Tuesday, November 19, 2013

What Should Replace Obamacare?

David Friedman offers a critical view of US health insurance prior to the Affordable Care Act:
A recent post on the Forbes site offers a convincing explanation of what was wrong with the current system of health insurance before Obama, hence what both it and Obamacare ought to be replaced by. Its central point is that what we call medical insurance is in part actual insurance, protection against low probability/high cost risks, in part prepayment of ordinary medical expenditures. The reason insurance policies take that form, also the reason that most of them are provided by the employer and so not portable, is that employer provided health insurance is bought with pre-tax dollars, ordinary medical care with after tax dollars.  
 One result is that individual consumers have little incentive to be careful shoppers for health care services, since for the most part they are not the ones paying for them.
This contains a number of misunderstandings. What we call health insurance is even more complicated.  In part it is what Friedman says, but also an agent that serves to negotiate favorable pricing for the consumer in advance, which is difficult to do when you are lying on the gurney,  or even when not: an organization that buys a lot of a product can often drive a better bargain than an individual. And sometimes, as an HMO, it bundles in the actual provision of health care.

If group health care was driven purely by tax considerations as described above we would expect employers to pay for almost all employee coverage.  This is in fact rare: most employers require a substantial employee contributions, for a share of the premiums, as well as deductibles, co-pays and uncovered expenses.

In part this is because many ordinary expenses are also paid with pre-tax dollars: flexible spending accounts, health savings accounts and health reimbursement accounts also offer tax savings.

But there is another reason. If you as an employer offer to pay health insurance costs in full, you let an outside organization drive your compensation policy. If you don't absorb price increases that drive up total compensation more than you think desirable, your only alternative is to cut nominal wages or fire some employees. Employers hate doing either: neither is good for morale.

There is also another reason why employer provided insurance is common that has nothing to do with tax policy. For the average consumer, group insurance is cheaper than an individual policy for the same level of coverage because the individual policy has higher marketing, screening, underwriting and administrative costs. Even without favorable tax treatment, expect this to continue.

Then we have the argument that insured individuals are reckless consumers of health care services, since they are for most part, not paying. If that's the problem, than we've had the solution for some time: the high deductible policy. Let the insured pay the first $3,000, or $6,000 or $10,000 of medical expenses before the insurer pays anything. That will surely encourage careful shopping.

This is still an option under ACA, actually. In my state, a significant number of the ACA conforming policies have deductibles over $5,000 for a single adult.

But this runs somewhat contrary to the goal of insurance. People pay an actuarial premium to avoid unpleasant surprises. Not everyone wants to accept the potential for $6,000 in unexpected expenses for a somewhat cheaper policy.

Some changes could be made to make current law more equitable and efficient. Extend the subsidy in the market for conforming individual plans so that the subsidy at 400% of the poverty line goes to higher incomes as well. Replace the tax exclusion for employer provided plans with a capped tax credit so that this and the prior change are revenue neutral, since it's absurd that the greatest subsidy for employee coverage goes to those that need it least. Change the fine for not buying insurance to a different penalty: people that maintain continuous conforming coverage individually or through a group can't be discriminated against based on their health history but people who don't go into the separate I Thought I'd Be Healthy Forever pool when they decide they want individual coverage after all.  Remove the limit on charging older individuals more because they are more expensive to insure. Allow employers to count the cost of employer provided insurance against minimum wage requirements since it is, after all, compensation. Replace the complicated higher subsidies in the exchanges for lower incomes with an increased Earned Income Tax Credit.

These changes would be more equitable, but create losers as well as winners. I expect them to be politically difficult.


David Friedman said...

On the question of whether high deductible polices, providing in effect insurance against catastrophic costs, are permitted under the ACA, I note the following from a news story on the most recent tweak to the law:

"People losing coverage also will be eligible to buy high-deductible “catastrophic” plans that the law normally limits to those under age 30."

It doesn't specify how high the deductible has to be before the age limit applies, but it sounds as though there are restrictions on such policies preventing most people from buying them.

Will McLean said...

The ACA currently considers a policy compliant for 2014 even if the deductible is as high as 6,350 for single coverage. To my mind, that's quite high enough to make an individual careful about their ordinary medical expenses.