“For every complex problem, there is a solution that is
clear, simple, and wrong.” – HL Menken
“Nobody knew that health care could be so complicated.” – President
Donald J. Trump
For the last six years, congressional Republicans have had a
clear, simple, and wrong solution to fixing the Affordable Care Act (ACA or “Obamacare”).
They voted umpteen times to repeal it and offered no measure to replace it.
The law, as many laws are, is a complex compromise between
aspiration (mostly by Democrats) and legislative reality. It was not perfect at
birth and, like a six-year-old car that has had no maintenance, is in worse
shape today. Had Republicans spent the last six years fixing the problems in
Obamacare, it would be in much better shape. But that is all past. We must look
to the future.
If you do not have sufficient
experience with the actuarial and underwriting principles that underpin the
individual insurance marketplace, I urge you to work with the American Academy
of Actuaries to understand how those principles relate to any proposed
legislation before casting your vote.
Perhaps had President Trump reflected on my open letter he
would not have been so surprised about the complexity of health care.
Fortunately, Congressional leaders recognized that the wrong
approach of repealing without replacing a law that runs to 906 pages (and tens
of thousands of pages of regulations) would lead to multiple disasters. With
healthcare, even the minutia has minutia.
However, there are several broad truths about heath care
that are important to keep in mind as we evaluate the Republican’s proposed
replacement.
The total cost of medical
insurance =
the total cost of medical benefits
provided, plus
administrative costs, plus
profit
To reduce the cost of medical insurance requires reducing
some or all of its three components.
Reducing corporate profits is not part of the Republican (or
Democratic) agenda.
Everyone would like to reduce administrative costs, which everyone
agrees are too high. There are very few incentives in place to reduce
administrative costs. Obamacare forced certain insurers to rebate to their policyholders
a portion of paid premiums if overhead, including profits, exceeded 20% (15% in
the large-employer market) of premiums collected. I received a rebate related
to my premiums for 2015 from my large-deductible medical care policy.
Moving to a one-payer system would probably reduce
administrative costs. It has for other countries; but the U.S. has its unique
issues, so I am not making promises. Shifting policies to give consumers a
larger choice of insurance options will not materially affect administrative
costs—and may increase marketing costs.
Which leaves us with reducing medical costs as the only
practical method to reduce overall premiums.
Reducing the cost of
medical benefits provided can be achieved by
(a) reducing costs charged to
patients or their intermediaries (insurance companies or the government),
(b) shifting the costs from covered
insurance to some other source of payment, or
(c) eliminating utilization of the
benefit.
Reducing Costs
Charged: Competition without collusion usually reduces costs. Republican
proposals to allow insurance carriers to operate over state borders could offer
additional competition and marginally reduce administrative costs. (Insurance
companies often must keep separate corporate entities and books for each state
in which they operate.) Changing laws to provide greater competition on drug
prices would address that aspect of cost. Three steps Congress could take to
reduce drug costs incurred are to allow Medicare to negotiate costs with drug
companies, to outlaw the ability of a drug patentholder from paying another
company to withhold a generic from the market, and to allow the public to import
drugs from other countries when they are the same drug sold at a lower price.
Regulating provider prices (as Congress has tried with
Medicare reimbursement rates) often leads to shortages of providers when
doctors make the economic decision to stop accepting Medicare patients and
concentrate instead on private insurance payments.
Shifting Costs from
Covered Insurance: One of the most popular approaches to reducing medical
insurance premiums is to shift costs from the policy elsewhere. The two major
approaches are to increase the policy deductible and to cap expense
reimbursements.
Before I became Medicare eligible, I purchased
high-deductible insurance. I was healthy and gambled that my out-of-pocket
medical costs would be less than the insurance costs of a low-deductible plan.
However, if something major happened, I didn’t want to pay for that out-of-pocket.
My insurance costs were significantly reduced – BUT at the cost of taking on
considerable risk. (My gamble paid off for the fourteen years I had individual
coverage.)
My behavior was affected, however. I thought twice before
going to a doctor or agreeing to a test or procedure. This is a double-edged
sword. Because I had monetary skin in the game, I was a more careful consumer.
However, studies have shown that when people defer routine healthcare, the
long-term costs of chronic diseases increases because the individual enters the
health care system at a more advanced stage.
The two ways of limiting reimbursement is to impose a
lifetime maximum or reimburse fixed amounts for a particular benefit (for
example $200/day in the hospital). As costs increase and reimbursement does
not, more of the total costs are shifted from the plan to the covered
individual. (The same will happen to states if they receive block grants.
Unless Congress continues to increase the block grants to match cost increases,
the states must either pick up the tab or cut benefits to those covered.)
Eliminating Benefit
Coverage: There are multiple ways to decrease benefits and reduce costs.
Health care policies could exclude certain procedures now covered. They could
decide to eliminate coverage for organ transplants, or abortions and birth
control, or sex-change procedures, or wellness exams, or any drug that costs
over $1,000 a year, or whatever was deemed legal. The United States could effectively
ration health care by limiting the number of procedures performed each year.
This is the approach Canada has taken to reduce costs: fewer procedures equals lower
costs.
Reducing the number
of covered individuals: Finally, the easiest way to reduce costs is to
reduce the number of individuals covered. Increase Medicare’s eligibility age
to seventy from sixty-five and you’ve eliminated five years of costs. Eliminate
medical coverage for Medicaid-eligible individuals, and cut those costs.
Obamacare increased overall covered costs by including
additional benefits in plans, decreasing the acceptable size of deductibles in
order to avoid a tax-penalty (I had to pay a penalty the first year because my
high-deductible plan did not qualify), and significantly expanding the number
of individuals covered under medical insurance by allowing children to remain
much longer under their parents’ policy and expanding Medicaid edibility for
those states who accepted it.
