The Incidental Economist

Everybody is entitled to their opinion. But if one wishes to convince critical and deep thinkers of something, it takes a pretty good argument. For example, if one believes that government should play little to no role in health care, it’d be nice to back it up with something that could convince the distinguished group of 23 economists that signed this letter back in November of 2009.

Or, if one believes that the ACA ought not to have passed, one would not be in the company of the 80 or so scholars who signed this letter in February of 2010.

I know full well, one could round up 80 or even 800 scholars to sign opposing letters. My point is this: government is and has been deeply involved in health care for decades. The ACA has passed, which is evidence that the argument for it not only convinced the scholars who signed the letter referenced above, but a majority of the members of Congress (including a super-majority of the Senate) and a president. Clearly a good argument–not one that convinced everyone–but a good one, has been made in favor of health reform.

What’s the good argument for going undoing it? That we have a looming budget problem is insufficient. We’d have one without health reform. That health care costs are out of control is not itself a reason to undo reforms to health insurance markets. I agree more cost control is needed. That’s the place to start a discussion.

Any argument that begins, “It costs too much,” should end with, “So we need more reform.” I would be more than happy to begin right there. Put aside “repeal.” That’s clearly politically charged. Just start with, “Let’s move forward with something that helps.” Then I’ll listen. Then you may convince me of your idea. And if you convince me, maybe you can convince one or another of those more distinguished and influential than I am. You know, someone who signs open letters to the President.

My advice: if you want someone to listen, don’t start arguing. Start with a good argument. Don’t pick fights. Pick up a shovel. Get to work! Build a coalition. Convince people of your good idea. Don’t harangue them about how they are wrong. There is a difference.

The following entertaining passage by Steve Landsburg is worth a read, as is the entire post from which it is excerpted.

[E]fficiency analysis strikes down political smokescreens. Like this: …

Economist: Your program [to subsidize health care for the poor] costs a billion dollars and delivers half a billion dollars worth of benefits. That’s inefficient. … [Y]ou could take that billion dollars and deliver a full billion dollars worth of benefits instead if you spent it a little differently. Why not just hand the cash out to poor people?

Politician: Because I don’t want to help all poor people. I only want to help sick poor people — and this is the only way I can think of to do that.

Economist: Ah. So your goal here is not to make the health care system work better after all. Instead it’s to transfer resources to sick poor people.

Politician: I guess so.

Economist: That’s fine. Now we can have a healthy debate about whether that’s what we want to do.

And now, you see, thanks to the economist’s insistence on thinking about efficiency, we end up having an honest debate about the politician’s real goal instead of a dishonest debate about the politician’s feigned goal. However the debate turns out, that’s a useful exercise.

I agree that thinking about efficiency is completely worthwhile. I’ve said so in blog posts and done so in my work. Making the not-too-risky inference from the above quote that Landsburg would consider the ACA a transfer program (since it subsidizes health care insurance for lower-income individuals an families), I agree with him on that too.

However, I disagree that the politician’s goal in his hypothetical is necessarily to redistribute wealth. In fact, I think the politician was duped by the economist. This reminds me of Greg Mankiw’s claim that the ACA is an merely an excuse to redistribute income. Here’s what I wrote in response:

There is a perfectly good reason why the ACA must be redistributive. By now we know how avoidance of adverse selection requires that a mandate accompany outlawing pre-existing condition exclusions. And low-income subsidies must accompany a mandate (if necessary, see Krugman for a review of the logic). If an individual can’t afford health insurance without a subsidy, it’s not helpful to provide one and to adjust the tax system to make the overall package distribution neutral. That’s like saying, “Can’t afford insurance? Let me help with the cost. Now pay me back.”

Putting this differently, there are externalities at work that justify redistribution. The goal is to address the externalities. Redistribution is just the necessary means.

The following is a guest post by Dr. Bradley Flansbaum, Chief, Hospitalist Services at Lenox Hill Hospital in New York City.  He is a practicing physician with a strong interest in health policy and engages in advocacy work through the AMA, Society of Hospital Medicine (SHM), and the American College of Physicians (ACP).   He blogs at The Hospitalist Leader.

