Health Reform without Self-insurance: How the Right Would Control Health Care Costs
In contrast to the proposals put forward by left-of-center policy analysts, a group of right-of-center economists, also writing in the New England Journal of Medicine (NEJM), are proposing two ideas with merit:
- Give Medicare enrollees the opportunity to enroll in private health plans, with the government paying a fixed sum of money toward the premium.
- Replace the current system of tax subsidies for private health insurance for the working age population with a lump sum, refundable tax credit and make it available regardless of where the insurance is purchased — at work, in the marketplace or in a health insurance exchange.
Both proposals would convert the open ended subsidies of the current system into a defined contribution approach. The federal government would pledge a fixed sum of money to individuals for private insurance. Individual choice and the marketplace, however, would determine what kind of coverage people acquire.
The Medicare proposal builds on the Medicare Advantage program that is already in place and which has allowed one of every four beneficiaries to have the same kind of insurance many non-elderly people have. The government’s contribution to these beneficiaries is risk adjusted, so that more money is committed to those with higher expected health care costs. Under the reformed system, however, plans would have far more freedom to offer seniors a wider variety of coverage options than they now have.
These proposals are put forward by Joe Antos, Mark Pauly and Gail Wilensky. They are good ideas. In fact I cannot imagine any serious health reform that didn’t do these two things. However, they don’t go far enough.
It feels like
There’s something here
But I wanna see it
Before it disappears.
Let’s begin with the titular issue: does either the left or the right have a serious plan to control health care spending? On the left, the answer is clearly no. Their proposals would require market wide setting of provider fees and limit the growth of those fees to an arbitrary rate. As I explained last week, suppressing provider fees is an attempt to shift costs (from patients and taxpayers to doctors, for example). But shifting costs from one group to another is not the same thing as controlling them. At the same time, global limits on provider fees imply rationing. But the left-of-center proposals do not tell us who will get care and who won’t and why. I must conclude that they have given us little more than a line drawn on a piece of paper — a wish rather than a serious proposal.
Is the answer on the right any better? These authors believe the size of the government commitment must grow over time more slowly than health spending has been growing. But they would not lock us into a pre-determined growth path — the way ObamaCare and even Paul Ryan’s Medicare plan would do. (See the Saving/Rettenmaier analysis here.) The two reforms identified above would give people improved incentives in choosing health insurance, since people would pay out-of-pocket for more expensive choices. But since premiums would not be allowed to reflect an individual’s expected health care costs, the link between individual choice and the full economic consequences of those choices would be very weak. That’s why more reform is needed.
Any time radical reforms are proposed, they face the potential objection that they are not politically realistic. So let’s start there. I believe you can take benefits away from people and shift more of the burden from taxpayers to beneficiaries. But that shift is a hundred times easier if you give the beneficiaries new tools to handle the new burdens they will have to bear.
Take young people. I believe you can tell 45 year olds that they are not going to get as good a deal from Medicare as we previously promised. But there should be a quid pro quo. They should be allowed to deposit funds into a tax-favored account over the next 20 years to help them save for the added burden they will face. (Here is a full blown proposal for doing that.) Similarly, I think those who remain in traditional Medicare would accept a higher deductible in return for catastrophic coverage — thereby removing the need for Medigap insurance. But seniors need to be able to self-insure for the deductible amount in a savings account, just as non-seniors can currently do.
I would go further. Tom Saving and I proposed some changes to Medicare at the Health Affairs blog the other day — all designed to empower patients and let the marketplace, rather than Medicare, determine the price of care. For example, we proposed to allow Medicare beneficiaries to add to Medicare’s fee and pay the market price at walk-in clinics and other commercial outlets where prices are clearly market prices, rather than artifacts dictated by the third-party-payer system. Since the alternatives to walk-in clinics are all more expensive, this change would not only expand options for seniors, it would probably save taxpayers money at the same time.
We also proposed allowing seniors to pay higher fees for primary care — say, in return for reduced waiting and other amenities — and even allowing Medicare to pay part of the fee for those who opt for concierge doctor services. Each of these proposals involves seniors paying more out-of-pocket. But they also involve allowing patients to get more timely care and perhaps better care.
Now let’s turn to the broader issue. There are basically two types of insurance: third-party insurance and individual self-insurance, say through a Health Savings Account. If you insists on constraining the former (by limiting its ability to price risk), more of the cost-reducing work must be done by the latter. If you insist on weakening the former, you must strengthen the latter. Fortunately, there is a lot of evidence that individual self-insurance is up to the challenge.
