The Incidental Economist

Every year, the Kaiser Family Foundation publishes its annual survey of Employer Health Benefits.  Here’s the summary.  Here’s the chart pack.  Let’s wade right in.

The average premium for coverage by an employer provided health insurance plan for an individual in 2010 is $421 per month or $5,049 per year. The average premium for family coverage is $1,147 per month or $13,770 per year.  Think about that for a second.  That’s not the Cadillac plan.  That’s the average.  Twenty percent of plans for families cost $16,524 or more.  How has that changed over time?

Health care premiums have more than doubled in the last decade.  Has your salary more than doubled in the last decade?  I doubt it.  We are putting more and more or our income every year into health insurance premiums.  Do you feel healthier?  Do you feel safer?  Do you feel happier?

This doesn’t mean that employers are paying all of the premiums, though.  How much of those premiums are workers paying for themselves our of their own income?

This year was an all time high.  What you have to remember is that this means that not only are the premiums going up; so are the percentages of those premiums that individuals and families have to pay.  So their costs are going up even faster than premiums are.  In fact, this year was the first statistically significant increase in the percentage of premium paid by employees in a decade.

But remember, that’s just the premium.  It doesn’t include cost-sharing – things like co-pays, out of pocket costs, or deductibles.  So how much are deductibles?

What this means it that even after paying for an increasing percentage of an all time high premium, more than one in four workers in an individual plan still has an annual deductible of $1000 or more.  That’s a lot.

How did the recession affect employer health benefits?  Well, if companies need to trim their budgets they can either reduce the quality of coverage, or they can make employees pick up a bigger share of the cost.  How often did this occur?

So looking at the yellow bars, which represent all firms, 30% of them reduced the benefits of the insurance offered or increased the amount of cost sharing for their employees (either in co-pays or deductibles).  Another 23% reduced the share of the premiums that they paid, making their employees pay more.  Again, remember this is at the same time that premiums went up.

So, benefits reduced.  Cost-sharing increased.  Share of premiums paid increased.  Total premium cost at an all time high.  And this is for employer provided health benefits, which are usually much better and cheaper than what’s available in the individual market.  Depressed yet?

I know that PPACA has barely kicked in yet.  Just as you can’t blame PPACA for the current bad situation, you can’t fault PPACA for not fixing it yet.  But everyone who thought that health care reform would become more popular after it was passed better take a close look at this.  Things are getting worse, and not slowly; there’s no reason to think that it’s not going to continue.  And since the majority of reforms don’t kick in until 2014, we still have time to continue in free fall.  Moreover, the idea that we would leave the employer-based health care system – which is what this  survey measured – alone, may have sounded like a good talking point, but I’m not sure how popular it will be if these trends continue.

PPACA has it’s work cut out for itself.  I hope it’s up to the task.

I can be pretty hard on the press.  I figure I lash out at them every few posts.

Because of that I think it’s important to acknowledge actual reporting when it occurs.  So kudos to Igor Volsky.*  After reading my piece on Senator Wyden’s sudden distaste for the individual mandate, questioning what he was thinking, Igor apparently picked up the phone and asked:

Wyden believes that the more choices people have, the more vibrant and competitive the market and the lower the health care premiums. Wyden’s communications director Jennifer Hoelzer told me that it’s not that Wyden rejects the mandate; he just thinks states should have the option of opting out of it if they think they can do a better job of expanding access and lowering health care costs. She says that Wyden’s state innovation amendment is actually an “antidote” to those who want to repeal the individual requirement. “If you can do just as good or better than the federal law, you can apply for a waiver from that. And if you can cover your residents without a mandate, then you can go ahead and do that,” she said. “Maybe states do stick with the mandates, maybe they don’t, but what it says that all of these federal requirements, if you can prove that you can do just as good of a job without that, the federal government wouldn’t punish you for not complying.” “The federal mandate says you can do it in X,Y,Z and this just gives us the leverage to go a different way,” she said.

So apparently, Sen. Wyden wants options for states.  If they can accomplish the goals of PPACA without a mandate, then he wants to let them do it.

