Category Archive: Healthcare
Comments Off on How the FDA hides its true costs — dollars lost and progress delayed
How would you feel if you needed to slip the clerk at the DMV a $100 bill to get him to do the paperwork for your driver’s license renewal? Pharmaceutical and medical device companies face a similar situation when they want the FDA to review a product for marketing. Just to get the agency to evaluate a submission for drug approval — with success not guaranteed — they must pay more than $2 million. The government euphemistically calls this sum a “user fee,” but it’s really a tax by another name.
The fees, which constitute a large chunk of the FDA’s budget — about two-thirds of the cost of reviewing new drug applications and about a quarter of the agency’s total spending — are a boondoggle, because they enable Congress to finance much of the agency’s work “off the books.” The pharmaceutical industry agreed to the fees two decades ago in return for the FDA’s promises to meet certain reviewing timelines and milestones.
But fat budgets have enabled the FDA to waste resources. For example, the agency recently sought public comments about its use of focus groups, claiming they “provide an important role in gathering information because they allow for a more in-depth understanding of patients’ and consumers’ attitudes, beliefs, motivations, and feelings.” FDA officials seem to have forgotten that their mission is to make science-based decisions — primarily about product safety, efficacy, and quality — as expeditiously as possible, whatever the public’s beliefs, motivations, and feelings may be.
Far worse, the FDA declared jurisdiction over all “genetically engineered” animals, then took more than 20 years to approve the first one — an obviously benign, faster-growing salmon — and then made a colossal mess of the five-year review of a single field trial of a mosquito to control the mosquitoes that transmit the Zika, yellow fever, dengue fever, and chikungunya viruses. Finally, the FDA relinquished jurisdiction over that mosquito and other animals with pesticidal properties to the EPA!
FDA User Fee Reauthorization in ProgressCongress is in the process of reauthorizing the FDA’s ability to collect user fees from drug manufacturers. Although the FDA and the pharmaceutical industry have worked out an agreement regarding fees for fiscal years 2018 through 2022 (which would impose a burden of about $10 billion on the industry over that period), it might be in jeopardy because President Trump has said he wants to boost the fees by $1 billion in FY 2018. This stated desire is inconsistent with the goals of a president who says he wants to reduce the tax burden, boost innovation, and stimulate American industries. A basic rule of economics is that if you want less of something, tax it.
The user fees should be abolished, but not for the reasons once cited by the New York Times, which condemned them as “cozy cash-fed agreements [that] have given industry far too much influence over the regulatory process.” The truth is that if pharmaceutical companies are exercising undue influence, they must have a death wish.
The Increasing Difficulty of Drug DevelopmentIncreasingly risk averse, capricious, and at times even hostile, the FDA has made drug development progressively more difficult in recent years. Bringing a new drug to market now takes 12 to 15 years and costs more than $2.5 billion — in no small part because FDA policies and actions have increased the average length and complexity of clinical trials, and regulators keep moving the goal posts. Drug approvals are down: during the four-year period from 1996 through 1999, the FDA approved 176 new medicines; from 2013 through 2016, the number fell to 103, a decline of 40%.
These unfavorable statistics are not due to rookie mistakes or inexperience; even for top-tier drug companies, the costs can be staggering. For pharmaceutical giant AstraZeneca, the cost to get a new drug on the market is almost $12 billion per drug, and for GlaxoSmithKline, Sanofi, and Roche, it is around $8 billion. Perhaps it’s not surprising, then, that drug manufacturers recoup their R&D costs for only one in five approved drugs, a deterioration from one in four a decade earlier.
In addition, regulators have concocted additional criteria for marketing approval of a new drug — above and beyond the statutory requirements for demonstrating safety and efficacy — that could inflict significant damage on both patients and pharmaceutical companies. For example, they have sometimes arbitrarily demanded that a new drug be superior to existing therapies, although the Food, Drug and Cosmetic Act requires a demonstration only of safety and efficacy. And Phase 4 (postmarketing) studies are now routine, whereas the FDA used to reserve them for rare situations with subpopulations of patients for whom data were insufficient at the time of approval. The time and expense required to conduct clinical trials to satisfy regulators have been increasing inexorably.
A Poor Argument against FDA User Fees — and a Better One
Searching for any crumb that supports its bias against user fees, the Times doubles down: “In some cases, the agency seems to have been loath to bite the hand that finances it. A survey by the Union of Concerned Scientists found that 40 percent of the [FDA’s] scientists felt that the consideration accorded to business interests was ‘too high.’”
Impressive, right? Not when you consider the huge potential sampling error of the survey — there was only a 17% overall response rate — and that in such surveys, those most likely to respond are the most disaffected. Failing grades, as usual, to the UCS for publishing such a shoddy study, and to the Times for citing it.On one critical point, the Times and I agree: “The best approach would be for the government to fully finance the FDA.” But I support this approach not because, as the Times believes, user fees make regulators beholden to industry. Rather, I support it because drug and device user fees are a discriminatory tax on specific, research-intensive business sectors, a tax that ultimately will be passed along to consumers. I also support it because user fees disproportionately affect smaller companies and because the imposition of user fees is an underhanded way to fund government activities “off the books.” Congress should face up to its responsibilities, appropriate sufficient funds, perform its oversight role conscientiously, and then evaluate the results.
Comments Off on What to expect when you’re expecting: Lots of weird regulations and obscure laws
In one of the wealthiest and most technologically advanced countries in the world, how could maternal mortality be increasing?
The United States has the worst rate of maternal deaths in the developed world, NPR reports. Some of these deaths are due to poor maternal health, but a big part of the problem is high rates of intervention.
We often talk about the US health care system being broken, but usually the focus is on the problem of uninsured Americans or the costs of care in general. What gets less attention are the ways our health care system harms some of our most fundamental rights, including the right to control what happens to our bodies.
For starters, let’s look at how a typical American woman gives birth.
She contacts her insurance company or Medicaid (which pays for over 40% of US births) to find an in-network provider. The in-network provider is almost always an obstetrician, and the care setting is almost always a hospital.While in the hospital, more than 40% of these mothers will have their labor chemically induced, and more than 30% of those induced mothers will end up with a cesarean section. Many more will be hooked up to machines and monitored, prevented from moving or even eating and drinking during labor, and in some cases subjected to vaginal exams and other invasions of their bodies they don’t meaningfully consent to. Most birthing women have little understanding of the risks and benefits of any of these procedures.
All these restrictions and invasions of the mother’s body are done ostensibly for the sake of her’s and the baby’s health, but no medical reason exists for this level of intervention for most of these women. In other words, the vast majority of childbirths could happen as or even more safely if the mother were able to move around, eat, drink, and avoid invasive interventions.
Why Women Can’t Use Hospital Alternatives for Childbirth
As it turns out, alternatives exist that lower intervention rates, lower costs, and provide more satisfactory care. These alternatives include freestanding birth centers and home births, and many European countries use these options as a foundational part of maternity care with great success. But most American women cannot take advantage of these options, either because they do not know they exist, insurance does not cover them, or they don’t exist in their area.
If all this hospitalization and treatment actually helped keep women and babies safe, maybe the economic and human costs would be worth it. But it doesn’t, and they aren’t.
So why do American women give birth like this? What the average new mother does not know is that her choices surrounding how her baby is delivered and how her body is treated during labor and delivery are limited by a tangle of regulations and laws.
Regulations Push Out Entrepreneurial Midwives and Obstetricians
In many states, birth centers must go through a certificate of need (CON) process. They have to ask the permission of their direct competitors — hospitals — to enter the market. Entrepreneurial midwives and obstetricians must pay tens, sometimes hundreds of thousands, of dollars in application and legal fees to navigate the CON process.
In New York State, for example, entrepreneurs must already have their space rented at the beginning of the CON process, which can itself take a year, thus forcing them to pay rent on an empty facility while they ask permission of their direct competitors to enter the market. Guess how often that permission is denied? Frequently.
In addition to getting through the CON process, birth centers in most states are legally required to have a written consulting agreement with a physician. Such agreements increase physician malpractice insurance rates, so many are unwilling to sign such agreements.
Moreover, birth centers must enter written agreements with hospitals to transfer their patients in case of an emergency, even though hospitals are already mandated by law to treat anyone who shows up in need. Birth centers cannot operate without these consultation and transfer agreements.Doctors and hospitals can pull out of an agreement at any time, which means birth centers are at the total mercy of their direct competitors not only to enter the market but to stay in business, even if they are financially successful and providing high quality care.
