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Be Very Afraid of the Next Step in Health Reform

The Tea Party Movement, the Republican Party, and the American people all scored a big victory this past week with election of Scott Brown to the US Senate.

Brown’s election was almost certainly the last nail in the coffin of President Obama’s push for a comprehensive health care reform initiative. That’s the good news.

Unfortunately there’s the bad news that has so far remained unnoticed amidst the justified celebrations of the reform package’s demise.

Democrats have been making what seem to be encouraging noises about scaling back their health care package to cover only the popular portions of the bill. In doing so they hope to either encourage or bully Republicans into jumping on board the bandwagon. They emphatically will not, however, come close to adopting the smarter Republican ideas about how to reform health care. Instead, they will focus on the most popular portions of their bill and drop the least popular.

What would that mean? The centerpiece of their proposal will be banning insurance companies from limiting coverage for pre-existing conditions. This would be popular, and be very difficult for Republicans to oppose.

However good it sounds, however, passage of such a measure without a corresponding requirement that everyone buy health insurance would put the current insurance system into a death spiral.

Here’s how it would (not) work: by banning insurance companies from limiting coverage of pre-existing conditions Congress would be creating a massive incentive for consumers to abandon health insurance entirely, even to the point of moving into a fee-for-service model for routine health care. After all, most of us would pay much less for medical services than insurance premiums if we stick to going to the doctor for routine care.

Sounds OK at first, doesn’t it. After all you would inject more market forces into the provision of routine health care, which would lead to lower costs and more competition.

But the flip side of that shift would be the trend of purchasing health insurance only after a serious medical condition hits in the family. Since insurance companies would have no choice but to accept all comers, a consumer could forgo purchasing insurance in good times, and subsequently shift the more expensive care onto insurance companies once disaster strikes.

That’s a great deal for consumers, at least at first. It would lower their outlay for health care without putting their finances at risk.

But how would that work for insurance companies? Put simply, their business model would likely collapse and insurance costs would skyrocket. The current insurance model works just like it does for car or homeowner’s insurance. Just as you can’t purchase car insurance to cover an accident after it occurs, you can’t purchase health insurance after you get sick. Premiums paid in good times provide the financial cushion for the large payouts necessary when disaster strikes, the insurance premiums of the healthy subsidize the payouts of the ill. This is a good deal for everyone because none of us can indefinitely or reliably count on remaining healthy.

There’s an easy way to fix this problem, in principle: convert all insurance into high deductible policies that only cover major medical expenses, while maintaining stringent pre-existing condition exceptions (thus incentivizing insurance purchase). But that is not what Democrats have in mind, because it would not be popular with their core constituencies or indeed the American public at large.

Hence the potentially disastrous consequence of the collapse of the current health care reform package, however welcome that demise is. We could actually get something worse if this alternative is not headed off at the pass, and soon.

Of course this disaster scenario is predicated on the assumption that Democrats will be supremely cynical in their attempt to salvage something out of their defeat. Maybe I am not giving them credit for responsibility that they deserve. We can only hope.

Cynicism 101

I just discovered a wonderful economics site called e21, run by a non-profit organization dedicated to promoting free markets and the conditions that make them work.

Their latest commentary explores a particularly cynical provision in the Senate health care reform bill, which proposes an increase of .5% to the Medicare Hospital Insurance payroll tax on all income over $200,000 for singles, and $250,000 for joint filers. The provision raises $54 billion over a decade.

What makes this tax increase so cynical? Several things, in fact.

First of all, while the tax increase is part of the Medicare payroll tax, its revenues would be dedicated to financing subsidies for non-Medicare recipients—this, despite the fact that the Hospital Insurance program in Medicare is itself already running a deficit.

Second, and even more cynical, by collecting this tax as part of the Medicare payroll tax the revenues will be treated as if they are indeed being deposited in a Medicare “trust fund,” despite the fact that they are indeed being spent elsewhere. In effect the revenues will be double-counted.

Nice trick, huh? If Congress decides to do this more often maybe they can completely eliminate the deficit through fancy accounting.

Speaking of tricks, Congress gets a hat trick with this provision by eliminating indexing for inflation on this tax increase, ensuring that an ever greater number of citizens will wind up paying this “tax increase on the wealthy” as incomes creep up over time.

It doesn’t get much more cynical than this.

We Have Models for Governing Interstate Insurance Sales

Minnesota Gov. Tim Pawlenty, a Republican, has invited his fellow governors to help him set up an “interstate health insurance compact” which would lay the groundwork for allowing consumers to purchase health insurance across state lines.

