Category: Medicine
Is the mandate penalty large enough?
Reihan offers some discussion. He also links to the Massachusetts page on penalties, for instance:
2009 tax penalties for adults above 300% of the federal poverty level are based on 1/2 the cost of the lowest-priced Commonwealth Choice plan. They are:
- $52 each month or $624 for an entire year for individuals aged 18-26.
- $89 each month or $1068 for the year for individuals 27 or older.
Those are higher penalties than for the Obama plan, which doesn't go up to $695 for a few years (update: Austin Frakt offers more numbers here). Still, media coverage may be a bigger issue than the size of the fee. If national media run stories about people who avoid the mandate and prosper, the practice could spread. Massachusetts media have not had the same power or influence. Keep in mind also that "right-wing media" may promote this point for political reasons.
Plenty of people cheat on their taxes. Plenty of people lied on their mortgage applications. That all said, I don't know how people will react on this one.
How about businesses? John Cassidy offers what seems to be the clincher:
Take a medium-sized firm that employs a hundred people earning $40,000 each–a private security firm based in Atlanta, say–and currently offers them health-care insurance worth $10,000 a year, of which the employees pay $2,500. This employer’s annual health-care costs are $750,000 (a hundred times $7,500). In the reformed system, the firm’s workers, if they didn’t have insurance, would be eligible for generous subsidies to buy private insurance. For example, a married forty-year-old security guard whose wife stayed home to raise two kids could enroll in a non-group plan for less than $1,400 a year, according to the Kaiser Health Reform Subsidy Calculator. (The subsidy from the government would be $8,058.)
In a situation like this, the firm has a strong financial incentive to junk its group coverage and dump its workers onto the taxpayer-subsidized plan. Under the new law, firms with more than fifty workers that don’t offer coverage would have to pay an annual fine of $2,000 for every worker they employ, excepting the first thirty. In this case, the security firm would incur a fine of $140,000 (seventy times two), but it would save $610,000 a year on health-care costs. If you owned this firm, what would you do? Unless you are unusually public spirited, you would take advantage of the free money that the government is giving out. Since your employees would see their own health-care contributions fall by more than $1,100 a year, or almost half, they would be unlikely to complain. And even if they did, you would be saving so much money you afford to buy their agreement with a pay raise of, say, $2,000 a year, and still come out well ahead.
This implies the current version of the plan won't work without stronger penalties. In principle, I understand that it can be advantageous to dump many more people onto the exchanges, but not if so many of them end up getting such large subsidies. Cassidy adds:
Even if the government tried to impose additional sanctions on such firms, I doubt it would work. The dollar sums involved are so large that firms would try to game the system, by, for example, shutting down, reincorporating under a different name, and hiring back their employees without coverage. They might not even need to go to such lengths. Firms that pay modest wages have high rates of turnover. By simply refusing to offer coverage to new employees, they could pretty quickly convert most of their employees into non-covered workers.
Typepad comments are still down (sorry!), but you can leave your comments here, sorry for the extra click which is required.
From the comments
Steve S writes:
Steve Entin at the National Center for Policy Analysis has written on the very issue of the subsidies vs the tax exclusion. His conclusion:
Adding the subsidies for premiums and cost sharing, the family getting the health exchange policy would receive a total subsidy of $17,400, while the family receiving employer-based insurance would receive a total subsidy of $4,143.
That is a huge differential. The whole piece is here: http://www.ncpa.org/pdfs/Health-Insurance-Exchange-Subsidies-Create-Inequities.pdf
File under "Not a political equilibrium."
How the bill will evolve
Many Americans will receive subsidies for insurance, from what I understand roughly in the range of 6k to 12k. Many other Americans — namely those who already have health insurance — will not receive direct subsidies of this nature. Yet the subsidy-receiving and non-subsidy-receiving Americans will very often belong to the same income classes.
