Research Explains Why the Obamacare Marketplace is Slowly Failing

With great fanfare, the U.S. Department of Health and Human Services issued a press release in mid-October estimating enrollment in the Obamacare Marketplace (i.e. the exchange) at 10 million by the end of 2016. HHS Secretary Burwell said, “We believe 10 million is a strong and realistic goal.”

Before you burst out with excitement, keep in mind enrollment for 2015 is estimated at 9.1 million. As recently as March 2015, estimates by the Congressional Budget Office (CBO) projected 21 million would sign up in 2016. Enrollment is only about half what the CBO originally estimated and is likely to gradually decline into what actuaries sometimes refer to as an adverse selection death spiral.

In a nutshell, Obamacare exchange plans are premised on the idea that young healthy people would be overcharged to help pay for older, less healthy enrollees – who would otherwise find their coverage unaffordable if charged premiums based on their health risk. In theory, sliding-scale subsidies would make premiums affordable for moderate-income families, while the law would force healthy, wealthier families to subsidize the poor and those in poor health.  The only problem: people know when they are getting a bad deal and resist in any way they can!

This was tried once before in the 1990s. At the time, states passed perverse regulations to force insurers to accept all applicants — including people in poor health — at rates reflecting average health in a community rather than individual health status. What happened was young people (who already had lower demand for health insurance because they were healthy) were charged too much and abandoned the market. As healthy people dropped out, sicker people remained in the insurance market. As this progressed, the risk pool of enrollees that remained became increasingly costly to ensure. Premiums increased in response to higher costs of the remaining enrollees, prompting an new round of healthier enrollees to drop out.

Under these perverse incentives, the only enrollees who were sure to stay put were those in poor health — whose medical benefits far exceeded the cost of their premiums.  This is what’s known as an adverse selection death spiral; it’s the vicious cycle of healthy individuals dropping out as their premiums rise too far beyond their expected benefits. Before long, health coverage is only a good deal for those in poor health. But, the  customers in poor health are not profitable ones for health insurers. When insurers are left with money-losing customers, they have no choice but to increase rates even higher or leave the market entirely. That is precisely what happened in virtually all the states that passed these regulations. As a result, state lawmakers quickly repealed them in most states. In the states that retained these laws prior to Obamacare, premiums were between two and three times the average in states that didn’t retain these provisions.

If health insurance regulations that mandate community rating have a history of failure, then what made proponents believe the Obamacare Marketplace would survive? The answer: a combination of taxpayer subsidies and coercion! The Affordable Care Act exchange provision are often likened to a 3-legged stool. The three legs are: 1) a law forcing everyone to have coverage or pay a fine; 2) regulations that force insurers to sell plans to all that apply at prices adjusted age, but not for health status; and 3) generous, sliding-scale subsidies for those who are too poor to afford premiums. Removing any one of these legs upsets the applecart as my father used to say!  The interaction of these three provisions was supposed to mitigate the tendency for healthy enrollees to balk when required to pay premiums far in excess of their expected benefits.

What is likely happening to the Obamacare Marketplace is people are slowly deciding the cost of premiums are not a good value when compared to their medical needs. Last year, 7.5 million people paid the fine rather than purchase coverage. This was far more than expected. Citing an NBER study, Duke University economist, Chris Conover, helps explain why Obamacare is a bad deal — even with subsidies.

“Except for those who are heavily subsidized, Obamacare coverage is a really bad deal for the uninsured.  Consider the poorest members on the Exchange (family income equivalent to 138-175% of poverty). Even after subsidies, the net premium paid by such families to obtain a Silver plan will be nearly triple the average amount they would have spent out of pocket had they remained uninsured!”

Health plans for the near-poor are highly subsidized, with their premiums capped at only about 3 percent to 4 percent of family income.  Data shows that those are the ones most likely to enroll in Obamacare plans. Individuals receiving generous subsidies are about the only ones likely to consider costly exchange plans to be worth their (subsidized) premiums. By contrast, people who don’t qualify for subsidies are getting the proverbial shaft, and avoiding the exchange any way they can.

Consider the example of my wife and me. Neither one of us qualifies for a subsidy. We are both active, eat a healthy diet, watch our weight and try to lead a healthy lifestyle. The cheapest Obamacare policies for us are bronze plans costing about $5,000 apiece. These plans have deductibles of $6,000 or more. Our combined medical bills are probably less than $1,000 per year. Yet, we spend $10,000 on plans that provide us no benefits until we’ve spent another $12,000 out-of-pocket on medical care. Stated another way, our health plans will not begin to provide benefits until we have collectively spent more than $22,000 ($10,000 on premiums and $12,750 towards our deductibles).  Think of it this way: this type of arrangement is only of value if we get hit by an (uninsured) bus, get advanced cancer, have a heart attack or experience a similar catastrophic health complaint. As you can imagine, the possibility of any of those things happen doesn’t make me lose sleep at night. And the possibility would probably not haunt my dreams if I were uninsured.

Writing in Forbes, Conover cautions this bad deal is expected to get worse as premiums rise (due to excessive regulations and probably a dollop of adverse selection). Conover points to research by Stephen Parente that estimates the premiums for bronze plans could double over the next year or so.