The compact would be modeled after the Interstate Insurance Product Regulation Compact (IIPRC) which was established in 2004. According to its website, “The IIPRC serves as a central point of electronic filing for certain insurance products, including life insurance, annuities, disability income and long-term care insurance to develop uniform product standards, affording a high level of protection to purchasers of asset protection insurance products.” Currently 36 States participate in the IIPRC.

Pawlenty is responding to criticism leveled by Minnesota Democrats that opening up the health insurance marketplace to interstate competition would gut consumer protection. Creating an interstate health insurance compact would ensure that health insurance products would be tightly regulated and standardized, with strong consumer protections.

Pawlenty’s proposal is particularly interesting because it represents an attempt to actually implement an idea that has been bandied about by Republicans for quite a while. It’s good to see someone finally trying to put some meat on the bones of a really good concep

The Doc Fix in Medicare and Health Reform

In an earlier post I pointed out the blatant budgetary dishonesty of what has become known as the “doc fix.” The “fix” would eliminate a provision in current law that is intended to limit Medicare expenses to a “Sustainable Growth Rate” by cutting reimbursement rates to doctors.

The so-called SGR has been honored more in the breach than in practice, for the obvious reason that it is incredibly unpopular with doctors and would in the long-term threaten access to health care for senior citizens as more and more doctors dropped their Medicare practices.

In an attempt to get more doctors on board the health care reform train, Senators have proposed eliminating SGR and simply acknowledge that Medicare will cost about $250 billion more than is budgeted for the next decade. That’s $250 billion spending added directly to the deficit.

Well, the “doc fix” has become a political hot potato, with Democrats and Republicans arguing like cats and dogs over what exactly it means.

In one sense the Democrats have a point. Nobody actually believes that the SGR cuts will actually be implemented; if it were doctors would see their reimbursements go down by over 20% in 2010 alone, and that simply is not going to happen. In recent years Congress has routinely voted to get around the SGR provisions because the alternative was too awful to contemplate.

The only real effect of the SGR provision was to maintain the illusion that somehow in the future Congress would actually cut reimbursement rates dramatically in order to reduce the deficit. I don’t believe that, and neither does anyone else. Yet the CBO is forced to include those Medicare cuts in its projects because the SGR is law.

So is the Democrat proposal to eliminate SGR from Medicare a rare example of honesty in budgeting? Of course not.

Two things make this obvious: 1) the proposed elimination of the SGR provision is being put forth as a naked quid pro quo to doctors; if they support the Democrat health reform proposal, Congress will in turn ensure that Medicare reimbursement rates will not decline; and 2) the additional $250 billion cost of eliminating SGR will not actually be considered as part of the health care proposal and hence the additional expense will be ignored when counting up the costs, ensuring that President Obama will be able to maintain his pledge that no bill he signs will add one dime to the deficit.

That’s a nifty trick when you think about it. Ignore the man behind the curtain.

Republicans are right to cry foul at this dishonesty. The President and his Congressional allies have claimed that they will pay for their “reform” through, among other things, reducing Medicare costs. This latest move shows just how hollow that promise really is.

Medicare Sleight-of-Hand

By now we’ve all heard about how the Baucus Bill supposedly reduces the budget deficit by $81 billion over the next decade.

And most of us also know that it achieves this goal through sleight of hand.  Too many unlikely things would have to happen in order for those projections to come true.

One of the biggest lies behind the budget numbers is the assumption that Congress will cut Medicare reimbursement rates by about 40% over the next decade. Nobody believed these rate cuts would happen in any case, but in a stunning move the Senate is cooking up a bill separate from the Baucus Bill that would restore the cuts envisioned by that health care reform proposal.

The bill, being proposed by Sen. Debbie Stabenow has a cost of $245 billion, and has no budgetary offsets to help pay for it.  Senate Majority Leader Reid expects to bring it to the floor next week for approval. According to Politico, “If Democrats can fix the reimbursement rates, it removes one of the major hurdles to reform and brings an important industry group’s substantial clout fully to bear on passing reform.”

So let’s see if we can get this straight: the Baucus Bill will reduce the deficit by cutting physician reimbursement rates. The Stabenow bill will guarantee that those reimbursement rate cuts will not actually happen. But because the Stabenow bill is not the Baucus Bill, the Senate can still claim that the Baucus Bill reduces the deficit. Even after it passes the Stabenow bill.

Sure, the actual deficit will go up by at least $164 billion when you combine the two bills together, but what of it? Passage of the Stabenow bill is now seen as crucial to getting the Baucus Bill (which, remember, will reduce the deficit) through the Senate.

My head is spinning.

