A Fatuous Defense of the Affordable Care Act

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“There are three kinds of lies: lies, damned lies, and statistics.” – Benjamin Disraeli

The L.A. Times provides a nice set of cherry picked data to justify the Affordable Care Act. The author is also fond of the word fatuous to describe Republican plans to repeal and replace Obamacare, so I feel compelled to maintain usage of the word my thoughts on the matter.Ignoring the long descent that healthcare has been on for decades now, and then claiming that slowing the growth rate of healthcare spend, while it still moves above the general rate of inflation and much of the decrease in observed to expected growth is related to the recession, is analogous to giving a kid a blindfold and a bat and told to hit the piñata in the tree in your backyard, meantime you have tied the piñata to a forest in the park two miles away. When the kid swings and misses, you take the blindfold off and tell him to try again, and declare success when he at least swings level at the air. The point being, even if Obamacare impacted these selective statistics, it is still miles from being where it needs to be.

To wit, there is many citations of costs decreasing, but the author conveniently ignores that those costs are going back up and projected to once again hit their stride of 6% a year, double the rate of inflation, for the foreseeable future. The recession was a temporary halt in healthcare spend, so it is really convenient to leave that fact out. Consider that in 1946 the average inflation adjusted hospital stay was $30 per day whereas today it is an astounding $2,200, a 70-fold increase. Trumpeting a modest decrease in this awful record is quite a bit like missing the forest for the trees.

Plus, while there is a lot of current debate about the tactics of repeal and replace given the slim Senate majority and how to use arcane Senate rules on budget reconciliation, Paul Ryan and others have come up with plans on replacing Obamacare, all under the banner of the Better Way moniker, which I detail in further detail elsewhere. Apparently this journalist is too lazy to look that up. But yes, I do hope that Republicans don’t take the risk of getting repeal without replace and do both at once. I honestly am not holding my breath given Republican ineptitude in the past.

It’s nice that the uninsured rate is going down, but of course a federal mandate to buy health insurance upon pain of hefty tax penalties is going to increase insurance rates. Would you praise a parent who upon their child spilling a drink or dropping food forced them to do 40 push-ups before eating again and then declaring to Facebook, “my child can do 40 pushups!”? No, I think not. At any rate, the real question is whether this metric on its own is the most important one and decoupled from the irrefutable evidence that healthcare costs and insurance premiums continue to skyrocket at a double-digit pace. Plus, recent research from economist Mark Warshawsky indicates that skyrocketing health insurance premiums have held down take home wages, as health insurance coverage has gone up for the lower and middle classes as a percentage of their total compensation from 4% to 12% in just a couple of decades – meaning they are not getting raises in take home pay because it is getting swallowed up in health insurance. Since inequality is a focus these days, look at the failures in our government run healthcare system as a main culprit.

If we are concerned with people not seeing the doctor, providing a stipend for catastrophic insurance and flexible Health savings accounts would have done the same thing without the enormous bureaucratic bloat that has led to skyrocketing premiums. And uncompensated care is an important gap to close, but this is all a bunch of cost shifting. What used to be covered through disproportionate share payments at the county and state levels, where great board oversight could be applied with local knowledge, is now being soaked up by cross-subsidies through the federal tax code – out of sight, out of mind, no accountability, and requiring hospitals to create a new administrative burden to work through the ACA and all its complexity.

This also ignores the many blatant failures of Obamacare, which I helpfully capture here. https://wordpress.com/post/gymnasiumsite.wordpress.com/117

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Explaining the EpiPen (hint – the company can jack its prices up because of government intervention, not because of the lack of it)

This author does as admirable of a job as any I have seen, so I am sharing it. http://slatestarcodex.com/2016/08/29/reverse-voxsplaining-drugs-vs-chairs/

The only point he leaves out that I would like to make is the laughable hypocrisy of government officials, including one candidate for President, claiming we need more government intervention and price controls. I have a better idea for policymakers – how about trying something that comes completely unnatural to you – get out of the way and let innovators do what you could never do, actually create products that people want at lower cost and higher quality, if only you would let them. I promise it will be more effective and help the poor and middle class a lot more than your prescriptions (lame pun intended.) But I suppose that is the point, your job security is only justified if you are seen as hyperactive in your “protection” of the people. If only the people knew that the only protection we often need is actually precisely from you – the paternalistic functionary.

