• Priceless: Chapters 16-17

    Chapters 16 and 17 of John Goodman’s book Priceless are about the Affordable Care Act (ACA). In the first of these chapters, he covers some of the ways the law will benefit some groups and ways it won’t. I’m not sure he got everything right. Let’s go through just some of it.

    A minor point: In many places in this chapter and elsewhere, John says that the Cadillac tax on high-premium plans will take effect in 2019. I had thought it was 2018. I’m not the only one.

    On evidence:

    Peter Orszag, former director of the Office of Management and Budget and Obama administration point man on healthcare while the legislation was being written, says that under the new law, Medicare has broad authority to refuse to pay for treatments that are not evidence-based. Orszag also believes the malpractice laws should be rewritten so that doctors who practice evidence-based medicine are given a safe harbor against lawsuits. Former White House health advisers Nancy-Ann DeParle and Susan Sher have made a similar recommendation.

    Insofar as I’m paying for your care, I prefer it follow the evidence. Insofar as you are paying your own way, do as you please. I would accept being held to the same standard.

    On ACOs:

    If you are getting care from an ACO, therefore, your insurance may not pay for you to see doctors outside the ACO. […]

    [N]o one had any previous interest in forming ACOs. […] Why don’t they already exist? […]

    ACOs will have capitated payments […]

    The ACO will get to keep any money it doesn’t spend.

    These are all highly misleading if not outright false. Medicare beneficiaries, even if assigned to an ACO, can obtain care from any provider. Some private sector insurers and providers are interested enough in ACOs to have established them before Medicare. Full capitation is not integral to ACOs, though some types (not all) include partial capitation. Medicare and private sector ACOs are based on a shared savings concept. The ACO does not keep all the money it may save. (For my own convenience, I’ve linked to my gated Health Affairs paper, which has references for these claims. With some Googling you can find ungated documentation.)

    On creeping socialism:

    For the first time in our history, both the practice of medicine and the way money is spent on medical care will fall under federal control. […]

    [W]e will all march toward a truly nationalized healthcare system.

    Readers, what do you think?

    It’s not John’s fault that he had to deliver the content of the chapter to the publisher before the Supreme Court ruled on the ACA. However, some of his concerns should be mitigated by the decision since states are not required to expand their Medicaid programs. On the other hand, unless they secure waivers to do something more to his liking, I don’t expect him to be satisfied, nor need he be.

    John wrote about employers dropping coverage. Here’s a relevant FAQ entry. In particular, see this post on Massachusetts. Did you notice John’s citation of the infamous McKinsey report, the one they admitted was “not intended as a predictive economic analysis of the impact of the Affordable Care Act”? What is a good argument for citing it, especially without any mention of its limitations?

    John wrote about potential loss of Medicare drug plans, of which beneficiaries now have a choice of at least 25 in every US state. Aside from Guam, which has only 1, and the US Virgin Islands, which has only 3, this seems like a market for which a bit of loss of choice is unlikely to be problematic.

    John wrote about the projections that Medicare will pay providers far less than private plans later in the century. I agree this is problematic. So problematic, in fact, that I’ve argued it’s not going to happen.

    John raised the “double counting” charge. This is an area where it is easy to get confused. (No, I am not saying John is confused, but you may be.) I tried to clarify it in a chart. Don’t overlook the footnote in that post.

    John and I agree that Medicare Advantage benefits will not hold constant as government payment rates are cut. There is a related and valuable discussion John didn’t invite: What is our obligation to Medicare beneficiaries, and how much should we pay for it? What is the implied Medicare “defined benefit”? Even if Medicare is remade as John would like, we still have to decide how much of taxpayer money to devote to it. We still have to define our obligation. Just because spending less means people get less doesn’t mean spending less is wrong. That’s an argument for always spending more, which we cannot do.

    It is easy to critique existing law. To become so, it has had to survive the political gauntlet. As such, it doesn’t even or only reflect the preferences of the originators. Of course we could have better policy. A lot of John’s ideas might be better. But once they’ve gone through the meat grinder, don’t expect them to look as appetizing as John’s sketches make them seem. The same applies to your vision of an ideal health system, or mine.