That line came from none other than Barack Obama at the Whitehouse Correspondents dinner this year, obviously lampooning the glass as half empty, 24/7 news cycle machine .  Normally, I accept the tabloid trough feed of the day, the presumed inspiration for the above laugh line, with my usual healthy sense of disdain or merriment.  However, a recent slew of postings commenting on the shift in Whitehouse and HHS messaging for the promotion of the new health law preoccupied and bothered me.  This type of commentary normally does not get under my skin.

I deliberated and was not sure what I found disturbing, the attacks, the methods of ACA promulgation by its architects, or whether the law itself was flawed, meaning is “is it as bad as they say it is?”

The root cause of the blitz is multifactorial.   As such, it is likely governing philosophy, conservative or liberal, that determines how you perceive and rank the motives.  On that short-list is the troubled economy, poor Whitehouse marketing, folks’ inability to appreciate the complexities of the law, or real gripes with the principles of reform, just to name a few.

The “new” selling points as outlined in the referenced memo are not minor changes as Igor Volsky or Kate Pickert posit.  They read like retractions and timidly portray the law as a less than strident advance.  Knowing the foundation for the less than ideal acceptance of PPACA (and for all you revisionists, remember how six months ago, the country would be “loving” it by now), is a combination of fear, unemployment, and everything mentioned above, I realized it was the attacks that still angered me.  I do not mean the demagoguery, the feeding of meat to the anti-ACA masses, or the snipes.  What I mean is the utter impossibility of anything McCain, conservatives, or the free marketeers could have put on the table enduring the same scrutiny at this juncture in time—and not the claptrap the GOP was pushing last minute.  I am talking a fully realized bill from the principled right.

I wish I could remember who said it, but a policy wonk stated there are four constituents of major importance you must get on board to move a bill forward:  1) the AMA, 2) the AHA, 3) AHIP, and 4) PhRMA/AdvaMed.  Lose one, and you can still move something through.  Lose two, and your dead.

I considered the republicans and the health care summit:  medical malpractice reform, buying across state lines with a Federalized, sensibly designed high-risk pool, consumer empowerment and transparency, etc., all concepts that might work—but with the right tools, safety nets, and oversight (I am a centrist, and not ideologically pure lest you think I am totally ACA adoring ).  Assuming they were in place, where would the advocates of this type of system be six months after passage?  Better yet, what kind of fakakta bill would they have gotten after their journey through the grinder?

Think malpractice reform, actualizing that, and how many pages that portion of the bill would encompass.  An important point the GOP overlooked, or failed to mention, was states oversee tort law and not the federal government.  Can you imagine that legislative headache and the machinations of standardizing anything resembling a national policy?

Even ignoring that, safe harbor creation with sensible use of evidence-based medicine to ameliorate defensive medical practice was also a big talking point.  To wit, a 5-10% reduction in the number of MRI’s, cardiac catheterizations, and unnecessary pathology specimens might be the end game if we minimize unnecessary practice.  Codify that however, and along with the savings, you will have the radiologists, cardiologists, and pathologists with a bit less pocket change.  The AMA, ACC, etc., will not be happy.  Minimizing assurance behaviors also reduces the need to admit diagnoses like chest and abdominal pain, which in turn reduces hospital volume and bed days.  Hospital margins are thin these days, and there is a reason hospitals pay their dues to the AHA.  Expect to hear about it, and keep in mind the most radical estimates of resource overutilization related to defensive practice are 15-20%.

On the delivery front, I recently read a brief from the American Enterprise Institute on the Utah exchange.  What they describe as sensible incremental reform with consumer empowerment, unleashing the forces of the free market that would be a model for national change, to me, is a trial that will play out for years as risk adjustment and quality measurement shake out.  It is not a bad idea, but they will make mistakes aplenty, and I assure you, critics would have a field day.  One man’s “rational evolution” is another man’s wrongheaded experiment.  That is another couple of hundred pages in the bill by the way.

Anyway, overly simplified I know, but you get the idea.  You can fill in the blanks with just about anything conceptually related to health care, left or right and it would all be a jumble 180 days after passage.