Here is the key crux of his argument, wrapped into a simple market analogy of chairs:

Imagine that the government creates the Furniture and Desk Association, an agency which declares that only IKEA is allowed to sell chairs. IKEA responds by charging $300 per chair. Other companies try to sell stools or sofas, but get bogged down for years in litigation over whether these technically count as “chairs”. When a few of them win their court cases, the FDA shoots them down anyway for vague reasons it refuses to share, or because they haven’t done studies showing that their chairs will not break, or because the studies that showed their chairs will not break didn’t include a high enough number of morbidly obese people so we can’t be sure they won’t break. Finally, Target spends tens of millions of dollars on lawyers and gets the okay to compete with IKEA, but people can only get Target chairs if they have a note signed by a professional interior designer saying that their room needs a “comfort-producing seating implement” and which absolutely definitely does not mention “chairs” anywhere, because otherwise a child who was used to sitting on IKEA chairs might sit down on a Target chair the wrong way, get confused, fall off, and break her head.

(You’re going to say this is an unfair comparison because drugs are potentially dangerous and chairs aren’t – but 50 people die each year from falling off chairs in Britain alone and as far as I know nobody has ever died from an EpiPen malfunction.)

Imagine that this whole system is going on at the same time that IKEA spends millions of dollars lobbying senators about chair-related issues, and that these same senators vote down a bill preventing IKEA from paying off other companies to stay out of the chair industry. Also, suppose that a bunch of people are dying each year of exhaustion from having to stand up all the time because chairs are too expensive unless you’ve got really good furniture insurance, which is totally a thing and which everybody is legally required to have.

And now imagine that a news site responds with an article saying the government doesn’t regulate chairs enough.

 

 

 

Government – the only sphere on earth where abject failure leads to more power and responsibility

It is a curious and novel tendency that government failures don’t lead to accountability and a search for knowledge and truth, but rather inexorable demands for yet more powers. Witness the increasing calls for the public option in healthcare insurance. Are we really going to trust the powers who gave us the VA and the monumental failures of Obamacare with even more arbitrary and market upending powers that will be impossible to claw back? This is a remarkable centrifugal force unique to government. Try getting away with this in the private sector and see how long it lasts.

The problem isn’t the scapegoated free market (that has not actually existed in healthcare for decades) or insurance companies when we witness rising premiums, the failure of insurance exchanges, and the decades-long march of healthcare costs rising faster than the rate of inflation. Although one can’t help but engage in just a tiny bit of schadenfreude at insurance companies groaning under the weight of their own Faustian bargains with the government in support of the Affordable Care Act (the tradeoff being forced and locked in customers in exchange for standardized coverage plans coverage of pre-existing conditions, and an overall environment of cross-subsidization of low-risk policyholders to higher risk ones). Too bad that there are real lives at stake and 20% of our economy continuing its long rapid descent into a massive government intervention – making this no small laughing matter.

The problem is the unintended (and often intended, as is the case of the mergers of health systems and the demise of the private physician practice) consequences of strangulating regulations and inept government policies foisted on the market by the tyranny of experts who are too arrogant to perceive that no individual or collection of elite individuals could ever effectively replace the collective and mysterious emergent order of free individuals making free choices. This aforementioned comedy of errors was entirely predictable, at least among those not within tenured positions within CMS and HHS and the rent-seekers that lobby them for rules that further entrench their monopolies (ahem, large insurers and large health systems).

Speaking of the tyranny of experts, I can’t help but view them as analogous to the competing architects in a Monty Python sketch in which one accidentally designs a slaughterhouse and one designs something that does exactly the opposite of what he says it will do – still somehow winning the contract. For the time-strapped for comedy, the best analogy occurs starting at the 3:15 mark.

 

The left’s massive remake of healthcare strikes and fails again

Bagdad Bob.jpg

In a recent Modern Healthcare article, it is evident that small health plans and insurers are being heavily penalized by the ACA’s risk corridor program in a shocking, but not entirely unpredictable, bit of reverse corporate wealth redistribution in which money is actually flowing from small businesses and insurers to the behemoths in the industry such as Anthem and Aetna. Since the ACA and ancillary modern healthcare legislation seems to be openly promoting and favoring the large health system and large insurer over the small private practice and small insurer, this really should not be a surprise. Perhaps it is bringing scarcely disguised huzzahs from those in progressive camps .

Meantime, officials at CMS, in true Baghdad Bob soothsaying fashion, continue to maintain that everything is working to plan. If by working according to plan they mean standing ready to cover and excuse their errors while promising to correct their original mistakes with more thousand page complex and inscrutable reforms (in other words, the standard government playbook of creating a problem through market intervention, blaming venal companies, and then creating more market intervention to further compound the original errors), then I guess they are correct. Meantime, there is less care plan choice due to mandated standardization, less consumer choice of  health providers and insurance companies due to industry consolidation, and precipitously increasing premiums. The next step from progressives is inevitable – proposals that only a single payer health system can resolve this government induced mess. The question to free citizens is, do you really trust the government that can’t build a bridge to manage the entirety of your health insurance system?

