What is Massachusetts doing?

1. All but the very rich must buy health insurance.

2. Business that don’t offer health insurance to their employees will have to pay a tax.

3. Individuals can buy insurance with pre-tax dollars, eliminating the favoritism currently shown to employment-linked insurance.

4. Insurance companies will be subsidized to offer barebones policies to the current uninsured.

There is more, here is a Boston Globe summary.  Here is the LA TimesThe Washington Post surveys various reactions.

Arnold Kling is skeptical:

…the politicians’ plan will force insurance companies to offer
no-deductible health insurance to people on modest incomes, at premiums
ranging from $1000 to $2000 per year. My guess is that the insurance
companies will not be willing to pay for more than about $2000 per
person per year in claims, and they will demand that the state provide
reinsurance for the rest. Given average health care spending in
Massachusetts of $6000, "the rest" could be a big number.

Andrew Sullivan approves, mostly for general reasons — "let the states try."

My take: This kind of approach will prove increasingly popular.  You claim to cover everybody.  It doesn’t sound very socialistic and most of the costs are hidden.  It appeals to voters’ sense of justice; there is a general belief that many individuals and businesses are free-riding upon the ready availability of hospital emergency rooms.  It keeps private insurance rather than trying to eliminate it (single-payer plans) or eliminate its tax advantages (HSAs).  This latter feature I find appealing, since I think the private insurance mode, for all its flaws, is or at least should be, the future of the sector.  "Not enough private insurance" is the relevant externality relative to the social welfare function, not "too much private insurance."  Of course various lobbies — most of all the insurance companies — also will like this feature of the program.

In a political debate, this will, for better or worse, probably crush the more ambitious Democratic plans for national health insurance.

The crunch comes, as Kling points out, when you pretend that covering the uninsured will be cheap or can happen under current levels of program budgeting.  Can you imagine California or Texas, both of which have higher levels of uninsured than Massachusetts, trying such a plan?  The long-run future of the idea replaces the insurance company subsidies with health insurance vouchers for the poor.  They would be means-tested, of course, and the expense would require federal involvement.

To me the Massachusetts plan sounds messy and fragmented.  It is a series of concessions rather than a set of solutions.  It relies too heavily on unfunded mandates rather than improving incentives.  I am not sure it will make anyone healthier.  It does nothing to solve the number one problem of the sector, namely bringing competitive forces to bear on improving product quality, accessibility, and affordability.  I just bought a new Toyota Corolla for a lower nominal (much less real) price than I paid nine years ago for the same but inferior make without side air bags.  Why can’t we have more stories like that in health care?  It is the person who figures out how to point health care competition in the right direction who will deserve the brass ring. 

That all being said, the Massachusetts plan is better than I would have expected.  I am not convinced that the plan will work out badly, at least relative to feasible alternatives.


"I just bought a new Toyota Corolla for a lower nominal (much less real) price than I paid nine years ago for the same but inferior make without side air bags. Why can't we have more stories like that in health care? It is the person who figures out how to point health care competition in the right direction who will deserve the brass ring. "

The problem is not that a defined solitary treatment is getting more expensive. I would bet that most medical treatments ARE getting cheaper. For example, I get sinus infections every year or two. Years ago, this would involve a 20-30 minute visit to a doctor to get some antibiotics. Gradually, under the pressure of the insurance companies, the visits have gotten shorter and shorter. The doctors I go to are increasingly quick to go rushing off to see another patient.

I can clearly see their reimbursements going down on the statements from my insurance company. The last time it happened, I went to a "minute clinic" in a CVS. The nice nurse or physicians assistant, spent quite a long time with me and only got a lousy 20 bucks or so.

The real problem in healthcare expenses is (to keep your automotive analogy going) is when you compare getting your next car with a GPS/computer/dvd/active suspension etc system. It will cost more because you are buying something new. An even better example is that growing up, we had one car. Nowadays people consider it a necessity to have several.

Or think about it this way. Let us say that there is no limit on how fast you want to drive (equivilent to there being no limit on how healthy or long you want to live). You can buy a car for 20 k to safely drive 80mph. Now, automotive science progresses and you can buy a car that can go 200 mph (but it costs 60K).

