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Gloria Vogel, CFA
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Gloria Vogel is Executive Vice President at Treehouse Technologies, Inc., a firm dedicated to growing digital distribution of insurance products. She is also an Adjunct Professor at NYU-SCPS. She was previously a Senior Vice President at Drexel Hamilton, and a Managing Director at Vogel Capital... More
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  • Unintended Consequences of Healthcare Reform
    Now that healthcare reform has moved beyond the Senate Finance Committee, there is discussion of melding various House and Senate proposals into a single bill that could gain enough votes to pass. So let’s examine the possible unintended consequences of current proposals.
    1. Public Option. Arguments are made that the public option will bring down costs, but this is nonsense. Take the argument out of the heated health insurance debate and look at government programs in any other sector. No matter what the area, government is not as efficient as the private sector. It requires bureaucracy to manage any program, and political pork always seems to creep into the process, further boosting rather than lowering costs. As such, the public option will push costs higher than would otherwise be the case.
    2. Eliminate Pre-Existing Conditions. Insurers are profit-making organizations and they have discriminated against individuals with pre-existing conditions. The reform proposals want to force insurers to cover everyone, including those that are sick. There is social merit in the proposal, but it can only keep costs down if the currently young and healthy also participate fully. It simply costs more to care for the sick than to keep the healthy in good physical condition. The currently uninsured young and healthy are strapped for funds or prefer to spend cash on other items. They will not join a plan unless there are either mandates with penalties for lack of participation, or tax incentives to encourage their inclusion in a plan. If only the sick with pre-existing conditions are added to insurance coverage, then costs will rise for everyone in the plan. Private insurers will leave the market to the government if there are no profits to be made.
    3. Tax the Cadillac Plans. Whenever a tax is placed on an item, the market tends to shift away from that item towards an alternative or replacement product that is not taxed. Consequently, if a tax is placed on “Cadillac” insurance plans, such plans will be replaced with more tax effective ones. Taxing high cost plans will thus drive such plans out of existence, as everyone shifts to the cheaper plans which provide less coverage. Most notably, union workers will feel the pinch since they currently have the best plans. The government will therefore never see the projected tax revenues needed to support its healthcare bureaucracy.
    4. Requirement for Small Businesses to Offer Coverage to their Employees. While the government has bailed out the “too big to fail”, it has done little to help small businesses. With consumer demand reduced significantly, and with tight credit markets, small businesses are hurting badly. They have already downsized their operations and are operating on very thin margins. Forcing businesses owners to pay for insurance coverage for employees will put additional pressure on those companies. The extra costs will push small business owners to eliminate more workers, thus raising the unemployment rate rather than raising revenues to support the healthcare plan. 
    5. Increase Competition. This goes back to the public option, which is intended to increase competition in the marketplace. In most states, the health insurance market is dominated by one or two big players, who have no real incentive to improve their prices or services. However, if the government is the only other competition, then it becomes no contest. Over time there will be no competition at all -- only a single payer system -- as all insureds will simply shift to the lowest cost government provider.
    6. Choice. The Administration claims that offering a public option will increase choice in those states that have only one or two providers. However, if a single payer system emerges as the private sector is pushed out, choice will in fact become more limited. A likely outcome of current proposals is that choice of doctors, treatments, hospitals, etc., will become more limited under healthcare reform.
    7. Cost Reduction. Government is likely to set fee schedules and to define procedures eligible for reimbursement in order to cut costs. Under one House bill, the so-called public option would set rates to 5 percent above those paid by Medicare. In another House bill, thepublic insurance firm would negotiate rates, as private insurers do. The government fee schedules for Medicare/Medicaid already encourage many physicians to reject Medicare patients. If fees are set too low in order to reduce costs, then the best and the brightest will no longer be drawn to the field of medicine, as the income level will not be sufficiently attractive. Indeed, in some nations there is a shortage of doctors due to inadequate fee schedules. The same shortage will happen in the US, while quality of care will be compromised.   
    8. Mandated Purchase of Insurance. In all the measures, Americans would be required to buy insurance, helped by purchasing exchanges and government aid. Insurers would face new rules, with preventive care, electronic records and cost-effectiveness research playing a larger role. However, the major issue in these measures is how the government will pay for its program. Newly revised estimates place the cost at around $800 billion. But, when Medicare was introduced, original government estimates turned out to be half the real cost. It is most likely that the total costs will again exceed the initial estimate. Moreover, the federal government will shift costs onto state and local governments, many of which are already reeling from budget deficits. 
    9. Rationing. The insurance companies already ration care through pre-existing conditions and dropping of coverage. Under the government plan, the rationing will more closely resemble that of other nations, where long waits for care are common, and where the elderly are placed at a disadvantage.
    10. Regulation. Currently, the insurance industry is monitored by state regulators. A government plan will require federal oversight, perhaps leading to conflicting situations with state insurance regulators over jurisdiction, rules, monies, fees, etc. 
    Alternative suggestions:
    What can be done instead? Much in behavioral economics has examined how individuals act in different situations. Mostly, individuals will go where there is least resistance (cost), most benefit (profit), and easiest path to completion. So let’s create incentives to drive the results. 
    • Give individuals tax credits for buying insurance.
    • Create assigned risk programs for those unable to afford premiums, as is currently done for auto insurance. Rather than create a new government aid program, cover those costs by assessing insurance companies based on premium volume,
    • Allow insurers to compete nationally across state lines.
    • Provide for increased transparency of costs that will allow the public to make informed decisions.
    • Offer incentives for individuals to seek preventive care.
    • Introduce national programs in schools and community centers to foster greater attention on diet and exercise.
    • Eliminate Medicare fraud to better cut costs.
    • Grant individuals more control over health care payments.
    No Positions Held
    Tags: AET, CI, UNH, ANTM, Insurance
    Oct 25 9:03 PM | Link | Comment!
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