Tag Archives: health care

The Problem with Obamacare

By James Kwak

When it comes to Obamacare, I’m firmly in the “significantly better than nothing” camp. Obamacare has increased coverage—although not as much as one might have hoped. The percentage of people uninsured has fallen from around 17% in 2013, when only a few coverage-related provisions of the ACA were in effect, to around 11% in early 2015, after the major changes kicked in in 2014. That’s six percentage points, or millions of people—but it’s still much less than half of the pre-ACA uninsured.

There has also been a lot of controversy over the impact of Obamacare on health insurance prices. According to the Kaiser Family Foundation, the weighted average pre-subsidy price of a silver plan on the exchanges only increased by 3.6% from 2015 to 2016, which certainly seems good. But one way the ACA keeps premiums reasonable is by pushing people into plans with high levels of cost sharing. The average silver plan has a combined annual deductible (including prescriptions) of more than $3,000; the deductible for an average bronze plan is close to $6,000. In other words, one reason that insurance premiums are affordable is that those premiums don’t buy you what they used to, as insurers shift more and more health care costs onto their customers.

This is exactly what we should have expected. Obamacare is an example of “managed competition,” something that Bill Clinton talked about on the campaign trail twenty-four years ago. The basic principle is that competitive markets will generally produce good outcomes—low costs, efficient allocation of resources to meet consumer needs, etc.—but need to be managed around the edges. Moderate Democrats (what we used to call moderate Republicans) have fallen in love with this idea, because they can talk about the wonders of markets while blaming anything they don’t like on “market failures.”

The classic example of correcting for a market failure, of course, is the individual mandate. By now, every liberal interested in policy has learned what adverse selection is and, more specifically, can explain why community rating will produce an adverse selection death spiral unless you have mandated universal participation. This is the image that Obamacare’s most ardent supporters want you to take away: cleverly designed regulation preventing a market failure and ensuring universal coverage, while enabling markets to reduce costs, encourage innovation, blah blah blah. What could be better?

The dirty not-so-secret of Obamacare, however, is that sometimes the things we don’t like about market outcomes aren’t market failures—they are exactly what markets are supposed to do.

The problem with adverse selection, remember, is that people know more about their health status than insurers do, so they only buy policies that are profitable for them on an expected basis (that is, sick people are more likely to buy insurance than healthy people), which means that insurers would lose money, so insurers raise premiums, but that only reduces the number of people buying insurance. But imagine if insurers had the same information as insureds, so they could calculate the actuarially fair price for every policy. No more adverse selection! But would that be a good outcome? Sick people and poor people would be unable to afford insurance at all. That’s what markets do: they distribute goods and services based on people’s willingness to pay, which is a function of their budget constraints. And that’s not something that we as a society are willing to accept.

So Obamacare says: No medical underwriting!—which means, basically, that the healthy and the sick pay the same up-front premiums. At this point, with a universal coverage mandate and no medical underwriting, you might think we should just have a single payer system. But … but … markets!

So, in order to give private insurers something to do, Obamacare allows them to offer different flavors of health plans, within the rules set up by the ACA. But what is it that insurance companies do? They try to sell policies for more (in premiums) than they cost (in benefits). We know sick people will cost more than healthy people, but now insurers aren’t allowed to price discriminate on the front end. So, instead, they offer plans with loads of cost sharing—high deductibles, high out-of-pocket maximums, and high levels of coinsurance. Cost sharing has two purposes. One is to deter people from actually using health care—this is the reality of “consumer-driven health care.” The other is to make the sick pay more than the healthy. Remember, that’s how markets are supposed to work. Insurers are supposed to identify the sick people and charge them more for insurance; Obamacare says they can’t do that, so instead they switch to policies that force sick people to pay more for care at the point of service.

None of this is at all nefarious. If you’re going to have private health insurance companies, you have to let them try to make money—otherwise, what’s the point? Indeed, if you like markets, you have to recognize that markets only do what they do because companies are trying to make money.

But you run up against this fundamental problem: Markets work by making people pay for what they get; the more health care you “consume,” the more you pay, either in insurance premiums or at the hospital. But the vast majority of Americans are not comfortable with the idea that rich people get good health care, middle-class people get passable health care (until they get seriously ill, in which case they go bankrupt), and poor people get no health care to begin with.

Obamacare is a heroic attempt to make the best out of this basic conundrum: we are trying to use markets to distribute something that, at the end of the day, we don’t want distributed according to market forces. That’s why we have not only the individual mandate and the prohibition on medical underwriting, but also the expansion of Medicaid, the subsidies, the Cadillac tax (because we don’t like the market when it produces gold-plated insurance plans) and, most telling of all, risk adjustment.

