Can Risk Adjustment Save the Public Option?
Ezra Klein has a truly excellent post on adverse selection and the public option. He concludes with, “The most important factor here will be the strength of the risk adjustment in the exchanges, so keep an eye on that.”
I wonder how optimistic we can be about the degree of variation in spending predicted by risk adjustment models. I think the answer is “not very.” From the literature on health care risk adjustment (via this post):
Statistical models developed by scholars have relatively low predictive power. Predicting ten percent of the variation in [health] expenditure is considered good (e.g., Medicare Advantage’s risk adjustment model). That means ninety percent of the variation is unexplained by the model or chalked up to random error. An individual ought to be a better predictor of his or her health expenditures than a model that cannot include measures unobservable to the researcher. (How much better? I don’t know.)
Expenses for some specific services are more predictable. Drug expenses, for example, are persistent because individuals tend to use the same medications year after year. The best statistical models of drug spending can predict about 55% of the variation in next year’s drug expenses, leaving 45% to random error.
That puts a reasonable cap at 55%, but only for very persistent services, like drugs. Expect the best overall risk adjustment to be no worse than 10% and no where near as good as 55%.
Private insurers should not be so worried but taxpayers should. The public plan looks game-able.(*)
(*) A wonky note: It isn’t game-able because the risk adjustment model is of low power. It is game-able because insurers likely have access to information not observable to researchers and omitted from the risk adjustment model, which makes it lower power than it could otherwise be. The risk adjustment model was developed in a political environment in which the insurers were participants.
Going Google via Verizon: Final Review
Several months ago my Palm Tungsten E died and I used it as an opportunity to migrate my contacts and calendar to Google. That was something I’d wanted to do for some time, but to make it work for me I needed to purchase a phone with web capabilities. That I did in July. Having now gained considerable experience using my LG enV®3 on the Verizon network and with a few billing cycles under my belt I can make a final report.
First of all, I am pleasantly surprised that Verizon did not make any errors with my bills. The first month’s bill was, as expected, considerably higher than bills will be in steady state due to the mid-month transition. It is a bit unkind for Verizon to essentially double bill for some services in a transition month, but that is what they do, and I expected it. Fine. That’s like a one-time start-up cost.
When I signed up for the new web service I was told that the second month’s bill would be higher than my old billing level by exactly the charge for the web access: $15. And indeed it was! Plus, the expected increase for my wife’s line, $10 for text messaging, was also correctly billed. I’m delighted at the time I’ve saved not having to fight Verizon for bill corrections, as I and countless others have had to do in the past.
I’m also pleased with the phone, Verizon’s services, and Google’s mobile products. The whole package fulfills my needs and provides a great deal of additional functionality I did not have with my old Palm and non-web cell phone. I can now catch up on e-mail, the news, my RSS feeds, Facebook, and do some blog management all on my phone. That is very handy when I’m away from a computer for extended periods or when I wish to use my commute time (train ride) efficiently.
Of course, I have a list of minor gripes. No product is perfect. Google and Verizon could both do a better job. Here’s how:
Google. One annoyance I have is with Google News (mobile). It never remembers my settings and is constantly reverting to the default number of news items and categories.
A second annoyance is with Google Calendar (mobile). It does not have a “jump to date” feature. So, to reach a date way in the past or future you have to keep clicking on the forward or back buttons. That’s a lot of stupid clicking. I have a few more grievances but they’re hard to explain and so minor I’ll overlook them.
Verizon. My main beef with Verizon is the silly process required to get phone-captured photos or videos to my home PC. Despite having a USB connector, you can’t download photos or videos from the phone with it. You have to send them over the Verizon network to a Verizon-based repository. From there, you can’t simply download them. You have to e-mail them–individually!!!–to yourself if you want them on your PC. That whole process is far more time consuming than it should be. It is frustrating to have a pretty decent camera on my phone but no way to efficiently download a set of pictures. How dumb!
As with Google, I have a few more extremely minor complaints about Verizon’s web service and/or how the phone works. They’re so trivial and hard to explain in words I’m not going to bother.
(While I’m listing gripes let me pass along this one from David Pogue (hat tip: Ezra Klein): those “wait for the beep” outgoing messages on cell phone voice-mail. They are annoying, unnecessary, and we pay for them (via the lost airtime).)
All in all, I’m very satisfied. It is $15/month (plus start up costs) well spent. I also really like having all my data on Google. No matter what computer I’m sitting at or where I am I can get it (provided I have internet and/or cell service). It is very convenient and increases my overall efficiency and productivity. Now I have even more time to write blog posts like this one.