I don’t have a problem with that per se.  But I am not sure exactly how Sen. Wyden thinks states will get it done.  After all, even as Igor notes, states won’t be able to exempt themselves from the other requirements of the law.  There will still need to be community ratings, guaranteed issue, and so on and so forth.  You need the mandate (or a stiff penalty) in order to keep healthy people from gaming the system and opting out until they get sick.  This would lead to adverse selection, and make the insurance market unstable.  This doesn’t have to happen, and wouldn’t if people voluntarily all got insurance, but it’s the risk.

This isn’t a new theory, by the way.  Here’s the Urban Institute back in early 2008:

[W]e conclude that, absent a single payer system, it is not possible to achieve universal coverage without an individual mandate. The evidence is strong that voluntary measures alone would leave large numbers of people uninsured. Voluntary measures would tend to enroll disproportionate numbers of individuals with higher cost health problems, creating high premiums and instability in the insurance pools in which they are enrolled, unless further significant government subsidization is provided. The government would also have difficulty redirecting current spending on the uninsured to offset some of the cost associated with a new program without universal coverage.

I may give Sen. Wyden the benefit of the doubt that this isn’t all politics.  He did, after all, slip in the amendment that makes this position now possible.  So he might have felt this way for some time.

I’m confused, though.  The mandate was always part of his Wyden/Bennet plan.  I assume he had it in there because he understood the theoretical need for it.  While I appreciate his explanation, I still remain unconvinced his position would work for Oregon or other states.

*Seriously, Igor is my hero for the day.  I wish I could pick up the phone and get an answer from a Senator myself, but short of that, I’m thankful that he’s on the job.

Sam Stein reports that Senator Ron Wyden is now against the mandate (emphasis mine):

One of the most innovative voices in the health care debate, Senator Ron Wyden (D-Ore.), is accelerating the process of exempting his state from some of the national reforms passed under President Barack Obama.

The Oregon Democrat is seeking to take advantage of a provision he helped write into the legislation that allows states to set up their own health care systems as long as they meet minimal requirements established by the Department of Health and Human Services. In a letter to the state’s Health Authority office, Wyden announced that he will introduce legislation to accelerate the start date for state waivers from 2017 to 2014, if not earlier for Oregon specifically.

In addition, he strongly suggested that the state should use the provision to exempt Oregon from the individual mandate, which would penalize those individuals who refuse to purchase insurance coverage.

I would ignore this usually, but Sen. Wyden is among the most knowledgeable lawmakers we have with respect to health policy.  His Wyden/Bennet plan, most recently known as The Healthy Americans Act, is one of the most bi-partisan health care reform efforts in maybe, well, ever.  It even showed up during health care reform as “The Free Choice Proposal“.  It was radical, in that it could eliminate the employer based system we have now.  But it included many regulations and ratings that liberals liked, while also placing cost control more at the level of the consumer, which conservatives liked.  His plans have had the support of a number of knowledgeable people all over the ideological spectrum.

It also always included an individual mandate.

I don’t know why Sen. Wyden now wants to get rid of it.  If I had to guess, it’s probably because the individual mandate has become unpopular.  But if there’s another explanation, I’d love to hear it.

For now, this feels like politics.  As I’ve said before, the PPACA wasn’t my reform of choice.  But I don’t see how it works without an individual mandate.  Sen. Wyden knows this too, I’d imagine.

If this is just politics, then “boo”.

Medicare Advantage plans consume more taxpayer money per beneficiary than FFS. This is a fact.

That’s not to say MA plans can’t achieve lower costs, only that taxpayers aren’t getting the benefit if and when they do. Beneficiaries do derive some benefit from the over-payments, but only at the rate of 14 cents on the dollar (that does not mean the other 86 cents is plan profit, more here). It is also true that there are some spillover effects. FFS costs may be lower when MA enrollment is higher, but to my knowledge, this has not been quantified with data more recent than 2001. A lot has changed in the MA program since then. The size of the spillover today is uncertain, as far as I know (happy to be corrected on this).