As a result of the regulatory tangles providers find themselves in, despite the 4 million women who give birth in the United States every year, only around 300 birth centers exist to provide out-of-hospital care. This despite the fact that hospitals in many rural areas are closing their maternity wards, leaving women to drive many miles while in labor to find adequate facilities to deliver their babies, putting themselves and their babies at risk.
How Medicaid Favors Hospital Births
Making the situation even more complex is that until recently, Medicaid did not reimburse patients for using birth centers at all, and now that it does (in some states), the reimbursement rates are laughable. Many birth centers do not accept Medicaid at all because the reimbursement rates are so low that they threaten the facility’s continued existence (in states like New Jersey, reimbursement is as low as $250 per birth for care that costs birth centers $2000 or more to provide). Yet Medicaid reimburses hospitals for the exact same birth at nearly 30 times that rate (an average of $7,000). Government insurers are therefore paying more for women to receive lower quality care.
Of course, part of the difference in reimbursement rates occurs because the reimbursement rates for hospitals do not just cover that average woman’s uncomplicated birth, but also more complicated ones. But another part of it is that government reimbursement policies are fundamentally broken. Because Medicaid payment rates do not clearly track or relate to the care being provided or its quality, they create dramatic access barriers to higher quality care.
Barriers to Home Birth
Some women decide that in order to get the birth experience they want, they will opt out of the system altogether, paying for birth out of pocket at home. That seems like a reasonable exertion of free choice. But government intervention doesn’t stop at hospital doors. Women in many states who want to give birth at home to may find that there are no legal providers to assist them.Until this month, home birth with a certified nurse midwife was illegal in Alabama, for example — any midwife who attempted to assist a woman in labor was subject to criminal prosecution. In still other states, birthing mothers who seek an alternative practitioner are limited to certified nurse midwives, who almost always operate in hospitals.
In many states, women who refuse unnecessary hospital procedures or who attempt home births are subject to state involvement, including threats from Child Protective Services. Things are even worse for women who want a vaginal birth after cesarean (VBAC), which many hospitals prohibit. But most American women, who don’t know that better alternatives exist or who don’t have access to those alternatives, continue to give birth in hospitals where their freedom to control their bodies is extremely limited.
This kind of government activity does not just affect birthing women. Government intervention affects your access to at-home care, urgent care centers, decent and high quality primary care, and a range of other options that can lower costs and increase the quality of care. Until we are fully aware of how our choices are limited — even before we step into the hospital — by CON laws, licensing laws, reimbursement policies, and other regulations, our bodies will continue to be used and abused by the monopolists who control them.
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Bryan Caplan says we could get rid of 95% of government health care intervention, and STILL have subsidized health insurance for the poorest. Watch the full interview
Comments Off on The health care shell game: Why not leave health care policy to the states?
Recent arguments against cutting federal health care spending — and letting states handle insurance regulation — reveal just how unaffordable the Affordable Care Act (Obamacare) is.
Law professor and Incidental Economist contributor Nicholas Bagley, reconstructing the arguments of the moderate Republican Tuesday Group, says that “it’s fine to give the states more authority to oversee their insurance markets,” but the states “don’t have the fiscal capacity to finance massive coverage expansions on their own.”
They’re required to balance their budgets every year, so any commitment to covering the uninsured will throttle their budgets when the next downturn comes.…
The states thus need federal money; it’s the lifeblood of health reform. And the real cleavage among Republicans is over how much money the federal government is willing to shell out. The Freedom Caucus wants to repeal the ACA’s taxes on industry and the wealthy, financing them with savage cuts to Medicaid and slightly less savage cuts to individual-market subsidies. The Tuesday Group likes the tax relief, but worries about the coverage losses associated with all the cuts.
State Budget Requirements
The case against letting the states fund Medicaid expansion on their own is that they have to run balanced budgets. But wait, I thought the Affordable Care Act actually reduced the deficit! That was, after all, the assertion of the Congressional Budget Office and the Joint Committee on Taxation in 2013.
So if federal ACA spending were cut or even zeroed out, why couldn’t states that like the legislation simply reinstate the same taxes and spending that the federal government currently uses under the law? If the net budgetary impact of the health care law really is zero, there is no inconsistency with state balanced-budget requirements.
What’s more, most states don’t have strong constitutional requirements that they actually run balanced budgets at the end of the fiscal year. More often, they just have statutory requirements that balanced budgets must be enacted — or even merely proposed — at the beginning of the fiscal year. Most states run balanced budgets because they want to, not because they are required to by law.
Federal and State Spending Constraints
Having the federal government pay states to run programs is just a complicated shell game — the states aren’t really winning if the federal government pays for the programs, because the federal government ultimately gets that money from taxpayers living in the states.
Now, perhaps Bagley’s response would be something like this: The ACA generally reduces the deficit, but there might be some years when its taxes bring in less than expected, and states would be tempted to cut spending in those years. The federal government doesn’t face the same constraint.
To this possible response, there are two counterarguments.
First, the federal government faces a stricter constraint than the states in one crucial respect: its total debt burden is much larger. Federal debt is already greater than 100% of GDP, leading to higher interest costs and crowding out private investment. Expanding the debt even further would only exacerbate these serious problems.
State and local debt is much lower, at about 16% of GDP. State and local governments are much more fiscally responsible than the federal government, and that’s precisely what gives them room to spend if there’s a good reason for it.
Second, states have a ready mechanism to deal with economic downturns and sudden revenue shortfalls: rainy day funds. States accumulate surpluses in good years and then use the saved funds to smooth out spending in bad years. Spending out of a rainy day fund violates no balanced-budget rules.
Desire vs. Ability
In short, state balanced-budget rules provide no good reason why states couldn’t fund health care spending on their own. Perhaps ACA supporters truly worry that states wouldn’t want to fund massive health-care programs, because states want to keep taxes low. (Even Vermont realized that it didn’t really want single-payer health care when it recognized the price tag.)
But isn’t this demand for hiding the costs of the ACA almost tantamount to admitting that the ACA isn’t good policy?
Comments Off on Highlights from our Reddit AMA with Professor Lauren Hall
If you missed the Reddit AMA with Professor Lauren Hall last week, fear not! We’ve taken the liberty of compiling some of the highlights for your viewing pleasure. You can check out the whole thing here.
Dr. Hall is associate professor of political science at Rochester Institute of Technology. She is the author of Family and the Politics of Moderation (Baylor University Press, 2014), regular contributor to the Learn Liberty Blog, and has appeared on Learn Liberty in Choice and Change: How to Close the Gender Gap and Bridging the Gender Gap: The Problems with Parental Leave.
Comments Off on Are Americans getting too much healthcare?
During policy debates on healthcare most people assume that more healthcare leads to better outcomes. What if that assumption is false?
In a 2010 essay in the Atlantic, Myth Diagnosis, Megan McArdle cites research by Richard Kronick of the Department of Family and Preventive Medicine at the University of California at San Diego. Kronick found that even when a “disease was particularly amenable to early intervention” there was no “significantly elevated risk of death among the uninsured.”
Dr. Atul Gawande writes in his essay “The Cost Conundrum,” “Americans like to believe that, as with most things, more is better. But research suggests that where medicine is concerned, more may actually be worse.” Among other things, Dr. Gawande summarizes findings of Dartmouth’s Institute for Health Policy and Clinical Practice, which examined “regional patterns in Medicare payment data.”
Two economists working at Dartmouth, Katherine Baicker and Amitabh Chandra, found that the more money Medicare spent per person in a given state the lower that state’s quality ranking tended to be.
Another Dartmouth team … examined the treatment received by a million elderly Americans diagnosed with colon or rectal cancer, a hip fracture, or a heart attack. They found that patients in higher-spending regions received sixty per cent more care than elsewhere … Yet they did no better than other patients, whether this was measured in terms of survival, their ability to function, or satisfaction with the care they received. If anything, they seemed to do worse.
Consider one specific procedure: the common heart catheterization. According to Shannon Brownlee’s book Overtreated, there are more than 2 million heart catheterization procedures performed in the United States each year. Well over 50% are elective procedures; the patient has symptoms but is not in immediate danger of dying. Brownlee writes that the research suggests “the vast majority of elective cardiac procedures are no more effective at preventing heart attacks and death than medical management, which involves giving patients drugs and counseling.”
