Insurance Arms Race

Paul Krugman describes a recent lawsuit ($) against UnitedHealth to illustrate several pathologies of the multi-payer insurance industry. Some choice quotations:

Our health insurance system, a system in which resources that could have been used to pay for medical care are instead wasted in a zero-sum struggle over who ends up with the bill...It's an arms race between insurers, who deploy software and manpower trying to find claims they can reject, and doctors and hospitals, who deploy their own forces in an effort to outsmart or challenge the insurers. And the cost of this arms race ends up being borne by the public, in the form of higher health care prices and higher insurance premiums.

He also notes an oversight in the McKinsey report that results in an understatement of administrative costs:

McKinsey's estimate of excess administrative costs counts only the costs of insurers. It doesn't, as the report concedes, include other "important consequences of the multipayor system," like the extra costs imposed on providers. The sums doctors pay to denial management specialists are just one example.

This is a frequent oversight and isn't taken into account by "medical loss ratios." Any proposal to cap or tax administrative costs inherently misses some of them if it focuses solely on the direct costs insurance companies pay to the exclusion of these indirect costs they impose on others. Comparisons between Medicare and multi-payer systems should account for both kinds of costs if possible, though the latter are more difficult to measure. For one study that does as good a job as any at estimating these costs, see: Administrative costs consume 31 percent of US health spending, most of it unnecessary. _{(Woolhandler, et al “Costs of Health Administration in the U.S. and Canada,” NEJM 349(8) Sept. 21, 2003).}

Buying off the insurance industry

Robert Frank has an interesting piece in today's NYT Business section. After a nice run down of why single-payer is so clearly the best solution, but insurance companies threaten any candidate who pushes for it, he suggests buying the insurance companies off:

Whenever a pie gets bigger, everyone can get a larger slice than before. Because moving to a single-payer system would make the economic pie bigger, it should be possible for everyone, including the insurance industry, to come out ahead.

The first step is to acknowledge that insurance companies are not evil, that they invested in good faith under tax laws that favored employer-provided private health insurance. To put them out of business with an overnight switch would be unjust.

Even so, they are not entitled to a permanent license to operate a system that has become economically unsustainable. The move to a single-payer plan would save far more than enough to compensate insurance companies for lost profits. Compensation for losses could start at 100 percent, then be gradually phased out as companies shifted investments elsewhere.

In a sense, he is proposing a more direct version of the MA and 1993 Clinton Health plans. Rather than use mandates and premium assistance to "buy off" insurance companies, he proposes doing so directly. This has two problems:

1. Which sounds more attractive from the point of view of the American people:

• Medicare for All, Paid for By a Tax Hike
• Medicare for All, Paid for By a Tax Hike, Plus Another Tax Hike to Pay for a Massive Give Away to Insurance Companies

2. Second, even the second plan could be sold, would the insurance companies even go along?

If I were an insurance company CEO, I would expect that once the plan gained momentum, congress would cut out the massive give away part in order to win the final votes they needed. Even if they initially included it, without the rationale of insurance companies actually performing some function or adding value (or at least appearing to do so), a later congress would probably ax the corporate welfare (this isn't the kind of small giveaway that lobbying would be enough to protect). Rather than go down this road, I'd work to kill the bill anyway, and use the huge expense (including the expense of the giveaway itself) as the main arrow in my quiver.

Better not to try to coopt the insurance companies.

Better to just say from the beginning that they're going to fight any plan tooth in nail because they want to defend their investment and profits.

Adding Up the Reasons for Expensive Healthcare

Steven Pearlstein, in yesterday's Washington Post, relays the findings of a recent McKinsey report on the sources for high healthcare costs in the U.S. It's worth a read, but some key points are:

