Repeal And Replace Cannot Escape Basic Healthcare Trade-Offs

| About: Health Care (XLV)


Healthcare is the single biggest sector of the economy, and it's also the main job creator.

The US has a particularly expensive healthcare system, which negatively affects the economy in myriad ways.

Because of its importance, and the complexity of the system, changes must be very well thought out in advance.

Healthcare is nearly a fifth of the US economy. It's the biggest sector and one of the biggest employers. Since it's labor-intensive and mostly resistant to automation, it's also the biggest job creator.

Healthcare and healthcare insurance markets suffer from a number of well-known market failures, which make government involvement difficult to avoid.

It looks like the US is embarking on another big change of its healthcare sector by a repeal of the Affordable Care Act (ACA), but as we'll try to explain, no plan can escape the basic trade-offs involved in healthcare. From what we know now, this has significant potential to go wrong and create significant disruption in the largest industry of the economy.

Not only does this potentially affect millions of people, the healthcare sector itself and, more specifically, healthcare insurance companies that derive a significant part of their income from the ACA exchanges can take a hit.

US healthcare is extremely complex, and its ramifications affect large swathes of the economy. It's having a substantial effect on the fortunes of individual companies and the competitiveness of the economy at large. It can also affect the economy in less suspected ways, for instance the way it affects the efficiency of the labor market or even the rate of startups if insurance availability outside existing jobs becomes compromised.

Nearly 18% of the economy

Healthcare cost have risen inexorably for decades, and the reasons are fairly universal (that is, not limited to the US):

  • Demographics: The population is getting older, and older people require more care.
  • Ever more expensive medicines and procedures are developed.
  • It's difficult to increase productivity in the healthcare sector (little is amenable to automation).

By far, the most healthcare is still provided by employers (roughly 158 million people versus 11 million on the ACA exchanges). To put the size of the sector in perspective, here is Investopedia:

Healthcare in the U.S. costs about twice as much as it does in any other developed country. If the $3 trillion U.S. healthcare sector were ranked as a country, it would be the world's fifth largest economy according to "Consumer Reports." The cost of this huge financial burden to every household because of lost wages, higher premiums and taxes plus additional out-of-pocket expenses is more than $8,000.

This suggests there are huge economies to be gained from a more rational healthcare sector. The question we try to answer here is if, and to what extent, the ACA has been a step in the right direction, and what the effects of repealing the ACA will be.

Needless to say, if one were able to design the US healthcare system from scratch, one would not come up with anything resembling employer-based care nor the ACA, which is aimed to remedy some of the former's shortcomings. Yet, we think critics are overlooking some of its benefits and improvements.

Not only is healthcare nearly a fifth of the economy, it's even more important in terms of employment. From HealthLeaders Media (our emphasis):

The healthcare sector created 234,600 jobs in the first half of 2016, including 39,000 new jobs in June, according to Bureau of Labor Statistics data. The 2016 growth is outpacing the 225,300 healthcare jobs created in the first six months of 2015, a year that finished with a record 471,600 new jobs in the healthcare sector, according to BLS data. Nearly one in four jobs created so far in 2016 is in the healthcare sector.

The US stands out

However, the US stands out in terms of healthcare cost, which is remarkable, as a significant fraction of the population still isn't insured, and US healthcare doesn't produce generally superior health outcomes.

The above quoted Investopedia article provides six reasons for the cost differential with the rest of the world. The system is rife with inefficiencies, and there is a dearth of incentives to control cost or prices or the number of interventions. Not seldom, the incentives actually work the other way.

Administrative cost (at a whopping 25% of overall healthcare spending) are way above other countries. This is not surprising if you consider the following from Vox:

What I didn't understand was the burden patients face in managing the health care system: a massive web of doctors, insurers, pharmacies, and other siloed actors that seem intent on not talking with one another. That unenviable task gets left to the patient, the secret glue that holds the system together.

