• Priceless: Preface (1)

    I’m blogging my way through Priceless: Curing the Healthcare Crisis, by John Goodman. All posts in the series will be found under the Priceless tag. I’ve already received a lot of feedback on Goodman’s book. Please keep it coming, preferably in the comments to my posts (and Aaron’s). I might round some of them up for a “reader response” post (maybe more than one) later. Or, I might not.

    This post pertains to the book’s preface and, mostly, to one reference therein. In the preface, John refers to a 1995 Health Affairs paper he co-authored with Mark Pauly (ungated PDF).* Though I’ve encouraged you (and still encourage you) to read the whole paper, here’s the gist:

    In this paper we propose tax credits for the purchase of combinations of catastrophic coverage and MSAs [medical savings accounts]. Instead of abolishing the current tax advantages, we propose to make a new system available to individuals and groups as a voluntarily chosen substitute for the existing tax treatment of health insurance.

    What John, Mark, and I all agree on is that tax policy ought to be neutral (or more neutral) with respect to how individuals obtain health insurance (through an employer or otherwise) and across goods and services, including types of health insurance (e.g., managed care, consumer-directed, etc.). One step toward achieving this is to eliminate the tax exclusion of employer-sponsored health plans.

    Due to politics, this is not going to happen, or not all at once anyway. Under current law something like it will happen, but in a rather convoluted, delayed, and slow manner. Well, you can’t have everything, and, in my view, the Cadillac (excise) tax is better than nothing on this front. That’s an argument in favor of the Affordable Care Act (ACA) — or one element of it — even acknowledging its imperfection(s). Naturally, people can disagree about this, and maybe John and/or Mark do. (I don’t know specifically, but it is possible.)

    Do you see what just happened? I began with something I believe John, Mark, and I all agree with and ended up with something highly correlated but about which we may differ (though I’m not certain we do). This is fairly typical. A lot of policy arguments among health economists turn on the way in which an ideal on which they concur is (very) imperfectly implemented in law. It’s silly, and I’m guilty of some of the silliness. Law is not likely to ever adhere to health economists’ ideal. To exist as law it must pass the political gauntlet and, therefore, satisfy far more constraints than those cherished by economists. To a large extent, this is as it should be. To insist otherwise is tilting at windmills anyway.

    There are a few other issues raised by the Health Affairs paper I want to highlight. First, consider these two quotes:

    1. “[B]eyond encouraging access to a basic level of medical care, public policy should be …”
    2. “One approach is to use tax policy to direct citizens toward types of care or insurance that have already been determined, by experts or by politicians, to be socially appropriate. We specifically reject this approach …”

    The first admits that there is a role for government in setting a minimum standard of access to care. (Later in the paper the authors note that income-sensitive limits on the size of out-of-pocket exposure to medical care cost might be entertained.) I see no reason why this cannot include a required minimum level of health insurance (or the demonstration of the equivalent for wealthy individuals who want to self-insure). That is, there’s nothing in point 1 that rules out the kind of insurance mandate in the ACA or any number of alternatives that have been proposed. There is nothing in point 1 or elsewhere in the paper that explains how to determine what that “basic level of medical care” is. My guess is that any reasonable way to do it would involve the consultation by politicians of experts. How else do you establish law and regulations to achieve what is suggested in point 1? Of course it won’t be perfect! (See above.)

    And yet, point 2 seems to reject something we might infer from point 1. I raise this not to charge hypocrisy. My point is that John and Mark are drawing a line. They want policy to rule out (or in) some things (point 1) but not go too far in some directions (point 2). My point is that where this precise line is drawn — and actually, it is many lines because there are many different dimensions of health care that can be each regulated independently — is a value judgement. Once you say there should be some basic minimum, you can’t claim your notion of what it is is unique. You have to allow that my “basic” may differ from your “basic.” We have to fight out which “basic” will rule with the only process we have for resolving such a dispute, the political process. Of course the outcome won’t be perfect! (See above.)

    As this post is getting long, I will just quote a few other passages of the Health Affairs paper and then come back to other issues in the book’s preface in another post.

    From the point of view of risk-averse consumers, there is a demand for insurance against the unpredictable cost of medical care.

    Yes, yes, 1,000 times yes! Insurance (public or private) is a response to consumer demand. If insurance didn’t exist, that itself would be a market failure, an example of an incomplete market. Of course one can debate the ways in which the insurance market should be regulated or public programs structured, but John, Mark, and I all agree that insurance should exist.