A stent is often placed during catheterizations. Dr. David L. Brown, a professor of cardiology at Washington University’s School of Medicine in St. Louis, is unequivocal about the value of a stent: “Nobody that’s not having a heart attack needs a stent.” Brown is the coauthor of a journal article that examined “every randomized clinical trial that compared stent implantation with more conservative forms of treatment.” The paper found “that stents for stable patients prevent zero heart attacks and extend the lives of patients a grand total of not at all.”
How can that be? Well, the cardiovascular system is more complicated than unblocking a clogged sink. Dietary changes, exercise programs, and medication can be more effective than stent surgery. Yet, doctors often resist taking these routes to treatment.
Examining the efficacy of other procedures too, David Epstein and Propublica observe that despite the wonders of modern medicine, “it is distressingly ordinary for patients to get treatments that research has shown are ineffective or even dangerous.”
Why does overtreatment systemically occur?
Milton Friedman was a long-time critic of the distortions caused by the tax exemption for employer-provided medical insurance. In his 2001 essay “How to Cure Health Care” Friedman explained succinctly one reason why there can be both excessive spending on medical care and dissatisfaction with the results: “Nobody spends somebody else’s money as wisely or as frugally as he spends his own.”
When we utilize healthcare, most of us are spending someone else’s money: the insurance company’s, the taxpayer’s, or our employer’s. In all, as the Cato Institute’s Daniel Mitchell points out, “Consumers are now paying only 10.5 percent of health care costs.” Under these circumstances, Friedman observes, “The patient — the recipient of the medical care — has little or no incentive to be concerned about the cost.”
Would you be more concerned about the efficacy of a treatment if you were spending your own money? Would you think twice about undergoing an expensive test? Would you be more interested in prevention in the form of dietary and lifestyle changes?
Imagine that employers provided tax exempt automobile maintenance insurance as a job benefit. Further imagine, as with many health insurance policies, the auto “insurance” benefit covered both routine expenditures like oil changes, and large unexpected expenditures like body repair after a crash. We can be certain that the automobile maintenance markets would be radically different.
With someone else paying, the incentive for car owners to take responsibility for auto maintenance is reduced. Would car owners learn basic automobile maintenance if expenses caused by ignorance were covered by insurance? If automobile insurance paid for new tires, how often would car owners rotate their tires? Suppose an engine seized up because of lack of oil and the insurance simply paid for a new engine. How often would car owners check and change oil?
With reduced consumer responsibility, automobile expenditures would explode. All well and good, if you are a provider of tires, engines, and automobiles. — but not so good for the rest of the economy.
Health insurance operates unlike other insurances. As Friedman points out, “We generally rely on insurance to protect us against events that are highly unlikely to occur but that involve large losses if they do occur — major catastrophes, not minor, regularly recurring expenses.”
“We have become so accustomed to employer-provided medical care,” writes Friedman, “that we regard it as part of the natural order.” Friedman asks pointedly:
Why single out medical care? Food is more essential to life than medical care. Why not exempt the cost of food from taxes if provided by the employer? Why not return to the much-reviled company store when workers were in effect paid in kind rather than in cash?
In 2016 the healthcare industry spent over $3 billion dollars lobbying. Given the rewards under the current system of heavy government involvement in healthcare, we can understand why the healthcare industry spends far more on lobbying than any other industry. Their interests are not the consumers’ interests.
If healthcare was financed by the consumer directly, the problem of overtreatment would diminish greatly. Healthcare expenditures and prices for healthcare would likely fall. Would the nation’s health improve too?
Comments Off on Healthcare will never be affordable without action on prices
Republican reformers have repeatedly promised affordable healthcare for all Americans — doubly affordable, in fact. They promise sufficient subsidies to put premiums and out-of-pocket costs within reach of low- and middle-income consumers. At the same time, they promise that the plan will be affordable to the federal budget, even given the constraints their most conservative members would like to impose on federal spending.
Unfortunately, the American Health Care Act (AHCA) now before Congress will make healthcare affordable in the budgetary sense only, by making it less affordable in the individual sense. According to analysis by the Congressional Budget Office, the AHCA will reduce the budget deficit by $337 billion over a ten-year period, but only at the expense of reducing the number of insured by 14 million in the near term and by 24 million after the full effects of the bill come into force. As the CBO points out, even many people who retain coverage will find it more expensive because the ACHA tax credits will be less than the subsidies available through exchanges under the current Affordable Care Act (ACA). For others, the only option that will become more “affordable” is that of going without insurance, due to the ACHA’s elimination of the ACA’s individual mandate.
Under the ACHA or ACA, one uncomfortable fact remains unavoidable: There is no way to make healthcare affordable for either the budget or individuals without strong action to control prices for drugs, medical devices, hospitals, and doctors’ fees that are higher than in any other country. The current draft of the ACHA does nothing to deal with that critical problem.
The Elephant In The Room
Princeton economist Uwe Reinhardt calls high healthcare prices the “elephant in the room.” Yes, he says, there is waste at every level of the U.S. healthcare system. Yes, U.S. doctors and hospitals probably do overuse some procedures (C-sections) and tests (MRIs). Still, Reinhardt argues that by and large, it is the high price of care, not an excessive amount of care, that makes our healthcare so much more costly than that of any other advanced country. We don’t have more hospital beds per capita, or more doctors, or more births. We just pay more for each unit of service.
Reinhardt cites data from the International Federation of Healthcare Plans to back up his claim. For example, in 2012, the average cost of an appendectomy in the United States was $13,851, compared to $5,467 in Australia, the country with the next highest price. For a normal delivery, the U.S. price was $9,775 compared to $6,846 in Australia. The range of prices charged within the United States was even more astonishing than the average. At the twenty-fifth price percentile, an appendectomy in the United States cost $8,156 — higher than Australia’s average. At the ninety-fifth percentile, the U.S. price was an astounding $29,426. A normal delivery in the United States raged from $7,282 to $16,653.
What causes high prices and what can we do about them? Here is a list of some of the most common ideas. (Warning: Each of the following paragraphs would have to be expanded to its own long post — or even to a doctoral dissertation — for a complete treatment.)
Lack of Transparency
A lack of transparency helps keep prices high by discouraging consumers from shopping around for the best deal, even when their problem is not so acute that they have no time to shop. As Reinhardt puts it, “Fees in the private [healthcare] sector have been jealously guarded trade secrets among insurers and providers of health care.”
Some reformers hope to encourage consumers to be smart comparison shoppers by imposing higher deductibles and copays and softening the blow with health savings accounts, which consumers can draw on to pay their out-of-pocket costs. However, those devices are useless if consumers cannot get price information in the first place.
Some insurers are trying to combat the lack of transparency by providing comparative price information, but what they give is not always easy to understand, and many patients do not look at it. A 2015 poll by the Kaiser Family Foundation found that only 6 percent of patients had seen price information on hospitals and doctors, and only 2 to 3 percent had made use of it.
There are plenty of ideas around to make price information more accessible and easier to use. For example, Jeffrey Kullgren, writing for the New England Journal of Medicine Catalyst, recommends bundling price quotes to show the sum of all fees that a consumer would face for a procedure, rather than separate fees for use of facilities, doctors’ services, supplies, and medications. He also recommends that providers have dedicated staff to provide price information to patients and explain what it means. Providers should also be willing to tell patients what services might not benefit them. For example, a $100 blood test might be essential for one patient but provide no useful information to another.
Even when price information is available to consumers, the structure of their insurance plan may not encourage them to use it. For example, if a plan covers whatever the provider charges, once a deductible has been satisfied, the consumer has no incentive to look for the best value for major procedures. In another article, Reinhardt recommends “reference pricing,” a scheme under which an insurer pays only the price charged by a low-price provider in the area, leaving consumers to pay the balance if they choose a higher cost provider.
Narrow network policies are a step in that direction of reference pricing, but they can meet resistance when patients have established relations with certain doctors and hospitals. Also, some consumers, to their sorrow, find that narrow networks can fail, leaving them with surprise bills from radiologists or anesthesiologists who are not network members, even though the hospitals where they work are.
Individual consumers are not always the ones to blame for a failure to respond to incentives. Reinhardt notes that employers are also notoriously bad shoppers for low priced care. One reason may be that they think they can pass higher healthcare costs along to workers through lower wages — a hypothesis that many labor economists agree with.
At a minimum, it is fair to say that a well-structured healthcare system should include some checkpoint in the chain between provider and patient where some party has an incentive to ask whether the product or procedure in question has a medical value that is commensurate with its cost. There is room for discussion as to who this should be or what standards should apply. The problem with the current U.S. system is that often no one at all has an incentive to address this question.