Limiting health insurance plan choice is harmful to consumers

A significant component of the Affordable Care Act is the forced standardization of health care coverage through prescribed components that must be carried by insurance plans. Ultimately, this approach has been tremendously disruptive and has moved millions of people off of the plans that in the previous market paradigm they were happy to buy. I refuse to call it a free market since it really has not been that for decades. This disruption is the impetus behind much of the lampooning of Obama’s language, which later proved to be an astoundingly incorrect bit of marketing and hype, that if you had a plan that you liked you could keep it.

Standardization of plans ostensibly removes buyer searching costs for complicated products. Such as approach would only make economic sense if the searching costs were higher than the benefits obtained from the selected product. The challenge is that this sets a remarkably paternalistic precedent – if we dupes in America can’t be trusted to buy health coverage that suits our needs, perhaps we can’t be trusted to buy financial instruments or real estate either. It also has the perverse effect of cutting off product innovation that caters to individuals and unique segments of the healthcare market. Something to consider and question: can government possibly keep up with the changing demands of consumers as well as the unpredictable emergent order that drives market-betterment ideas and innovations? Even if government might be approximately right on the first iteration of defining product standards, it would be impossible for them to keep up with the pace that a free market comprised of consenting adults engaging in commerce could drive. Furthermore, a significant philosophical challenge is that such an approach mandated by government significantly violates an essential freedom of consumers to choose for themselves what is best for them. Finally and perhaps most perniciously, such an approach allows government to enact their own views of desirable social policy through diktat. The Supreme Court case of Burwell vs. Hobby Lobby  is an example in which a private employer was forced to provide contraceptives against their own religious beliefs. Whether one believes Hobby Lobby is outside of the societal norms in their stance on contraceptives is quite beside the point. The point is really whether we believe government should be powerful enough to be able to force anyone in society to choose which product to purchase and what it should contain. This is the first-order principle freedom-loving citizens should be concerned with.

In the book The Future of Healthcare Reform in the United States, Richard Epstein, of the NYU School of Law, pens the following compelling narrative on the challenges with the elitist assumptions of government needing to protect consumers through standardized plans:

Any decision such as that made in healthcare markets – to require given firms to offer a particular type of contract with predetermined coverage – does not facilitate competition but thwarts it by restricting the dimensions over which innovative firms can compete. To be sure, it is unlikely that either midsize firms or ordinary consumers can canvass the entire market. But they can make a series of initial cuts to focus on the market segment they care about most. At this point, one of the key drivers of good competition is the ability to offer a particular configuration of goods and services that make sense to some segment of the overall market. The standardization of service packages thus prevents innovation along certain key dimensions, which hardly improves the overall competitive market. Put otherwise, product differentiation is the great and beneficent spoiler because it allows rapid and discontinuous changes in the market such as the rise and fall of BlackBerry and the now possible decline of Apple in the face of potential disruptive technological developments from a host of competitors. In my view, these large gains dominate any negative effects. Indeed the constant use of product differentiation, both large and small, in market after market, suggests healthcare regulators engage in a dangerous gambit by limiting product choice to a few set choices in order to reduce the buyer’s costs of search. People can truncate searches using sensible strategies. They do not have similar ways to expand market options.

Imagine if government decided that our smartphone choices were overwhelming to consumers and determined that we should all have certain features based upon some government committee’s determination of a rightful specific set of requirements. I suspect the product so described by the committee in the duly published 500 page document would prescribe usage of something resembling the BlackBerry more so than the iPhone. And despite Hillary Clinton’s fondness for this device, we obviously would be immediately worse off as consumers. Further imagine that the government decided that we could no longer buy the phones at Apple stores or Best Buy, but purchasing of these devices had to occur at government licensed locations. Behold the entirety of the healthcare market: a market in which there is an inherent paternalistic assumption that consumers are too ignorant and overwhelmed to make their own choices. The government committee decisions on what we can buy and where we can receive our products described in the smartphone analogy is precisely the kind of marketplace we have allowed our government to create in healthcare. Perhaps it is time to step back and ask ourselves why and whether we are getting good outcomes out of this approach.

 

Let’s repeal Obamacare and replace it with something more consumer-centric

At long last, Republicans have started to coalesce their various one-off healthcare reform ideas from the past 6 years into a semblance of a comprehensive Obamacare repeal and replace proposal. There is much to appreciate in this proposal, which includes oft-repeated catchy taglines of, “a better way,” “patient-centered,” and my personal favorite, “backpack.” I will discuss more on the backpack later. The whole presentation, which I have linked above, can be watched in a recent AEI video.

