Dan Mitchell of the Cato institute provides a brief explanation of the fiscal disaster that is "health care reform".

The video is only a few minutes long and well worth watching.

How much does this thing cost, III

Cato’s Michael Cannon, writing in National Review Online, does a deep dive on the true cost of Ms. Pelosi’s health care monstrosity:

The $1.5 Trillion Fraud

This is quite possibly the largest expense cover-up in national history, and appears to be an “inside job” – Democrats concealed the individual mandate cost, which helped defeat the Clinton proposal:

Rather than admit the individual mandate’s unpopularity and move on, congressional Democrats simply ensured that its costs would not appear in the federal budget this time around by gaming the CBO’s rule for what constitutes “federal revenues.”

Guess who worked his behind-the-scenes magic to enable this? You got it -

Obama budget director Peter Orszag laid the groundwork for this feat. While director of the CBO in 2007 and 2008, he fostered a more collaborative relationship between the CBO and members of Congress, which enabled the agency to provide behind-the-scenes guidance to Democrats crafting their mandate. That’s why the cost of the Democrats’ individual mandates appears nowhere in the half-dozen or more “preliminary cost estimates” the CBO has completed on various Democratic health-care bills.

So, it still costs “only” $1 trillion, right?

Nope:

So while the CBO estimates that the coverage expansions in the House Democrats’ legislation would trigger about $1 trillion of new federal spending over ten years, the actual cost of those coverage expansions is more like $2.5 trillion.

Thomas Sowell on the Empty Promises of Health Care Reform

In his latest column, Thomas Sowell explores the concept of price and cost with regard to medical care and the foolish, empty promises of politicians.

If we cannot afford to pay for doctors, hospitals and pharmaceutical drugs now, how can we afford to pay for doctors, hospitals and pharmaceutical drugs, in addition to a new federal bureaucracy to administer a government-run medical system?

and..

Economics and politics confront the same fundamental problem: What everyone wants adds up to more than there is. Market economies deal with this problem by confronting individuals with the costs of producing what they want, and letting those individuals make their own trade-offs when presented with prices that convey those costs. That leads to self-rationing, in the light of each individual's own circumstances and preferences.

Politics deals with the same problem by making promises that cannot be kept, or which can be kept only by creating other problems that cannot be acknowledged when the promises are made.

Why the public option will become mandatory

Michael Tanner at Cato has a critical piece about the outcome of health insurance under a so-called public option, Putting Private Insurance Out of Business.

Of note:

The lower cost means that businesses, in particular, would have every incentive to dump workers from their current health insurance plan into the government plan. And, if other provisions of the bill make insurance more expensive, as is likely, the incentive for employers to shift workers to the government plan would be even greater. Estimates suggest that nearly 90 million workers could eventually be forced into the government plan.

It is an economic misconception (or deliberate misrepresentation, depending on your level of skepticism) that introducing a “competing” public plan will somehow achieve lowered costs, but not drive out private providers.

Government-run programs are not subject to regular economic forces, and do not have the same operating constraints borne by private sector enterprises, allowing them to do exactly as Mr. Tanner suggests. To believe otherwise is to live in economic fantasyland.

How much does this thing cost, II

The CBO estimate For HR 3962 is out, and it says $1.055 trillion:

CBO Puts House Health Bill Total Cost At $1.055 Trillion

By Martin Vaughan, Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- The Congressional Budget Office said Thursday a U.S. House health-care system re-write would extend health insurance to 96% of the nonelderly U.S. population by 2019, and spend $1.055 trillion to do so.

Penalties imposed on individuals who did not purchase insurance, and employers who did not offer coverage to their workers, would raise $161 billion over that time-frame. That brings the net cost of the bill to $894 billion through 2019, CBO said.

House Democrats have seized on that net cost figure to claim that their bill is below President Barack Obama's upper limit which he set for health-care legislation of $900 billion.

The $1.055 trillion estimate also does not include $245 billion needed to stop Medicare payments to doctors from decreasing, which the House plans to address through separate legislation introduced Thursday.

...

More here: CBO Puts House Health Bill Total Cost At $1.055 Trillion

How much does this thing cost?

The House version of the health care reform bill has gone well above President Obama’s target of $900 billion:

House health care bill exceeds $1 trillion

By DAVID ESPO (AP) –

WASHINGTON — Health care legislation taking shape in the House carries a price tag of at least $1 trillion over a decade, significantly higher than the target President Barack Obama has set, congressional officials said Friday as they struggled to finish work on the measure for a vote early next month.

Democrats have touted an unreleased Congressional Budget Office estimate of $871 billion in recent days, a total that numerous officials acknowledge understates its true cost by $150 billion or more. That figure excludes several items designed to improve benefits for Medicare and Medicaid recipients and providers, as well as public health programs and more, they added.
...

And let’s not forget the stellar track record of government cost predictions.

Ranking US Health Care II

Health Insurance Co. profitability, via Mark Perry at Carpe Diem,

Health Insurance Companies Rank #86 By Industry Profit Margin, Earning $98 on Average Per Policy

[h/t Coyote]

Update: From Calvin Woodward (AP) -

…
Health insurance profit margins typically run about 6 percent, give or take a point or two. That's anemic compared with other forms of insurance and a broad array of industries, even some beleaguered ones.

Profits barely exceeded 2 percent of revenues in the latest annual measure. This partly explains why the credit ratings of some of the largest insurers were downgraded to negative from stable heading into this year, as investors were warned of a stagnant if not shrinking market for private plans.
…

See: FACT CHECK: Health insurer profits not so fat

Ranking US Health Care

One of the “statistics” cited by critics of US health care is the number 37, assigned by the World Health Organization.

