Hiatus

I won't be able to blog on health policy for a few months because I'm working on some intiatives in CT and don't want to go near any possible conflicts of interest. Sorry for the hiatus. Please come back in May.

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.

Framing the problem

Sorry to keep harping on my idea to recapture the tax expenditures we're making to subsidize private insurance's bloated administrative costs, but I want to emphasize another feature of the idea, that it helps correctly frame the problem clearly. In the fight to enact this proposal, its proponents can and should just repeat three things over and over:

1. Health insurance costs too much because insurance companies skim too much off the top
2. Insurance companies fighting this proposal just want to keep their special interest tax breaks for overhead, while we want to redirect the subsidy to providing actual care
3. When insurance companies say they could never reduce costs much more than they have, they're saying Medicare is more efficient than they can ever be

Best of all, these same messages help frame the debate over whatever the big proposal is that the tax is designed to help fund. Insurance industry running "Harry and Louise" ads? They don't think the plan won't work, they just would rather keep the money for their special interest tax breaks.

What kind of gradualism?

Matt Yglesias suggests a gradual approach to expanding good single-payer style programs instead of a "big bang" approach to getting universal health insurance now, but based on a cobbled together approach resting on the faulty premises of the employer/individual market systems.

The strongest reason for this approach is that it's good policy. Let's make sure our victories (compromises or not) work, instead of winning passage of a plan that fails and gives all UHC efforts a bad name. But Matt also makes a good political point:

It means the step-by-step defunding of the health-industrial complex that does so much to provide financial support for reactionary politics in America. The alternative -- sticking progressive necks out for the opportunity to direct customers to an insurance industry that hates us -- doesn't make sense.

This approach to fighting big tobacco has worked wonders (as the bunch of recent cig tax hike proposals can attest to). As smoking sections and warnings give way to taxes and bans on smoking in restaurants, bars and public buildings, the number of smokers declines and the tobacco industry has fewer people to whip into a fury and consequently less clout.

One question for Matt though: does this gradual approach have to be straightforward single-payer style programs or is there a role for policies like caps or taxes on administrative costs that make the current system better, rather than building on its flaws (as individual mandates and premium subsidies do)? The taxes or fines from these programs can help pay for the small expansions of medicare and also reduce the insurance industry's profit margins and clout. The drawback is, if these approaches work, they do lower the pressure for change. But is that enough reason to oppose them?

Health plans are in the air in... Pennsylvania

Gov. Rendell (D) has also proposed a new plan early in January to expand health insurance. Part of the plan is the fair share for healthcare model used to target Walmart retooled for small business:

The plan would also make it mandatory for small businesses -- those with fewer than 50 employees -- to provide health care or pay a fair-share assessment of 3 percent. It would be phased in over several years, with the smallest of employers, those with fewer than 10 employees, having to commit last.

Next, he proposes a cap on administrative cost (or floor on premiums going to healthcare):

Rendell proposes that rates for health care be set by an insurance commissioner, with 85 percent of the premium money dedicated to medical care. The remainder could be used for advertising and overhead.

The bulk of the program would be called "Cover All Pennsylvanians" (CAP) and, according to his press release:

Businesses may participate in CAP if they have not offered health care for their employees in the past six months, if they have fewer than 50 employees and if, on average, those employees earn less than the state average annual wage (approximately $39,000). Businesses that choose to join the program will pay approximately $130-per-employee/month and their employees will pay on a sliding scale, ranging from $10 to $70, depending on income.

Governor Rendell said all uninsured Pennsylvanians – no matter the size of their employer – will be able to purchase affordable health insurance through CAP. Every uninsured adult who earns more than 300 percent of the federal poverty level can participate in CAP by paying the full cost of the premium, which will be approximately $280 per month.

Uninsured adults who earn less than 300 percent of the federal poverty level and employees of small businesses whose average wages are lower than the Pennsylvania average will get help paying CAP premiums through discounts and subsidies. For example, a family of four who earns up to $60,000 a year will be eligible for assistance.

The individual mandate will focus only on individual earning more than that level and on employers (who have to "pay or play"), but presumably those beneath that threshold will still have the option not to buy a CAP plan, meaning Rendell's plan will still have more adverse selection costs than medicare for all. Still, the state subsidies will make CAP attractive for even those with relatively low expected costs, so this looks like quite an improvement. It expands coverage without adding too much to the private health insurance system with its high administrative costs.

Health plans are in the air in... California

In CA, GOP leaders reject governor's health plan, suggest an alternative. The alternative?

