Ep. 64 Why It’s Impossible to Keep Only the “Good Parts” of Obamacare

11 December 2016     |     Tom Woods     |     19

Let’s keep the part about covering pre-existing conditions, say Donald Trump and many other Republicans, and just get rid of the parts we dislike. Unfortunately for them, that can’t be done.

Krugman Column

The Art of the Scam” (December 5, 2016)

Book Mentioned

The Primal Prescription: Surviving the “Sick Care” Sinkhole by Doug McGuff, MD and Robert P. Murphy, PhD

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  • LP

    A big part of the reason that vet costs are so much cheaper is, as Bob mentioned, due to the difference in liability cost. The reason for this is that, in most states at least, malpractice insurance is carried on the animal, not on the vet. The other major reason for the difference in expense is that, since people don’t generally have health insurance for their animals, they know exactly how much they are paying, and seek alternatives if the cost is too high. This leads to a much wider array of treatments for animals, from state of the art care, similar to a human would get in a hospital (iv, heart rate monitor, et cetera) costing upwards of $1000 a day, to treatment at home, with a vet just consulting, and everything in between. There are even charity funds for caring for sick and injured animals when either there is no owner, or the owner cannot afford the needed treatment. This, combined with the difference in liability, means that treatments for simple things (minor cuts, infections, dislocated joints or cracked bones) is often done either by the owner, or some friend of the owner, rather than wasting a vets time.

  • https://www.facebook.com/david.rogers.hunt David_Rogers_Hunt

    No one mentioned that employer carried health insurance started in WWII (along with ‘temporary’ withholding) as employers were not being allowed to simply raise salaries to get new employees.

    Who among us ever learned that American fiat currencies (greenbacks) started as another ‘temporary’ action during the Amercian Civil War. Or how about the sleight of hand were in 1871, in the case of Knox v. Lee, the Supreme Court settled the matter by declaring that making United States notes legal tender was indeed constitutional. I understand this was accomplished by the Ulysses S. Grant administration putting five railroad lawyers on the Supreme Court all at once. This would be an interesting subject for a future podcast,… especially how this little incident just fell down the collective memory hole of the United States of Amnesia. https://uploads.disquscdn.com/images/0c5799c2ed01fb20cb6bda64fe94ab3f8ec655748d7bdfaaaa7c24a76ca14b83.jpg

  • http://www.economicmanblog.com Roger Barris

    1. The alternative that Bob mentioned, quoting Dr Jane Orient, doesn’t really work in the same way as employer-sponsored healthcare. Employers don’t get group discounts primarily because they buy a lot of insurance and therefore can negotiate better pricing. (This is partially true, but is not the primary reason. If it were, then employers would probably be sourcing all kinds of insurance for employees – car, homeowner, etc.) They get preferential rates because they avoid the problem of negative selection. An insurer can look at a pool of employees, all of whom are insured, as being a reasonably random mixture of healthy and non-healthy people and therefore can price the insurance on the basis of an average. What Dr. Orient proposes doesn’t really replicate this UNLESS the insurance would be compulsory within those groups, which is obviously not the case.

    2. Bob, I think that I have asked you this question before, but what is your solution for pre-existing conditions? The problem is that the financial consequences of many medical problems endure beyond the typical one-year term of a policy. One solution is a “continuous coverage” obligation, but for this to really work, I think that it has to be continuous coverage with a certain company, which obviously makes it very difficult to shop around; there also have to be regulatory or contractual non-discrimination provisions so that the person with a pre-existing conditions is offered a standard premium — this is complicated to police. The only other solution that I can think of is treating illnesses as “long-tailed” exposures for which the original insurer retains a lifetime responsibility. But the problem with this, of course, is determining which subsequent health problems can be attributed to the original disease and which are due to an independent source. Do you have any thoughts?

    • BobMurphy9

      Hi Roger: If sick people are being provided coverage that is going to cost more than they can afford to pay–and this is known ex ante–then giving them “insurance” is a pure subsidy. If we as a society want to use the government to fund that, so be it, but I think it’s cleaner to just provide the support directly, rather than the indirect route of mandating everybody buy health insurance etc.

      Regarding the first part of your question, I think it makes sense for health insurance to be patterned more along the lines of life insurance. In life insurance you can buy a 30-year term or even a “whole life” policy, which has guaranteed renewability with a fixed premium. You lock in your rates even if your health status changes during the life of the policy.

      • http://www.economicmanblog.com Roger Barris

        Hi Bob: I totally agree with your first comment. It is a pure subsidy which would more efficiently be treated as direct support.