I read a story once that talked about the "health care singularity" which is the time when a decade comes that in ten years of medical research the life expectancy is increased by more than ten years....the rub being that the cost of the medical treatment is more than any but the richest could afford.

The reality of medical costs in the advanced world is that as the cost of food and other necessities falls, medical costs are going to become a huge part of what we spend our income on. It is easy to imagine a world where you spend your entire working life saving for the anti aging treatments that will let you keep working to pay for even more expensive healthcare!

As with so many things, the devil is in the details, and the media coverage has tended to leave out the details.

For instance, Kling alludes to no-deductible plans. This being Massachusetts, the bill has a host of requirements for what health care must offer -- after all, it wouldn't be fair if some people had sort of crappy health plans -- even if they were cheap. Not only are high-deductible plans forbidden under this scheme, but all plans must also cover a laundry list of services (infertility treatment, for example). I am not at all clear on how plans will compete on price when they have to exist within this framework.

There's also the assessment on companies that don't provide health insurance. In principle it makes sense, I guess -- you have to have some way of subsidizing lower-income people who are now forced to buy health insurance. But the assessment is absurdly low: $295 per employee per year. The first thing that sprang to mind was the anecdote in Freakonomics about the day care that started charging late fees, but the late fees were so low the parents treated them as permission to leave their kids. It's hard to see why an employer would offer health care (at roughtly $3300 per year per individual or $8700 per year per family for my employer) when they could pay $295 instead. Additionally, and much to the ire of my employer's business guy, there's a fee levied on companies which *do* provide health care -- just for the hell of it, I guess.

(That $295, by the way, was calculated from the costs of the state free care pool. I guess it never struck legislators that the type and cost of that care might be not at all comparable to the type and cost of care through a proper private-sector health plan. I am not at all surprised.)

I think that Massachusetts is doing something right by experimenting; the system we have now is broken and the only way out is going to involve trying something wacky. But the details will make it a catastrophe.

Health care reform in the United States will be nothing more than rearranging the deck chairs on the Titanic until *something* is done about runaway spending on end-of-life care. We have to come to some realistic expectations about life and its limits, namely that life inevitably comes to an end and spending unlimited amounts on extending it a few weeks or even days - when the chances of recovery and quality of life are both zero - is both a waste of resources and cruel to the people involved.

The healthcare system in the US is backwards.

I think Gladwell put it best:

The closest I can come is to imagine if we had employer-based subways in New York. You could ride the subway if you had a job. But if you lost your job, you would either have to walk or pay a prohibitively expensive subway surcharge. Of course, if you lost your job you would need the subway more than ever, because you couldn't afford taxis and you would need to travel around looking for work.

That is how health insurance is currently set up.

It needs to be completely redone. And the only logical answer is universal insurance.

Strange, it seems to me that cars of a given model are getting more expensive in real dollars (much more nominally), not less.

There might be some ways of improving medical productivity--one would be paying for longer initial appointments. From all I've heard, patients frequently don't get around to their most important complaints, and I expect that there's a lot of misdiagnosis, leading both to problems not getting treated and new problems from side effects from the wrong treatments.

Another possibility is doing a big push to get better sanitation in hospitals.

Last fall I bought a Toyota Corolla wagon for $2800. It was a salvage car; sat for over ten years after a fender bender. Perfectly repaired, 34,000 miles, only car I've ever had which was nicer to drive was a BMW 2002. What's the health care analogy to this sort of deal?

As for the Massachusetts plan, does it make any provision for those people who have religious objection to health insurance? At one time we took part in a risk sharing pool which mostly served such people, because the health care package offered by my employer could not include maternity benefits when I was the only employee hoping to father a child.

The Massachusetts plan is a disaster. Only a plan that follows unyielding economic law is likely to work. This will require a flexible, private policy choice for people paying for their own insurance and making their own health care decisions. There will need to be a gate-keeper for those who are not paying for their care. The quantity demanded for a scarce resource with no cost is infinite. Formulating a plan that would work really isn’t that difficult.

Those that can afford health insurance should individually buy a tax deductible, actuarially sound plan of their choice. Rational people will choose a high deductible plan. Paying for expected health care expenses in advance is a sucker bet. You wind up paying $1.00 for $.50 worth of care. If your employer buys health insurance he will choose the Wal-Mart option, the lowest price guaranteed. That leaves no incentive to develop and provide quality plans. If you can afford a plan and don’t buy one you get the government plan discussed below.