As Carl Biailk (WSJ) observed,

Among all the numbers bandied about in the health-care debate, this ranking stands out as particularly misleading. It is based on a report released nearly a decade ago by the World Health Organization and relies on statistics that are even older and incomplete.

No single ranking can capture the complexity of the US health care system, and this ranking appears to be particularly poor in evaluating actual performance.

See Ill-Conceived Ranking Makes for Unhealthy Debate

About to Get Very Ugly

On Wednesday, Democrats blocked S. 1776, designed to fix the Medicare physician payment formula. In doing so, they may have gained a mortal enemy in the AMA.

To this point, the AMA was cautiously optimistic about reform possibilities. This seems to have evaporated:

Congress created the Medicare physician payment system, and Congress needs to fix this problem once and for all to fulfill its obligation to seniors, baby boomers and military families. Permanent repeal of the Medicare physician payment formula is essential to comprehensive health system reform.

[AMA deeply disappointed Senate has failed seniors, baby boomers and military families by blocking S. 1776]

Coupled with last week’s health insurance industry shot across the bow, this can only mean a very noisy Senate-House ObamaCare legislation merger, and even more contentious full body approval.

If this legislation moves forward, Congressional Democrats are about to learn a very costly lesson: once the groups you invited to dinner discover they’re actually on the menu, nobody sticks around very long, including and especially your voting constituents, who are directly affected by this legislation. That's most of America.

Severe Economic Dishonesty

Now that we’re back in high season for health care reform debate, here’s another example of politicians blatantly ignoring the truth, and their own past statements. This example is exceptionally disturbing, given the size of the economic impact this reform will have, along with universal personal effects, not just protected groups or special interests.

The Baucus Bill, as it has become known, is being touted by the Obama Administration as "deficit neutral," and even more aggressively as reducing the overall deficit. This is a bald-faced lie.

Peter Orszag, current Office of Management & Budget (OMB) Director, has put his stamp of approval (unsurprisingly) on the Baucus Senate proposal, going as far as calling it "fiscally responsible," in response to a CBO finding last week that would supposedly reduce $81 billion from the deficit over 10 years.

It isn’t, and it won't, and he knows it. Mr. Orszag's previous job was head of CBO (Congressional Budget Office), where he stated in 2008 that "The federal budget is on an unsustainable path." This was before the financial meltdown, and largest post-WWII incremental deficit spending stimulus, much less a multi-trillion dollar additional entitlement.

Devilish detail: CBO is forced to score legislation given static projections, which are almost universally false, and refrain from ruling on the overall economic veracity of those projections. As Gene Epstein notes in last Monday's Barron's,

The problem, [Douglas] Holtz-Eakin [also ex-CBO director] explained, is that when it comes to "scoring" a specific piece of proposed legislation, the CBO's hands are tied. It cannot use its discretion to question the plausibility of a proposed bill. It must, therefore, "accurately assess the legislative fantasy presented to it."

Basically, the projections are a joke.

Further, in 2008 Mr. Orszag (see above) apparently thought that Medicare physician reimbursement would increase, but now mysteriously believes the opposite, which drives the "deficit reduction" numbers conclusion:

But a big component of the new bill was that physician payment rates under Medicare continue to be cut, one of the very things CBO director Orszag had specifically dismissed as unlikely. So OMB director Orszag might have explained, in the interests of fiscal responsibility, why he had changed his mind.

Taxes must and will go up as a result of Baucus, and there will still be major dislocations and deficits as a result of the "revised" proposal. The representation of this proposed legislation to date has been excessively economically dishonest.

It would be most helpful if the media would actually do their jobs and report this.


Kudos to Gene Epstein - CBO to OMB: A Tangled Tale (Barron's, subscription required)

See also: The Baucus Bill Is a Tax Bill (Douglas Holtz-Eakin, WSJ)

Danger Will Robinson! Economic Danger!

ObamaCare is a looming economic disaster.

It will pile on to the largest post-WWII deficit stimulus in US economic history, creating huge additional tax disincentives to start businesses, and crowding out productive private investment.

Incentives are the gravitational force of economics. Removing incentives stalls economic growth, most often via taxes. Obama’s idea to fund his plan fails miserably, and taxes the largest economic producers:

The House bill proposes to raise the highest personal income tax rate by 5.4 percentage points. This is on top of the Obama administration's plan to raise the top rate by another 4.6 percentage points next year. The combined 10-percentage-point increase raises the top income tax rate to 45%—an economic growth-destroying level not seen since the early 1980s. Sen. Max Baucus (D., Mont.) proposes, instead, to tax some health insurance premiums.

In neither bill do higher taxes finance the proposed additional spending. Should the Medicare savings fail to materialize, as we* believe they will, the spending in either bill will add more than $100 billion per year in perpetuity to the already soaring national debt. [my emphasis – Pub.]

*John F. Cogan, R. Glenn Hubbard, and Daniel Kessler, Doubling Down on a Flawed Insurance Model, WSJ, 9/25/09

Notably, these new taxes start in 2010, a really stupid idea when we're still in an economic recovery, but health insurance full-coverage doesn't begin until 2013, comfortably after the 2012 election. Also note the indefinite expiration “in perpetuity” cost. That's not funded, either.

Barack's economic timing could not be worse: leftover misguided Depression-era, unfunded social welfare programs like Social Security, Medicare and Medicaid are about to step on the baby - boomer demographic landmine, effectively bankrupting them before the inevitable temporary ineffective politically expedient non-fix "fix."

Somehow, President Obama thinks adding to the problem will solve it.