How will this play out? Here is what I predict: initially, moderate-income families are excited about getting coverage for a reduced rate.  As time goes by, bills pile up, the car breaks down, the truck needs new tires, etc. Maybe an addition to the family is born, but daycare is now a burden. The couple calculates what their coverage is costing, say, $100, maybe $200 a month after subsidies. But their coverage has deductibles so high most doctor visits are paid out of pocket. They reason dropping their coverage will allow them to get caught up on some bills and they can enroll again at the next open enrollment. But at the next open enrollment, premiums are much higher than they anticipated. As this goes on, more and more people will decide the penalty is better than the cure.

Further reading: Mark Pauly, Adam Leive and Scott Harrington, “The Price of Responsibility: The Impact of Health Reform on Non-Poor Uninsureds,” National Bureau of Economic Research, NBER Working Paper No. 21565, September 2015.

An earlier version of this appeared in Town Hall.

Comments (59)

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  1. Jimbino says:

    The penalty is so easy to avoid by adjusting your withholding so as to leave on the IRS table only 90% of taxes you will owe at year’s end.

    • PJohnson says:

      True. The IRS can only extract the penalty from a refund. No refund, no penalty. Plus refunds are a scam. You’ve given your money to the Fed rent free.

      The other “loophole” (actually tax code) is if premiums exceed 8% of your income (AGI). So if your premiums are $500 a month* , that comes to $6,000 a year (WOW!). Divide by 8% you get $75,000. Meaning if you make less than $75,000 a year, you’re exempt. And $75K is btw $25K higher than the average household income in the US. So on average EVERYONE is exempt! What a well crafted bill Pelosi, Reid & Obama.

      *at 62, single, male, no kids at home it was the lowest premium I could find for a “qualified” plan, meaning I’d have coverage for the kids who aren’t here, pregnancy and pap smears. Thank you Obamacare!

      • Ron Greiner says:

        PJohnson, not EVERYONE is exempt. What about a 30-year-old male with a kid in Tampa Bay earning $54,000 a year. He is not exempt because he is too young and Obamacare penalties mostly go to the young. This young taxpayer is paying high Medicare taxes too so fat-cat multi-millionaires can float on their boats in the bay and scarf down free drugs in Medicare.

        In the 34691 zip code the smallest premium is from those blood sucking Blue Cross of Florida Inc’s dangerous HMO that pays NOTHING taking a sick child Out-Of-Network with a sky-high deductible of $6850 per person for $355 a month. Whip that up in your calculator and you can prove to yourself that I am correct.

        • PJohnson says:

          I think you misread my comments. I said ON AVERAGE. And to be sure, I’m no fan of the crony capitalism the insurance companies bought into.

          • Ron Greiner says:

            PJohnson, when you say (AGI) and really mean (MAGI) why don’t you say it?

            At the NCPA blog we strive for accuracy.

            When you say “crony capitalism” when talking about Blue Cross in the states do you really mean Giant Fascist Monopoly?

            • Pjohnson says:

              AGI is Adjusted Gross Income. The only MAGI I’ve heard of are in the nativity.

              • Ron Greiner says:

                Pjohnson, you’re a hoot. Obamacare tax credits are based on Modified Adjusted Gross Income (MAGI).

                “May the kings of Tarshish and of distant shores bring tribute to him. May the kings of Sheba and Seba present him gifts.” (Psalm 72, Verse 10)

                When I wrote the 1st tax-free MSA in October 1996 I had just left being top dog at Self-Employed Benefits Agency (SEBA) and my DAR wife, the VOICE of the tax-free HSA, took over as President of Insurance Processing Corporation (IPC).

                My wife’s Patriot was named FOX. That’s why I call my DAR wife and daughter – FOXY LADIES. Here is a clear voice of total tax FREEDOM if you want to hear it in a quick 60 seconds. The video is no good but the audio is the best.

                Merry Christmas Everyone!


  2. John Fembup says:

    All true, all true.

    Impressive, since I suspect you wrote it 6 years ago. Or could have. 😎

    • Devon Herrick says:

      That’s sort of true. The core theme of my Obamacare PowerPoint, that I have used for the past six years, has not changed much. I’ve updated slides when newer data come out, but the general theme of what’s wrong with the PPACA was has not changed. I created much of the PowerPoint before the PPACA was being developed and debated. It was not hard to predict what Obamacare would look like because all the leftwing advocacies were praising: 1) how everyone needed coverage (i.e. a mandate); 2) coverage would only be affordable when everyone was covered (i.e. guaranteed issue/community rating); and 3) poor people should be subsidized by the rich (Medicaid/Exchange subsidies).

  3. Barry Carol says:

    “As this goes on, more and more people will decide the penalty is better than the cure – See more at:”

    I wonder how many people would still opt to pay the penalty (fine) if it were set at, say, 80%-90% of the cost of the least expensive Bronze level plan.

    I get that healthy people would prefer to pay a low premium for health insurance that reflects their low actuarial risk and good health history. I also understand that insurers need to make money to stay in business. The question, then, is how do you provide insurance to less healthy and already sick people who need it most at a cost that they can afford?

    High risk pools are one possibility but they’ve been around since the 1970’s and never worked very well because politicians were unwilling to spend the money it would take to make them work because it would mean spending way too much money to insure a comparatively small number of people many of whom are too sick to even vote.

    So where does that leave us if we were to repeal to ACA and go back to the world of medical underwriting? More to the point, where does that leave the less healthy and the already sick? Any decent alternative to the ACA needs to be able to satisfactorily answer that question.

    • Devon Herrick says:

      That is the big question: how do we guarantee sick people coverage?

      Beside risk pools, we’ve often written about the need for guaranteed renewability. People who maintain continuous coverage should be guaranteed the right to renew. But, then the question becomes: renew at what price?

