(The following are selected excerpts from NCPA President John C. Goodman’s new book, Priceless: Curing the Healthcare Crisis. For more information about the book and to order a copy, click here.)
Ideal health insurance is often said to be health insurance with no deductible or co-payment, making medical care essentially free at the point of delivery. Yet, if patients have no out-of-pocket costs their economic incentive will be to overuse the system, essentially consuming healthcare until the last amount obtained has a value that approaches zero. Also, if patients are not paying money for the services they receive, they’re not likely to shop around for the best buy, so doctors, hospitals, and other providers will not compete for patients based on price, They will have no economic incentive to keep costs low—the way producers behave in other markets. To the contrary, the incentive of the providers will be to maximize against the payment formulas in order to enhance their incomes.
Well-intentioned public policies designed to make healthcare affordable for individuals, therefore, have had the surprising effect of causing healthcare spending to become unaffordable for the nation as a whole. Rising health- care spending is the principal cause of our out-of-control federal deficit. It is bankrupting cities, counties, and state governments. It has created huge un-funded liabilities for some of our largest corporations. It is contributing to the stagnation in worker take-home pay. It can potentially bankrupt the families of individuals who have the misfortune to become ill—even those with health insurance.
Another well-intentioned public policy initiative—adopted by some states— is to try to make health insurance affordable for people with pre-existing conditions by requiring insurers to charge the same premium to all buyers, regardless of health status. Yet, this legislation has the unintended consequence of encouraging people to remain uninsured until they get sick. As healthy people drop out of the market and only people with health problems remain, the premium needed to cover the insurers’ cost begins to soar. In the state of New York, this sort of regulation has produced staggeringly high premiums. For a run-of-the-mill individual policy, United Healthcare Oxford charges a premium of $1,855.97 a month, or more than $22,000 a year. For a family, the premium is $5,707.11 per month, or more than $68,000 a year.1 A policy designed to make insurance affordable, therefore, is pricing thousands of people out of the market.
Federal health programs provide other examples of unintended consequences of public policies foisted on a complex system. In 1965, Congress passed Medicare in an attempt to increase access to healthcare for the elderly and improve their health status. Members of Congress believed they could do so without any material impact on the rest of the healthcare system. Yet MIT professor Amy Finkelstein has discovered that the passage of Medicare had no effect on the health of the elderly—at least as measured by mortality—but the additional spending set off a bout of healthcare inflation for all patients—one that never subsided.2
In 2003, Congress passed a Medicare drug benefit, largely out of concern that senior citizens couldn’t afford the coverage themselves. Since the new program (Medicare Part D) had no funding source, Congress created a $15.6 trillion unfunded liability for the federal government, looking indefinitely into the future—more than the unfunded liability in Social Security.3 Yet economist Andrew Rettenmaier discovered that only 7 percent of the benefits actually bought new drugs for seniors. The other 93 percent simply transferred to government (and taxpayers) the bill for drugs the elderly or their insurers were already buying.4 Only one in every thirteen dollars represented a new drug purchase. Interestingly, the help given to the small number of people who were not otherwise getting medications actually reduced Medicare’s spending, as drugs were substituted for more expensive doctor and hospital therapies.5 But this profit on the truly needy was overwhelmed by the cost of giving the benefit to those who didn’t need it—a cost that has created an enormous obligation for current and future taxpayers.
Here are two other unintended consequences of health policies designed to make healthcare free at the point of delivery. In other markets, producers don’t compete only on price. They compete on quality as well. In healthcare, however, it appears that when providers don’t compete on price, they often don’t compete on quality either. That may be one reason why critics find that the quality of care we receive (including the very large number of avoidable errors and other adverse medical events) falls far short of what we would expect in a normal market.
Also, in most markets, we pay for goods and services with both time and money, and producers and sellers understand that we value our time as well as our pocket book. Public policies designed to suppress the role of money as a medium of exchange in the medical marketplace, however, have had the inadvertent consequence of increasing the importance of waiting times and other non-price barriers to care. These efforts to increase access to care may well have decreased access instead by making people wait longer to get appointments and to see the doctor once they reach her office.
1 Uwe E. Reinhardt, “The Supreme Court and Healthcare,” New York Times, Economix (blog), November 25, 2011, http://economix.blogs.nytimes.com/2011/11/25/the-supreme-court-and-health-care-2/.
2 Amy Finkelstein, “The Aggregate Effects of Health Insurance: Evidence from the Introduction of Medicare,” Quarterly Journal of Economics 122 (2007):1-38, http://www.dartmouth.edu/~jskinner/documents/FinkelsteinATheAggregate_000.pdf.
3 “The Medicare/Social Security Trustees Spring Report: A Bleak Future,” National Center for Policy Analysis, 2009, http://www.ncpathinktank.org/pdfs/A_Bleak_Future.pdf.
4 Andrew J. Rettenmaier and Zijun Wang, “Medicare Prescription Drug Benefit: What Difference Would It Make?” National Center for Policy Analysis, Brief Analysis, No. 463, Monday, November 17, 2003, http://www.ncpathinktank.org/pdfs/ba463.pdf.
5 J. Michael McWilliams, Alan M. Zaslavsky, and Haiden A. Huskamp, “Implementation of Medicare Part D and Nondrug Medical Spending for Elderly Adults With Limited Prior Drug Coverage,” Journal of the American Medical Association 306 (2011): 402-409.
[page]To people who subscribe to the health policy orthodoxy, the riddle of modern healthcare is: Why are health costs rising so fast? To me the riddle is: why isn’t health spending rising even faster?
Every time you and I spend a dollar at a physician’s office, only 10 cents is coming out of our own pockets, on the average.1 The remainder is paid by a third party—an employer, an insurance company, or government. That means our incentive is to consume healthcare until it’s worth only 10 cents on the dollar to us. That’s enormously wasteful. It means we are consuming healthcare that is worth 10 cents when with the same money we could have consumed something worth a dollar. Why do we do that? Because we are trapped. We are in a third-party payer system with use-it-or-lose-it benefits. Most of the time our health plan doesn’t give us the option to buy less healthcare and more of something else.
With the advent of ACA, our incentives will become even worse. A long list of preventive services will be made available without any co-payment or deductible. Yet if the cost of these services to us is zero at the time we consume them, our incentive will be to consume them until the last bit is almost worthless.
Some Type A personality readers may be skeptical of the idea that people will overuse the healthcare system. Are we talking about a few hypochondriacs? Or, are we talking about ordinary people? The latter. In Florida, for example, the waiting rooms of many specialist doctors are gathering places for senior citizens who take the occasion to socialize and enjoy each other’s company.
First-dollar health insurance coverage means healthcare is free or almost free at the time we obtain it. When something is free, our incentive is to consume it so long as it furnishes any value at all. Yet the reality is that these services are not costless. In fact, the way our system functions, they are very expensive. So although we consume care as though it were free, we all end up paying a very steep price through higher premiums and higher taxes.
As a practical matter, once we pay insurance premiums, that money is combined with everyone else’s premiums in a pool. Once the money is in the pool, it is no longer “ours.” In fact, when we draw from the pool, we are spending everybody’s money. Moreover, the only way to get benefits from the health insurance pool is to spend money on medical care.
If you and I are in the same insurance pool, consider how many ways there are for me to spend your money:
- If my wife and I decide to have another child and we have fertility issues, there’s always in vitro. Cost: $20,000.
- If we decide not to have a child, there is always a vasectomy or tubal ligation. Cost: $1,000 to $7,000.
- If I decide my thinning hair needs to be a bit bushier, there’s Propecia at an annual cost of $842.
- If my testosterone level isn’t in sync with my idealized vision of my own virility, there is Androgel ($831/year).
- If my unhealthy diet leads to diabetes, many of those costs will become “ours” as well (average annual extra cost = $7,000).
Notice I haven’t even mentioned yet the normal diagnostic screenings (PSA test, colonoscopy, etc.). They cost money as well. Then, let’s say that over time, I abuse my body with alcohol, tobacco, drugs, fatty foods, lack of exercise, and so on. I know that others will pay my medical costs—mainly from first dollar—once I get old enough to qualify for Medicare.
1 On average, patients pay only 12 percent of medical care out of pocket. “National Health Expenditures by Type of Service and Source of Funds: Calendar Years 1960 to 2009,” Centers for Medicare and Medicaid Services, US Department of Health and Human Services, January 4, 2011, https://www.cms.gov/NationalHealthExpend Data/downloads/nhe2009.zip.
[page]There are two fundamentally different ways of thinking about complex social systems: the economic approach and the engineering approach.
Social engineers see society as disorganized, unplanned, and inefficient. Wherever they look, they see underperforming people in flawed organizations producing imperfect goods and services. The solution? Let experts study the problem, discover what should be produced and how to produce it, and then follow their advice. Social engineers invariably believe that a plan can work, even though everyone in society has a self-interest in defeating it. Implicitly, they assume that incentives don’t matter. Or, if they do matter, they don’t matter very much.
Yet to a commonsense observer, incentives seem to matter very much. Complex social systems display unpredictable spontaneous order, with all kinds of unintended consequences of purposeful action. To have the best chance of good social outcomes, people must find that when they pursue their own interests, they are meeting the needs of others. Perverse incentives almost always lead to perverse outcomes.
In the 20th century, country after country and regime after regime tried to impose an engineeringmodel on society as a whole. Most of those experiments have thankfully come to a close. By the century’s end, the world began to understand that the economic model, not the engineering model, is where our hopes should lie. Yet healthcare is still completely dominated by people who steadfastly resist the economic way of thinking.