He’ll make it far worse.

When is a Tax Not a Tax?

When is a tax not a tax?

Apparently, when President Obama says so.

On the Sunday shows this weekend, Mr. Obama continued his sale of health reform. Among his comments on ABC’s “This Week” program was the statement “For us to say you’ve got to take responsibility to get health insurance is absolutely not a tax increase.”

George Stephanopoulos, to his credit, pressed Mr. Obama on this, looking up the definition of tax in the Merriam-Webster dictionary.

[full exchange available here.]

President Obama seems confused by this health care tax increase, because those who would be required to purchase insurance would receive some benefit in return. But The Wall Street Journal observed, “what doesn't count as a nontax under Mr. Obama's definition? All taxes can be justified in the name of providing some type of service, however wasteful.”

[Obama’s Nontax Tax, WSJ, 9/21/09]

As we (and many others) previously remarked, requiring people to spend their money is absolutely a tax. And because many of the affected people currently pay $0, choosing not to carry health insurance, it is an increase. So if the reform proposal backed by Mr. Obama passes, including mandatory coverage, it will be a tax increase.

Farewell, Free Speech

The debate over health care has taken a frightening new turn. David Henderson of EconLog blogs about the HHS threatening Humana and demanding it stop mailer because its information runs counter to the current administration's narrative on health care reform.

One of the ways that governments try to "win" debates is to make debate by the other side illegal. This is what HHS is doing, at the behest of Senator Baucus.

The HHS threatened to take action against Humana if it didn't stop sending out its mailer.

For years, various commentators have said that Friedrich Hayek, in The Road to Serfdom, and Milton Friedman, in Capitalism and Freedom, exaggerated the dangers to freedom of speech from government control. But also for years, drug companies have feared criticizing the FDA because the FDA has so much discretionary control over their economic livelihoods. Now HHS has upped the ante. Will the defenders of freedom of speech step up to defend Humana's rights, as opposed to Humana's statements. How many people will there be who disagree with what Humana said, but who defend (I don't even need "to the death"--I'll settle for a letter and postage stamp) their right to say it?

When we allow the government to exercise its might to strip us of our basic right to speech, to stifle opposition at its whim, then we are in deep trouble. Then, we are on the road from freedom to tyranny. To serfdom.

Correcting Mis- and Disinformation in the Health Care Debate

Drs. Groopman and Hartzband (both Harvard Medical School) correct some myths and factual misrepresentations in today's Wall Street Journal:

• The World Health Organization ranks the U.S. 37th In the world in quality. This is another frightening statistic. It is also not accurate. Yet the head of the National Committee for Quality Assurance, a powerful organization influencing both the government and private insurers in defining quality of care, has stated this as fact.
The World Health Organization ranks the U.S. No. 1 among all countries in "responsiveness." Responsiveness has two components: respect for persons (including dignity, confidentiality and autonomy of individuals and families to make decisions about their own care), and client orientation (including prompt attention, access to social support networks during care, quality of basic amenities and choice of provider). This is what Americans rightly understand as quality care and worry will be lost in the upheaval of reform. Our country's composite score fell to 37 primarily because we lack universal coverage and care is a financial burden for many citizens.

[Sorting Fact From Fiction on Health Care, WSJ, 8/31/09]

Profits, competition, and the public option

On Aug. 20, President Obama was interviewed by Michael Smerconish on his radio show. Responding to a question about choice and the public option, he stated the following:

But the important thing that I think I have to make absolutely clear: Nobody would be obligated to choose the public option. If you went on that Web site and you said, you know what, Aetna or Blue Cross Blue Shield are offering a good deal and I would rather choose that plan than the public plan, you'd be perfectly free to do so. Nobody would be saying you are obligated to go into a public plan.

Unfortunately, President Obama seems to be confused by basic economics and ignorant of key facts. Under the proposed insurance exchange incorporating a public option, government would be able to 1.) set the terms for all other participating insurers, and 2.) undercut them, driving them out of the competitive space.

Eventually, there would be no Aetna, BCBS, UnitedHealth , or other providers for this type of insurance.

Politicians eager to pass the current proposed legislation are promising to increase competition by providing a "public option". Even if government were to miraculously level the playing field between itself and private insurers by compensating doctors at the same level as private insurance companies (which would increase, not reduce health care spending), one more participant in a health insurance market thick with 1,300 participants wouldn't make any impact at all on competition. It certainly wouldn't come close to the competitive effect of all 1,300 companies competing in a national market for health insurance - without a "public option".

Worse, it seems the politicians want to not only control the "public option", but all insurance companies as well using strong-arm tactics. In an effort to demonize the health insurance industry, the largest insurance companies were recently targeted by various pro-reform politicians for “immoral profits.” This is nonsense - health insurance companies aren’t that profitable. As Brett Arends observed in the Wall Street Journal,

Returns on assets, a key measure of profitability, are typically pretty modest too. According to analysis by FactSet, WellPoint's ROA has averaged 5.8% over the past five years, Aetna's, 4.2%. Those were, remember, supposedly boom years. UnitedHealth was higher, at 9.6%, but fell to 6.4% in 2008. These are reasonable, but hardly spectacular, results. By comparison, Wal-Mart averaged a 9.2% return on its assets and Dell, Inc. 12.4%.

[Will a Public Option Hurt Insurance Company Profits? WSJ, 8/5/09, more profit margin analysis here: What Does Pelosi Define as “Immoral” Profits? Greater than Zero?]

Perhaps before promising maximum choice and large cost savings from eliminating “immoral” 4% profit margins, President Obama and his supporters should do better research on the actual operating environment of health insurance providers, as well as take a few economics courses.