    Chapter 17 is about how to reform the ACA. No question the ACA has problems, though I’m not certain everything John mentioned will actually be a problem. I am confident some will. Likely some won’t. What I am certain of is that Democrats will not open up the law to reform in the current political climate. It’s too risky for them. They will wait until clear evidence of an existing crisis, not act on predictions of one. If the GOP takes over the government in January, however, some or all of the issues John raises become more likely to be addressed in some form of repeal/replace effort.

    Chapter 18 is John’s conclusion. I will post mine sometime next week. All posts in this series found at this link.


    • Hmmm. Not sure what to make of this overview of my treatment of Obama Care. Readers could easily miss these flaws:

      • You will be required to buy a health plan whose cost will grow at twice the rate of growth of your income. How long can that go on?
      • Subsidies for private insurance for people at the same income level can differ by as much as $10,000 to $20,000 for people at the same income level. How long can the Hilton stay in business providing ObamaCare coverage if the Hyatt is sending all its employees to the exchange?
      • Insurers in the exchange will have strong incentives to over-provide to the healthy and under provide to the sick. That’s not good if you are sick.
      • The law increases demand without increasing supply, leading to a huge rationing problem – with predictable rationing by waiting for people in Medicare and Medicaid.
      • Medicare hospital fees will fall to Medicaid levels in a few years and Medicare doctor fees will fall well below Medicaid levels, threatening access to care according to Medicare’s Office of the Actuary.

      You don’t think Democrats are going to want to change some of this before 2014? What I find missing from TIE site is any recognitioin of how fatally flawed all of this is.

      • “You will be required to buy a health plan …”

        Nope. Paying the penalty is an option. Nobody is forced. That doesn’t mean you need like the options, but let’s be clear on what they are.

        “Insurers in the exchange will have strong incentives to over-provide to the healthy and under provide to the sick.”

        When is an insurer ever under an incentive to do otherwise? I don’t find it credible that any scheme reduces insurers’ incentives to reduce their costs.

        “What I find missing from TIE site is any recognitioin [sic] of how fatally flawed all of this is.”

        You’re either not reading closely enough or interpreting things oddly. We’ve hit every one of your points in our posts. Every blessed one. On some, we even agree. What I find missing from you is any recognition of that fact or any response to the ideas I’ve suggested that seem consistent with your goals (a law of one price per provider per service, competitive bidding in Medicaid, market-based risk adjustment — I’ve suggested and/or linked to all these in my review of your book asking for your thoughts. Crickets.) What we don’t do is hyperventilate and extrapolate to conclude a necessary catastrophe. Nor do we assert that the ACA is an ideal plan not in need of change. Seems fairly reasonable to me.

    • Following Austin’s link I found he delivers one of the most confusing treatments of PPACA and Medicare I’ve ever seen. There is nothing complicated here. The law will reduce spending on Medicare by $716 billion over the next ten years. The money will be used to provide health insurance for young people. The Medicare Actuary predicts the spending cuts will force one in seven hospitals out of the market in the next eight years. Seniors will shortly become less desirable to providers than welfare mothers from a financial point of view. It won’t be pretty. See the Actuary’s charts and a very clear explanation of all of this here: http://healthblog.ncpa.org/whats-wrong-with-the-health-care-media/

      If Congress buckles to political pressure from senior voters and restores the spending, then PPACA was never paid for. We will have a huge unfunded liability connected to a new entitlement, adding debt to our already huge debt – forever.

    • Austin:

      “When is an insurer ever under an incentive to do otherwise? I don’t find it credible that any scheme reduces insurers’ incentives to reduce their costs.”

      Casualty insurance. Almost every ad you see on TV or in print tells you how well they will treat you after you experience the casualty. (Allstate. Aflak, etc.) You never see this in any health insurance exchange.

      BTW, Austin, i’ve never had a problem with your ideas on competitive bidding. in certain circumstances, it’s a very good thing to do.

      • Wow John, I think you should have picked a better example (or maybe thre aren'[t any examples and Austin is right). Casualty insurance is notorious for their deceptive tactics. The play basically works like this: insurer shows up at site of casualty and offers an immediate and seemingly large lump sum payment that is actually not enough to cover damage. By accepting this the insured waives rights to further damages. If the insured wants to seek a higher (full) payment the insurer drags their heels and fights the higher award. But you don’t have to take my word for it – here is a bloomberg article that goes into greater detail.