As I see it, healthcare is a field that can be described as a sea of mediocrity punctuated by islands of excellence. The islands always spring from the bottom up, never from the top down; they tend to be distributed randomly. They are invariably the result of the enthusiasm, leadership, and entrepreneurial skills of a small number of people. They are almost always penalized by the payment system.1
Now if you think like a commonsense economist, you will say, “Why don’t we reward, instead of punish, the islands of excellence and maybe we will get more of them?” But if you think like an engineer you will reject that idea as completely unacceptable. Instead, you will try to (1) find out how medicine should be practiced and (2) find out what type of organization is needed for doctors to practice that way, so that (3) you can then go tell everybody what to do.
Here is Harvard Medical School professor Atul Gawande, explaining how medicine should be practiced:2
This can no longer be a profession of craftsmen individually brewing plans for whatever patient comes through the door. We have to be more like engineers building a mechanism whose parts actually fit together, whose workings are ever more finely tuned and tweaked for ever better performance in providing aid and comfort to human beings.
Here is Karen Davis of The Commonwealth Fund, explaining (in the context of health reform) how medical care should be organized:3
The legislation also includes physician payment reforms that encourage physicians, hospitals and other providers to join together to form ac- countable care organizations [ACOs] to gain efficiencies and improve quality of care. Those that meet quality-of-care targets and reduce costs relative to a spending benchmark can share in the savings they generate for Medicare.
The ACA was heavily influenced by the engineering model. Who, but a social engineer, would think you can control healthcare costs by running pilot programs? They are a prime example of the social engineer’s fool’s errand.
1 John C. Goodman, “It’s Still Not What I’m Looking For,” John Goodman’s Health Policy Blog, February 20, 2009, http://healthblog.ncpathinktank.org/its-still-not-what-im -looking-for/.
2 Atul Gawande, “The Velluvial Matrix,” New Yorker (blog), June 16, 2010, http://www.newyorker.com/online/blogs/newsdesk/2010/06/gawande-stanford-speech.html.
3 Karen Davis, “How Will the Healthcare System Change Under Health Reform?” The Commonwealth Fund Blog (blog), June 29, 2010, http://www.commonwealthfund.org/Blog/How-Will-the-Health-Care-System-Change.aspx.
[page]Just as noneconomists think wages can be set at any level, some people think that any public policy is possible. If wages are judged to be too low, the noneconomist thinks that’s because the business owner is hardhearted. If a public policy is judged insufficiently generous, the person unfamiliar with public choice thinks that public officials are hardhearted. In both cases, the error is the same: the belief that decision makers have enormous discretion when, in fact, they have very little.
The Politics of Spending Decisions
In a typical health insurance pool, about 5 percent of enrollees will spend 50 percent of the money. About 10 percent will spend nearly two-thirds.1 The numbers differ a bit from group to group, but in any given year, a small number of people spend most of our healthcare dollars.
Now suppose you are a Minister of Health. Can you afford to spend half of all healthcare dollars on 5 percent of the voters? Even if they survive to the next election, they may be too sick to get to the polls and vote for your party.
From a political point of view, the answer is clearly “no.” The inevitable political pressure is to skimp on care for the sick to spend on benefits for the healthy. Put differently, the politics of medicine pushes decision makers to underprovide to the sick so they can overprovide to the healthy.
That is why it is easier to see a primary care physician in Britain than it is in the United States but harder to see a specialist and much harder to access expensive technology. In the 1970s, the British invented the CAT scanner and for a while supplied half the world’s usage (probably with government subsi- dies). But the National Health Service bought very few CAT scanners for use by British patients. The British (along with the United States) also invented renal dialysis, but today Britain has one of the lowest dialysis rates in all of Europe.2
The Politics of US Medicare
In the US Medicare program, policymakers achieve through patient cost sharing what other countries achieve through the rationing of services: They punish the sick to reward the healthy. For example, although basic Medicare pays for many minor services that most seniors could easily afford to purchase out of pocket, it leaves the elderly exposed to thousands of dollars of catastrophic costs. This is exactly the opposite of how insurance is supposed to work.
Medicare’s hospital deductible is $1,156. Seniors experiencing an extended stay lasting more than two months, however, are required to pay $289 per day in cost sharing. This increases to $578 per day after three months, and Medicare pays nothing in hospital costs for patients who stay more than five months.3
When the federal government began regulating Medigap insurance (which fills the gaps in Medicare), Congress forced insurers to follow the same pattern. Medigap must pay small bills, but seniors can still experience thousands of dollars in out-of-pocket costs.4
The pattern is repeated in the new Medicare prescription drug program (Part D). A “donut hole” exposes the relatively sick to significant out-of-pocket expenses for no other reason than the political desire to provide first-dollar coverage to the relatively healthy. In 2012, the maximum deductible for a Medicare Part D plan is $320. Once the deductible has been met (not all plans have a deductible), Medicare Part D pays 75 percent of the next $2,610 in drug spending until total drug expenditure is $2,930. The donut hole reflects drug spending that falls between $2,930 and $4,700. Until 2012 it was the responsibility of the enrollee to pay all costs inside the donut hole. The Patient Protection and Affordable Care Act created a new benefit in 2012 that pays for 50 percent of the costs. After $4,700 in total drug spending, Medicare Part D enrollees pay only a modest co-pay of $2.60 and $6.50 for each prescription. The donut hole is slated to close by 2020, however.5
The Medicaid Exception
It is not uncommon for Medicaid programs to underpay doctors and over- pay hospitals. Or they underpay hospitals less than they underpay doctors. In either case, this limits the availability of doctor-provided primary care and drives low-income patients to hospital-based services. How can we explain this apparent exception to the pattern described above?
If low-income people don’t vote, or if they always vote for the same party, politicians won’t compete for their votes. That means the only significant political pressure comes from providers; and hospitals seem to be much better at pursuing their interests in politics
1 Mark W. Stanton, “The High Concentration of US Healthcare Expenditures,” Agency for Healthcare Research and Quality, Research in Action 19 (2006), http:// www.ahrq.gov/research/ria19/expendria.pdf.
2 John C. Goodman, Gerald L. Musgrave, and Devon M. Herrick, Lives at Risk: Single Payer National Health Insurance Around the World (Lanham, MD: Rowman & Little-field Publishers, 2004), 62.
3 For an explanation of Medicare cost-sharing see “Summary of Medicare Benefits and Cost-Sharing for 2012,” California Health Advocates, November 15, 2011, http:// www.cahealthadvocates.org/basics/benefits-summary.html.
4 William J. Scanlon, “Medigap: Current Policies Contain Coverage Gaps, Undermine Cost Control Incentives,” Testimony before the Subcommittee on Health, Commit- tee on Ways and Means, House of Representatives, March 14, 2002, http://www.gao.gov/new.items/d02533t.pdf; also see Noam N. Levey, “Once Politically Taboo, Proposals to Shift More Medicare Costs to Elderly Are Gaining Traction,” Los Angeles Times, July 15, 2011.
5 “2012 Medicare Part D Outlook,” Q1Medicare.com, undated, http://www.q1medicare.com/PartD-The-2012-Medicare-Part-D-Outlook.php.
[page]Most Americans will be required to have health insurance beginning on January 1, 2014. The type of insurance you have, where you will get it, and what you will pay will be determined not by you and your employer or by free choice in the marketplace, but by government. Here are the biggest problems the mandate will create.
Crowding Out Other Consumption
Health costs per capita have been rising at twice the rate of per capita income for the past forty years. President Obama did not create the underlying problem. Nor is this a uniquely American problem.1 The result: healthcare spending will consume more and more of our income with each passing year.
To make matters worse, the normal consumer reactions to rising premiums are going to be disallowed. For example, most people would react to unaffordable premiums by choosing a more limited package of benefits, or opting for catastrophic coverage only or relying more on Health Savings Accounts. But these and other responses are limited or barred altogether under the new law.
The provisions governing preventive care illustrate the problem. Everyone will have to have a plan that covers preventive care (mammograms, Pap smears, colonoscopies, etc.) with no deductibles or co-payments. Since there will be no out-of-pocket payment, no one will have any incentive to comparison shop and try to minimize the cost of these services. Could some preventive care be provided by a nurse at a walk-in clinic more cheaply than at a doctor’s office? Undoubtedly. But the new law will prevent you from being in a health plan that gives you economic incentives to economize and reduce those costs.
Crowding Out Wage Increases
Most people will continue to obtain health insurance through an employer. The Congressional Budget Office estimates the average annual cost of a mini- mum benefit package at $4,500 to $5,000 for individuals and $12,000 to $12,500 for families in 2016.2 Thus, the minimum cost of labor will be a $7.25 cash mini- mum wage and a $5.89 health minimum wage (family), for a total of $13.14 an hour or about $27,331 a year.
Imagine you are an employer. You certainly aren’t going to pay an employee more than his value to the organization, and competition from other employers will tend to prevent you from paying less. If the government forces you to spend more on health insurance, you will spend less in wages in order to pay for the mandated benefits.
For above-average-wage employees, this is all straightforward. Expect wage stagnation over the foreseeable future, as employers use potential wage increases to pay for expanded (and mandated) health benefits instead. At the low end of the wage scale, however, the effects of this new law are going to be devastating.
Crowding Out Jobs
Ten-dollar-an-hour workers and their employers cannot afford $6-an-hour health insurance. If they bought it, only $4 would be left for cash wages and that would violate the (cash) minimum wage law. This is not a small problem. One-third of uninsured workers earn less than $3 above the minimum wage.3
Further, although health economists have known for decades that these are the workers that most need help in obtaining insurance, there are no new subsidies to help employees at Wal-Mart or McDonald’s or Denny’s or any other restaurant chain buy health insurance. These workers and many others are at risk of losing their jobs.
Do We Really Need a Mandate?
