• Another health reform proposal

    By eight important health economists, with support from the National Research Institute and the American Enterprise Institute (ungated PDF here):

    First, we allow and encourage insurance companies to charge individualized premiums to consumers that reflect their true health care costs. This moves away from the current approach of offering coarse and relatively uniform premiums to the wide range of individuals seeking insurance (through the use of group insurance or state-level community-rating mandates). This reform provides a firm foundation for a health insurance market that no longer motivates healthy individuals to opt out. Insurance offerings would be made available in an open market—for example, through insurance exchanges— with premium transparency.

    Second, to ensure that offers of insurance are affordable, we propose government financed premium supports. The poor, especially the sick poor, gain access to a basic insurance plan at no cost and to more generous plans at significantly reduced costs.

    Third,we propose eliminating the practical and legal barriers to multiyear (long-term) health insurance contracts. Such contracts protect all Americans from increases in insurance rates that could accompany major illness.

    Fourth, we propose to abolish the tax preference for employer-sponsored health insurance plans. This subsidy encourages excess utilization of both insurance and low-value health care services. It also costs the federal government nearly $300 billion in lost revenue—revenue that could be used to fund insurance for the sick and the poor. Finally, it forces an awkward bundling of health care and employment with adverse consequences for workers and firms alike.

    I did not read all the details, so perhaps the following is included somewhere. I’d add something that encourages/removes barriers for plans and providers to fund and offer health care that is evidence based (e.g., safe harbor from lawsuits under certain conditions). Still, theirs is a plan with elements I could defend.

    Nevertheless, I would be surprised if the authors believed any plan like the above would become law in their lifetimes. This sounds critical, but I don’t intend it that way. I just believe path dependency, status quo bias, stakeholder interests, etc. are too strong.

    That’s not to say it isn’t likely we’ll see some movement in some of the directions the authors propose. Indeed, in a few cases, the Affordable Care Act takes steps consistent with their plan (e.g., the Cadillac tax; see also Arkansas’s private option). Though in many other ways, it must be acknowledged, it is a step in another direction.

    That does not, by itself, make it a step not worth taking. Reasonable people can differ on that. But they really should keep in mind the likelihood of passage other, substantial reforms that assist the poor and near poor. Just as it is reasonable for people to find the ACA wanting, it is also reasonable for others to cling to it unless and until another plan obtains strong political viability. Repeal will never obtain broad, bipartisan appeal without replace. Even then, good luck!


    • Delightfully vague wording for the sick poor and uninsured who have the misfortune to beill. A “basic coverage” policy for these unfortunates seems to institutionalize tiers of care. You fall ill, your rates go up to the point of unaffordability and/or you are offered “basic care” whatever that is. Its a wonderful way for insurers to flush risk out of their covered population.

      Market economics doesn’t work with sick people and their non-descretionary health care needs.

    • There are millions of expatriate Amerikans and Amerikan foreign tourists who spend up to 6 months of the year outside the USSA. For them to be treated fairly by both Medicare and Obamacare, there needs to be some provision, at least, of portable insurance. Else they will be unfairly paying for a service that is not rendered.

      The alternative, of course, would be for them to be able to suspend their Amerikan coverage so that they could pay for overseas health care.

    • This whole opt-out/individual mandate thing seems positively bizzare to this outsider looking in (from Canada).

      At least where I live (British Columbia) almost no one opts out, I presume because the premiums are so low and the benefits relatively generous. It just seems crazy to not take advantage of the program. I suspect there’s also a cultural element in that everyone is ‘expected’ to participate, as a cultural norm.

      I’m also befuddled by this whole “you can only enroll at certain times of the year” business. In BC, there is a 6 month waiting period. That is, you can’t sign up whenever you want (even if you were in one of those sign up periods.) Your coverage only takes effect 6 months after application.

      There are all sorts of logical/reasonable exceptions, such as switching from your parents plan as a dependent child, or moving from another province where you also had continuous coverage.

      If you want to opt out in BC, you can. But if you get sick, you’re on the hook for the first 6 months. Combine that with what appears to be the equivalent of a “Cadillac plan” and low premiums, and almost nobody opts out.