In the end, we would have a mash up that the minority–Pelosi and Reid, would describe as a “gargantuan 2000 page failure of the American people that the GOP rammed down our throats!”  Suddenly, a rapacious left would rise up and engage in the same behavior as the conservative detractors I am criticizing now.

My point is that as Aaron and Austin have stated many times on this blog, whether we get to the Promised land with a value-added tax, value-based purchasing, or vouchers is immaterial—as long as it is equitable, fair, and it works.  However, no matter what passed, at this stage, frankly, we would be, and are, stuck with a helluva problem, and opponents need to know their Shangri-La version of PPACA would be no charmer either.  Talk is cheap, and they would be in a similar pickle.

Regardless, I do not worry about repeal or defunding, but I do have concerns about resistant states where the messaging is ugly, and individuals push back and prolong implementation.  Len Nichols said it best: “reform is a participation sport.”  Do not forget PPACA is now law, and there are opportunities for reach outs and change.  Obfuscation and bluster will only hurt most of the folks in this country who are paying gobs (or not) for a system badly in need of repair.  At some point, I hope we can move on begrudgingly, begin to compromise, and make the darn thing work…warts and all.

PS–If you are speculating as to whether we will ever perform a wart-ectomy, this segment is a nice primer on potentially finding a cure.

Since I just dinged Senator Baucus for admitting to not reading the bill, I feel compelled to talk about this as well.

If you’ve been following me at all, you know my dislike of people’s supposing they know others’ reasons or explanations for things without asking.  Here’s a perfect example.  Here’s Kevin Drum picking up on another:

Megan McArdle reacts to a story from Kaiser Health News suggesting that healthcare reform might prevent universities from offering low-cost student insurance policies:

I imagine that the administration has been blindsided by this one….Had this been written into the law, it probably would have passed unnoticed, but the farther this presses into the spotlight, the harder it’s going to be to arrive at a politically acceptable answer.

Chalking this one up to the cost of passing multi-thousand page bills that no one has read.

Hah hah! Stupid Democrats didn’t even read their own bill! I imagine we’re going to be inundated with stuff like this over the next few years, as critics of reform crow over every story that suggests even the remotest possibility of some negative outcome on one benighted group or another. But here’s my prediction: virtually none of these self-serving pity stories will amount to anything.

You should read the whole piece because Kevin easily explains a number of things – some of which appear in the article Megan cites herself – that explain that this is likely much ado about nothing.

Did Megan pick up a phone and ask anyone who voted for the bill about this?  Did she talk to anyone in HHS?  Or did she decide – all on her own – that it’s because no one read the bill.

BTW, Austin touched on this tangentially right here.  Why don’t people just ask?

Sigh.

Sen. Max Baucus (D-MT) one of the main authors of the new health care law, admitted in a Montana town hall meeting that he did not read the entire 2,400 page piece of legislation, according to the Flathead Beacon.

Said Baucus: “I don’t think you want me to waste my time to read every page of the health care bill. You know why? It’s statutory language. We hire experts.”

To anyone who has worked in the U.S. Senate this is not at all surprising but the politics of this line of attack has dogged Democrats for months.

Yes, it’s long.  Yes, legislators have staffers who read it for them.  Yes, it’s common practice evidently for politicians on both sides of the aisle not to read bills.

I don’t care.

This is the most controversial and important piece of legislation likely passed this year.  You’re head of the Senate Finance Committee, which was largely responsible for much of the bill.  You know you’re going to get the question.

Read the bill.

It’s not really 2,400 pages.  If you take the bill, which has huge margins, and copy the text into a word document it’s a few hundred pages.  Crack open a beer, put your feet up, and read it.  You have to fly up and back to Montana, right?  Take that down time and read it.  I’m not asking that you understand every single part.  I’m not asking that you have perfect recall.  I’m asking that you spend one night sitting in bed and read the thing so you can say you did.

I’m sorry – it’s part of the job.

Know what?  I’ve read the whole bill.  Cover to cover.  I found that I was asked if I read it every single time I talked about the bill.  I got tired of the distraction, and so I read it.