Health markets have been found to work well — in fact, very well — wherever the market is dominated by patients spending their own money: cosmetic surgery, Lasik surgery, online mail order drugs, walk-in clinics, telephone and email consultation services, concierge doctor services, the international market for medical tourism and the domestic market for medical tourism.
Wherever providers must compete for patients spending their own funds, we find transparent prices, package prices, price competition and quality competition. Remarkably, we find the real price falling for well over a decade in cosmetic and Lasik surgery, despite a huge increase in demand and all sorts of technological change (of the type that is said to increase costs for every other type of surgery!).
So why have our conservative friends overlooked this point? Ironically, Mark Pauly (with yours truly) actually worked out the ideal mechanism for combining individual self-insurance with a fixed sum refundable tax credit: it’s what we today would call a Roth Heath Savings Account.
Here is another irony: the left-of-center proposals seem to better reflect an understanding of the need for a greater role for self-insurance than those on the right. Their proposal, for example, calls for tiered third-party insurance, under which patients would pay more out-of-pocket for more expensive drugs and procedures. Unfortunately, it doesn’t dawn on them that generous HSAs will be needed in order for this option to work well.
Before giving up on third-party insurance’s ability to control costs, however, why not consider fundamental reform in this area as well. Under the two policy ideas we began considering, premium support for the elderly would be risk adjusted, as noted. This means that when a senior with an expensive health problem switches health plans, the new plan receives a premium support payment from the government reflecting the enrollee’s higher-than-average health care costs.
The tax credit offered to non-seniors would not be risk-adjusted, however. This means that non-seniors need a way to protect themselves against the economic consequences of switching health plans in case they develop an expensive-to-treat, pre-existing condition. The conventional solution is to require the new health plan to accept the enrollee at a community rated premium, regardless of expected costs. But this assures that the new plan has no interest in satisfying the new enrollee or in meeting her needs. Mark Pauly in particular has proposed change of health status insurance in these cases. So has John Cochrane. And so have I.
Allowing people to insure against the future costs of a pre-existing condition should be part of any right-of-center health reform plan.
I think the question comes down to can we really afford this. The 65 and over population of United States may be on controled incomes. ObamaCare and even Paul Ryan’s Medicare may not fit into a large portion of life savings and retirement checks. Is the working class going to foot the bill?
I agree, those two ideas don’t go far enough.
Canada just changed the age from 65 to 67 for their version of SS. It will only affect people under 55. Not a complete solution, but an acknowledgment of the problem. DRHP’s can do much more
I like this. You guys are the only ones that ever talk about self-insurance. Keep it up!
I believe Ryan is trying to mitigate the impact on seniors by ensuring that his plan isn’t applicable to those within 10 years of filing. Giving people more time to adjust, who knows if this is near enough time though.
Regarding changes to non-elderly insurance, we need to be clear that replacing the fixed-dollar tax credit proposal would mean the end of employer-sponsored, community-rated coverage. Thus approximately 65 percent of the non-elderly population would face drastic changes in how they pay for medical care, for better or worse.
I understand that all things community-rated are regarded unfavorably on this blog, but is this really the top priority. I would expect the prime focus right now to be on keeping individually-underwritten plans from being outlawed entirely.
The two forms of coverage have coexisted for years; why not work on allowing the two to compete meaningfully? Rather than a fixed tax credit for health insurance per se, why not direct it toward your health-status coverage? That seems a more direct counterpart to the current tax subsidy for HIPAA-compliant (community rated) coverage.
Sorry, please strike the word ‘replacing’ from my first sentence.
Excellent points.
It gets back to the same problem over and over again. Neither patients nor providers have any incentive to control costs. Indeed, they have every incentive to consume resources. Until patients control dollars and have an incentive to protect those dollars, providers will have no reason to compete on price and quality. If patients/providers are not willing to control spending, the third-party payer will have to assume that responsibility. This means rationing by means other than price rationing. It’s that pure and simple.
Great column as always, but I’m not following this concept of a “Roth HSA.”
HSA distributions for medical expenses are already tax-free. What does the “Roth” component in this context add? It seems to me that you’re just losing the 125 plan pre-tax contribution ability, or the ability to deduct contributions on your tax return if contributions are made outside a 125 plan.
In other words, why would you want to contribute to an account on an after-tax basis if you can currently contribute pre-tax and receive tax-free distributions? That’s the best of all worlds. The reason Roth adds a new dimension in the 401(k)/IRA world is that the distributions are taxable unless your contributions are after-tax (Roth).