Those that cannot afford health insurance or choose not to buy it need to be given a private HMO paid for by the government or deducted from your paycheck. The HMO plan would have gate keepers, chronic disease management, nurse practitioners, and drug cost containment. Different HMO plans would bid for the government contracts on a regional basis. This would allow competition to keep costs down. There is no reason for the government to be running health plans.

There could also be a blended plan or subsidized plan for people like diabetics who could normally afford health insurance but have an expensive illness

This approach would allow a free market in health care to develop, there isn’t one now, and take care of the universal coverage problem. People who are responsible would get great care and people getting it for free would have reasonable, cost effective care.

I do not believe Tyler's Toyota Corolla point that price improvements are not observed in health care. There is a wrinkle, though: most price improvement in health care comes from replacing an expensive procedure/hospitalization with a completely different and higher-quality but cheaper result. It's more like trading your Toyota Corolla in for a cheaper flying car, while the Corolla itself keeps going up in price. Some examples:

-- had ulcer surgery? Probably not. The number of ulcer surgeries is dropping dramatically due to the discovery of H. Pylori and the use of antibiotics and proton-pump inhibitor drugs to stop it.

-- better antibiotics have also made tonsil surgery less common.

-- I've had endoscopic sinus surgery. This is a relatively new procedure which is much cheaper, done on an outpatient instead of inpatient basis, and has a much shorter recovery time than the old method of doing sinus surgery. (Endoscopic = they just insert instruments up your nose instead of cutting open your face).

-- many other surgeries have switched to laproscopic methods (tiny instruments thru 1 small incision instead of cutting you all the way open). These have the same benefits as my sinus surgery. In most cases the instruments are more expensive and the surgeons require re-training, but, the complications, the lost work time, and the nights in the hospital are much much lower.

-- statin drugs are expected to cut the need for major heart surgery, but I'm not sure the savings can be demonstrated yet.

As Peter and other say above, the real problems with health care costs are end-of-life care, the labor inputs needed in hospitals and nursing homes, and higher expense for higher quality, not a lack of innovation.

I think the problem is that people complain about health care being "expensive & bad". Then it is nationalized. It continues to be "expensive & bad", only it is less obvious to the people how expensive it is because of how the costs are collected, and less obvious how "bad" it is because there is nothing else to compare it to.

The analogy to liability insurance for cars isn't all that far off. Once we decided to have emergency rooms also double as free clinics of last resort, we effectively decided that your decision to not get health insurance would not only cost you money.

I wonder how Massachussets will handle people moving just across the border to either get into or out of the program.

WS Grizzard, MD,

"Only a plan that follows unyielding economic law is likely to work."

Presumably we should then start by eliminating the temporary monopolies granted to the most expensive of the technologies. Next, we can work on the credentialism monopolies of MDs.

"Unyielding economic law" is one of those funny phrases that sounds a lot more nailed down in theory than in practice. Can you give some examples of unyielding economic law? Say's law perhaps. ;)

I think there are a lot more fundamental issues at play with healthcare and healthcare costs. Few deny that health is a human right but does everyone agree that extraordinary healthcare is a human right? There is a rough benchmark of acceptable cost/quality (QALY) threshold in the US of $50,000 - $100,000. For the uninitiated, this is the acceptable cost to society for which a treatment adds a quality-adjusted life-year. And yet studies have pegged patient's WTP (willingness-to-pay) at about $200,000 - $250,000 per QALY. There's an apparent disconnect in how people complain about the cost of healthcare but at the same time want the very best treatment at any cost. When it comes to health, no one asks for the Toyota Corolla - they want the top-of-the-line Ferrari. For the same reason, even countries with socialized medicine are experiencing their share of problems, namely growing medical expenditures, poor access to specialists, and long waits. Peter and ryan got it right - without limits or realistic expectations of end-of-life treatment costs, it's unreasonable to think that medical expenditures can be controlled. It's not sexy and everyone would rather debate the merits of their particular brand of healthcare system.

