The Incidental Economist

Suggested by a reader, on my commute home yesterday I read the 2008 Health Affairs paper by Katherine Baicker and Amitabh Chandra, “Myths and misconceptions about U.S. health insurance.” It was a breath of fresh air! I agree with every word of it, and I recommend you read it, even if you well understand our health care system.

The abstract doesn’t do it justice, but here it is anyway:

Several myths about health insurance interfere with the diagnosis of problems in the current system and impede the development of productive reforms. Although many are built on a kernel of truth, complicated issues are often simplified to the point of being false or misleading. Several stem from the conflation of health, health care, and health insurance, while others attempt to use economic arguments to justify normative preferences. We apply a combination of economic principles and lessons from empirical research to examine the policy problems that underlie the myths and focus attention on addressing these fundamental challenges.

So, what’s so special about this? It’s that Baicker and Chandra don’t dumb things down and they don’t try to fit square pegs in round holes. That is, the health care system and how to reform it are very complicated. The system didn’t evolve according to some sensible plan. Its emergent properties are functions of perverse incentives, inconsistent and sometimes (but not always!) misguided government policy, and failed markets. It’s a mess! Given all that, it is folly to think that any one thing–whether it be consumer directed health plans, “Medicare for all,” or some other bumper-sticker idea–will solve all our problems.

I’ll leave the details to Baicker and Chandra. What follows is a selection, just to give you more of a taste of how they present the ideas. I’m not singling this selection out because it’s the only thing in the paper I agree with. As I wrote above, I agree with the whole thing. (Bloggers, if you’re tempted to reference this post, don’t bother. Read the paper and reference that.)

[I]nsuring the uninsured would raise total spending. This does not mean that it would not be money well spent (we personally believe that it would be, but this reflects a normative preference). Spending more to extend insurance coverage is not a problem if it generates more value than it costs, and the view that health care is a right is not inconsistent with this framework. First, and sometimes overlooked, is the security that insurance provides against the uncertainty of unknown health care expenses. The value of this financial smoothing alone is estimated to be almost as much as the cost of providing people with insurance. Second, much of the additional health care that the newly insured would receive is clearly likely to improve their health. (But this is by no means automatic; as we discuss below, being insured is not enough to guarantee good health care.) Extending health insurance coverage may be well worth the cost for these reasons, but it would not save money.  …

Greater patient cost sharing would help, but it is not the magic bullet that some make it out to be. It is certainly true that first-dollar insurance coverage … encourages the use of care with very low marginal benefit and that greater cost sharing would help reduce the use of discretionary care of questionable value. But there is also evidence that patients underuse drugs with very high value when confronted with greater cost sharing. … Worse, there is evidence that even $5–$10 increases in copayments for outpatient care can result in some patients’ being hospitalized as a result of cutting back too much on valuable care, partially offsetting the reduced spending. …

There is no reason to think that the optimal insurance structure would look like the typical high-deductible plan. Rather, it might subsidize high-value care such as treatments to manage diabetes or asthma, while imposing greater cost sharing on care of lower value, such as elective surgeries with limited health benefits. People would choose the insurance plans that offered them the best benefit mix—trading off higher premiums for plans that covered care of diminishing marginal value. Of course, what may be valuable to one patient could be wasteful for another, and the key challenge for “value-based insurance design” policies is to differentiate between these cases. …

On the other hand, a single-payer system does not automatically provide high quality care: the provision of low-value care is as pervasive in the single-payer Medicare system as it is elsewhere. Single-payer systems are also slow to innovate—as suggested by the fact that it took Medicare forty years to add a prescription drug benefit, long after most private insurers had done so. Nor do calculations of the costs of a single-payer system measure the utility loss from forcing people with different preferences into a monolithic health insurance plan, or the cost to the economy of raising taxes.

To some readers, this might seem uselessly equivocal, the mutterings of the proverbial two- (or three-) handed economist. To me it is a strong dose of reality. Baicker and Chandra tell it like it is, and it is complicated. No single, simple idea is going to solve everything. In my view, anyone who says otherwise is either selling something or misguided, or both.

Did you miss (or do you miss) health reform? If not that which occurred over the past year, maybe you didn’t notice the many efforts between 1912 and 2009. If that’s the case, the New York Times’ A History of Overhauling Health Care is for you. It’s an interactive time-line with links to historical NY Times articles and, more recently, video. I just stumbled on it and it is utterly fascinating.

For example, the figure below is from a 1968 NY Times article titled “Spiraling Medical Costs Reflect Deficiencies in U.S. Health Care.”

In the accompanying article Harold Schmeck wrote,

Some professional observers believe that minor reforms will not be enough. They think major changes are needed in the very fabric and essence of American health care.

As one doctor put it, “It is just no use to build a better mousetrap when the problem is elephants.”