    [I]t probably would not be desirable to permit a lower-income family to select a policy with a very high deductible and put their entire life savings into an MSA, since fear of wiping out their assets may deter them from seeking beneficial care.

    Agreed. And the risk of this becomes significant well before one puts one’s entire life savings on the line.

    One thing we learned from the roiling debate on health care reform is that there are no magic bullets to solve the health care problem.

    I’m glad to see the authors admit this. There is more than one way to skin the cat.

    My next post, also about the preface, will appear on Friday.

    * At least in the Kindle version, there is an end-note numbering problem. The reference is made to end-note 5, but it is really number 4.

    @afrakt

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    • I have a quick question relating to the point on why the MSA with Catastrophic Risk Coverage (CRC) is not already being done.
      In the article Goodman et. al state:

      “To be sure, employees could have chosen to set up an MSA and purchase catastrophic coverage under current tax laws. But if they did so, and reduced their premium by $1,100, they would have to pay additional taxes on the higher money wages. The additional taxes ($330 at a 30 percent marginal rate) would wipe out 41 percent of the $800 savings on medical expenses. Under current law they would be deterred from making this choice, because they would have to share their savings with the government.”

      Assuming all of this is true, there would probably still exist a state (lets say for single, younger workers) where it would net beneficial for worker and employer (Pareto Efficient) to have the worker transition to a MSA & CRC arrangement even with the loss to taxes because this sub-class of worker uses so little healthcare. Since this arrangement is possible in the current system, and, according to Goodman’s points in the Introduction of his book, the market will naturally take steps to move to a Pareto Efficient state given the financial incentives (such as with his pre-existing conditions example), why do we not see this happening now by firms in the market?

      Am I missing something?

    • What are the worst features of the way we subsidize private insurance through the tax system? The subsidies are (1) highly regressive, (2) arbitrary and unfair and (3) they are unlimited — subsidizing all insurance, no matter how wasteful.

      Is the Affordable Care Act an improvement? It retains all of the current regressivity in the employer market. It becomes highly progessive in the health insurance exchange. However, the price of that change is a huge increase in arbitrariness and unfairness.

      Someone at 138% of poverty will be forced to “buy” family coverage equal to almost one-half his annual wage. He gets no new help from government if the insurance is obtained at work. But the government pays almost all the insurance in the exchange. This difference in subsidy can amount to between $10,000 and $20,000 a year for two people at the same income level!

      The Cadillac tax will eventually put a cap on everyone’s subsidy, but it will be phased in at a snail’s pace — too slow to save us.

    • What is the best feature of the way we subsidize private insurance through the tax system? The relationship is basically strictly financial. With few exceptions, the government does not tell people what insurance they have to buy. Those decisions are left to employees, employers and the marketplace.

      On this score, the Affordable Care Act is a huge step backward. By dictating the content of the insurance package down to the tiniest detail (contraceptives?), it opens the door to every special interest group. But even before that process begins, we already have mandated spending on a slew of screenings and preventive measures that cannot possibly be justified on the basis of cost-benefit.

      So on balance I prefer Goodman-Pauly to the current system and the current system to the ACA.

    • “. There is nothing in point 1 or elsewhere in the paper that explains how to determine what that “basic level of medical care” is. My guess is that any reasonable way to do it would involve the consultation by politicians of experts. How else do you establish law and regulations to achieve what is suggested in point 1? ”

      At my website I outline an approach in which there is a large free market in individual health policies.

      Given that market, a “basic minimum policy” is one that covers those benefits found in 95% of all policies sold on the free market.

      There is a similar approach to the reimbursement levels and to lifetime total payment.

    • [I]t probably would not be desirable to permit a lower-income family to select a policy with a very high deductible and put their entire life savings into an MSA, since fear of wiping out their assets may deter them from seeking beneficial care.

      “Agreed. And the risk of this becomes significant well before one puts one’s entire life savings on the line.”

      There may be problems with asymmetric information, where a low-income person cannot get adequate information to make the optimal decision about which care is needed and where to stop aggressive intervention. But I wonder if it’s not a little disingenuous to say that low-income people (as opposed to wealthier households) should be discouraged from making trade-offs about how much of their life savings they should (or should not) commit to protecting their health. At the margin, most care is not a life or death decision. How much care to pay for is a normative judgment and not uniform from person to person. By that I mean the solution should not be to force low income families to have expensive, comprehensive insurance with first-dollar coverage just because they might make a decision inconsistent with a wealthier family.