• We spend $477 billion a year more on health care than would be expected if the United States fit the spending pattern of 13 other advanced countries. That staggering waste of money works out to 3.6 percent of the nation's entire economic output, or $1,645 per person, every year.
• The average incomes of $274,000 for specialists and $173,000 for general practitioners are, respectively, 6.6 and 4.2 times those of the average patient. The rate in the other countries is 4 and 3.2. [The difference costs $58 Billion a year and is after accounting for malpractice insurance premiums.]
• While Americans spend fewer days in the hospital than people elsewhere, that efficiency is more than offset by a higher average cost per day -- $1,666, four times the industrial-country average. There are multiple causes for this $224 billion in annual overspending on hospital services -- everything from more serious illnesses to more nurses per bed to extraordinary overhead and capital costs.
• Americans pop fewer pills than people elsewhere[, but] spend $57 billion a year more for drugs than other developed countries.... [D]rug companies are able to charge, on average, 60 to 70 percent more for branded prescription drugs.
• But as long as Americans continue to reject a government-run health system, a private system will require something close to the $30 billion a year in after-tax profits earned by health insurance companies. What may not be necessary, McKinsey suggests, is the $32 billion that the industry spends each year on marketing and figuring out the premium for each individual or group customer in each state. Insurance-market reform could eliminate much of that expense.
• Offering universal coverage without reining in costs would add another $77 billion each year in unnecessary and unproductive health spending.

Clean Elections Being Challenged

I knew I'd find some sinister doctors' group to take the rosy hue off our MN friends.

Arizona's Clean Elections law is being challenged by the Association of American Physicians and Surgeons, a Tucson-based physician advocacy group.

Attorneys opposed to the measure argue that, in effect, the measure has muted the physician group's speech. The group declines to donate to political candidates because doing so under the measure provides funding for opposing candidates.

After all, the first amendment "bonus clause" guarantees rich people the right to unopposed speech. These poor souls are suffering because, when opponents have the ability to respond, theat takes away the whole the point really. I imagine some of the group's members had a similar issue as adolescents in debate camp.

They get a rebuttal? No Fair!
Come on Jimmy, I drove all the way out here so you could do your debate.
But they're trying to take away my freedom of speech!
Yes, dear. Maybe we should go back to working on your science project...

Doctors Supporting Medicare for All

A new study of doctors (in Minnesota) suggests they think medicare for all style programs will be best for their patients.

Pardon me for being a bit cynical of doctors and thinking they didn't support medicare for all. It looks like I may have let the few anecdotal gripes I've heard about fears of lower reimbursements from governmental insurance stand for too much. On the other hand, maybe I'm not being cynical enough and its really that doctors are just sick of the many headaches of dealing with difference insurance bureaucracies. After all, they had their reasons for not going into business administration in the first place.

The Politics of Bush's Budget

It may seem a little odd at first that Bush is proposing massive slashing to popular social programs despite the fact that most of the cuts have no chance of actual enactment (or maybe because of that fact). Sure, this might be popular with his base and he may get some credit for finally attempting to lower the deficit he created, but can this possibly be worth the cost politically?

The best explanation I can think of is that this proposal is designed to place Democrats in a tighter fiscal straitjacket. By campaigning on Pay-As-You-Go, Democrats already limited their ability to pass popular spending proposals without phasing out Bush's tax cuts more quickly than present law would. But their frequent criticisms of Bush's lack of fiscal responsibility also makes it difficult for them to pass a budget that closes the deficit less quickly than his proposal. This leaves them with an awkward choice. They can:

1. Employ similar budget gimmicks to make their budget appear to "balance the budget by 2012" as well, but reduce the size of the spending cuts by phasing out some tax cuts on a faster schedule
2. Pass an honest budget that in both appearances and actuality does reduce the deficit more quickly than Bush's, but has draconian spending cuts and/or large tax increases
3. Attack Bush's budget deficit as pure fuzzy math and throw it out the window (except for a few concrete proposals on Pell grants and International AIDS funding) and then pass a budget that is more responsible than Bush's actually is, but eschews gimmicks and therefore will be attacked as "unserious about the deficit"

It seems like the most likely course is a mishmash of all three. Some democrats are insulting the budget gimmicks Bush used, but they appear concerned enough about competing with it that they will also pass something that at least appears to "balance the budget by 2012." Inevitably, this will require either gimmicks that are just as bad or politically unattractive budget choices, meaning that those making halfway attacks on Bush's budget will later be forced to choose between appearing to be hypocrites or being tax-lovers. A full commitment to Option 3 would clearly be better politics and better policy.

Pulling out of the death spiral

So, community rating fans suggest that Edwards's plan can prevent Medicare II (a program "modeled on, but separate from Medicare") from being subjected to the adverse selection death spiral because it:

1. Requires plans to admit anyone, regardless of preexisting conditions
   
2. Requires plans to charge everyone the same
3. Requires certain minimum standards for what is covered

The first two features of community rating actually make it more likely that plans, whether public or private, will offer benefit menus that are as stingy as legally possible. Otherwise, they will attract people who are likely to have high costs. (One exception to this are benefits, like subsidized gym membership, that are attractive to people with lower expected costs.)

