• Priceless: Chapter 10

    I wish Chapter 10 of John Goodman’s book Priceless had come sooner. It’s excellent. I agree with the vast majority of it. Though I have concerns about a few of his policy suggestions, I’ve covered some of them already. Others I just don’t feel like addressing right now as they’re not the core of his proposal, the gist of which is to reform how insurance is regulated and taxed to encourage consumers to have more incentives to pay 100% for certain classes of care at the point of purchase (or fewer disincentives not to).

    With sufficient assistance for low-income families and thoughtfulness in defining what these certain classes of care are (elective visits and procedures, yes; emergency open heart surgery, no), I think this is a fine idea. I, for one, would love to pay reasonable prices out-of-pocket for email and phone access to doctors, for example. I am largely able to achieve what I want because I know a lot of doctors who will respond to my emails and phone calls for free, but I’m lucky. Not everyone is buddies with Aaron, for example. I can tell you from this experience, however, that it is very valuable. It saves time. And, even at some reasonable price, it’d save money. A $20 phone consult to avoid a $100 office visit is a win for me. Is it a win for the doctor? OK, maybe it has to be $50 for that phone call.

    One issue John hasn’t yet addressed is how value-based insurance design would apply to his approach. Insurers, even those overseeing catastrophic plans, might have a financial interest in incentivizing some preventative and disease maintenance care that offset future cost. This is how health insurance plans rationally become health incentive plans.

    John wants people to have no incentive to choose health care over another good or service or vice versa. Why then does he advocate so many ways of making spending for health care tax free? All other goods and services are taxed, both because the income or capital gains we use to buy them is taxed and through sales taxes. We can’t not tax everything. So the only way to level the playing field is to tax dollars used for health care too.

    But, at the 30,000 foot level, I find many of John’s policy ideas worthy of consideration. Why don’t more people? I think it’s how they’re set up. Whether John realizes it or not, he packages things in a contrarian cloak. I don’t think he need do this. Just go back and read what I wrote about much of the first half of the book. (See the Priceless-tagged posts.) He’s bending over backwards to explode everything you might think is decent about the status quo. Sure, some of it should be blown up. But a lot of people aren’t ready to see it that way. And some of it need not be blown up.

    John’s core ideas won’t resonate with many because the packaging is too extreme and off-putting. It’s also not practical and not the way things would happen in real life. Major reform would be phased in. It has to be. The system can’t turn on a dime. John may not like incrementalism, but he might find his ideas more accepted by others if he leaned a bit in that direction and stopped taking on unnecessary fights in the process.

    For all that, keep in mind that not all of John’s ideas would save money system-wide. Using Medicaid dollars to subsidize private insurance would cost more. The benefits may be worth the price, but let’s not imagine it’s a lower price.

    This passage caught my eye:

    The problem with the current system is that neither employers nor sellers of group insurance are allowed to adjust an individual’s premiums to reflect higher expected healthcare costs. This encourages insurers to seek the healthy and avoid the sick before enrollment. After enrollment, insurers have an incentive to overprovide care to the healthy and underprovide to the sick.

    These incentives need to be reversed. In the Medicare Advantage program, the government pays higher premiums for seniors with more expensive health needs. This encourages insurance companies to create specialized plans—especially for chronic illnesses—that compete with each other.

    Beneficiary-paid MA premiums are still community rated. Also, even with risk adjustment, plans still have incentives to underprovide for the sick relative to the healthy. Plans always have incentives to spend less and to select for healthier patients. No prospective risk adjustment will ever fully address that. This is a limitation of a multi-payer system. In the eyes of many, the strengths may outweigh it, but that doesn’t mean it doesn’t exist.

    John notes that “individual insurance premiums for, say, a 60 year old are often five or six times higher than for a 20 year old.” He has a few suggestions for how to help retirees not yet eligible for Medicare. But none of them would go a long way toward changing the fact that the premiums they would face would still be very high, too high for many people to afford. This is one of the issues that community rating is meant to address. Yes, that’s redistributive. You can’t address this problem without redistribution in some form. Can we all at least agree that’s a fact?

    I’ll post on Chapter 11 on Friday.

    @afrakt

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    • >>The problem with the current system is that neither employers nor sellers of group insurance are allowed to adjust an individual’s premiums to reflect higher expected healthcare costs.>>

      Insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Allow enough adjusting (and working risk analysis) and you’re taking the insurance element out of insurance.

      The entire idea of insurance is to spread risks (which is necessarily redistributive) – some will need expensive care and some won’t and those who don’t are subsidizing those who do.