But back to taxpayer costs. Below is a figure I’ve posted before that illustrates the relationship between MA payments and FFS costs. (Actually, it shows “benchmarks,” not payments, because plan-level payments aren’t available to me as a researcher. But we know from MedPAC that payments are only a few percentage points below benchmarks on average, and still well above FFS costs.)

In this figure, each circle is a county and its size is proportional to the county’s MA enrollment. Circles centered above the 45-degree line correspond to payments (benchmarks) above FFS costs. All the circle centers are above the line. Additional details are in a prior post.

Given the fact that MA plans are paid above FFS costs, you’d think folks in favor of harnessing the efficiency of the market to achieve taxpayer savings would be appalled. I am. This has got to stop. And that does not mean “eliminate private plans.” It means “stop overpaying them.” There are a lot of ways that could be achieved. I prefer a competitive bidding approach that includes FFS among the bidders. Details next week.

In a Kaiser Health News column today, James Capretta misunderstands my prior critique of Medicare Advantage (MA), a critique that I believe applies to Rep. Paul Ryan’s voucher plan (which his own staff has admitted to me). Capretta wrote,

Critics say Medicare Advantage plans — the private insurance options offered to beneficiaries — are inefficient and costly. But those same critics oppose vouchers for Medicare — even though that would set up a direct competition between the private plans and the traditional fee-for-service program. …

After all, if the case critics (see Austin Frakt’s August 19 KHN column) make is correct and private insurers simply can’t do the hard work of cost control as well as the government, then Medicare’s “public option” would presumably win this contest.

Kinda makes it sound like I’m one of those critics, that I think private insurers are incapable of reducing costs. Where did I write that? What I really wrote was this,

The politics of Medicare are such that Ryan’s idea, paying for care entirely through private plans, costs more. That’s not due to a market failure, but a political one. Congress likes to spend money; insurers, providers and beneficiaries like to receive it. Congress spends even more when it can satisfy those interests under the guise of a seemingly pro-market, pro-competitive program.

MA plans have a political problem. They are paid above FFS cost whether they can achieve below-FFS cost or not. The same political problem would befall Rep. Ryan’s voucher program because under his plan the HHS secretary has the discretion to set voucher levels. We can do better than that.

In a post on August 23 I followed up on this idea and described a voucher plan that does not suffer this problem. If an independent body, shielded from politics, is in control of voucher levels and other conditions described in that post are met, I would support a voucher plan. Moreover, I am in favor of a competitive bidding system (I’ve written about it in many posts going back a year or more) with a level playing field, as described in my August 24 post. I’ll describe it more fully next week.

Capretta clearly didn’t read all my writing on this topic. He just presumed I was anti-private plan. I never wrote that. I hope he’ll read my post next week on competitive bidding and be in touch if there is any uncertainty about my position.

Austin and I have been up and back this morning on the odd ways people have misinterpreted this post.  Avik Roy weighs in by talking about the fact that while health care is different from other markets, in that it does involve life-or-death decisions, that those aren’t as common as we think:

It turns out that the true range of life or death decisions in health care is rather narrow. If a poor woman gets hit by a bus and is sent to the ER, we all agree that America should come together and pay for that woman’s care: and, in fact, we do pay for it. If a physician makes a mistake, causing a patient to die or suffer disability, we have malpractice litigation for that—i.e., this is a problem upon which government-subsidized health care has no impact.

It would benefit those who believe that health care is incompatible with the free market to refine their arguments. A stronger liberal argument for socialized medicine would be: let’s let the free market reign in those areas of health care that are most like the rest of the market economy (i.e., non-catastrophic and elective care), and instead focus on socializing the aspects of the system that are most unlike the rest of the economy (i.e., catastrophic care).

I don’t disagree on his initial point – as a pediatrician I rarely have to deal with life-or-death decisions with my patients.  I do, however, need to deal with significant quality-of-life issues.  All the time.

When Avik calls for a stronger liberal argument, he’s ignoring the fact that many have been making it for a while.  I, for instance, have no problem with using the free market for some things.  I said this just two weeks ago:

I come down somewhere in the middle.  I’d say that for the stuff we agree everyone should get, that comprises the base set of quality health care, you ignore the moral hazard.  We want people to get that, and we should make it as easy as possible.  But for stuff that is unnecessary – and there is a lot of it – we let people get additional insurance to cover that.  Or we cost-share that.  Or we make them pay for it themselves.