The third feature does limit how stingy plans can become, but this floor is less solid than you might imagine. Plans can technically meet the legal threshold while making it very difficult or annoying to actually take advantage of the mandated benefits. They also will still have incentives to spend a large portion of premiums on marketing to those with low expected costs.

Even if Medicare II were allowed to compete in this system, it would also have to respond to these pressures. If it didn't (perhaps because of political pressures), it would end up with a sicker than average pool and have to charge more or receive government subsidies (which could be implicit ones). Possibly, making it the default option or its lack of a need for profit margin could allow it to remain competitive, but that's just a hope.

Response to Ezra on Edwards's Plan

I'll be doing more detailed analysis later, but for now, check out Ezra's discussion of John Edward's new plan. While I certainly don't mind the inclusion of a Medicare like program as part of Edwards's state-based "Health Markets," Ezra is a bit more enthusiastic than I would be:

In other words, the public sector will finally be allowed to compete with the private sector, and consumers will be able to decide which style they prefer. For Democrats, this is a significant step forward.

I don't think allowing public plans to compete with private plans is a panacea. There's no particular reason to think the "New Medicare" option will perform much differently from a similarly generous private plan. The one major advantage is that it will presumably not be skimming off premiums to provide dividends to shareholders. But other administrative costs may remain just as high. After all, private plans spend money on marketing or designing benefit systems to attract a healthy pool of beneficiaries for a reason: that's the only way in a competitive system to avoid the death spiral of higher rates and fewer healthy customers. Community rating or minimum benfits requirements may help a bit, but New Medicare would still have to find ways of excluding sick people outright or making itself unattractive to them or it would have to start raising rates, just like in the private sector (unless it gets extra subsidies).

The best way to allow Medicare-like programs to "compete" is either a) mandatory expansiosn to a new group or b) voluntary expansions to a fairly small group of new customers at a time, so the average health of the pool stays decent and others start clamoring for the same option. One example of option b) would be a pilot program expanding state employee pools to a few small businesses, but the only way to scale it up once the clamoring begins is to make it mandatory for the first group before moving on to voluntary expansions for a different small slice. Just expanding the group of people eligible to buy in voluntarily invites the adverse selection death spiral.

Bush's Budget Slashes Health Programs

In addition to lots of Budget gimmicks that lead to a supposedly balanced budget in 2012 (but deficits in nearly every year before or after), Bush's Proposed Budget would slash many domestic health programs. The Center for Budget and Policy Priorities summarizes several:

• Funding for health care research and training — the budget category that includes the National Institutes of Health — would be cut by 8 percent, or $2.6 billion.
  
• Despite the fact that 5.6 million low-income children are uninsured today, the budget fails to provide sufficient funds to the State Children’s Health Insurance Program even to continue insuring the same number of children as the program insures today.
  
• Many of the proposed Medicaid cuts would essentially shift costs to states, likely leading many states to cut back Medicaid eligibility or restrict health care services for the low-income beneficiaries whom the program serves.
  
• The budget also would cut the Social Services Block Grant, which provides funds to states for basic services to vulnerable low-income children, seniors, and people with disabilities, by $4.4 billion over ten years, or nearly 30 percent in nominal dollars.

Here's the summary of Bush's proposed budget changes from Families USA:

The President’s budget proposal would cut health coverage for children in low- and moderate-income families. Instead of expanding health coverage to America’s 9 million uninsured children, the President proposes to reduce coverage in two ways.

First, the President’s proposed funding for the State Children’s Health Insurance Program (SCHIP) is inadequate to retain enrollment for the children who currently participate in the program. Not only will states be unable to enroll more children, but they will be forced to terminate coverage for hundreds of thousands of children, thereby consigning them to the ranks of the uninsured.

Second, the President’s proposal is designed to reduce SCHIP eligibility in 18 states where eligibility exceeds 200 percent of the federal poverty level ($34,340 in annual income for a family of three). It would jeopardize health coverage for many additional children.

It is short-sighted to limit assistance to children in families with less than $35,000 in income, especially since the cost of family insurance premiums now averages $12,000, more than one-third of their incomes.

MA's roundabout route to single-payer?