        Your idea about term health policies is an interesting one. This is one way to resolve the conflict between long-term health consequences versus short-term policies that I had not thought of. It would mean that the buying decision would have to be long-term also, but as you point out, this is true for other types of insurance already. It would expose policyholders to a long-term credit risk on the insurance company, but this is also not unusual. Interestingly, if policies were structured this way, then the incentive of the insurance company to promote preventative care and a healthy lifestyle would be greatly enhanced — a possibly very good thing. I think that this would also minimize some of the Kenneth Arrow negative selection problems because the decision would probably be, for most people, made at an early age when there would be less information asymmetry.

        One problem, though: if the policy can be terminated at the option of the policy holder, doesn’t this reintroduce the negative selection problem? The relatively healthy could drop out and move (after some medical tests) into a low-cost, “clean” insurance pool, leaving behind the higher risk clients. The insurance company would be left with the relatively sick and a diminished premium base.

        Thoughts?

        • BobMurphy9

          Hi Roger,

          Wouldn’t there be an analogous problem with (say) 30-year term life insurance policies? E.g. if one company starts having people die, then the remaining (alive) people switch to a difference company to get lower rates? I.e. if you mentally replace “person dying and getting $1 million check from life insurance company” with “person getting cancer and getting $1 million in treatment from health insurance company” does your worry still hold? And yet, we see that life insurance companies have been viable for more than a century.

          • http://www.economicmanblog.com Roger Barris

            It’s a good point. I need to think if there are reasons why health insurance may be more prone to negative selection and than life insurance, although on the face of it, one would think that there shouldn’t be big differences.

            One question: I think that there are usually financial penalties associated with terminating an insurance policy early, right? Although these might be more related to investments (ie., the fact that the insurance company might have to sell an investment earlier than expected, which is usually costly) they might also deter negative selection. (A related question: do whole life policies, ones that provide pure insurance with no investment element, also contain financial penalties? If not, then this would negate my argument.)

            As you know, there is always an element of negative selection in insurance. Sometimes insurers can simply price this in without so much impact that the market “fails” (ie., it produces a price where there is no consumer interest). Maybe this is one of those cases.

            Thanks again for your comments.

            Roger

            PS. Here is an early blog I wrote on some of these subjects after being outraged by a reference to “contraceptive coverage” by Obama in a presidential debate with Romney: http://www.economicmanblog.com/2012/11/07/contraceptive-coverage/

        • Hidden

          If there were failures of health insurance companies that assume larger liabilities because they insure high risk or unhealthy patients, couldn’t there just be insurance on top of that?

          For instance, *if it were possible* to get a 30 year policy on health insurance, why not get insurance on the success of that company. Couldn’t there be like an FDIC but for health insurance if it did become an issue?

    • BrotherDave

      Actuarial studies already show you cannot tell the difference in claims between a fully screened/underwritten small group plan vs. full guarantee issue of pre-existing conditions once the groups have been on the books 32 months.

      We also already tried the “continuous coverage” solution under HIPAA/ HIPAA allowed for portability from one employer plan to another without having to incur all new “waiting periods” before have coverage for pre-existing conditions.

      The ACA wasn’t needed to accomplish this!

      • http://www.economicmanblog.com Roger Barris

        Thanks, BrotherDave. It’s good to have someone from the industry on this chain.

        Let me understand your first paragraph. Are you saying that, after 32 months, the long-term effects from pre-existing conditions are basically washed out? And that two pools, one of which is randomly chosen and the other of which has been screened for pre-existing conditions, have basically the same cost characteristics? If so, this is good news for those of us seeking a private market solution to pre-existing conditions.

        Your comment about HIPAA was also interesting, although not entirely satisfying from a free-market approach. After all, HIPAA was not ACA, but it was legislation nonetheless. The broader question is why hasn’t long-term health insurance of the type proposed by Bob been more widely adopted by the private sector, even without any form of legislated requirement? It seems to be an obvious case of a sub-optimal contract.

        • BrotherDave

          Yes, cost estimates for “mature” groups screened for medical history reaches parity with full guaranteed issue groups after 32-months. My source for this info was head underwriter for one of the largest small group medical insurers, a 100-year old insurer company in the Midwest. Unfortunately, they like many others, eventually decided to take their capital where it would be better treated and exited this part of the business.

          As to why more innovative plans haven’t been offered, it is largely due to the legal requirements insurers must meet. Insurance remains a state-regulated industry, grown more complex now with the myriad rules of the ACA now layered on top of them. (Even so, there is opportunity for employer groups to largely escape most restrictions of the ACA by “self-funding” their claims, governed primarily by long-standing Federal ERISA rules. )

          “Association” plans were once a refuge from many state health insurance requirements, but few of those even exist today. Even before the ACA they risked “death spirals” as claims matured and costs rose, members would exit for new, lower rates on the larger underwritten market. Without sufficient “glue” to hold them together (i.e. commons interests other than access to insurance) association based plans eventually implode.