What this proposal does not promote is my own personal preferences of a drastically reduced role for health insurance, a product that should be beaten back into its proper place for coverage of catastrophes only. The price-obfuscating impacts of coverage for every service and the price-decreasing impact that would ensue if consumers were able to see prices and outcomes more transparently by paying more directly out of their pockets is not part of this proposal. Nor does it address the supply-side needed reforms such as lifting the competition stifling (and therefore price increasing) impacts of the various regulatory mandates and rent-seeking political lobbying of regional monopoly hospitals that prevent new hospitals and clinics from opening. Finally, while it promotes Medicare and Medicaid reform, it leaves Medicare, which is mostly a middle class welfare and wealth transfer that has a naturally price inflating impact, largely intact. These are my caveats for why I don’t consider this a perfect proposal. That being said, the main themes presented certainly stanch the government takeover of healthcare bleeding and presents significant and politically feasible patient-centric reforms in place of the current construct of byzantine, dizzying, and unsustainable complex web of government controls and mandates. For this fact alone, this substantial reform proposal should be applauded and supported as a significant improvement to the status quo that just might get enough electoral support if Americans pay attention to it and can keep from being distracted by the ongoing Trump/Clinton circus. As a former boss of mine used to tell me, “don’t let perfect be the enemy of good.”

The focus is clearly on consumer choice, portability, decentralization of decisions to state and local levels, and sustainability of Medicare. It is this concept of portability that is referenced as a backpack of items that will allow consumers to move across companies and states and maintain their same coverage and access to health services. Paul Ryan opened the session indicating that Obamacare is singularly focused on quantity of people insured, while ignoring the staggering costs in the system that Obamacare caused that are, in his words, causing the act to collapse under its own weight. Not to mention the tremendous loss of individual freedom and choice that resulted from centralized decision making and mounds of mandates arising out of D.C. Allowed to blossom, these are salient points that I believe will resonate with a public that has been remarkably skeptical and loathing of Obamacare. The marketing pitch is clear – consumers, take back your choice and freedom to choose the health plans that are right for you and not dictated by a government bureaucrat. Perhaps it is more appropriate to say take it back from thousands of bureaucrats, as one Congressman indicates in the video, there are fully 159 agencies and commissions currently involved in interpreting and implementing the dictates of Obamacare.  Several congressmen, including Budget Committee Chairman Tom Price (R-GA), Education and the Workforce Committee Chairman John Kline (R-MN), Energy & Commerce Committee Chairman Fred Upton (R-MI), and Ways & Means Committee Chairman Kevin Brady (R-TX) took turns articulating the proposal once Ryan got off the dais. Below, I have summarized the important components of the proposal, ranked in order of my opinion on which are the most important to least important.

  • Extending the health insurance tax break to individuals that businesses currently receive, and capping the amount that businesses can receive tax breaks. This concept will sever the link that causes Americans to be solely dependent on their employer for health insurance and promotes portability and accessibility of insurance. Hopefully, it results in more people taking the initiative to get insurance on their own and subsequently bargaining for higher direct compensation from their employers. The capping of tax breaks for businesses is intended to serve as a cost inflation and “over-insurance” containment provisions. Coupled with the ending of specific coverage mandates, also part of the proposal, this could go a long way towards incenting people to get more affordable coverage that makes sense for their life situation and promote innovative models such as high deductible plans, insurance coupled with wellness programs that promote actual health and wellness, and insurance that covers catastrophes only complemented with health savings accounts. These forces could make a major dent in insurance cost inflation and concomitantly overall health cost inflation.
  • Free up insurance purchasing across state lines – this simple and sensible act will drive up competition and will do much more to drive consumer choice and put downward pressure on prices than the continually failing exchanges and insurance co-ops (most of which have declared bankruptcy by now) could ever do, even though that was their ostensible original purpose. The challenge is that it is impossible to drive choice and cost containment when you also force standardized minimum levels of coverage and mandated cross-subsidization of high risk individuals.
  • Promotion of Health Savings Accounts – Provisions of Obamacare amazingly and wrong headedly penalize HSAs through the tax codes. This proposal would wisely end those disincentives and work to actively promote their use. HSAs are popular despite their government created disadvantages.. Furthermore, usage of HSAs promotes pricing transparency and healthcare service usage portability and flexibility.
  • Medicare Reform – The proposal kills off the unpopular and unaccountable Independent Payment Advisory Board and promotes consumer choice through expansion of the popular Medicare Advantage Program.
  • Provide state block grants for Medicaid – this will provide greater flexibility at the state level to craft cost saving programs at the localized level.
  • Provide for ability of Small Business Group Purchasing Associations – the proposal would allow for small businesses to band together for group purchasing of insurance coverage. While I prefer a high degree of an individualized market(which hopefully the tax breaks to consumers will promote), the fact is that most employees now expect and HR departments like to offer health insurance as a hiring incentive. Allowing small businesses to band together and to receive the same tax incentives as larger businesses will promote further consumer access with the nice boon to small business employment. Currently, Obamacare punishes small businesses through a web of complex rules that force them to either cover employees on increasingly expensive and bloated plans or pay a tax penalty per employee that they do not cover.
  • Protection of Pre-Existing conditions coupled with state incentives to create risk pools. While I would submit that a free-market system that promoted insurance for catastrophic conditions only would solve for this without the need for regulatory enforcement, this provision that is currently part of Obamacare is one of the few things that is actually politically popular. Thus, it is important from a politically feasible standpoint to keep it. One way of potentially holding down cross-subsidization amongst premiums and spiking premium costs for the average holder is to also create risk pools for certain conditions as a backstop to insurance coverage. The concept of risk pools is also promoted in the proposal.