It includes expanding the role of clinics in caring for the uninsured as well as providing tax breaks and other incentives to get more workers and employers to voluntarily buy coverage.

The plan also contemplates redirecting hundreds of millions of dollars in tobacco tax money that now goes to preschool and anti-smoking programs to pay for health care programs.

Health plans are in the air in... Maryland

Maryland Pushes Expansive Coverage

The most ambitious of several new plans is offered by Del. Peter A. Hammen (D-Baltimore), the health committee chairman and "would affect about a third of the state's uninsured but leave a half-million people without coverage." Its features:

• Workers earning four or five time the poverty level mandated to get insurance or pay fee (possibly as a lost tax deduction)
  
• $1 Cigarette Tax
• expand Medicaid coverage to many low-wage workers who now are eligible only if their income is 40 percent of the federal poverty level, which is set at $10,210 for an individual or $20,650 for a family of four
• subsidize small businesses to encourage them to provide coverage for their employees

And Governor O'Malley's plan? Its features (or bugs, you decide):

• No Cigarette Tax
• Small businesses would set up accounts for their workers to use tax-free dollars to buy coverage

Why is NJ looking to emulate MA on Universal Care?

After cutting property taxes, NJ's Governor Corzine (D) and state legislators appear to be looking at an expansion in health insurance modeled after Massachusetts.

Can I just ask... why? Sure, nearly any policy to cover uninsured people might be good in the short run, but the Massachusetts plan, less than a year old, is already falling short.

The MA plan involves and individual mandate with some state assistance in paying premiums for those with incomes too high for Medicaid but too low to afford insurance on their own. Gov. Romney (R) vetoed the version of the plan that penalized employers for not providing insurance, so naturally, the individual market is growing more important and driving prices up for bare-bones plans. The "Connector" agency established to help make sure there are low cost plans is bewildered:

Disappointed by the high costs of the minimum insurance plans – which average around $340 to $380 per month – the Connector told insurers to "sharpen their pencils and come back with more affordable options," said Joe Landolfi, spokesperson for Connector chair Leslie Kirwan.

Of course, the basic dynamics of a relatively-unregulated individual insurance market will prevent any premiums from coming in much lower - sharp pencils notwithstanding. Unless administrative costs of private plans are address - through caps, taxes, or some other kind of limit - private plans for individuals will never be a good deal.

Healthcare Xbox Style

Remember all those riots over Xboxes and, I think originally, cabbage patch kids? I think "medicare for all" advocates could use that marketing model for their own policies. One idea my friend Raj mentioned seems particularly promising:

A number of states have great, cheap, efficient health insurance for state or municipal employees. Some have suggested allowing small businesses or self-employed folks to buy into these plans, since the regular insurance market is so expensive or skimpy for them. The problem with that is that those most likely to need care would buy-in, driving up prices, while others would buy cheaper private plans. The ideal solution, "medicare for all," forces everyone to buy-in, but we're working on making that politically feasible.

Raj's idea is to start with a pilot program. By limiting the number of businesses who could buy in, the adverse selection problem would be pretty minor and the overall premium rates would stay more or less the same. Perhaps more importantly, small businesses who didn't get picked for one of the coveted pilot slots would start clamoring (and lobbying) for the program to be expanded so they too could get the good insurance for reasonable prices that the state's low administrative costs make possible. The public clamor (though maybe absent the riots from the Xbox fights) would help change the debate and show how well public insurance works and that everyone wants in.

The legislature could respond to the lobbyists by saying "well, we can't scale this up too much more without diluting the pool . . . unless you want to put everyone in the pool by making it mandatory." And a lot of small business (not to mention Ford and GM and others with legacy costs) might be pretty happy at that point to take them up on it.

The Moral Foundations of Health Insurance

Jennifer Prah Ruger here at Yale at the School of Medicine has a new paper posted on SSRN on the moral foundations of health insurance. Thanks to Alan for the heads up.

From the Abstract:

The US and numerous developing countries do not provide universal health insurance coverage to their populations. Academic approaches to health insurance have typically adopted a neo-classical economic perspective, assuming that individuals make rational decisions to maximize their preferred outcomes, and businesses (including insurance companies) make rational decisions to maximize profits. In this approach, individuals who are risk-averse will purchase health insurance to reduce variation in the costs of health care between healthy and sick periods. In empirical studies, however, individuals do not always make rational choices. They also find it difficult to assess their health risks and to know how much insurance they need.