The idea of a health insurance mandate has seemed reasonable to many people on the right as well as the left because of the free-rider problem: those who remain willingly uninsured will have extra money to spend, and if they become sick and need care they cannot pay for, they will look to everyone else to provide that care for free. Are we not rewarding them for being irresponsible and allowing them to be free-riders on the rest of society?
That argument seems persuasive until we ask this question: if we require everyone to have health insurance, what is the appropriate punishment for some- one who doesn’t? The only practical way to enforce a mandate is with a fine. And if that is all we have in mind by way of enforcement, we do not need a mandate. All we need is a system that fines people who don’t purchase insurance.
In fact, the income tax already provides this “fine.” Middle-income families who have employer-provided health insurance (as opposed to higher wages) receive a generous tax subsidy. The flip side of that subsidy is a penalty: People who don’t have employer-provided insurance pay higher taxes as a result of that fact.
Why is it good not to have a mandate? Because once the government tells us what insurance we must have, every special interest imaginable will lobby Congress to become part of the mandated benefit package. This has already happened at the state level, where insurance plans in various states are required to cover providers ranging from acupuncturists to naturopaths and services ranging from in vitro fertilization to marriage counseling. All told, there are 2,156 mandates at the state level.4 They increase the price of insurance and have priced as many as one-in-four uninsured people out of the market.5
1 Uwe E. Reinhardt, Peter S. Hussey, and Gerard F. Anderson, “US Healthcare Spending in an International Context,” Health Affairs 23, No. 3 (May 2004): 10–25.
2 Many people will opt for more comprehensive plans. See Douglas W. Elmendorf, “Letter to Honorable Olympia Snowe,” Congressional Budget Office, January 11, 2010, http://www.cbo.gov/ftpdocs/108xx/doc10884/01-11-Premiums_for_Bronze_Plan.pdf.
3 Katherine Baicker and Helen Levy, “Employer Health Insurance Mandates and the Risk of Unemployment,” Risk Management and Insurance Review 11 (2008): 109–132. doi: 10.1111/j.1540-6296.2008.00133.x.
4 Victoria C. Bunce and J. P. Wieske, “Health Insurance Mandates in the States, 2010,” Council for Affordable Health Insurance, http://www.cahi.org/cahi_contents/ resources/pdf/MandatesintheStates2010.pdf.
5 John C. Goodman and Gerald L. Musgrave, “Freedom of Choice in Health Insurance,” National Center for Policy Analysis, NCPA Policy Report No. 134, 1988; Gail A. Jensen and Michael A. Morrisey, “Mandated Benefit Laws and Employer- Sponsored Health Insurance,” Health Insurance Association of America, January 25, 1999; and Stephen T. Parente, et al., “Consumer Response to a National Marketplace for Individual Insurance,” Office of the Assistant Secretary for Planning and Evaluation, US Department of Health and Human Services, Final Report, June 28, 2008, http://aspe.hhs.gov/health/reports/08/consumerresponse/report.html.
[page]Suppose that Congress passed a law requiring all health plans to pay for an hour of free conversation every year between patients and doctors. The logical question would be: where are the doctors going to find all the additional hours to provide this service? The same question is relevant for the Affordable Care Act. It promises almost everyone in the country access to annual physicals, mammograms, Pap smears, prostate cancer (PSA) tests, colonoscopies and other services most are not now getting—with no deductible and no co-payment.1 Who is going to deliver these services?
The Demand for Free Preventive Care
There’s an even more important question: when millions of Americans line up for additional preventive care, how will this affect cost, quality and access to care? In a 2003 study researchers at Duke University Medical Center estimated that it would require 1,773 hours a year of the average doctor’s time—or 7.4 hours every working day—for the average doctor to counsel and facilitate patients for every procedure recommended by the US Preventive Services Task Force.2 And remember, every so often a screening test turns up something that requires more testing and more doctor time. The current supply of medical personnel cannot come anywhere close to providing what has been promised.
In addition, screening tests and similar services add to healthcare costs, rather than reduce them,3 And sick patients may be crowded out in the process. Patients in higher-paying plans seeking preventive services could displace the more urgent needs of sick patients in lower-paying plans. The most vulnerable patients will be the elderly and the disabled on Medicare, poor families on Medicaid, and newly insured enrollees in subsidized private plans sold in the health insurance exchanges.4
Impact of Concierge Doctors
A major increase in demand and no change in supply will cause increased waiting for care almost everywhere, and one place patients will turn is to concierge doctors. In return for an annual fee, patients receive increased access and additional services.517 Whereas a doctor in a regular practice typically has about 2,500 patients, however, a concierge practice usually has only about 500 patients. The more doctors that opt out of conventional care for concierge care, the greater the rationing problem becomes for everyone left behind. This could result in a two-tiered system in which those with more financial resources have concierge care, and everyone else is subjected to rationing by waiting.
The Administration’s Options
For its part, the Obama administration is caught on the horns of a dilemma. While it wants to be seen as the champion of preventive care, a vast increase in this kind of coverage will increase healthcare costs and crowd out access to care for those who have more serious medical needs. Even before health- care reform, the Association of American Medical Colleges was predicting a 21,000 primary care physician shortfall by 2015, while the Health Resources and Services Administration at HHS estimated a shortage of between 55,000 and 150,000 physicians by 2020.6
The Obama administration knows the problem and is quite worried about it. Is there anything it can do to ameliorate the situation?
Apparently, Health and Human Services Secretary Kathleen Sebelius plans to use $250 million targeted for “prevention and public health” in the Patient Protection and Affordable Care Act for physician training instead.7 The funds would train 500 physicians, 600 physician assistants, and 600 nurse practitioners. Also, she plans to raid pots of “stimulus” money created under the American Recovery and Reinvestment Act to subsidize the training of doctors and nurses. All told, the administration now claims it will train 16,000 primary care providers by 2015.8
However, this initiative will not create any new medical residency slots, which are required before a medical graduate can practice medicine. Thus, it is unlikely that any additional physicians will be trained. Moreover, virtually all of the medical students and nursing students who will be subsidized are already enrolled in medical training programs.
1 Timothy Jost, “Implementing Health Reform: Preventive Services,” Health Affairs Blog, July 15, 2010, http://healthaffairs.org/blog/2010/07/15/implementing-health -reform-preventive-services/.
2 Damon Adams, “Who has 7-Plus Hours a Day to Put Toward Preventive Care?” American Medical News, April 21, 2003, http://www.ama-assn.org/amednews/2003/ 04/21/prsc0421.htm.
3 Louise B. Russell, “Preventing Chronic Disease: An Important Investment, but Don’t Count on Cost Savings,” HealthAffairs28 (2009): 42–45. doi: 10.1377/hlthaff.28.1.42.
4 John C. Goodman, “For the Vulnerable, Expect Less Access to Care,” John Goodman’s Health Policy Blog, November 16, 2011, http://healthblog.ncpathinktank.org/for-the-vulnerable-expect-less-access-to-care/.
5 Devon M. Herrick, “Concierge Medicine: Convenient and Affordable Care,” National Center for Policy Analysis, Brief Analysis No. 687, January 19, 2010.
6 Julian Pecquet, “Investment in Healthcare Workforce Announced as Doctor Short- age Looms,” Healthwatch, The Hill’s Healthcare Blog, June 16, 2010, http://thehill.com/ blogs/healthwatch/health-reform-implementation/103575-invetment-in-healthcare -workforce-announced-as-doctor-shortage-looms.
7 Doug Trapp, “Primary Care Gets Boost with $250 Million in HHS Grants,” Amerian Medical News, July 1, 2010, http://www.ama-assn.org/amednews/2010/06/28/ gvsf0701.htm.
8 “Fact Sheet: Creating Jobs and Increasing the Number of Primary Care Providers,” Health Reform.Gov, December 12, 2010, http://www.healthreform.gov/newsroom/ primarycareworkforce.html/.
[page]Do you care whether I have health insurance? If you do care, do you also care if I have other kinds of insurance?
While you’re thinking about the initial question, here are a few follow-up questions:
- Do you care whether I have life insurance?
- What about disability insurance?
- Homeowner’s insurance?
- Auto casualty insurance?
- Auto liability insurance?
- What about retirement insurance? (A pension or savings plan.)
- Do you care whether I keep my money at an FDIC-insured institution?
- Or whether I bought an extended warranty on my car?
- Or whether I bought travel insurance before taking a scuba-diving trip to Palau? (It pays off if you get sick and can’t go.)
There is actually a rational reason (based on economics) why you should care about some of my decisions and not others. Most of us basically don’t care whether people insure to protect their own assets (at least we don’t care enough to try to make them insure). But we do care about decisions that could create external costs for the rest of us.
Through Social Security, we force people to pay for life insurance benefitting dependent children (who could potentially become wards of the state) but not for a working-age spouse. All but three states force people to have auto liability insurance (covering harm to others) but not casualty insurance (covering their own cars). We basically don’t care whether people insure their own homes, but we force them to contribute to retirement and disability schemes to prevent their accidental dependency on all the rest of us.
Here is the principle: Government intervenes in those insurance markets where an individual’s choice to insure or not insure imposes potential costs on others. Because of our basic human generosity, we’re not going to allow people to starve or live in destitution. So when people don’t insure in some areas, society is going to step in and help (where help is needed). Implicitly, we have a social contract that socializes the downside of certain risks. If we leave the upside to individual choice, we have privatized the gains and socialized the losses. When people don’t bear the social cost of their risk-taking, they will take more risks than they would otherwise.
Another way to think about the problem is in terms of the opportunity to become a “free rider” on other peoples’ generosity. Consider people who have no life insurance (for dependent children), no disability insurance, and no retirement savings program. Because they are not paying premiums or saving for retirement, they can consume all of their income and enjoy a higher standard of living than their cohorts. But if they bet wrong (die while children are still minors, become disabled, reach retirement with no assets), they are counting on everyone else to help them out.
