Obamacare Fail in Full Flower; Better Way Possible

This is my third essay in an occasional series remarking upon the striking failure of the Obamacare health insurance reforms. The first, published way back on August 16, observed that we were at long last seeing hints that the Obamacare market had begun an adverse selection “Death Spiral“, while the second, published about three weeks ago, brought further confirmation of this fact. In those essays I also remarked upon the deeper issues of efficiency and affordability that Obamacase was intended — or should have been intended — to address, and left open the question of what a sensible reform package would look like; that is, market reforms that would actually help the ordinary working American citizen.

First, I will note here that the steady drumbeat of bad news for Obamacare has continued apace. In fact, this drumbeat has grown more and more insistent. This week, the federal government released figures showing that plans to be offered over federally-run exchanges starting November will be dramatically more expensive compared with last year — by an average of 25%. While previous announcements of price rises have typically been one state at the time, this announcement covers dozens of states, proving that the problems that first came to light in North Carolina and Minnesota are not idiosyncratic, but typical of the system. This time, the failure is widespread enough to be undeniable and noticed nationally; the hand-wringing and political gloating over this has finally spilled onto the national stage. The full weight of these price increases will be blunted for some consumers, as government subsidies rise to help defray premium inflation, but that’s just robbing Peter to pay Paul — and with public debt and the federal deficit at historic highs. The system is not working as promised.

I will next pause for a moment to consider a counterargument to a point I made in an earlier essay. I had observed that per-capita U.S. health care spending was considerably higher than per-capita spending than other advanced western nations, and argued that it was plausible that money could be saved by increasing efficiency, and that it was a good idea to pursue this. Meanwhile, an anonymous blogger with better access to high-grade statistical analysis software than I have — and far more time on his hands — published a set of detailed posts setting forth the following argument: Heathcare is a superior good, meaning that as we grow more wealthy we consume disproportionately more of it, and as the U.S. has a considerably higher material standard of living compared to most western countries (a fact which regularly escapes the notice of most Europe-worshiping leftists), we should naturally expect the U.S. to consume more health care per person than other countries. Moreover, a detailed examination of U.S., European and global health care spending patterns over time suggests that a trend towards increased health care spending in the wake of increased prosperity has been historically true, and that current U.S. spending, while very high, fits the prosperity / health-expenditure trend line reasonably well.

Read it for yourself. I will say that I am convinced by the argument that the extraordinarily high per-capita level of U.S. health expenditure is broadly explained by the extraordinarily high per-capita level of U.S. personal consumption (which is in part a function of our per-capita GDP being much higher than most of western Europe’s), and the universal tendency to spend more on health care as prosperity increases. The corollary is that that as other advanced countries grow more prosperous, their per-capita health care expenditure grows to American proportions. This has evidently been the case in recent decades — Germany, France and the UK reached, in the early 1990s, levels of personal consumption that the U.S. enjoyed in the late 1970s, and like clockwork their per-capita health care expenditures rose to 1970s American levels by the 1990s. I stand convinced that the underlying appetite for health care expenditure in the U.S. is not unusual relative to other countries. I’m also convinced by the data collected in showing that Americans generally get more goods and services in exchange for the extra spending, proving that the increased expenditure is not simply waste and inefficiency in delivery — bracketing the question of how effectively the increased volume of care actually improves health and well-being. The moaning about unusually high American health care expenditure is in many ways misplaced — for a very large swathe of the population, our cars and houses are as big and luxurious as we could want, so why not spend more on health?

The one problem I have with this analysis is not strictly tied to health care policy. It is that U.S. per-capita consumption outstrips GDP in a way which flips the usual OECD GDP/consumption pattern on its head. This is nothing more than evidence of the large current account deficit we run, and a discussion of the relative macroeconomic merits and dangers of that is well beyond the scope of this essay. But this fact also points to the unresolved question left at the end of my last essay: It’s well and good that a more prosperous person (or society) would gladly spend more money on health care than a poorer neighbor might. But it sure seems that there are plenty of Americans who are not particularly prosperous and not particularly happy (or able) to pay increasingly higher costs for ever increasingly elaborate health care — even if their richer neighbors are. It seems that these people are not well catered to in the byzantine American health care market as it currently stands, and that Obamacare has only set them back. How best to reform the market, then, accommodate them?