Insurance coverage in the United States is highly fragmented. In the private insurance market, there are many carriers. Small carriers, especially, have weak bargaining power compared to large hospital groups and drug companies. On the government side, coverage is divided among Medicaid, Medicare, and VA systems that have differing authority to negotiate for low prices — and sometimes none at all.
In the private sector, insurers could be given the power to negotiate jointly with providers in their area. Government providers could also have a way to negotiate jointly for advantageous prices.
The ultimate in bargaining power would be to have a single payer for all healthcare services. The bargaining power inherent in single-payer systems is one of the main reasons other advanced countries have lower healthcare costs and still manage to produce superior quality of care compared with the United States, where doctors remain in individual practices and hospitals are privately owned.
The issue of pricing has nowhere received more attention than in the case of drug prices. Some observers think the advent of a million dollar pill is not far off. A recent commentary by Scott Alexander provides a good summary of the complexity of the issues involved.
The central problem is that of balancing the high costs of research and testing against the relatively low costs of producing drugs, once they are in use. The current regime handles this by giving drug companies temporary monopoly rights through patents. During the patent period, producers can charge whatever prices they deem appropriate. After patents expire, competition from manufacturers of generics usually brings the price down toward production costs.
This regime can have good outcomes or bad. The new generation of drugs to fight hepatitis C, which are very expensive but also very effective, appear to represent the good end of the spectrum. Research that, at vast expense, only fiddles with a molecule or two to produce a drug that prolongs a patent with no added medical benefit is the bad end.
Price discrimination also contributes to high U.S. drug prices. A 2015 report from Bloomberg found that the prices of seven out of eight common medications cost less abroad than in the United States, even after taking into account the discounts negotiated behind closed doors with some insurers. The cholesterol lowering pill Crestor cost five times more in the United States than in the next-most-expensive country at list price, and more than twice as much even after discounts. The leukemia drug Gleevec cost four times more in the United States, and no discount was available.
Economists do not universally condemn price discrimination. No one objects when theaters or theme parks charge reduced prices for children. Airlines use price discrimination to keep their airplanes filled — a practice that lowers average prices in the long run and increases the number of fights passengers can choose from. However, there are ways to keep price discrimination from getting out of control without undermining its usefulness in markets where fixed costs are high.
High barriers to resale across markets are one factor that facilitates price discrimination. For that reason, many reformers suggest allowing consumers to purchase drugs online from retailers in Canada, Mexico, and other countries where prices are lower. Since the United States is the high-price consumer in most cases, moves to reduce price discrimination would probably lower prices here. However, the net gains would be less than suggested by the current cross-border price differential, since curbing price discrimination would probably raise drug prices abroad at the same time it lowered them in the United States.
Mergers, Monopolies, and Entry Barrier
Numerous studies (this one, for example) have found that mergers among hospitals tend to raise prices in the affected areas. Mergers between hospitals and physician groups can have a similar effect. During the Obama administration, the Federal Trade Commission began to push back against the wave of mergers. It is not yet clear whether such actions will continue under the Trump administration.
Entry barriers are another factor that contributes to a lack of competition and higher prices. A recent study from the Mercatus Center notes that thirty-six states do not allow the entry of new hospitals without a certificate of need issued by a government agency. The ostensible purpose is to improve the quality of care by preventing excessive competition. The Mercatus study casts doubt on that claim, showing that by some measures, the quality of medical service is actually lower in states with certificate of need laws.
Economists have also long argued that limits on admission to medical schools help to keep doctors’ salaries higher than in other equally wealthy countries. Observers on both the left and the right of the political spectrum complain that the American Medical Association acts as a cartel in resisting the expansion of medical schools even as the number of applicants rises.
The fragmented nature of U.S. healthcare produces higher administrative costs than other countries. Those costs ultimately work their way into the prices of hospital care, physician services, drugs, and every other area of care. A study from the Commonwealth Fund found that in 2014, administrative costs accounted for 25 percent of all hospital expenses—higher than any of eight other countries studied, and double the level of Canada. An earlier study from the Office of Technology Assessment found similar results for total administrative costs in the healthcare system.
Single payer systems are inherently more efficient in terms of administrative costs. International experience shows that many savings can be realized within a unitary administrative framework without requiring that hospitals be owned and operated by the government or that all physicians become government employees.
No Simple Answer But a Need for Action
It should be clear from these examples that there is no single explanation for high U.S. healthcare prices, and no simple solution. Action is needed, but it needs to come across many fronts at once — against mergers, entry barriers, drug prices, lack of transparency, administrative fragmentation, and other problems. If each of these areas could eliminate a single percentage point of the gap between U.S. prices and those that prevail in our high-income peers, we could save billions of dollars a year.
If the current draft of the AHCA is not revised to address the problem of excessive healthcare prices, it is likely to do little to improve affordability. Any savings it brings can come only from reducing the quantity or quality of care provided, not by reducing costs per unit of service.
Paul Ryan, the most vocal backer of the bill, insists that this is only the first step. We have to understand, he says, that the AHCA is tailored to meet the arcane requirements of the Congressional reconciliation process, which limits changes to matters directly affecting taxes and spending. He promises a second wave of reforms to address cost controls and issues of efficiency.
There is a huge danger in this approach, however: Every dollar saved in healthcare costs means a dollar less of revenue for some healthcare provider. Any proposals to cut drug prices, increase competition among hospitals, or squeeze out administrative costs in the insurance industry will face tooth-and-nail opposition from an army of lobbyists.
The AHCA, if passed in its current form, will satisfy the potent symbolism of repealing Obamacare. Any Republican Senator or Congressman who votes against it will have broken an explicit campaign promise and will face a primary fight in the next election. But once a repeal bill passes — any bill — the political heat will be off. The motivation to tighten the screws on big pharma or the insurance industry, against the will of the lobbyists, will evaporate.
At the same time, Democrats will dig in their heels against anything that might make the AHCA work better. At least a few Democratic votes will be needed for any further reforms that can’t squeeze through the eye of the reconciliation needle. But where is the political motivation to cooperate? Many Democrats may well prefer to see a half-baked GOP reform collapse in a death spiral, (as I predicted in an earlier post that it will do), and hope to pick up the pieces after the 2020 elections.
In short, the two-part approach is unworkable. Sen. Tom Cotton was right when he tweeted to his colleagues in the House to “Pause, start over. Get it right.”
Comments Off on Entitlement reform key to fixing America’s fiscal future
In his first address to Congress, President Trump lamented that “the past Administration has put on more new debt than nearly all other Presidents combined.” With federal debt approaching $20 trillion, he is right to be concerned about the rapid accumulation in recent years.
However, the president did not mention of Medicare and Social Security, two of the largest and fastest-growing federal programs, and he has previously stated that he sees no reason to reduce spending on these programs. Treasury Secretary Mnuchin reiterated last week, “We are not touching [entitlements] now, so don’t expect to see that as part of this budget.”
Without substantive reform, it will be exceedingly difficult to address the country’s long-term fiscal problems, and it will only get harder if needed changes are delayed.
Medicare and Social Security already account for roughly two-fifths of all federal outlays, and they will account for a growing share of the federal budget over the coming decade. Medicare, Social Security, and net interest payments on the debt will account for roughly 55 percent of federal outlays by 2027, an increase over their already significant share of 45 percent last year.
Source: Congressional Budget Office, “10-Year Budget Projections, January 2017,” Tables 1-2 and 1-3.
Entitlement spending growth is a major reason that budget deficits are projected to surge over the next decade. Although forecasting ten years in advance is notoriously difficult, the deficit is estimated to exceed $1.4 trillion by 2027 and accelerate further after that, with trillions added to the debt as a result. By 2045, debt held by the public will almost double, to 145 percent of GDP according to the Congressional Budget Office. It is practically inconceivable that politicians would not step in before this happened. However, if left unaddressed. debt at these levels would severely hamper economic growth, reduce living standards, and put increasing amounts of pressure on net interest payments and other areas of the federal budget.
Source: Congressional Budget Office, “Long Term Budget Projections, January 2017,” Supplemental Table 1. Annual Data Underlying Key Projections in CBO’s Extended Baseline.
Efforts to root out waste, fraud, and abuse, or to increase government’s efficiency are certainly worth pursuing, but proposals that eschew any kind of entitlement reform will leave the main drivers of debt in the long-term untouched.