By contrast, medical ethics has focused on the issue of equal access to health care, but provided little in the way of philosophical justification for risk management through health insurance per se. Nor has it shown how the practice whereby many at-risk individuals pay premiums to cover one individual's expensive health outcome ('risk-pooling'), is ethically desirable, except insofar as it ensures equal access to health care and equal income to purchase it for all contributors.

This article offers an alternative moral framework for analysing health insurance: that universal health insurance is essential for human flourishing. The central ethical aims of universal health insurance coverage are to keep people healthy, and to enhance their security by protecting them from both ill health and its economic consequences, issues not adequately considered to date.

Universal health insurance coverage requires redistribution through taxation, and so individuals in societies providing this entitlement must voluntarily embrace sharing these costs. This redistribution is another ethical aim of universal health insurance unaddressed by other frameworks. This article is part of an alternative approach to health and social justice, offered here and elsewhere, that builds on and integrates Aristotle's political theory and Amartya Sen's capability approach.

Op-ed: "Fix the system with Medicare for all"

Dr. Marcia Angell, a senior lecturer at Harvard Medical School and former editor-in-chief of the New England Journal of Medicine, wrote an op-ed published in today's Boston Globe: Fix the system with Medicare for all.

Looks like the "medicare for all" framing is catching on, which I couldn't cheer more.

In coming weeks, I'll analyze some of the state plans like those in MA that try to cobble together fixes without fundamentally changing the employer-provided insurance foundation. Obviously, some politicians prefer incremental approaches, but these seem to be particularly inefficient models.

So, the $64,000 (or, um $1.9 trillion) question is:
Besides phasing Medicare in for younger workers, what are other incremental approaches progressives might pursue?

I Undersold Myself By Half

In the last post, I suggested taxing insurance companies directly on their administrative costs, but realized there's another way to do this that may already have momentum behind it.

President Bush wants to phase out the deduction for health insurance to discourage "gold-plated" plans. Why not use the same method to discourage plans with bloated, inefficient bureaucracies. It may be hard to convince Americans that healthcare shouldn't be deductible, but why not require insurers to specify how much of premiums actually go to healthcare and how much goes to profits and administration.

People could still deduct the healthcare part, but would get no deduction for the overhead. Even having access to these percentages would help people and employers shop around (and probably lead them to government plans where available), but the tax change would further that effect. It may be more popular to levy the tax on the insurance companies, but in the end, the economic effect would be similar, except that using the income tax system would distribute the burdens more progressively. The revenue raised could be targetted at buying or subsidizing insurance for the uninsured directly or through an offsetting tax credit.

Dueling Republican and Democratic Plans in Connecticut

Connecticut's Governor Rell has also come out with a "Charter Oaks" health plan.

Basically, she hopes to attrach a private insurance company to offer coverage for $250 per person to all adults between 19-64. The claim is that the only costs to the state will be administrative and marketting, so one wonders why insurance companies how haven't done this already would be willing to do it now. Perhaps she is expecting the democrats to add premium support and doesn't want to be the one to propose significant spending as a bargaining position.

She and the Dem House leader have raised questions about funding for the more significant State Senate proposal. Senate President Don Williams has said everything, including tax increases are on the table. They could raise income taxes. They could follow the Governator's model of taxing doctors and hospitals and then returning them the money in higher medicaid payouts. But why tax the part of medical care we like (actual services), which may be passed onto those who need the care, instead of taxing the costs we don't like. Here's a proposal:

Let's levy a 20% tax on insurance companies on all premiums that don't go directly to service provision. Unlike the hard floor of 85% for services the Governator proposed, this would allow some flexibility for insurance companies to achieve efficiency, while giving them an incentive to do so and raising revenue to boot.

Connecticut's new health proposal

Connecticut's State Senate majority leader announced a new plan to dramatically expand and streamline the state's medical insurance system. It's difficult to know whether the plan will get through the conservative Democrat led House and moderate Republican Governor in anything like its current form, but it's worth a close look. CT borders MA and legislators here don't want to be outdone by the universal healtchare promised by their neighbors to the north.

While not universal, the plan sets the stage for a much more coherent system than the MA/Clintonian model of employer and individual mandates. It's nice to see the State Senate Leader's release using the words "looks ahead to 'Medicare for all.'

A little more than half of the $450 million proposed would go toward raising reimbursement rates for Medicaid as well as slightly more expansive state programs HUSKY and SAGA to levels more similar to Medicare. This change will make doctors much more willing to see patients enrolled in these programs and may ease the pressure on raising costs to privately-insured patients.