While you’re at it, please prepare yourself for the follow-up question that is inevitable.   “If you read the bill, you surely know that sub-section blah-blah calls for thus-and-such. That contradicts something you just said. Did you read the bill or not?”

I’d answer that I don’t have perfect recall, and that no one should be expected to memorize it.  I will be happy to go and double check the section of the bill you are talking about and get back to you.

Don’t politicians have people to help with this stuff?

The Robert Wood Johnson Foundation’s State Health Access Reform Evaluation program and the Urban Institute have a report out on who remains uninsured in Massachusetts, and Igor Volsky has a nice summary.  You may remember that Massachusetts enacted a form of health care reform years ago that is somewhat like the PPACA.  So by looking at who remains uninsured, we might get a clue as to who will remain uninsured nationally after 2014.

First of all, let’s recognize that Massachusetts had an uninsurance rate of 4.1% in 2008, which is much better than the national average of 15.1%.  Yes, it’s expensive, but I don’t think it was ever designed to contain costs (a flaw).  But who is this 4.1%?

Consistent with earlier work on the characteristics of uninsured adults in Massachusetts and in the nation as a whole, we find that the adults who remained uninsured under health reform in Massachusetts in 2008 were more likely than those with insurance coverage to be:

- Male, young, and single

- Racial/ethnic minorities and non-citizens

- Unable to speak English well or very well

- Living in a household in which there was no adult able to speak English well or very well

Compared with insured respondents, uninsured adults also reported substantially lower educational attainment and less employment and had lower family income and greater financial stress.

They make the logical argument that if you wanted to target people for interventions, you would look for younger, single, minority males, especially those who don’t speak English well or are non-citizens.  Good information to have, I guess.

But I’m not so sure that we will see entirely the same thing with the PPACA.  I’m taking a chance here, because what comes next seems so strange, I’m afraid I’m missing something.  If so, let me know.

The Kaiser Family Foundation has a nice subsidy calculator up that you can play with.  You enter information about your income and situation, and you get to see how much health insurance and care will cost you in 2014.

It’s not all good news.

Let’s say you are a 60 year old divorcee in 2014.  You make $46,136, which is 401% of the poverty line.  You are therefore eligible for NO subsidy from the government.  Your premium will be $10,162.  Should you actually need care, your out of-pocket costs will be capped at $6250.

So in a best case scenario, your health insurance/care will cost you 22% of your income.  In a bad year (or a regular year if you have a chronic illness) your health insurance/care will cost you 36% of your income.  Um… that’s not affordable.

Granted, the cost is so high that you would likely not be subject to the mandate.  Great.  So you continue to have the option to be uninsured.

I worry that the people who are going to be left out in the PPACA are those making just over 400% of the poverty line.  Because, ironically, if you make just a little bit less – say $45,906 (399% of the poverty line), then – due to subsidies – your premium will cost you $4361.  That’s less than 10% of your income.  And your out-of-pocket costs are capped at $4167.  So the most you could pay in a year would be 19% of income.

That’s still a lot.  But it’s WAY less than if you make just over the 400% line.

I have yet to see a good answer for what the government is going to do when people start asking for pay cuts to get under the 400% line.  I don’t see why it won’t happen.

The following has been included in the 19 August 2010 edition of Health Wonk Review.

Jonathan Cohn has a smart piece up at The American Prospect on the daunting task of getting insurers to comply with the new regulations of the PPACA:

First, the good news: The most important new restrictions on insurance-company behavior are also the most straightforward. These are the rules guaranteeing that people who represent high medical risks because of their personal characteristics or pre-existing conditions have access to policies at the same prices as healthy people do. For the most part, this is already true for people who get insurance through large companies — but not for people who buy on their own or through small businesses. As of 2014, under the law, insurers that sell to these markets will have to practice “community rating” (charging everybody the same rate for a given policy) and “guaranteed issue” (selling policies to anybody willing to pay the premiums).