        I find it particularly ironic that McKinsey is at the core of this problem as well, and again not in a good way.

      • How does casualty insurance in health care work in a way that avoids the obvious information asymmetry that leads to big incentives for fraud? I’m sure you can point me to something you or someone else has written, which would be fine. I recall Mark Pauly, among others, has described why we don’t have casualty insurance in health care. I was convinced. Does any health care market in the world work on that basis?

    • Not to continue to beat a dead horse on the McKinsey study, but, as an economist by trade I am dumbfounded by the argument that large employers will drop coverage as a result of ACA.

      What is the penalty right now for large employers who do not offer coverage? The answer is $0, nada, zilch.

      So why would a company that offers insurance now drop insurance in the future when it will be (more) costly to do so? There is no sane economic argument here. Large employers (and small employers) offer insurance because it is required (table-stakes) for them to compete in the free market for labor. That is unlikely to change with ACA and the valuable link to what is happening in MA is the empiric proof to what is a simple theoretical concept.

      • Many employers are dropping coverage currently, primarily by shifting to more contract-based and part-time workforces. If the ACA requires a more comprehensive (i.e., expense) set of benefits than you currently provide, your expected increased costs could be more than the penalty.

        You don’t have to rely on theoretical economic arguments (which seem awfully simple and sane to me). Instead, look at what is actually happening:


        • That incentive has always existed. If you didnt want to pay for health care, you could just make workers part-time. It is much easier to do this now in a labor market with over capacity. In a tighter labor market, they will have the same incentives they had in the 90s and 2000s. For large employees the incentives do not change, they will continue to provide insurance. For small business, they dont have to provide insurance, but if they want to do so it will be cheaper. Mid size businesses will have to sort out their own needs and incentives. However, the employees will have access to insurance through the exchanges at more affordable rates if the part-time option is chosen.



          • Steve and Matt,

            You are missing the point, Many employers continue to provide HI because 1. It is in their interests to have a workforce that is covered, and 2. there is no reasonable alternative. PPACA changes that calculation. They can send their employees to the exchange where they will get get similar coverage and much bigger subsidies than the employer can provide. There is no longer a competitive advantage in the labor market in providing coverage directly. Under the ACA employers will drop coverage in droves.

            BTW, there was absolutely nothing wrong with the McKinsey survey. It was a legitimate exploration of employer intentions. The caveat you fellows are fond of citing was simply explaining that this report was a survey of employer intentions, NOT an economic analysis.

    • “creeping socialism” a dialogue stopping metaphor…a real harumph! a familiar “and that is that”, a tangent,,,

      government regulation is the issue

      health insurance…health care …pharma.. are regulated…

      health care is a regulated market…

      question is what is optimal regulation for this market

      regulation that provides mutually advantageous benefits to society, patients, providers, insurers, pharmas and others

      there is much agreement that current regulatory schemes are suboptimal

      “creeping socialism”…”crony capitalism”…good umperstickers…not discussion points

    • Employers would be foolish to provide health insurance to below-average wage workers. The subsidy is much greater in the exchange. They would be equally foolish if they dropped coverage for above-average wage workers. They get little or no subsidy in the exchange, but get a generous tax exclusion at work.

      The trick is: how do you drop coverage for the low-wage folks and keep coverage for the high-wage. Darden’s (fast food chains) is apparently going to make all its low-wage employees part-time to get around the mandate.

    • On casualty insurance:

      The whole argument of Chapter 11 is that we should adopt the casualty model for health insurance. If you combine that with change of health status insurance, the insurers would compete for enrollees (“we’re really good on cancer care, heart care, etc.”) the way Allstate completes for homeowners insurance.

      • John,

        But why hasn’t the casualty insurance model been introduced in either the individual or group/employer market? What about Pauly’s argument that Austin brought up?

    • The goal of the ACA was admirable in this respect:

      it wanted to help the millions of waitresses, start-up real estate agents, part-time programmers, hairdressers, hotel workers and farm workers who have never gotten a nickel’s worth of help from their employers for health insurance.