Here’s John Stossel’s take on health care competition: The Case for Real Health Care Competition
[h/t Coyote, Reason]

Not my brother

Ezekiel Emanuel (brother of Chief of Staff Rahm Emanuel) is gaining prominence as chief medical advisor to President Obama in the healthcare debates.

Dr. Emanuel adds a scary dimension to the discussion.
He has written extensively about bioethics, and believes that it is the job of the state to decide who gets treatment and who should be left to die, given the right set of circumstances, and in spite of his oath to do no harm.
In a 2008 Washington Post Op-Ed, he wrote:

The United States is No. 1 in only one sense: the amount we shell out for health care. We have the most expensive system in the world per capita, but we lag behind many developed nations on virtually every health statistic you can name.

This statement reveals a dangerous ignorance of morbidity and mortality statistics, and is factually wrong.
When adjusted for premature death, US life expectancy ranks first. The same is true of cancer survival rates.

Dr. Emanuel also bickers,

Society ended up paying the whole bill for dialysis instead of having people make those decisions.

Since Dr Emanuel caused the dialysis machine shortage via government restrictions, Dr. Emanuel probably should rethink his conclusion.

Medical (and most other) insurance pools attempt to anticipate costs among voluntary group participants, i.e. insurance company, co-op, underwriter syndicate, or other pool. Participants and investors in those pools are direct stakeholders.

Under state-run health care, everyone is an involuntary participant, and no one is accountable.

If Dr. Emanuel's suggestions are implemented, physicians will be required to judge what is best for an amorphous society rather than what is best for the patient he is treating. In a 2008 article in JAMA, Dr. Emanuel expressed a belief that the Hippocratic oath is taken too seriously by physicians:

"This culture is further reinforced by a unique understanding of professional obligations, specifically the Hippocratic Oath's admonition to 'use my power to help the sick to the best of my ability and judgment' as an imperative to do everything for the patient regardless of cost or effect on others"

Instead, Dr. Emanuel prefers "to provide socially sustainable, cost-effective care."

Physicians are neither equipped to nor wish to treat the pecuniary problems of society. Treating individual patients is an arduous enough task without becoming keepers of a false aggregate labeled "society" as well.

The argument that the US spends more on health care than other countries is irrelevant. Dr. Emanuel is economically ignorant and ethically suspect. Do doctors and patients really want a committee of Dr. Emanuels making decisions about something as personal and individual as our medical care?

Health Care Bill Forces the IRS to Reveal Your Personal Tax Information

Declan McCullagh at Taking Liberties shines a light on a portion of the bill that forces the IRS to reveal filers' tax return details to both the Social Security Administration and the and Health Choices Commissioner.

Section 431(a) of the bill says that the IRS must divulge taxpayer identity information, including the filing status, the modified adjusted gross income, the number of dependents, and "other information as is prescribed by" regulation. That information will be provided to the new Health Choices Commissioner and state health programs and used to determine who qualifies for "affordability credits."

and

Section 1801(a) says that the Social Security Administration can obtain tax return data on anyone who may be eligible for a "low-income prescription drug subsidy" but has not applied for it.

What the bill doesn't contain is any limits on what is to be provided and penalties if your information is made public by government officials. This has obvious implications for both privacy and ease of identity theft.

Lessons from the Soviet Union

Yuri Malstev reminds us that the Soviet Union's universal health care was also justified with the same arguments as those put forth by President Obama in favour of a larger role for Government and universal rights.

We may not end up like the Soviet Union, but it's important to consider what others before us have found at the end of the same path we are considering embarking upon.

(hat tip to brotio)

Private Health Insurance discussed on Cafe Hayek Blog

An interesting discussion of private insurance was sparked by a Cafe Hayek reader, Tom. Professor Russ Roberts, Co-owner of the Cafe Hayek blog asked readers of his blog to answer Tom's concerns:

Tom Writes:

Imagine we had entirely private health insurance market – no Medicare or Medicaid. If I live to be sixty-five, I will probably have a personal and/or family history that indicates a strong probability of developing an expensive chronic condition. I would wager that is true of almost all sixty-five year olds.

So here is my question: which insurer in their right mind would take on my risk?

I suspect none. Once philanthropy and savings were exhausted, I would surely risk a painful life and preventable death.

Do I want this? Does anyone? Isn’t “socialized” medicine for older people an unpleasant moral necessity for our wealthy society? Please note I am deeply suspicious of most arguments cast in moral terms in discussions of politics and economics. I ask these questions guardedly.

The comment section for this post is long and well worth reading.

The Insurance Problem - Part III

Most people would agree that we should have the same tax treatment for those who buy their insurance as individuals as those who receive their insurance through employer contributions. This means that either you pay normal income taxes on any premiums paid on your behalf by your employer or that the folks in the individual market get to deduct their insurance costs.

Keeping employer contributions untaxed and expanding the deductibility of premiums to individuals is certainly the politically expedient thing to do since polls have shown that most people don’t want their benefits taxed. But adding a new deduction cuts tax revenue, and cutting tax revenue without cutting a like amount of spending only adds to the deficit, shifting the a larger tax burden onto our children and grandchildren. And we will still have the problem of the paying for the 45 million uninsured. If we, as a people, want insurance for all, we are going to have to increase taxes. The logical way to do this is to treat employer paid health insurance premiums as any other compensation. Everyone would buy insurance with after tax dollars.

So what “insurance reform” turns out to be necessary?