This disparity does not bother me personally (I have other worries about the subsidies), but I believe it will be very unpopular once it is publicly understood. One way or another, the "firewall" between the exchanges and the employer-supplied system will break down. Some people will want to spread the subsidies, others will want to limit them. Yet the former is budgetarily problematic and the latter will be politically difficult.
A second and related issue is that the differences in reimbursement rates — across private insurance, Medicare and Medicaid (highest to lowest) — will become a more pressing issue. For one thing, Medicaid patients will be crowded out by those buying private insurance on the exchanges, plus they will be crowded out by the growing number of Medicaid (and Medicare) patients. There will be pressure to fix this problem and the difference in rates will lead to growing supplier gaming, queues, quality differentials, and so on.
Over time, reimbursement rates across programs (insurance subsidies, Medicare, Medicaid) will converge to an increasing degree. Subsidies will be increasingly determined by income class rather than previous insurance history.
In the limiting case (I'm not suggesting we will get there), everyone will receive means-tested subsidized vouchers for regulated private insurance. In this strange way, Medicare and Medicaid could end up partially privatized and Ezekiel Emanuel — a voucher advocate — will end up being more influential than his brother Rahm. We will have to live with the problems of means-testing to a higher degree than today, but we will have something closer to a unified system, as do most other countries with universal coverage. There will be political pressure for compulsory health care savings, as they have in Singapore, to lower costs of finance.
It would be good if such vouchers could evolve in the direction of emphasizing catastrophic care and eventually they will have to.
Massive pressure will be put on such vouchers if either health care consumes 30-40 percent of gdp or income inequality continues to rise. In the former case, subsidies become increasingly expensive and involve extraordinarily high implicit marginal tax rates (earn more, your subsidy declines in value). In the latter case, it becomes increasingly difficult to ensure "near-equal" levels of health care access at feasible subsidy levels. Those pressure points are not unique to the Obama bill, but they become especially critical under the evolutionary scenario I am outlining. Perhaps we would give up the ideal of near-equal access, but that day is a few decades away.
Addendum: Here is Bryan Caplan's scenario, which means the bill will not work; my above post is assuming that problem is solved by raising the penalty. I am reading long lists of why the bill is so good but few proponents are analyzing that problem.
Plain speaking
The oddest thing about the health care debate, at least in my view, is that Republicans basically did not engage on the actual substance of the bill. Lots of stuff about death panels, and lots of stuff about procedure, lots of stuff about backroom deals (most of which will be gone after reconciliation) but shockingly little about the individual mandate — or, as Tim Noah points out, about the actual taxes that really are being raised for this. The only real substantive complaint they highlighted was Medicare, where they argued against their own position.
That's from Jonathan Bernstein. David Frum is also right on the mark.
Strategies of (unintended) precommitment
Geoff Robinson writes to me and speculates:
I was thinking that Scott Brown's election was instrumental in yesterday's passage of the health care bill, in the game theory sense. The Senate managed to pass a bill, and then, with Brown's election, credibly declare that it would not be able to consider any changes to the bill. No health care legislation would make it through the body again. House Democrats, faced with this take it or leave it scenario, were forced to pass the Senate version without modification (or let it fail).
I wonder how things would have proceeded if Martha Coakley had won? The House would have had (and certainly used) the option to force changes. This would have required the Senate to hold its super-majority coalition together for one more vote. Would all 60 senators have held the line? Would the use of reconciliation have been a viable political alternative? Would we have been debating health care all summer as negotiations dragged on?
My guess is the bill still would have passed, nonetheless this is an interesting exercise in the idea of unintended consequences.
How to improve the bill
I won't return to previous ground or the bigger picture questions, but this paragraph struck me:
The second part of the subsidies, estimated to cost $466 billion during the next decade, would limit out-of-pocket expenses for deductibles and co-payments. This help, for individuals with salaries of $27,000 and families with income of $55,000, would be significantly more generous than any version of the legislation Congress has considered.
Cut out or limit the second part of the subsidies, at the very least. I found the article as a whole to be a very useful discussion of which subsidies are contained in the current bill.