Then there are drug prices. From Investopedia:

In most countries the government negotiates drug prices with the drug makers, but when Congress created Medicare Part D, it specifically denied Medicare the right to use its power to negotiate drug prices. The Veteran's Administration and Medicaid, which can negotiate drug prices, pay the lowest drug prices.

Also incentives are wrong. Basically, the fee-for-service pays providers on the basis of each healthcare service performed, which tends to lead to overtreatment without sufficient regard for outcomes.

This isn't the place to go into these themes, apart from noting below that there are some reasons to assume the ACA has made some modest improvements.

Free market in healthcare doesn't really exist

This is fairly simple to explain and is a general feature of insurance markets.

  • Adverse selection: The healthier you are, the fewer incentives you have to insure yourself. So in a free market, the sick would disproportionally want to insure themselves, while insurance companies prefer the healthy.
  • The bigger the number of insured, the lower premiums are (other things equal). This is a simple arithmetic of risk-pooling in all insurance markets.

In a (more or less) free market, insurance companies would deal with a adverse selection through discrimination. Basically keeping as many sick people out as possible, limiting their payout, and/or charging them much more for insurance.

So there are sound economic reasons for considerable state involvement in healthcare. Many of the segments are also rife with information asymmetries that can be (and at times are) exploited opportunistically.

Much of medical care is a long-term experience good, the quality and effectiveness of drugs, doctors, treatments and facilities aren't easily assessed at the point of engagement, and oftentimes not even long afterwards, if at all. This is one reason why drugs and the medical profession are strictly regulated.

Insurance policies are notoriously complex and difficult to compare, and here the ACA has brought a modicum of standardization with minimum requirements and segmentation in categories (gold, silver, bronze).

We give you a flavor of the Swiss healthcare system, which is one of the most market-based systems in the world - public spending on healthcare is only 2.7% of GDP, compared to 7.4% for the US. From Forbes:

The Swiss have an individual mandate. The government defines the minimum benefit package, which has been subject to expansion from special-interest lobbying, and is more comprehensive and less consumer-driven than it could be. The government has enacted Medicare-style price controls for hospital and physician reimbursement. Insurers must charge similar rates to the young and old ("community rating"), must cover pre-existing conditions, and must operate as non-profit entities. Princeton economist Uwe Reinhardt describes Switzerland as "a de facto cartel of insurers and health care practitioners who transact with one another in a tight web of government regulations."

Needless to say, there are numerous public interventions without which the system wouldn't work, like the individual mandate (without which one would either have adverse selection or insurer discrimination against the sick).

One of the ironies, which hasn't escaped the outgoing president himself, is that repairing some of the shortcomings of the ACA would involve more, not less, government intervention. Stuff like the individual mandate to increase coverage, or using the size of big programs to negotiate drug prices down or force minimum standards of what policies offer, or ending discrimination on the basis of pre-existing conditions all depend to some extent on more, not less, government.

The ACA rationale

One of the aims of the ACA was to end discrimination and insure more people, and this has been a popular feature of the Act. However, by ending discrimination, you're faced with the adverse selection problem, i.e., disproportionally more sick people will insure themselves.

In order to deal with this, two more planks were necessary:

  • The individual mandate: Basically, forcing the healthy to sign up.
  • Subsidies, making insurance possible for those who cannot pay for it.

All three (end of discrimination, individual mandate, subsidies) are a coherent whole. Take away one, and the other two will fall. This is not just theory - here is what happened when put into practice (from the NY daily news):

If you tell insurance companies that they can't discriminate and allow individuals to wait until they are sick to buy insurance, then insurance companies will lose money. Insurers will rightly be afraid that individuals will wait until they are sick to show up to buy insurance, and as a result insurers will either exit the market or charge very high prices to protect themselves. This isn't just an idle conjecture: Seven states, including New York, tried this approach in the 1990s. In every state, the change was either repealed or, as in the case of New York, led to the collapse of the individual insurance market, with very few participants and extremely high prices.

Uninsured people still get sick

Something that not everybody seems to realize, but having insurance is both better and cheaper. Much better in terms of health outcomes, as uninsured people only have recourse to emergency care and do not benefit from regular preventive care or early interventions.