1.)Remove the regulatory burden on individual insurance market to allow market innovation as proposed by John Cochrane. (Solves preexisting conditions and medical underwriting issues plus encourages cost effective plan designs and competition)

2.)Allow sales of individual health insurance across state lines. (At least partially resolves state mandate burden)

3.)Delink health insurance from employment and tax group and individual policy premiums the same at the individual level. (Assists portability and funds insurance for all Americans)

The only issue not dealt with is that of “free riders.” These are the individuals, not eligible for Medicaid or Medicare, whose annual income is $50,000 or more and who choose not to purchase insurance. What happens when the need to medical attention and can’t or won’t pay? Their unreimbursed costs get built into health care providers charges just like the under reimbursements from Medicaid and Medicare. They become a hidden tax on all of the insured. Some form of individual mandate is one solution to this problem, but mandates are politically difficult to implement.

There are probably many other improvements in the way we could insure ourselves against unforeseen medical expenses. The free market would undoubtedly discover them if the heavy hand of regulation were lifted.

The Insurance Problem - Part II

In the case of the majority of Americans, the needed insurance reform is to ensure that they can keep their insurance in the case of job loss or a change in employer. Their health insurance needs to be portable. Reform should delink insurance and employment. But if insurance is not linked to employment, who will pay for it? And what happens to the ERISA exemption from expensive state mandated benefits? And most important, how will individuals be protected from preexisting conditions limitations and the threat or recession? In fact, if insurance is delinked from employment, won’t we be giving up all that is favorable in the current insurance of the majority of Americans? Let’s explore the issues by taking a look at individual insurance.

Individual health insurance is underwritten one person or one family at a time, much like you purchase homeowners or auto insurance. And, just like you can’t insure your house while it is on fire, you can’t get individual health insurance if you are already ill. Insurer’s use medical information to assess whether you are a “normal” risk as contemplated in the premiums you are to be charged. This is called Medical Underwriting. Standards and practices vary among insurers, but essentially, if you have a current medical condition, are taking medication or have been diagnosed, you may be uninsurable. In addition, insurers know that some applicants will not be honest when describing previous medical conditions and that some who claim to be normal risks know they are ill. Therefore it is common practice to examine claims, especially ones submitted shortly after a policy becomes effective, in an effort to determine if there was a “preexisting condition.” If the insurer believes they have found one, they may rescind the policy, usually returning premiums paid, but leaving the person uninsured. Medical Underwriting, preexisting conditions and recession are among the biggest issues in individual health insurance.

Delinking your health insurance from employment, and forcing you into the individual market doesn’t seem very attractive given the above discussion. But here’s a new take on how to solve the problem. John H. Cochrane writing in the August 14, 2009 edition of the “Wall Street Journal” suggests: “A truly effective insurance policy would combine coverage for this year’s expenses with the right to buy insurance in the future at a set price….A ‘guaranteed renewable’ individual insurance contract is the simplest way to deliver both. Once you sign up, you can keep insurance for life, and your premiums do not rise if you get sicker.” See his full paper here (http://www.cato.org/pubs/pas/pa-633.pdf). Under Cochrane’s proposal insurance companies, rather than avoiding the sick, would compete to insure them. Combining his “insure your insurability” concept with a high deductible/HSA policy would eliminate the preexisting conditions issues with individually underwritten health insurance.

The Insurance Problem - Part I

Now that President Obama has changed his rhetoric from reforming health “care” to reforming health “insurance,” you any be asking yourself what insurance reforms are needed.

If, like about 60% of Americans, you receive your health insurance as a condition of employment you are in a fortunate majority. And, in most states, if you work for a company with more than 50 employees you are not subject to pre existing condition limitations or recession of your coverage.

Your employer probably bears some of the cost, and because of laws put in place during WW II, you do not have to pay taxes on this compensation. Yes, compensation; your employer deducts the dollars paid for your insurance as a business expense just as is done for your cash compensation. But because of the WWII legal exemption, you don’t pay taxes on what your employer pays. And because of the employer contribution the amount deducted from your paycheck is less than the value of your insurance.

But, if you are in the other 40% of Americans, you either buy your insurance in the individual market with dollars you have had to pay taxes on or you go uninsured (unless your fellow taxpayers pay your costs under Medicare or Medicaid). So, which part of health insurance needs reforming and who should pay for the “reform?”

Let’s start with the majority of Americans. And let’s assume you work for an employer large enough to “self insure” (usually 200 or more employees). This means that the employer retains the liability for your health care costs rather than buying an insurance policy. Why would an employer do this? First of all, by assuming the risk, your employer avoids paying an insurance company a “risk charge.” This lowers the overall cost of the group policy.

Even more importantly, by “self insuring,” your employer, under ERISA (a federal law), is exempt from state mandated benefits. This is especially important for employers who need to have a single plan design for multiple locations in several states. Otherwise state mandates would result in different plans depending on where you live. Here’s why. In many, if not most, states, special interest groups have lobbied the legislatures to mandate that their “services” are covered in any insurance policies issued in the state. It doesn’t matter if you want the coverage, or if your employer wants to include the coverage in your policy; if it is mandated, you have to have it and that adds to cost. ERISA exemption means your insurance costs are not inflated by these special interests.

Your problem is that if you lose your job, or want to change employers, you risk losing your coverage. That’s really your “insurance” problem.

When Health Care is a Zero-sum Game

Shannon Love, posting on the Chicago Boyz blog, eloquently explains why senior citizens have good reason to fear the proposed health care reform.

Right now, medical spending is like baking three separate pies for three siblings. Each sibling gets his or her own pie, so they don’t quarrel over who gets the biggest slice.

