Can There Be Scaled-Down Health Reform?
Yes and no.
On the affirmative side, I have ten reforms in mind and every one of them would be especially beneficial to people with chronic (pre-existing) conditions.
But let’s take up the negative side first. Here is Paul Krugman, writing in The New York Times:
Suppose, for example, that Congress took the advice of those who want to ban insurance discrimination on the basis of medical history, and stopped there. What would happen next? The answer, as any health care economist will tell you, is that if Congress didn’t simultaneously require that healthy people buy insurance, there would be a “death spiral”: healthier Americans would choose not to buy insurance, leading to high premiums for those who remain, driving out more people, and so on.
And if Congress tried to avoid the death spiral by requiring that healthy Americans buy insurance, it would have to offer financial aid to lower-income families to make that insurance affordable — aid at least as generous as that in the Senate bill. There just isn’t any way to do reform on a smaller scale.
Alert readers will recall that I made a similar point here and Uwe Reinhardt agreed with me. But I wasn’t arguing for ObamaCare. I was arguing against divorcing health insurance premiums from risk.
In a complex system — especially one that is hugely dysfunctional because of regulation, tradition and bureaucracy — there are basically two ways to go:
- We can liberate people, giving them new opportunities to solve problems; or we can further constrain them, making problem-solving more difficult than ever before.
- We can give people new tools to solve problems; or we can take away tools they already have.
- We can unshackle the price system, allowing competition and choice to solve problems the way problems are solved in other markets; or we can suppress prices even more than they are already suppressed.
The former choices are the path to real problem-solving; the latter are not workable, not desirable and not real reform.
With that in mind, here are some steps to deal with the problem of pre-existing conditions that give people good incentives instead of perverse incentives. I posted these last week at the Health Affairs blog.
Reforms for Pre-existing (Chronic) Conditions
- Encourage Portable Insurance. In almost every state, employers are not allowed to buy the kind of insurance employees most want and need: Insurance they own and can take with them from job to job and in and out of the labor market. Most of the time, the problem of pre-existing conditions arises precisely because health insurance isn’t portable. Here is an outline of how to achieve portability.
- Allow Special Health Savings Accounts for the Chronically Ill. Cash and Counseling pilot programs in Medicaid are underway in more than half the states. Homebound, disabled patients manage their own budgets, and hire and fire those who provide them with services. Satisfaction rates approach 100% (virtually unheard of in any health plan anywhere in the world). This program could become a model for chronic illness everywhere.
- Allow Special Needs Health Insurance. Instead of requiring insurers to be all things to all people, we should allow plans to specialize in treating one or more chronic conditions. Plans could specialize, for example, in diabetic care, heart care, cancer care, and they should be able to charge a market price (say, to employers, other insurers and even risk pools) and price and quality competition should be encouraged.
- Allow Health Status Insurance. To facilitate the market for chronic illness insurance we should encourage a division of conventional insurance into two separate kinds of insurance, with two separate premiums. Standard insurance would cover the health needs of people during the insurance period, while health status insurance would pay future premium increases people face if they have a change in health status and then try to switch to another health plan.
- Allow Self-Insurance for Changes in Health Status. The tax law allows employers to pay for current-period medical expenses with untaxed dollars. But there is no similar opportunity for either employers or employees to save for a future change in health status — one that will generate substantial increases in medical costs. Clearly, people need the ability to engage in contingency savings — a Health Savings Account (HSA) for future, rather than current, medical costs.
- Give People on Their Own the Same Tax Break Employees Get. Most people who have a problem with pre-existing conditions are trying to buy insurance in the individual market. Yet, unless they are self-employed, they get virtually no tax relief and even the self-employed are penalized vis-à-vis employer-provided insurance. This should be a no-brainer: All insurance should get the same tax relief regardless of where it is obtained and individuals should get the same tax relief, regardless of how they obtain it.
- Allow Providers to Repackage and Reprice Their Services Under Medicare and Medicaid. Most providers today are trapped in a payment system that encourages high-cost, low-quality care. By contrast, we should encourage innovative solutions to the care of diabetes, asthma, cancer, heart disease, etc. Along these lines providers should be able to offer a different bundle of services and be paid in a different way so long as they reduce the government’s overall cost and provide a higher quality of care.
- Allow Access to Mandate-Free Insurance. Studies show that as many as one out of four uninsured Americans has been priced out of the market for health insurance by cost-increasing, mandated benefits. These are mainly healthy people. At the same time, however, these mandates raise premiums for the chronically ill and divert dollars away from their care. There is no reason a diabetic should have to pay for other peoples’ in vitro fertilization, naturopathy, acupuncture or marriage counseling, in order to obtain diabetic care.