The Affordable Care Act leaves relatively little to chance here. The law spells out the requirement unambiguously, allowing insurers to vary rates only by geographic area, tobacco use, and age (on a three to one ratio between old and young). In 2014, the prices for all policies will be publicly listed on the new insurance exchanges, where people can sign up for them. Enforcing the rule will be a simple matter of checking what insurers are charging for policies and investigating any reports of discriminatory pricing in policies sold outside the exchanges.

Anytime I hear someone claim that a law or regulation leaves relatively little to chance, I get a little shiver.  Give credit where credit is due.  Insurance companies are very, very good at what they do.  And, while many politicians and activists are still campaigning and crying for a repeal of PPACA, you’re not seeing that from the insurance companies.  They are (probably smartly) much more concerned with doing the best they can under the new landscape.

I have no doubt they will succeed.  I made this argument a while ago talking about the limits of the public option’s power, but it still applies here.

In an important paper in the New England Journal of Medicine in 1997, researchers examined how people moved in and out of Medicare HMO plans and traditional Medicare.  See, back in the 1990′s there was a swing to “managed care”.  Private HMOs began to offer their services to Medicare recipients.  If you were over 65, you could choose a Medicare HMO or regular Medicare on a month-to-month basis.  If you chose the Medicare HMO, you had to use their providers and hospitals, but otherwise it should be similar.  So, here were the rules if you were eligible for Medicare:

• You could choose any plan
• You could switch up and back
• No one could deny you access to their plan
• The benefits in the plans could go over a specific minimum (public Medicare), but not below

Got that?  No cherry picking allowed.  It’s Medicare, so it’s one big community rating.  This looks very similar to how plans would function in the exchange (except here, there was a public one).  So what happened when this was set up and let loose?  Guess:

Methods We used Medicare enrollment and inpatient billing records for southern Florida from 1990 through 1993 to examine differences in the use of inpatient medical services by 375,406 beneficiaries in the Medicare fee-for-service system, 48,380 HMO enrollees before enrollment, and 23,870 HMO enrollees after disenrollment. We also determined whether these differences were related to demographic characteristics and whether the pattern of use after disenrollment persisted over time.

What did the researchers do?  They looked at Medicare billing records for over 375,000 elderly Americans over a number of years.  This allowed them to look at how much inpatient care those people used.  They also looked specifically at how much care they used in the year before anyone went to an HMO and the three months after they left an HMO.  If there is no cherry picking, then they should find that the amount of care used should be the same in all of those groups and times.

Results The rate of use of inpatient services in the HMO-enrollment group during the year before enrollment was 66 percent of the rate in the fee-for-service group, whereas the rate in the HMO-disenrollment group after disenrollment was 180 percent of that in the fee-for-service group. Beneficiaries who disenrolled from HMOs re-enrolled at about the time that their level of use dropped to that in the fee-for-service group.

What did the researchers find?  People who wound up joining the (private) HMOs used 66% less care before joining than those who stayed in the (public) Medicare group.  Somehow the private insurance HMOs figured out a way to get the healthy people to jump ship out of the another plan into theirs!

Not only that, but people who left the (private) HMOs and went back to the (public) Medicare used 180% more care after leaving than the people who stayed.  Somehow the private insurance HMOs figured out a way to convince the sicker people to jump ship back to the public plans.

So we had a system where plans were in an exchange like environment.  Regulations prevented cherry-picking.  And yet, the insurance companies figured out a way to preferentially cover healthy people.  And this was competing with a giant government program.

Insurance companies are very, very good at what they do.  I don’t doubt that they will find ways to remain profitable. That’s not a moral judgment.  I don’t hate them for it; it is their nature.

The Medicare-HMO revolving door–the healthy go in and the sick go out. Morgan RO, Virnig BA, DeVito CA, Persily NA. N Engl J Med. 1997 Jul 17;337(3):169-75.

This is a repost/update of my last piece on Rep. Ryan’s “Roadmap” from my old blog.  Still relevant:

Rep. Ryan is disappointing me. He has a defense of his “Roadmap” up. Specifically, he wants to talk about how his plan will affect Medicare. In his own words:

We do not have a choice as to whether Medicare will change from its current structure. It is being driven to insolvency. An honest debate requires a serious discussion of how Medicare will avert its collapse and be made sustainable. Unfortunately, but not surprisingly, the Democrats’ political machine has attacked my contribution to this debate, making the false claim that the only solution put forward to save Medicare would “end Medicare as we know it.”