With Obamacare, that will change. The walls of the financial compartments will crumble. All medical spending for everyone will come out of one big financial pot. Suddenly, health-care spending will become zero-sum. Spending more on the elderly or the poor will automatically mean spending less on middle-class families and vice versa. Middle-class families won’t be able to accommodate increased spending on the elderly by trimming other parts of the family budget. Even if middle-class people pay more taxes into the entire system, politicians will always have to balance spending those increased taxes on the elderly and poor against the needs of middle-class families.

The American People are a Special Interest?

From President Obama's Colorado Town Hall:

Mr. Obama: "But look, because we’re getting close, the fight is getting fierce. And the history is clear: Every time we’re in sight of reform, the special interests start fighting back with everything they’ve got. They use their influence. They run their ads. And let’s face it, they get people scared. And understandably — I understand why people are nervous. Health care is a big deal. In fact, whenever America has set about solving our toughest problems, there have always been those who’ve sought to preserve the status quo by scaring the American people."


This is absurd. The special interest groups were bought off long ago - including insurance companies and the AMA in exchange for a seat at the table. In fact, they are scheduled to run pro-ObamaCare ads in key states.

The president insists on accusing people who don't want this health care reform of being terrified into submission to the status quo by special interest groups. Nothing can be further from the truth. Judging by poll numbers showing ever decreasing support for the current health care reform proposals in the abscence of health care industry ads against them and the number of Americans who have suddenly taken an interest in attending Town Hall meetings in the middle of August as well as calling and writing their representatives, the only "interest group" against the current proposals are a majority of Americans themselves. Aren't the American people the interest group which Mr. Obama has pledged to serve?

Americans want reform - they want more choice and lower costs. The only way to achieve that is to open the health insurance market to national competition and allow doctors to similarly compete for patients. That's reform only an industry lobbyist or a statist could hate. The president should consider it.

Fixing High Insurance Premiums by Increasing Premiums?

During President Obama's Town Hall meeting in Colorado Saturday, he claimed that he is seeking to protect policyholders from increasing insurance premiums and out of pocket health care expenses by forcing insurance pools to pay for unlimited care.

"So insurance companies will no longer be able to place an arbitrary cap on the amount of coverage you can receive or charge outrageous out-of-pocket expenses on top of your premiums. That’s what happened to Nathan and his wife. Their son was diagnosed with hemophilia when he was born. The insurance company then raised the premiums for his family and for all his coworkers who were on the same policy. The family was approaching their cap.....Now thankfully, Colorado’s law doesn’t allow coverage for small businesses to permanently exclude preexisting conditions like his son’s, so eventually they found insurance. But they’re paying increasing premiums and they still have to face the prospect of hitting their new cap in the next few years.”


The president's ignorance of even the most basic economics of insurance is puzzling given that he is proposing an insurance overhaul. Nothing about the process of calculating caps, premiums and the share of health care expenses which must be borne by the policyholder is random. In fact, all of those features are very precisely calculated and disclosed as part of the voluntary legal contract between the insurance company and the policyholder.

As we pointed out here earlier, someone must pay for Nathan's son's care. The only way for Nathan's insurance companies to obtain the resources to pay for Nathan's son is to collect premiums from its policyholders - including Nathan. If the insurance company doesn't collect enough in premiums from policyholders to pay for the care of the members of the pool who become ill, then it will not be able to pay for anyone as it will soon go bankrupt. If the insurance pool is forced to pay for unlimited care for every policyholder, then insurance premiums will soon become so high that people will start dropping out of the insurance pool in search of lower premiums. To keep premiums lower for the group, the insurance company must cap how much it will pay over the lifetime of each individual in the group. The undeniable reality is that there is a limit on how much we can force someone else to pay for a benefit to us.

If insurance companies can't shift some of the cost of care for an individual in the pool to that individual (a limit touted by Mr. Obama), then it must raise premiums to cover the cost of unlimited care for all. President Obama's complaint is that insurance is too expensive. He proposes to fix this problem by making insurance even more expensive.

Demonizing Doctors

The American College of Surgeons kindly request President Obama refrain from accusing surgeons of needlessly slicing their patients for purely pecuniary reasons.

Monitoring for Money

During his Town Hall meeting in New Hampshire, President Obama said:

“…if a family care physician works with his or her patient to help them lose weight, modify diet, monitors whether they're taking their medications in a timely fashion, they might get reimbursed a pittance. But if that same diabetic ends up getting their foot amputated, that's $30,000, $40,000, $50,000 -- immediately the surgeon is reimbursed. Well, why not make sure that we're also reimbursing the care that prevents the amputation, right? That will save us money.”

Besides the president’s persistent and offensive implication that physicians regularly subject their patients to painful and risky surgery to line their pockets, it seems the president could use a refresher in basic economics.

Physicians don’t ignore their diabetic patients until they develop peripheral neuropathies only to dump them on a surgeon who lops off their limbs to line his pockets. Surgery is always a last resort and usually becomes necessary when a patient doesn’t comply with treatment or if a compliant patient just gets unlucky and develops complications requiring surgical intervention.

Since the key to controlling diabetes is patient compliance (a factor of treatment completely outside the control of doctors), how would paying doctors more for monitoring patients with no guarantee of compliance and an associated reduction in surgeries save us money?

How will government even decide whether a doctor is adequately monitoring patients so that he may be paid for monitoring instead of sending patients for presumably unnecessary surgery? One metric is the changes in the patient’s condition. However since those results are largely a function of patient compliance, doctors have incentive to drop or ignore non-compliant patients. If we are to simply take the doctor’s word that he is calling and reminding the patient a certain number of times in a given period, then that’s a system that can be easily gamed. As we discussed in an earlier post, when outcomes and payment are determined by a third party, the incentives tend to be perverse.