How does all of this apply to health? Considering the extensive interest in insuring the uninsured, you would expect an exhaustive literature. But aside from Robin Hanson’s thesis that healthcare is different,1 there is virtually nowhere you can go to find a rational, well-thought-out, consistent analysis of why you should care whether or not I have health insurance.
If we are concerned that the uninsured will impose an external cost on the rest of us, there is a simple remedy: impose a fine equal to the expected cost of any unpaid medical bills they might incur. Note, however, that uninsured middle-income families are already paying higher taxes because they do not have the tax-subsidized (employer-provided) insurance their neighbors have. Far from being free riders, these families appear to be paying their own way. Of course, the extra taxes the uninsured pay tend to go to Washington, while uncompensated care tends to be delivered locally. This mismatch of revenue and expense is not caused by the uninsured, however. It is the result of government not having its act together.
For high-income families, it’s not clear why we should be concerned. People who have, say, $1 million or more in assets—and that’s about 1 in every 30 people —can afford to pay their own medical bills without insurance. Also, the argument for intervention becomes weaker the lower a household’s income. People who cannot afford health insurance anyway are not willful free riders. They are not making choices that impose new costs on others. So there is no obvious social reason to force them to insure. They will need healthcare from time to time, however.
What is the best way to get healthcare to people with low incomes and few assets? Not Medicaid or state-run Children’s Health Insurance Plans (which you can think of as Medicaid for children). Nor is it any other system, inappropriately modeled on the insurance approach to healthcare.
Bottom line: the case for trying to get everyone insured is not an easy one to make. Nonetheless, most people I know in health policy are obsessed with the idea. In fact, they are more concerned with whether people are insured than whether they get healthcare.
1 Robin Hanson, “Showing that You Care: The Evolution of Health Altruism,” Depart- ment of Economics, George Mason University, August 2007 (first version May 1999), http://hanson.gmu.edu/showcare.pdf.
[page]There have been a number of claims that lack of insurance is life threatening. The most recent and well known is an Institute of Medicine (IOM) study claiming that 18,000 people die every year because they do not have health insurance.1 Using a similar methodology, a study for the Physicians for a National Health Program expanded that number to 44,789.2 Families USA, a nonprofit advocacy group, went as far as to predict the number of deaths by state.3 “More than eight people die each day in California because they don’t have health insurance,” the organization asserts.4 Careful analysis by such scholars as the former Congressional Budget Office director June O’Neill5 and health economist Linda Gorman6 find these studies are defective.
Helen Levy and David Meltzer, scholars with an interest in healthcare, found that most studies that attempt to find a causal link between health insurance and health status were poorly designed. They conclude that, although health insurance can make a difference to selected subpopulations of people, for most people, the effect is very modest.7 In a more thorough study, former Clinton adviser Richard Kronick found that insurance had virtually no effect on mortality rates.8
Moreover, in the decision about where to invest finite resources to improve health outcomes, universal coverage may not be the low-hanging fruit. Michael Cannon, the director of health policy studies at the Cato Institute, points out that if improving health status is the primary goal, there is no evidence that universal coverage would accomplish this any better than, say, boosting education or expanding community health centers. If saving lives is the primary goal, the IOM’s own estimates suggest that reducing preventable medical errors would save far more lives than boosting health coverage.9
The conventional wisdom among health experts across the ideological spectrum is that people need health insurance to get good healthcare. Indeed, to some politicians the terms “no healthcare” and “no health insurance” are inter- changeable. Almost as widely accepted is the view that some health plans are a ticket to better healthcare than others. But a RAND Corporation study shatters those assumptions:100
- Among people who seek care (actually see a doctor), RAND researchers found virtually no difference in the quality of care received by the insured and uninsured.
- They also found very little difference in the care provided by different types of insurance—Medicaid, managed care, fee-for-service, and so forth.
Unfortunately, the care everyone received was less than ideal. The study concluded that patients received recommended care only about half the time.
The implication is that reforming the supply side of the medical marketplace is far more important than getting everyone on the demand side insured.
For people who have a hard time imagining a world in which health insurance does not matter, consider the case of Parkland Memorial Hospital in Dallas, Texas. Both uninsured and Medicaid patients enter the same emergency room door and see the same doctors. The hospital rooms are the same, the beds are the same, and the care is the same. As a result, patients have no reason to fill out the lengthy forms and answer the intrusive questions that Medicaid enrollment so often requires.
Furthermore, the doctors and nurses who treat these patients are paid the same, regardless of patients’ enrollment in an insurance plan. Therefore, they tend to be indifferent about who is insured by whom, or if they’re even insured at all. In fact, the only people concerned about who is or is not enrolled in what plan are hospital administrators, who worry about how they will cover the hospital’s costs.
1 Committee on the Consequences of Uninsurance, Board on Healthcare Services, Institute of Medicine, Care Without Coverage: Too Little, Too Late (consensus report, Washington DC: National Academy Press, 2002), http://books.nap.edu/openbook .php?record_id=10367.
2 Andrew Wilper et al., “Health Insurance and Mortality in US Adults,” American Journal of Public Health 99, (2009), http://www.pnhp.org/excessdeaths/health -insurance-and-mortality-in-US-adults.pdf.
3 “Dying for Coverage,” Families USA, April 2008, http://www.familiesusa.org/issues/ uninsured/publications/dying-for-coverage.html.
4 “New Report Shows How Many People Are Likely to Die in California Due to Lack of Health Coverage,” Families USA, Press Release, April 3, 2008, http://www .familiesusa.org/resources/newsroom/press-releases/2008-press-releases/dying-for -coverage-ca.html.
5 June E. O’Neill and Dave M. O’Neill, “Who Are the Uninsured?” Employment Policies Institute, June, 2009. http://www.epionline.org/studies/oneill_06-2009.pdf
6 Linda Gorman, “Dying for (Media) Coverage,” John Goodman’s Health Policy Blog, May 2, 2008, http://healthblog.ncpathinktank.org/dying-for-media-coverage/; Linda Gorman and John C. Goodman, “Does Lack of Insurance Cause Premature Death? Probably Not,” John Goodman’s Health Policy Blog, November 2, 2009, http://healthblog.ncpa .org/does-lack-of-insurance-cause-premature-death-probably-not/.
7 Helen Levy and David Meltzer, “The Impact of Health Insurance on Health,” Annual Review of Public Health 29 (2008): 399–409
8 Richard Kronick, “Health Insurance Coverage and Mortality Revisited,” Health Services Research 44, No. 4 (2009): 1,211–1,231.
9 Michael F. Cannon, “Perspectives on an Individual Mandate,” Cato Institute, October 17, 2008, http://www.cato.org/pub_display.php?pub_id=9722.
10 Steven M. Aschet et al., “Who Is at Greatest Risk for Receiving Poor-Quality Health- care?” NewEnglandJournalofMedicine 354 (2006): 1147–1156.
[page]In 1980, Census Bureau statistics showed that less than 1 percent of the population had been denied health insurance because of a health condition. Moreover, this was a period of time when there were few legislative remedies. Even so, this 1 percent was a politically vocal group and, in many cases, they evoked understandable sympathy. However, rather than deal with this group directly (for instance, by creating risk pools or offering direct subsidies), politicians through the years have imposed unwise restrictions on the other 99 percent of the people.
Destroying the Market for Risk
A proliferation of state laws has made it increasingly easy for people to obtain insurance after they get sick. Guaranteed issue regulations (requiring insurers to take all applicants, regardless of health status) and community rating regulations (requiring insurers to charge the same premium to all enrollees, regardless of health status) are a free rider’s heaven.
They encourage everyone to remain uninsured while healthy, confident they will always be able to obtain insurance once they get sick. Moreover, as healthy people respond to these incentives by electing to be uninsured, the premium that must be charged to cover costs for those who remain in insurance pools rises. These higher premiums, in turn, encourage even more healthy people to drop their coverage.
Federal legislation has also made it increasingly easy to obtain insurance after one gets sick. The Health Insurance Portability and Accountability Act (HIPAA) of 1996 had a noble intent: to guarantee that people who have been paying premiums into the private insurance system do not lose coverage simply because they change jobs. However, a side effect of pursuing this desirable goal is a provision that allows any small business to obtain insurance regardless of the health status of its employees. This means that a small mom-and-pop operation can save money by remaining uninsured until a family member gets sick.
Individuals also can opt out of an employer’s plan and re-enroll after they get sick. They are entitled to full coverage for a pre-existing condition after an 18-month waiting period. A group health plan can apply pre-existing condition exclusions for no more than 12 months, except in the case of late enrollees, to whom exclusions can apply for 18 months.
Under ACA, the perverse incentives to remain uninsured until you get sick will intensify. Basically, anyone who is uninsured will be able to obtain insurance for the same premium as a healthy individual, regardless of how long or why the person is uninsured. As in Massachusetts today, there will be fines for being uninsured, but the tax penalty will be small compared to the cost of insurance. And it may be weakly enforced, even at that.
Consequences of Unwise Regulation
By far, the worst consequence of government regulation of the market for risk is the unintended harm done to the very people the laws were intended to help. Precisely because the premium attached to high-risk individuals is much lower than their expected healthcare costs, insurers seek to avoid enrolling them in the first place. Precisely because payments to providers also do not reflect expected costs, they, too, have an incentive to avoid attracting the hard cases, especially among the chronically ill.
If healthcare markets worked the way normal markets do, health insurers and providers would vigorously compete for the business of the sick. In normal markets, entrepreneurs make profits by figuring out how to better solve other people’s problems. In healthcare, by contrast, entrepreneurs run from other people’s problems.
[page]There is no topic in healthcare that is more misunderstood than what other countries are doing. At both ends of the political spectrum, the mistake is the same: the belief that other healthcare systems are radically different from our own. They aren’t.