      In years past we wrote about Ideal Health Insurance, where a insurer luring away a healthy enrollee from a competitor’s risk pool would have to negotiate and pay a (healthy) exit payment to the losing competitor. An insurer accepting a less-healthy enrollee would receive an adverse risk payment from the departing enrollees’ insurer to compensate the insurer getting the less healthy enrollee.

      This sounds like an application of game theory. How it would work in practice is anyone’s guess.

      I like the idea of individuals cross subsidizing their own risk over a working life. Instead of asking healthy younger enrollees to cross subsidize older, sicker enrollees, young people would have a larger proportion of their premium dollars deposited in an HSA, while less would be required to pay for a high-deductible plan. As the person ages, the ratio of premium dollars to HDHP vs. HSA would slowly change as the cost for their high deductible plan rose. When they hit their 50s, they begin to spend down the HSA balances as their health costs rise.

  4. Bob Hertz says:

    To paraphrase that guy in New York politics, “The premiums are too damned high.”
    As you note, paying $5,000 a year for a policy with a $6,000 deductible does indeed feel like a waste of money.

    The cause of high premiums is guaranteed issue. In a group of one hundred insureds, all it takes is 8 or 10 large claims a year ($50,000 each) to bring about high premiums. The risk pools in Obamacare are filled with high risk people.

    • John Fembup says:

      “The cause of high premiums is guaranteed issue”

      Bob, I think you trap yourself inside an insurance perspective. The problem is much broader.

      The cause of high premiums is high medical care cost.

      Productive workers bear all of that cost: some is direct cost-sharing e.g., deductibles or self-pay; some is other direct payments e.g., premiums; and some is indirect cost sharing e.g., taxes. However you slice it up, productive workers are bearing all the high medical care cost.

      That is a real problem. But it is a medical delivery problem, not an insurance problem. Trying to solve the problem of medical care cost using insurance schemes is doomed to fail. Exhibit A = Obamacare.

      • Ron Greiner says:

        I read what you wrote several times and I don’t have a clue what you are saying.

        You wrote, “The cause of high premiums is high medical care cost.” Are really sure that is the only problem?

        We don’t have to worry about these blood sucking Fascist insurance companies?

        • John Fembup says:

          Sure, worry about them all you like.

          But that won’t help you understand the medical cost problems we have, or that other countries have for that matter,

          It will just lead you to conclude that insurers are blood-sucking fascists. Not real helpful, Ron.

      • Devon Herrick says:

        You have identified a chicken/egg dilemma. We can never hope to solve the high cost of insurance until we get a handle on medical costs. But, we can never get a handle on medical costs until people have the appropriate incentives. Sick people who are highly subsidized have no incentive to control spending because they’ve long pasted their deductible. Healthy people using HSAs may control their spending, but they won’t make a difference because runaway medical spending is mainly on the sick. We must address the high cost of caring for the sick if we hope to control spending.

        Reference pricing has some promise as a way to encourage better utilization of high cost procedures. But we need to move to a system where insurance is only used for catastrophic medical problems. Oddly enough, I think we’re getting there slowly. Exchange plans are largely bronze or second lowest silver. Employers have been ratcheting up cost-sharing for more than a decade. The recent slowing of medical spending is, in my opinion, due to increased cost-sharing. We just need to expand these incentives to Medicare/Medicaid and costs well beyond a deductible. If the big spenders don’t face higher cost-sharing for poor decisions, we will never control spending.

  5. Ron Greiner says:

    Devon, why wouldn’t an insurance carrier use Obamacare to produce really low premiums and great value for the consumer? We know that Short-Term-Medical (STM) is medically underwritten so only the healthy can get insurance. Then, STM takes the consumer to the next Open Enrollment so if they are sick they can get coverage and they are safe. That would produce really low premiums – correct?

    Everybody should know that United Healthcare just told all of the agents that there are no commissions starting tomorrow. After these agents have spent thousands getting prepared for Open Enrollment the rug is pulled out from under them again. I know none of you folks care about America’s insurance agents so never mind.

    I’m sure UHC has been planning to do this to the field force for quite some time.

  6. Bob Hertz says:

    Ron’s point about short term medical insurance is correct. A 60 year old can buy a short term policy for $135 a month with a $2,000 deductible, but if and only if they have no chronic illnesses. The policy can be kept for a total of 12 months if it is correctly renewed.

    Which absolutely confirms my point about guaranteed issue.
    I do not think it is possible for any insurance company, even if were run by Mother Teresa, to produce an inexpensive, comprehensive guaranteed issue policy for persons over age 50.

    Let’s say that I am right. That leaves us with the following choices:

    a. Subsidize everyone who has to buy one of these policies, regardless of their income. (meaning higher taxes)

    b. Expand Medicare to lower ages. (meaning higher taxes)

    c. Get rid of guaranteed issue (leaving many older persons uninsured, just when they need coverage most)

    d. Continue guaranteed issue but do nothing. (i.e. our current policy)

    Bernie Sanders has many flaws, but at least he has an answer. I am not sure that anyone else in national politics is facing this issue.

    By the way, my insurance agency is also affected by the action of United HealthOne. Commissions are being slashed on policies sold in the ACA exchanges. Leaving aside the treacherous timing, we do see this pattern:

    As the exchanges have gotten better, and they have, buying insurance is getting more like buying airline tickets, i.e. point and click. This drove travel agents out of business, and the same thing is happening to independent health agents.