Medicare’s Financing Problems: The Basics
I recently wrote a little bit about the solvency of two huge entitlement programs: Social Security and Medicare (U.S., not Canada). This post goes a little further in depth on Medicare’s financing issues, as requested by a reader. Subsequent posts will provide additional details and some proposed solutions.
To understand Medicare’s financing problems one has to understand a little how Medicare is structured and financed, naturally. I wrote about this at some length in three earlier posts (on traditional Medicare, on the Medicare Advantage program, and on prescription drug plans), but I can summarize it succinctly here thanks to a concise American Academy of Actuaries “Backgrounder” on the topic.
Broadly and with respect to financing, Medicare has two arms: (1) earmarked 2.9% payroll taxes finance the Medicare Hospital Insurance (HI) trust fund and (2) beneficiary premiums and general revenue finance Medicare Supplementary Medical Insurance (SMI). As the names suggest HI covers inpatient hospital services and SMI covers physician and outpatient hospital services and drugs.
Since SMI is funded from premiums and general revenue it can’t formally have a solvency problem. Congress can simply raise premiums and/or contribute more general revenue to cover costs. That puts SMI’s funding problems in the same class as health care funding more generally. It is eating up a greater share of national income and the federal budget year after year. That’s an issue, but not formally a solvency problem.
HI has a solvency problem because its revenue is capped by payroll taxes. In fact in the last year spending for HI services exceeded payroll tax revenue. By 2017, it is projected that all of the HI’s assets (held in the form of Treasury bonds in a trust fund) will be depleted. By that time payroll tax revenue is expected to only cover 81% of expenditures. The shortfall will increase rapidly each year thereafter.
That’s a big gap and one that will be reality very soon. I’ll discuss some more of the details and some possible solutions to Medicare’s HI solvency problem in my next post on this topic.
Medicare Advantage Payments: Why 100% Should Be Enough
Medicare Advantage (MA) plans are paid more by Medicare to insure a beneficiary than it would cost to cover that beneficiary’s care directly under traditional fee-for-service (FFS) Medicare. Some of the overpayment funds additional benefits. But one can ask the question: how much should MA plans be paid to provide exactly the FFS Medicare benefit? Perhaps every taxpayer, or at least those who are not Medicare beneficiaries, would answer, “no greater than 100% of average FFS costs.” That should be enough, right?
Actually, that should be more than enough. It turns out that MA enrollees are cheaper to cover than the average Medicare beneficiary, at least according to the balance of the scholarly literature on the topic. That is, MA plans experience favorable selection. They ought to be able to provide the FFS benefit for less than the FFS cost, using the extra for additional benefits and/or profit.
Below are three peer-reviewed journal articles that document selection into MA and the degree to which it is favorable, along with a few excerpts and comments from yours truly. Each publication references and describes the older literature on this topic.
(1) M Mello, S Stearns, E Norton, T Ricketts. (2003). Understanding Biased Selection in
Medicare HMOs. Health Services Research 38:3. June. ["We find that favorable selection persists in the cohort over time on some, but not all, measures...Most, but not all, studies of Medicare HMOs have found evidence of favorable HMO selection." See Table 1 for a list of studies from for years no later than 1996.]
(2) J Ng, J Kasper, C Forrest, A Bierman. (2007). Predictors of Voluntary Disenrollment From Medicare Managed Care. Medical Care 45(6). June. ["Medicare plans experience favorable selection bias partly because sicker members are likelier to disenroll."]
(3) S Shimada, A Zaslavsky, L Zaborski, A O’Malley, A Heller, P Cleary. (2009). Market and Beneficiary Characteristics Associated with Enrollment in Medicare Managed Care Plans and Fee-for-Service. Medical Care 47(5). May. ["...numerous studies have shown that Medicare managed care plans still attract healthier Medicare beneficiaries....Our findings extend prior research showing that [MA] plans experience favorable selection.”]
Roth Conversion: Do You Have the Headroom?
We’re coming into the time of year when I begin to consider how much of my traditional IRA funds to convert to a Roth IRA. Because there are tax implications one should think Roth conversion through carefully. If you haven’t done this exercise yet this post may help, though there are a lot of other places online to find the same information.
Considering the tax implications of Roth conversion is something more people may be doing in 2010 when the income limits on Roth conversion are eliminated, making Roths available to many who did not previously have access (see the Center on Budget and Policy Priorities report Roth IRA Provision Effectively Eliminates Income Limits on Roth IRAs: Establishes Major New Tax Shelter For High-Income Households).