Take the United States and Canada. I would say that the healthcare systems of these two countries are 80 percent the same. In both countries, third-party payers pay the vast majority of medical expenses. In both countries, the third parties pay by task. In Canada, when patients see a physician, it’s free. In the United States, it’s almost free. In both countries, normal market forces have been completely suppressed. Healthcare in both places, therefore, is bureaucratic, cumbersome, wasteful, inefficient, and unresponsive to consumer needs.
One reason so many people get misled is that in Canada, government is the third-party payer, whereas in the United States, about half of all spending is private. The mistake is assuming that there is a substantial difference between public and private insurance in the United States. There isn’t. As we have seen, Medicare in the United States is managed almost everywhere by private con- tractors, and much of Medicaid is privately managed as well. Furthermore, one out of every four Medicare enrollees and a substantial majority of Medicaid enrollees are enrolled in private health plans, even though government is paying the bill. Most of the time, private insurers pay providers the same way that the government pays. They use the same billing codes and pay for essentially the same services the same way.
Moreover, private insurance in the United States is so heavily regulated that there is no important difference between the public and the private sector. Our public insurance looks just like the socialized insurance we find in Canada. But so does our private insurance. Indeed, what we call private insurance in this country is little more than private-sector socialism.
One more thing to keep in mind: in the United States, we do not have one health system. We have many. In addition to Medicare and Medicaid, there is the VA health system, CHAMPUS (for military families), the Indian Health Service (which is apparently even worse than Medicaid),1 all the employer plans (running the gamut from “mini-med” plans2 to cradle-to-the-grave coverage), a whole host of special labor union plans, and, of course, garden-variety health insurance. There is far more difference within US healthcare than there is difference between the US and other countries.
The pluralism of US healthcare is important to keep in mind in thinking about health reform. Suppose you are dissatisfied with the way the healthcare system is working in your city or your locality, and you are curious about whether somewhere in the world people have found a better way of doing things. Odds are that you are going to find better answers somewhere within the United States than outside of it.
People on the left and right who are prone to stress the differences between US healthcare and the healthcare of other countries invariably ignore the 80 percent commonality and focus on the remaining 20 percent. On the left, the focus is usually on the ways we appear to be worse; on the right, the focus is usually on the ways we appear to be better. But even here the differences are narrowing, and I expect that trend will continue.
Doctors who object to managed-care interference with the practice of medicine in this country will not be pleased to learn that everything that is happening here is finding its ways to other countries as well. Indeed, US insurance companies are contracting with governments in other countries to export what they do here to other places.3 People who are concerned about rationing by waiting time in other countries had better brace themselves. Waiting times are growing in the United States as well.
As for global budgets, a lot of state Medicaid programs already have them, and they may go system-wide in Massachusetts in the near future.4
Another way in which people get misled is in assuming that differences in health outcomes are mainly due to how the medical bills are paid. Yet, differences in health outcomes are far more related to lifestyle, culture, and personal behavior. The United States is an incredibly heterogeneous country—especially in contrast to the homogeneous populations of most Europeans countries. Trans- plant the US population to France and replace the indigenous population there, and I suspect that in a short period of time, the French healthcare system would come to resemble the system we have in America today. Conversely, transplant the French population to this country to replace all the Americans, and in short order, I suspect that our healthcare system would come to resemble what you see in France today.
Differences in outcomes are very often due to differences in the people involved. Too often, these differences are wrongly ascribed to differences in the payment systems.
1 “Broken Promises: Reservations Lack Basic Care,” Associated Press, June 14, 2009, http://www.msnbc.msn.com/id/31210909/ns/health-health_care/#.TxBITvl2BBk.
2 David R. Henderson, “Mini-Med Plans,” National Center for Policy Analysis, Brief Analysis No. 727, October 21, 2010, http://www.ncpathinktank.org/pub/ba727.
3 Karen Stocker, Howard Waitzkin, and Celia Iriart, “The Exportation of Managed Care to Latin America,” New England Journal of Medicine 340 (1999): 1131–1136.
4 Abby Goodnough and Kevin Sack, “Massachusetts Tries to Rein in Its Health Costs,” NewYorkTimes, October 17, 2011.
[page]In complex systems, there are always unmet needs and problems to be solved. The more dysfunctional the system, the more numerous are the unmet needs and the more severe are the problems. In other sectors, needs to be met and problems to be solved are the fertile ground from which entrepreneurs emerge. Where is healthcare’s equivalent of a Bill Gates or a Steve Jobs?
The answer: There are literally thousands of entrepreneurs in healthcare. I meet them every day. In fact, I believe I can safely say that there is no serious problem in the business of health that is not already being substantially solved in some way by an entrepreneur somewhere in the system. Unfortunately, these efforts tend to be scattered and limited. Most of the time they run into three major barriers: insurance companies, employers, and government.
These are the three entities that pay most of the healthcare bills. They are the third-partypayers. (The first two parties are the doctor and the patient.) With respect to healthcare, they tend to be bureaucratic, wedded to tradition, and resistant to change. They are, in a word, the entrepreneur’s nemesis.
Take the subject of hospital costs. It is well known that the cost of procedures varies radically from hospital to hospital, as does the quality of care. So why not take advantage of this fact? A version of what some call value-based health insurance could cut the typical health plan’s hospital costs in half. How does it work? The insurer pays the cost of care at a low-cost, high-quality facility (which may require the patient to travel) and only that amount. Patients are free to go to another facility but must pay the full extra cost of their choice.
Now, I wasn’t the first person to think of this. In fact, an Austin, Texas- based company, Employer Direct Healthcare, is offering employers a variation on that idea at this very moment. They negotiate rates with select hospitals that are from one-third to one-half lower than what other health insurers are paying. Most insurers are at the opposite end of the smart-buying spectrum, however. BlueCross of Texas, for example, not only does not steer patients to one hospital rather than another, there is not a single hospital in Dallas that is not in its network.
Part of the reason why the insurers are so resistant to cost-reducing innovations is that many of their employer clients are also resistant. The typical client of Employer Direct Healthcare, for example, waives the deductible and co- payment for patients who choose the low-cost, high-quality facilities, but that is the full extent of the financial incentive. A step in the right direction perhaps, but a timid one. An aggressive strategy would be to let the employee pay the full extra cost of their choices.
Of the three third-party payer institutions, government is by far the worst at resisting entrepreneurship—even when the government itself is implementing radical change. As part of the Affordable Care Act (ACA), for example, states are to establish health insurance exchanges, allowing individuals to electronically select their health insurance from among competing plans. The federal government is offering millions of dollars to set up these exchanges. In some states, officials are arguing about how to spend the money, and in other states, they are actually refusing the money on the grounds that it amounts to acceptance of a health reform they do not like.
But why does any state need to spend millions to set up an exchange? Did you know that eHealth already has an electronic exchange, and more than 1 million people have health insurance purchased online through its system? The Obama administration is asking fifty state governments to spend a great deal of money to invent something that a private company has already discovered—and is ready to implement for the government for pennies on the dollar.
The administration is also spending millions of dollars trying to encourage electronic medical records. But did you know that eHealth already offers many of its customers an electronic medical record (including a record of doctor visits, prescriptions taken, etc.), based on insurance payment records?
[page]Although we often associate the term entrepreneur with profit seeking, the healthcare field is teeming with innovators who are largely motivated by altruism. Take Dr. Jeffrey Brenner of Camden, New Jersey.16 In any other field, Brenner would be a millionaire, but because he’s in healthcare, he doesn’t know how he’s going to make ends meet. Like entrepreneurs in every market, Brenner thought outside the box. He discovered an ingenious way of lowering health- care costs: focus on the “hot spots” of medicine—the high-use, high-spending patients—and solve their problems with unconventional care.
Brenner discovered that of the 100,000 people who used Camden’s medical facilities over the course of a year, only 1,000 people—just 1 percent—accounted for 30 percent of the costs. He began with one of them: Frank Hendricks (a pseudonym), a patient with severe congestive heart failure, chronic asthma, uncontrolled diabetes, hypothyroidism, gout, and a history of smoking and alcohol abuse. He weighed 560 pounds. In the previous three years, he had spent as much time inside hospitals as he spent outside them.
Some of what Brenner did to help Hendricks was simple doctor stuff, but a lot of it was social work. For example, Brenner and his colleagues helped Hendricks apply for disability insurance so that he could leave the chaos of welfare motels and have access to a consistent set of physicians. The team also pushed him to find sources of stability and value in his life. They got him to return to Alcoholics Anonymous, and when Brenner found out that Hendricks was a devout Christian, he urged him to return to church. As a result, Hendricks’s health improved, and his medical expenses plummeted.
Following that success, Brenner formed the Camden Coalition to apply his methods to more patients. He tells me he can drive down the streets of Camden, point to entire buildings, and say how much the people who live there are costing the taxpayers. By targeting these patients in unconventional ways, Brenner is saving millions of dollars for Medicare and Medicaid. Were others able to do the same thing in other cities, the savings for taxpayers would be huge.
Now for the bad news. How much does Medicare reward Brenner for all the savings he creates for our nation’s largest health plan? Zero. How much does Medicaid pay for all the savings it realizes? Not a penny. In fact, Brenner is able to do what he does only because of grants from private foundations.
Like many other providers of low-cost, high-quality care, Brenner and his colleagues leave tons of money on the table when they fail to practice medicine in conventional ways. Of the thousands of tasks that Medicare pays doctors to perform, social work is not among them. Brenner’s attempts to get Medicare and Medicaid to pay him in a different way have all drowned in a bureaucratic morass, even as Medicare is spending millions on pilot programs and demonstration projects “to find out what works.”