These are simply the highlights. I will need to dig into the documented details of the plan to provide additional thoughts, but I certainly appreciate the direction this is heading.

We are from the government, and while we created this mess, we are here with a 900 page dictate to help

Price is high

Health and Human Services, ever so helpful, is now taking aim at simplifying patient billing, a problem largely of the government’s own creation due to decades-long healthcare meddling (thanks to my friend Bob for the picture above). A HISTalk post on the hypocrisy of HHS taking this challenge on has a quote that captures the essence of the true underlying reasons for the mess in the first place:

This is the height of hypocrisy. Does CMS think providers on their own created the insane billing requirements and processes? It started with Medicare Part A, then B, then D. Co-payments, deductibles, out of network, referral approvals, contractual allowances, UC charges, and on and on. Next, billing systems will have to deal with VBP, P4P, bundled payments, MACRs, and more. Providers never asked or suggested any of these — they just have to figure out how to carve up charges/costs and services and put it all on a one-page bill. A 1995 analysis found that the Federal Register contains 11,000 pages dealing with an IRS 1040 submission, but hospital billing required 55,000 pages to describe. If CMS really wants to simplify the patient bill, they need to go to a single-payer system. Until they do that (not likely), the patient bill will continue to be the mess it has been for the last 50 years. Who do I call to collect my $5k?

Of course, I wholeheartedly disagree with the author’s prescription to create a single-payer health system as a result. He is inviting the wolf that created the mess in the first place farther into the hen-house and proposing making them even more all-powerful and monopolized. Does he really believe that they will somehow suddenly find sagacious angels to run the system at that point? The real answer is market-based and comprehensive demand and supply side reforms of the kind I captured in a separate blog post.

Here is what I predict: HHS will view a few isolated reform proposals that might work in certain settings but not all, decide that it is something that should be centrally mandated and in fact applicable to all, follow that with the creation of a 900 page unreadable document that hospitals and clinics, in despair, are forced to hire a team of consultants to figure out, but which gets the actual needs of patients and consumer transparency on pricing and outcomes precisely wrong.

 

 

A brief history of how the American healthcare system became high cost and low performance

In two separate but connected articles posted on the Mises Institute website, Part 1 covering the pre-World War II construct of American healthcare and Part 2 covering the explosion in healthcare costs and our current system development post World War II, Dr. Michael Accad, a Cardiologist with an impressive resume and who has a tremendously insightful blog, provides a remarkable yet succinct overview of how we got to where we are today, which can be briefly described as a costly and underperforming health system.

In just a few minutes, the reader will witness the 100+ year descent into the 7th layer of hell that is our healthcare system and all the errors and paternalistic hubris that got us there. Begin with the status of healthcare in the 19th century, which while far from ideal (this is the era when bloodletting, blistering, and toxic purgatives were common, after all), was beginning to witness the emergence of competitive and innovative medical reforms under a scientific and competitive basis under the guide of the free market invisible hand. For example, germ theory and surgical advancements, and the formation of high-performing health systems such as Mayo Clinic that practiced care on these scientific foundations, were beginning to blossom in the late 19th century without the meddling hand of government agencies and regulations that are prevalent today. But then everything changed when in the early 1900s, a sensational report on the inadequacies of the health system penned by Abraham Flexner resulted in reforms in more onerous physician licensing and health education that remain largely intact to the modern-day. The offshoot was a tremendous narrowing of diversity in medical approaches and education models and medical practices. Everything outside of the Flexner dogma was ostracized and shunned. The challenge with this paternalistic approach is that licensing led to self-serving restrictions on the supply of physicians, leading to spiked costs.