    • dennisbyron says:


      Isn’t “Bernie Sanders’ answer” (see NOTE) your option A? But “higher taxes” is only one of the issues with “Bernie Sanders’ answer.” He also — apparently (see NOTE) wants to eliminate insurance companies altogether, make all hospitals and like facilities non-profit, fix the salaries/compensation of all medical professionals by government fiat, treat every person in the United States from the second they arrive here, and many other things that work exactly the opposite of today’s U.S health system. He has a slogan, “Medicare for All,” but what he apparently supports is actually exactly the opposite of United States Medicare.

      (NOTE: My comment assume “Bernie Sanders’ answer” is some amalgam of HR 676 and the original Vermont single payer proposal, both of which he supported. Today, Bernie Sanders’ answer” is simply a slogan. There is no actual Bernie Sanders proposal that I can find that we can analyze… but I have not looked in the last few weeks)

      • Barry Carol says:

        Even Vermont backed away from its own single payer legislation when they found out how much it would cost and how bad it would be for the state’s economy. Talk is cheap. Execution at an affordable cost is difficult.

        • Devon Herrick says:

          Colorado has a ballot initiative on Single Payer. I believe proponents want to have a 10% payroll tax to pay for it.

          Avik Roy wrote about Vermont’s single payer initiative. The governor in Vermont decided it was unaffordable. As I recall, this was because the proponents thought it inconceivable to force Vermont residents to make due with a health plan that had an actuarial value of less than 94%.

        • dennisbyron says:

          Yes, they backed away from the second single payer proposal in late 2014. It was quite different from the initial single payer proposal. The initial Vermont single payer proposal — about which Sanders spoke favorably at the time (2011) — was a cross between Medicaid and the UK’s National Health Service. Of course we don’t know what Sanders’ current proposal is; all he has is a extremely misleading slogan that inaccurate equates any known single payer proposal to Untied States Medicare

    • Ron Greiner says:

      Bob, my friend Lee just called me after his appointment this morning. The small business owner was paying part of the premium on 6 employees and they are all on individual plans and getting tax credits too.

      My questions is: Because this is a $100 a day fine for each employee would Lee get a 10% finders fee if he turned the small business owner in to the IRS?

      365 X $100 = $36,500 X 6 = $219,000 (IRS fine) X 10% = $21,900 for Lee

      • Devon Herrick says:

        Ron, I don’t know about the finders fee. But the small business owner would be in the clear if he/she merely told the employees, “I’m not sponsoring a health plan. But I’m putting an extra $200 per month in your gross pay”?

        I realize employers cannot deposit funds into HRAs to pay for workers’ individual premiums. But what prevents employers from setting up a notional (HRA) account, where the employer only promises to reimburse, say, the first $2,000 in medical costs per year; while making his workers get their own individual coverage on the exchange?

        • Ron Greiner says:

          Devon, the IRS has increased the amount whistle blowers get on these tax cheaters – up to 30% of whatever the IRS can collect. With all of the penalties and interest Lee could get more than $65,700 by exposing this business owner and his Obamacare lawlessness.

          Buying individual insurance on employees should come with some tough prison time too. The last thing we want to do is splinter the employer-based insurance scheme in this great country.

    • Francisco Machado says:

      “Higher taxes?” How about expenditure reallocation? How much does our government spend on foreign aid to people who hate us anyway? How much got spent on Obama’s pie-in-the-sky projects that went broke, like Solyndra? How much is given to citizens of a foreign country squatting here illegally? His “saving” GM, which wouldn’t have turned to dust – it would have been bought at bankruptcy auction. What is Obama’s AGW fanaticism costing? His Byzantine regulations? Hell, what are his vacations costing? When the government is by far the largest employer in the nation, even excluding the military, it’s easy to see where the money taken from the productive sector goes – it pays for paper pushers.

  7. Barry Carol says:

    I’ll offer a couple of thoughts.

    First, I read an article recently though I forget where that quantified the incremental cost of health insurance premiums attributable to guaranteed issue at 94% as compared to medical underwriting. Community rating adds an additional 25% on top of that. Short of a penalty equal to something close to the lowest cost Bronze level plan or a whole system financed by taxes instead of health insurance premiums, I don’t see how you can get most young and healthy people to buy health insurance for a premium that far exceeds their actuarial risk. That leaves high risk pools as the best alternative for the unhealthy and already sick but they’ve never worked very well since the 1970’s when they first came on the scene.

    Second, with respect to the cost of healthcare, I was chatting with my primary care doctor yesterday after seeing him for a minor issue. We were talking about defensive medicine and our litigation environment. I asked him what percentage of the revenue attributable to the tests that he orders can be classified as defensive medicine / CYA decision making. His answer: about 20%. When I asked my cardiologist the same question a couple of years ago, his answer: 15%. Yet liberals insist that the tort environment only accounts for 1% or 2% of healthcare costs because they only look at malpractice insurance premiums and court awards but totally ignore how medicine is actually practiced in the field. That’s why they’re wrong on the issue.

    To lower the cost of healthcare, we need sensible tort reform. We also need better price and quality transparency tools and we need to ensure that patients will face higher coinsurance if they want to go to an expensive teaching hospital for routine care or see a doctor who is employed by a hospital and charges significantly more for the same work than an equally qualified doctor who practices independently of a hospital. Moving away from pure fee for service in favor of value based care including bundled payments where it makes sense would also be helpful. Incentives matter for both providers and patients. We’re a long way from getting those right but we’re gradually moving in the right direction, I think.