Over forty years later those elephants are much larger.

University of Minnesota professor Roger Feldman, with whom I’ve co-authored several papers, has written an opinion piece for the Minneapolis/St. Paul Star Tribune. He takes the Obama Administration to task for rhetorically double counting health reform’s Medicare cuts, once to shore up Medicare and once again to pay for expansion of health insurance. However, he notes CBO made no such error.

The CBO did not make a mistake in its arithmetic. By law, it must estimate the effect of proposed legislation on the federal deficit, and … [not on] other federal programs [that] must be cut.

The president, however, does not have to follow the same rules as the CBO. He could have told us that Medicare spending cuts can be used to fix Medicare or to pay for health insurance expansion, but not both. Instead, he chose to maintain the fiction that Medicare savings can be counted twice.

… Congress should address Medicare reform and health insurance reform separately in future legislation. … However, the CBO should not change its method of scoring proposed legislation. The CBO is not responsible for maintaining the fiscal soundness of Medicare. But another federal agency, the Office of Management and Budget, should publish a budget that shows the future liabilities for all entitlement programs and these should be included in the president’s annual budget.

Until we meet this challenge, we will continue to use bad arithmetic and budgetary tricks to hide the cost of health care reform.

I would also prefer to see policy debates conducted in a climate of candor. Unfortunately one can’t count on everyone to behave that way. And neither side has an incentive to be fully open and honest. The proper penalty is to point it out, as Roger has. None of this changes the fundamental truth that the budget deficit problem is a health care spending problem. I don’t think anyone who follows the debate is under the illusion that that problem will be fixed with this reform alone. Obama may have tried to make the hole appear shallower than it is. But even half a deep hole is a deep hole.

Let’s call the health reform that will be in place after budget reconciliation passes the Senate and is signed into law Health Reform 1.0. I think someday we’ll see Health Reform 2.0 that focuses more on costs. Between now and then there will be tweaks to version 1.0. Here’s are a few things I’d like to see in version 1.1:

• Medicare Advantage competitive bidding
• Larger individual mandate penalties
• More access to insurance exchanges (more below)
• Simpler employer mandate penalty with no perverse incentives

Depending on an individual’s income, the employer plan for which he is eligible may be a better deal than exchange-based plans (or vice versa). That’s because employer plans benefit from a tax subsidy and exchange plans come with low-income subsidies. Except (perhaps) in the case of small businesses employees, one can’t receive the tax subsidy for an exchange plan and one can’t receive both a tax subsidy and a low-income subsidy.

All this heterogeneity in subsidy rules creates different incentives that have nothing to do with the underlying quality of health plans. I’d much rather see all insurance products compete on a level playing field where subsidies are fully portable across all plan types. I don’t like the employer-sponsored health insurance tax subsidy, but I accept that it won’t go away quickly or easily. If we’re going to have it anyway then let’s allow the subsidy to be used for an exchange plan.

In time states will be permitted to allow larger employers to offer exchange plans. So that’s a good start. The sooner we decouple health insurance from employment the better.

With his Economix post today Ed Glaeser struck some internal chords. In it he distinguishes libertarian purity and governing practicalities. He concludes,

The health care bill with its mandates, new regulations and increased spending has brought forth a surge against the state, but sensible health care reform requires more than just saying no.

From a purely libertarian perspective, the status quo — with its vast and growing public health care expenditures — was no nirvana. Pure libertarians will never succeed in just wishing the government out of health care, but pragmatic libertarians may be able to push more modest reforms that can make the public role in health care less expensive.

I’ve tapped out more than a few posts on the theme of political feasibility and arrived at similar conclusions. There are ideologically or technocratically motivated policy ideals and then there is the real world in which not everyone shares the same notion of what is “ideal.” One can rage against the system and denounce everything as imperfect, impure, and worse than nothing. Or one can accept the reality that the perfect doesn’t objectively exist, roll up one’s sleeves, and try to actually accomplish something.

(By the way rejecting the good, bad, and ugly in pursuit of the perfect is the functional equivalent of choosing the status quo, and I’ll note that few who harshly criticize policy give the status quo a free pass. So something must be done.)

Glaeser and I agree that running mostly with the crowd (or the majority, or even plurality, of it) while attempting to tinker with the direction where opportunities arise is the most practical way to influence policy. In the case of health care, I would have accepted many possible sets of comprehensive reforms, some far more government dominated, some far more market based. My principal criteria were that the reforms be internally consistent (i.e. technically sound to the point that they’d plausibly work and with support from empirical evidence) and politically feasible (i.e. not obviously counter to large interest groups so they had a chance of surviving the congressional gauntlet). But whatever comprehensive set of reforms satisfied those, that was the vehicle to try to steer, not too much so as to take it off-road, but just enough to improve the ride.

