Friday, February 10, 2017

Healthcare repair on "The Hill"

On repeal and replace, a healthcare oped on "The Hill", here.  

Republicans replacing Obamacare, beware. It has a certain logic. Much of it patches up unintended consequences of previous regulations. If we just roll back and patch once again, we will end up right back where we started.

It’s wiser to start with a vision of the destination. In an ideal America, health insurance is individual, portable, and guaranteed renewable — it includes the right to continue coverage, with no increase in cost. It even includes the right to transfer to a comparable plan at any other insurer. Insurance companies pay each other for these transfers, and then compete for sick as well as healthy patients. The right to continue coverage is separate from the coverage itself. You can get the right to buy gold coverage with a silver plan.

Most Americans sign up as they graduate from high school, get a drivers’ license, register to vote, or start a first job. Young healthy people might choose bare-bones catastrophic coverage, but the right to step up to a more generous plan later. Nobody’s premiums subsidize others, so such insurance is cheap.


People keep their individual plans as they go to school, get and change jobs or move around.  Employers may contribute to these individual plans. If employers offer group coverage, people keep the right to individual plans later.

Health insurance then follows people  from job to job, state to state, in and out of marriage, just like car, home and life insurance, and 401(k) savings.

But health insurance is not a payment plan for small expenses, as home insurance does not “pay for” lightbulbs. Insurance protects your wallet against large, unexpected expenses. People pay for most regular care the same way they pay for cars, homes, and TVs — though likewise helped to do so with health savings and health credit accounts to smooth large expenses over time. Doctors don’t spend half their time filling out forms, and there are no longer two and a half claims processors for every doctor.

Big cost control comes from the only reliable source — rigorous supply competition. The minute someone tries to charge too much, new doctors, clinics, hospitals, and models of care spring up competing for the customer’s dollar. “Access” to health care comes like anything else, from your checkbook and intensely competitive businesses jockeying for it.

What about those who can’t afford even this much?  Nobody dies in the street. There is also a robust system of government and charity care for the poor, indigent, those who have fallen between the cracks, and victims of rare expensive diseases. For most, this simply means a voucher or tax credit to buy private insurance.

But — a central principle — the government no longer massively screws up the health insurance and health care arrangements of the majority of Americans, who can afford houses, cars, and smartphones, and therefore health care, in order to help the unfortunate. We help people forthrightly, with taxes and on-budget spending.

Why do we not have this world? Because it was regulated out of existence, and now is simply illegal.

The original sin of American health insurance is the tax deduction for employer-provided group plans — but not, to this day, for employer contributions to portable individual insurance.  “Insurance” then became a payment plan, to maximize the tax deduction, and then horrendously inefficient as people were no longer spending their own money.

Worse, nobody who hopes to get a job with benefits then buys long-term individual insurance. This provision alone pretty much created the preexisting conditions problem.

Patch, patch. To address preexisting conditions, the government mandated that insurers must sell insurance to everyone at the same price. Insurance companies will then try to avoid sick people, so coverage must be highly regulated.  Healthy people won’t buy it, so it must be nearly impossible for people to just pay out of pocket. Obamacare added the individual mandate.

Cross-subsidies are a second original sin. Our government doesn’t like taxing and spending on budget where we can see it. So it forces others to pay: It forces employers to provide health insurance. It forces hospitals to provide free care. It low-balls Medicare and Medicaid reimbursement.

The big problem: These patches and cross-subsidies cannot stand competition. Yet without supply competition, costs increase, the number of people needing subsidized care rises, and around we go.

The Republican plans now circulating make progress. Rep. Tom Price’s plan ties protection from preexisting conditions to continuous coverage. His and Speaker Paul Ryan’s “Better Way” plan move toward premium support for private insurance, and greater portability.

So far, though, the announced plans do not really overturn the original sins. But those plans were crafted in a different political landscape. We can now  go big, and really fix the government-induced health care mess in a durable way.

I visited my dermatologist last month. I spent 20 minutes with a resident, and 5 minutes with the dermatologist. The bill was $1335. An “insurance adjustment”  knocked off  $779. Insurance paid $438. I paid $118.  The game goes on. We start with a fake sticker price to negotiate with the uninsured and to declare uncompensated care. But you cannot just walk in and pay as you can for anything else. Even $438 includes a huge cross-subsidy.

We’ll know we’ve fixed health care when we don’t get bills like this.

Mr. Cochrane is a Senior Fellow of the Hoover Institution at Stanford University and an Adjunct Scholar of the Cato Institute.

33 comments:

  1. Tax Credits and Vouchers are not good for the majority of Americans who live paycheck to paycheck. The cost are upfront while the Benefits are way in the future. They have no means to pay.