Experiences just like Brenner’s are repeated again and again, day in and day out, around the country. No one knows if Brenner’s techniques can be replicated (any more than we know if the medical practices of the Mayo Clinic or the Cleveland Clinic can be replicated). But there’s one way to find out: Let Brenner out of the trap. How do we do that? By letting him become rich. Rich? Yes, rich. The federal government should offer to let Brenner and his colleagues keep twenty-five cents of every dollar they save the government. Then let every other doctor, nurse, social worker, hospital administrator, and so on in the country know that the government is willing to change the way it pays for care. The message should be: If you can save taxpayers money, you can make money— the more money you save us, the more you earn for yourself. Let a thousand millionaires bloom. Sadly, the trend of federal health policy right now is in the opposite direction. Not only will it not let Brenner out of the trap, it will make the trap more confining. Under the new health reform law, doctors are being encouraged to join Accountable Care Organizations (ACOs), where a federal bureaucracy will virtually dictate the way medicine is practiced.
Brenner, in fact, is trying to get his organization qualified as an ACO. In my opinion, this is a mistake. Under the new rules, bureaucrats will ask: Did Brenner have the prescribed electronic medical record? Did he follow the checklist of inputs ACOs are supposed to follow? Did he manage all of the care—including hospital care? Sadly, the answers are no, no, and no.
It is almost impossible for an entrepreneur to flourish in an environment that fundamentally dislikes entrepreneurship. Fortunately for the innovators, however, patients are paying for more healthcare bills out of their own pockets. And wherever we find health markets dominated by patients paying for care directly, entrepreneurship is thriving.
1 Atul Gawande, “The Hot Spotters,” New Yorker, January 24, 2011, http://www.newyorker.com/reporting/2011/01/24/110124fa_fact_gawande.
[page]Time and again, President Obama has told us how he intends to solve our healthcare problems: spend money on pilot programs and other experiments, find out what works, and then copy it. He’s also repeatedly said the same thing about education. The only difference: In education, we’ve already been following this approach with no success for twenty-five years.
Still, if the president were right about health and education, why wouldn’t the same idea apply to every other field? Why couldn’t we study the best way to make a computer or invest in the stock market—and then copy it?
I want to propose a principle that covers all of this: entrepreneurship cannot be replicated. Put differently, there is no such thing as a cookbook entrepreneur. Let’s suppose for a moment that I am wrong. Suppose we could study the behavior of successful entrepreneurs and write down the keys to their success in a book that everyone could read and copy. Consider Bill Gates, Warren Buffett and Sam Walton. If we could discover what they did right, and everyone copied their behavior, then we could all become billionaires. Right? Well, not quite. Here’s the problem: In order for each of us to be a billionaire, we have to each be doing something that produces a billion dollars’ worth of goods and services. But if all we’re doing is copying action items out of a book, then we are not doing anything special. And if we’re not doing anything special, we are definitely not producing a billion dollars of value added.
In mathematics, Gödel’s Theorem says that no complex, axiomatic system can be both consistent and complete. What I am proposing is something similar for social science. Although some habits of highly successful people can be identified and copied, not enough of them can be copied for each of us to become highly successful ourselves through copycat behavior alone.
This is Goodman’s Nonreplicability Theorem.
In healthcare, it’s already been borne out. Scholars associated with the Brookings Institution identified ten of the best hospital regions in the country and then tried to identify common characteristics that could be replicated.1 There were almost none. Some regions had doctors on staff. Others paid fee-for-service. Some had electronic medical records. Others did not. A separate study of physicians’ practices found much the same thing.2 There were simply not enough objective characteristics that the practices had in common to allow an independent party to set up a successful practice by copycat alone.
By the way, this is not bad news. It is good news. How much fun would life be if we all went around copying what we read in a book?
1 Atul Gawande, Donald Berwick, Elliott Fisher, and Mark B. McClellan, “10 Steps to Better Healthcare,” New York Times, August 12, 2009, http://www.nytimes.com/ 2009/08/13/opinion/13gawande.html. See also John C. Goodman, “The Demand- Side Approach to Changing What Doctors Do,” John Goodman’s Health Policy Blog, November 16, 2009, http://healthblog.ncpathinktank.org/the-demand-side-approach-to -changing-what-doctors-do/.
2 Mark Kelley, “Productivity Still Drives Compensation in High Performing Group Practices,” Health Affairs Blog, December 20, 2010, http://healthaffairs.org/blog/2010/ 12/20/productivity-still-drives-compensation-in-high-performing-group-practices/.
[page]Lack of quality competition is in part the result of certain characteristics of healthcare quality. What we call core quality is not a variable at all. It is the result of other decisions made by the providers. Since the vagaries of medical practice are many and since the decision calculus of doctors will often differ, this allows for considerable quality differences. Beyond this core level, quality improvement is a decision variable, and improvements are costly. However, since it is difficult and costly for patients to secure quality data on their own, information about quality typically comes only from the providers.
Such communications are unlikely, however, unless by means of quality improvements, providers are able to shift demand (and, therefore, revenue), sufficient to pay for those improvements. In general, this is not the case.
But why don’t providers with superior quality take advantage of that fact and advertise it to patients? In other words, why doesn’t quality competition arise in healthcare the way it does in normal markets?
Imagine a health market where supply is restricted and where demand exceeds supply at a zero (or nominal) money price—both for the market as a whole and for individual providers. Under these conditions, which roughly describe most primary care practice, the provider’s time will tend to be rationed by waiting. Improvement in the quality of care (if perceived or communicated) will potentially increase demand—maybe even attracting new patients. However, the increased demand will be initially reflected in increased waiting (higher time price), which in turn will cause some of the initial group of patients to see the doctor less often. On the other hand, a decrease in quality of care (again if perceived or communicated) will diminish demand and lead to shorter waits (a lower time price), thus inducing some of the remaining patients to see the doctor more often.
Since the doctor’s time is already fully allocated, and since the fee is fixed, in neither circumstance will the physician’s revenue be much affected. The same principle applies to amenities. In the face of rationing by waiting, amenity improvements will not in general increase the provider’s income, and amenity degradation will not in general decrease it.
So in comparing two practices—one that predominantly relies on price rationing to clear the market and one that relies on rationing by waiting, we would expect both amenities and quality of care to be higher in the former than in the latter.
“I practiced for 30 years without knowing how long patients waited to see me,” says Robert Mecklenburg, a doctor who is now at Virginia Mason Medical Center in Seattle.1 Can you imagine the owner of a retail outlet in any other market admitting that he has no idea how long his customers wait before being served? In a normal market, a storeowner with that attitude would not survive for ten minutes.
1 Harris Meyer, “Collaborating Reduces Costs of Healthcare,” USAToday, January 6, 2012, http://www.usatoday.com/money/industries/health/story/2012-01-05/health-care-collaboratives/52394918/1.
[page]In those healthcare markets where third-party payment is nonexistent or relatively unimportant, providers almost always compete for patients based on price.
Where there is price competition, transparency is almost never a problem. Not only are prices posted (e.g., at walk-in clinics, surgicenters, etc.), they are often package prices, covering all aspects of care (e.g., cosmetic surgery, LASIK surgery, etc.), and therefore easy for patients to understand.
Wherever there is price competition, there also tends to be quality com- petition. In the market for LASIK surgery, for example, patients can choose traditional LASIK or more advanced custom Wavefront LASIK. Prices vary with type of procedure and where it is performed, ranging from less than $1,000 to more than $3,000 per eye.1
Even when providers do not explicitly advertise their quality standards, price competition tends to force product standardization. This reduced variance is often synonymous with quality improvement. Rx.com, for example, initiated the mail-order pharmacy business, competing on price with local pharmacies by creating a national market for drugs. Industry sources maintain that mail- order pharmacies have fewer dispensing errors than conventional pharmacies.2 Walk-in clinics, staffed by nurses following computerized protocols score better on quality metrics than traditional office-based doctor care and have a much lower variance.3
In general, medical services for cash-paying patients have popped up in numerous market niches where third-party payment has left needs unmet. It is surprising how often providers of these services offer the very quality enhancements that critics complain are missing in traditional medical care. Electronic medical records and electronic prescribing, for example, are standard fare for walk-in clinics, concierge doctors, telephone, and email consultation services, and medical tourist facilities in other countries.4 Twenty-four/seven primary care is also a feature of concierge medicine and the various telephone and email consultation services.
Competition in the provision of amenities is also common in the niche markets. Cancer Treatment Centers of America takes third-party payment, but its patients usually have to travel some distance to get to its facilities—at both inconvenience and expense. To attract them, the Centers go to great lengths to ensure the comfort of its patients and facilitate the needs of accompanying family members—offering services similar to what medical tourist facilities offer in other countries (they also post their cancer survival rates).5
In general, providers who compete on price are competing to lower the money price of care. Where this occurs, they tend to compete to lower the time price as well (hence the term “MinuteClinic”). Teladoc promotes its services by publishing the response times (a doctor’s return call) for its clients. Most concierge doctors promise same-day or next-day appointments. Some diagnostic testing services make the test results available to patients online within 24 to 48 hours.6
In general, these markets do not appear to be fundamentally different from non-healthcare markets. Competition tends to produce more uniformity of fees and waiting times than would otherwise be the case. Similarly, quality competition also tends to produce either uniform quality or a uniform trade-off between money prices and quality.
1 Liz Segre and Marilyn Haddrill, “Other Corrective Procedures,” AllAboutVision .com, October 13, 2011, http://www.allaboutvision.com/visionsurgery/cost.htm.
2 J. Russell Teagarden et al., “Dispensing Error Rate in a Highly Automated Mail- Service Pharmacy Practice,” Pharmacotherapy 25 (2005): 1629–1635.
3 Minnesota HealthScores website: http://www.mnhealthscores.org/.
4 Devon M. Herrick, Linda Gorman, and John C. Goodman, “Information Technology: Benefits and Problems,” National Center for Policy Analysis, Policy Report No. 327, April 2010.