The CBO has said that my reform plan, “A Roadmap for America’s Future,” would put Medicare on a sustainable path. The plan protects and preserves Medicare for those enrolled now and for those who will become eligible in the next 10 years, while reforming the program to ensure it will be there for younger generations. Future seniors would have access to the same coverage I enjoy as a congressman.

OK. First of all, no one is arguing against the fact that Medicare might have to change from its current path to be sustainable. But part of the reason that path was made worse was because of the huge unpaid for addition of Medicare Part D, which was not passed by the Democratic machine. ARGH. Look, he’s made me make a partisan argument. Unforgivable. Deep breath.

Rep. Ryan, your plan for Medicare is not crazy. It’s not corrupt. It’s not morally wrong. But I’m sorry, it absolutely would end Medicare as we know it.

Medicare right now is a defined benefit plan. Everyone knows exactly what they are going to get from the government and that’s what happens. Every year, the government (CMS) figures out how much it will cost to give those defined benefits, and it pays the bills. There are pros and cons to such a plan, but that’s Medicare as we know it.

You would like to change Medicare to a defined contribution plan. In that plan, everyone knows how much money (in a voucher) they are going to get every year, and then they go out and buy insurance. Every year, the government sets how much it is willing to pay, and gives out the vouchers.

A defined contribution plan is NOTHING like a defined benefit plan. Going to a voucher system, is a total change from Medicare. It’s the “end of Medicare as we know it”.

Medicare right now is the equivalent of Canada’s single payer health care system. You want to end that; you want to privatize it. It’s a radical change. Own it. Deal with it.

Your proposal would be a much greater disruption of Medicare than anything in passed in health care reform recently. Yet many of your colleagues have said that any cuts to Medicare would be horrible. Did you share this view with them earlier this year? I ask, because I’ve always felt that the demagoguery about cuts to Medicare was foolish. I’m not sure you’ve always been consistent. A wonk would clarify that.

The irony is that you keep talking about the CBO as if they were the gold standard of knowledge in terms of how reform will affect the budget in the future. Did you share this feeling with your colleagues when they were debating health care reform earlier this year? I ask, because I’ve always felt the CBO was credible. I’m not sure you’ve always been consistent. A wonk would clarify that.

Another irony is that what you are proposing, giving people money or vouchers to buy private insurance, sounds much like the exchanges recently passed in the PPACA. Right? How is it different? Did you share your feelings on the value of this type of setup with your colleagues when they were debating health care reform earlier this year? I ask, because I’ve always felt the exchanges seemed like something conservatives would support. I’m not sure you’ve always been consistent.

A wonk would clarify that.

UPDATE: Paul Krugman clarifies a point I’ve been trying to make.  A true conservative wonk would answer the challenge of ending Medicare as we know it with, “Yes, and we should.”  There are arguments to be made by serious people who think that a voucher/defined contribution system would be superior.  I have not yet been convinced those arguments are correct, but there are people I respect who continue to make them.  What I don’t respect are people who don’t appear to understand those arguments, and think that somehow you could take Medicare, turn it over to private insurance, give people vouchers that may not be enough to cover premiums in the future, and claim with a straight face that it’s still “Medicare as we know it.”  Come on.

More and more I’m sticking closer to my area of expertise in my blog posts. But this will never be a mono-themed blog. My thoughts are too diverse, and I blog what I think.

For a moment or two I thought about Virginia’s ACA challenge. Then my brain started to hurt (law is not for me). So I asked Jim Hufford what he thought. In short, he thinks the ruling to allow the challenge to go forward is a muddle of conflation or conflation of muddles or legal arguing beetles in a poodle paddle battle bottle muddle:

The opinion conflates implementation of the ACA’s Medicaid and insurance-regulation reforms with implementation of the mandate—even though the state has absolutely no role in the latter. It conflates Virginia’s “sovereign” interests with the interests of its citizens. It conflates a single, declaratory enactment of the Virginia legislature with the full breadth of state “sovereign” powers. It conflates the mandate’s minimum coverage requirements with its penalty. And it conflates the scope of the commerce power with that of the taxing power.

