Philadelphia Reflections

Stepping out of the Obamacare Frame

The most painful criticism of Obamacare, is it wastes so much opportunity to make important reforms -- and still doesn't make them. Gail Wilensky, who spent two years running Medicare and Medicaid, spending decades struggling with a reform of the healthcare system, recently deplored the program's inconsequential goals, if coverage extension is all there is to it. More likely there was to be more, but events overtook the project. Seemingly, the President underestimated the difficulties and overestimated his advisors. Under the circumstances, the natural thing would be, back off in the face of many other demands on his attention, hoping there would be time left in his presidency to recover. The longer he delays, the less chance this strategy will have.

Most of the things which are seriously wrong had been wrong for decades. Using insurance for small healthcare claims is too expensive, merely making administrative costs compulsory and universal for no purpose other than tax avoidance. The only insurance against large and infrequent medical expenses has some modest place we might retain and repair while betting on science to reduce sickness costs. Rather than play historian trying to explain the whole situation, let me devote this chapter to a handful of illustrative changes which might make a big difference, even if only a few prove spectacularly successful. That is, we should taste them to see if they work, not bully ahead and swallow a whole banquet. Listen to the famous warnings of Galen and Hippocrates: primum non-nocere . At least, don't make matters worse.

1. TAX EQUITY. I wish I could name a solitary blunder we could fix or a solitary villain we could hang, to watch everything get better. Our general problem has many contributing problems at its source, At the top of the list, It's a toss-up between a handful of insurance practices begun seventy years ago, and the World War II expedient which we will call the Henry Kaiser tax exemption. I'm sorry, but "job lock" is advantageous to employers, who should not be expected to give it up without a reason. Small businesses are small, but in the aggregate are still important competitors. The fairness argument is meaningless in a competitive environment; large employers must be given something in return for a concession. It is only necessary to review the many regulations which favor small businesses over large ones, to see that large employers feel abused that government's thumb is on the scale. The way to eliminate job lock is to be found in bargains struck in this other environment, where there are more opportunities to balance unfairness arguments. The difference in costs is 15-30%, and it's big enough to warp the system toward certain types of insurance. It's certainly big enough to induce almost anyone to take it when offered. In summary, the designers of the Affordable Care Act seem to have underestimated the value of the Henry Kaiser Law to large employers, and therefore have not made a high enough offer to induce large employers to give it up. Since that would create a tax cost for the government, the rate should be reduced by about a quarter and extended to everyone.

If Congress simply must micro-manage --

A few tips

The importance of preserving the tax inequity in the eyes of big business has been under-estimated. However, the importance of eliminating it has also been underestimated by reformers. All tax exemptions stimulate overuse because they amount to a discount. Federal tax exemptions now mainly extend to two consumer purchases: health insurance and home mortgages-- and both of them are destabilized by it. We currently have a national crisis in both at the same time. The tax-subsidized home-mortgage housing bubble preceded the financial panic, and tax-subsidized health care has led health costs into a second unsupportable bubble. Considered on the level of economics, giving a tax advantage to one group but not to its competitors requires a truly substantial justification because it can distort whole industries. The point here is that you can't eliminate it until you give it to everyone, because only then will the lobbyists go away.

Giving a tax subsidy to employees but not to self-employed or unemployed persons created the uniquely American system of employer-based health insurance, and now largely perpetuates the rather odd fringe-benefit system. Many employers wish they could find a way out of it. Emphasizing the important but temporary origins of this tax quirk in the California war industries merely dramatizes its lack of justification for seventy years afterward. Since the tax preference has been sustained almost exclusively by lobbying, it even calls into question the sustainability of our form of government. It should not be necessary to describe collateral damage like job lock and internal hospital cost shifting. The issue of equal justice alone should be enough to justify the abolition of this unfairness. To go still further down this path, mandating individual coverage to large populations while also excluding some of them from tax exemption because of the nature of their current employers, is to invite a Supreme Court case. And since mandatory coverage has been passed, the sooner a case is granted certiorari , the better.

2. REVISIT THE INSURANCE INNOVATIONS OF THE 1930-40s:

INDIVIDUAL OWNERSHIP OF HEALTH INSURANCE POLICIES is really another way of saying eliminate employer ownership because somebody must be the owner. Aside from the person covered or the person paying the bill, there are no other obvious choices. The only conceivable alternative is government ownership. Because the present participants fear that particular outcome more than almost anything else, a major source of resistance to change is the lack of clarity about what would replace employer ownership. And the longer the Obama administration fails to adopt reassuring measures, the more they are suspected of having that motive. Determined opposition originates in the current owners of "self-insured" groups, the employers, or the unions who have acquired this function from employers. Since most such arrangements are de facto "administrative services only", insurer protests of higher administrative costs for individual ownership are often just relics of ancient combat between Blue Cross and commercial insurers.