This can (and often will) have dramatic health outcomes, where serious illness or even death could have been prevented by earlier diagnosis and intervention.

From a cost perspective, this is often also cheaper, and these costs fall on the taxpayer. Take, for instance, Texas (from RCP):

Families USA, a nonpartisan health care advocacy group, estimated that in 2010 an average family in Texas paid an extra $2,786 in premiums to cover care for the uninsured

The ACA insured 20 million additional people

In terms of insuring people who weren't covered, the ACA has been a success, but not everybody seems to be aware of this (from The Atlantic):

At Vox, Sarah Kliff points out that most Americans simply don't know that the uninsured rate is the lowest that it's ever been. In fact, according to a Kaiser Family Foundation poll, about 20 percent of all Americans think there are actually more uninsured people on average than last year. While a majority of Democrats and supporters of the law don't know that uninsured rates are at historic lows, nearly all independents, Republicans, and people who oppose the law are unaware..

One should also be aware that this figure could have been substantially higher if it weren't for 19 states opting out of Medicaid expansion. We're not sure opting out was a good idea. It is leaving millions uninsured, and has led to a substantial number of avoidable deaths and other adverse health consequences, something which isn't reaching many headlines (from Health Affairs):

Predicted national-level consequences of states opting out of Medicaid expansion are displayed in Exhibit 2. We estimate the number of deaths attributable to the lack of Medicaid expansion in opt-out states at between 7,115 and 17,104.

While these numbers are imperfect approximations at best, there is little doubt that not expanding Medicaid has serious consequences for many - like for this woman, or in Idaho (a thousand avoidable deaths in three years), or Florida (up to three avoidable deaths a day) - even if we might not know exactly how many.

Also financially, there doesn't seem to be an overriding rationale. Uninsured people still get sick and incur cost on society, and at least some states have seen a financial net benefit from having insurance. From Eureka Alert:

Michigan's expansion of Medicaid health insurance coverage has boosted the state's economy and budget, and will continue to do so for at least the next five years, according to a new University of Michigan study.

ACA benefits the most needy

Here is Think Progress summing it up (our emphasis):

Legal immigrants and naturalized citizens also saw large increases in coverage, as did groups that are more likely to be working low-wage jobs, such as high-school graduates and Americans living in non-traditional households, which can be a sign of economic distress. Indeed, the law was so successful in lifting up underserved populations that it stopped a decades-long expansion of the health-insurance gap between low-income and wealthier Americans.

And the people gaining coverage under the Affordable Care Act are among America's sickest, according to a different report from Blue Cross and Blue Shield that analyzed the claims for 4.7 million Americans newly enrolled in insurance plans. New policy holders are more likely to have significant health problems, such as diabetes or HIV, which previously would have locked them out of coverage that they desperately needed. " It's no surprise that people who newly gained access to coverage under the Affordable Care Act needed health care. That's why they were locked out of coverage before," said Ben Wakana, a spokesman for the Department of Health and Human Services.

According to a report from the Urban Institute's Health Policy Center, Americans who have new health insurance through Obamacare - either through its state-level insurance marketplaces or through its expansion of Medicaid - are better off than the uninsured and in many areas comparable to those with employer-sponsored insurance plans.

Of course, the fact that so many sick people signed up is a double-edged sword. On the one hand, it illustrates how the previous arrangements kept many of the most sick and needy people out (with really adverse health consequences).

On the other hand, the risk pool is worse than what quite a few insurance companies expected, which has led to premium rise and even some of the insurance companies leaving the exchanges.

ACA premiums

There has been much fuss about the prospective 2017 rise in ACA premiums - 22-25% on average - and indeed, this is a very high increase. What is much less known is that ACA premiums were way below expectation in the first years of the ACA (see graph below). The premiums are still some 10% below those in company-provided healthcare. Some 83% of those on the ACA exchanges receive subsidies. According to estimates from the Department of Health and Human Services (HHS), if everybody switched to the lowest-price plan in their metal level (bronze, silver, etc.), premiums would go down an average of 20%.

