insurance regulations, reimagine the private market, provide some financial incentives to increase coverage, and take baby steps towards eliminating the insurance tax subsidy. I can’t imagine enacting anything less and still calling it health reform. It is the purest expression of legislative minimalism.

When I compare the Senate and House bills, I tend to agree with Mies. Less is more.

A side note: I was bored over the weekend so I spent a few minutes watching the Fox News channel. I could swear they were reporting that the Senate plan would double Medicaid enrollments and, to win the vote of Senator Ben Nelson, exempt Nebraska from having to contribute more dollars towards Medicaid. Was I dreaming? Did they make this up? It sure seemed like political suicide. Maybe it was wishful thinking.

Alberta, Leonardo DiCaprio, and the KISS Principle

About two months ago, the University of Calgary and the Alberta Health Service (AHS) asked me to prepare a report on “procuring health services.” To put it simply, AHS was not pleased with its rules for paying for certain surgery services such as cataract surgery and joint replacements. They specifically asked me to propose new rules for paying for cataract surgery. I asked my colleagues Cory Capps and Leemore Dafny to work with me and we submitted our report at the end of November.

Last week, I travelled to Calgary where I presented the proposal to a conference of academics, regulators and stakeholders. It was frigid outside (below zero no matter how you measured it) and I expected an icy reception from the surgeons. But the meeting was cordial and productive.

The university also arranged for a press conference. I didn’t imagine that any reporters would actually come, but there were at least a half dozen and two camera crews. Issues like how to set payment rules for surgical procedures can make or break a healthcare system yet barely attract any media interest in the United States, where the press seems enthralled by the politics and personalities of the legislative process. But there I was, facing the Canadian media including one reporter who was a dead ringer for the Fantastic Four’s Ioan Gruffudd – also known as the Welsh Leonardo DiCaprio (I am not making this up), explaining the nuances of gatekeepers, second price auctions and quality warrantees. The next day newspapers across Alberta carried the story and included many of the economic details.

After spending two months delving into the minutiae of payment rules, I appreciate more than ever that we cannot predict the impact of any health reforms by reading the legislation. The legislation provides only the broad outline for health reform – the detailed rules that make or break the legislation are worked out behind the scenes. I wish this meant that we could count on some of my colleagues, like Joe Newhouse and Jon Gruber, to set the rules. But as Joe recently reminded me, every rule affects a constituency, and every constituency has a direct line to a Congressman, and every Congressman has leverage over the rule makers. More than anything else, this is why I fear sweeping legislative reform. Unlike in Alberta, where empirically-based analysis seems to carry more weight than interest group politics and the media are concerned about both, the American rule-making process, done behind closed doors and far from the scrutiny of a disinterested media, offers untold opportunities for abuse.

As we consider our options for expanding insurance coverage, we should follow the KISS principle: Keep it Simple Stupid. Insurance exchanges are not simple. Public options are even more complex. So is trying to operate Medicare side by side with a private market for under 65 year olds. Whatever the economic merits of these proposals (exchange – good/expanded Medicare – bad) implementation is likely to be treacherous. Pay or play is fairly simple. So are tax subsidies for low income Americans. We can do a lot of good with a few simple rules. And maybe that is as far as we should go without blowing up the whole thing.

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!