What is risk adjustment? Well, consider what a profit-seeking insurer would do if it has to charge the same price to everyone. In that case, you want to sell insurance to healthy people, not to sick people. Since you’re not allowed to turn people away, you design marketing programs so that only healthy people find out about your product. Again, nothing nefarious going on. But that’s bad for the system, because then other insurers will get stuck with the sick people, lose money, and pull out of the market.

So Obamacare’s risk adjustment provisions transfer money from plans with healthy people to plans with sick people. Insurance companies aren’t allowed to compete by trying to attract lower-risk customers. The only way they are allowed to compete is by paying less to health care providers for the same services (since Obamacare requires standard minimum benefit packages for all plans). But the thing is, we already know how to lower payments to providers. The key is to be a really, really big insurance plan, covering lots of people, so that you have bargaining power when it comes time to negotiate rates with hospitals and physician offices. There’s no “innovation” to stimulate here; it’s pure market power. No one has more of it than Medicare—and nothing can have as much market power as a single payer plan.

So at the end of the day, Obamacare is based on the idea that competition is good, but tries to prevent insurers from competing on all significant dimensions except the one that the government is better at anyway. We shouldn’t be surprised when insurance policies get worse (in terms of the benefits they actually provide) and health care costs continue to rise.

If we take as our starting premise that everyone should be able to afford decent health care—something that literally everyone agrees with—then the most obvious solution is single payer or one of its close cousins, such as we see in every other advanced economy in the world. But … markets! Not just Republicans, but also most Democrats are convinced that markets must be better, because of something they learned in Economics 101. Health care is one of the best examples of economism—the outsized influence that the competitive market model has had on public policy, even in areas where its lessons patently don’t apply.

You could say that the Obama administration made the best of the lousy hand it was dealt by decades of market propaganda and a weak majority that hinged on Democrats In Name Only. Obamacare certainly improves on what preceded it (nothing, that is, as far as the individual market is concerned). But ultimately it is a flawed attempt to force markets to produce outcomes that markets don’t want to produce.

No You Can’t

By James Kwak

Yesterday the Obama administration announced that healthcare.gov “will work smoothly for the vast majority of users.” Presumably they intended this as some sort of victory announcement after their self-imposed deadline of December 1 to fix the many problems uncovered when the site went live two months ago. But anyone who knows anything about software knows that it’s not enough to “work smoothly” for the “vast majority” of users.

Apparently pages are now loading incorrectly less than 1 percent of the time. Well, how much less? Pages failing 1 percent of the time make for a terrible web experience, especially for a web site where you have to travel through a long sequence of pages. There is evident fear that the current site will not be able to handle any type of significant load, like it will get around the deadline to sign up for policies beginning on January 1. And we know that “the back office systems, the accounting systems, [and] the payment systems”—in other words, the hard stuff—are still a work in progress.

None of this should come as any surprise—except to the politicians, bureaucrats, and campaign officials who run healthcare.gov. The single biggest mistake in the software business is thinking that if you throw resources at a problem and work really, really hard and put lots of pressure on people, you can complete a project by some arbitrary date (like December 1). It’s not like staying up all night to write a paper in college. This isn’t just a mistake made by people like the president of the United States. It’s made routinely by people in the software business, whether CEOs of software companies who made their way up through the sales ranks, or CIOs of big companies who made their way up as middle managers. You can’t double the number of people and cut the time in half. And just saying something is really, really important won’t make it go any faster or better.

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Why Taxes Should Pay for Health Care

By James Kwak

William Baumol and some co-authors recently published a new book on what is widely known as “Baumol’s cost disease.” This is something that Simon wanted to include in White House Burning, but I couldn’t find a good way to fit it in (and it would have gone in one of the chapter’s I was writing), so I it isn’t in there. (Baumol is cited for something else.) But in retrospect, I should have put it in.

Baumol’s argument, somewhat simplified, goes like this: Over time, average productivity in the economy rises. In some industries, automation and technology make productivity rise rapidly, producing higher real wages (because a single person can make a lot more stuff). But by definition, there most be some industries where productivity rises more slowly than the average. The classic example has been live classical music: it takes exactly as many person-hours to play a Mozart quartet today as it did two hundred years ago. You might be able to make a counterargument about the impact of recorded music, but the general point still holds. One widely cited example is education, where class sizes have stayed roughly constant for decades (and many educators think they should be smaller, not larger). Another is health care, where technology has vastly increased the number of possible treatments, but there is no getting around the need for in-person doctors and nurses.