One might also note that premium hikes were considerably higher in states that opted out of the Medicaid expansion, at least last year. We don't know whether this is just a coincidence, though.

And it's not that ACA premiums are the only ones to rise. The premiums for employer-based healthcare have risen, sometimes at double-digit percentages, for the past decade and a half


Often, deductibles are high in ACA plans, but again, this has to be placed in context, as this is a phenomenon that's by no means restricted to plans on the ACA exchanges. Consider the development of deductibles in employer-provided plans:

Indeed, according to the WSJ, payments toward deductibles by consumers who have insurance through large employers rose 256% from 2004 to 2014.

Since about 15 times more people have employer-provided healthcare compared to those insured through the ACA exchanges, it affects way more people, and we wonder why there hasn't been any outcry about this compared to the litany of criticism about ACA deductibles.

Death spiral

Some big insurance companies have left the exchanges because the risk pool they were facing turned out to be less healthy than what they expected, and Congress cut the promised pay for taking on that risk really substantially. From Business Insider:

But when the time came to pay up for risk reduction in the Obamacare exchanges, Congress reneged and paid only 12 percent of what was owed to the insurers. So, on top of the fact that the companies had to bear the risk of unknown costs and utilization in the start-up years, which turned out to be higher than they expected, insurers had to absorb legislative uncertainty of whether the rules would be rewritten.

Since these were new markets, companies probably underpriced (indeed, see above under premiums) in order to gain scale. It also takes time to get familiar with the right approach and the characteristics of the market.

We have to stress that this is at least in part the result of an insufficiently binding individual mandate. Countries with a similar healthcare system (like the Netherlands and Switzerland) achieve universal coverage through a binding individual mandate.

For those that argued the death spiral is already upon us, here is ratings agency S&P (from CNBC):

An analysis out Thursday says that health insurers are expected in 2016 "to start reversing" financial losses on their Obamacare business after "hitting bottom" in 2015. And 2017 "will likely see continued improvement" for those insurers selling individual health plans, "with more insurers getting close to breakeven or better," according to the report by Standard & Poor's Global Ratings. The report also says big price increases for Obamacare plans in 2017 were likely a "one-time pricing correction."

Should things get worse, other countries show a solution is rather straightforward. Reinforce the individual mandate or you get stuck with the adverse selection problem.

One again the logic of the ACA exert itself - one cannot end discrimination without the individual mandate. At the heart of this is adverse selection.

ACA cost and cost control

Medical inflation has slowed quite markedly:

What's less clear is what has caused this. It is increasingly difficult to blame this all on the recession - it is possible that the ACA bears at least some responsibility:

For example, by curtailing excessive Medicare payments to private insurers and medical providers, the law has contributed Recent Trends in Health Care Costs, Their Impact on the Economy, and the Role of | 149 the Affordable Care Act to the recent slow growth in health care prices and spending, reducing health care price inflation by an estimated 0.2 percentage points each year since 2010. hospital readmission rates have turned sharply lower since the ACA began penalizing hospitals that readmit a larger number of patients soon after discharge.

Similarly, the ACA has substantially increased health care provider participation in payment models designed to promote high-quality, integrated care. An emerging literature also suggests that the ACA's payment reforms, which operate primarily through Medicare (and, to a lesser extent, through Medicaid), may generate "spillover" benefits throughout the health system.

This literature finds that when Medicare reduces payments to medical providers, private payers tend to follow suit, and also finds that the same is true for changes to the structure of how Medicare pays providers. Some recent evidence also suggests that changes in payment structures by one insurer may benefit patients covered by other insurers, even if those other insurers do not adopt the new payment structures.

Here is the Commonwealth Fund:

A tightening of Medicare's hospital "productivity adjustment," which lowered the prices paid by the program. Adjustments to Medicare's annual updates of provider payment rates. Lower payment rates for private Medicare Advantage plans. Strong incentives to reduce hospital readmission rates and infections. New payment methods for holding health care providers and systems more accountable for the quality and cost of care they provide.