I don’t think, for instance, that insurance should pay for elective plastic surgery.  I don’t think it should pay for Lasik.  I don’t think it should pay for more expensive drugs when equally efficacious generics are available.  I don’t think it should pay for full body CAT scans or unnecessary screening tests.  I don’t think it has to pay for single rooms or fancy food or satellite TV.

All of those things – cost share away.  Free the markets.

But for things which do work and yet still are not life-or-death decisions, like asthma medications, diabetes check-ups, appropriately recommended colonoscopies and mammograms, and so on, I think that we should avoid the free market.  We want people to get that stuff, even need them to.  And even small increases in cost-sharing have been shown to dissuade them from it, resulting in bad outcomes and sometimes increased cost.

Avik and I don’t disagree in principle, we disagree on the details.  And I think if Avik looked closely, he would see that many people arguing the more “liberal” side have been making strong arguments in this fashion for some time.

Earlier I alluded to the cost risk allocation problem in health care. Costs are high. Who should bear the risk, individuals, insurers, physicians, the government? I suggested that the risk should be allocated differently for different populations. The elderly and ill should, perhaps, bear less risk, the young and healthy more, and so forth. ACOs are an attempt to shift risk to provider organizations. CDHPs are based on shifting more to individuals. Both models can do some good, but for different populations. That’s why I never claim that either is the solution or totally wrong. It’s more complicated than that.

Risk can be allocated differently by diagnosis or treatment too. This dimension of risk allocation is compatible with ACOs and CDHPs, or any number of other designs. The concept is value-based insurance design, something I’ve written about before. It’s a way to take the full conclusions of the RAND health insurance experiment and other, related work seriously and to fine-tune risk allocation accordingly.

From that work, we know that some people–those with chronic illnesses or the elderly–really do suffer worse outcomes when they have to pay for more of their care, while others–healthy, working-age individuals–generally do not. To the extent that a specific type of care would improve outcomes (relative to other types of care or to no care) and/or reduce future costs, that should be reflected in cost sharing. One should pay less for care that is more beneficial.

But if an individual pays less, some other entity pays more. The cost risk is shifted, but to whom? The answer is, “It depends.” Insurers can bear some risk. So can the government. What’s best can be settled via a competitive pricing system. I’ll have a lot more to say about that next week, so forgive me for just leaving it hanging there.

Rather than repeat a fuller description of value-based insurance design and some of the research relating to it, I refer interested readers to a this prior post.

I think it is worth emphasizing the key underlying idea here. The health care cost problem is a risk allocation problem. If risk is allocated optimally, costs will come down (relative to trend) with minimal reduction in (or better an increase in) quality.  To recognize that simple fact is already to admit that there is an optimum, we’re likely not at it, and that it can vary by population and even health condition. So, it is complex in detail and not amenable to a one-size-fits-all insurance design.

If past experience is any guide, some will find something to disagree with in what I’ve written above. That baffles me. Does anyone want to spend more for worse outcomes? (It seems so.) Does anyone not think financial incentives and price signals matter in health care as in all other industries? (Apparently.) That’s all I’m talking about, harnessing them to obtain far better results. Welcome to health economics.

Unless you’ve been under a rock, you’ve heard that Governor Tim Pawlenty has declined the discretionary federal health care money that comes with PPACA:

Republican Gov. Tim Pawlenty Tuesday ordered all state agencies to not to submit applications to any health care funding from the federal government related to the health care overhaul.

Any applications must be either required by law or approved by the governor’s office.

Pawlenty, who appears to be gearing up for a run for president in 2012, has long decried the health care overhaul, which opponents call Obamacare, and has pledged to join a lawsuit to undo it.

“Obamacare is an intrusion by the federal government into personal health care matters and it’s an explosion of federal spending that does nothing to make health care more affordable,” Pawlenty said in a news release.