      If we wait until these sectors unionize, we will be waiting for 30 years and maybe forever.

      So, the ACA has come in and, in effect, turned the government into a big union at least for health care.

      This is not an inherently wicked thing to do.

      However — the ACA (like almost all federal laws) was drafted inside the
      Beltway by Congressional staff health care experts who, on the whole, have secure jobs in the bureaucracy. By and large they are not subject to arbitrary employer decisions of any kind.

      This ivory tower-ness has led to wide loopholes in the ACA that are described above, and have exposed all along by John Goodman.

      If the ACA survives, then Sebelius’s office is going to have pretty damned nimble to address the loopholes.

      • A functioning Congress would amend the legislation as needed to address the issues. We are all smart enough to know that political incentives don’t easily permit Congress to work that way. It’ll be polarized “repeal the job-killing, socialist catastrophe” vs. “implement the well-balanced law that Americans will grow to love”. (The same would apply to any other law, whether John or you or I think it a worthy one or not.) What I’ve been trying to do in my little corner here is demonstrate that some of us can at least discuss things in a more nuanced, balanced fashion. This doesn’t seem like something everyone is able or willing to do. Too bad.

        • I sympathize with your view. I reluctantly supported Part D hoping that it was just the start of Medicare reform and that Congress would come back with additional reforms every year, slowly building a better system. Alas, I was naive. It seems Congress is incapable of sustained effort on anything.

          • Agreed. And this is a universal plague. Rational bipartisanship outside the the Beltway would focus on institutional reforms to address the fundamental sources of dysfunction.

      • who have never gotten a nickel’s worth of help from their employers for health insurance.

        Very few employers provide health insurance to help their employees but to attack better workers and build loyalty. This was a good strategy when healthcare was only 5% of the economy the perk was not to expensive and it built good will toward the employer, but with medical care now 17% of GDP it is awkward to have your employer and an insurance company make that much spending decisions for you.

    • 1. I strongly agree with this statement:
      Insofar as I’m paying for your care, I prefer it follow the evidence. Insofar as you are paying your own way, do as you please. I would accept being held to the same standard.

      It seems to me that the payer has to decide what he will pay for and what he will not. This is less of a problem for government than for insurance companies because the insurance companies have made specific promises, Government has not.

      But IMHO because of this problem we should avoid having Government and insurance company paying for our bills.

      This makes me want to see as much as possible paid directly by the consumers.

      I wonder if a plan that was guaranteed for life that started with a relative high premium part of which was put into an account that would allow a lower premium in the future if it was not used would work.

      2. We are moving more and more toward socialized medicine and our Politicians are so corrupt that socialized anything does not seem to work well in the USA.

      3. I see employers dropping coverage as a good thing but so good if they end up on Government insurance .

    • I support the view that employers moving workers into the Exchange is a feature, not a bug; and would add that, from my limited perspective, this is the single best/most important feature of the ACA over the long term.

      But I have some doubts and wonder if the TIE audience could help:

      I understand the historical political reasons why health insurance in the USA is primarily acquired through one’s employer (thank you Paul Starr and your Social Transformation)–I also understand, from a policy perspective, why this is silly. And I understand that there would be some perhaps painful but temporary disruption in coverage for employees transitioning into the Exchange and/or Medicaid. And I understand the political repurcussions of this happening vis a vis Obama’s “keep your current coverage if you like it” promise.

      BUT, I DON’T understand, and would appreciate it if someone could explain it to me, why any reasonably informed person (i’m looking at you, conservative health economists) would still insist that shifting from employer-based insurance is a bad thing, and that it makes the ACA a (policy) mistake?? Is there some evidence that I’ve missed which suggests employer-based insurance is a sensible way of pooling health risk from a societal perspective? Who exaclty benefits from this current arrangment, aside from the insurance industry and large established employers and their shareholders? Any clarification would be greatly appreciated.

      Great blog and mostly great discussions, by the way.

      -SB in StL

      • SB,

        I can’t speak for all conservative economists, but most of us do not think it is a bad thing at all. Why would you suppose otherwise? We have been advocating this for decades. Employer-based coverage makes no sense, and never has.