    • Austin,

      You are exactly right that defining “basic” is a key discussion. Some people argue “basic” means “catastrophic,” others argue it means “commonplace,” others that it means everything that might be beneficial. My question is whether any panel of experts can define it in a satisfactory way. To one person “basic” must include chiropractors but not prescription drugs, another thinks absolutely in vitro but not eyeglasses, yet another thinks just the opposite. How can any panel of experts resolve this? When does the consumer/patient get to weigh-in?

      My suggestion is to define it in terms of money, not specific benefits. Ensure that each person has a certain amount of money to spend on the the services he/she views as basic or essential.

      • Greg,

        I agree. And if we had a market where all these folks’ free choices, unconstrained by legal shackles imposed by interest groups, were available for study, we could come up with a plausible definition of a basic minimum policy … as I discussed in my comment above.

        Right now, I can’t think of a currently available database. Perhaps in some other country? Any suggestions?

      • Wouldn’t that just shift the problem to be the “basic benefits basket” in terms of dollars but still of an uncertain amount/contents?
        If the contents aren’t set then the price of basic will change from person to person unless we define basic and then set a price to it. Moreover a money approach would add the variable of price differences between providers/regions.
        As such, the money approach would seem to have the same problems as defining basic plus some extra.

        • Dev,

          In a basically market system a “basic” policy needs to be defined only for those without any resources. You could define that policy and then either just guarantee access to it for those folks, or give them the money that an insurance company will accept for it.

          I suppose, if the latter, the recipients might use it to buy any other policy on the market if they could find it for that price and preferred it. There would have to be regulation to ensure that it was a reasonable policy, e.g. not a health club membership. Must include some catastrophic.

    • I agree Greg, “define it” [basic benefits] “in terms of money, not specific benefits”, but two other things could help frame basic benefits. 1) Accept those epidemiological issues where transmission from the host can affect others. 2) If a basic benefits plan is used and debated, use one that has the least impact on the market place.

      Patients, whether they pay or not, frequently do not follow life saving advice so the benefits supplied are often not the issue. Additionally poor patients without the funds that desire care frequently find a way. Thus the argument raised about the poor not getting care is faulty though not entirely incorrect. Solving that last problem always creates the danger of doing too much and thereby causing greater harm.

    • I think that it is not helpful to confuse public health and individual medicine when the discussion concerns what we consider “basic” healthcare. Public health has, until recently, been a separate discipline for a reason–there is value in public funding for activities that reduce infectious diseases that have serious consequences.

      The debate over what constitutes a “basic” level of medical care is in itself symbolic of what is so unfortunate about the approach taken in the PPACA. Basic medical care is a concept that developed along with medicine itself. Basic in 1910 is not basic now. It depends upon what individuals value and how wealthy they are. Basic in the US is not basic in Nepal or the United Kingdom, for that matter.

      If one believes that government should offer some basic level of care, one could argue that clinics should be available where that care is freely available. This is the approach that has historically been used in the US. It does not follow that providing basic care requires forcing people to finance their health care in a certain way–namely purchasing bloated insurance policies that we know that people almost never choose to buy when they are spending their own after tax dollars.

      • Could you clarify what you mean by clinics? Are you just thinking outpatient care with BP screenings and URI treatment? Would the clinic cover deliveries, CABGs and chemotherapy? If you have free clinics, how do you avoid overutilization? How do you define basic and what is bloated?

        Steve

    • @ Dev

      Before the HSA legislation, self insurance was often combined with catastrophic coverage, especially in the individual market. But since the savings were not tax free there was no reason to have a segregated account. However, people are not very good at saving for irregular, unanticipated expenses.

      Here is something that is rarely explained: HSA’s are at root a paternalistic idea. They are a way of making sure that if a child wakes up in the middle of the night with a stomach ache, the mother will be able to afford the emergency room fee. But it leaves the money and the decision to seek care in the hands of the mother.

      As for taxes, there must be a level playing field: third-party insurance and individual self-insurance (thru, say, HSAs) must be treated the same way under the tax law — to avoid distorting peope’s choices.

    • 1:
      [I]t probably would not be desirable to permit a lower-income family to select a policy with a very high deductible and put their entire life savings into an MSA, since fear of wiping out their assets may deter them from seeking beneficial care.