So now we get to my policy prescriptions:

Repeal Obamacare. The health insurance policies promoted by this law are ill-suited to the less well-off customers who receive subsidies on the exchanges. Obamacare policies tend to be expensive, complex products with high out-of-pocket copays and deductibles, typically featuring $2,500 deductibles and $12,500 per year out of pocket maximums. And that’s supposed to be suitable for a family of three earning $30,240 per year facing a sudden health crisis! The subsidies that would be freed up by ditching the exchanges would amount to an enormous sum of money — around $120 billion per year — which could be sent on better things than buying useless health insurance policies for the lower middle classes which feature ruinously high out-of-pocket costs.

Expand Medicaid on the Obamacare affordability model.  Obamacare does contain a useful premium affordability concept (which sadly, as noted above, does not translate to covering the out-of-pocket deductions and exclusions). The Medicaid expansion tacked on to Obamacare made it possible for states to allow any household earning up to 133% of the poverty line to enroll in Medicaid at nominal out-of-pocket cost. Meanwhile, Obamacare exchange subsidies are targeted at households earning up to 400% of the poverty line, but with a sliding scale of subsidy: As families earn more, a growing percentage of their yearly income is treated as available for spending on health coverage premiums, which can add up to a fairly substantial sum.  For instance, a family of three with a $60,500 yearly income is at 300% of the poverty line, meaning 9.69% of their income (or $5,862) is deemed available to pay for a health plan.

With Obamacare exchanges gone, the point would be to offer Medicaid enrollment to such households at these income-based prices. Now, Medicaid costs per household exceed the annual contributions expected under the Obamacare formula from most households earning less than 400% of the poverty line, so the subsidy money currently in Obamacare would be rolled into paying the difference here. But Medicaid has the advantage of having lower yearly costs than standard health plans (as explored in a previous post), so the subsidies would cost the public less, while at the same time having sharply lower deductibles, co-pays and out-of-pocket costs to users — making it possible for low and lower-middle income families to use their coverage without going broke. Medicaid also has the advantage of being noticeably worse than most regular private plans, which gives families an incentive to obtain private insurance (and stop using subsidies) just as soon as they can land a job with benefits or scrape enough money out of the budget buy something better.

Scrap the Individual Mandate; Make All Health Insurance Premiums Tax-Deductible. In theory, the individual mandate prevents the adverse selection “Death Spiral” by pushing everyone into the market, keeping the risk pool of the various competing plan providers knowable and stable. In practice, there is no political will to impose a penalty strong enough to make the mandate effective, so adverse selection happens relatively quickly. Under my plan, adverse selection risks are collected on state-wide basis and pushed into the Medicaid budget, so the individual mandate is a needless complication — Medicaid doesn’t need a balanced risk pool if its entire mission is to provide a single-sourced bare-bones care to poor people largely at public expense. If we need more money, we raise more revenues. If we don’t want to raise revenues, Medicaid will ration care more strictly, like every socialist system does, and poor will have to suffer that — and the public will suffer whatever moral pangs that follow. The tax-deduction is a stealth way of reinstating some of that incentive effect on consumers, but efficiently: If you forgo buying into Medicaid your income will be higher, meaning your taxes will be as well — kind of like the current individual mandate penalty, but without all the political shrieking.

Price Transparency in the Private Market. I’ll introduce this concept by starting with its opposite: Many fans of health care reform have argued that the U.S. should have implemented a fully public option, citing the NHS in the United Kingdom as a utopian vision of the joys of socialized medicine, where the consumer never pays any out-of-pocket cost. But like most socialist systems, in reality the NHS is a craptastic hellhole of underfunded services which can be counted on routinely to deliver substandard care — it’s a nightmare version of Medicaid that the entire nation is expected to use in the first instance. Just this week, for instance, the NHS admitted that fully three quarters of its maternity wards were failing. The UK’s cancer survival rates have long been the worst in western Europe. Necessary surgery, such has joint replacement, is simply denied to smokers and the obese in numerous areas a vain attempt to cut expenditures. Just how is an overweight person supposed to work off the pounds if he can’t walk on his bum hip goes unexplained. The list of NHS shortcomings goes on and on.