        That is part of the reason Heritage and others supported “connector” type programs and even individual mandates in the early 1990s. Others of us believe that substituting government for the employer will make a bad situation worse. We argue that real markets require individual choice, which includes the choice to decline what is available.

        This last point is essential, imo. In most markets if people don’t want to buy what you are selling, it is a signal of product deficiency. But in health care policy makers have chosen to ignore that signal and would rather force people to buy what they don’t want.

        We, of a conservative bent, have had a ferocious debate over these things. It took many years but most of the community has come to agree that 1. Mandates do more harm than good, and 2. Government exchanges add no value. But individual ownership is still key.

        • Thanks Greg,

          Could you please elaborate, or perhaps point me in the direction of some work related to this statement:

          “Others of us believe that substituting government for the employer will make a bad situation worse. We argue that real markets require individual choice, which includes the choice to decline what is available… But in health care policy makers have chosen to ignore that signal and would rather force people to buy what they don’t want.”

          My understanding is that one of the benefits of having employer-sponsored insurance, particularly through a large firm, is that there exists an HR department which takes responsibility for determining what is available in the market, valuing it accordingly, and facilitating enrollment and claiming of benefits. In the absence of an employer, or an Exchange, or some other mechanism for the layperson to recognize and respond appropriately to whatever market signals are available, how can we be sure that insurance companies are actually competing on plan quality rather than marketing, underwriting, etc.?

          In short, it seems to me that placing the full burden of plan selection on the individual lay person, without an external source of objective information to enable “apples to apples” comparison shopping, would ultimately result in insurers rigging the market via information assymetry. How do we get around this problem (if you would acknowldege it as such) without government intervention of some kind?

    • “Socialism.” Americans don’t even know what that means.

      While in DC I had a tea-partier confront me about how Obamacare was going to lead to “socialism.” On and on he went. When I asked him what insurance he had he said, “Medicare.”

      I asked him if he knew that Medicare is a single-payer system. He had a slew of reasons why his Medicare was OK.

      The goal has been to get the uninformed everyday folk who lean right to drink the fear-inducing Kool-Aid. And they then do the bidding of the ideologues and politicians (who need the cash from big donors to run their campaigns.)

      So the right-wing masses, duly indoctrinated, throw around words like “socialism” when they are really thinking “communism” and “KGB.”

      So how does it play out? The senior on Medicare becomes a good foot soldier for the cause as he declares the evil of socialism and votes against his own best interests.

      C’mon. The socialism nonsense is off the table.

      The ACA if anything encourages entrepreneurship. Now all those people with preexisting conditions who wanted to try something on their own but stayed in their jobs for insurance can do it.

      I’m looking forward to seeing what great ideas are going to come out of tinkering in garages.

    • Okay, here are my thoughts on the latest comments.

      First, we need a level playing field under the tax law. Individually purchased insurance should get the same tax relief as employer-provided insurance. If employers are able to offer something better than what individuals can purchase on their own, they will do so. If not, they will pay higher wages instead.

      Second, employers should be encouraged to purchase individually owned insurance that is portable and travels with the employee from job to job and in and out of the labor market. Right now, almost every state has outlawed this.

      Third, we should avoid exchanges with their community rating requirements and annual open seasons. Instead, we should have change of status insurance with the right to switch plans at any time.

    • Leaving health insurance up to employers, as we have for the past 70 years, produces a nation where those workers with strong bargaining power have good insurance, and those workers with poor bargaining power have lousy insurance or no insurance.

      (whether the bargaining power is through unions or through labor shortages is not my concern right now)

      In other words, restaurants-retail-janitorial businesses provide no insurance, because it is easy for them to find workers anyways, and no pesky unions get in their way.

      Since the workers with poor bargaining power do not vote in a bloc, or vote much at all, the status quo I just described has survived despite all the discontent that is created by this great inequality.

      The Clinton health plan of 1994 tried to address this with what amounted to an employer mandate. This was shot down hard by business owners
      and their political allies.

      The ACA has introduced a very complex system of subsidies and penalties to greatly reduce the inequality.