- Create a National Market for Health Insurance. More competition, especially among the special needs insurers (see number 3) would be a huge benefit for the chronically ill. Being able to buy insurance across state lines would encourage that competition.
- Encourage Post-Retirement Health Insurance. If the past is a guide, more than 80% of the 78 million baby boomers will retire before they become eligible for Medicare. It is among this group that the greatest potential exists for denial of health insurance because of pre-existing conditions. Fortunately, one out of every three baby boomers has a promise of post-retirement health care. However, two out of three do not, and even for those who have a commitment, almost none of the promises are funded.
Employers should (1) be encouraged to negotiate with insurers to cover their retirees; (2) be able to pay some or all of the premium for retiree-owned insurance or make deposits to the retiree’s HSA with pre-tax dollars; and (3) both employers and employees should be able to save in tax-free accounts in anticipation of these needs (see number 5).
Very interesting. Most people are stuck in a rut when in comes to pre-existing conditions. This is innovative, creative thinking.
Wow. Why can’t Republicans get behind some of these ideas?
John – Your post is a good smattering of the kinds of things that could be done with what we currently have, even in the absence of rationally reforming provider pricing across the board (meaning fair pricing for all payers, public and private). However, I think there could be a couple of glitches in any transition to “health status insurance” and the issue of what to do about people who are essentially uninsurable (or insurable only for an untenable premium) at the start of such a system. Firstly, apparently both you and John Cochrane kind of hand wave over the question about whether there would be anyone interested in selling “health status insurance” – this is very challenging actuarially because of the rather open-ended nature of medical expenses for the rest of a person’s natural life, or even just an extended term period. The “definition” issues alone would be considerably challenging. I’m not saying these barriers can’t be hurdled, it just might take a while. Your description of Cochrane’s thesis suggests that by splitting current premiums into these two (apparently) mutually exclusive and exhaustive pieces is somehow more effective that the combined risk premium, but I am not sure. Why not just have the same insurer on the hook for both pieces? You will probably claim it is so that there can be specialization in chronic condition insurance related to the health status portion once a person contracts such a condition. However, what you are doing is unraveling the insurance pooling principle, and I am pretty sure that that will always lead to a more expensive solution than an appropriate pooling structure. Previous experience with cafeteria plans and similar devices has generally shown that when you allow people to only buy what they need/want or think they need, the global aggregate cost to the system as a whole is actually greater than what the cost would have been when a uniform benefit is provided to everyone. It might not make everyone as happy, on average (and I admit that happiness may be viewed as an economic good of some kind), but the effectiveness question is at least arguable.
I believe a better approach on the insurance side is to move to a “disability” style definition of claim from the current “medical expenses incurred and paid within such and such a date” definition, which current approach creates artificial cliff edge points of conflict due to time “running out” to get a claim in, and then the carrier gets to “re rate” you based on new information. The “per cause” or “per condition” type approach to medical expense insurance used to be utilized fairly often decades ago, but legal issues that allowed lawyers and doctors to squeeze unanticipated benefits out of such a definition eventually led to insurers moving almost exclusively to “incurred claim” definition coverage. However, the disability insurance approach could be applied to medical expense insurance and eliminate most of the “post transition” health status issues, since the insurer who is covering you when the condition first manifests itself has got you for some extended benefit period, whether you renew your policy with them or not! Granted, this approach still does not take care of the transition to such a system for persons who already have pre-existing conditions that are too costly to just cover from the beginning. Perhaps that is an effective and probably final use for state high risk pools.
H. Carroll is pretty much spot on here. I think John’s ideas are innovative and thought provoking, but we should probably avoid complicated insurance scenarios as solutions. The “ultimate” long term answers are not that complicated, and have been laid out over and over by John Goodman and others. The problem area is that of “transition” specifically when dealing with issues of “insurability” and “pre-existing conditions”. The task of Dealing with this in a fair politically viable manner would be the gorilla in the room.
Perhaps John’s #10 addresses this in a way, but I am not sure how long the quoted statistics will be valid (80% of Boomers retiring before medicare eligibility). I look for that statistic to change pretty fast because most boomers are figuring out they can’t afford to retire. And I don’t think employers are going to be easily encouraged to negotiate for retiree benefits. Many of them have been singed by this practice in the past. Plus, seeking solutions within the employer sponsored group health programs seem to always run afoul amid conflict of interest issues.
Excellent reform ideas. I would add another point about pre-existing conditions. It seems some insurance companies have expanded the definition of preexisting conditions to include acknowledgment of symptoms whether or not a formal diagnosis exists or even if a complaint is an anomaly within the patient’s medical records. 2 things:
1) Perhaps there needs to be a standardization of the definition of preexisting conditions to regulate insurance company abuse of such.