Small steps toward a better world
In Hawaii, Kaiser Permanente has started a pilot project that churn through its database of patient data to predict which patients might need which tests – and then sends individuals email alerts suggesting they come in for a test or checkup. It's the same sort of technology that Netflix uses to recommend movies. And the Cleveland Clinic has teamed up with Microsoft to bring self-monitoring tools to patients managing chronic diseases, successfully engaging them in better health behaviors without expensive visits to the hospital.
Here is more, via Steve Silberman. How much of the health care cost-saving revolution will occur in the hands of the individual patient?
The economics of managed care
Here is my latest NYT column and these are some relevant excerpts:
Conceived in its broadest form, managed care can be run by the government, as in Britain, or left in the hands of a regulated private sector. Because the United States already has substantial private-sector capacity, and because many Americans are suspicious of government controls, the private route is the most likely option. Individuals would choose among competing providers – and those providers would try to offer the most appealing bundles of services, relative to cost.
The current tax exemption for health insurance benefits could be modified to encourage more cost-effective delivery systems, including forms of managed care that meet quality standards. For the elderly, the current Medicare fee-for-service method could be transformed into voucher programs for managed care treatment. Of course, people could go outside their network for additional services, if they were willing to pay.
It’s not well advertised, but the Obama plan would move in this direction. Many people receiving new health insurance coverage would be enrolled in Medicaid, which already relies on managed care for about half of its patients.
On a national scale, effective managed care will require the right mix of reputation and regulation to enforce provider commitments, and will need some reframing and renaming to make it palatable. It could accurately be called “competitive, choice-based single-payer coverage.”
…On the other hand, for reasons of perceived fairness, some people may be more willing to accept a “no” answer on health care from a government agency than from a private company. If so, we run the risk of limiting our care choices just because we’re more squeamish about one kind of “no” than another.
You'll note that this is a proposal to come after the Obama plan (or whatever else we do), not in lieu of it. It's not a competing idea but rather a recognition that rationing is coming in one form or another, even if some of the cost control proposals work.
There was not nearly enough space to deal with numerous points, including the following:
1. What are the pluses and minuses of competitive managed care offers vs. government-run single-payer systems? Or compare voucher-based competitive managed care — for seniors — to a much stronger Medicare advisory board. Under the former scenario, individuals choose, upfront, which services won't be reimbursed. Under the latter scenario, "experts" make that choice for everyone, subject to the constraints of politics. Which will lead to better outcomes?
2. I suspect the biggest problem with the voucher-based idea is when patients need to switch providers, say if they dissatisfied or if they are moving geographically. To what extent would the required regulations here mimic some of what the Obama plan does to insurance companies? Or could we just transfer how Medicaid handles managed care right now?
3. If people do not trust their managed care providers, can we expect a mutual, cooperative, or non-profit form in those markets? If so, how many of the advantages of markets over governments do we lose?
4. What are the ethics of converting fee-for-service Medicare into vouchers for managed care? In theory the role of government is to provide public goods, not private goods. Which health care treatments for the elderly can be considered public goods and which not? Is there an argument that paying more and more and more falls under this category of public goods? I am skeptical on this point. I think we have been pioneering a revolution in government, namely by assigning most expenditures to private goods. In the long run that is simply not sustainable.
Few people would think that a ne'er do well brother would be justified into taking $50,000 from you to prolong his life (with p = 0.17) for another three months. (Bryan Caplan has made a similar point.) So why do we approve of comparable transfers through the public sector?
5. I am struck by how many people, over the last year, claim we don't know how to make cost control work. There is plenty of evidence that managed care lowers the rate of cost growth, we just don't want to do it.
I also should note that the ideas of Arnold Kling were an influence on this column.
Addendum: Arnold Kling comments.