    • As far as I can tell, the first point means that if you’re in your 20’s, male and in good health, you can get a cheap policy. If you’re older, female, have ever been sick or injured (or pregnant), good luck with that.

    • Check out AEI’s webcast of the presentation of this proposal. Henry Aaron goes after the authors hammer and tongs.

    • Hey Austin,

      How is this proposal any different from the others AEI has offered? In most critical respects it looks exactly the same as the McCain plan.


    • So what does this mean?

      “… we allow and encourage insurance companies to charge individualized premiums to consumers that reflect their true health care costs.”

      If one’s premiums ‘reflect’ their true healthcare costs, then is it insurance? I guess that hinges on the interpretation of the word ‘reflect’. But my understanding that it is health insurance because some people incur higher (and very high) costs and others do now. The intervention called insurance smoothens these variations longitudinally across ones life time and laterally across populations of people.

      What is wrong with these guys, that the above extract is on the first page of the executive summary of their study?

    • As someone who is older but not yet Medicare-eligible, who has pre-existing conditions that can potentially cost some serious money, I don’t like the sound of that first paragraph. The bros would be winners and people like me would be losers.

    • This proposal seems to suggest that we eliminate the insurance part of the insurance without eliminating the insurance companies. What’s the point of having something called “insurance” from a third party that isn’t insurance?

      Might I suggest a socialized health service? It seems to fix the same problems and unfortunately has the same chance of happening…..

      • People in the bro demographic should be wary, too. I’m currently a 20-something male in great health, but I understand (and I wish many of my friends also understood) that young healthy men don’t stay that way forever. I think paying higher premiums in my 20’s is a more than acceptable price to pay for the peace of mind that comes from knowing I won’t be paying steep premiums when I’m nearing 60.

    • Points two through four are more than defensible. But the first point is contrary to the premise of risk management, which is just another term for sharing risk. It would be comparable to limiting lenders to making loans only to those buying real estate on Long Island, or in Miami, or in Tokyo. What makes insurance/risk management work is a risk pool with very different risks. In a perfect world, all risks (illness, death, disability, unemployment, etc.) would be shared so that the per capita cost would be very small. Indeed, the global economy has the potential for risk sharing that would unlock enormous potential for economic growth, as the risks of someone in China are pooled with the very different risks of someone in the US. Of course, that’s a “conservative” model. Why, then, does the AEI promote the opposite when it comes to health care? Because this has nothing to do with risk management, and everything to do with politics. If AEI doesn’t believe in risk sharing, then we should prohibit derivatives, the product for risk sharing AEI vigorously supports that almost imploded the world economy. But bad faith aside, I have argued in favor of AEI’s third point as an alternative to the mandate: let the market give the young and healthy an incentive to buy health insurance today, namely, a lifetime, fixed premium for health insurance.

      • What makes insurance/risk management work is a risk pool with uncorrelated risks AND premiums that reflect the risk. If there are a million people in the risk pool they have a 5 in million chance of a 10 million dollar loss a year, charging each $70 a year works. If you add another million people to the pool that have a 10 in a million chance of a 10 million dollar loss a year and also charge them $70 a year then the system falls apart. Since many might not be able to afford the resulting premiums there were points 2 and 3. Maybe single payer would be more efficient but correlating premium payment to risk is part of insurance.

        • No two people have the same health risk. Or death risk. Or disability risk. Or unemployment risk. Just as no two borrowers have the same default risk. And, of course, when is an illness within the person’s control. When she resides with a smoker and breathes second hand smoke, lives in a city with smog, rides a bicycle for transportation in a crowded urban area? But AEI’s third point still intrigues me: a fixed (level) premium health insurance policy – much like a fixed (level) premium life insurance policy. With a variety of options, including an “investment” feature (like whole life insurance) that builds up cash value or paid up benefits. Require pure community rating and let private insurers figure out how to make it work. Community rating with a mandate is either (a) an expression of no confidence in the creative capacity of private insurers or (b) a gift to private insurers so they don’t have to be creative.

    • Using standard actuarial methods to accurately price risk, price transparency and competition to promote efficiency, using subsidies to insure access to the very poor and/or very sick is a much more efficient, fair, and rational approach than any of the blunt transfer schemes championed here in the comments.