5 Herrick et al., “Information Technology: Benefits and Problems.”
6 Devon M. Herrick, “Healthcare Entrepreneurs: The Changing Nature of Providers,” National Center for Policy Analysis, Policy Report No. 318, December 2008.
[page]Imagine a system in which health plans offer networks of doctors and hospitals in return for fixed premiums. People who are seriously ill and need specific, expensive medical treatment will select in a very different way from other people. Take a heart patient in need of cardiovascular surgery. The individual has a self-interest in finding the best cardiologist and the best heart clinic. Armed with this knowledge, the patient will try to learn which health plan employs that cardiologist or has a contract with that clinic. The premium is of secondary importance, since the value to the patient of receiving the best cardiovascular care will far exceed any premium payment.
The incentives facing healthy people are different. Since their probability of needing any particular service in the near future is small, they are unlikely to spend much time investigating particular doctors and clinics. To the degree that they do investigate, they are likely to inquire only about the primary care services they are likely to receive.
Thus, the people who carefully compare the acute care services offered by competing health plans are likely to be the people who intend to use them. These are the very people health plans want to avoid. By contrast, those who choose a plan based on the quality and accessibility of nonacute services are more likely to be healthy.
As Alain Enthoven has noted (disapprovingly), “A good way to avoid enrolling diabetics is to have no endocrinologists on staff. . . . A good way to avoid cancer patients is to have a poor oncology department.”1
To see how managed competition affects the incentives of insurers, imagine two competing HMOs. In the first, enrollees can see a primary care physician at any time, but there are cumbersome screening mechanisms and waiting periods for knee and hip replacements, heart surgery, and other expensive procedures. In the second, joint replacements and heart surgery are available when needed, but primary care facilities are limited. Given a choice, most of us would enroll in the first HMO if we were healthy and switch to the second if we had a serious health problem. But if everyone acted in this way, the second HMO would attract only expensive-to-treat patients. It might seem that the second HMO could compete successfully by offering more primary care services. But to be truly competitive, it would have to change its strategy completely. To cover its costs, it would have to charge a premium many times higher than the first HMO. The premium would have to equal the cost of the expensive procedures, but few people could afford the premium, and they might be better off to simply buy their medical care directly. In any event, the HMO would face financial ruin.2
A survey by the Kaiser Family Foundation discovered how HMOs were competing for seniors on Medicare. The HMO ads in print and on television showed seniors snorkeling, biking, and swimming but did not feature the sick or disabled. In addition, nearly one-third of HMO marketing seminars were held at sites that were not wheelchair accessible.3 The following are just a few other examples of how managed competition works, uncovered by The Washington Post:4
- When a Minnesota network began offering direct access to an obstetrician while rivals required referrals from a gatekeeper, it attracted disproportionate numbers of pregnant women, lost millions of dollars, and soon ended the practice.
- When Aetna offered unusually generous coverage for in vitro fertilization, people with fertility problems flocked to the HMO, and Aetna had to end the practice.
- In another case, a California health plan severed its relationship with a university hospital known for practicing high-tech medicine and tackling complicated cases.
- Other HMOs avoided contracting with doctors’ groups known for expertise with high-risk patients.
The term medlining is sometimes used to describe the practice of avoiding the sick. It is healthcare’s version of redlining, the banking and insurance practice of avoiding deteriorating neighborhoods. The other side of the coin, of course, is attracting the healthy. In addition to health club memberships, health plans also have offered dental benefits and vision care. The theory is that anyone who will switch health plans to get a free pair of eyeglasses cannot be very sick.5
1 Alain Enthoven, “The History and Principles of Managed Competition,” Health Affairs (1993 Supplement): 35, doi: 10.1377. On the practice of encouraging high-cost patients to “disenroll,” see Jonathan E. Fielding and Thomas Rice, “Can Managed Competition Solve the Problems of Market Failure?” Health Affairs (1993 Supplement) 222; Joseph Newhouse, “Is Competition the Answer?” Journal of Health Economics 1 (1982): 109–116.
2 The HMO would receive premiums only from people who were about to undergo expensive medical procedures. Thus, the average premium would have to equal the average cost of the procedures. It is precisely because most people cannot easily bear such a financial burden that health insurance is desirable in the first place.
3 Reported in Natalie Hopkinson, “Study Finds Medicare HMOs Target Active Seniors but Not Disabled in Ads,” Wall Street Journal, July 14, 1998.
4 David Hilzenrath, “Showing the Sickest Patients the Door,” Washington Post, National Weekly Edition, February 2, 1998.
5 David Hilzenrath, “Showing the Sickest.”
[page]There is something rather simple the federal government could do that would have enormous impact in controlling healthcare costs: Allow deposits to FSAs to roll over at year end and grow tax-free.1
Here’s the backstory. Like HSAs and HRAs, Flexible Spending Accounts are set up by employers. But unlike those use-it-or-save-it accounts, FSA accounts are use-it-or-lose-it. Any account balance left at year end (or after an extra two and a half-month grace period) is forfeited.
Employers are allowed to make deposits to FSAs, and there is no limit to how much they can deposit, but few take advantage of this opportunity. Because of the use-it-or-lose-it feature, these plans are additions to, rather than integrated parts of, employer health plans. Because the deposits are tax-free, they almost certainly add to healthcare spending, as they are currently structured. They encourage employees to purchase designer eyeglasses with pre-tax dollars, for example, rather than purchase other goods and services with after- tax dollars. At year’s end, employees will view almost any kind of permissible spending as preferable to forfeiting the money left in the account.
Why are these accounts use-it-or-lose-it? Apparently this feature is the result of a Treasury Department ruling, not the result of any act of Congress. So I believe the Treasury could undo this unfortunate rule without any new legislation.
What if these accounts could roll over and grow tax-free? Then employers and their employees would have a vehicle much better than any option currently available to them to control healthcare spending:
- FSAs could be combined with high deductibles, allowing employees to directly control, say, the first $2,500 of spending without all of the point-less restrictions that hamper the usefulness of HSAs.
- FSAs could be created to allow employees control of whole areas of spending, say, all preventive care and all diagnostic tests—services for which individual discretion is both possible and desirable.2
- FSAs could be created for the chronically ill3—allowing, say, diabetics or asthmatics to manage their own healthcare dollars, much as home- bound, disabled Medicaid patients manage their own budgets in the Cash and Counseling Programs.4
- FSAs could be combined with value-based purchasing insurance plans5—where the insurer pays only for certain drugs, doctors, and hospitals but allows patients to add money out-of-pocket and make other choices—thus allowing the development of a real market for more expensive healthcare services.6
Currently, about 25 million people have an HSA or HRA account (roughly evenly split), and another 35 million people have FSAs. That means that over half the people with a health account have an incentive to spend rather than to save. If FSAs could roll over and become use-it-or-save-it accounts:
- There would be a huge immediate impact on the incentives of the 35 million current account holders if they could save for more valuable future healthcare spending.
- Employers across the country would consider integrating these accounts into their health plans, making employer contributions to them, and experimenting with some of the new health plan designs described here.
- Many of the companies that currently have HSA or HRA plans might discover the FSA approach better for controlling costs.
1 Michael F. Cannon, “Flexible Spending Accounts: The Case for Reform,” National Center for Policy Analysis, Brief Analyses No. 439, May 13, 2003.
2 John C. Goodman, Gerald L. Musgrave and Devon M. Herrick, “Designing Ideal Health Insurance,” in Lives at Risk: Single Payer National Health Insurance Around the World (Lanham, MD: Rowman & Littlefield Publishers, 2004), 235.
3 John C. Goodman, “Ten Small-Scale Reforms for Pre-Existing (Chronic) Conditions,” Health Affairs Blog, January 27, 2010, http://healthaffairs.org/blog/2010/01/27/ ten-small-scale-reforms-for-pre-existing-chronic-conditions/.
4 John Goodman, “Patients Managing Their Own Healthcare Budgets,” John Goodman’s Health Policy Blog, April 19, 2010, http://healthblog.ncpathinktank.org/patients-managing -their-own-health-care-budgets/.
5 Jack A. Meyer, Lise S. Rybowski and Rena Eichler, “Theory and Reality of Value- Based Purchasing: Lessons from the Pioneers,” Agency for Healthcare Policy and Research, AHCPR Publication No. 98-0004, November 1997, http://www.ahrq.gov/ qual/meyerrpt.htm.
6 Goodman, Musgrave, and Herrick, “Designing Ideal Health Insurance,” 235.
[page]Of all the people in the healthcare system, none is more central than the physician. Fundamental reform that lowers costs, raises quality, and improves access to care is almost inconceivable without physicians leading and directing the changes. Yet of all the actors in modern healthcare, none are more trapped than our nation’s doctors. Let’s consider just a few of the ways your doctor is constrained, unlike any other professional.1
Sometime in the early part of the last century, all the other professionals in our society—lawyers, accountants, architects, engineers, and so on—discovered the telephone. It’s a handy device. Ideal for communicating with clients. Yet, telephone consultations are not on Medicare’s list of about 7,500 tasks it pays physicians to perform. (At least, it’s not there in a way that makes telephone consultations practical.) Private insurance tends to pay the way Medicare pays. So do most employers.
Sometime toward the end of the last century, all the other professionals discovered email. In some ways, it’s even better than the phone. But reading and responding to emails doesn’t make Medicare’s list in a practical way, either.2
At a time when doctors feel that third-party payers are squeezing their fees from every direction, most are going to try to minimize their non-billable time. Because patients cannot conveniently use modern media to consult with physicians, they make unnecessary office visits. The result is more rationing by waiting at the doctor’s office, which imposes disproportionate costs on chronic patients who need more contact with physicians. This might be one reason why so many are not getting what they most need from primary care physicians and what is most likely to prevent more costly problems later on: prescription drugs.3
The ability to consult with doctors by phone or email could be a boon to chronic care. Face-to-face meetings with physicians would be less frequent, especially if patients learned how to monitor their own conditions and manage their own care.