More emphasis on preventive care is one plank (from The Balance; our emphasis):

The goal of preventive care is to help people stay healthy. The idea is to nip diseases in the bud, before they become catastrophic. That keeps costs healthcare costs low. It also keeps people productive, enabling them to keep earning well into their senior years. Most people don't realize that healthcare costs are the number one cause of bankruptcy. They also don't know that 46% of retired people were forced into it before they were ready because of healthcare problems.

This is an ongoing debate without much in the way of definite conclusions. It is likely that the ACA has contributed to at least some cost control through more emphasis on preventive care, incentives against readmissions and similar stuff.

But US healthcare is still rife with misaligned incentives, inefficiencies, idiotic prices and practices that blow up costs. At best, the ACA has made a tiny improvement here.

Some other ACA advantages

  • End of discrimination on pre-existing conditions, which potentially affects a quarter of the workforce.
  • The ability to switch jobs and start one's own company. This is particularly important from a labor market perspective, as it makes the labor market more flexible.
  • Reducing medical-related debts and bankruptcies.

Effect on the economy

There is really little evidence that the ACA has led to large-scale job losses or any shift to temporary work. What did happen was that it freed people to chose to work less, as they no longer risked losing healthcare coverage. So, it has produced a voluntary reduction in labor supply.


Some, like Jonathan Chait, argue that underlying the often vitriolic critique that the ACA has endured is a fundamental objection toward government-induced redistribution.

There might be some truth in this. as most alternatives either leave more people uninsured and/or cap payments (block grants, vouchers) or allow steeper rate differentials, higher deductibles or co-payments, or less comprehensive policies.

That is, the young and healthy are better off under such schemes at the expense of the old, poor and sick. Two things should be kept in mind here:

  • Insurance, by definition, involves redistribution from the lucky to the unlucky. Basic insurance economics dictate that, other things equal, premiums decline with the number of insured.
  • As we stressed already, bad luck and the financial and health consequences of it doesn't disappear without insurance. The redistribution is still present, but in a more hidden form.

The basic problem is simply that one cannot have one's cake and eat it too. Either one covers everybody or at least the same amount of people that the ACA managed.

But that involves non-discrimination and a higher risk pool, which needs an individual mandate and some compensation to insurers to offset some of these risks. Or one could allow them to offer stingier policies, but the criticism of the ACA is that these are already way too stingy.

Insuring most must also acknowledge the fact that many earn way too little to be able to afford premiums, so subsidies for individual plans are also unavoidable (unless one accepts way less coverage).

The point is, there is no magical cure. A free market in healthcare doesn't magically overcomes adverse selection. Insurance is essentially redistribution, and the real world is full of awkward trade-offs. Even a single payer system covering everybody, while able to contain healthcare costs better, involves some rationing, resulting in waiting lists (as the experience of many other countries shows).

ACA fix

Politics aside, it's actually not terribly difficult to fix the ACA exchanges. The problems stem from the fact that many insurers underestimate the risk profile of the population. So one either improves that by enticing (or forcing, through higher fines) younger and healthier clients on the markets or offering compensation for the higher risk.

Something similar has been done with the Medicare Advantage program (offering a market with private policies for Medicare) through the 2003 Medicare Modernization Act. The Medicare Advantage program suffered from the same ills as the ACA now, but the 2003 Act increased subsidies (most notably for prescription drugs), which enticed more private insurers to stay in the market, and this worked very well.


Repealing the ACA without replacing it with anything else could easily be a disaster for millions of Americans, many of whom are amongst the most vulnerable (that is sick and/or poor). From the CBO:

CBO and JCT estimate that the number of nonelderly people who are uninsured would increase by about 19 million in 2016; by 22 million or 23 million in 2017, 2018, and 2019; and by about 24 million in all subsequent years through 2025, compared with the number who are projected to be uninsured under the ACA.