Part 2 of the series covers the evolution of the American health system into what we know today. With increased costs came a decrease in demand. With excess hospital and physician capacity, leaders in healthcare began crafting strategies to increase collective payment models that would blunt the direct cost impact on consumers and thereby increase demand in line with existing capacity. While a European national health system seemed politically out of the question, pilot models in which employees of a Dallas school system were part of a collective payment system seemed to offer the best model to emulate more broadly in order to bring up hospital service demand as well as mitigate adverse selection of the sickest patients opting into insurance plans. Intuitively, people who are able to work are typically healthier than the average American. Legislation promoting insurance plans duly followed, with favorable reserve requirements for Blue Cross and Blue Shield Programs compared to other types of commercial insurance as well as tax exemptions for employers who offered health insurance coverage through the 1942 Stabilization Act. My own editorializing is that the reader should bear in mind that this legislation was a compounding error in the sense that it was meant to address a challenge with employers being able to compete for employees given pricing and wage controls that were persistent in that era. Allowing employers to de facto increase their wages by offering health plans was a backdoor sop allowing them to more effectively compete for labor. The unintended consequences that we are still living with today is that we are collectively highly dependent upon employers for health coverage, which has its own perverse effects of holding people hostage to jobs as well as decreasing our direct take-home pay. The more immediate impact of this in the mid-century was a rapid increase in medical utilization and price inflation. I wish a magic time machine would allow me to just go remove the insidious price and wage controls in the first place.

Dr. Accad focuses heavily on the paternalism of the system that drove us inexorably towards the vicious cycle conclusion that government must take an active role in providing insurance, at great risk and ignorance of the ensuing moral hazards of over-using healthcare services that such an approach entails, which further leads to a whack a mole approach of controlling costs. Better to have not created the holes and brought in the moles in the first place, but I digress. Through a Question and Answer method, Dr. Accad elaborates on two aspects of moral hazard and how this most important of economic concepts impact health care:

Q:  What are the two aspects of moral hazard?

A: The first one, which matches the negative connotation of the term, is the aspect imported from other insurance settings. For example, in the case of car insurance, the term moral hazard refers to the fact that someone with car insurance might drive less carefully than someone without coverage. In a way, that person may be “taking advantage” of the insurance company.

In health care, that aspect of moral hazard probably exists, but may not be very important. For example, it’s conceivable that people who have insurance are more likely to engage in more dangerous sports activity. But this kind of moral hazard can probably be accounted for by the insurer and be factored into the actuarial analysis to determine premium prices.

The other aspect of moral hazard stems from the fact that every single medical encounter or medical act can be said to be ordered toward the preservation of life or toward the well-being of the person. This by itself presents a strong incentive to use medical services, and the behavior should not have the same negative connotation as in the first aspect of moral hazard. In fact, economist John Nyman has argued that the behavior by which insured people would use more health care is a social good.

The bottom line is that one does not need to be sick to utilize medical services and that all that is needed is a plausible argument that if a medical action is taken, life may be prolonged or enhanced. Such plausible arguments are not hard to come by, especially in a health care system where doctors and hospitals are largely paid on a fee-for-service basis. There is no objective limit on what can be considered “desirable care,” and if cost is not a consideration, more medical actions will be taken.

Of course, when consumers are shielded from direct costs, there is little to stop inflation. Insurance premium inflation has consistently outpaced general inflation since the 1950s. Stop and think about how remarkable that factoid is. Dr. Accad addresses this as well, and I love the comparison of health insurance to a harmful drug:

Q: Didn’t the increasing cost of insurance hurt employers?

A: To the extent that it did, there was not much employers could do about it. With rising medical prices, the need to have health insurance would become more and more acute. Employee discontent would have been too great to abandon health insurance as a benefit. Executives themselves also benefited from the group rate, so the idea that health insurance should be abandoned could not be entertained seriously.

Q: People were hooked!

A: Health insurance is a seriously addictive and harmful social drug.

Once medical price inflation occurs for those who are covered, those who are not covered begin to get priced out of the market. During those times, it tended to be the poor, the aged, and unemployed who were left in the lurch, and that brings us to Medicare and Medicaid:

Q:  How was the situation addressed?

A: With the enactment of Medicare and Medicaid in 1965. The government provided generous health insurance benefits to the most politically influential class, the elderly, which also happens to be the class whose needs for medical care are naturally the highest.

The terms of Medicare insurance were also very generous to physicians and hospitals since, to secure their cooperation, the government decided to pay them their “usual and customary rate,” which means that, for a time, the government had no way of controlling costs.

Q: I can see things spiraling out of control…

A:  As a matter of fact, once Medicare was introduced, medical prices became completely “unhinged.” Within a few years, Medicare expenditures were quadruple what had been anticipated.

The demand for medical services was so high there was an acute shortage of doctors. Immigration laws were adjusted to allow a rapid influx of physicians from abroad. There was a boom in hospital construction. Incredible facilities and health care complexes were built.