Other doctor tasks that might be helpful—but are not compensated by Medicare and other insurers—are providing advice about the cost of brand- name drugs versus generic and therapeutic substitutes as well as over-the- counter alternatives. Information about comparative prices and how patients can save money through smart shopping would be a valuable service, and who would be in a better position to provide it than the physician? In addition, numerous studies have shown that chronic patients—people with diabetes or asthma, for example—can often manage their own care, with lower costs and as good or better health outcomes than with traditional care, reducing the number of trips they make to the emergency room. ER doctors could save themselves and future doctors a lot of additional time and trouble if they took the time to educate the mother of a diabetic or asthmatic child about how to monitor and manage the child’s healthcare. But time spent on such education is generally not billable.
What is the common denominator for all of these problems? Unlike other professionals, doctors are not free to repackage and reprice their services in ways they believe will best help their patients. Instead, third-party payer bureaucracies tell them what tasks they will get paid for performing and how much they will be paid to charge. Doctors are the least free of any professional we deal with. Yet these unfree actors are directing one-fifth of all consumer spending.
By now readers will be familiar with what I regard as the essential way out of this trap: Medicare should be willing to pay for innovative improvements that save taxpayers money. And doctors and hospitals should be able to repackage and reprice their services (the way other professionals do), provided that the total cost to government does not increase and the quality of care does not de- crease. This change in Medicare would almost certainly be followed by similar changes in the private sector.
1 John C. Goodman, “What’s Wrong with the Way We Pay Doctors?” John Goodman’s Health Policy Blog, December 2009, http://healthblog.ncpathinktank.org/what%E2%80%99s -wrong-with-the-way-we-pay-doctors/.
2 About 34 percent of physicians email their patients. Wall Street Journal Staff, “Vote: Should Physicians Use Email to Communicate With Patients?” Wall Street Journal Health Blog, January 10, 2012, http://blogs.wsj.com/health/2012/01/10/vote-should -physicians-use-email-to-communicate-with-patients/. These are usually messages alerting the patient about an appointment or other notification. Email consultations are rare.
3 John C.Goodman,“Time, Money, and the Market for Drugs,” in Innovation and the Pharmaceutical Industry: Critical Reflections on the Values of Profit, eds. H. Tristram Engelhardt, Jr. and Jeremy Garrett (Salem, MA: M & M Scrivener Press, 2008), 153–183.
[page]For the working age population, one of the biggest problems in the US healthcare system is that health insurance is not portable. In general, when you leave your employer, you must eventually lose the health insurance plan your employer was providing. Almost all the problems people have with pre-existing conditions arise because of a transition from employer-provided insurance to individually purchased insurance. And those problems arise because the employee doesn’t own employer-purchased insurance.
So if everyone wants portable insurance, why don’t we have it? First, the federal tax law generously subsidizes employer-provided insurance, but it offers very little tax relief to those who must purchase insurance on their own. Employer-paid premiums avoid federal income taxes, federal payroll taxes (FICA), and state and local income taxes as well. But individuals tend to get none of these tax benefits when they pay premiums out of their own pockets.
Even with these discriminatory tax subsidies, insurance could still be portable if employers bought individually owned insurance rather than group insurance for their employees. But here is the second problem. It is illegal in almost every state for employers to use pre-tax dollars to purchase individually owned insurance that travels with the employee from job to job, as well as in and out of the labor market.
Clearly, both state and federal laws need to change. We need to move in the opposite direction—making it as easy as possible for employees to obtain portable health insurance.
The case for portability is strong and goes far beyond the fact that most people want it. First, portability allows a long-lasting relationship with a health plan, which in turn allows a long-lasting relationship with providers of care. This means that people who switch jobs frequently can still have continuity of care—which is usually a prerequisite for high-quality care. Second, people who have portable insurance (as well as portable retirement plans and other benefits) will not be locked into jobs solely because of the nonportable nature of their benefits. Portable benefits are consistent with a mobile labor market, which is a necessary component of a dynamic, competitive economy. Finally, a system of portable benefits is one in which the employer’s role is financial, rather than administrative. Employers, therefore, can specialize in what they do best, leaving health insurance to the insurance firms.
[page]There are 78 million baby boomers, and a very large number of them have retirement on their minds. If the past is a guide, more than 80 percent of them will retire before they become eligible for Medicare (at age 65). Although about one-third of US workers have a promise of postretirement healthcare from an employer, almost none of these promises are funded, and as in the case of the automobile companies, they may not be completely honored.
As a result, millions of retirees will find themselves buying their own insurance in the individual market. There they will face some unpleasant realities, which for many of them may come as a shock:
- Whereas employers typically pay about 75 percent of the premium at work, these retirees will have to pay 100 percent of the premium out of their own pockets.
- Whereas the share of premium paid by employees tends to be the same— regardless of age—individual insurance premiums for, say, a 60 year old are often five or six times higher than for a 20 year old.
- Whereas employers are forced to accept employees into their health plans and charge the same premiums regardless of health status, people in the individual market typically face medical underwriting. They may be charged higher premiums because of a health condition; they may face exclusions or be denied coverage altogether. If they are forced into a risk pool, they may face waiting periods as well as higher premiums.
In general, tax law, labor law, and employee benefits law favor the active employee and discriminate against the retiree. For example, here are three public policy barriers that will stand between early retirees and affordable health insurance:
- Employers cannot make premium contributions to the individually owned insurance of their retirees with untaxed dollars.
- Retirees must pay their premiums with after-tax dollars.
- There is no easy way for employers and employees to save (tax-free) for future medical expenses—including postretirement expenses.
Employer promises of postretirement healthcare are usually an all-or-nothing proposition. That is, employers can keep their retirees in their group insurance plan—paying expenses with pre-tax dollars—or they can do nothing. It’s hard to be in between. If an employer cannot afford, say, $12,000 for family coverage for a retiree, the employer cannot split the difference and contribute $6,000 to the employee’s individually owned insurance. Such a contribution would be treated as taxable income.
The obvious solutions to these problems are:1 (1) allow employers to make contributions (say, to a retiree’s Health Savings Account); (2) allow retirees to pay their share of premiums with pre-tax dollars; and (3) allow active employees and their employers to save tax-free—knowing that they will face the problem of postretirement care.
1 Pamela Villarreal and Devon M. Herrick, “Healthcare Costs During Retirement,” National Center for Policy Analysis, Brief Analysis No. 660, May 2009.
[page]Here are ten ways to deal with the problem of pre-existing conditions that give people good incentives instead of perverse incentives.1
Encourage Portable Insurance. In almost every state, employers are not allowed to buy the kind of insurance employees own and can take with them from job to job and in and out of the labor market.2 That prohibition needs to be rescinded. Most of the time, the problem of pre-existing conditions arises precisely because health insurance isn’t portable.
Allow Special Health Savings Accounts for the Chronically Ill. Cash and Counseling pilot programs in Medicaid are under way in more than half the states.3 Homebound, disabled patients manage their own budgets and hire and fire those who provide them with services. Satisfaction rates are in the mid-90 percentile (virtually unheard of in any health plan anywhere in the world).
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.4 Plans could specialize, for example, in diabetic care, heart care, or cancer care, and they would 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 two kinds of insurance: 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.5 You can think of this as a way of insuring against the emergence of a pre-existing condition.
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 for future, rather than current, medical costs.
Give Individual Buyers 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. 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. This would encourage people to be continuously insured—and increase the likelihood that they will be insured when a health condition arises.
Allow Providers to Repackage and Reprice Their Services Under Medicare and Medicaid. We should encourage providers to create innovative solutions to the care of diabetes, asthma, cancer, heart disease, and other chronic health issues. 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—most of them healthy—have been priced out of the market for health insurance by cost-increasing, mandated benefits.6 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, 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 percent of the 78 million baby boomers will retire before they become eligible for Medicare. This group has the greatest potential for denial of health insurance because of pre-existing conditions. Fortunately, one out of every three baby boomers has a promise of post-retirement healthcare. However, two out of three do not, and even for those who have a commitment, almost none of the promises are funded. A solution: give post- retirement health insurance the same tax encouragement as active-worker insurance and allow pre-retirement insurance to be portable.
1 John C. Goodman, “Ten Small-Scale Reforms For Pre-existing (Chronic) Conditions,” Health Affairs Blog, January 27, 2010, http://healthaffairs.org/blog/2010/01/27/ ten-small-scale-reforms-for-pre-existing-chronic-conditions/.
2 John C. Goodman, “Employer-Sponsored, Personal, and Portable Health Insurance,” Health Affairs 25, No. 6 (November 2006): 1556–1566.
3 Randall Brown et al., “Cash and Counseling Evaluation Changes Policymakers’ Approach to Consumer Directed Care,” AcademyHealth, 2009, http://www.academy health.org/files/publications/cashandcounseling.pdf.
4 John C. Goodman, “Patient Power for Chronic Illness,” Health Affairs Blog, February 12, 2009, http://healthaffairs.org/blog/2009/02/12/patient-power-for-chronic-illness/.
5 John H. Cochrane, “Health-Status Insurance: How Markets Can Provide Health Security,” Cato Insitute, Policy Analysis No. 633, February 19, 2009, http://www.cato .org/pub_display.php?pub_id=9986.
6 Gail A. Jensen and Michael A. Morrisey, “Employer-Sponsored Health Insurance and Mandated Benefit Laws,” Milbank Quarterly 77, No. 4 (1999).