As we said before, these people still get sick, but not having insurance will put them at much greater risk for dramatic health outcomes, while still entailing costs for the tax payer. From CNBC, (our emphasis):

state spending would increase by $68.5 million during the same time frame as the reductions in Medicaid spending "would be more than offset by increases in uncompensated [medical] care," for people who lack health coverage.

And there are even more dramatic accounts. From the Washington Post (our emphasis):

The nonpartisan Urban Institute released a study Tuesday explaining that repeal without an eventual replacement would result in such a destructive unraveling of the individual insurance market that the health-care system would end up far worse off than before Obamacare, with some 30 million people losing coverage, uninsured rates spiking and strapped state governments facing massive new uncompensated health-care liabilities.

Or (per MarketWatch):

Affordable Care Act ensures health coverage for those with diabetes, mental disorders, even obesity. At least one in four U.S. adults could be uninsurable due to a pre-existing condition in the wake of a repeal of the Affordable Care Act, according to an estimate by the nonprofit Kaiser Family Foundation released Monday. Those adults, or about 52 million people, have a current or past diagnosis that could allow health insurers to refuse them health coverage, the Kaiser analysis found.

The rest of the article is even more depressing. So repeal without replacing isn't the way to go and isn't very likely anyway, as the politics of this is complicated (through a budgetary reconciliation process, etc.).

There are also budgetary implications, according to the CBO, in two parts:

Excluding the effects of macroeconomic feedback-as has been done for previous estimates related to the ACA (and most other CBO cost estimates)-CBO and JCT estimate that federal deficits would increase by $353 billion over the 2016-2025 period if the ACA was repealed. Repeal of the ACA would raise economic output, mainly by boosting the supply of labor; the resulting increase in GDP is projected to average about 0.7 percent over the 2021-2025 period. Alone, those effects would reduce federal deficits by $216 billion over the 2016-2025 period, CBO and JCT estimate, mostly because of increased federal revenues.

Including the economic effects (that is, including the increase in labor supply as the effect of the ACA, which allows people voluntarily chose to work less without fear of losing coverage), there is still a substantial adverse effect on future public finances, but this also depends on what the ACA will be replaced with (and as the CBO report argues, uncertainties are rather substantial as to the magnitude of these effects).

What is curious is that opponents, after railing against the ACA since the start, have still not gelled upon a replacement plan. What seems to be happening now is repeal and delay (from Vox):

Laszewski doesn't hide his point of view: He's no fan of the Affordable Care Act. But he sees the Republicans' new Obamacare strategy - to repeal the law, but leave it in place for three years as they work to create a replacement plan - as an absolutely terrible way to fix it. "The problem is when you have an insurance market, and the new administration declares it DOA, it will go into death throes," Laszewski says. Laszewski argues that the one way to stabilize the insurance market - to ensure that health insurers don't flee - is for the federal government to guarantee to cover their losses. But the politics of that aren't easy: This would mean reestablishing an Obamacare program that Republicans have previously branded " a bailout for insurance companies."

Basically, this repeal and delay strategy is likely to induces a death spiral, and as long as there isn't a replacement, there will be many victims of this (as even conservative health experts acknowledge). And we're leaving out the possibility that after the delay, there is still no consensus on an alternative (per WP):

Health-care experts and industry groups are sounding the alarm with increasing urgency. They worry, first, that Congress will schedule much of the law to expire in a few years and then fail to agree on a replacement. There is plenty of evidence that lawmakers would not be able to unite behind an alternative. Republicans already have spent years trying to agree on a preferred plan, without success.

Why not just retable one of the repeal bills that were tabled in the past? Well...:

A Republican senator on condition of anonymity said the details of the repeal bill remain very uncertain. Originally, Republicans were planning to simply bring back the bill they put on Obama's desk last year for his veto. But that bill was written knowing it wouldn't become law, and now some Republicans want to make tweaks to soften the blow of repeal. "Even people who voted for this before are, 'Wait a minute, wait a minute, we knew that wasn't going to happen,'" said the senator. "There were no consequences." He said there's a growing sense among some of his colleagues that they need to have a replacement for Obamacare ready soon "because we're going to own this."