Naturally, with skyrocketing medical prices, insurance premiums had to increase correspondingly. This began to really affect employers.

The rest of Dr. Accad’s journey through the American health system history concludes with the modern-day challenges to restrain the predictable cost increases that ensued with Medicare – from the Managed Care Organizations that were designed in the 1970s to the various pay for performance schemes, Accountable Care Organizations, and shifts from fee for service that we see today. Some of these are likely steps in the right direction, and it is certainly better to pay physicians based upon outcomes and quality rather than volume of services. That being said, with all of the recent mandates and focus on payments for an entire episode of care that has and will incent mergers and consolidation, I am not sure the incentives will truly be great for newly minted local monopolies to increase quality and pass on cost savings to consumers.

It would be far more effective to implement policies that end onerous licensing and task performance restrictions (i.e. by allowing nurses to perform tasks they are perfectly capable of), end supply side restrictions (it is near impossible to open a new hospital in an area due to hospital political lobbying and political connections at the local and state level), end reliance on insurance that covers everything, which obfuscates health care prices, provide individuals with the same tax advantages that employers receive for health service coverage, shift employer based coverage to portable and widely usable health savings accounts, and replace health insurance subsidization for the poor with directly funded health savings accounts similar those enjoyed by their better off peers. Such a model would drive greater innovation, better customer service, and more transparency around outcomes and costs. All of these combined would tame cost inflation while at the same time increasing health outcomes.

 

The Next Frontier in Healthcare Reform and Why it Will Harm Consumers

There is a working group chartered by Health and Human Services (HHS) comprised of a combination of private, public, and non-profit players in the healthcare industry that have been active in determining the direction of the next frontier in healthcare reform. Namely, the next frontier in healthcare reform will focus on how providers and organizations are paid for the services that they deliver. This working group has been given that rather lengthy title of, “The Health Care Payment Learning & Action Network (LAN),” and they recently created a whitepaper that sheds tremendous light light on the Centers for Medicare and Medicaid Services (CMS) most likely direction and next steps with looming payment reforms. The whitepaper can be found at https://hcp-lan.org/workproducts/apm-whitepaper.pdf. At the outset I will say that I am a tremendous skeptic of this type of crony capitalism in which entrenched monopolistic industry players such as large hospital networks and insurance companies that have close connections with government are the ones that are creating frameworks for payment models. We won’t be surprised when such models are favorable to them at the expense of consumers and the small-market players, would-be new entrants, and competitive market forces that are so sorely needed in healthcare.  That is a topic I will leave to a future post and in many ways I discussed in my healthcare section of  a recent blog post where healthcare is one section addressed within a broader economics manifesto in which I borrow liberally from University of Chicago Economist John Cochrane.  Suffice it to say that asking the fox for the right ways to guard a henhouse are likely to result in a more well-fed fox then it will result in protected hens.  Let me also say at the outset that I am not an advocate of the largely fee-for-service regime that exists in healthcare today. I will briefly indicate that I do not believe government “expert” led attempts to change healthcare demand and supply through insanely complicated bundled payments for episodes of care will be the new tweak that bends down our healthcare cost curve while protecting quality and consumer choice. The new reforms are analogous in my mind to building a pretty white picket fence on a trash heap. Broad market-oriented reforms are the real cure, the effective way to remove the trash heap and create meaningful healthcare reform, but again, that is a future post.

Now turning to the merits of the plans put forth by the HCPLAN. What good is a government body if it does not have a 6 letter acronym?  The graphic below reveals how they group categories of Alternative Payment Models being advocated.

Payment Reform

It is clear that the working group (and one can assume they will guide in large part the decisions that CMS will make) holds in high regard the bundled payment for a specific episode (i.e. hip and knee replacement) and a population based payment (payment that is for a beneficiary as a whole and agnostic to the services they actually wind up using) as the holy grail models of payment reform. It is also interesting to note the convergence of government and private payer focus on such payment reform models (my point above on crony capitalism at work). Thus, this is not simply a government thrust, but is being directed by the large industry players that will benefit from more complicated payment structures that only large providers will have the scale to work around  The working group makes their strategy clear with statements in the white paper such as, “The Work Group believes that shifting from traditional fee for service (FFS) payments to person focused payments (in which all or much of a person’s overall care or care for related conditions is encompassed within a single payment) is a particularly promising approach to creating and sustaining delivery systems that value quality, cost effectiveness, and patient engagement.” Thus, healthcare systems can anticipate that what CMS has begun with bundled payment pilots and the recent Comprehensive Care for Joint Replacement Model (CCJR or CJR) is but a mere crack in the opening of the door that will highly likely culminate in many other healthcare conditions being moved into a bundled payment models. Indeed, in the work group whitepaper, the call is for health payments to increasingly shift towards Category 3 and 4 payments. This will intuitively fuel consolidation across the acute and outpatient settings as well as drive a much more narrow and controlled continuum of care networks. In other words, as healthcare consumers, we will be left with much fewer options and much less control over where and how we consume healthcare services.  In this era of payment structures, hospitals will have great incentives to create unprecedented levels of of hospital-based control (if not outright ownership) over outpatient and post-acute settings through tightly controlled referral agreements and at risk quality and financial contracts between hospitals and outpatient settings. The outpatient settings that can’t keep up in this space will inevitably be shutting their doors.Many hospitals will find it to their advantage to simply acquire the outpatient and post-acute players around them. Indeed, to their credit the working group admits in their whitepaper that, “The transition away from FFS may be costly and administratively difficult….the Work Group recognizes the possibility that shifts in payment can result in unintended and unanticipated consequences, such as cost increases owing to provider consolidation, reduced provider willingness to exchange data, and a potential reduction in costly but effective medical services”