That last sentence is when I wish there were more real reporters.  Could you push him on any of those last statements?  Just one follow-up question in what I am sure will be any number of articles on what this means for his Presidential bid?

Notice that Gov. Pawlenty isn’t stopping all of PPACA.  He even requested money for abstinence only education from PPACA.  Nor has he stopped seniors from getting their Medicare donut hole $250 checks (the elderly vote, you know).

But look, if he has a point, I’d like to hear it.  I would hope the media would try and seek it out.  Help us to understand how this stand helps the people of Minnesota (whom he represents right now).  Help us to understand how this helps the businesses of Minnesota, many of whom have already applied for reinsurance grants (they could use the help).  Help us to understand how blocking this one tiny piece of the law does more good than harm.

Instead, we get things this (emphasis mine):

Leaving aside now the substantive merits of the Minnesota governor’s executive order, barring some huge development, opposition to ObamaCare will be one of THE animating battles of the war for the Republican nomination. Pawlenty’s move allows him to argue that he stood on the frontlines as an elected official and tried to thwart the law through aggressive means.

“Leaving aside now the substantive merits”?  Are you kidding?  How about you leave aside the politics of a Presidential election that is more than two years off, is impossible to predict at this time, and likely will go through any number of “Game Changes” between now and then.  You can cover those in your next book.

How about you actually explain the substantive merits first?

It’s clear to me from Ezra Klein’s reference to my “Health care is different” post that I need to say more.

Many suggest that the solution to our health care system’s problems is to be found in a more market-based approach. Consumer-directed health plans are at the center of this concept. If you make people spend more of their own money, they’ll be more prudent users of care and seek better value at lower prices. That’s how other industries work, and we don’t complain much about them. Why should health care be any different? Get the government out of the way. Give vouchers to Medicare and Medicaid beneficiaries. Let people shop for the best deal on the unfettered market. And, moreover, reduce first-dollar, third-party payment by encouraging high-deductible plans.

About now you’re thinking I disagree with the notions I just expressed. Actually I don’t. They have merit, which I recognize, accept, and support. Where I take issue is that they are not solutions to all the problems in our system. They can address, at least in part, some of the problems, though even there more is required. It’s just not that simple. (Again I strongly encourage those who thinks otherwise to read Katherine Baicker and Amitabh Chandra, “Myths and misconceptions about U.S. health insurance.”)

That brings me to the post to which Klein referred. I illustrated how health care is like other industries,

Health care markets and the airline industry both have barriers to entry. The former requires special licenses, the latter requires considerable capital and regulatory compliance.

Trust in one’s doctor is important, as is trust in one’s lawyer.

Information assymetries exist in health care as in auto repair. Your mechanic (doctor) knows more about your car (your internal organs) than you do.

Health services and health insurance products are differentiated and complex, as are other products like cell phones or personal computers.

Health professionals want a good income, as do those in other fields.

That would suggest that if we just make health care even more like any of those industries, by reducing third-party payment, government regulation, and so forth, we could harness all the characteristics of the free market–characteristics that we don’t complain about (and even like) with respect to other products and services. True!

Except that health care is different, in one crucial way. I said it, and so did Klein:

First, if you don’t get good health care, you might die. That makes it hard for individuals to say no to things, it makes it hard for insurers to resist the backlash that comes when they say no to things, and it makes it hard for government to say no to things. [Bold mine.]

This may not seem important to the wealthy, young, and healthy. But to poorer, older, and sicker individuals (e.g. those on Medicaid and Medicare) it dominates. It is very hard to be a prudent purchaser of care when you’re in the ICU or responsible for the health of a vulnerable population. That alone suggests that an emphasis of moving the cost risk to individuals isn’t sufficient. There is plenty of cost risk to spread around. Some of it should be borne by physicians and hospitals, some by insurers (public and private), and some by individuals.

The optimal allocation of risk across these entities is not likely to be the same for the young and healthy as for the old and sick. That might be OK for buying a cell phone–overpaying for or under-utilizing cell phones won’t do you much harm–but it isn’t for buying health care. Why? Because health care is different. A mistake costs far more (your life) and you really do know far less about it than the salesman or practitioner, particularly when you’re very sick.