The boldest vision of the ACA critics is to change the whole landscape of US healthcare. Here is an assessment of what motivates these grand plans (from WSJ):

The expected proposals seek to end federal entitlement spending in health as it has been known by capping federal financial exposure through fixed-dollar insurance tax credits, Medicaid block grants, and voucher-like supports for Medicare premiums. Legislative details haven't been released yet, but Republican plans are likely to shift costs to individuals and states as well as reduce consumer protections-and result in a significant increase in the number of uninsured. Conservatives who have long favored these changes view them positively; they want to reduce government regulation and federal spending, give consumers more choices in the marketplace, drive down costs by promoting high-deductible insurance coverage, and give states greater flexibility to tailor health programs to their own preferences and needs.

If this materializes, there are a number of positives (as listed in the quote). But in light of the negatives, all the noise about high ACA deductibles start to sound a little shrill, for starters.

Will any coherent alternative emerge in case the ACA is repealed? In a way, it's odd that it hasn't already - the critics have had plenty of time to gel on an alternative. At present, there are some 6 or 7 different plans.

We prefer to discuss these if and when a clear front runner emerges (most likely that of the Heritage Foundation), but you can find a good discussion of these plans here and an excellent discussion of criteria which these plans need to fulfill here.

For instance, we can discuss the popularity of Health Savings Accounts (HSAs), as it is a universal feature of all ACA replacement programs:

While conservatives love these plans, which are growing rapidly, they have a fatal flaw: They serve to dramatically reduce the redistributive element of insurance - the very reason why insurance exists. "While the poor and sick quickly deplete their HSA funds each year, the rich and healthy retain their unspent money which would have previously gone to subsidize care for the sick," a report from the Physicians for a National Health Program (PNHP) concludes.

Indeed. Insurance by definition entails transfer from the lucky to the unlucky, and in the case of healthcare, from the healthy to the sick. It should not be forgotten that the healthy might be healthy today, but they can become sick tomorrow as well.


The US healthcare sector is rife with inefficiencies and perverse incentives. It's nearly twice as expensive as healthcare systems in other advanced systems, while being the only system that doesn't produce universal coverage, and in general, producing no better health outcomes compared to other advanced countries.

Yet, we wonder whether this is the time to risk yet another upheaval in the sector - an upheaval that could have ramifications not only for millions of people, but for the healthcare sector itself, which is the biggest sector in the economy.

By its size alone, healthcare generates important economic outcomes. Upheaval in such a large part of the economy which serves as an input in every other sector can even affect the economic performance of the US economy at large.

There are compelling reasons for reform, perhaps even from the ground up. However, we think there is substantial evidence (some of which we presented above) to argue that the benefits of the last reform, the ACA, are insufficiently appreciated, and its shortcomings are not difficult to fix.

The ACA isn't nearly as broken as the critics have it, and other plans cannot escape the basic trade-offs. Repairing it is a much safer way to fix its shortcomings than repealing the law, especially without something really well thought out that replaces it.

The cost curve has started to bend. The law has been successful in ending insurance discrimination, it has reduced the amount of uninsured people by 20 million (in an often outright hostile environment), and it has enabled people to change jobs, reduce working hours or start their own companies without fear of losing coverage.

The law has been a godsend for many of America's poorest and sickest, who without coverage, would risk much adverse health outcomes and would still bring to bear a medical cost on the rest of society, and it has facilitated a reduction in medical debts.

The ACA's emphasis on preventive care is especially important, as it allows people to stay healthy for longer, often preventing dramatic health outcomes, and also keeping them as productive taxpayers instead of drawing early retirements. One can see healthcare as a maintenance tool for the economy's most important input: labor. As we know from Total Quality Management, prevention is much more efficient than "rework and repair," and less costly.

Whether or not people, even those with pre-existing conditions (a full quarter of the workforce), can count on insurance even if they leave their jobs or start their own companies will determine the efficiency of the labor market and the allocation of labor.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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