An Early Victory for Health Reform

When the Affordable Care Act was enacted, there was immediate and enormous uncertainty about how the law would be implemented, whether or not it would be successful, and how its success or failure would be recognized. Proponents pointed to economic theory and Romneycare in Massachusetts, suggesting that we’d see a decrease in the number of uninsured initially, followed–hopefully–by a reduction in the rate of health care spending growth. Opponents, meanwhile, shook their collective heads and began filing lawsuits over the constitutionality of the individual mandate, and those cases are still winding their way through the courts.

While the ACA is still in its infancy, with numerous provisions of the law yet to be implemented, there is now evidence that health reform is doing its job. To be sure, a tremendous amount of uncertainty remains, but the latest data from the U.S. Census Bureau shows that the number of uninsured Americans remains unchanged between 2009 and 2010. Though health reform critics might like to jump on that statistic and proclaim that the ACA has failed to cover more Americans, history proves otherwise.

The U.S. economy–while supposedly no longer in a recession–is far from robust. Historically, economic downturns coincide with increases in the number of uninsured, as people lose their jobs and, thanks to the design of our health care system, their insurance coverage. So, the unchanged number of uninsured masks what actually happened: Roughly 810,000 middle-aged adults, those ages 45 to 64, were likely let go from their jobs, didn’t yet qualify for Medicare, and ended up uninsured. Meanwhile, some 494,000 young adults, those ages 18 to 25, gained coverage, which seems to point to the ACA provision allowing children to stay on their parents’ plans until age 26 that went into effect in the fall of 2010. Of course, there may be other explanations, but the simplest explanation is likely the right one.

Assuming that the ACA continues to reduce the number of uninsured, the bigger question is what happens to costs after it is fully implemented. A large part of this will hinge on consumer behavior, and the news here is mixed. There is emerging evidence that uninsured patients don’t dramatically alter their care-seeking after gaining coverage. In some cases, this is a good thing. For example, in Massachusetts, the uninsured being served by community health centers continued to seek care there even after they were insured. That’s good news for the health centers, which would otherwise be left with an even heavier burden of uncompensated care than they currently face, and it’s good news for the health care system, because health centers are widely recognized as high quality, cost effective primary care providers. Expanding that model could help to bend the cost curve.

At the same, however, there is evidence from the University of Pennsylvania’s Dan Polsky and colleagues that the uninsured who become Medicare eligible don’t change their behavior either. In particular, they continue to have lower rates of physician office-visits and higher rates of emergency room and hospital outpatient department use. That’s bad news, because those sources of care are notoriously more expensive and present an obstacle to continuity of care.

Consequently, the future is uncertain. The promise of the ACA to reduce the number of uninsured remains intact, but what happens to health care costs will be determined largely by the actions of tens of millions of newly insured persons. If ever there was a time to help patients make informed decisions regarding their use of the health care system, that time is now.

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The Nonsensical Private Insurance Model

Today, I’m going to try to convince you that private insurance companies should not exist. Okay, maybe that’s a bit hyperbolic, but let me explain. The basic premise of insurance is that, by pooling people together, risk can be made more manageable. Say, for instance, that historical data indicate that 1 in 10,000 people will develop a rare illness that is very expensive to treat. In fact, let’s say that the cost of treating that illness is a cool $1 million. Because most people aren’t millionaires–our group of 10,000 people might contain none at all–being the individual with the illness goes from being a health concern to being a financial concern as well. Bankruptcy is almost assuredly the outcome.

But there’s some uncertainty in the risk. None of the 10,000 people knows if they will be the one to contract the million dollar illness. At this point, they have two options: They can take their chances–after all, there’s only a 0.01% chance that they’ll get the illness–and figure out how to come up with the $1 million if they become ill, or they can pool their risk with the other 9,999 people and buy a product called health insurance. In our simple little single illness world, where probabilities always work out nicely, we might imagine a scenario where the total health care expense would be $1 million (the cost of treating the illness for the one person who contracts it). The fair thing to do, then, would be to charge everyone a premium of $100. That’s the break even point, anyway. And it’s obvious why the one person who falls ill would want to have this insurance–$100 is a lot cheaper than $1 million. In fact, because people are typically risk averse, they’d rather go ahead and pay the $100 with certainty, rather than letting a million dollar bet ride on an open ended “what if?”. Risk pooling works in theory.

Of course, the world is not so simple as our little experiment happens to be. Instead, the total health care expenditures would be far more than $1 million for the group, because people would contract other illnesses, develop other diseases, and even spend money for routine check-ups. But we have data on that amount of utilization, too, and the setup is the same. Figure out how much our population of 10,000 people is expected to cost, divide that total by 10,000 and charge everyone that same amount. Welcome to community rating.