The irony of it all is that the best medicine is often free. A proper diet and an hour of exercise daily is infinitely more helpful than a statin regimen. For the most part, our spiralling medical costs are just the manifestation of a lifetime of poor, unhealthy behavior and a disregard for the true costs of extraordinary medical care. It's no surprise that the greatest burden of medical costs to the state and the individual is in diseases that could be prevented - cardiovascular, pulmonary, and certain cancers.

uncurable = incurable.

Having only an undergraduate degree in economics, I wish I were a brillliant economist with a PhD and that I could add something to this discussion.

Where are those brilliant economists who I assumed would be alert and manning the guard tower for us all? Frankly, I am alarmed.

I see and hear talk of this great Mass health care plan and about health care being a "right" -- on par with free speech! To me, it is an Income Transfer, pure and simple; and sadly one that removes useful personal incentives from society.

Where are economists with the courage to demonstrate and to say that these programs misuse the power of the state and usurp people's individual liberties -- most often the liberties of those people who behave in the most 'productive' ways for society!

I've yet to do the math, but it wouldn't be difficult to prove -- would it -- that a young person that saves a LITTLE in a retirement account, in a health savings account (HSA), and makes simple, prudent decisions for the most part regarding their health and lifestyle, wouldn't need a paternal state to bail them out! Why should healthy, well-behaved, savers be coerced into "pools" to bail out the "less fortunate"!?

It is even more shameful in a society in which technology (computer databases, genetic profiling, etc.) can granulize personal risks and measure the results of human behavior as never before! A misguided mob -- using the power of the state -- wants to ignore this science and "pool" us all, as if we were born with the same endowments and later behave the same!

Where is an economist with guts that will say, "Mr. and Mrs. Jones, you have a high risk health profile; you need to save more for potential health problems, consider curtailing your family size -- or adopting instead, and make a number of other modifications to your lifestyle."

It is sad fact of life that some will have lessor endowments and that bad things will happen to others -- BUT, nonetheless, they can still make prudent choices with their behavior if the market is free to give them some signals!

Shamefully, I so often hear "market failure" thrown out as a way for some to advance their pet social cause, however noble, say feeding the poor or tending the sick. We do need structures to help the less endowed and less fortunate -- but it is dangerous to embed all these Income Transfers in places that eliminate good incentives and create new bad ones. We must all fight to make income transfers simple and transparent!

(How many people know, for instance, that the tax on their phone bill subsidizes rural phone lines and therefore rural living? Maybe this "noble idea" isn't such a good one when we think about $100/barrel oil ...maybe people should live in cities!)

At least, we need the markets to be FREE to do some cajoling -- peoples' parents, advisors, and government seem unwilling to do it for them.

You make a very simple mistake in assuming that adheence to markets is value that many people share. Very, very few people consider markets as anything other than a means to acheiving an end.
If you think about, I think you would like to rethink your core values as asserted in this piece.

The other problem is that you are extrapolating extremely simplistic economic models into a very complex real world, a real world in which there is precious little evidence for your simplistic models. So much the worse for the models say I, but apparently, so much the worse for reality say you. I would rethink that approach, if I were you.

Max wrote:
Not necessarily. There are many examples on how increase in prices lead to better product positioning and drastic increase in sales (read a book on marketing).

First: Note the phrase "all else held constant" -- in the example you cite that isn't happening. The price change (along with other marketing activities) bring about a perception/positioning change that juices the demand.

Second: These laws are marginal, meaning that they explain behavior when the changes are small. If you increase the price of a $20 book by a $1, sales will go down by ~5%. Large changes often do not follow the law, because (as in the example you cite) they trigger structural changes, perceptual changes, etc.

Third: In the current health financing mess, supply and demand is meaningless because the payer is not (generally) the decision maker. Everyone will eagerly choose the most expensive shot-in-the-dark treatments for Granny when someone else is paying for it.

Private health insurance stinks, because there are huge incentives for the private insurance company to spend all its time either trying to enroll people with a low risk profile, or denying payments after the health costs are incurred. Fighting over bills and trying to pass the buck is unproductive activity. Granted, getting docs to cut back on genuinely unnecessary care is productive, as is getting enrollees to obtain useful preventive care, but in my experience this is not what the private companies spend most of their time doing. Some version of single player with a reasonable deductible is the way to go. Competition can still be preserved at the provider level. But we need to flat out get rid of the private insurance industry. On net, I think it subtracts value from the system.

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