President Obama’s game plan will cost more than the status quo and it will create more perverse incentives for physicians.

How much will health care reform cost?

The Congressional Budget Office estimates proposed health care reforms will cost around $1 trillion over 10 years. Is this a credible cost estimate? One way to find out is to examine past cost estimates for related programs, particularly Medicare.

Leading up to passage and implementation in 2003, Medicare part D (prescription drug benefit) was estimated to cost $400 billion over a decade. Two months later, the estimate was $534 billion. The actual current cost estimate of the program is $900 billion.

The Senate Joint Economic Committee released the following results from a recent study of health care "improvement" cost estimates:

Medicare (entire program). In 1967, the House Ways and Means Committee predicted that the new Medicare program, launched the previous year, would cost about $12 billion in 1990. Actual Medicare spending in 1990 was $110 billion—off by nearly a factor of 10.

Medicare home care benefit. When Congress debated changes to Medicare’s home care benefit in 1988, the projected 1993 cost of the benefit was $4 billion. The actual 1993 cost was more than twice that amount, $10 billion.

Medicare catastrophic coverage benefit. In 1988, Congress added a catastrophic coverage benefit to Medicare, to take effect in 1990. In July 1989, the Congressional Budget Office (CBO) doubled its cost estimate for the program, for the four-year period 1990-1993, from $5.7 billion to $11.8 billion. CBO explained that it had received newer data showing it had significantly under-estimated prescription drug cost growth, and it warned Congress that even this revised estimate might be too low. This was a principal reason Congress repealed the program before it could take effect.

Source: Are Health Care Reform Cost Estimates Reliable?

(h/t Heritage)

Why is government so bad at estimating cost? A few reasons:

1. Government has a vested interest in underestimating and understating cost, but they do not have incentive to minimize cost, once programs are enacted. As we mentioned in a previous post, government is largely impervious to competitive forces, which result in greater efficiency and lower prices.

Further, the CBO estimate likely understates the actual cost, as it employs static scoring, which incorrectly assumes tax rate changes do not result in revenue changes and/or behavior changes.

2. Government employees, however well-intentioned they may be, are not in the business of maximizing consumer choice or lowering prices, as they have neither the incentive nor ability to do so. That can only be accomplished in a private consumer marketplace, not by a group of bureaucrats.

3. Independent modeling indicates a larger utilization of the public plan for larger companies, something the CBO does not emphasize. These data seem to suggest costs as high as $2.1 – $2.4 trillion for the current House proposal.

(reports available here, h/t City Journal)

So much for the plan adding "only" $1 Trillion to the deficit.

Will you be able to keep your health care plan?

There is much doubt about the claim that everyone will be able to retain their current health coverage under the America’s Affordable Health Choices Act of 2009. ABC news recently asked this question:

What Does the President’s Promise "You'll Be Able to Keep Your Health Care Plan, Period," Really Mean?

The fact that this question needs to be asked in the first place is a giant red flag. It means that with this legislation, government may have taken from you the right to make a decision as personal as how much and what sort of health insurance coverage you must have .

In fact, upon closer examination, that's exactly what this legislation does. The current proposal is structured to “rig the game in the government’s favor,” i.e. create an uneven playing field, so that the few private insurance providers currently qualifying under the new legislation will be driven out of the market altogether over time. (see previous post)

Page 72 (Section 201) of the House proposal establishes a Health Insurance Exchange (under the purview of a Health Commissioner), which will offer qualifying private insurance plan coverage, and a public option. No other options will be available and no new plans may be written that don't conform to the Health Care Exchange government mandates. If your current insurance company so much as needs to raise premiums to cover additional costs, you will be pushed into the Health Care Exchange.

Further, one of the functions of the Health Commissioner will be to evaluate non-participating individuals and employers to assess potential “improvements:"

(1) IN GENERAL.—The Commissioner shall conduct a study of access to the Health Insurance Exchange for individuals and for employers, including individuals and employers who are not eligible and enrolled in Exchange-participating health benefits plans. The goal of the study is to determine if there are significant groups and types of individuals and employers who are not Exchange eligible individuals or employers, but who would have improved benefits and affordability if made eligible for coverage in the Exchange.

(p. 83)

The language is vague enough to be troubling. The legislation is written in such a way as to give regulators and commissioners the ability to mold the details of the legislation behind closed doors and without the prying eyes of the public. "Benefits" and "affordability" will not be defined by you, but by the commission and you will be forced to comply with the commission's findings by purchasing policies the commission (not you) deems favourable to you.

This effectively means that if you are not initially covered by any of these reforms, it is very possible you will be at some date in the not too distant future. You will likely eventually be forced to join, either on the employer or consumer side, the Health Insurance Exchange.

So even if the statement “You can keep your health care plan” is nominally true on the first day the legislation is in force, the economics of the current proposal, as well as various other sub-requirements and the ability to craft the details after the legislation is passed, virtually guarantee that the statement will be shown to be false.

Consumer Protection or Consumer Nightmare?

Proponents of the current proposed health care reform legislation are stressing “consumer protections” measures in the bill, including:

• Prevent insurance companies from denying coverage for pre-existing conditions
• Cap the amount insurers may require policyholders to pay out of pocket in a given year
• Require all insurers to cover routine check-ups such as mammograms, colonoscopies, and eye exams.
• Prohibit insurers from dropping or "watering down" coverage for someone who has become seriously ill.
• Eliminate both yearly and life-long spending caps

Politicians seem to believe that insurance companies grow money on money tree farms and they’re simply too stingy to cover any and all treatments for any and all health issues that might occur. They also omit a small detail – having “insurance coverage” is not synonymous with “treatment”.

