Winston Kotzan's  Instablog

This past weekend, for the first time the Obama administration hinted that it would be willing to sacrifice the publicly funded insurance portion of the Affordable Health Choices Act in order to make a bipartisan concession.  Investors reacted positively to this news, sparking a rally in managed care stocks Monday as fear was assuaged that this government insurance option would over the long run hurt the industry.

Despite growing signals that this congress is willing to loosen some of its more controversial measures to fix healthcare, there are still plenty of reasons to worry.  I contend that Affordable Health Choices Act will not achieve its laudable goals if it is passed in current form.  Here are some of the key reasons that I believe this bill will accelerate the unsustainable trend of costs and national debt over the long term:

1. The Affordable Health Choices Act will fail to curb healthcare inflation

A lack of individual accountability for the costs associated with treatments is a major cause of healthcare’s spiraling financial burden.  Yet, the proposed reform ineffectively addresses this problem.  In Senator Daschle’s book Critical, he writes:

 “…doctors and hospitals had little reason to care about costs.  Hospitals considered doctors to be their clients, and doctors made the decisions about how to care for patients.   They decided whom to admit to the hospital, how long to keep them there, and which tests to run.  Doctors, bound by the Hippocratic Oath, had no reason to know or care about the cost of what they ordered.  Hospitals were happy to earn as much money as possible by performing every test and procedure imaginable.  Patients with insurance didn’t pay much attention either, since they weren’t paying the bills, and their main concern was getting well.”

In later pages, he cites examples of how even after the advent of managed care, the misguided use of expensive tests and procedures leads to poor cost containment. 

The bill calls for all Americans to have some form of health insurance.  Unfortunately, this “Shared Responsibility for Healthcare” does little to encourage personal responsibility towards cost containment – the moral hazard of patients and doctors liberally using expensive treatments on the tab of other insurance payers still abounds.

2. A reduction in subsidies to private industry will not cover the cost of expansions

In town hall meetings, President Obama has suggested that the overpayments made in the Medicare Advantage program could be redirected to insure more people.  However, the savings of a cutback in Medicare Advantage would appear to be insufficient.  According to a June 28, 2007 CBO testimony, leveling Medicare Advantage payments with the traditional fee-for-service arrangement would save $149 billion over 10 years.  However, according to CMS figures, Medicare in total spent $431 billion in 2007 alone to insure its approximately 44 million members.  Diverting any extracted savings from Medicare Advantage to help cover the 47 million uninsured citizens would be a drop in the bucket.  Additionally, many Medicare Advantage programs provide supplemental benefits on top of traditional Medicare so it would naturally be more expensive.

3. The prevention and wellness components are inefficient

A major cost containment component of the bill involves a strategy for curbing costs through numerous expensive public programs which include the establishment and expansion of government entities directed towards wellness and prevention.  However, the CBO recently released a report stating that preventive care measures tend to increase net healthcare costs, and the benefits of wellness programs are tenuous at best.  The CBO report states:

“Although different types of preventive care have different effects on spending, the evidence suggests that for most preventive services, expanded utilization leads to higher, not lower, medical spending overall. …a new government policy to encourage prevention could end up paying for preventive services that many individuals are already receiving—which would add to federal costs but not reduce total future spending on health care.”

On wellness programs, the CBO commented:

“…designing government policies that are effective at inducing people to be healthier is challenging. Even successful efforts might take many years to bear fruit and could involve significant costs. Moreover, many employers already support some wellness services for their employees, and new government efforts to encourage such services could end up paying for services that some individuals are already receiving—which would add to federal costs but not reduce total future spending on health care.”

Along with these programs, Congress vows to increase insurance coverage via mandates and the use of federally funded credits to make plans more affordable. If the prevention and wellness efforts are ineffective at lowering costs, then how could this bill reasonably expect to achieve both goals of expanded national coverage without adding a significant burden on top of our already insurmountable government debt? 

4. The public plan is an unnecessary use of public funds

The Affordable Health Choices Act aims to increase competition in the insurance market by establishing a public plan.  Even a wholly nonprofit-driven insurance organization is unlikely to offer an incremental benefit significantly better than what is currently delivered in the private market.