      Under the ACA, a worker with no bargaining power and a modest income can get health insurance for about the same net cost as what a secure corporate employee pays now for his/her share of the company plan. (i.e. about $4000 per family out of pocket for a family making $50,000).

      The problem is that these subsidies will cost up $100 billion a year, and the Democrats did not have the strength to just raise income taxes to cover this.

      This leads to all the bewildering rules for employers, which are of course intended to make them do through incentives what the Clinton plan (and most European plans) just do openly — pay money for your workers.

      These rules have a certain internal logic, but they were not drafted by people with ‘boots on the ground’ in the American labor market.
      Just the fact that about 40% of American workers are in self-funded plans is but one fact among many that the ACA will have to deal with.

    • There are a lot of people commenting at this site who seem to have no understanding of labor economics. Economics is mainly common sense. So let’s use some, folks.

      The employees where I work are offered health insurance. They are not unionized. The insurance is not a gift. We provide insurance instead of higher wages because wages are taxed and insurance is not. The employer can do something the employees cannot do on their own: pay premiums with pre-tax dollars.

      If our employees told us they do not want health insurance, but would rather have higher wages instead, we would oblige. We have to complete for labor just like any other employer.

    • In the so-called ‘secondary labor market’ of restaurants, farm labor, retail trade, nursing homes, etc., workers are not offered a choice of higher wages or health insurance.

      They are offered low wages and no insurance, and still the employers find enough workers to open their doors. (There is a lot of turnover, of course.)

      The want ads do not say “12 an hour with no insurance or $10 dollars an hour with insurance.” The ads say, $10 an hour, take it or leave it.

      Dr Robert Evans wrote a comment to Alain Enthoven about 20 years ago that covered this more eloquently that I just did. The gist was that
      Enthoven’s employer (Stanford) recruited professors who were unique and had other employment options.

      Rather like Dr Goodman’s firm, I suspect.

      I am writing about the employees who have no other options, and the employers who know that and set wages accordingly.

      Bob Hertz, The Health Care Crusade

      • Portable HRA accounts are employee-owned bank accounts which allow multiple wage earners (or part timers) to contribute into a single family account. Even pizza delivery workers can benefit from a P-HRA (see Garlic Jims on YouTube). LyfeBank recently signed on an association of apple growers who each pay into migrant worker accounts as the workers move from one grower to the next. Employers want to provide health benefits whenever it is feasible because it’s in their best interest.

    • Bob: Go read an economics textbook! Workers get their marginal product. Employers don’t care how the compensation is divided — all wages, part wages, part insurance, etc. In the market for low-wage employment, people typically have access to Medicaid. So employers probably correctly assume that employees want their entire compensation in the form of money. This isn’t rocket science.

      • “In the market for low-wage employment, people typically have access to Medicaid.”

        This is not necessarily true and is up to the state as they are the ones that establish the income threshold for Medicaid eligibility. Someone can be working part time (e.g.., under 40 hours/week) at a fast food restaurant and make enough money that they will not be Medicaid eligible and also will not have enough money to purchase their own HI policy. It’s likely that they will also be just scraping by but of course that’s not the point of this discussion.

    • At the present time, most states do not allow a low-wage worker without children to receive Medicaid.

      Some states like LA and TX restrict Medicaid further to 100% of the poverty level for anyone to get benefits..

      In other words, in the restrictive states a worker can make as little as $12,000 a year and get nothing.

      MN WI, and a few other states do have state insurance programs for low wage workers.

      But in general, you are not correct to say that low wage workers get Medicaid. (The ACA will change this if a state agrees to the change.)

      In the low wage arena, employers don’t care what their employees want. In this arena, free markets do not fully apply because the workers are desperate, and will accept a ‘trade of last resort.’

      Think of it this way:

      Picking watermelons or washing dishes should pay more than being an art history professor, because the work is so unpleasant.

      But that does not happen. because employers keep finding new sources of desperate workers who will take a lower wage.

      Also, the businesses that employ watermelon pickers and dishwashers have to fight hard to survive, so that they cannot be too generous about anything. Whereas colleges are more comfortable, and can pay art history professors more than they need to.

      To quote a New Yorker cartoon, some workers are bitch-slapped by the invisible hand.