      There is simply no economically or ethically sound reason why an obese chain-smoker who’s income places him in the upper middle class or higher should have his excess health risks financed by transfers from other people who are either less wealthy or more prudent stewards of their own health, or both. None.

      • Though I understand your point, I do think it is not complete without making an argument for the case in which the prudent steward happens to contract an illness beyond his control. This is obviously the case the draws the greatest sympathy. Does that alone justify a transfer? Some believe so. I presume you don’t. Can you spell out why?

        • @Austin:

          I was originally going to extent my comments to cover that scenario, but just ran out of time.

          The most ethical and efficient framework would transfer funds to those people hit with an illness beyond their control when it was necessary to secure access to the health care that they need to treat it. Jeff Bezos would get zero public money to secure care in this framework. Someone who has substantial equity in their home, or other stores of wealth, would have to tap them to pay for their care before the public would be obliged to do so. Those who lack the assets to cover their own medical expenses, but have a sufficient income to repay them over time would be extended loans with terms dictated by their situation. The public would be obliged to cover only those expenses for either premiums or care that the truly unfortunate could not cover with either their existing wealth or future earnings.

          As it stands now, a great many people who do not need a penny of public money to pay for their coverage and care are getting a great deal of it through various mechanisms such as the employer tax exemption, and various ratings regimes that insulate those who can afford to pay the full cost associated with all of the health risks that they have the capacity to control but do not.

          I do not include you in this group – but beyond status quo bias – I have a great deal of difficulty how people who self identify as progressive can defend these frankly regressive aspects of the current system.

          • @JayB

            I’ve always had problems with drawing lines between the working middle class, the working poor and the indigent. According to your scenario to get help with coverage a person would have to impoverished him/herself, sell off vital assets (home) and such, and go into debt before receiving help for health care. But if he/she were indigent help would be available. Is this really your view?

            Talk about an incentive to be unproductive.

            I know of no other industrialized country that uses this type punitive policy.

            • @Paul:

              I think it’s all a matter of where you set the thresholds for assistance. Set them at a threshold where they’re only available to the truly destitute and I doubt many people will voluntarily impoverish themselves to the degree necessary to qualify. Set the threshold high enough and you’ll probably start to see some effects.

              Having said that – we already have a vast array of existing policy incentives that discourage employment, savings, investment, and production and promote helplessness,indebtedness, idleness, and consumption. I’m not sure that introducing means testing for health insurance/care subsidies would decisively alter this set of incentives.

            • @JayB: I figure 80-90% of Americans are in the categories of middle class or less with inadequate retirement savings and salaries under $80,000/year (the mean and median are around 50-60,000/year).

              Considering health insurance costs, if any of these folks should have a “pre-existing illness,” they will be priced out of the insurance market. Paying down their assets will aggravate their already tenuous financial condition and jeopardize whatever retirement they might hope for.

              We have a non-system of health care in which cancer medications cost over $100,000/year and operative procedures are in a similar range, the highest costs for care by far than anywhere else in the world. We are number 1. Going without insurance is not a reasonable alternative.

              And by the way I don’t believe the so called disincentives for employment, savings, investment, and production apply to these folks who are simply trying to live. Now maybe some of the 1% might feel a disincentive to add to their income and savings and yes, pay more taxes, but folks on the edge and at the bottom don’t voluntarily become impoverished to languish on the public dole….but that’s another complicated story beyond the scope of this discussion.

    • Charge everyone the same rate: not 3 to 1, according to age, but 1 to 1.
      Allow participants to build paid-up benefits, which will allow them to price the coverage AS IF the deductible was raused.
      Allow family members to build up the same paid-up coverage for nominal premiums.
      Everyone wins.
      The young and healthy, while being overcharged at first, accrue savings of 60-80% wihtin 3-5 years (and the savings accrue immediately every month, as long as claims are not made).
      Those having continuous claims receive fully community-rated premiums, a significant discount from today’s experience-rated premiums.
      Look for this patented plan in 5 states in 2014, offered by National Prosperity Life and Health.
      Don Levit

    • The core of this proposal is to de-regulate health insurance.