In 2008, Wellpoint paid 83.6% of its $51 billion in premium revenue to cover the medical payments of its clientele.  After subtracting administrative costs of running the business, the company was left with a measly 4% profit margin ($2.5 billion) for its shareholders.  Removing this profit would only lead to a slight discount on premiums for customers.

Even President Obama admits that it would be difficult for a public plan to remain competitive with private industry.  As he stated during a town hall meeting, “If you think about it, UPS and FedEx are doing just fine, right? No, they are. It's the Post Office that's always having problems.”

An alternative idea now being floated is the establishment of state founded insurance co-ops, a type of independent company owned by its constituents.  Depending on its implementation, a network of co-ops could be more or less efficient than a public plan.  Incrementally, I don’t believe it would provide any more marketplace competition than the original idea of a single competing government entity.  However, the conflict of government ownership may be abated.  The good news from this analysis is that public plan, co-op, or not, managed care companies like Wellpoint, UnitedHealth, and Humana likely here to stay.

A Proposed Alternative

A big government solution with the high potential for waste is not the answer to our healthcare issues.  In fact, government regulations are an impediment to competition within the insurance industry.  Because each state has its own requirements for what should be included in an insurance plan, insurance providers must devise separate systems for performing business in each state.  This leads to a great deal of administrative waste and prevents risk pools from being effectively spread across populations.

I believe the following ideas would be more effective in accomplishing healthcare reform goals:

1. Promote the use and accessibility of Health Savings Accounts (HSAs)

HSAs put some responsibility of lowering healthcare costs on the patient.  With standard insurance, patients have no incentive to seek quality care at a more affordable price because copays are standard.  With a finite flexible spending account such as an HSA, the incentives are aligned for patients to shop around for non-emergency healthcare.

Flexible spending accounts could be installed as an option in a program like Medicare by offering monthly allotments toward the individual’s account combined with higher deductibles or percentage-based copays.  A proportional cost sharing system driven by flexible spending accounts could have wider implications beyond simple episodes of primary care.  Rather than having the government make a decision on whether a patient receives certain diagnostic tests, the economics of financial scarcity will lead to more personalized choices between the patient and the doctor.  Patients will be more likely to seek tests such as MRIs at the least expensive venues and competitive forces will lower prices over the long run. 

2. Deregulate the insurance market to allow interstate competition

Rather than rely on a solitary incremental choice provided by a public plan that is likely to operate in the red, the government could open a firestorm of free market competition and innovation by just allowing plans to compete across state lines.  According to a February 2005 study by The Commonwealth Fund (Insuring the Healthy or Insuring the Sick? The Dilemma of Regulating the Individual Health Insurance Market), a large disparity exists in the individual market insurance premiums between states.  This is primarily due to state regulations about what benefits should be covered by insurance.  A tradeoff occurs between coverage and benefits.  By allowing interstate competition through the American Health Benefit Gateway, a wider variety of choices will be available to purchasers and local public policy makers could use a trial-and-error based approach to determine the best balance of benefits and affordability.

3. Allow a tax deduction for individual market insurance premiums

It is widely believed that the bane of our insurance system stems from employers’ World War II era tax break for healthcare expenses.  Our employer-driven healthcare system engendered a dependency of employees on their workplace for healthcare.  Today this system presents a significant obstacle to entrepreneurship and burdens our domestic businesses competing against foreign enterprises that do not have an obligation to pay for healthcare costs.  Rather than further impose healthcare costs on our businesses with a pay-or-play provision, a reform should work to nudge us away from this system by establishing a stronger independent insurance market.

Conclusion

Once this proposal is signed into law, any mistakes will be nearly impossible to repeal.  For an industry so important to America morally and economically, such sweeping untested changes could have disastrous consequences.  We have already seen similar reforms fail in states such as Massachusetts.  The state achieved a remarkably low uninsured population rate of ~2.7%, but at a cost.  Rationing now exists via wait lists, insurance is still unaffordable for many families, and the state’s budget is threatened by cost overruns.

Rather than allow the government to flex its “bully pulpit” and exercise unprecedented market manipulations over one of our key industries, I believe it would be more productive to minimize the existing governmental interferences that have led to obstructions in the marketplace.  An effective reform would inspire true competition for insurers, providers, and the regulators within different geographic localities.