The first thing to recognize is that every dollar converted to a Roth IRA that has not previously been taxed is taxed upon conversion at your marginal income tax rate. For example, every dollar converted from a tradional (or rollover) IRA is taxed. Earnings converted from a non-deductible IRA are taxed. Assuming you want to pay the lowest possible taxes it is unlikely a good idea to convert your entire traditional, rollover, or non-deductible IRA to a Roth all at once. You’ll probably want to do it gradually, year-by-year. Here’s why:
Every converted dollar that has not been taxed is taxed upon conversion because it increases your taxable income by one dollar. Add enough dollars to your taxable income and you’ll break out of your current marginal tax bracket and into the next one. Suddenly you’re not paying 15% on your converted dollars (if that was your tax bracket) but 25% (the next braket up). Or you’re paying 33% instead of 28%. You don’t have to do that.
You are permitted to convert as much or as little of your IRA funds to a Roth as you like. You can spread it out over as many years as you like. Doing so spreads out the tax payment and gives you an opportunity to match your annual conversion amount to your “tax bracket headroom”: the difference between the top of your marginal tax bracket and your taxable income before conversion.
For example, in 2009 the 15% tax braket for a married couple filing jointly applies to taxable income in the range $16,700 to $67,900. Suppose your taxable income is $50,000 without any conversion funds. You have $17,900 of “headroom” left in the 15% bracket ($67,900 – $50,000). Therefore, you can convert $17,900 of taxable funds to a Roth and only pay 15% tax on those funds.
If you convert more, you’ll pay a higher tax on the additional amount (25% on the next $69,150 of taxable conversion in 2009). But why do that? You can wait until the next tax year to convert additional funds and save on taxes by doing so. This is precisely what I do. Each year, before the end of December, I estimate how much headroom I have in my marginal tax bracket and I convert just enough into my Roth so as not to exceed the top of the bracket. This estimation isn’t precise because I don’t know my taxable income exactly until I do my taxes in March or so, but it is better than guessing and far better than just converting the whole amount.
Caveats and notes: (1) Due to the market downturn, this year it might have been advantageous for me to have converted early in the year an amount beyond the size of my tax bracket headroom. I would have been taxed at a higher rate for some of that conversion but I would have converted at a time when the total was depressed, avoiding taxes in the future when the portfolio recovers. I didn’t do that. I didn’t even try to calculate if it would have been a good idea. (2) In 2010 there is a special option on conversions. You can pay no tax in 2010 and spread the tax due over the two years: 2011 and 2012. For an excellent article on the special 2010 conversion rules see Making a Good Deal for Retirement Even Better (Wall Street Journal). (3) There is also five-year rule that pertains to qualified Roth distributions (of earnings) taken before age 59.5 (an early distribution). The clock on those five years restarts at the time of conversion. If you’re considering taking an early distribution of earnings you should do some more reading about the five year rule. See 5 Year Rule for Roth IRA Qualified Distributions at Good Financial Cents.
Does McCarran Matter?
We have argued that increased enforcement of competition laws against insurers without similar efforts against providers could have perverse consequences without a public option. And we’ve also observed that absent the threat of a public option, there is no reason to believe insurers would pass on to consumers the benefits of any market power they are allowed to maintain. In today’s companion post, Austin elaborates on the relationship between insurer market power and a public option.
In each instance, our remarks have been occasioned by Democratic efforts to repeal, in whole or in part, the 1945 McCarran-Ferguson Act, which provides a partial antitrust exemption that insurers currently enjoy. But they have not been premised specifically on the proposition that the exemption itself contributes to increased concentration in the health insurance market, or that such concentration would be diluted by repeal. I consider that question now.
The McCarran-Ferguson Act exempts from federal antitrust laws most aspects of “the business of insurance” to the extent regulated by the states. The exemption for “the business of insurance” applies to activities like issuing policies, underwriting risk, and setting premiums. But it does not apply to “the business of insurers” – for example, purchasing services from providers or engaging in mergers and acquisitions, in most circumstances. Nor does the exemption protect “boycott, coercion, or intimidation” from federal antitrust scrutiny.
Roughly, the exemption tracks the risk-spreading relationship between insurer and insured that has traditionally been the subject of state regulation, while mostly subjecting insurer-provider relationships and other non-insurance activities to federal scrutiny.
So what sorts of potentially market-concentrating conduct are left to exclusive state regulation after the exemptions to the exemption? Agreements to fix prices and to divide up markets are generally considered to be within the exemption’s scope. While the former type of agreement would not enhance the power of participants to bargain with providers, the latter surely could. If, for example, two insurers in a state were allowed to agree that one would market policies in one part of the state, while the other would take the rest, then each would have greater leverage over providers in its allocated region.