    In the past, I got the cheapest insurance I could because of the Insurance discount no matter the deducible, there was a benefit.

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  2. Cochrane writes, "Big cost control comes from the only reliable source — rigorous supply competition."

    It must be self-evident to Cochrane that free market elixir applies equally to healthcare as to widget manufacture. But, as in mathematics, "there exists" does not mean "for all".

    Nobody likes the defects in our present system. But where's the sector-specific evidence that the free market will make healthcare all better?

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    1. Some comparison can be done using the areas of health care which are infrequently covered by insurance -- Lasik, cosmetic, and weight loss surgery. I don't know of any formal studies but am aware of a some anecdotal evidence. Lasik surgery has dropped from about $3000 per eye in the late 1990s (with people going to Canada since it was cheaper) to about $300 per eye today (per the former head of Kaiser and a quick web search). I also know from personal experience that both doctors and hospitals will offer fixed price packages for procedures not covered by insurance.

      There were also trends pre-Obamacare. Walmart started (and most pharmacies followed) with $4.00 prescriptions for many generic drugs, a great savings for those with limited means. Low price clinics for routine / urgent care were also opening up, often housed in pharmacies or other stores. Neither of these trends has survived. I don't know if it's because more people have insurance (so theoretically can afford more expensive coverage) or if it's due to legal changes.

      Under today's system my local hospital routinely bill 10 times the amount the insurance company pays. I mentioned this to them once and was told they have discounts for those without insurance. Which leaves the question "why set the billed price so high"?

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    2. I'm sorry, but evidence is not the plural of anecdote.

      Cochrane knows how to marshal quality (macro-level) empirical evidence of positive free-market effects on healthcare, but has not done so here. I suspect we can guess why: no such evidence is available.

      Instead, his is basically a rationalist argument, which is just unconvincing when so much is at stake.

      Finally, to paraphrase Buckley, a true conservative stands athwart history yelling Stop. The conservatives here should be appalled at this activist agenda.

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    3. I'm not sure I understand the argument. It is true that there is no empirical evidence offered in the post. This is obvious.

      Are you saying we should not consider alternative solutions without evidence? There are economic foundations that suggest his ideas could work. Conversely, can somebody please provide evidence that the current system will lead to more affordable healthcare? I am appalled by the system's track record, and there must existing evidence that things will get better? Right?

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  3. My opinion is that Obama's health care reform effort failed the moment that single-payer was dropped off the table. I think that single-payer-basic-healthcare is the foundation of a sane healthcare system in a country like USA. Most other "industrialised" countries have a free basic healthcare system that accompanies private payment (including via insurance mechanisms) for extra services.
    My most "right-wing" friends, who have reached that age, are fans of medicare.
    --E5

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  4. Pity also the poor doctors, under the present system, who are in private practice. I'm sure they don't know why they billed you so, nor why there is such a big "insurance adjustment". Most importantly, there insurance reimbursement at the end also includes bonuses (esp. in changes in renewal terms) and such for keeping costs down etc. I know a lot of doctors who've just given up and work instead for a large hospital or system.

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  5. Cochrane's ideal society sounds crappy and complicated. I do not want it. We should be moving towards a better, improved society, not crappier, more complex health care.

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    1. I agree entirely. I want high quality, immediately accessible health care, provided free by the government. Same for houses. And cars. And gliders. It would all be so better and simpler. Perhaps we can get Mexico to pay for it all.

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    2. Hi John,
      I presume that (February 11, 2017 at 10:48 AM) is directed at my comment. You make a nice analogy with good humour. A key part of what I was trying to say is the word "basic". Needing a broken leg fixed is "basic". Needing a glider is not, although you and I might consider that debatable. Needing fixed a heart condition that was brought on by sugary drinks, grease, and no exercise is arguably not "basic". Encouraging people to avoid that condition is, arguably, "basic" because such encouragement reduces the total expense, to the economy as a whole, of medical treatment.
      My perspective is cost to the economy as a whole. Notionally, immediately-available "basic" healthcare costs less, to the economy as a whole, than a make-sure-somebody-pays system because of, as you said, elimination of bookkeeping, claims processing, insurance executives, and so on.
      Now along with this I think it is important to have pay-for-extra services like private hospital rooms, queue jumping, better drugs etc.. There should be plenty of scope there for supporting a reasonable population of insurance executives.
      Just like the carbon tax there will be plenty of people afraid of change in the healthcare system. Especially among those afraid that ordinary folks will get screwed again.
      And, repeating another of your points, we need to avoid the absolutism that nobody should get anything without paying for it.
      --E5

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    3. and, besides, we all benefit when somebody else is healthy, suffer when they are sick, especially if the sick propagates to us.
      --E5

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  6. Professor, your anecdote aside (pedestrian visit to doctors office...wow giant bill from doctor! Negotiations ensue and voila you pay a little; your insurer pays a fair bit more ), do you have a single proposal to get us to your preferred approach? LASIK and Botox work well in the free market. Cancer, MS and assorted diseases from our pathetic genetic code, not really.