Much cheaper, almost as good
Here is part of the problem behind health care cost control, from the Annals of Internal Medicine:
Under conditions of constrained resources, cost-saving innovations may improve overall outcomes, even when they are slightly less effective than available options, by permitting more efficient reallocation of resources. The authors systematically reviewed all MEDLINE-cited cost–utility analyses written in English from 2002 to 2007 to identify and describe cost- and quality-decreasing medical innovations that might offer favorable “decrementally” cost-effective tradeoffs–defined as saving at least $100 000 per quality-adjusted life-year lost. Of 2128 cost-effectiveness ratios from 887 publications, only 9 comparisons (0.4% of total) described 8 innovations that were deemed to be decrementally cost-effective. Examples included percutaneous coronary intervention (instead of coronary artery bypass graft) for multivessel coronary disease, repetitive transcranial magnetic stimulation (instead of electroconvulsive therapy) for drug-resistant major depression, watchful waiting for inguinal hernias, and hemodialyzer sterilization and reuse. On a per-patient basis, these innovations yielded savings from $122 to almost $12 000 but losses of 0.001 to 0.021 quality-adjusted life-years (approximately 8 hours to 1 week). These findings demonstrate the rarity of decrementally cost-effective innovations in the medical literature.
Let me just repeat that last sentence: "These findings demonstrate the rarity of decrementally cost-effective innovations in the medical literature."
Pre-existing conditions
I've read that the Democrats are stressing this idea more in their arguments for the health bill. Oddly, even from intellectuals, you rarely hear what is one of the strongest arguments for the bill, namely that personal genome sequencing might mean — how many years from now? — that many more people have pre-existing conditions than we currently are aware of. Alternative equilibria are that the sequencing technology won't give us much health information, that the information will stay private (don't accept that cup of coffee!), or that we should in the meantime simply wait. There's plenty to debate there but I'd like to see more discussion on the long-term future of the health insurance sector or possible lack thereof.
On related issues, Ross Douthat wants a smaller bill:
But even as a hypothetical, the more modest plan is instructive. Per the Journal, it would insure half as many people as the House and Senate bills – 15 million, all told – at a quarter of the cost. 15 million happens to be roughly the number of American citizens who don’t have insurance, aren’t already eligible for Medicaid or S-CHIP, and make less than 300 percent of the poverty line. Which suggests that you can do some of the most morally urgent work of health care reform without a mandate or price controls, and at a fraction of the current legislation’s price tag.
Jon Chait has an exasperated response. First, the importance of that extra coverage, as would result from the mini-plan, he is suddenly downgrading in the grand scheme of things. Second, and more fundamentally, I'd like to repeat, and modify, an earlier question. I understand that the mini-bill does relatively well by "almost Medicaid" patients and relatively poorly by those with pre-existing conditions.
Compare the full bill to the mini-bill. For the extra insurance coverage granted by the full bill, some of which goes to individuals with pre-existing conditions, how much are we paying per person for that coverage?
Much better (but harder) would be to see how much extra we would be paying for the coverage each additional person, conditional on that person wanting the insurance at the price he or she would have to pay for it.
A third and related approach is to assume that consumer surplus, from the mandate/subsidy mix, is small for those individuals without pre-existing conditions. Take the extra expenditure and divide by the number of people with pre-existing conditions who now fail to get coverage. What is the cost per uninsured person with a pre-existing condition?
If you, as a supporter of the full bill, want to change people's minds, those are some critical numbers. For all the work that has been put into this legislation, it doesn't seem unjust to be asking for that hitherto unprovided information. The "it's too late to turn back now" argument doesn't much sway me. Nor does Chait's claim that by passing the mini-bill we would be foregoing a "transformative" moment. If the core of the full bill doesn't make sense, the entire structure won't hold up on its own.
The numbers, please.