      The result would be something we already have for private long-term care and private disability insurance.

      Premiums are indeed accurate actuarially, carriers do pay claims if slowly, and the market trudges on.

      Except that less than 10 per cent of Americans have these kinds of insurance, and even those who buy it are sometimes later forced to surrender it due to premium increases.

      The sun will still come up in the East if only 10 per cent of Americans have health insurance. But it will be a lot poorer country.

    • I’d like to hear what those overutilized services are. “Let’s take another ride in the MRI?” Also, let’s be clear: the main objection to employer-provided insurance comes from employers. It’s expensive and the employment market demands it. And, apart from some positive signs over the last few years, these costs increase at unpredictable rates. This must be the one and only area AEI and/or the Republican Party supports a tax increase.

    • The AEI report is interesting as an intellectual exercise. The problem is that it is created in a political vacuum, as if politics didn’t exist. The fact is that any plan would have to be passed by Congress and signed by the president. So far, the ACA is the only plan that’s met that test. If we can get there, experience will tell us what works and what doesn’t and maybe we can modify it (if we can get past the gridlock that currently prevents that). But the idea of scrapping it and starting from scratch is a fantasy.

    • I agree wholeheartedly with JayB.

      Insurance is a religion, not unlike marriage, that a whole hell of a lot of us don’t subscribe to, including Jesus Christ himself (cf Matthew 6 “Take no thought …”).

      The return on Obamacare insurance (“loss ratio”) is supposed to be held to 80%. For NFIB flood insurance, the return is some 65%. For title insurance, it is about 2%. As a thinking scientist, I cannot subscribe to anything that returns less than 100% on my investment, whether marriage, breeding, lottery or insurance

      The idea that insurance should be seen as a device for risk abatement instead of a poor investment is a canard. There are folks who climb Everest and jump out of perfectly good airplanes. It is the height of idiocy, if you are one of those folks, to have car insurance, Obamacare or any other type of insurance since you are obviously a non-risk-averse person.

      Insurance to cover your skydiving and mountaineering is, first of all, not normally available (cf Lloyds of London) or not useful if you are dead. I am the kind of person who does lots of risky things, and there is no way I will pay to support fat, hypochondriac, breeding couch potatoes by subsidizing their insurance religion.

      • @Jimbino – It’s about financial risk, isn’t it?

        Just curious – I assume you’re uninsured. Who pays if you have a high cost illness or injury?

    • Locking people into long term insurance contracts creates a moral problem: Suppose a long term contract limits care of for a particular condition or limits a particular kind of care, whatever that may be. (This type of care might not even exist when the contract is written.) When some beneficiaries develop this condition or need that kind of care, these beneficiaries will protest, “I did not intend to sign my life away, 20 years ago, when I signed this contract.”

      Probably some such beneficiaries will get the care they need, undermining this system. In response to this problem, we would need a lot of regulations setting minimal requirements for contracts, and standardizing them. It also would be difficult to get anyone to sign on to such long-term contracts. So it would be hard to get this system going.

      The AEI authors acknowledge the long-term contracts would be difficult to enforce, “both practically and legally.” While Obamacare makes insurance companies the agents of a government policy of universal coverage, the AEI proposal would require government to act as the enforcer of arbitrary insurance contracts. Theoretically possible, perhaps.

    • You don’t want to feel locked in to long-term contracts.
      But, it is advantageous to price products so that over the long term, they are affordable. In that way, people would want to stick with the policy.
      Our policy is designed for just that. We are looking at excellent retention over 20 years.
      Normally,according to Milliman, our actuary, an insurer needs lapses to make up for the risk of older policyholders staying on board.
      For a molehill of extra dollars in the beginning, we provide mountains of savings.
      Don Levit

    • And of course the insurance companies will be barred from demanding and the actuaries will be prohibited from using DNA test results of prospective customers in determining premiums. /snark/

      Imagine your healthy 2-year old assessed a $50,000 annual premium because she has a genetic profile associated with breast cancer, colon cancer, heart disease, epilepsy, and depression plus whatever other genetic links discovered in the next 80 years.