The same would be true in market segments, such as for large group, small group, and individual policies, that were the subject of an exempt agreement. Of course, state regulators are free to police such arrangements. But even weak policing is enough to displace federal regulation under McCarran-Ferguson.
Anticompetitive agreements are not the only conduct exempt from federal antitrust oversight. Some partial repeal proposals would still commit all manner of exclusionary conduct by individual insurers seeking to maintain or acquire monopoly to potentially lax state oversight. Federal law, for example, would still not reach a predatory pricing scheme in which a monopoly insurer lowered prices below its costs to deter entry by a new competitor in the expectation that it could recover its losses after successfully defending its monopoly. While there is much skepticism about the feasibility of predatory pricing outside markets with large economies of scale or scope, or high barriers to entry, the health insurance market has these features.
In short, there are reasons to believe, in theory, that the current antitrust exemption does promote lax regulation of practices that could lead to increased concentration in the health insurance market. Certainly, that market has come to be characterized by a high degree of concentration in recent years. While other factors have no doubt contributed to that concentration, it is not implausible that the antitrust exemption has contributed as well, whether through the conduct that it clearly allows, or the vagueness that it brings to enforcement against conduct that is not clearly outside its scope.
We don’t condone or promote the type of conduct that the antitrust exemption allows or encourages. But going easy on such conduct may be the price of maintaining the balance of power between insurers and providers if we do not enact a robust public option.
The Economic Necessity of a Public Option
The fundamental problem in health care in the U.S. is that we spend so much to get so little. The current health reform effort is unlikely to address this problem in the short term. But it will establish the institutional structure of health care financing within which it must one day be faced. At the moment it is not entirely clear what form this institutional structure will take. But any way you slice it, it is hard to see how to achieve cost, volume, and quality control without some form of public option.
At the moment, the market power of health care providers (e.g. hospitals) is largely being viewed as inviolable. In fact, and ironically, for reasons of payment reform described elsewhere on this blog providers may be encouraged toward greater integration and coordination. It is a reasonable expectation that provider market power will not diminish under health reform.
At the same time, there is a renewed interest among Democrats to repeal the existing exemption from federal antitrust law currently enjoyed by insurers under the 1945 McCarran-Ferguson Act. While the direct effects of repeal, if any, are uncertain (as discussed in today’s companion piece by Ian), this move strongly suggests an intent to break up large insurers and dilute insurance markets.
With insurers weakened, what would serve as a counter-weight to the power of provider groups that is expected to maintain or increase? Who or what would have the power to bargain on behalf of consumers? It would have to be an entity capable of negotiating (or dictating) low prices, reasonable volume, and high quality. An insurer without substantial market power cannot do it, but a public option could.
On the other hand, if we permit insurers to maintain sufficient market power to extract low prices from providers, what would compel them to pass the savings on to consumers? With little competition they wouldn’t have to. But a fallback version of the public option–one that entered if insurers didn’t offer affordable premiums–would serve as a stick.
Whatever market structure health reform encourages it had better be one that includes mechanisms for cost, volume, and quality control and, moreover, does so on behalf of consumers, not just to the benefit of insurers. At a high level, I don’t see how we get from here to there without at least the threat, if not the reality, of some form of public option. The only other approach I can fathom is to dilute the power of providers. But, for perhaps sound political reasons if not to facilitate payment reform, that does not seem to be in the works.
Me, On NPR’s Morning Edition
Yesterday I didn’t know if I’d be in David Welna’s Morning Edition story on insurers’ antitrust exemption. This morning I know I am, at 7:20AM and again at 9:20AM. What I take to be a text summary of the story is available online (I’m in that too). If you miss it the audio will be posted online on the same page where you can read the summary text version right now.
Sources
Since I like to promote things that are worthwhile I’m sharing my primary non-research information sources in this post. (Of course for research I reference the academic literature and government agency publications. Those are not included here.) The lists below include the best of what I read via RSS/Google Reader (mostly) and what I listen to via podcast (iPod). Everything listed is included in my rotating blogroll (far right sidebar). Beyond these my other main sources of news and information are Google News and NPR news programs. Also, I like Y Combinator’s Hacker News as a source for new, unusual, and interesting stuff on the web. (It is not just for hackers.) The only (non-academic) periodical I read regularly is The Atlantic.