2) Patients with chronic illnesses or preexisting conditions vary widely according to their level of compliance, motivation, support, etc. To lump all persons with the same condition together is just wrong. Insurance cos. could offer incentives of reduced premiums for meeting certain measurable outcomes such as weight, blood pressure, controlled blood sugar, drug levels, etc.
Hello John. I know that you know that I am working hard to reach employees by selling HSA and creating awareness about consumerism. Real tort reform, preventing defensive medicine, eliminating fraud and the overuse of imaging and lab facilities for extra profit will be huge contributors to reducing extraneous costs in our system. But I’ve heard NO ONE, and I mean NO ONE, ever give a solution to the real cost of increasing health insurance premiums. Today I heard a fantastic report about a new procedure to locate and resolve a problem in an area of the brain that causes terrible seizures. It’s a brand new procedure that totally transformed the life of the patient in the report who previously suffered frequent and uncontrollable seizures, rendering her unable to stay in a job, go to school and have appropriate social interaction. Now she is seizure free for over one year, employed, happy and apparently healthy. The report praised the procedure but made sure to point out its great cost. They, of course, were referring only to the immediate fees charged and didn’t even mention the incredible cost of development in the first place. As in most cases, over time, these procedures will become more readily available and affordable, as most everything in healthcare eventually does. But what about the costs now? Who should pay for this? Insurance. Who does pay for this? Insurance. Can we reasonably expect these charges will reflect in the insurance premium we all pay? Of course. What other choice do we have? Do we stop advancement? Do we halt the scientific process? Should we stop the development of new drugs and technologies? Of course not! So, unless we decide to stop progress, I’ve heard NO ONE float the answer to this problem. It’s a good and expensive problem to have.
Quoting Krugman:
This statement is absolutely false. The proof by counter-example: employer-sponsored insurance is prohibited by law from discriminating on the basis of medical history, subject to a waiting period for individuals without prior creditable coverage. But government doesn’t require those individuals to purchase insurance, nor does it prohibit them from seeking cheaper insurance outside the workplace.
Instead, favorable tax treatment gives healthy individuals incentive to participate. Naturally, this requires the expenditure of tax dollars.
The scheme Krugman seems to think necessary requires a transfer of tax dollars as well, but in this case the taxes are hidden. For healthy individuals, the difference in cost between community-rated and individually-underwritten coverage is effectively a head tax. Congress attempts to compensate for this highly regressive tax by adjusting the premium based on income. So now you have what amounts to a shadow graduated income tax, presumably requiring a shadow IRS operating within HHS, and who knows what anyone’s effective tax rate will be. It’s no wonder the proposal grew to over 2000 pages.
Rather than a regressive implied tax that requires extensive compensation to turn regressive into progressive, a fairer and more honest source of funding would have been the existing tax system. That’s what 2/3 of the country already uses; compared to the annual $200 billion cost of the employer tax exclusion, the cost of a voluntary community-rated alternative would have been relatively minor.
Response to H. Carroll and others. I have no problem wrapping the two premiums together and, for that matter, let’s call the combined premium “health insurance.” The issue is: what happens when the individual leaves his insurance plan for another plan? Current practice is to let the exited plan off scott free and make the new plan pay the full cost of continuing care. That practice needs to change.
If a high cost patient leaves Plan A (to which he has been paying premiums all these many years) and enters Plan B, then A ought to make a payment to B to cover the extraordinary expenses B will now have to pay for. That payment is what you get from what I am calling change of health status insurance.
No question that this makes the management of risk more diffficult. But it’s easier for insurers to manage that risk than individuals on their own.
This should not add costs to the system as a whole, however, since we still have the same medical bills we had before.
Correction: I should have said “the difference in cost between community-rated and individually-underwritten coverage is effectively a head tax if the former is made mandatory.
In either case, the subsidy to high-risk individuals has to come from somewhere. Transferring the money directly from low-risk individuals rather than cycling it through the general fund doesn’t make it free. Concealment of this fact seems to be the main purpose for the complexity of the House and Senate bills.