In response to this — but largely unreported in the American press — the British have actually developed a highly efficient and user-friendly private healthcare sector. It delivers high-quality care quickly and easily — at a reasonable, published price. U.S.-style health insurance plans exist to pay fees in this system, but such plans are generally reserved as a perk for higher-level employees in big companies who use the system for most of their health care. Many middle class people will use the NHS for basic needs while paying out of pocket once in a while for something that they feel is important and can afford. At the heart of the system lies a remarkable degree of open and frank price transparency. Want to know how much it costs to deliver a baby in a fancy private hospital in central London? Just click on the link! Middle class people actually choose to pay cash for these services much in the way they’ll look up the cost of a fancy restaurant, and decide whether or not to book for a special occasion. I challenge you to find a fee card remotely as transparent in an American hospital.

The advantage that price transparency brings is that is allows for greater use of high-deductible or flexible-spending health plans. Better-off people can insure against truly catastrophic risks (i.e. being hit by a bus — the months of extensive reconstructive surgery will be covered with little out-of-pocket cost) while being given plenty of flexibility in choosing just how fancy they want their routine or chronic care to be. Do you want your hip replacement done as soon as possible? Pay more to a hospital that maintains a lower utilization rate, which drives up their overheads but ensures that free spots are available all over the calendar. Are you willing to wait? Then you can choose the hospital that maintains a higher utilization rate and is more cost efficient, but their next free opening is three months from now. A customer can’t do anything of the sort right now under the American system, because the pricing is made deliberately opaque, with absurdly inflated sticker prices that are not really meant to be paid, mainly as part of the insurance reimbursement negotiations kabuki (but also in part as a way to chisel as much as possible from poor schmucks who don’t have a health insurance policy). Providers have little incentive to differentiate themselves into rational price / quality tiers of the sort that exist in virtually every other market — food, clothing, transportation… you name it.

There was some attempt, a number of years ago, to promote high-deductible health plans that diverted some of the premium into a customer-controlled Health Savings Account. The idea was that the cost to the employer would be the same as a traditional plan, and the high headline “deductible” would be offset by the cash deposited in the HSA. But because the customer got to control (and roll-over) the cash in the HSA, he would have incentive to consider some of these trade-offs and shop around. It never caught on widely, in part because it was never particularly easy to do the comparison shopping that would be at the heart of process. Failing to expand this model was one of the real missed opportunities of the 2010 health care reform.

I believe quite strongly that an Americanized cousin of the two-tier British system would be an effective and useful reform. Expand Medicaid to cover the bottom third (or so) of the income distribution, with Obamacare-style increasing customer contributions required as one moves up from the threshold of poverty. But don’t plan for it to cover all or a majority of the population, because socialized services are second rate and we want people to graduate to a higher class of care in the private sector. On the flip side, for the majority of Americans, expand the discipline that comes from maintaining price transparency and maintaining a sense of spending one’s own money — through high up front deductibles and self-directed spending accounts — to allow users to more finely gauge the level of routine service they feel likely paying for. But reduce the ultimate out-of-pocket caps allowable within private plans, as those mainly end up penalizing people who suffer catastrophic risks and couldn’t easily control costs even if they wanted to.

In short: Avoid the British mistake of promising an impossible socialist utopia to all, avoid Obama’s mistake of handing lower income people a health plan that would drive them bankrupt actually to use, and avoid the current extravagance of every private insurance customer striving to get everything done first class, on the basis that they don’t actually know the costs and aren’t directly paying them anyway. All that, I think, would be a good start to developing a system which takes some of the stress and uncertainty out of the U.S. health care market, allowing for cost control and informed purchasing where needed, while also allowing a wealthy people to spend just as much extra on health care perks as they like.

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