Loosen up Insurance Market, Pawlenty Says

The idea of allowing consumers to purchase health insurance across State lines got a boost on Tuesday.

Minnesota Gov. Tim Pawlenty unveiled a legislative initiative to allow just that, setting off what is sure to be a lively debate in both the Minnesota Legislature and on Capitol Hill.

Pawlenty’s proposal would allow Minnesota consumers to expand their health insurance options beyond those currently available in Minnesota. Currently just three insurers cover 80% of Minnesotans in the private health insurance market. And due to Minnesota law all insurers must be nonprofit companies subject to strict State regulation.

In keeping with Minnesota’s tradition of strong consumer protection Pawlenty is not proposing to fully open the health insurance marketplace to all comers. Instead the proposal places strict limits on what policies will be offered in the state. Provisions of the plan include:

• the state insurance regulator where the company is based must be accredited by the National Association of Insurance Commissioners;

• the insurance company must have a certificate of authority in Minnesota;

• the insurance regulator in the state where the company is based must review and approve policy forms;

• the insurance company must agree to abide by Minnesota’s claims practices and other consumer protection laws; and

• the insurance company would be subject to Minnesota fees and taxes.

Further restricting the pool of available insurers, Pawlenty is proposing that only policies approved in the 20 States deemed most effective at regulating insurance will be eligible for sale in Minnesota. Precisely how that determination will be made is not clear at this time.

Unsurprisingly, Minnesota’s Democrats wasted no time taking aim at the proposal. A statement from Brian Melendez, Chair of the Minnesota Democratic-Farmer-Labor party (Minnesota’s Democrats) took direct aim at Pawlenty:

“The governor’s efforts to protect HMOs and maintain the status quo on health care are neither new nor innovative, and would not work for the people of Minnesota. Gov. Pawlenty’s more-of-the-same attitude has become his trademark, and today’s rehash of previously failed health-care initiatives shows no leadership, no courage, and no foresight — three qualities that are sorely lacking in this governorship. Sometimes you really can’t teach an old dog new tricks.”

I’m not exactly sure how proposing something never tried in Minnesota is “maintain[ing] the status quo,” but then again it’s been years since I thought like a liberal.

Raising Insurance Costs by Design

If the Senate Finance Committee gets it way private sector health insurance costs are sure to skyrocket.

That’s the conclusion of a PriceWaterhouseCoopers study of the impact of the pending legislation.

Overall health insurance costs would increase 18% over baseline if the Baucus plan passes; individuals buying their own insurance would see their costs increase almost 50% more than if the legislation died on the vine.

Chief among the culprits for the projected cost escalations is the requirement that health insurers issue coverage regardless of pre-existing conditions and forgo pricing based upon health status. This provision, coupled with the very weak requirement that everyone purchase health insurance almost ensures that the population actually covered by insurance will become more ill over time.

Here’s how that would work: nominally everyone would be forced to purchase insurance; however, the penalties for failure to purchase insurance are substantially less than the actual cost of the insurance. Hence healthy people have a strong incentive not to purchase insurance until they need it.

Of course in a functioning insurance market that problem is easily solved: exclusion of pre-existing conditions and variable costs based upon the insured’s health. But in Baucusland such measures are banned. Insurers are required to accept all comers, regardless of health.

The consequence? More and more individuals forgoing health insurance until they get sick.

Add to this toxic mix the inevitable cost-shifting from Medicare patients to the younger population and purchasers of non-governmental health insurance will see their costs skyrocket.

Thanks, Congress. I knew we could count on you to solve our health care woes!

Insurance Can’t Give Something for Nothing

The health care reform proposals being discussed in the Senate all have a provision that requires Americans to buy insurance. All these provisions specify a minimum level of insurance that would qualify as acceptable coverage, but there are substantial differences between the bills about just what in fact would suffice.

The New York Times portrays the debate as essentially between those pushing for better coverage vs. those who seek to keep costs in check, and that is obviously one dimension of the debate. But what caught my eye was the argument put forth by  Senator Debbie Stabenow (D-Mich.) that lower-cost insurance plans defeated the entire purpose of health care reform by requiring the insured to pick up a larger part of the tab for their health care.

“The more we lower the actuarial value, the more the individual or the family will have to shoulder the costs of their plan,” Ms. Stabenow said. If a plan has a value of 60 percent, she said, policyholders as a group would be expected to pay 40 percent of their medical expenses.”

Senator Olympia Snow (R-Maine) shared those concerns.

That argument, to me, seemed to be exhibit one in the case against allowing Congress to shape our health care marketplace.