Bart – your point about using employer based insurance as a counter example to Krugman’s anti-selection argument is a bit off-target in my view. The reason is that there is a very significant difference between the actuarial dynamics of group insurance purchasing/rating versus that of individual health insurance. There is, in fact, anti-selection that takes place in the group market when the coverage is not what we call non-contributory – that is, in situations where the employer does not pay the total cost of the plan. When employees must contribute (we’ll ignore the question about dependents which is related but not relevant to the point at hand) for their own coverage, participation definitely goes down, for lots of reasons, many of them the same as the kinds of reasons individuals don’t buy an individual policy when that is there only option. When that participation gets down past some minimum critical level, at least theoretically, the insurer won’t quote the case, or in other words, the “group” has in fact become uninsurable because it doesn’t meet the underwriting requirements. And, the purchasing process is far different than why an individual wants to buy an individual policy. However, the decision by an individual within the group to participate or not is to a fair extent driven by the fact of the tax sheltered status of her contributions, you are correct about that. The system should most definitely equalize the tax status of premiums and to some extent out of pocket expenses across all individuals/employer plans.
John – I understand the issue of “carrier equity” with which you are concerned. It only comes up when carriers can no longer rate for health status. My suggestion for using policies where “responsibility follows occurrence” as with disability coverage takes care of most of that issue, since in that case, Plan A doesn’t “escape” the financial responsibility for the patient’s condition even if the patient switches to Plan B on the renewal date. Plan B only worries about NEW conditions, things first manifesting themselves while they are providing the coverage. Plan A must manage the claim and take care of the expenses relating to the condition that started while they were providing the coverage, and would have prevented Plan B from writing the patient risk in the “current” way of doing things. This provides incentive to Plan A to manage treatment of the condition from the longer term point of view, purchase packages of “condition based capitation” from the best providers for that condition, etc. It also makes Plan A more “honest” in its renewal offer, since they hold no “leverage” over the patient.
An alternative would be to develop something along the lines of “whole life medical expense” insurance, where healthy people buy a “level premium” life time cover similar to whole life insurance. Actuarially this must include a major component of cash build up to “level” the premium out (in fact, a guaranteed increasing scale of premiums is probably more practical than a truly level amount – it would still call for significant “paid in” extra in the early years). This would be the equivalent to an HSA type accumulation vehicle intended to be drawn down to cover the increasing costs going forward after a certain point. There are a number of interesting actuarial and other practical challenges to such a product (not the least of which is to factor in inflation and the impact of any Medicare benefits), but nothing that can’t be accomplished with a little creativity. There would be sizable cash values to such a policy, which could be transferable should the insured decide to switch to a different carrier later on, and that would serve as that transition transfer, of sorts, to which you prefer. This just deals with the financial side of the issue, of course, and doesn’t discuss how it interrelates to the “provision” side.
H.Carroll, I agree that employer-based coverage is not uniform. But two points:
1) The counterexample doesn’t need to be universal to falsify Krugman’s statement.
2) If you aren’t trying to use forced participation by healthy people as a hidden tax to finance the subsidy for sickly people, then universal participation is no longer critical. The total societal cost to subsidize high-risk people down to a given premium level should be the same whether everyone signs up, or only those sick people. Sure, lack of participation is a problem for small businesses, but that’s not really what we’re talking about here.
Back to the first point, I’m sure there are many things that influence participation in employer plans. Laws vary from state to state, thereby affecting small business rates. Tax rates aren’t uniform, so lower-income workers face the double disincentive of a lower tax incentive on top of having less disposable income to spend on insurance. And the pools are not uniform. And as you say, some healthy people just don’t want to pay for insurance. So I agree with all that. But with all the gaps, employer-sponsored insurance is still the most common form of coverage in the U.S. If you back away from the variations, the overall picture is one of a system that subsidizes community rating using the income and payroll tax, rather than a hidden head tax.
Once again H. Carroll has hit the nail on the head when he suggests that an alternate answer is introduction of “whole life medical insurance”. In fact, I submit that it is the “ultimate answer”, and that everything between what we are doing now and the eventual majority acceptance of the concept of whole life medical is merely transitional.
Indeed, “creativity” is the key element of workable solutions to healthcare financing, and it should be the job of the government to create an environment to encourage that creativity instead of re-enforcing a system of total dependence and entitlement.
My MD has this suggestion, which would ease the problem of “pre-existing conditions” and the “affordability” problem: Allow doctors, clinics and hospitals to deduct the cost of charitable care.
Let’s face it, giving someone medical insurance benefits that he hasn’t paid for whether in cash or with insurance premiums is a form of charity anyway, however it’s packaged. Somebody always pays for it, whether it’s the other members of the insurance plan, or the taxpayer.
My MD also says one reason hospital costs are so high is that they have to provide emergency room care to literally anyone, whether it’s an emergency or not, and whether they can pay or not. If “non-emergency” care were tax deductible, then it could be provided in non-hospital settings at lower cost. Even better, it would be voluntary and not mandatory, which makes it more American, in my opinion.
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