So, the more I think about the MA plan, the funnier I find it. First, the rely on the private insurance companies, but require individuals to buy insurance and subsidize their premiums on a progressive basis. The insurance companies come in way above cost estimates because of administrative costs inherent to a private system. Now the "Health Connector" has rejected the $380 plans and demanded cheaper ones, while (at least for now) still enforcing minimum standards. Some are talking about price ceilings for basic plans and at least one person (me) is talking about capping administrative costs. The result of these suggestions, if enacted, is that many insurance companies will leave MA, but a few will remain and offer similar plans that provide the minimum required at the maximum price allowed. The individuals mandated to buy insurance will have the choice among a few very similar plans, at similar prices, but with extra administrative costs (because even 2-3 firms in a market will spend money trying to avoid sick people and market to healthy ones).

So we have:

• Mandatory purchasing
• Similar coverage
• Premiums charged on a progressive scale
• Little competition

Other than the higher administrative costs, how is this different from establishing a single-payer, "Medicare for all" style program? It seems like a roundabout way to achieve much the same thing, with all of the same so-called "drawbacks" (its mandatory and offers few choices), but fewer advantages.

Romney distances self from Mass. health plan

In "Romney distances self from Mass. health plan," the Boston Globe points out that even though "Romney introduced the idea in late 2004" and "after the Legislature made its own adjustments, Romney signed it into law last April," he's now trying to distance himself:

"It is very tempting as a legislator to say, 'You're right, we'll change the law so you don't have to pay anything,' " Romney said. "And once that happens, now you start attracting people from all over that want to come get free care, and then the price starts going up, and taxpayers are going to start feeling a burden, and employers will start leaving the state."

Now, it's true that the more subsidies MA provides to enable people to pay premiums, the more attractive it will be for people to move to the state, but that doesn't explain why even the unsubsidized premiums apparently will cost $380 a month for individuals. Romney is also now on record against requiring fees from employers who don't offer any insurance, so one wonders how he why he supported this plan to begin with (and apparently is still bragging about it) or how he plans to fund any proposal he makes on the national level.

This is one more reason for Democrats to be very cautious in enabling mediocre plans from "moderate" Republicans to go through on their watch. Better to support something that works and is efficient, rather than aiding GOP in their unsustainable "handouts to the insurance industry" style plans.

The new Governor, Deval Patrick, is apparently considering tinkering with the law. Just requiring insurance companies to offer cheaper plans is likely to reduce coverage dramatically or, given minimum requirements, destroy the incentive to offer any plans. Perhaps the requirement should be a cap on administrative costs. Better yet, Patrick could do more than tinker and use the allocated funds for an expansion of state provided insurance programs.

Fixing Labor Law

Since the ballooning of uninsured populations (not to mention income inequality) is partially the result of the decline in the labor movement, any advocate for accessible health insurance needs to care about how to reverse that decline.

Thomas Geoghegan over at the American Prospect proposes a "Fair Trade" between labor and business: if business convinces the GOP not to block the "Employee Free Choice Act" that unions so desperately need to start growing instead of shrinking, then Democrats should offer to repeal the tougher parts of Sarbanes Oxley, parts that business leaders hate because they might lead some of them to be thrown in jail.

Although this deal certainly seems worth it, I question two of Thomas's premises. First, while some CEOs and CFOs might not like to think about jail, they also don't want to admit that they might be some of the bad apples who would have to worry about such sordid things.

Second, even if big business were on board, there's a bigger roadblock. This isn't the kind of policy deal, like the minimum wage hike for tax benefits swap, where a quid pro quo can make all sides happy. Many in the GOP may usually follow business's lead, but not when their political lives are at risk.

Unlike a minimum wage hike, anything that helps labor grow would be a huge help to the Democratic Party - not merely as a policy accomplishment to brag about, but on the ground in elections. More union members and households are the only major group where working class whites turnout for Democrats in droves. Every 5-10 new members organized if labor law were fixed would mean at least another vote for Democrats (yes, that's a ballpark estimate). More importantly, the increased dues would allow unions to raise their political spending on key races. Remember, along with Soros and a few other billionaires, it was labor's hundreds of millions spent through America Coming Together and other independent spending that allowed Kerry to even be in the ballpark in 2004.

Given that, do you think the GOP is going to touch a deal that will help unions expand their membership, no matter how much their business friends might want them to?

Off Topic Websites

It seems Giuliani has some new supporters: studentsforgiuliani.org.

For those of you who have been following Sen. Biden's announcement gaffe, check out Obama's new web domain.

OK, back to health now.