      Seems quite compatible with my compromise plan. The poorer a person is the less savings they tend to have but it goes beyond that because in general the poor are less capable and so are more likely to forgo valuable care and get wasteful care (after all they often buy lottery tickets) and so it would be good to have the rich pay out much more out of pocket while protecting the poor from the same. My plan encourages that.

      2:
      Yes, yes, 1,000 times yes! Insurance (public or private) is a response to consumer demand. If insurance didn’t exist, that itself would be a market failure, an example of an incomplete market. Of course one can debate the ways in which the insurance market should be regulated or public programs structured, but John, Mark, and I all agree that insurance should exist.

      True but insurance might have been a good way to pay for medical care when medical care was just a few percent of GDP but I am not so sure that we are better off for the existence of health insurance at least in its current form. Insurance seems an inefficient way to pay for anything. Remember if they recover people can amortize the cost of care over time.

    • While you “healthcare policy experts” dither over this new book, there are those who are solving problems not just talking about them. Here’s my thoughts to John:

      I went straight to the local Barnes & Noble when I first saw an ad for “Priceless.” At the end of Part I, page 52, I was enthralled, “If people don’t come to their convictions by means of reason, then reason isn’t going to convince them to charge their minds,” so very true.

      However, when reading your explanation of HRA plans on page 147, where you write: “All the money that flows through these accounts (HRAs) comes from employers, and employees really have no property right in the accounts . . . owners of HRA accounts may not regard the funds in the account as their own.” I became so angry that I almost threw “Priceless” across the room.

      John, you are very well aware that there is a method where employees take ownership of their HRA accounts with great flexibility and can accumulate funds for future years. My dear friend Randy Ray, CEO of LyfeBank has spent years of time and treasure to make this a reality, but you wouldn’t even make a passing mention in your book!

      My rage grew through “Letting People Out of the Trap” where you explain “supply-side effects” of self-insurance (pg. 148). LyfeBank clients with high deductible plans (today) accumulate substantial balances and pay with their own money for healthcare with VISA cards. On page 153 you extol making and HRA like a FSA, LyfeBank has accomplished this too. On page 166 you write “Portable benefits are consistent with a mobile labor market,.” LyfeBank accounts belong to the employee and are completely portable. Then you write “Most employers, and certainly all small-business owners, would prefer not to be in the health insurance business,.” Employers using LyfeBank simply make defined contributions to the employee accounts.

      To top off my rage, in Freeing the Nontraditional Workplace, pg. 167, I became apoplectic. LyfeBank allows multiple wage earners (or part time) to contribute into a single family account. My friend Randy told me how they recently signed on an association of apple growers who each pay into migrant worker accounts as the workers move north from one grower to the next. I pray that God blesses this man who truly helps the poor.

      I’ve pondered as to why, when there is a working solution available to many of the problems explained in “Priceless” you wouldn’t mention it? Perhaps you should add another line to your statement on page 52, regarding “convictions by means of reason,” to include this;

      “If it’s not my idea, I’m not interested,” or “What’s in this for me?”

      • @ Leon from Redding

        LyfeBank sounds like it has an innovative product. I agree, HRAs are very flexible and can be tailored in a variety of ways. A few years ago I met with some executives at a Dallas-based firm, HealthMarkets, who marketed customized health plans that integrated a HRA-type personal health account within an employee health plan. Its plans also featured other financial incentives and provided extensive web-based tools to assist enrollees when they shopped for medical services. I thought HealthMarkets had a great idea. I tend to like HSAs a little more than HRAs only because HRAs are often notional accounts. Employers often don’t prefund them; and don’t have to allow employees access to funds when they leave. However, I still believe HRAs are an important way employers can encourage workers to consider costs, while also encouraging them not to forgo beneficial care.

        • HSA withdrawals can be used for non-qualified expenses (w/ tax penalty) and are often just another savings vehicle like an IRA, diminishing the appeal for reduced government while HRAs can only be used for qualified health care expenses.

          P-HRAs (Portable) such as LyfeBank accounts are employee-owned bank accounts which I wouldn’t consider as “notional.” The P-HRA structure solves many of the problems John presents in his book but it seems few people understand how they work. I would encourage you or John in contacting Randy Ray, CEO (Randy@Lyfeststems.com). I’m neither employee nor spokesperson for them, just an advocate.