Inasmuch as Americaís fractured health care finance system has been a common topic on this blog since early 2004, many friends and readers have asked my thoughts about the health care reform legislation that was passed yesterday. So here goes.
The legislation is fundamentally flawed because it imprudently foists a top-down reorganization plan on something as complex and disparate as financing health care. But frankly, I have no idea whether it will result in a worse finance system than the current one, which is pretty bad.
My biggest criticism with both the current system and the one contemplated by Obamacare is that the patient is not the customer, at least as it relates to non-catastrophic illness and injury. Without cost control ñ and customer decision-making is the most efficient one available – neither the current system nor Obamacare will be able to maintain delivery of high-quality care to an increasingly aging population.
However, the reality is that we now have two solid generations of Americans now who enjoy having someone else pay for their health care. So, itís unrealistic to think that such a societal shift is going to change anytime soon. But itís still important to understand how we got to this point.
Employer-based health insurance became popular during World War II because it was initially exempted from gross income as a way to circumvent wartime wage and price controls. After the war, marginal income tax rates were high and individual medical expenses were tax deductible, so at least some rational incentives were returned to the medical marketplace.
But all this changed in 1986 when the Reagan Administration made concessions to achieve bipartisan tax reform. Individual medical expenses were no longer deductible until they reached 7.5% of gross income, which virtually eliminated individual incentives in the medical marketplace. Not surprisingly, everyone was incentivized after tax reform to move all medical expenses to third-party-payor health insurance. As a result, individual out-of-pocket expenses in the health care market dropped from 22% in 1985 to less than than 10% of the market now.
So, in essence, the Reagan Administration horse-traded personal tax deductibility of medical expenses away, but figured that was acceptable because at least employer health insurance remained tax-free benefit. Iím sure if we could ask him now, President Reagan would tell you that he expected a future Congress would fix such perverse incentives after the dust settled on the benefits of tax reform. But alas, that never happened.
What happens now? The only certainly is that special interests will be descending upon Washington in droves to do their bidding over the transfers of wealth that will occur under the new legislation. At least it will be entertaining to watch who wins and loses.
But there are two big points that everyone should remember as we embark on this new world of health care finance.
First, the Obama Administrationís rationalization of future cuts in Medicare spending as a funding source for the health care legislation is utterly disingenuous, as Arnold Kling artfully explains:
Imagine that your crazy uncle Fred had bought a dozen cars on credit. As a result, he faces car payments far in excess of what he can afford. He comes to you and says he has a plan that in a couple of years will reduce his car payments by a few thousand dollars. "Now I have the money for a down payment on a boat!" he exclaims, as he runs off to the boat dealer.
The equivalent is for Congress to treat future cuts in Medicare as if they were a newfound source of wealth to be tapped. Once they adopt this precedent, they can increase spending on whatever they want, in unlimited amounts, while claiming deficit neutrality. Future Medicare spending is so high that you can always come up with cuts, as long as they deferred.
Second, as Greg Mankiw notes, projected Medicare cuts in payment rates for physician services portend the rationing of medical services that the promoters of the current legislation contend wonít occur. Because few consumers actually pay for their health care, most folks donít realize that Medicare and Medicaid payment rates for physician services have already been cut by around 30% since the late 1990ís. That has led many doctors to limit substantially the number of Medicare and Medicaid patients who they are willing to treat in their practices. In my view, that trend is likely to continue under the new legislation. Who will tend to the medical needs of consumers who elect to rely on such insurance in the future?
Supporters of Obamacare generally argue that the legislation offers more equality through expanded insurance and redistribution of benefits. But the wealthy will always find ways to get around the rationing and other restrictions of a government-run health care system. On the other hand, the poor will have no choice but to accept the government health care, which is unlikely to be as high a quality as what the rich folks obtain from their private doctors. Accordingly, although the distribution of health care may be a bit more equal in the short term, I’m not sure that means more equality in health care in the long run.
Which leads me to this question: How long will it be before the federal government requires physicians, as a condition to being allowed to engage in private practice, to accept a certain number of patients under government-sponsored insurance plans that limit payments to the physicians far below what the physicians would otherwise accept?
Two comments to add to your excellent presentation, Big T.