Republicans currently claim their proposal will decrease
medical costs. The question that we need to answer is how will they do it? What
are the tradeoffs they are proposing? Whose ox is gored?
The truth about pre-existing
conditions
I pay house insurance every year and I hope to lose money
every year because I don’t want my house to burn down just so I can win. Even
though I have “lost” money on my housing insurance every year, it’s reasonably
fair. Actuaries and underwriters price my insurance based on my house’s size,
structure, safety measures, type of wiring, how far it’s away from a fire
hydrant and fire station, and so on. They can reflect all the pre-existing
conditions of my house in determining the premium.
In the past, we have done the same thing with individual
medical insurance. If you are a young, healthy male, don’t smoke, do drugs, or
engage in risky avocations (motocross racing, for example), your medical
insurance can be inexpensive. Your biggest risk is from accidental injury; you rarely
get sick. And you don’t get pregnant, which is why individual insurance for
women used to cost more than for men.
Until as a society we decided that wasn’t fair, and
eliminated sex as a basis for determining premiums. Men now subsidize women in
this regard.
Many group medical insurance plans charge the same premium
regardless of age. Older folks have more medical issues than younger ones. The
young subsidize their elders. This is also the case for Medicare. Young(er)
beneficiaries generally cost less than their older compatriots, yet premium
costs are the same.
Even where plans reflect age in their premiums, they may not
reflect health status. All Medicare beneficiaries pay the same premiums
(ignoring extra premiums paid based on income status). Healthy beneficiaries
subsidize sicker ones.
When we turn to the individual insurance market, healthy
people think premiums should be based on their age and health. Why should they
pay to cover someone who is older, or overweight, or has diabetes? It’s a fair
question and one that needs an answer.
Under Obamacare, the answer was essentially that the young
and healthy had to join plans and pay more than their fair share as part of a
societal good. The same extra costs that are buried in group plans now became
embedded in individual plans. Younger individuals either joined and paid these
extra costs through their premiums or chose not to join and paid the costs
through a tax. Because Obamacare provided a financial mechanism for supporting
the extra costs of those with pre-existing conditions, they could require
insurance companies to provide coverage for those sicker people. It was up to
insurance companies to enroll enough of the younger, healthy individuals to
break even on the deal.
What happens under such a system? The sick sign up in a New
York minute: it’s a great deal for them. It’s up to insurance companies to enroll
enough healthy folks to pay the tab for the sick ones. Insurance companies set
rates based on an assumption of how many sick and healthy people they could
attract. Where they were unable to enroll as many younger healthy individuals
as they planned, they lost money. To make up for those losses, they raised
premium rates. In those areas of the country where states supported the new
marketplaces, lots of younger people joined the plans. Competition remains and
premiums increases are moderate. Where states did not support the new
marketplace, enrollment was well below expectations, resulting in subsequent
huge rate increases and carriers dropping out of the market.
The death spiral of
individual plans
Those of us involved in employer group medical insurance saw
this death spiral when employers first introduced optional higher-deductible
plans in an attempt to lower their insurance costs. Back in the 1970s and early
1980’s, most plans had no or very small ($100 individual/$300 family)
deductibles. Increasing the deductible to $250 or $500 produced significant
savings relative to the costs at the time. Employees chose the plan that made
the most economic sense to them. Healthy individuals and families rushed to the
higher-deductible plans. Older and sicker individuals stayed with the old
no-deductible plans.
At the same time, companies first introduced Flexible
Spending Accounts, seeding them with money for those employees choosing the
higher-deductible plans and allowing employees to set aside tax-free money to
pay for the costs they would now need to pay out-of-pocket.
Note what employers did: they lowered plan costs and
provided “tax credits” to help pay for the plans. The very same elements
Republicans currently promote (although we do not yet know the details). How
did that work?
The next year, the costs of the no-deductible plan increased
significantly. It included sicker folks after all, and in the second year,
those on the margin dropped their expensive coverage and selected the higher-deductible
plan. Those folks in the high-cost plan were on average even sicker. In a short
time, the high cost plan had astronomical premiums and the companies dropped
those plans altogether.
Deductibles for everyone have continued to increase, as have
premiums, but at least under the group plan concept, those with pre-existing
conditions can still receive coverage, and that coverage is subsidized by their
fellow employees.
Take the same scenario to the individual market and no such
protection will exist for those with pre-existing conditions. With multiple insurance
plans to choose from, the healthy will make economic decisions that will cause
people with pre-existing conditions to experience that same cost death spiral. Sure,
they won’t be denied insurance, but they won’t be able to afford it.
Squeeze the Balloon
Visualize medical costs as a balloon. Each new drug, each
new treatment, each new test, each new procedure, each administrative change
either blows more air into the balloon or lets a little out. Total U.S. medical
expenses only decrease if we find ways to let air out of the balloon. Squeezing
the balloon simply shifts who pays for it and makes the one doing the squeezing
“good” by pushing costs away from their sector of the balloon.
Propositions such as changing Medicare from a single-payer
system to a system in which all covered members receive a credit grant to allow
them to shop for their own insurance does not affect the size of the balloon. It
will affect who pays the costs, and, depending on its implementation, may
create its own death spiral similar to the corporate experience of the 1970s
and 1980s. Block grants shift responsibility and burdens from the Federal
government and introduce additional inequities between states.
Conclusion
Above all, ignore the pretty words (and titles) politicians
use to describe their laws.
When evaluating health care proposals, consider the
specifics: how costs are being reduced, who will subsidize whom and by how
much, and what incentives will counteract the inherent inequities in paying for
medical plan costs.
~ Jim