    • Devon Herrick says:

      I asked him what percentage of the revenue attributable to the tests that he orders can be classified as defensive medicine / CYA decision making.

      Also, keep in mind that examples of defensive medical testing from years ago have a way of becoming habit. Over time they become the standard protocols once a practice has been around for awhile.

      • Perry says:

        You also have to understand that while many states have enacted tort reform, that can be later overturned by a court ruling.

      • Al says:

        Devon, you are right. It is difficult to eliminate the habit of ordering tests secondary to defensive medicine. There is no way to quickly reverse this problem unless the insurer forces the physician to undertake more of a malpractice risk. They can only do that for a limited time frame. We could of course legislate against high awards, use loser pay laws and elevate the standards of malpractice to make malpractice cases more difficult to win. But, then we face the possibility of increasing malpractice and the refusal of insurers to pay for costly treatments. The best way to lower malpractice is to let the patient decide the course of treatment by having the patient have skin in the game. That requires a true marketplace.

        As a physician for decades starting before managed care I note how much more defensive care is required when the patient is fully insured. Once they know they are going to get a large bill those without insurance or limited insurance had a blunt discussion with the physician as to the need for the expenditure. It is amazing how smart patients are in distinguishing the different kinds of risk presented to them and it is amazing how much lower the bills can go. There is almost no malpractice risk when a patient knowledgeably declines care offered. It also makes the physician think instead of acting in a knee jerk fashion.

        If one wants to really attack the core problems leading to high healthcare costs, rules and regulations are not the way to go. All they do is promote gaming with eventually higher costs as we have seen in the Medicare program since 1965. With the market place the patient will assess the premiums, nature of his insurance and the risks and tailor all of that to his specific needs.

        Great post.

    • John Fembup says:

      “they only look at malpractice insurance premiums and court awards but totally ignore how medicine is actually practiced in the field”

      Barry, that’s a useful insight because it helps illustrate how limiting ones perspective to insurance is the wrong way to go about understanding why the cost of medical care is high and continues to rise.

      And yet, as Devon points out above, the very presence of insurance masks the true cost of care that people receive – which induces higher utilization by patients – and by service providers, too – all of which contributes to cost. Just to make it more complex, “utilization” is not simply the frequency of services. It also reflects today’s cost for services that did not exist before. For example, Lipitor and atorvastatin did not exist before 1990. Same is true of other medications, plus medical and surgical procedures we take for granted today; many did not exist before 2000; or 1990; or 1980, etc. Could we return to a medical cost environment similar to the 1970s? Technically yes, but impossibly unlikely; who would give up today’s medical care and go back to the care available 45 years ago?

      There is also the medical cost impact of the declining health of our general population. Our population is not simply aging, it is is arguably less-healthy than 25 years ago (obesity, diabetes, stress-induced illnesses, risky individual behaviors such as poor diet, smoking, substance abuse; etc etc etc). So other questions are relevant: how to influence health-related behaviors? Some are very specific: Is salt harmful, or not? Why are so many people allergic to peanuts today? Others are broader in scope: Is the US Public Health Service as effective and efficient as it needs to be?

      All these factors are part of our system of health care. Limiting one’s perspective to “insurance” and trying to solve the broader problems with an insurance scheme is equivalent to wearing blinders. It won’t work. Exhibit A = Obamacare.

      • Ron Greiner says:

        John, you got most things in there but you forgot how inexpensive blood letting was. All you need is a few inexpensive leaches and a barber shop pole. Exhibit A = Obamacare

      • Devon Herrick says:

        John: Could we return to a medical cost environment similar to the 1970s? Technically yes, but impossibly unlikely; who would give up today’s medical care and go back to the care available 45 years ago?

        Ron: …you forgot how inexpensive blood letting was. All you need is a few inexpensive leaches and a barber shop pole.

        All true statements. But, old health care technology isn’t necessarily cheaper, due to providers that have no incentive to compete on price. Granted, Lipitor is cheaper in generic form than brand Lipitor was while under patent protection. But if doctors still performed blood letting, it would be a surgical procedure — billed at thousands of dollars.

        Babies have been born and the delivery assisted by midwives since the birth of modern humans. Yet, a simple labor and delivery is $13,000 (minus health plan discount).

        In competitive markets, advancements in technology cost more, but prices for a given technology doesn’t tend to rise indefinitely. You can buy a high definition television for $300 that would totally put to shame the 27″ color console from 1975 (~$700 at the time). The old color console would cost something like $2,500 in inflation-adjusted dollars. The first Motorola brick phone (model 8000X) cost $3,995 in 1984. iPhones are $650 today; a two-year old model is $250 used.

        Which brings me to an area of medicine where insurers do not pay. Old fashioned Lasik is still available. The average price today ($1,800 per eye) is lower than when it was introduced in 1999 ($2,100). Discounts on Groupon often undercut the average price by 50% ($1,750 for both eyes). Custom wavefront Lasik is far better, its average price today ($2,142) is about what conventional Lasik was back in 1999. You can find well-respected providers offering custom Lasik for about half the going rate on Groupon ($2,500 for both eyes).

        I’ve done a lot of research on cosmetic surgery. The prices for most surgical procedures have only risen about 35%-50% in the past 20 years. By contrast, medical care inflation has increased by around 128%. It’s the same doctors in many cases that do both curative and cosmetic procedures. In their cosmetic practice, they compete on price, quality, convenience and other amenities. In their curative practice, they are stuck with bureaucratic insurance reimbursements and have little incentives to compete on price, and no opportunity to rebundle or repackage services in patient-pleasing ways to attract more business.