And there’s still time to do that. Health reform is a work in progress. The bill that will be signed into law today is not the end of reform. With it as a starting point many improvements, now more incremental though by no means politically easy, can be made. Trashing it and starting over is a recipe for disaster. Or maybe it is somebody’s ideal. But a world in which the ranks of the uninsured grow (and you could be next!) along with health care costs strikes me as a very odd utopia.

Nancy Pelosi’s staff has gathered a very nice set of documents and links on all things health reform (h/t Ezra Klein). This looks like the first place to go with questions. Among the documents is a summary of mandated benefits within exchanges, which include those for mental health among others.

My wife works in the mental health field so we’re naturally curious about how health reform might affect access to mental health benefits. My hunch is that it would only improve such access in two ways: (1) by expanding eligibility for and funding of Medicaid, which is already a major facilitator of access to mental health benefits; (2) by expanding coverage in general, which will increase the affordability of mental health benefits for uninsured individuals not eligible for Medicaid.

In an e-mail I put the question to Aaron Carroll who replied,

I think the short answer is that mental health parity has already passed and is law.  Employer based insurance now has to include mental health coverage.  The Senate bill requires that plans sold through the exchange will have parity, and those added to Medicaid should have it as well.  Here’s a summary from the Bazelon Center for mental health law, as well as a summary page for those who want more information.

In particular, the overview of the Bazelon Center’s health reform analysis which Carroll cites states that health reform legislation “require[s] that health plans meet certain standards and cover mental health and substance abuse services.” Though I have not seen an analysis of the specific bill that passed I think it is overwhelmingly likely that health reform will increase affordability of and access to mental health benefits.

Informed readers who know a great deal more about the likely effects of health reform on mental health are invited to share their knowledge on this issue.

Later: See my follow-up post for more information on mandated benefits.

I do not think it was politically wise for Obama to have attempted major, comprehensive health reform in his first year, if ever. The risks were high. The outcome was uncertain. The political consequences remain unclear. However, as all readers of this blog know, I am glad he made the effort anyway. I am pleased with the outcome.

Having said that, I concur with Aaron Carroll that a victory lap is the wrong metaphor. I’m not interested in the “in-your-face” political trash talking we’re likely to see among the commentariat. Nevertheless, an historic event has occurred despite very high obstacles. That warrants some special attention. And a number of individuals deserve credit for their extraordinary efforts.

News reports indicate it was Nancy Pelosi more than anyone else who championed health reform, convinced the White House to continue the pursuit of it, and found the votes to pass it. The Hill reported last night that

Nancy Pelosi showed Sunday why she is one of the most powerful Speakers in history.

In shepherding one of the most controversial bills through the House, Pelosi achieved what some thought what was impossible after Scott Brown’s victory in Massachusetts two months ago.

Pelosi had a lot of help. In fact there is a large class of government employees, consultants, and non-governmental analysis who have toiled mightily to craft and analyze health reform policy over the last year, if not longer. Under tremendous pressure, CBO and congressional staff, officials and analysts in many administrative agencies and elsewhere, academics, and policy consultants have worked and reworked reform provisions and analysis thereof, responding to the thousands of shifting political and policy imperatives generated by the debate.

Moreover, all those folks nearly saw their hard work tossed into the dustbin after Scott Brown’s victory in the Massachusetts special election earlier this year. With health reform near death, after having come so far and been so close to passage, at the time many policy analysts no doubt felt demoralized and understandably so. Theirs was not a political game, though they were caught up in one. They were sweating the challenging policy nuances. How much is saved if the excise tax is crafted this way? How many more people are covered if the cost sharing support is designed that way? And so on.

I know from my own experience working on much simpler policy-relevant analysis that such work is incredibly hard. To achieve even one arguably credible result that can withstand the scrutiny of public disclosure takes hundreds, if not thousands, of person-hours. Many people put their heart and soul, and no doubt many all-nighters, into getting health reform right and analyzing it properly, within the constraints of the political necessities dictated by their ultimate masters, our elected representatives.

Nancy Pelosi deserves Person of the Year status for her efforts and her mark on history. But it is the largely invisible and un-thanked analysts I want to recognize. They receive too little credit relative to the amount of work they do. Though convention and institutional objectivity prevent most of them from taking a deserved bow I applaud them anyway. If you contributed to health care policy analysis that shaped health reform and its debate, thank you. Excellent job. Stand proud. And then go get some rest.

The note, as stipulated by my daughter, appears below.

OK, Monty Python hasn’t commented on health reform, or not the current version of it anyway (as far as I know). But they did predict how Democrats would pass it (or nearly fail to do so). You see, way before the Democrats figured out they had the power to pass health reform all along, Monty Python went through similar reasoning. As with Monty Python’s soccer-playing philosophers (video below), the Democrats finally reached a eureka moment and put the ball in the net. It is a great idea whose time has finally come.