    Given that health care economics is not your field, I assume you read people like Uwe Reinhardt and Henry Aaron. My read from their work is the following:

    1. 66% of total health spending comes from 10% of the population, 20% from 1% of the population
    2. Insurance is always a game of the fortunate subsidizing the unfortunate
    3. All health financing systems have to figure out, within budget, how they will finance the sick from the premiums of the well

    Beyond the outcome you'd prefer, you haven't identified a single path to get to your outcome. Don't you owe this to your readers?

    One more point: it turns out that the highest satisfaction of ACA in many red states is in fact for Medicaid because of its lack of complexity, lack of deductables, etc. hmmm what a surprise?? People would rather take the single payer approach even if humiliated by the prospect of taking Medicaid, rather than go with the subsidides (vouchers) on the individual market.

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    1. Thomas Sowell suggested when I see "single payer" I should think "government monopoly." I think some "people" would not welcome single payer under that prospect.

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    2. Don't trust your reaction to such rhetoric. It is designed to invoke such reactions that are, probably, counter to your well being.
      A well designed system has basic no-fee service that can be supplemented by extra money either out of pocket or from insurance.
      So the government has monopoly only on the no-fee part of it.
      --E5

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  7. The Republican Party has been promising a better, cheaper alternative to the Affordable Care Act for six to eight years.

    It really is long past time for them to roll out their detailed proposal. We should not be having such first principles discussions.

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    1. As a conservative, if they fail to pass anything, I will be pleased.

      Same could be said for tax policy, banking regulation, etc.

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    2. "As a conservative, if they fail to pass anything, I will be pleased."

      The ACA does not repeal itself so if they do nothing the ACA continues.

      As someone who believes the public has a right to make informed choices I think that it is important that politicians tell the truth. I think it is important to the proper functioning of the American democracy that the Republicans put forward this alternative plan they have been promising or give a candid explanation for why, after making promises for six years, they can't.

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  8. Cochrane bemoans the patchwork nature of healthcare. "Patch, patch", he laments.

    But is a centrally planned reboot of healthcare really the solution to patchwork? Say goodbye to the benefit of decentralized decision-making. (The irony!)

    Patchwork systems readily develop in the private sector, as well. You can blame decentralized decision-making for this. (More irony!)

    Instead of rebooting their complex products, companies patch them, and then work very hard to produce for their customers the illusion of an unpatched simplicity. (You wouldn't know this unless you've worked in the private sector.)

    The point: complexity is a fact of life in all sectors. Bashing the government for generating excessive complexity is misguided.

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  9. Isn't part of the problem that the ACA (without Medicaid and the taxes) is in fact, always was and will be the orthodox republican plan?

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  10. If we are to fix costs won't supply-side competition have to be restored? To do this, the power that the AMA has to restrict competition would have to be reformed. It is not a question of having enough people who are able and talented enough to increase the percentages of physicians it is a question of letting an association control those percentages to protect the economic interest of their members. Should it take months to see a specialists because there are so few within a certain area? If had prospect lined up for months to see me how customer-friendly would I really have to be? If someone has an appointment at 1 PM and I don't see them until 2 PM do I have to worry about my business being hurt? No not until someone across town is scheduling patients in a week, seeing them on time for less money will my behavior change but that won't happen when an association is controlling how many physicians per X are available.

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  11. https://www.aei.org/publication/american-medical-association-the-strongest-trade-union-in-the-u-s-a/

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  12. But what about Moral Hazard? You promote a health insurance that doesn't rely on subsidies, with an individual choice for how much coverage to get. But you also say nobody dies in the streets, i.e. people with bad luck will be helped out somehow. This means people will get too little insurance, knowing that if something bad happens to them, the government will help!

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  13. I usually agree with you, but you are skating by a very difficult problem with respect to pre-existing conditions. You say Price's plan is tied to "continuous coverage." Well, that's not much protection, is it? What happens to the person who loses their job and must choose between feeding and housing their family, and paying their now-higher health insurance premium (since they lose the employer contribution), and who chooses the former? It sounds like they are out of luck -- permanently. What happens to the person who is chronically ill and cannot work, and has difficulty making their payments?