      Well, not the entire idea. Part of insurance is to get better bargaining power in order to negotiate for lower rates. However, single payer (or the like) should be able to get even lower rates. Unfortunately, the flip side of giving insurance companies more market power to negotiate with providers is that they’d have more pricing power to get higher rates from customers.

      • You are right that insurance spreads risks, but this simple idea is often misinterpreted in at least two ways —

        1. All of the benefits of risk pooling are gained at a relatively small number — like 20,000 to 60,000 enrollees (actuaries are mixed on the optimum number). Beyond that, there is NO additional gain.

        2. People often argue that employer plans are needed because they spread risks. Actually most employer plans do just the opposite — they concentrate risks by having a selection of enrollees that are more alike than would be true of the general population.

    • Community rating is not fair. It over-charges the young in order to subsizie the not-so-young, for no apparent reason. People in their 50s and early 60s generally have more income and assets than people in their 20s and they should expect to pay a larger protion of thier income for health care. (They probably don’t have any more child raising expenses and they have likely paid off thier mortgages.) Don’t screw around with the price system uless you have to.

      As for making all this more appealing, i think the solution is to have Austin and Aaron repackage the ideas for thier readers. Voila! Problem solved.

      • John, perhaps naively, I would think you would want to reap the credibility-enhancing effects of less extreme packaging. But, now with somewhat less naivete, perhaps it does not suit your business model. I provide this without judgement. Just speaking my mind. One does wonder.

      • ” Don’t screw around with the price system uless you have to.”

        Just as bankers always seem to outsmart the regulators, shouldnt we assume that the insurance companies are better at assessing risk than the public and that adverse selection will always work in their favor? At what level do we have to? Never? When they are unable to obtain insurance? In the 50s and 60s is when people start to rack up medical bills. Once you have any kind of significant illness, obtaining insurance again should you need to do so can be nearly impossible.

        Steve

      • Of all the potential medical underwriting issues, age actually seems like one of the least objectionable vectors to ban under community rating. After all, no individual remains in the same cohort throughout their lifetime. Assuming continuous coverage, every older worker currently being subsidized by a younger worker was once a younger worker subsidizing the older workers of his youth. It seems like the only clear losers on net would be those who die young and thus don’t reap the benefits of being a subsidized elder. Of course, as per your examples, there are extremely valid reasons to expect older insurees to contribute more than younger ones.

        I would think that the more problematic issues that community rating addresses have to do with simple family history and genetics. Obviously, no one can control if they have a family history of cancer or heart disease, so is it any fairer for those people to be punished with higher costs than someone like myself who had the good fortune to be born into a family with no history of illness?

        I don’t know which is the greater sense of unfairness, that some people pay more than their expected costs, or that others have higher expected costs through no fault of their own.

        • Good points. Are such transfers more objectionable than those of economic surplus between consumers and producers or among producers in a supply chain? That is, are these transfers pie shrinking or not?

          • Not to be silly, but can insurance really ever be fair? If you make it fair, can it still be insurance?

            Steve

            • @ Steve: “Not to be silly, but can insurance really ever be fair? If you make it fair, can it still be insurance?”

              I’m not sure, but my understanding is insurance is not fair or unfair. It is something available to the consumer should he choose to purchase it to reduce risk. I think our present use of the words health insurance are an inappropriate use of the word insurance and lead to a lot of confusion and ill will.

              The real question should be, can taking money from one individual without permission and giving it to another be fair?

          • Premiums are either redistributed via community rating with some folks paying or receiving more than their share.

            OR

            We have an experience rated system with a high risk pool/reinsurance.

            While one may object to the redistributive nature of community rating, how is a high risk pool funded?

            Presumably, from state and federal coffers, and ultimately tax payers. Us.

            Is that not redistribution?

        • Brian,

          Think about this a bit. You don’t object to age-based rating, but you do object to risk-based rating because people can’t control their risks? Actually, people have more control over their risks than they do over their age.

          But more importantly, you ask — “so is it any fairer for those people to be punished with higher costs than someone like myself who had the good fortune to be born into a family with no history of illness?”

          Prices are not punishments. Prices are information that combine the costs of service to the producer with the value placed on the service by the consumer. On both counts it is appropriate for high-risk people to pay more — 1. They cost more to serve, and 2. The value the coverage more. They are not being punished, they are paying a price that corresponds to the value they place on the coverage.

          • Greg,

            I absolutely agree that people have more control over some of their risks than their age, but how does someone have any control of their family history or genetics whatsoever? While we can certainly control our behavior based risk factors like whether we choose to smoke, be obese, eat properly and exercise, some things are simply out of one’s control. It’s fundamentally different than being born to parents who have had heart attacks before age 55, even if the risk adjustment for both may be in the same ballpark.