Think about what they are arguing: consumers should be shielded from having to pay the cost of their health care. Would that that were possible. All of us would like to get something for nothing, but in the real world the large majority of us will have to produce at least as much, and in many cases more than we consume over our lifetime. We simply cannot all consume more than we produce, because there will not be enough to go around.

How that basic fact of economics manifests itself with regard to health care should be pretty obvious. Over our lifetimes we have to pay into the health care system at least as much as we eventually take out of it through care. Else there will not be enough health care to go around, because it is not being paid for.

The function insurance (should) provide is not to shield us from the cost of health care (these costs must be paid, after all), but to shield us from paying the full cost of expensive care all at once, just as a mortgage helps spread the cost of buying a house over 15 or 30 years instead of requiring you to come up with $250,000 all in one chunk. Health insurance should serve as a financing mechanism, not a shield from the costs themselves. That’s why health insurance really should not be a preferred method of paying for routine care. We all in fact should know how much things cost, and exerting consumer pressure on the health care system to find efficiencies to provide better care for less money.

One of the many failings of our employer-based health insurance system is that it tends to hide the costs of health care from most people, despite the fact that in reality most of us are paying for our health care through lower wages and fewer choices.

It is disheartening but unsurprising that our representatives in Washington seem to view people paying for their own health care as unacceptable instead of inevitable. It displays an ignorance of the basic fact that in order for the economy to work at all each of us must contribute at least as much as we take out.

An Ounce of Prevention … May Be Costly

An ounce of prevention is worth a pound of cure.

It’s an idea so simple and powerful that policymakers at both the State and federal levels of government are touting preventative care as one of the powerful solutions to our skyrocketing health care costs.

The Minnesota Department of Health’s website touts $47 million in grants awarded last month to county and tribal governments that are aimed at improving Minnesotans’ health and well-being. The grants are to be used by local units of government to encourage such healthy activities as walking, quitting smoking, and eating better.

“The Statewide Health Improvement Program will improve the health of Minnesotans and also help contain the spiraling costs of health care” according to Governor Pawlenty.

Would that it were so. Almost all the available evidence suggests that in the aggregate preventative medicine increases the cost of health care, often with little health benefit to its intended beneficiaries. The Congressional Budget Office tells us that “Although different types of preventive care have different effects on spending, the evidence suggests that for most preventive services, expanded utilization leads to higher, not lower, medical spending overall.”

This is true for multiple reasons. First of all, a great deal of cost-effective preventative medicine already takes place. Routine mammograms, prostate cancer checkups, blood tests, and so forth are already done. Routine screening for common diseases have been incorporated into medicine because it already makes sense. Screening for less common diseases, even if they are wildly expensive to treat, will fail a basic cost/benefit test.

Secondly, truly preventative medicine usually has less to do with care and more to do with behavior modification, which is wildly difficult to accomplish, and usually equally unpopular (smoking bans being a possible exception). It is easy enough for policymakers to give grants to local governments to get people to walk more or eat better, but translating those grants into miles walked and pounds shed is another matter entirely. Evidence seems to suggest that we are doing a remarkably bad job of it, as obesity education has become even more pervasive than obesity itself.

Third, extending lifespan—even healthy lifespan—is not a sure path to lower health care costs. Living longer is undoubtedly an unadulterated good, but not necessarily a cheaper one. It is usually the case that the longer ones lives the more health care one is likely to consume. So even successful wellness and prevention programs are likely to increase health care costs over time.

When Everyone is Legal, There’s No Health Care for Illegal Aliens

There’s more than one way to skin a cat.

President Obama has caved in to Republican pressure and declared that any health care reform that made its way to his desk should have provisions that ensure that the new program does not steer resources to illegal aliens.

That was the point of contention that inspired Rep. Joe Wilson’s outburst during Obama’s speech, and Obama caved on the issue in a Friday night news dump when it became clear that covering illegal immigrants was too hot a political potato to keep a hold of.

Now, though, in a speech to the Congressional Hispanic Caucus, President Obama appears to be backtracking a bit. While maintaining that illegal immigrants should not get benefits in the new health care reform package, the President told the Hispanic Caucus that “If anything, this debate underscores the necessity of passing comprehensive immigration reform and resolving the issue of 12 million undocumented people living and working in this country once and for all.”

Hmm. That’s a neat trick. Instead of covering illegals as the plan implicitly did until recently, the President seems to be suggesting that the best way to deal with the problem of uninsured illegal immigrants is to make them legal and make them eligible for coverage.

I don’t think that’s what most people thought Obama meant when he promised that our tax dollars wouldn’t be spent on providing insurance to the millions of illegal immigrants in this country.