But people don’t like that approach. After all, some people in our group of 10,000 smoke and some do not. Those who don’t smoke aren’t often excited about paying a higher premium to cover the cost of lung cancer treatment that has its origins in the bad decisions made by smokers. It’s kind of like going out to dinner with a big group that eats and drinks its fill while you have a salad and a glass of water. At the end of the night, they want to split the check evenly, and you don’t want to subsidize their wine habit. Surely there must be some system that figures out your own personal risk category and charges you accordingly. Welcome to experience rating. Obviously, this leads to stratification that is antithetical to the solidarity inherent in the concept of risk pooling, but that’s a subject for another post.

Figuring out everyone’s risk, and the costs involved requires actuaries. Sending out the bills for the premiums requires administrative staff. In other words, running the risk pool takes work and is associated with additional costs. These, too, must be added to the total health care expenses in determining the break even point for premiums. And, if the government ran health insurance, it could stop there. The calculation would simply be:

Per enrollee premium = (total health care costs + total administrative costs) / number of enrollees

When private companies get involved in the insurance business, things get more complicated, because one of the goals–even if the company is technically a non-profit–is to make money. There’s only one way for that to happen, which can be explained by the following formula:

Per enrollee premium > (total health care costs + total administrative costs) / number of enrollees

It looks almost identical to the government equation, with one difference: the equal sign has been replaced with a greater than sign. There are two primary ways that this can happen. The insurance company can charge a higher premium, or it can deny claims–essentially asserting that “total health care costs” are lower than the enrollees would claim. If they do both–increase premiums and deny claims–they stand to make even more money. Now, conventional wisdom would suggest that if the insurance companies did this, people would leave in droves. Unfortunately, imperfections in the market make this easier said than done. For starters, as I discussed last week, most people have no idea how much their health insurance premiums actually cost.

The bottom line is this: Insurance companies profit the most when you pay them and they don’t pay your claims. They have a financial interest in denying you your benefits. That makes about as much sense as McDonald’s earning 10 cents on each hamburger it sells, and 20 cents on each hamburger it doesn’t sell. There’s an inherent conflict of interest in the private insurance business. The government, by contrast, isn’t in the business of making money. I think even my conservative friends who want to slash domestic spending and lower taxes would agree that. As a result, they are perfectly content to break even, and the only claims that they would have an interest in denying would be fraudulent ones. As I see it, this moves us away from the inefficient world of private insurance towards the purest risk pooling function that only government can provide. People freak out about this (a technical term), because they distrust government and can’t envision any scenario where the profit motive doesn’t generate the ideal results. Apparently, these people prefer the idea of paying more and getting less to the idea of getting what they pay for.

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Lies, Damned Lies, and Scare Tactics

This morning, an understandably concerned friend shared an editorial with me that suggested that the House version of the health reform bill would kill the individual private health insurance industry. The article, the link to which I hesitatingly include here (read at your own risk), plays on two rather prominent concerns Americans have: Loss of choice and Government-run health care.

Specifically, the editorial claims that those who currently have individual private coverage would not be able to change their plans, but would be forced to keep their current coverage (loss of choice), and that the future creation of new individual private insurance plans would be, and I quote, “illegal.” This, we are told, would lead directly to an Orwellian state-run system.

Are you scared to death yet? I wouldn’t blame you if you were. Scare tactics are VERY effective. The problem is, that the editorial is just plain wrong. Allow me to explain….

The editorial takes one paragraph of a HUGE piece of legislation out of context. There is no indication that the individual private health insurance market is being made “illegal”…..rather the proposed legislation would:

1. Grandfather in existing individual private insurance plans and require them to adhere to strict terms — which are included to protect enrollees from having their benefits reduced or their premiums raised at unreasonable rates in the wake of health reform (to prevent private insurers from attempting to “compete” with the public plan on uneven terms that would essentially be unfair to the consumer who would be ill-informed as to prices and benefits of other products
available to them — if any of you’d like to give that a try, you should visit the Medicare Part D Prescription Drug Plan Finder and play around with it to see if you can pick the “best” plan.
(And before you go saying, “Well, that’s no surprise! The government can’t do anything right!” Keep in mind that these are PRIVATE insurers’ plans you are looking at.)

2. Require private health insurers who intend to offer new individual plans in the wake of reform to participate in the government’s new “health insurance connector” — something taken directly from the Massachusetts plan (enacted under the Republican Gov. Mitt Romney, by the way) — the purpose of which is to help pool risks in the individual market (which would help keep costs down) as well as make it easier for individuals to compare plans side-by-side. Like the Medicare Part D tool referenced above, this is likely to be confusing, but honestly, it will be less confusing than the convoluted mess we have now. That is to say “seeing through a glass darkly” is better
than remaining completely blind.

But, hey, this is a democracy, so don’t just take my word for it. When it comes to anything we hear, see, or read in politics, we would do well to be like Paul Harvey and be sure to get “the rest of the story.” For those of you who feel especially “inclined” the full 1,018 page House bill is available here.

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