        • Ron Greiner says:

          Devon, I used to be really stupid on health insurance. I ran 6 Richard Simmons Anatomy Asylums in Denver and when the company was sold all employees went to the new owner but me. I went to the big clubs now called Bally, in Texas they were called the President Clubs I think. Anyway, I never missed paying a premium out of my check for health insurance but because it was a different company my wife was uncovered when our baby was born. I was told that because the company was self insured from IL, Chicago Health Clubs, there was no extension. That was probably a lie because we are dealing with Chicago people here.

          Anyway again, I told the doctor that we had no health insurance and immediately he wanted to do a “Rule Out Labor”, probably because uninsured people sue more. I told him this is our 3rd child and my wife says she is not in labor so we don’t need to do the test which is a belt they strap around her. He said we had to. I said that it will cost at least $250 and he said it was more like $50. Well, after 30 minutes it was confirmed she was not in labor and the bill was $750 for that belt around her.

          Then in January 1984 she didn’t take any meds to have that child and we were out of the hospital in 22 hours and the bill was $22,000. I can tell you it took a long time to pay that “medical” bill off. I could have delivered that baby.

        • John Fembup says:

          @Devon, “old health care technology isn’t necessarily cheaper”

          Correct. I think the larger cost impact would come from giving up all the newer and more expensive technology that became avallable since 1970, in order to revert to a 1970s medical delivery environment. Wouldn’t you agree? (In fact, that’s why I use the term “environment” rather than “cost level”).

          I think your comments on non-covered services are right on point.

          • Devon Herrick says:

            That is certainly true of drugs. Nearly 90% of drugs prescribed are generics, which only account for 28% of drug spending. By contrast, 1% of drugs prescribed fall into the category known as “specialty drugs.” Specialty drugs account for one-third of all drug spending.

            By definition, when taking a generic drug, you are using 20+ year old technology. The reason specialty drugs are expensive is because they were costly to develop, often difficult to manufacture and under patent protection.

            Now consider hip/knee replacement. The technology really hasn’t changed much in decades. But the outcomes are likely better today due to increased knowledge derived from the length of time the procedures have been performed. This is incremental improvement that is mostly not due to research, but the collective experiences of thousands of doctors and millions of patients. Knee replacement, however, is not the same price as it was back in 1995, it’s far more expensive. This makes little sense.

            Another observation. For the most part, technology from 1975 wouldn’t necessarily be any cheaper than 1995 technology. I’d rather have 1995 than 1975. But your point is important. Part of the higher cost of health care is paying for advancements in technology. But I would add that much of the high cost of health care is paying for medical care in inefficient ways.

            • Barry Carol says:

              One issue, though, is how much more these newer technologies cost in the U.S., even at Medicare reimbursement rates, vs. in other developed countries.

              Most brand name drugs also cost significantly less in other countries because of government price controls and the drug companies are willing to price more on a marginal cost basis because they can charge what the traffic will bear in the U.S. market.

              Finally, I never heard of any other product that varies its price from one country to another based on ability to pay with per capita GDP used as a proxy to define that ability.

  8. Don Levit says:

    Paying $22,000 per year before receiving benefits is like having a $22,000 deductible
    That is about 45 percent of the risk
    This husband and wife are their own mini insurance company!

    • Ron Greiner says:

      Don, I tell people with no health insurance that it is like having a $250,000 deductible.

      Besides Devon was wrong. If Devon gets a head full of brain tumors he has a $6,000 deductible that pays the rest of the bill. He and his wife have premiums of $10,000 so the total that year is $16,000 and not $22,000. Of course if Devon’s wife gets a head full of brain tumors too they would have reached his $22,000.

      Trust me, Devon’s car cost more than double $22,000 so having coverage on his wife that could save her life, his auto, home and bank accounts is worth it. Devon could get sick no matter how much he works out, as if that makes any difference. I know Devon comes from a long line of dying people.

      • PJohnson says:

        I wish it were like car insurance. Premiums would be affordable plus my policy has medical coverage for $500,000 and no cap on close head injuries. (Woo hoo! I’ll never drive under the speed limit again.) I can only hope my future brain tumors can be tied to my auto… Maybe I’ll just camp there.

  9. PJohnson says:

    What most people need and would pay for is cheap, no frills catastrophic care with coverage that doesn’t begin until after you’ve shelled out $5K. That can be had even at my age (62) for $150 a month. Much less if I were younger. I had a similar policy when I was first married at 27. It cost about $40 a month and ensured that I wouldn’t be a liability to my extended family (I had no assets). Unfortunately Obama has declared these plans “unqualified”. There is a loophole (again tax code). They can be had as “temporary” policies at 6 month intervals. Meaning you have to renew every 6 months. That’s the plan of action I’ve taken.

    • Devon Herrick says:

      I agree that what most people need a $5,000 deductible policy that costs $150 a month. What my wife has is a $6,000 deductible policy that costs $389 a month. The difference in premiums ($239 x 12) is $2,868. If she only had a $5,000 deductible, and could had that $2,868 in an HSA to use towards her deductible, she’d be happy with her coverage. But with Obamacare, not so much. Indeed, I try not to have these types of conversations with her because I don’t want to get her on a rant. It’s very frustrating that the ACA has destroyed the individual insurance market and we’re a captive customer who are required to throw nearly $5,000 per year down a rat hole.