First, Medicare payment levels impact more than just those patients actually on Medicare – a good portion of traditional third-party payors (Blue Cross / Blue Shield, for example) establish their reimbursement rate as a percentage of Medicare payments. In Texas, the rate has been between 125 and 150% of Medicare allowables, but in some sections of the country (specifically in the NE), the Blues actually pay less than Medicare for the same service.
Second, forcing a physician to take “some” Medicare patients will require an adjustment to current law. At present, as a physician, one must decide to “participate” or not – this means that you agree to see Medicare patients and accept what the Feds decide is appropriate payment for your service (so called “Medicare assignment”), or you choose to “opt out” – which allows you to bill the patient directly for the fee you want (or what the market will bear). Currently, this is an All or Nothing decision – the doc can’t decide to take Medicare assignment on some patients and to bill other patients directly.
The future of medicine is grim. I predict that within a generation, the majority of physicians will either be employees of large medical groups, or directly under Uncle Sam.
Imagine a governmental bureaucracy with the efficiency of the Post Office and the compassion of the IRS…..
jrb
Well done Tom–it is a broken system. The more claims are denied the more senior execs at insurers bonus themselves. Ditto where they cut back payments to the docs. Employers mostly abdicate becuse they just pass on higher costs to employees, by increasing employer co-pays and other means. Maybe if there were some incentives to induce less reliance on the system unless truly needed it might work better. Most people just glaze over at the entire process, and only care when they get sick. The truly chonically ill and those who sustain an extraordinary medical event are what we should provide a baseline support system, after that seems like self insuring is best up to some hurtful, but payable, limit as a deductible. Complex problem. Lots of cost benefit issues to weigh, and oxes to protest being gored.
Tis a shame that otherwise smart people have fallen for the canard that the problem is employers paying for health care.
First, don’t economists agree that employees pay for health care in the form of lower compensation? And since pretty much every employee realizes that increased usage results in higher premiums and thus higher co-pays and deductibles, how do you explain the fact that employees aren’t already seeking to lower their consumption?
Second, implicit in the claim that forcing people to directly pay for their own health care will result in lower health care consumption and thus lower costs, two assertions not supported by the evidence.
For the first, let’s use you as an example. What health care are you now consuming that you would do without if you had to pay for it yourself? And, assuming there was some (which signifies your realization that you’re getting care that doesn’t provide much of a value), I’d bet it would be the rather trivial and relatively inexpensive components. Do you think we can save the health care system simply by having people do without an occasional trip to the doctor or emergency room? Or by taking a needed medication only once a day instead of twice? And here’s a question: if there are items you could do without, but consume only because someone else is paying for it, since you’re a smart person who realizes that in the end you are already paying for your health care, why haven’t you already given up consuming what you feel is unnecessary?
For the second, assuming there was less consumption, why wouldn’t health care providers raise the prices on what was still being consumed to offset the revenues they were no longer making from the now-discontinued care? Isn’t that what they do now when forced by Medicare and insurance companies to accept lower reimbursements, to raise the prices they charge other patients? What is the basis for assuming that a hospital that lost $XX million in now-no longer sought after care was just going to absorb the costs and not try to recover the lost revenue in some other form, thus offsetting much if not all of the purported savings?
And third, taking away the employer paid component effectively destroys any savings that result from large diverse plans that spread the relatively low risk / high cost claims across a large audience. Without the groups (and without employer sponsored coverage, what group would replace it?), each person would be charged more as they would represent a single data point and all statisticians know there’s a higher likelihood of outliers with a small group than with a larger group. Eliminating the group concept forces everybody to pay the higher individual risk profile.
steve,
when a doctor, for more legal than medical reasons, proposes a 2000 dollar test to a guy making 80,000/year, often, such patients will be heard to reason they will get the test because of “low co-pay” or “already met my deductible” etc.
the observation that few people are DIRECTLY paying for their care and this raises utilization is unassailable.
nowhere is this worse than in the medicare crowd, a group that is subsidized by hard working people and a group who have almost no incentive to limit costs–they use the system far more than others and seldom met a test or treatment they don’t love–the entire system’s biggest flaw is that folks who have had 65 years to get their finances in order are not responsible to pay for their care–change this and utilization goes down and life is fair.