          The “innovations” Bob mentions aren’t actually new, but old ideas ripe for reinvention. Few people realize most of today’s commercial insurers trace their beginnings to mutual aid societies and fraternal organizations. These groups flourished and proliferated across the country going back to the 19th century. Amazingly, there are still a few survivors left today, who mostly sell life insurance and annuity contracts, not medical coverage.

          Bob is absolutely on target talking about these as real alternatives. I contend the the Constitutional right of freedom of assembly extends to like minded people voluntarily choosing to pool resources for any number of purposes, including risk-sharing schemes. It is time to breathe new life into these kinds of organizations.

  • Jimmy S.

    Something not mentioned was a tax incentive for people to comply with the individual insurance mandate. When I lived in Germany, where health insurance is required, I could choose the standard plan through my employer or upgrade to a better one, or go private and choose whatever plan I like from basic to cadillac plan. Under both plans (employer or private) I could deduct the premiums from my income tax. In Switzerland, private health insurance is also required but it is not deductible from income taxes, though it costs less in Switzerland than it cost in Germany.

    • Hidden

      Why might it cost less in Switzerland than in Germany?

      • http://www.economicmanblog.com Roger Barris

        After living in Switzerland for 2 years, I don’t know the answer to your question, but as is usually the case, the Swiss way deserves analysis. The country works!

        I think I paid about the equivalent of about $2000/year for my Swiss health insurance, which I bought on-line on a completely private cost comparison website. The whole process took me about 15 minutes. Conversely, in the UK where I currently live, I am paying about 5x that amount for slightly poorer insurance coverage.

        The standard of health care in Switzerland is very high and yet it is dramatically cheaper than in the US, even though Switzerland in general is a blisteringly expensive place.

  • Eileen

    I am going to be politically incorrect. Veterinarians are “animal doctors”. Humans are animals, so the Medical Doctor is a SPECIALTY of veterinary medicine. I certainly agree that a dog does not look like a human, but a dog’s knee looks a LOT like a human knee. Think about that.

  • chazz novit

    If auto insurance were run like the Health Care Insurance concept we’ve (politicians) Rube-Goldberg’d since the 1940’s, we wouldn’t even be calling it INSURANCE (risked based coverage). The consumer, who typically doesn’t ask prices, and providers who avoid price transparency would cost it to escalate in premiums. When combined with the notion that all my standard visits, such as gas fill ups, oil changes, and tuneups, are to be included, instead of collectively bargained, for the cheapest out-of-pocket payments, no wonder that healthcare premiums have risen 800% of inflation. If there are poor people, or ill people, let that come from true welfare funds of the city/state/feds. But mixing the different risk pools of smokers, pre-existing issues, and the poor, is like mixing “apples and footballs”…

  • Tyrone Costa

    Bob and Tom thank you. You guys have been big part of our homeschooling family. Couple of velvet hammers.

  • BrotherDave

    I’ve sold group medical plans in Maryland where we’ve had guaranteed issue with coverage for pre-existing conditions since 1994. The agent community worked closely with our state legislature to craft laws years ahead of the rest of Obamacare. You do not need all the baggage of the ACA to accomplish this, including the ability to write coverage without limits on pre-existing conditions.

    In 1997 HIPAA took this concept nationwide with the portability feature of the act (HIPAA was not just about privacy). You could effectively reduce or eliminate any waiting periods to cover pre-existing conditions with time served under an immediate prior coverage. This DID require the insured to exercise responsibility in order to maintain a continuous chain of coverage.

    What HIPAA left out was portability of coverage to the individual market. HIPAA was about allowing portability of coverage from group to group and group to individual ,market plans. But it left out portability from individual plan to individual plan (non-employer sponsored coverage). We did not need the aCA to remedy this; a simple amendment to HIPAA to extend protability to the individual market would suffice.

    To further refute Wood’s and Murphy’s contention on the pre-existing condition requirement are actuarial studies which show any savings from
    “medical underwriting” on small groups is mitigated within 32-months. In other words, you cannot tell the difference in claims between a group fully screened for pre-existing conditions vs. one with guarantee issue of coverage once they’ve been on the books 32 months. And, contrary to Murphy’s statement, this is not an impossible risk to price and it would not be cost-prohibitive to do so. You simply price new groups at current cost plus “trend.”

  • Jimmy S.

    The mandate to cover pre-existing conditions is one major reason costs have escalated so fast. Imagine if you went to get car insurance with a wrecked car and then insisted the new company cover the repairs. They’d tell you to get lost.