In fact, insurance companies must obtain resources to pay for health care for sick individuals by collecting premiums from the pool of policyholders. They are limited in the amount of coverage they may provide the sick because there are natural limits on how high the premiums they charge may rise before people start opting out of the pool and stop paying their premiums. It’s a trade-off. A large reason for the estimated 10 million young uninsured who make over $50,000 per year is that they don't find the expensive, mandate-laden coverage worth it.

If the insurance company must pay for all of this additional coverage and take all the additional risks imposed by legislators, it must also collect additional premiums. This can only mean that premiums for private insurance will either skyrocket, or insurance companies will soon be overwhelmed by claims and go bankrupt - or they will have to “water down” care and deny certain treatments.

Will government be able to do better? The government has a problem similar to private insurance companies – it must collect money in the form of taxes from everyone else to pay for the treatments it promises the sick. The only problem with that plan is that “everyone else” is a much larger voting block than the few sick people in our country at any given time. It is difficult to imagine that tax rates can be raised high enough to make good on government’s promise of top-notch coverage for all if they should be unfortunate enough to become truly sick. In fact, it already limits (“waters down”) treatment in its Medicaid program for cost reasons, as do all other countries with socialized medicine.

The bottom line is that there is no free lunch. There is no such thing as unlimited coverage coupled with cost controls. It’s one or the other. At some point, you will not be able to force someone else to foot the cost of your $40,000 treatment to give you a 5% chance at 6 more months of life. The difference between a government run health care system and a private system is who gets to decide what your life or limb is worth and who decides how much health insurance coverage you must purchase. In a private system, you have the option to pay out of pocket for the difference between what the private insurer won’t pay and what your life or limb is worth to you. In a government (or "public option")system, that decision is made entirely by the government.

Michael F. Cannon, director of health policy studies at the Cato Institute, on proposed health care reform

In this podcast (radio interview from The Brian Wilson Show), Michael Cannon points out that the President’s claim that taxes will not be raised on the middle class is untrue. As currently configured, the proposed health care reform legislation requires everyone to buy insurance. Requiring people to spend their own money on something is a tax.

The current proposed legislation also includes an explicit 2-10% employment tax levied on employees of businesses that either 1) don’t offer health insurance, or 2) whose health insurance doesn’t meet the government’s guidelines. It’s highly unlikely that this employment tax will be borne exclusively by “the rich,” i.e. those earning over $250,000 per year.

While the President has promised that you will be able to keep your private insurance or choose a private insurance option from the Health Care Exchange, it’s very likely that the government will sweep everyone into the government option over time – even if the government option is worse. As Michael Cannon points out, government has the unique ability to keep premiums for its plan artificially low by subsidizing the plan with tax revenue, a competitive advantage unavailable to private market providers.

The current proposed legislation gives government the right to mandate the terms of coverage and pricing for plans that qualify for the Health Care Exchange (which will be the only plans that may legally be sold after the passage of the reform bill). Restricting the remaining private market participants will allow the government to artificially inflate the price of qualifying private coverage, thereby driving more people into the government program, even if it provides worse coverage.

Michael Cannon’s article on “Fannie Med,” mentioned in the interview, is available here.

Unintended Consequences Of Paying Doctors for Outcomes

In June, during an hour long speech to doctors in Chicago, President Obama said that “we need to bundle payments so you aren’t paid for every single treatment you offer a patient with a chronic condition like diabetes, but how well you treat the overall disease…We need to give doctors bonuses for good outcomes, so we’re not promoting just more treatment but better care.” Sounds good. Rewarding doctors for quality instead of quantity seems like the right thing to do. The difficulty lies in standardizing good outcomes so that the appropriate bonuses may be paid, and the incentives such a system creates for doctors.

While it’s true that paying by procedure creates the incentive to perform more procedures, some of which may be unnecessary, an outcomes based payment system has its own drawbacks. It creates the incentive for doctors to choose to treat patients who are less sick over those who are more sick. Very sick patients require a lot of attention and time, but are less likely to have a bonus-worthy outcome.

On the other hand, less sick patients are easier to treat, are likely to have a better outcome, and will offer a better bonus opportunity for the doctor. Doctors’ time is scarce, so they must put it to the best use possible to provide for their families – and in a pay-for-outcomes system that means choosing easier to treat patients who will generate the highest bonuses. No matter how much we narrow the arbitrary measure of “outcome”, the incentive for the doctor in an outcome based system, where “outcome” is defined by a third party, will always be to select the least sick patients at the expense of the sickest patients most in need of care.

Because human beings are complex organisms, defining what constitutes a “good”, bonus-worthy outcome is itself a daunting, if not an altogether impossible undertaking for the third party tasked with producing and evaluating those metrics. Medical outcomes depend on many variables, including, but not restricted to the overall health of the patient (not just the condition being treated) and the patient’s compliance with the treatment - a factor over which the doctor has no control.

Imagine the costly government bureaucracy that would be necessary to set outcomes for chronic diseases, sift through every case to determine which outcomes qualify as “good”, evaluate the specific circumstances of treatment, and decide bonus size and merit. Such a bureaucracy is unlikely to be cost-efficient, and would have to be created exclusively for this purpose as it is currently nonexistent.

An outcome-based system providing incentive for doctors to reduce treatment to the sickest patients and requiring an additional giant government bureaucracy is likely to increase costs for everyone while reducing the quality of care for the sickest patients. That’s exactly the opposite of President Obama’s intention and the stated goal of health care reform.