On the points made related to the unintended consequences, something to watch out for will be how CMS plans to address the natural incentives that bundled payments will create to reduce innovation and quality of care in order to cut costs. It won’t come as any surprise that a bundled payment will fuel cost reduction at the expense of quality and consumer value.  I personally am skeptical that government apparatchiks will be able to command these tradeoffs from up on high effectively.  Since the ultimate aim in any industry should be to both reduce cost and increase value in order to please and gain more customers, a bundled payment by its inherent nature will greatly incentivize lower cost care that does not in fact improve quality, or even worse, will highly likely decrease quality. Thus, there will have to be some efforts to couple the bundled payment to pay for quality reforms. All that being said, health systems and consumers can anticipate government reform to continuously work towards the rapid shift from fee for service to at least one of the APM payment frameworks despite the recognized challenges. After all, recognized challenges did not stop the Obama administration from rolling out disastrous insurance exchanges.

The graphic below reveals a rough representation of the shift that the Work Group believes must occur. While the precise amount that flows into Categories 2-4 can’t be predicted at this juncture, what seems a foregone conclusion is the shift out of Category 1 (Fee-For-Service) is all but inevitable in today’s current environment. Those organizations that do not opt for full on Accountable Care Organization models created under ObamaCare will increasingly find the majority of their payments in the form of person-centric population bundled payments, episode of care bundled payments, or payments for services in which a significant portion of the payment is dependent upon achieving certain quality measures.

 

Model Shift

In its discourse on the payment models, the Work Group unveils its construct of the holy grail of health care delivery: the integrated care delivery network. It states within the white paper that, “On one end of the spectrum, plans and providers in Category 4B models may be virtually integrated. On the other end of the spectrum are highly integrated arrangements that are characterized by vertical integration of financing and care delivery, common ownership, and strong linkage across strategy, clinical performance, quality, and resource use. These groups may also have a higher percentage of salaried physicians. After reviewing the literature and discussing these highly integrated arrangements with people who operate within them, the Work Group has reached the conclusion that they can be ideally suited for delivering person centered care because they: 1) force transformational thinking about delivery system reform; 2) optimize coordination of infrastructure investments; 3) most fully remove financial incentives for volume; and 4) expedite community investment and engagement.”

There you have it – a frank admission that these payment models will drive consolidation of health systems, drive small players out of the market, and drive private physicians into the arms of working directly for hospitals. I personally believe that a competitive market without the insane supply restrictions and prevention of new entrants of the market and removing of the insurance premiums and government programs that create tremendous price and demand distortions would create the cost and quality driven models we seek, but what we are getting instead will be more complexity, less choice, and potentially less quality. With some luck, maybe our costs will go down, but I am not betting on the benevolence of even larger industry monopolies passing their cost savings on to consumers.

“How Marco Rubio is quietly killing Obamacare”

Source: How Marco Rubio is quietly killing Obamacare

The linked article provides yet another example of a candidate in the race that has serious proposals and shows the leadership and initiative to bring about change through intelligently crafted legislation. The act of legislation exhibited deep knowledge of where the actual weaknesses of ObamaCare existed and presents a mortal blow to the Act that slipped past the desks of its most ardent supporters. Meantime, taxpayers are protected from cronyist bailouts written into the law – part of the Faustian bargain insurance companies made with the government as a prerequisite to receiving their support (and their lobbying dollars) for the law.

Hopefully the mounting evidence to the American people that the Republican race has a few viable candidates will finally stem the tide from fascination over the bluster that is confused with straight talk, the unintelligible shooting from the hip for actual sound policy, and the mistaken notion that we need an outsider to shake things up rather than someone that can actually lead.