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The ObamaCare Tax on the Middle Class

By James Kwak

So the new Republican argument (which Mitt Romney was against before he was in favor of it) is that the individual mandate is an oppressive tax on the middle class. Cute, isn’t it, adopting John Roberts’s argument?

First of all, there’s the little matter that the word “tax” in legal doctrine means something different from the word “tax” in ordinary English. And there’s nothing wrong with that. Plenty of words have precise legal meanings that would be foreign to ordinary English speakers, like “negligent,” “reckless,” “material,” and so on, and billions of dollars turn on those precise legal meanings. But that’s not going to sway many people, so let’s go to the numbers.

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Pure Spite

By James Kwak

In my Atlantic column on Thursday, I wrote the following about the Roberts Court’s decision to allow states to opt out of Medicaid expansion without losing their existing Medicaid funding:

“What we are going to see is Republican-controlled state governments refusing to expand Medicaid out of bitter hatred toward President Obama and spite for the working poor who need access to health care.”

For those who aren’t up to speed, the deal is basically this. Medicaid is administered by states (which often outsource it to third parties), but the federal government sets certain minimum coverage requirements that states must meet in order to receive federal funding. Those requirements are pretty low, states can choose not to cover able-bodied adults without children, regardless of their income. The Affordable Care Act required states to dramatically increase their Medicaid coverage, with the federal government kicking in 90 percent of the additional funding required (100 percent in the early years).

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What’s Liberty Got To Do With It?

By James Kwak

Constitutional law is not my field. I think we spent one day on the Commerce Clause in my constitutional law class. I’ve barely been following the Supreme Court oral arguments this week because I figured (a) they would be silly, (b) we won’t know anything useful until June, and (c) with the rest of the commentariat focusing on it I would have nothing to add. But even at that distance, I can’t help but be shocked by the ludicrous nature of the proceedings, best represented by the framing of the case in terms of individual freedom and government coercion. According to the Times, the case may turn on Anthony Kennedy’s notion of liberty.

What’s wrong with this? Liberty should have nothing to do with this case. I’ll repeat the analysis, made my dozens of law professors more expert than I (Charles Fried, for example). The question is whether Congress has the power to impose the individual mandate under the Commerce Clause, which gives it the power to regulate interstate commerce. If the individual mandate does in fact regulate interstate commerce, then it’s fine unless it violates some other part of the Constitution.

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Insurance or Redistribution?

By James Kwak

Mark Thoma makes an important point about the “individual mandate” that applies equally well to health care and to Social Security:

“I don’t see anything wrong with asking people to pay the expected value of their health care — a mandate to get insurance to cover the catastrophic things that society would cover in any case — to avoid this type of gaming of the system. Yes, it’s true that many healthy people will pay, remain healthy, and seem to get nothing. But that’s the wrong way to look at it. They have insurance whether they pay for it or not. Society will not let them die of a standard, treatable illness so insurance services are present. In fact, it’s the knowledge that society is providing these services that motivates many people to take a chance and go without.”

This is the relatively common argument that, since people already have guaranteed access to a basic level of emergency care, they should have to pay for it.

There’s a slightly different point in there that I emphasized above and that I want to focus on. Health insurance, like any kind of insurance, can be framed after the fact as redistribution. You pay health insurance premiums, you stay healthy, and therefore you “lose”—your money goes to pay for other people’s losses. But this is true of any kind of insurance. It’s equally true of homeowner’s insurance: if your house doesn’t burn down, you are the victim of redistribution from you to the people whose houses do burn down.

The other way to think of insurance is, well, as insurance. We want and value insurance in the current period, before we know if we’ll be “winners” or “losers” in the future period. The insurance itself has value to us. In fact, whenever you buy insurance, you are hoping that you will end up as a loser.

The framing of the health care individual mandate as a transfer from the healthy to the sick is the exact same as the framing of tax-funded social insurance programs as a transfer from the rich to the poor. At the time you enter the system, you probably don’t know which category you will fall into. You might have some knowledge of the probabilities, but you could turn out to be very wrong: there are plenty of people who are healthy in their twenties but get very sick later. In either case, the framing as redistribution and the focus on winners and losers is a way of making something that all people value—protection from risk, backed by the federal government’s balance sheet—seem like a from of zero-sum redistribution brokered by that evil, meddling federal government.