Reading List. I read a lot of blogs in four main categories: health care policy, economics, politics/policy, and personal finance. Some blogs are cross disciplinary, but I’ll categorize them below according to the principal reason I read them (at least lately). I do not intend to give the impression that I read every post of every blog I follow. I don’t. I skim, sample, and ignore just as I would the content of a newspaper.
Of course, the best bloggers on the planet write on health care policy. For general health care policy news one can do no better than the Kaiser Health News service. Ezra Klein does the best job at putting health policy in political context (he blogs on many other important topics too). I’m also fond of Jonathan Cohn of The Treatment and Jonathan Chait (both at The New Republic). The latest addition to my health policy blog subscription list is Rational Arguments written by Aaron Carroll (Aaron’s take and mine are so closely aligned it is frightening). The following blogs round out my sources (in no particular order):
- The Alan Katz Health Care Reform Blog
- Health Affairs Blog
- Health Policy and Communications Blog (Michael Miller)
- Health Care Policy and Marketplace Review (Robert Laszewski)
- Healthcare Economist (Jason Shafrin)
- The Health Care Blog
- Daily Dose/Washington Post
- O’Neill Institute’s Legal Issues in Health Reform
The list of economics blogs to which I subscribe is also long. For its variety my favorite is NY Times’ Economix. I consider Paul Krugman required reading, both his NY Times blog and column. NPR’s Planet Money is a good source for the basics, though I prefer to take it in as a podcast (see below). One cannot be a serious economics blogger without reading Tyler Cowen and Alex Tabarrok on Marginal Revolution, Brad DeLong, or Mark Thoma’s Economist’s View. And that’s only about half the economics blogs I follow. The rest include, in no particular order:
- Baseline Scenario (Simon Johnson, James Kwak)
- The Atlantic: Clive Crook
- Econbrowser (James Hamilton, Menzie Chinn)
- EconLog (Arnold Kling, Bryan Caplan, David Henderson)
- Follow the Money (Brad Setzer)
- Greg Mankiw’s Blog
- The Money Illusion (Scott Sumner)
- The Stash/The New Republic (Noam Scheiber)
Many of the aforementioned blogs contain considerable political and policy content. For serious takes on all matters budgetary I follow the Center for Budget and Policy Priorities, the CBO Director’s Blog (Douglas Elmendorf), and the OMB Blog (Peter Orszag). I also highly recommend Kevin Drum, Matt Yglesias, and The Wonk Room (Igor Volsky and others). For quantitative analysis of anything politically hot there’s no better source than FiveThirtyEight.com (Nate Silver and others). Finally for pure politics, I consult Political Insider, Political Wire (both by Taegan Goddard), and Talking Points Memo (Josh Marshal and others).
My favorite blogs for personal finance include The Finance Buff (where I got my start), The Oblivious Investor, and Get Rich Slowly (GRS is among the most popular). I’m also fond of the Bogleheads Investment Forum. Among finance blogs I read Bad Money Advice has the best blogging style. It’s author, “Frank Curmudgeon,” is simultaneously amusing and informative.
Lastly, I only recently started subscribing to Overcoming Bias (Robin Hanson) and Less Wrong (various). I don’t know what to make of those yet or how to categorize them (probably economics?).
Listening List. I use my iPod to further my education and to stay informed, not for music. As with my blog subscriptions, I don’t listen through every episode of every program suggested below. If I’ve gotten the gist or an episode doesn’t interest me I move on.
My favorite podcast material to date includes that provided by Russ Roberts’ EconTalk (see my review) and Open Yale Courses (class reviews). I cannot imagine anyone not enjoying Radio Lab (Jad Abumrad and Roger Krulwich). This American Life (Ira Glass with guests) is famously entertaining. I mentioned NPR’s Planet Money blog above, but I think the podcast is more fun. Fresh Air (Terry Gross) and On Point (Tom Ashbrook) are among the finest interview programs. Finally, Intelligence Squared is a well-crafted debate show, and The Ethicist (Randy Cohen) from The NY Times is amusing.
I’ve tried many other podcasts (most popular NPR shows, some other NY Times podcasts, some TV network Sunday morning political shows, some cable TV political comedy shows). They’ve all failed to sustain my interest and have fallen away. Though I’ve sampled a lot, I’m always searching for good stuff I haven’t tried. If there are any you like that I haven’t listed, please share them with me.
Me, On Morning Edition, This Friday
David Welna will be reporting on antitrust and health insurer market power on NPR’s Morning Edition tomorrow (Friday 10/23). I just completed an interview for his piece. I suppose there is no guarantee he’ll air my voice but it is possible. Either way it is likely to be worth listening to. So tune in. And keep watching here for more on this issue. Posts are in the works.
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