            I would absolutely agree that some degree of underwriting should be allowed for those factors that we have control over. I see no reason why non-smokers should be fully subsidizing the eventual expected lung cancer and emphysema costs of people who choose to smoke, but it’s simply a fallacy to say that all risks are similarly behaviol-based.

            My point was, that, like one’s age, there are other risk factors that an individual has no control over. No amount of underwriting is going to allow someone to change their family history or genes to lower their expected health costs. In that sense, these people are punished by being saddled with higher health care costs through no fault of their own.

            • @Brian: “how does someone have any control of their family history or genetics whatsoever?”… ” In that sense, these people are punished by being saddled with higher health care costs through no fault of their own”

              Without debating your point I just want to understand what you are thinking. It seems that since some people have better genes than others you wish them to subsidize those with worse genes. Does that mean you want Magic Johnson to subsidize the other guy who was just a trifle slower due to inferior genes that now works as a stock boy?

            • Al:

              I would say that gets into the false representation of equality of opportunity vs. equality of outcomes. No one outside of hard core communists want the latter, while the former is probably something most people will agree on, at least in principle. I do believe advocating that people born with inherent disadvantages relative to a generic baseline (i.e. healthy, no major genetic dispositions to disease) get assistance is different than saying we need to handicap anyone born with a genetic advantage.

              Beyond that, though, I think it’s completely unfair and insulting to Magic Johnson to imply that he was going to become one of the greatest basketball players ever simply based on his genetics. Ignoring the hours of work and practice that he put in over the years to achieve that. Many people are born with similar physical gifts, but only one became Magic, after all.

            • @Brian: “false representation of equality of opportunity vs. equality of outcomes.”

              There is no such thing as equality of opportunity. There is something known as equality under the law that sometimes is confused with equality of opportunity and outcome. Intellect and IQ are related to genetics so one with a low IQ has the criteria for support based upon your criteria ” I do believe advocating that people born with inherent disadvantages relative to a generic baseline”.

              ” insulting to Magic Johnson to imply”: By the way I didn’t insult Magic J. as I compared two individuals that both trained hard, but one had a gene to make him a bit quicker.

      • John accepts a considerable amount of government intervention and doesn’t promote capitalism without limits. That puts John somewhere in the middle of the spectrum where he resides so classifying him as extreme in any form might be confusing.

    • Much of what John talks about wanting to have evolve is presented in a more orderly and nuanced way by Michael Porter and Elizabeth Teisberg (2006) — no-fault malpractice, relaxation of licensure barriers to entry, focused factories, stimuli for price competition, delayering of insurance, limitations of perverse tax incentives. I wonder, to what extent is he influenced by that book? It seems to me that they take themselves and their recommendations a little more seriously than John does his own, talking about market possible evolution of incentives and arguing that there are ‘first mover’ advantages for entrepreneurs who are willing to innovate now. They are also, as I recall from the distance of 5 years, more careful about how all of this might be made to work for poor people.

      http://search.barnesandnoble.com/Redefining-Health-Care/Michael-E-Porter/e/9781591397786?ean=9781591397786

    • Also, even with risk adjustment, plans still have incentives to under provide for the sick relative to the healthy. Plans always have incentives to spend less and to select for healthier patients.

      The trick thing is we do not want plans to provide everything to everyone because it would mean higher premiums for every one and so the problem is very tricky to address.

    • Austin, a couple of comments:

      You wrote — “He’s bending over backwards to explode everything you might think is decent about the status quo. Sure, some of it should be blown up. But a lot of people aren’t ready to see it that way.”

      Perhaps, but how will they become ready if no one says it? You may think because John is “off-putting” he isn’t effective at getting them ready. And yet, John has been extremely effective at popularizing once-obscure ideas like HSAs. His “Patient Power” was one of the best selling policy books ever.

      You also wrote — “Major reform would be phased in. It has to be. The system can’t turn on a dime. John may not like incrementalism, but he might find his ideas more accepted by others if he leaned a bit in that direction and stopped taking on unnecessary fights in the process.”

      Here you are kidding, right? HSAs have been nothing but “incremental.” And they have been so successful that they have revolutionized the way most decision makers think about health care financing. This in spite of the unfounded charges that “they are only for the healthy and wealthy,” and other such blather. John (and I) have been happy to have them tested and refined in the marketplace, and that is how they differ from truly “un-incremental” ideas like PPACA.

      • Greg, I’m providing my honest reaction to the book, not discussing past history. Obviously that has been incremental, HSAs and all.