The economics of placebos for self-remitting diseases
Daniel Carpenter, who just wrote the very impressive FDA book, has an interesting paper on his home page:
I develop a simple stochastic model of inference and therapeutic utilization in the presence of placebo effects, when the underlying medical condition may be self-remitting. In the model, expectations generate a “felt” health state which can mimic the medically cured health state even when the treatment in question has no real curing power. This effect may be augmented by self-limitation of the medical condition for which the treatment is utilized. A human agent then applies Bayes’ rule to the felt history as if it were generated pharmacologically. A more sophisticated agent knows of placebo effects but does not know the precise extent to which they contribute to curing. I describe the bias that attends inference and the under – or overutilization of therapies under such a model. A central result of the model is that human placebo learning is generally subject to greater bias in estimating treatment efficacy when diseases are self-limiting. Human agents may commit several types of decision errors under placebo learning. They may continually choose a more costly (expensive, hazardous) treatment when a less costly one would work as well, or they may continually use inferior treatments for life-threatening illnesses. When diseases are self-limiting, both these types of error are more likely when the human agent has high initial beliefs about the treatment. Possible applications of the model include the patent medicine industry, the robustness of markets for herbal and nutritional supplements, and the contemporary stability of counterfeit drug operations.
Of course this applies a lot more broadly than to medicine. It helps explain why people overuse and underuse "treatments" of many different kinds, including education. Here is Dan Carpenter's page on fly fishing.
Haiti fact of the day
Between 25% and 30% of postearthquake surgeries will need to be done again to avoid problems, says Dr. Jean "William" Pape, an infectious disease authority who is founder of Gheskio, an HIV/AIDS clinic next door to a field hospital set up by the U.S. Department of Health and Human Services.
The title of the article is "Emergency Doctors Leave Haiti."
Ezra Klein summarizes the new health care push
There's not a lot of policy news in the president's new health-care plan. The changes are pretty much what we expected: more money going to subsidies (which are now being referred to as "the largest middle class tax cut for health care in history"), an excise tax that kicks in later and affects fewer plans, a new Health Insurance Rate Authority to oversee premium increases and reject them if they're unfair, the elimination of the Nebraska deal, and so on. There's no public option, nor any significant retrenchment. In fact, the cost of the bill has increased by $75 billion, the result of more generous subsidies.
What I'd like to see — if this is going to pass — is a tougher penalty for not signing up. Ezra also discusses the politics of where it is headed.
Addendum: Megan McArdle says it won't happen.
Price controls for insurance companies
I'm confused by the recent discussions emanating from the Obama administration. If something like the current proposals pass, and those proposals "work," low-risk individuals end up subsidizing the health care of high-risk individuals. Prices for insurance won't need to go up at outrageous rates, or so we are told.
If current proposals fail to pass, insurance companies can still just dump people. Forcing them to lower their prices will induce them to dump even more people and to have a tighter definition of preexisting conditions.
It seems to me this announcement is either just headline-seeking or an admission that, after the plan is passed, premia will continue to rise at high rates. The latter case runs contrary to the narrative of how the plan will contain "the health insurance death spiral of the status quo."
Perhaps forthcoming details will clarify this matter. (Is it for the transition period?)
Sweden, Medicare, and what really matters
Tino writes:
Medicare was introduced 1965 in the US. Public health coverage for the elderly existed by 1950 in Sweden, but full universal coverage dates to 1955 in Sweden (a public health insurance was founded in 1891, and public municipal public health existed for even longer).
In 1950, before Medicare, and before Universal coverage in Sweden the difference was +2.6 at birth and +0.3 at 65. In 2001-2005 the difference between the Sweden and US was +2.7 at birth and +0.3 years at 65. Identical!
First, regarding the life expectancy at birth we can note that 50 years of different health policy, labor mark policy, welfare state coverage seems to have had zero effect on total outcome.
And:
Last note: around 1900, before the expansion of the welfare state, the estimated life expectancy at birth was 54.0 years in Sweden and 47.3 years in the US, a difference of 5.3 years, twice the current gap.
If you scroll through Tino's blog, you will find various critiques of The Spirit Level. On the health care point, I would stress that Hansonian results also can be used to argue for the extreme exercise of monopsony power, so don't think the policy implications of this are so simple.