Similarly, reducing regulatory barriers, improving the tax code, and generally developing a policy framework that allows the economy grow more rapidly are good ideas. To some extent, this could attenuate structural fiscal issues, but even higher rates of growth cannot make them go away. According to one recent estimate, productivity growth would need to be twice projected levels just to stabilize the debt at slightly lower levels as a percent of GDP. Doubling productivity growth rates would be an impressive accomplishment, but there is a limit to how much it can help the country get out of its debt problem.
This is why entitlement reform is key. The unsustainable nature of these programs face mean that some reforms will have to be implemented: the only questions are when and what kind of changes will be made. The longer these reforms are put off, the inevitable changes will by necessity be larger and more abrupt.
For example, the Social Security Trustees estimate that an immediate and permanent benefit reduction of 16 percent for all beneficiaries would be enough to make the program solvent for the full 75-year projection. If nothing is done until the trust fund becomes insolvent in 2034, an immediate 21 percent reduction in benefits would be necessary.
Phasing in a gradual increase in the retirement age indexed to increases with longevity, or using the chained CPI for cost of living adjustments are measures that could go some way to making the program sustainable without sudden, significant benefits or tax increases. Kicking the can down the road will only increase the magnitude of eventual disruption, when changes will have to be concentrated in fewer years and the burden will fall on fewer people.
Part of the political difficulty stems from the public. People are wary of reforms that could affect their benefits, and they lack understanding regarding which programs are the drivers of the country’s debt. In a recent poll, 46 percent of respondents said they thought foreign aid, which accounts for roughly one percent of the federal budget, contributes “a great deal” to the national debt, a higher proportion than for any of the other programs polled. It is laudable to take a hard look at spending at all agencies and to excise inefficient or wasteful spending, this alone will not be enough to improve the overall fiscal picture.
Without real reform, the important task of placing entitlement programs back on a sustainable trajectory will be left for later generations—at which point the country will be farther down this unsustainable path.
Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on twitter @CharlesHHughes.
Comments Off on The House GOP leadership’s health care bill is ObamaCare-Lite — or worse
During the presidential campaign, Donald Trump promised legislation that “fully repeals ObamaCare.” Monday night, the Republican leadership of the House of Representatives released legislation it claims would repeal and replace ObamaCare. Tuesday afternoon, Vice President Mike Pence will travel to Capitol Hill to pressure members of Congress to support the bill. On Wednesday, two House Committees will begin to mark-up the legislation. House and Senate leaders are hoping for quick consideration and a signing ceremony, maybe by May, so they can move on to other things, like tax reform and confirming Supreme Court nominee Judge Neil Gorsuch.
Everyone needs to take a step back. This bill is a train wreck waiting to happen.
The House leadership bill isn’t even a repeal bill. Not by a long shot. It would repeal far less of ObamaCare than the bill Republicans sent to President Obama one year ago. The ObamaCare regulations it retains are already causing insurance markets to collapse. It would allow that collapse to continue, and even accelerate the collapse. Republicans would then own whatever damage ObamaCare causes, such as when the law leaves seriously ill patients with no coverage at all. Congress would have to revisit ObamaCare again and again to address problems they failed to fix the first time around. ObamaCare would consume the rest of Congress’ and President Trump’s agenda. Delaying or dooming other priorities like tax reform, infrastructure spending, and Gorsuch. The fallout could dog Republicans all the way into 2018 and 2020, when it could lead to a Democratic wave election like the one we saw in 2008. Only then, Democrats won’t have ObamaCare on their mind but single-payer.
First, let’s look at how the main features of this bill fall short of repeal.
ObamaCare expanded Medicaid to able-bodied adults below 138 percent of the federal poverty level. The federal government covers a much larger share of the cost of covering Medicaid-expansion enrollees than enrollees in the “old” Medicaid program—currently 95 percent, bottoming out at 90 percent in 2020. So far, 31 states have chosen to implement the Medicaid expansion; 19 have declined.
The House leadership’s bill would not even start to repeal ObamaCare’s Medicaid expansion until 2020, more than two and a half years from now, and even then would repeal it only one enrollee at a time. In 2020, states could no longer enroll new able-bodied adults into the Medicaid expansion. Yet the federal government would continue to pay for each and every continuously covered able-bodied adult who enrolled in the expansion before then. And it would do so at the enhanced ObamaCare matching rate, in perpetuity, until an enrollee leaves the program. If the House leadership has its way, we may be decades away from full repeal of the Medicaid expansion.
For the two-plus years between enactment and 2020, the House leadership bill would continue to allow states both to opt into the expansion and to go on an enrollment binge, for which the federal government could be paying for decades. It is likely that the number of states participating, and the number of people enrolled in the Medicaid expansion will be higher after “repeal” than before.
Which means the Medicaid expansion may never disappear at all. By 2020, the constituency for preserving the Medicaid expansion would be much larger than it is now. More states, more voters, and more special interests will resist repealing the expansion than do today. As I discuss below, Congress will likely be more Democratic than it is today.
When eventually we see a Congressional Budget Office score of the bill (House leadership has numbers, but they’re not sharing them), it may show a reduction in federal spending on the Medicaid expansion after 2020. I would not bet on that happening.
Currently, Congress matches states’ spending on their Medicaid programs. When a state spends $1 on its program, Congress contributes between $1 and $3. This creates a pay-for-dependence incentive. It encourages states to expand both enrollment and benefits far beyond what they would if states bore the full marginal cost.
The House leadership bill would reform the Medicaid program by converting it to a system of “per capita block grants.” It would give each state a fixed amount of money per enrollee, with the amount varying by the type of enrollee (aged, blind, disabled, children, non-expansion adults, and expansion adults).
A per-capita block grant would therefore resemble ObamaCare’s Medicaid expansion. States would get additional federal dollars for each additional person they enroll in their programs. But states would face the full marginal cost of providing new or existing benefits to enrollees. Just as ObamaCare’s Medicaid expansion creates incentives for states to expand their programs to able-bodied adults, while reducing access to care for the aged, blind, disabled, children, and pregnant women, the House leadership bill would create (or preserve) an incentive to expand enrollment to less vulnerable populations while cutting benefits for more vulnerable populations.
Economists describe the basic architecture of ObamaCare’s overhaul of private health insurance as a three-legged stool. The three legs of the stool are (1) “community rating” price controls that force insurers to charge healthy and sick people of a given age the same premium, and only allow premiums to vary from older to younger enrollees by a ratio of 3 to one, (2) an individual mandate that penalizes taxpayers who do not purchase a government-designed health plan, and (3) subsidies to help low-income people purchase that compulsory, overpriced health insurance. The House leadership plan retains all three legs of the stool, as well as many other ObamaCare provisions designed to mitigate the damage done by the community-rating price controls.
The first thing the House leadership’s bill does is expand ObamaCare by appropriating funds for the law’s so-called “cost-sharing” subsidies, something no previous Congress has ever done.
The House leadership bill retains the very ObamaCare regulations that are threatening to destroy health insurance markets and leave millions with no coverage at all. ObamaCare’s community-rating price controls literally penalize insurers who offer quality coverage to patients with expensive conditions, creating a race to the bottom in insurance quality. Even worse, they have sparked a death spiral that has caused insurers to flee ObamaCare’s Exchanges nationwide, including driving all insurance companies from the market in 16 counties in eastern Tennessee. As of next year, 43,000 Tennesseans in those counties could have no way to obtain coverage. Nearly 3 million Exchange enrollees are just one more carrier exit from the same fate.
The leadership bill would modify ObamaCare’s community-rating price controls by expanding the age-rating bands (from 3:1 to 5:1) and allowing insurers to charge enrollees who wait until they are sick to purchase coverage an extra 30 percent (but only for one year). Even with these changes, however, premiums would remain high, ObamaCare would continue to make it easier for people to wait until they are sick to purchase coverage, and the law would continue to penalize high-quality coverage for the sick. In fact, the House leadership’s decision to leave ObamaCare’s community-rating price controls in place while relaxing its “essential health benefits” requirements would cause coverage for sick to deteriorate even faster than ObamaCare does.
It is because the House leadership would retain the community-rating price controls that they also end up retaining many other features of the law. Observers have started to notice that successive iterations of the bill look increasingly like ObamaCare.
For example, the House leadership bill retains and modifies another leg from the three-legged stool: ObamaCare’s advanceable, refundable, and means-tested tax credits for health insurance. Though they sound like tax cuts, ObamaCare’s tax credits are actually 94 percent government outlays and only 6 percent tax reduction. The House leadership’s tax credits are likely to be similarly lopsided.