        I’m also not claiming John has not been effective. I’m explaining why there is a segment of thinkers (let’s call them “the left” for lack of a better term) that is hostile to his ideas. In fact, I don’t think all of them would be if they understood them better. But, as I’ve demonstrated dozens of times so far, he’s put them behind a very thick wall of arguments on issues he need not take on. For example, notice how badly he seems to want to explode the idea that the US spends more than other nations for mediocre quality. Why bother with that fight? Why not use that as motivation for the change he endorses?

        More focus, more patience in explanation, more consideration of the potential risks and limitations, and more care with the evidence could go a long way. A serious thinker would take feedback like this to refine his approach, not continually declare his critics misguided. Notice, on the core issues, I’m not saying he’s wrong! Why is that not enough? (Well, take it or leave it, I can’t go much further.)

    • I don’t doubt that John is listening to your thoughts (I certainly am) and looking for ways to expand upon the areas of agreement. As I have said before, I think what you are doing here is a real (and unfortunately unique) service in having discussion (rather than argument) about very important issues.

    • @ John Grima

      I very much liked the book by Michael Porter and Elizabeth Teisberg. However, there is one huge problem. They correctly say that doctors need to re-package and re-price their services. Yet they seem unaware that most doctors are not free to do so. They are trapped by a third-party payment system that they cannot escape.

      @ Brian

      Arbitrary redistributions are almost never a good idea and they always have efficiency effects. In this case, community rating encourages young people to under insure (because the price is artificially high0 and older people to over insure (because the price is artificially low).

      @ Steve

      I agree that the insurers will always outsmart the regulators. That is why risk adjustment should not be left in the hands of regulators. Let the insurers find the best solutions among themselves.

      @ Greg and Austin

      I don’t have much more to add about my style.

    • -“Yes, that’s redistributive. You can’t address this problem without redistribution in some form. Can we all at least agree that’s a fact?”

      Yes – with the current set of policies and incentives. Couple a high-deductible plan, a guaranteed renewal clause (this is standard in the disability insurance market), and an expanded HSA with lifetime accrual/heritability/giftability and over time funneling money into the HSA that would have gone to health insurers in the form of much higher premiums for first dollar coverage would result in a situation in which as people age, they will have also accumulated significant, dedicated balances to cover their higher health expenses. I’d be glad to see the government transfer assets into the accounts of those who don’t make enough to fund them with their own earnings.

      Transfer payments will always be necessary, and I have no problem with them in principle – but any incremental steps that helped insure that more of the transfer payments were from the people with the most income and assets to those with the least income and assets would be a development that I would hope that most on the left would applaud. The current system of transfers from young-to-old that prevails in community rating runs in precisely the opposite direction. Even if the ethical appeal of re-routing the flow of transfer payments isn’t appealing to everyone, one would hope that lowering the fiscal strain that the existing transfer system imposes on the country might.

      Also seems like transfer recipients would get more for their money if they were able to use them in a competitive marketplace rather than a bureaucratic monopsony but I’ll leave that dead horse alone.

      -Listing what elements of your thinking have changed, and how, as a result of reading the book would be a very interesting and welcome summary at the end of this series.

      • “Listing what elements of your thinking have changed, and how, as a result of reading the book would be a very interesting and welcome summary at the end of this series.”

        Just read along. You’ll get the gist.

    • BTW, AI makes a very good point. Priceless is “radical” only in the sense that it breaks away from conventional thinking about health policy. But it is not politically radical. It doesn’t call for a separation of government and state – which would be the libertarian position. It actually endorses a lot of paternalism and redistribution. In fact there is more redistribution in my reform proposals than there is in Obama Care.

      At the same time, government in my reform does only what government absolutely needs to do. Nothing more. Nothing less.

      • Both John and Al, while making good points, are missing mine. I used “extreme” with respect to positions on ancillary issues. As I’ve said perhaps a dozen times now, it is wading through those necessary fights that made the book a challenge to read. I, and others, nearly didn’t make it to John’s main point. I assert that he is losing a lot of potential readers by front-loading things he can do without.

        • Austin, I accept what you say, but I still don’t see it. What I do see is the potential for confusion because the word extrem- ist has been used in a derogatory fashion to dehumanize the opposition. I definitely am not saying you used it in that fashion, you didn’t, but that is the way it can be interpreted.

          • “I accept what you say, but I still don’t see it.”

            Fine. I pointed you to a prior post where I used the term in the sense I mean. I can’t do more than that. So, let’s move on.

            • Austin, I am not looking to have this posted, but I wanted to make sure that you realized that my comment on extremism was mostly a reflection of Eric’s attitude “Ideological extremism does sell books and generate pageviews. It’s the free market at work.” Your word might have prompted that type of thinking and response. It is a hot word, but your use of it was entirely different something I recognized initially.