Steve, you say:
“And since pretty much every employee realizes that increased usage results in higher premiums and thus higher co-pays and deductibles, how do you explain the fact that employees aren’t already seeking to lower their consumption?”
The premiums and co-pays are still largely subsidized, so the true cost of the service purchase is still hidden from the consumer. That will usually result in more consumption of the service.
“Second, implicit in the claim that forcing people to directly pay for their own health care will result in lower health care consumption and thus lower costs, two assertions not supported by the evidence.”
Really? Check out the reduction in dental costs, payment of which is much less subject to insurance than other medical costs. Also, check out the reduction in medical costs attributable to lasic eye surgery and plastic surgery, most of which is not covered by insurance.
“For the first, let’s use you as an example. What health care are you now consuming that you would do without if you had to pay for it yourself?”
I pay for my family’s routine health care costs directly. I monitor the costs very carefully. I have an insurance policy that covers medical costs attributable to catastrophic illness or injury.
“assuming there was less consumption, why wouldn’t health care providers raise the prices on what was still being consumed to offset the revenues they were no longer making from the now-discontinued care?”
That would depend on the marketplace. If providers were forced to be responsive to consumer demand, then they would not be able to raise prices in regard to a popular service above a market price without risk of losing market share.
“And third, taking away the employer paid component effectively destroys any savings that result from large diverse plans that spread the relatively low risk / high cost claims across a large audience.”
I don’t agree with your assertion. In a freer marketplace, some employers would choose to maintain their plans because it builds goodwill with employees and/or it is a cheaper way to pay a portion of compensation to employees. Moreover, there would still be a robust market for insurance covering catastrophic illness or injury that would spread risk over large pools. Creating a market for such insurers to provide policies that do not preclude pre-existing conditions could have been achieved through having the government provide reinsurance for such pools.
Dr Tom:
1 – Doctors may blame the fear of lawsuits for ordering tests, but they’re also doing that in order to eliminate any reasonable doubt that they’re proceeding appropriately. If those $2,000 tests were truly medically unnecessary, not doing them wouldn’t expose a doctor to a higher degree of legal exposure. And trust me, patients like the certainty that comes from all of these allegedly unnecessary tests (“Mrs. Smith, we’re still not sure why you have those terrible headaches, but we’re sure it isn’t because of a brain tumor”).
2 – Medicare isn’t health insurance, it’s a subsidy program for old folks, a way of paying for the health care they consume that is in excess of the amount they collectively want or are able to pay. Getting rid of employer-paid health insurance doesn’t do anything to change the Medicare dynamic. And even supposing Medicare were reformed in a way that gave each senior an amount to spend, society (i.e., voters) isn’t going to stand by and let old folks die because their utilization exceeded the amount of cash they were given… no matter how foolish they were earlier in life when they should have been getting their finances in order.
Tom K:
C’mon, citing dental and cosmetic surgery? Apples to oranges. Nobody dies because they don’t get cosmetic surgery, almost nobody dies because they don’t get their teeth straightened or power cleaned by a dentist.
And I disagree with your assertion that there would be a robust market that spread the risk over a large crowd. Insurance is priced – as much as the statistics will allow – on a unit by unit basis… no groups, no group savings. If I were to buy health insurance on my own, my premiums would be based on my health, family history and so on. No insurance company is going to offer me an individual package that is priced lower than it ought to be because they’re making some other guy pay more than he should… for the simple reason that the other guy wouldn’t stick with an insurance company that overcharged him relative to his risk/usage. Imagine that in auto insurance: you’re a lousy driver, but they’re not going to raise your rates too much, they’ll make some good driver pay a lot more?
And bad choice, picking you as an example.
Steve, you are simply wrong about people not dying from poor dental health. Ask any cardiologist or internist about the connection between gum disease and heart disease.
Moreover, why do you suggest the robust market for uninsured elective procedures is apples and oranges in comparison to routine medical expenses and procedures? What evidence do you have of that?
Given that our society has not had a true market for such services for over 60 years now, your argument is conjecture. My view is conjecture, too. But at least the evidence relating to uninsured procedures indicates that market forces may yield impressive cost savings.