  10. Bob Hertz says:

    Devon, the reason that your wife’s high deductible policy costs $389 a month is not that the insurers are sadists and not the the insurer is all that profitable.

    The reason is guaranteed issue, which puts your wife in a risk pool where about ten percent of the insured population is likely to be hospitalized for some reason this year.

    Before the ACA, if your wife was healthy she could go into a risk pool of other healthy people, of whom maybe three or four each year would be hospitalized.

    That is all it takes to drive up premiums. I speak regularly with some actuaries at Blue Cross of MN, and they have shown me the rate setting process. Just bringing in a relatively few patients with MS or Lou Gehrig’s disease or advanced cancer into the risk pool has a dramatic result.

    Our society is generous toward the sick, and so we are going to pay for terminally ill people in one way or another. But the real options are these:

    a. We have Medicaid and high risk pools, and dialysis covered by Medicare, and in this way the expenses of the very sick are covered by all taxpayers:


    b. We have guaranteed issue, and then the expenses of the very sick are forced onto the other people who have to buy individual insurance (like your wife).

    Very few politicians are this honest about the options. Republicans refuse to vote higher taxes for Medicaid, and Democrats pretend that guaranteed issue will solve everything.

    • Barry Carol says:

      Bob –

      Thanks for the information. That’s very interesting about how much just a few incremental expensive claims can make in determining the premium.

      If high risk patients were eligible for and covered by Medicare, I suspect that the definition of high risk would expand dramatically. In theory, whenever an insurer determined that a particular individual was no longer profitable to serve, he or she would be dumped into the high risk pool to be covered by Medicare and paid for by taxpayers. We’ve talked before about why state high risk pools won’t work mainly because of the adverse political tradeoff between the financial cost to state taxpayers and the number of votes in play.

      I’ve come to reluctantly conclude that the health insurance approach most likely to work for the unhealthy and the already sick is Medicare Advantage for all financed by a combination of a broad based value added tax to cover 75% of the cost and beneficiary premiums to cover the other 25%. Premiums would be determined on a county by county or state by state basis as opposed to a national basis.

      Let’s have a strong role for insurers to better mitigate fraud and people can also buy a supplemental plan if they want to and can afford to. Details around the composition of the benefits package, the range of allowable deductibles that people can choose, and to what extent and under what circumstances doctors and non-hospital owned imaging centers and other facilities can balance bill for non-emergency care can be worked out as the program is debated. I wouldn’t allow hospitals to balance bill at all and I wouldn’t let doctors employed by hospitals to balance bill either and nobody should be allowed to bill for emergency care. Those who are allowed to balance bill would have to provide complete price transparency to patients ahead of time.

    • Devon Herrick says:

      That raises an important question: prior to the ACA where were the sick people (the ones driving up premiums) getting their care? They are, presumably, getting a substantial amount of care for it to require everyone in the risk pool to cough up $4,700 — 90% of which never meet their deductible — and the plan is still barely profitable.

      Prior to the ACA the care for the sick was being borne by someone. Was it internalized? Was it ignored until the first year of Medicare eligibility? Were the hospitals eating the cost of uncompensated care in years past?

      I agree that we cannot ever get a handle on runaway health care spending until we address the cost issue. Economists traditionally believe that cross subsidies tend to exacerbate rising costs rather than solve the affordability problem. If we’re trying to get a handle on rising health costs, this isn’t the way to do it.

      • John Fembup says:

        Devon, recall that Milliman – among others credible analysts – documents substantial “cost shifting” of uncompensated care to private insurance. Costs of uncompensated care have been shifted from uninsured persons, and from inadequate reimbursements paid by Medicaid and Medicare.

        Milliman found the aggregate cost-shifted amount to be in the range of $90 billion a year, enough to boost private insurance costs 15% above what they otherwise could have been (and of course, the ahifted costs also result in a comparable understatement to the true cost of Medicaid and Medicare).

        How long had this cost shifting been going on? I first read of it in the March, 1970 issue of Atlantic Monthly. Then, the p author described how uncompensated “welfare” costs increased private charges at a large Boston hospital by 16%. How likely is it that only one hospital would have been affected this way?

        Instead, it seems much more likely that cost shifting has existed broadly in hospitals for almost 50 years, and especially among those hospitals with high numbers of Medicaid or Medicare patients. It also seems likely that the magnitude of the overall cost shift has been consistent over that period of time. (btw, the author of the Atlantic article was a young Michael Crichton, M.D.)

        its unpleasant to consider the possible impact on tax appropriations for Medicaid and Medicare, if or as Obamacare causes cost-shifting to disappear.

  11. Bob Hertz says:

    Devon raises a good point about cost shifting.
    If hospitals raised their rates to paying patients as a result of uncompensated care, then this was a burden to the paying patients. ( a small and burdened group)

    If insurers in the individual market now must raise their rates due to guaranteed issue, this is a burden to other buyers of individual insurance (a rather small group).

    Seems to me that if the federal government just paid the hospitals for uncompensated care, whether through a side program in Medicare or another vehicle, then the costs would be transmitted to taxpayers as a whole.

    This seems fairest to me.

    • Barry Carol says:

      Bob —

      I think they already do that. There is a pool of money intended to compensate what are called Disproportionate Share Hospitals (DSH) which serve a much greater than average number of uninsured and Medicaid patients. Unfortunately, it’s not nearly enough to take care of the problem.