House leaders are retaining all that government spending—again, we don’t yet know how much ObamaCare spending the bill retains—largely because retaining community rating drives premiums unnecessarily high. Ironically, due to congressional budget rules, the fact that there are tax credits in the bill makes it impossible for Republicans to repeal ObamaCare’s community-rating price controls and other regulations. The CBO reportedly has projected that if the bill repealed those regulations, the price of insurance would fall so much that many more people would take advantage of the tax credits, and the bill would run afoul of budget rules by increasing federal deficits. Republicans evidently cannot repeal ObamaCare’s regulations if they hold on to health-insurance tax credits.
The tax credits could create a very thorny problem for both House and Senate Republicans. The House leadership bill prohibits the use of its tax credits for health plans that cover abortion. Due to an arcane Senate rule, Democrats likely can and will strip any such restrictions from the bill before final passage. This means that if the House bill ever makes its way to President Trump’s desk, it could subsidize abortion even more than ObamaCare does.
To the extent the bill’s modified tax credits are tax reduction, however, they are the functional equivalent of ObamaCare’s individual mandate. The flip side of tax credits that are available solely to those who purchase health insurance is that those who do not purchase insurance must pay more to the IRS than those who do. Just like a mandate. And since the effective penalty is just an increase in the taxpayer’s income-tax liability, tax credits for health insurance are actually more coercive than ObamaCare’s individual mandate, because the IRS has many more tools it can use to collect the penalty.
Conservatives deny any similarities between an individual mandate and a tax credit for health insurance. But consider the following. ObamaCare’s individual mandate penalty for single adults is $695 or 2.5 percent of income, whichever is greater. Suppose that instead, Congress had simply enacted a tax with those features, and then come back and provided an equivalent tax credit for anyone who purchases health insurance. The end result would be identical to ObamaCare’s individual mandate. But which would it be, a tax credit or a mandate?
Like ObamaCare’s tax credits, the House leadership’s tax credits would involve burdensome projection and verification of the taxpayer’s income (taxpayers above a certain threshold are ineligible for credits) as well as whether the taxpayer has an offer of qualified health insurance from an employer (taxpayers with an offer of coverage from an employer are ineligible).
Finally, the House leadership creates a new program of matching grants to states to fund things like Exchange subsidies, insurer bailouts, high-risk pools, and perhaps a “public option,” even after Republicans spent years railing against many of these things. If states don’t use the money, the federal Centers for Medicare & Medicaid Services can use the funds for insurer bailouts. The funding formula for this new grant program appears to reward high-cost states.
The House bill zeroes out the individual and employer mandates and outright repeals all manner of ObamaCare taxes, including: the tax on over-the-counter medications; the additional 10-percent tax on non-medical HSA withdrawals; the limits on health flexible spending arrangement contributions; the medical device tax; the tax on poor and/or sick patients (the AGI threshold for the medical-expenses deduction reverts from 10 percent to 7.5 percent); the “Medicare” “payroll” tax; the net-investment tax; the tanning tax; the tax on insurance-executive compensation; the health-insurance tax; and the pharmaceutical-manufacturers tax.
In a pretty crass budget gimmick, the bill retains the “Cadillac tax” on high-cost health plans but delays its onset until 2025.
Swallowing the Republicans’ Agenda
Republicans don’t seem to have any concept of the quagmire they are about to enter with this bill.
ObamaCare’s Exchanges are already on the brink of collapse. Since this bill does not repeal the community-rating price controls, repeals the individual mandate, shifts the benefits from ObamaCare’s tax credits up the income scale, and tasks states with devising new bailout schemes of uncertain timing and efficacy, the threat of death spirals will remain. Even where the individual market does not collapse, the coverage will get increasingly worse for the sick. If the tax credits (read: subsidies) for low-income Americans are less than under ObamaCare, many more low-income patients will lose coverage. Premiums will continue to rise. Republicans will take the blame for all of it, because they will have failed to repeal ObamaCare, or learn its lessons, when they had the chance.
The leadership bill therefore creates the potential, if not the certainty, of a series of crises that Congress will need address, and that will crowd out other GOP priorities, in late 2017 before the 2018 plan year begins, and again leading up to the 2018 elections. If Congress gets health reform wrong on its first try, health reform could consume most of President Trump’s first term. Pressure from Democrats, the media, and constituents could prevent Republicans from moving on to tax reform, infrastructure spending, or even Supreme Court nominees.
Partial Repeal Is the Road to Single Payer
Flubbing ObamaCare would at once united and embolden Democrats while dividing the GOP base, driving the former to the polls in 2018 and 2020 while causing the latter to stay home. If ObamaCare is not doing well, and Republicans take the blame, it will create the potential for the sort of wave election Democrats experienced in 2008, when they captured not just the House and the presidency, but a filibuster-proof, 60-vote supermajority in the Senate. If that happens, and ObamaCare is not doing well, Democrats will be less interested in rescuing ObamaCare than repealing and replacing it themselves—with a single-payer system.
ObamaCare opponents often muse that supporters designed the law to fail because it would give them the excuse to enact a single-payer system. Republicans have a choice. They can either prevent that future from unfolding, or they can help it along.
Widespread voter dissatisfaction with ObamaCare produced Republican gains in 2010 and 2014, and a GOP sweep in 2016. President Trump and congressional Republicans pledged full repeal of the law, and to replace it with free-market reforms. The parts of the country that stood the most to gain from ObamaCare swung the most to President Trump. That looks suspiciously like a mandate. The good kind.
If Republicans care about covering people with expensive medical conditions, they should stick to that promise. Making health care better, more affordable, and more secure requires first repealing all of ObamaCare’s regulations, mandates, subsidies, and taxes. Next, Congress should block-grant the Medicaid program, giving each state a fixed sum of money that does not change from year to year, combined with full flexibility to target those funds to the truly needy. (If states want to cover less-needy populations, like able-bodied adults, they can pay 100 percent of the marginal cost of that coverage.)
Finally, and crucially, Congress needs to enact reforms that make health care more affordable, rather than just subsidize unaffordable care. To make health insurance more affordable, Congress should free consumers and employers to purchase health insurance licensed by states other than their own. To drive down health care prices, Congress should expand existing tax-free health savings accounts into “large” HSAs. Large HSAs would be a larger effective tax cut than the Reagan and Bush tax cuts combined, adding $13,000 to the wages of a typical worker with family coverage. Large HSAs would drive down prices by making consumers cost-conscious at every margin, and would reduce the problem of preexisting conditions by freeing consumers to buy portable coverage that stays with them between jobs. Sen. Jeff Flake (R-AZ) and Rep. Dave Brat (R-VA) have introduced legislation to create Large HSAs.
The House Republican leadership bill does not replace ObamaCare. It merely applies a new coat of paint to a building that Republicans themselves have already condemned. Since the most important asset health reformers have is unified Republican opposition to ObamaCare, at least in theory, it would set the cause of affordable health care back a decade or more if Republicans end up coalescing around this bill and putting a Republican imprimatur on ObamaCare’s core features. If this is the choice, it would be better if Congress simply did nothing.
But this can’t be the only choice. Right?
Comments Off on The key questions any Obamacare replacement must answer
Republicans do not yet have a full replacement for the Affordable Care Act (ACA or “Obamacare”), but the outlines of one are emerging. The Policy Brief on Repeal and Replace issued by House Republicans on February 16 points the way toward a three-tier system. It promises to provide “coverage protections and peace of mind for all Americans—regardless of age, income, medical conditions, or circumstances,” while ensuring “more choices, lower costs, and greater control over your health care.”
Those are lofty aspirations, but reformers will have to address many difficult questions before they can be met. To find realistic answers, they will have to overcome divisions within the party, ideological constraints, outside pressures, and some hard realities of healthcare economics.
The new policy brief, and similar plans put forward by Rand Paul, Mark Sanford, Paul Ryan, and others, include many common elements. Together, they point to a three-tier system that, in broad outline, would look like this:
Central tier, for individuals and households with incomes well above the poverty line in which no member suffers from a serious chronic health condition. Such people account for roughly 70 percent of the population and roughly 25 percent of personal healthcare spending. Members of this tier would be served by conventional commercial health insurance. The cost of premiums would be covered by a combination of individual payments, advanceable healthcare tax credits (HCTCs), and employer contributions. Premiums and HCTCs could rise with age, but insurers would not be allowed to charge differential premiums based on pre-existing conditions or to refuse coverage. High-deductible policies would be encouraged by using health savings accounts (HSAs) for covering out-of-pocket costs.