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  14. Ultimately the question is should health care be seen as a community service like police, fire brigade etc or something that belongs in the market domain. My view is that this is mostly just a matter of taste. There are good arguments that can be made either way. A good amount of health care really can be said to be just something to be purchased - e.g. a dental clean-up. But a good amount wouldn't fall into that category e.g. stuff that impairs a person's physical or psychological functioning. When the latter happens, we, as human beings, do not feel comfortable leaving our fellow human in distress. In other words, we gain some "feel-good" utility in paying some money to help that person if he/she cannot do it by themselves. I think the question in the end is, how much money we want to pay i.e. how much is it worth to society - in terms of the pleasure of helping out. It seems then the solution should be a a two-level system. (1) Health -care services that you just have to pay for out of pocket and (2) Services that are entirely paid for through taxes. Now which services fall into (1) and which in (2) should just be a matter of the legislative process that will account for changing tastes over time. There is really no need for "health insurance" at all!

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    1. Be careful, I think you quite logically walked your way into single payer.

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    2. "Be careful"
      Yes, with a little care we could have the kind of system that exists in most of the "developed" world. "Single payer", "national health", whatever the name for basic medical services provided to whoever needs them. Plus insurance, or self-pay, for extra services.
      --E5

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  15. Disclaimer: I am a retired physician. I have no “skin in the game” except as a consumer. I do offer some observations about medicine.

    First, there is no amount of medical care offered to a group of individuals that will satiate the desire for more of it (as far as I can tell this occurs in no other aspect of life except amassing money).

    The second observation follows from my first. Namely, there are only four ways to control cost in the medical care:

    1) Make the patient responsible for rationing their own medical care based on cost.

    2) Make the “government” responsible for rationing medical care based on arbitrary criteria.

    3) Make the system so slow and onerous to obtain care (long waiting times) that patients ration their own care based on frustration.

    4) A combination of the previous three previous rationing methods.

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  16. I'm pretty liberal and very against repealing the ACA without a better plan, but I agree with a lot of this. Especially "Health insurance then follows people from job to job, state to state, in and out of marriage, just like car, home and life insurance, and 401(k) savings."

    One often overlooked problem is that your company makes a decision on how much insurance to buy for all employees. This is often framed from the perspective of how expensive it is, but I personally have always wanted better healthcare than my employer provides. I would pay more for it. When I have a choice I pick the most expensive plan. We have a situation now where I'm basically beholden to the whims of my company's decision on benefits.

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  17. What's your opinion about Maryland's "All Payer" pricing to avoid the fake prices you mentioned in your anecdote about going to the doctor recently?

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  18. Under a system where "People pay for most regular care the same way they pay for cars, homes, and TVs" many people may choose to forgo care unless they feel they need it urgently at that moment. On the face of it this sounds good for controlling costs by nudging people to avoid unnecessary care. However, I'm curious what your view is on the role of routine, non-essential medical care in catching conditions early and possibly avoiding bigger costs down the road. Is it possible that forcing people to pay more out of pocket for routine care could actually drive up total costs by leading to more chronic conditions over time?

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    1. I think the answer (to Abiel at 8:52pm) is Yes.
      Look at Kaiser Permanente. This is a business, albeit a not-for-profit, but operating under business rules all the same. They don't have to reward owner capital but they do have to pay for borrowed capital, offer a competitive price, and all the other business constraints. So they have to minimise cost so that they can prosper in a price competitive market. Kaiser (presumably as a cost optimisation) encourages people to come in for routine checkups, immunisations, fixing stuff on a weekend that could wait till Monday but is better fixed now, and so on. This is all stuff that people would defer, or ignore, until more expensive in a pay-for-everything system. Especially so in a system (one comparable to auto insurance) where the patient pays up front the first $n of every visit.
      Arguably the outcomes are also substantially worse in a system were people are encouraged to defer medical attention. Unless, of course, you are amongst those who consider untimely death an economic good on account of reduced retirement payouts.
      And few people, hypochondriacs aside, bother to get medical attention unless it hurts more than aspirin can deal with. So unnecessary care is limited to expensive interventions in conditions where the medical provider benefits financially from the transaction.
      --E5

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  19. I do not at all get the attraction to this system. It sounds bizarrely overcomplicated. I would rather have crappier but simpler health care. Cochran's plan sounds like something out of a bad scifi novel, not a real plan for the real world.

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  20. ""Young healthy people might choose bare-bones catastrophic coverage, but the right to step up to a more generous plan later. Nobody’s premiums subsidize others, so such insurance is cheap""

    Who subsidizes the right to step up ? The insurer surely has to pin a price tag on that right.

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