For the most part, all that muddling and conflation is achieved obliquely—e.g., through a suggestive quotation from plaintiff’s counsel. And though I’m not worried about the mandate’s long-term prospects, I’d be a lot more comfortable for now if Judge Henry Hudson didn’t seem so comfortable with the arguments of the mandate’s opponents.

No wonder I’m so confused! It’s hard to make sense of the senseless. Now I’ll return something far more straight-forward, like what to do about escalating health care costs (ha!).

The following has been cross-posted at The New Republic’s Citizen Cohn.

During debate over and since passage of the Affordable Care Act (ACA), there has been some concern over whether the individual and employer mandate provisions will work.  Will employers drop coverage in large numbers once their workers can purchase insurance through exchanges? Will enough individuals game the system–purchasing insurance only when sick–to destabilize those exchanges? If the Massachusetts experience is any guide, the answer to both questions is “no.”

At first glance one might think the ACA’s and Massachusetts’ mandates wouldn’t work because the penalties for noncompliance are low. For example, the employer mandate in Massachusetts has a very weak penalty, just $295 per employee per year, far below health insurance premiums and the ACA’s penalty. But employers have not been dropping coverage in Massachusetts. In their recent NBER paper, Colla, Dow, and Dube summarize the relevant empirical findings:

Based on a pre-post comparison from a Massachusetts household survey, Long and Masi (2008) found no evidence of dropped coverage or restricted eligibility, and no major changes in the scope of benefits, network of providers, cost to employees or quality of available care under health plans. They also found that employer sponsored coverage had expanded due to increased take up among employees. Gabel and colleagues surveyed Massachusetts employers, finding that the percentage of firms with 3 or more employees offering health benefits increased from 73 to 79 percent, that there was an increase in firms offering Section 125 plans, and that Massachusetts employers were less likely than other US firms to terminate coverage or restrict eligibility (Gabel et al. 2008, Gabel, Whitmore, Pickreign 2007). Furthermore, evidence from Massachusetts indicates that despite concerns about potential crowd out from new public options (Cutler and Gruber 1996, Gruber and Simon 2008), there was actually an expansion in private coverage. (© 2010 by Carrie Hoverman Colla, William H. Dow, and Arindrajit Dube.)

Despite apparent incentives to the contrary, employer-based coverage is alive and well in the Bay State.

Turns out the individual mandate is working fine too. Although there are individuals gaming the system in Massachusetts—by waiting to purchase insurance until they need it–the overall coverage rate is high (about 96% insured) and the associated degree of adverse selection is very low (meaning insurers are able to cover medical costs with premium dollars, a necessary condition for a stable market).

In a recent report released by the Massachusetts Division of Insurance, actuaries estimated that part-year insurance purchasing in Massachusetts’ combined individual and small group market increased premiums by 0.5 percent to 1.5 percent. Based on an average individual premium in Massachusetts of about $5,000 per year, that translates into an annual premium increase of $25 to $75, far too low to have a major impact on the market. Insurance companies can pass that level of premium increase on to consumers without many of them dropping coverage.

Thus, there is reason to think gaming won’t be an issue with the national individual mandate. First, the ACA’s penalties for lack of compliance with the mandate are actually higher than Massachusetts‘. Second, exchanges will have open enrollment periods, which don’t exist for the Massachusetts version of an exchange right now. Restricting the enrollment decision to a once-per-year event reduces the ability for individuals to time coverage to coincide with illness. There are, of course, differences between Massachusetts and other states that may cause results to vary.

Note that I am not saying that everything about the health care system in Massachusetts is wonderful. The Bay State still has a health care cost problem and no agreed upon solution to it, for example. Nevertheless, the individual and employer mandates are functioning as designed in Massachusetts, even with lower penalties than will exist under the ACA. That should give us hope that they can work well elsewhere, though it doesn’t guarantee that they will.