Some reduction in costs at minimal to no reduction in health may be possible with increased personal responsibility. The RAND health insurance experiment has demonstrated that, on average. However, that fact does not hold for all sub-populations. The health of individuals with certain chronic illnesses included in the RAND HIE was harmed by increased cost sharing. The RAND HIE did not include the elderly. More recent work has shown that increased cost sharing for Medicare beneficiaries can lead to adverse outcomes and doesn’t necessarily save taxpayers money.

I’m all for using square pegs in square holes. But when the hole is round, it just doesn’t fit. Forcing it is bound to break something, or someone. And it isn’t necessary. A health policy more nuanced than “free market for all” isn’t really that much harder. It just takes a little more thinking than can be conveyed on a bumper sticker.

A longtime reader writes:

OK newbie, here is something that has given me pause over the last few weeks.

Health Exchange begins in a few years, and you are an insurance broker in 2010 (notice the attention they are garnering in the press nowadays). As you go through the Kubler Ross stages, you realize your imminent demise is a potential reality.

The possibilities are as follows:

1. Get your trade group to lobby the hell out of the Washington and find a vestigial role in the new exchange. You are unnecessary, perhaps, but “we will find a place for you,” cause, well…that is what Congress does best.
2. You jump ship, and begin that correspondence course you always dreamed of—time to get out, if you know what I mean. You see the flat line on the monitor beginning to coalesce.
3. Do not look towards the Democrats, as they are staring in the opposite direction. “Hey, that is the market for you, kill or be killed.” Taste your own medicine Wall Street boy.
4. Look towards the Republicans, because it is ObamaCare after all, and this is not a “free market” (it is a regulated utility), and we will need these folks to navigate through a consumer-oriented landscape.
5. Hope you are one of the few left standing to sell the niche products to fill holes and cater to the affluent.

OK smart guy, comment.

I will, thank you very much.

Long term, I have no idea what will happen.  Maybe the worse fears of conservatives will come true and we will shift over time to a single payer system.  Maybe the whole thing collapses and insurance goes away.  Maybe nothing changes at all.

But in the short term, I don’t think things are nearly as dire as you think for insurance brokers.

First of all, those brokers which help large businesses provide insurance to their employees (the vast majority of insurance) will continue to function as normal.  Life will go on.

For those that sell individual insurance, well, that will still need to be sold.  Yes, it will be more tightly regulated.  But never underestimate the power of government to make things more complicated than they will need to be.  Do you think the average person will understand the difference between a bronze, silver, gold, or platinum plan?  Or a catastrophic coverage plan versus a high deductible health care plan (if those exist)?  There will still be a market for brokers to help people make choices and navigate the system.  In fact, I can imagine with a more level playing field, insurance companies will be more desperate than ever to subsidize good salespeople who can get the public to choose their plans.

Brokers aren’t happy about the medical loss ratio cap – that will reduce the available amount of money for commissions.  But they have to be thrilled that the public option got crushed.  They also should be happy that the exchanges are states based and not national.  It’s not all bad news for them!  In fact, it’s possible that some states may have markets outside the exchange (without subsidies), but that’s not totally clear.  If there are, it will be even more complicated – and good for business.

Nor is this group foolish.  They have already been hard at work getting HHS to include them in the portal healthcare.gov.  Moreover, they scored this:

Thirteen states will sponsor a resolution affirming the “indispensible role that licensed insurance professionals play” at the NAIC Executive Committee meeting today, according to a draft obtained by PULSE. The resolution will specify that Exchange Navigators, a reform-created designation for individuals who help consumers obtain coverage via the Exchange, should stay out of licensed brokers’ territory, “limited to directing consumers to government agencies and licensed insurance professionals.” The resolution comes on the heels of a similar health committee amendment Monday. It signals that NAIC will watch out for brokers, who have worried about their business as consumers purchase from the Exchange directly and turn to Navigators, who do not require licensing, for assistance.

As I said before with insurance companies, this industry is very, very good at what they do.  Don’t count them out.