Low-income tier, for individuals and households with incomes close to or below the official poverty line in which no individual suffers from a serious chronic health condition. Such people account for roughly 20 percent of the population and roughly 10 percent of all personal healthcare spending. Their coverage would be funded entirely, or almost entirely, from government sources. Some proposals use Medicaid block grants as the model for this tier.
High-risk tier, for individuals in the 10 percent of the population with chronic health conditions who account for roughly 65 percent of all personal healthcare spending. Average healthcare costs for this group exceed median household income. Their conditions are uninsurable due to the high cost of care and the chronic nature of their conditions. They would receive coverage from Medicare or some kind of high-risk pool, funded entirely, or at least in large part, from government sources.
In principle, such a system could ensure that 100 percent of the population had access to quality healthcare at an affordable cost—the aspirational goal set, but not fully achieved, by the ACA. However, the devil is in the details. Unless each element of the three-tier system is well thought out and adequately funded, and unless the parts fit together seamlessly, a Republican replacement could easily end up costing families more than the ACA and leaving a greater number of people without coverage.
Here are some questions that need answers before it will be possible to assess the workability of a Republican replacement for the ACA.
Questions for the central tier
How to control adverse selection? Conventional health insurance is affordable only if healthy people participate in the insurance pool. If people can easily buy into coverage after they become sick and drop out at will when they recover, the average cost of claims rises and premiums become unaffordable. This is the notorious “death spiral,” known to economists as the problem of adverse selection.
One way to control adverse selection is to make coverage mandatory. The ACA included a step in the direction of mandatory coverage in the form of tax penalties for healthy people who did not obtain coverage. However, that proved to be one of the least politically popular aspects of the ACA, especially among Republicans.
Another way to control adverse selection would be to refuse care to people who do not have insurance. However, absolute refusal would defeat the goal of making healthcare universally accessible. No one wants to see people who have been turned away by doctors and hospitals dying on the streets.
A possible compromise would be to require that providers serve people without insurance coverage, but to make aggressive retroactive efforts to collect full payment from them for services rendered. Those efforts would include mechanisms such as asset forfeiture, garnishing wages, and personal bankruptcy. A sufficiently severe financial threat would probably be enough to induce most healthy members of the middle-class to purchase insurance—catastrophic coverage, at least—thereby avoiding the worst effects of adverse selection. If expenses from a serious illness drove an uninsured person or household into bankruptcy, they would become eligible for coverage either under the low-income or the high-risk tiers.
How to deal with temporary, cyclical, and unexpected loss of coverage? In addition to dealing with people who voluntarily accept the financial risks of foregoing insurance, any plan should have some provision for dealing with people who lose coverage through no fault of their own. Examples include cyclical job loss, plant closings, death of a covered parent or spouse, and divorce. Measures to deal with such contingencies might include emergency premium support for affected individuals. They might also require temporary federal help to state-administered programs in cases of economic downturns that affect regions unevenly—say, a Florida real-estate collapse or an Oklahoma energy bust.
What role for employer-provided insurance? Historically, a large portion of people eligible for the central tier of the three-tier system have received coverage through their employers. However, employer-provided coverage has a number of disadvantages. Among others, it is a burden on the employers themselves—one that, according to economists, is passed through at least in part to workers in the form of lower wages. It works less well for small and medium businesses than for large corporations. Also, it tends to decrease labor mobility through “job lock,” since moving to a new job will most likely mean loss of coverage.
One option would be to follow the lead of the ACA and leave the current employer-provided system in place. Doing so would perhaps have the political advantage of reducing the apparent budgetary cost of subsidies to individual insurance companies within the central tier. However, those savings are largely illusory, since existing tax preferences for employer-provided insurance are a drain on the budget, too.
Another option would be to let employer-provided insurance gradually die. It is, in fact, already gradually dying. Some GOP proposals would accelerate the demise of employer-provided insurance by repealing the employer mandates of the ACA. It would also be possible to speed the phase-out of employer-provided insurance by withdrawing tax preferences, as some Congressional Republicans are reportedly considering.
What conditions should be set for transition into the high-risk tier? Premiums would remain affordable for people in the central tier only if the sickest patients—the 10 percent of the population who account for two-thirds of all personal healthcare spending—were covered by the high-risk tier. To make that work, there would have to be an orderly transition mechanism to move people who develop costly chronic conditions from one tier to the next.
One way to do that would be to allow insurers in the central tier to place annual or lifetime caps on claims. The ACA does not allow such caps, although they were previously common. If access to the high-risk tier were automatic for all people whose expenses exceeded the caps, it would be possible to maintain the goals of universal coverage and affordable premiums for the central tier.
Questions for the low-income tier
How to ensure full funding? There is much discussion within the GOP about providing coverage for the lowest tier through Medicare block grants to individual states. What mechanisms would ensure that states actually provided universal coverage and quality care to people in this tier? At present, states vary enormously in the degree to which they achieve these goals and in their political willingness even to try to do so.
A further question concerns the growth of funding over time. There has been some discussion of pegging the size of block grants to increases in the consumer price index, but the rate of growth of healthcare costs, in the past, has regularly exceeded the growth of the CPI. Pegging grants to the CPI, then, would mean progressively tightening healthcare budgets of the states.
How to maintain work incentives during transition into the central tier? In order to achieve universal coverage, participation in the low-income tier would have to be a universal entitlement for all people meeting the income criteria. Furthermore, the upper bound of eligibility would have to be set high enough so that people would not leave the low-income tier until they were financially able to participate in the central tier. The terms of transition from the low tier to the central one will require careful thought.
In particular, it is important to make sure that healthcare subsidies to not degrade work incentives for low-income individuals. For example, a simple income cutoff, say 150 percent of the poverty line, would create a “healthcare cliff,” beyond which earning a few dollars of extra income would cost a household thousands of dollars in medical benefits. One way to avoid a cliff would be to gradually taper low-income healthcare benefits as income rose. However, the healthcare benefit reduction rate for people in the transition range would add to the effective marginal tax rate faced by affected workers. Its disincentive effects would be compounded by that of other social programs, such as the earned income tax credit. The problem of high effective marginal tax rates for households close to and just above the poverty line is already severe. (See here for a more detailed discussion.) Ideally, healthcare reform should alleviate the problem, not intensify it.
How to ensure interstate mobility? For a variety of reasons, interstate mobility in the U.S. labor market has significantly decreased in recent years. Decreased mobility makes it harder for the economy to adjust to trade shocks, technological change, and occupational shifts. If low-income healthcare coverage is to be provided on a state-by-state basis, as many Republican plans propose, what assurances will there be that coverage will remain portable from state to state, without waiting periods or major changes in coverage? The question is especially important since workers who lose their jobs due to trade or technology shocks are likely to drop into the low-income tier temporarily while seeking new employment. Their chances of finding new jobs would be greatly reduced if they had to remain within their home state to receive continuous health coverage.
Questions for the high-risk tier
Who provides coverage? The healthcare needs of people in the high-risk tier are uninsurable by traditional standards because of high costs and a high probability that claims will continue year after year. Except, perhaps, for the very wealthy, the healthcare needs of people with expensive chronic conditions will require heavy subsidies.
The existing Medicare program would be one way to finance care for the chronically ill. Forty percent of people in the top 5 percent by health care spending are over 65. They could remain on Medicare, reducing the number of people who would need another financing mechanism. Simpler still would be to extend Medicare to everyone in the high-risk tier, regardless of age.
Alternatively, the nonelderly chronically ill could be covered by high-risk pools, as was done in some states before the advent of the ACA. The pools could be run either at the federal level, or at the state level with federal subsidies. If they were run at the state level, they would raise the same questions of interstate mobility as would state-by-state coverage for the low-income tier. Even though many seniors are no longer in the labor market, interstate moves to be closer to relatives, or necessitated by relatives’ job changes, would create problems if high-risk coverage were not fully portable.
How to ensure full funding? The past record of state high-risk pools is decidedly mixed. Inadequate funding often led to waiting periods, denials of eligibility, or other limits on coverage. There is no getting around the fact that the high-risk tier, although small in terms of the number of people it includes, represents by far the largest single slice of healthcare spending.
If the top 5 percent of spending units ended up in the high-risk tier, they would absorb approximately half of all spending. If it were 10 percent, they would account for two-thirds of all spending. Reducing the funding needs of the high-risk tier by reducing the number of people covered would mean leaving more people with costly chronic conditions in the central tier. That would push up premiums in that tier, increasing its subsidy needs.