Finally, from an underwriting standpoint, removal of pre-existing conditions as an underwriting criteria would limit one of the major factors in differential pricing in insurance pools. However, as with any pool (including a governmental pool such as Medicare and Medicaid), differential pricing will always exist to some extent.
Sure, some people die from poor dental hygiene, but it doesn’t happen that often (evidenced by the lack of daily such sob stories) and pales to the number of people who would die from heart attacks, etc., if having to pay on a per-visit basis discouraged them from going to a dcotor or hospital ER.
And with the claims that preventative care is a key to health, wouldn’t it seem logical that discouraging me from going to my doctor for my once a year blood test could have a negative effect on my life expectancy? So you drive down the amount of money spent on health care at the price of poorer health, is that what we’re striving for?
Using elective cosmetic surgery as a base for projecting the impact on what people truly consider to be non-elective care just doesn’t make sense. Nobody is going to die if they don’t get that fourteenth tummy tuck.
Steve, a consumer whose routine expenses are paid by someone else has no direct financial incentive to minimize those expenses. So, a consumer whose routine medical expenses are subsidized has little financial incentive to make lifestyle choices that could minimize those expenses or to elect not to have an expensive MRI for a sprained ankle when a relatively inexpensive x-ray would suffice.
steve,
as to your point 1 above, doctors do not order self-protecting tests to “eliminate any reasonable doubt” but rather out of rational/irrational fear of being blamed for every contingency. you are simply wrong in your assertion.
secondly, the entire point is that if mrs. smith is not reassured enough by my judgment that she does not have a brain tumor so she wants an mri, she ought to have to pay for her desire, not spread it to the rest of us.
your understanding of medicare is flawed or you favor the rank excess of socialism that is medicare, i can’t easily tell which? for pennies on the dollar, medicare patients go anywhere, see anyone, have any test, doctors and hospitals lose money in the act and pass the cost on to non-medicare patients. this is true when warren buffet goes to the doctor—a carpenter somewhere is paying for it—i did not intend to link this to employer provided insurance except as illustration of excess use when you got no skin in the game—concede this point, it is 101.
Weighing in a bit late in the discussion….
“Second, implicit in the claim that forcing people to directly pay for their own health care will result in lower health care consumption and thus lower costs, two assertions not supported by the evidence. ”
Steve, the data on health care utilization by patients with MediCAID disprove your statement. Having been deemed as qualifying for this program through financial screening, these folks have no out-of-pocket expense for any of their health care – these are the patients who come to the ER in the middle of the night (often by ambulance) with a complaint of “diarrhea for 6 months”. Not an exaggeration.
And, although it has not been well reported, the folks who lose their health insurance from their employer (when the determination is made that it is cheaper for the boss to pay the fine than to provide the mandated coverage) will be thrown into the “exchange”, which is just a different way of saying that they will be enrolled in an expanded Medicaid program.
So, we will end up with an even larger portion of the population whose “insurance” has no significant cost control mechanism and has no impediments to infinite utilization.
jrb
What seems to be missing in this debate, and what Obamacare does nothing to address is the actual cost of healthcare. There is a lot of talk that this program or that program will reduce the cost of healthcare. But in all my research, I have never found anyone that can tell me what the true cost of healthcare really is. That $2000 test that was mentioned earlier? Does anyone know why it costs $2000? The price of something is generally set at a level that covers the costs of delivering it plus a profit. In medicine, the costs seem to be determined by what some third party is willing to reimburse you for?
Recently my 9 yr old son spent 23 hrs in the hospital for a videotaped EEG. The bill came in for around $9500. But, United Healthcare had a contracted rate of around $2500 of which I paid 80%. I looked at the bill and wondered, what did this did procedure really cost? If it was $9500, then who ever negotiated with UHC on behalf of the hospital should be fired. Maybe they said it was $9500 in order to get a $2500 reimbursement from UHC, but the true cost was only $2000, leaving the hospital a little profit. Who the hell knows. If you are lucky to get an itemized bill, you might find that the two Motrin capsules you took for a headache cost $24.00. (I guess that included the little paper cup in which its delivered).
What if there was no insurance at all? Wouldn’t the prices just drop to a level that consumers could actually pay?