The other $200 million or so would increase the eligibility for these three programs to include all children and families up to 185% of the federal poverty level, including dependents up to age 26 if enrolled in school, and even single adults earning less than $9800. It would also combine a few of the programs to deal with a problem many enrollees have: constantly being shuffled between programs due to relatively small fluctuations of income.

The last major item is a panel to look at solutions for the other 60% of the uninsured, and those who are struggling to remain insured. As the nod to "medicare for all" suggest, single-payer suggestions are at least nominally on the table.

On Wisconsin!

Three cheers for Wisconsin's Governor Jim Doyle. If his proposal for a statewide ban on smoking in restaurants and taverns and a $1.25 tax a pack on cigarettes is adopted, it will:

1) Help curb teen smoking, which is highly responsive to price
2) Reduce damage to non-smoking patrons and employees
3) Lower costs for the state's medicaid program
4) Finance the costs that remain with the cig tax, freeing up health funds for CHIP or other health priorities

As a smug non-smoker, I've loved being able to go to bars without someone blowing smoke in my face and on my clothes in NYC. All the doomsaying from tavern owners that this will destroy their business turned out to be overblown there. A year later, some where saying their increases in family business more than compensated for any disgruntled smokers who chose to drink and smoke at home.

I'm still waiting for a WI transfat tax though. Since 2003, it is no longer the fattest state in the union...but that's because the other states gained weight.

More on Bush's "Plan"

The NYT's "Experts See Peril in Bush Health Plan" elaborates on some of the points made in yesterday's editorial about the economic distadvantages of Bush's plan.

Unfortunately, the article focuses too much on this year's tax consequences of the plan for various families and only to a lesser extent on the transformation it may initiate in the health insurance markets.

Although economists debate how extensive a shift toward the individual insurance market Bush's plan might create, it clearly will create some shift. The emphasis so far has been on whether employers will now decide to drop coverage (presumably using the money to increase wages) because their employees can then purchase their own insurance on the private market.

This has too problems. First, as already noted, the same insurance is much more expensive on the private market because of adverse selection. Plans that offer decent coverage attract more individuals who think they're likely to need it, and thus are much more expensive than similar plans given equally to all employees of a single business.

Individuals must purchase insurance to get the standard deduction, but insurers will continue to deliberately design plans with holes in areas like mental health that are highly correlated with other types of expensive care to try to convince individuals with high expected costs to choose other plans.

The other problem is that employers may simply drop coverage while providing little or no bump in salary. Even if raises initially offset the costs of catastrophic insurance, there is little guarantee that wage increases will rise at the same rate as insurance premiums. In fact, the predictability and lower rate of increases is precisely why employers may want to stop providing insurance in the first place.

How to Make Bush's Health "Plan" Work

The NYT mentions how President Bush's plan would add to the "dysfunctional individual policy market, where administrative costs are high and insurers strive to avoid covering people who are apt to become sick." This is dead on and may imply they finally started reading Krugman's columns on their op-ed page.

So, how should Democrats respond to his proposal with a more progressive policy proposal of their own?

First, they could replace the "standard deduction" with a credit for all health care or insurance expenditures. If the credit were refundable, it would be worth the same to all families, as opposed to the standard deduction, which is worth over $5,000 to families in the top bracket and nothing to the more than 50 million wage earners who don't otherwise owe federal income taxes.

The credit change isn't enough though, because it still undermines the risk pooling of the employer-based solution without providing a replacement. This is likely to increase costs for everyone as insurers ramp up administrative costs and invest more money in avoiding the individuals who are most likely to get sick and require expensive care. It will also dramatically raise costs for those with preexisting conditions, who may not be able to get insurance at all.

Along with converting the health insurance deduction to a credit, Congress should copy the best features of Governor Schwarzenegger's recent proposal.

First, they should require that at least 85% of premiums pay for direct health services, effectively capping administrative costs at 15%. This limit forces insurers to focus on improving efficiency (rather than just weeding out applicants and denying care) to remain profitable.

Second, they should enact a "community rating" law requiring insurers to charge everyone the same, regardless of age or preexisting conditions.

Along with the tax credit proposal, these two simple changes could make health insurance dramatically more affordable without adding to the federal deficit or violating Pay As You Go rules. Insurance companies will still tinker with their policies to try to be unattractive or annoying to those who tend to use their insurance, but that's difficult to get rid of in a private system.

Insurers will probably complain that they can't reduce their bloated administrative costs below 15%. When they do, Democrats can point out that maybe it's time to let younger people buy into a system where administrative costs total only 2%, like say, Medicare.