The only potential Roth advantage I can see would be if you use the HSA for retirement savings. This would allow you to take tax-free distributions for non-medical expenses at age 65.
All this talk still doesn’t focus on the biggest issue – people need to be accountable and responsible for their own health. Over 70% of claims can be attributed to people’s lifestyles. Until we focus the attention on this point (in other words, call obese people and smokers out), the majority of the rest is all lip service. There’s only so much premiums can differentiate for people who make healthy lifestyle choices vs. unhealthy ones if all the rates are cut from the same pool.
Yes, I know a lot needs to be done from a community standpoint to make a focus like this successful, but throwing dollars on making people healthier makes a whole lot more sense than throwing dollars at finding ways to mitigate claims from Type 2 diabetics.
Why doesn’t any health insurance company offer a policy without third party payment? What’s stopping them? You’ve never explained this.
@joemac
They do, depending on what state you are in
@Ralph
Really? Shouldn’t John Goodman and other economists be looking into those cases? How come I never hear more from them? I;’ve never heard anything about them.
@JoeMac,
I’m sure John knows about it. There’s been so much going on with obamacare etc. that it probably hasn’t been at the top of his radar.
John, 2 things:
1)Concierge service (VIP) in at least my area take payments from Medicare and other insurances so I don’t think they would warrant a reimbursement by Medicare as Medicare would be paying twice.
2)Again I ask why you wish Medicare to permit balance billing of fees to walk in clinics, but not of other physicians that are providing the same services? I know you also support balance billing, but I don’t understand this distinction you are making here and have made elsewhere.
@JoeMac
When you suggest insurance companies offering policies without “third party payment” I assume you are referencing a simple indemnity approach. If that is what you mean I can tell you the problem is provider contracting. An insurance company cannot compete premium wise with carriers such as Blue Cross who have preferential pricing from healthcare providers.
@Frank,
There are other options outside of indemnity that can be part of the mix.
@Frank
Well, then my criticism of Goodman is that he talks about not having third party payment without actually explaining how insurance would work without it or how the transition would be. No specifics at all. I assumed that not having third party payment means indemnity, but then what exactly does Goodman want if not indemnity. He is always criticizing third party payment and talks about people paying with 100% cash, but then no specifics.
@JoeMac,
Have you read John’s new book “Priceless”. A lot of your questions would be answered in that book. There are other products outside of what is considered “health” insurance. Products like Critical Illness insurance for example, and DRHP’s
@JoeMac
Obviously I don’t speak for John Goodman, but I do support his concepts because they generally push us away from third party involvement.
With regard to “specifics”, I think I understand your frustration, but the number one priority is to get people to embrace the reality that efficient delivery of healthcare cannot occur if the focus and ultimate responsibility of the process lies with anyone but the patient and the provider of services. The realization of a system that embraces this approach is complicated by the fact that “insurance” must play a part, and the nature of “real” insurance necessitates pooling of risk. Risk pooling requires some underwriting disciplines that require insureds to be “grouped” in some manner. This is where the trouble starts. The key is to minimize the role of “insurance” to the greatest extent possible.
Keeping within that approach is encouraging the use of indemnity type catastrophic coverage with the lowest premium cost possible. This brings me back to my previous contention of the fact you or I cannot receive (in the current system) the best pricing for our healthcare services unless we are “attached” to a “conventional” healthcare plan controlled by a “third party” (usually a major insurance carrier).
Consequently, IMHO it is difficult to get past concepts and ideas and into “specifics” until we have addressed the issues of “transparency and cost shifting” as it relates to patients, providers and insurance.
If you follow the links in my Health Alert I believe you will find all the details you need. Also, I agree with Ralph: read Priceless.
You hit on the problem. There is no way a senior will get insurance in the private sector for $6-7000. I cannot get that type of premium now at 61. The Ryan/Romney proposal would definitely create a dilemma. If a person has an option of private sector coverage or traditional medicare then insurance providers will most likely throw the unhealthy pool back to the government. The costs of health care will rise tremendously.
Unless someone sees something I do not I cannot imagine that retirement income in our country will exceed the $28,000/year which is where it is today. He may increase as a number but not in buying power.
I also understand that if Romney repeals the ACA, health care costs will go up to present day seniors. The prescription drug saving and cost containment features would disappear.
The program needs work put I am not certain you should throw the baby out with the bath water.