      They could also more fully compensate teaching hospitals for their incremental costs attributable to medical education and, to some extent, research so they could lower the spread between their charges and what community hospitals charge for the same services, tests and procedures.

      I’m told that Medicaid only pays hospitals 65% of costs on average and Medicare pays 91% of costs. Commercial insurers pay about 130% of costs to make up for government underpayments.

      I often ask if most hospitals could make money if they were paid Medicare rates for all comers with no uncompensated care. I haven’t heard anyone clearly say that would work. If Medicare rates were about 15% higher than they are now, it probably would work.

    • Why should the federal government pay at all? Most of these hospitals are nonprofits, which claim they are following a command from Jesus Christ to heal the sick. Show me in the gospel where Jesus said “heal the sick and then send the bill to Caesar.”

  12. Bob Hertz says:

    Last time I read about the DSH Medicare subsidy, the total payout was about $7 billion, and the ACA whiz kids have scheduled it to decrease very soon.
    And the payouts had the usual complex Medicare formulas, rather than being a small, straightforward payment to every hospital that had an uninsured patient who could not pay his bill.
    This dilemma somewhat goes back to the passage of EMTALA in the 1980’s. To my knowledge this bill had no money in it for the hospitals who were required to accept and stabilize all patients. It was feel-good liberal legislation, in that mandated a good thing, but refused to raise any taxes to pay for that good thing.

  13. Bob Hertz says:

    Here is one way to take care of the uninsured.

    Virtually every uninsured person has a potential tax credit they are not using. (by not going to the ACA exchange)

    Why not put all those credits into a superfund, supervised perhaps by Medicare.

    Then when an uninsured person goes into the hospital for emergency care, the superfund pays most of the hospital bill. (using the Medicare fee schedule to cap the total bill)

    This solves a problem without playing big brother with the ACA tax penalties, and without forcing people of modest incomes to buy overpriced insurance policies.

    • Pjohnson says:

      That assumes the credits are actual dollars. When you run an annual trillion dollar deficit (or more) as Obama has every damn year, there is no money just floating around.

    • Thank you. That is very similar to what we’ve been advocating for years, with a universal tax credit.

      • Ron Greiner says:

        Rand Paul’s Reform also includes restoring the FREEDOM of Healthy Discounts and medical underwriting in Individual Medical (IM) insurance in the United States exactly like Life Insurance. This much needed reform assures that young healthy people have the lowest possible prices when purchasing health insurance. This important reform to allow insurance companies to offer Healthy Discounts to consumers will allow hundreds of new insurance companies to enter the market because they will be able to predict their future costs with actuarial science. Insurance companies cannot currently enter the market because Obamacare has no medical underwriting so a new insurance company could possibly get a dying alcoholic who is high on the list for a $739,000 liver transplant. In 10 years from now America requires hundreds of insurance companies for the consumers to choose from. Competition is critical in Free and Open Markets. It is competition that keeps prices low and value high for the consumer.

        Secondly, Rand Paul enacts age-based tax credits for the purchase of personable and portable Individual Medical (IM) insurance of the consumers’ choice. The amount of the credit is; age 1-18 = $1,000, age 19-35 = $1,500, age 36-50 = $2,000, age 51-64 = $3,000. A 30-year-old couple with 2 children would receive a $5,000 tax credit to purchase IM insurance ($2,000 + $2,000 + $1,000 + $1,000 = $5,000).

        The Federal Government is spending $500,000 a minute for lost taxes on employer-based health insurance. This is the largest tax write off in the United States. This large expense is small compared to the larger cost of over-priced health insurance that Blue Cross Blue Shield Inc. (BCBS) is extracting from American employers and their employees. BCBS wrote Obamacare to extend their monopoly of employer-based health insurance as long as possible but Obamacare’s days are numbered and Rand Paul’s Reform would create Free and Open Markets and the economy would soar like never before.

  14. Bob Hertz says:

    The idea above was raised by Dr Goodman a couple of years ago.

    This procedure would not stop cost shifting. Nothing is perfect.

    The supporters of the ACA would not like it either. The ACA is greedy to get healthy lives into the risk pool, and the concept I just presented would make healthy persons more at ease if they did not buy insurance.

    It does not bother me if the ACA exchanges wind up with a great many high risk persons. Premiums will go up, but I have no problem if subsidies go up also. In fact, I would recommend three steps to improve subsidies right now:

    a. Extend subsidies to all incomes, so couples with a middle class income (in most states) of $64,000 would not be cut off from all aid as they are today.

    b. Key subsidies off the cost of the gold plans, which are usually the only decent products on the exchanges.

    c. Calculate subsidies using 80% of AGI, since that is what consumers can really spend after taxes.

  15. Pjohnson says:

    “Extend subsidies to all incomes” is no different than lifting yourself by your boot straps.

  16. Bob Hertz says:

    Notes to P Johnson:

    The subsides that I favor need not be just added to the deficit, which I agree is a bad idea.

    (George Bush added far more to our deficits when he pushed for Medicare Part D without a nickel of offsetting taxes.)

    Anyways, try this one out.

    The persons who receive tax credits are not getting affordable insurance from their employers.

    I do not favor mandating enployers to pay $20,000 family insurance premiums.

    But if we forced employers to pay 2% of wages into a federal health care fund?

    What if we forced the best off government and private sector employees to pay a little taxes on their now tax-free emmployer benefits?

    This would help the worker who is stuck with an employer who does not offer benefits.

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