The funding requirement of a high-risk pool that maintained open access and quality care would vastly exceed the costs of subsidies for the low-income tier. Imposing them entirely on state budgets would be unrealistic, especially given the large income disparities among states. Most of the money would have to come from the federal government in one way or another, and the amount would have to increase with actual healthcare costs, not just the CPI, in order to avoid the re-emergence of waiting periods or other coverage limits. Also, it would need to be protected from periodic waves of austerity and sequestration arising from business cycles and generally imprudent fiscal policy.
Questions for all tiers
Some questions cut across all tiers of coverage, from low to high incomes and from the completely healthy to the chronically ill. GOP healthcare policy reformers will have to address these questions, too.
How to ensure that “accessible” means “affordable”? The GOP policy brief uses the words “accessible” and “affordable” almost interchangeably, but they are not necessarily the same thing. Suppose you take the “Members Only” sign off the door of an exclusive country club, and replace it with one that says, “Open to the Public. Greens Fees $250.” That makes the club accessible but it is still not affordable.
One of the chief criticisms of the ACA is that in some cases, premiums and out-of-pocket costs for insurance purchased on exchanges are so high that the covered parties cannot actually afford to use the services. Without adequate funding for all three tiers, at both the federal and state level, the GOP plan would be no better. If budget hawks gain control of Congress or statehouses, it could turn out worse. But adequate funding is only half the story of making “accessible” and “affordable” truly synonymous. Our next item, cost control, is equally important.
How to control underlying healthcare costs? Healthcare policy is not just a matter of how to distribute the burden of costs—it also has to deal with their magnitude. The United States currently spends far more per capita on healthcare than any other OECD country—16.9 percent of GDP compared to just 11.8 percent for the second highest spender, the Netherlands, and far above the OECD average of 9.3 percent. Although about half of all U.S. healthcare dollars now come from private sources (a far higher percentage than in any other OECD country), the government share of U.S. healthcare spending alone is higher than the average government share for the OECD. In fact, U.S. government healthcare spending is higher in relation to GDP than total public and private healthcare spending in Korea and Israel.
Clearly, cost control has to be a priority in any healthcare reform. The growth of healthcare spending has slowed somewhat under the ACA, but it has not been reversed and may accelerate again with full recovery from the Great Recession. GOP reformers offer a number of promising cost-control measures, including stronger bargaining over drug prices, greater vigilance against fraud and abuse, more interstate competition in the insurance market, and reform of medical malpractice. Many of these are good ideas, and there are more good ideas on the Democratic side of the aisle. However, the implementation of cost controls faces a major obstacle: every dollar of healthcare cost savings means a dollar less of revenue for some healthcare providers. Providers, whether pharmaceutical companies, doctors, hospitals, or insurance companies, have considerable influence in Congress. “Watch what they do, not what they say,” must be the rule in judging the seriousness of would-be healthcare cost cutters.
How to ensure participation by providers? Healthcare coverage for patients is worthless unless providers are willing to accept that coverage. There are already many providers who opt not to accept patients covered by Medicaid, Medicare, or narrow-network private plans. Encouraging participation by a broad spectrum of providers would be especially important for the low-income and high-risk tiers. Reform proposals to date have not always been clear on how they would maintain adequate levels of participation by doctors, hospitals, pharmaceutical companies, and other providers.
What services to cover? Another problem that reformers have not always adequately addressed is that of what services should be covered in any given tier. There seems to be a general preference among GOP reformers to minimize mandates and allow consumers free choice of plans with broader or narrower coverage, especially in the central tier. However, that could lead to problems. Women who opt for plans without coverage for pregnancy might accidentally become pregnant. People who opt out of coverage for mental health or addiction services, thinking “It can’t happen to me,” might nonetheless find themselves in need of those services. Problems could also arise if a person making the transition from a central-tier plan with broad coverage found themselves unable to use their regular doctor, hospital, or medications if circumstances forced them into the low-income or high risk tiers.
Will GOP reforms match international best practices? Contrary to what one often hears, the high level of U.S. healthcare spending does not buy the world’s best health care. A survey of the healthcare systems of eleven wealthy countries by the Commonwealth Foundation ranked the U.S. dead last in terms of overall efficiency and effectiveness. Despite the popular belief that the U.S. system provides timely care while the single-payer systems of other wealthy countries impose long waiting times, the U.S. ranked only fifth among the eleven in terms of timeliness. In practice, though, the U.S. healthcare system uses rationing by cost more than by waiting. In terms of cost-related problems of access, such as inability to afford insurance or to pay for needed services or medications, the U.S. ranked eleventh out of the eleven countries.
Creating a system that performs better than the ACA should not be hard. The various pieces of the ACA do not fit together smoothly. The system as a whole fails to adequately address many of the questions raised above regarding Republican alternatives—gaps in coverage, perverse disincentives, and difficulties in moving from one part of the system to another. Conceptually, if all of our earlier questions receive satisfactory answers, a three-tier system like the one that seems to be emerging from GOP reform efforts could more fully meet the goal of universal and affordable access to quality healthcare services than does the ACA.
But just beating the ACA is a low bar. The real question that Republican reformers should ask is whether their proposed multi-tier mechanism would outperform the best single-payer systems of countries like Switzerland, Sweden, Germany, and New Zealand. Achieving that level of performance within the limits of self-imposed ideological constraints and outside pressures from providers who profit from the status quo will be extremely challenging.
Comments Off on Was Obamacare truly evil, or just a missed opportunity?
I was mildly opposed to Obamacare, but mostly because I thought it was a missed opportunity to reform health care. I was bemused to see very strident opposition to the program on the right, with some pretty hyperbolic language about socialized medicine and the end of freedom. (Language I don’t recall with Bush’s massive increase in government involvement in healthcare.)
In recent weeks I’ve seen a number of conservatives argue that the GOP would be making a mistake to simply repeal Obamacare. But why? If it’s such a horrible program, won’t Americans be much better off without it? So just repeal the program, and then later try to work on sensible reforms. That’s not my view, but it’s the view I’d expect from the people who told us that Obamacare was horrible.
One counterargument is that some people have grown to rely on Obamacare. But if that’s an argument against repeal, then it’s also an argument against any policy changes in any area of governance. All policy changes create winners and losers. Lots of people who made investment decisions based on the current tax code, will be hurt if the GOP lowers rates and closes loopholes. Should we not do tax reform? (See David Henderson’s excellent post discussing this issue.) At most, I would think you’d want to add a three-year grace period for those who were currently insured under Obamacare, to give them time to find suitable alternatives. But if the program is horrible, then get rid of it.
But those are not the arguments I’m seeing. A typical example was recently published in the National Review, a very conservative intellectual publication. The article suggests that Obamacare should be replaced with a new program . . . which sounds almost exactly like Obamacare! Now just to be clear, it’s not identical, but the similarities are so strong that it makes me wonder what all the fuss was about. Why did conservatives view Obamacare as a disaster, if they wish to replace it with such a similar program?
As I said, before the election I was to the left of the conservative movement, opposed to Obamacare but viewing some of the opposition as rather hysterical. Now I’ve shifted to a position to the right of the conservative movement, I favor radical changes in health care:
- Elimination of all tax subsidies, such as the deductibility of health insurance costs.
- Radical deregulation, including no barriers to market entry, no quality regulations, open borders for doctors, abolishing the FDA, no barriers on the type of insurance that can be offered.
- Government healthcare would be provided at the lowest cost possible, even if it meant flying Medicaid patients to Thailand. (It probably would not after open borders for doctors, and no barriers to entry.)
I do favor some role for the government. One idea for overcoming the free rider problem is mandatory health saving accounts and catastrophic insurance. (The alternative is letting people who choose not to be insured simply die when they are sick. Even if that’s the right policy, society is not willing to adopt it—so health savings accounts seem like a good second best policy.)
In addition to health savings accounts and catastrophic insurance, there could be some sort of government subsidy for the needy. That might be government run clinics and hospitals, that offer bare bones service, as in Singapore, or subsidies for the purchase of HSAs and catastrophic insurance, for low income people. Singapore’s government spends only a tiny fraction of what our government spends on health care, but it has universal coverage and the world’s second longest life expectancy.
If people don’t like catastrophic insurance, they would be free to buy ordinary insurance, instead of HSAs. But there would be no government subsidy.
The GOP could do these radical changes, which but they would be highly controversial. As a result, they’ll probably end up with something similar to Obamacare, but called Trumpcare.
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