Regardless of the internal structuring of incentives, healthcare reform cannot be permanently settled without individual ownership. It must be understood, however, that eliminating the tax preference could be resisted at first by patients who acquire it, because of fear the tax would in some way be shifted to them, too, rather than eliminated. That need not be true if consideration is given to the relative size of the losers and gainers. Since the membership of group policies greatly outnumber individual policyholders, the revenue cost of tax equity -- after redistribution -- would be considerably smaller than 50/50, and likely be in the range of 75/25.

PRE-EMPT STATE LAWS WHICH INHIBIT CATASTROPHIC COVERAGE. State mandated benefits now impact high-deductible insurance in many states, and are the main reason Health Savings Accounts have been slow to spread. The provisions of ERISA shield employer-based health insurance from the unfortunate health coverage mandates in question. ERISA could not have been successful without this pre-emption, so unions and management unite in absolute concern to isolate ERISA from congressional meddling, although for different reasons.

REVISIT McCarran FERGUSON ACT. This act effectively makes the "business" of insurance the only major industry restricted to the state rather than federal control. It should be amended to permit the sale and portability of health insurance policies across state borders, thus greatly increasing competition and reducing prices. Once more, present law discriminates in favor of the employees of interstate corporations, who are also exempted by ERISA.

RESTORE ORIGINAL FORM OF PROFESSIONAL STANDARDS REVIEW ORGANIZATIONS (PSRO). These physician organizations effectively regulated many issues which are now the subject of a complaint. They were lobbied into ineffectiveness in 1980, and together with "Maricopa", essentially turned medical oversight over to insurance companies who thus receive no physician advice except their own employees.

The Supreme Court Needs Help, Too

LEGISLATE OVER-RIDE OF 1982 MARICOPA CASE. This unfortunate U.S.Supreme Court 4-3 decision was never tried and upholds only a motion of summary judgment about a per se violation. It prohibits physician groups from agreeing on lower prices and has been taken to mean physicians are excluded from exercising control of HMOs and Managed Care. It also perpetuates the notion of individual competitors in a profession which is rapidly acquiring larger groupings as units of competition. By some quirk, the full tape recording of the 1982 U.S. Supreme Court arguments can be heard on the Internet. It is above this author's pay grade to know whether it would be better to ask the Supreme Court to review its earlier decision, or to make legislative changes in the antitrust law which would somehow result in a better outcome.

WIDESPREAD INTERFERENCE WITH MARKET PRICING. Of equal or greater importance, is the package of expedients introduced by the Blue Plans in the 1920s and refined up through 1950. They include first-dollar coverage (the Henry Kaiser tax subsidy may share equal blame), service benefits, internal hospital cost shifting, hidden discounts to favored insurance companies, and the "pay-as-you-go" system. A more recent addition has been the DRG system of inpatient reimbursement, a brilliant idea poorly implemented, leading to total confusion in hospital inpatient and outpatient pricing. All of these subjects have been discussed at length in this book, and will not be repeated here.

SUBJECT MEDICARE TO MORE UNDERSTANDABLE AND CONVENTIONAL ACCOUNTING. The present special accounting of transfers by an agency of government, escapes being treated as debt would be treated in the private sector, and actually treats interdepartmental debts as assets. Medicare is now the largest debtor in the world, rapidly becoming more indebted, and hardly anyone realizes it is 50% subsidized. The implicit need to extend this subsidy to the rest of health insurance makes "Single payer" wholly impractical, however attractive it is to get a dollar for fifty cents. The public is largely unaware that Medicare is 50% supported by tax infusions from the general fund, not to mention the tax deduction employers take on the payroll deductions supporting Medicare. The change sounds like an inconsequential technical one, but merging the debts of Medicare and Medicaid would be considerably eased by this improved transparency, as just one example of where the special accounting leads us. Uncoupling the debts of Social Security from those of the 1965 amendments would be another example, but in the reverse direction because of the accounting razzle-dazzle. Until the CMS reports make this subsidy more apparent, the public is not participating in the debate.

No surgeon can pay malpractice premiums out of Medicaid reimbursement.

Now hear this.

TORT REFORM. Malpractice costs mainly affect surgeons and obstetricians, who sometimes pay annual malpractice premiums of $200,000. Not only does this provoke defensive medical behavior, but it also provokes local physician shortages which in turn lead to hospital cost-shifting and other responses. The only tort reform which has proven value is to place a limit on awards for "pain and suffering", the traditional catch-all cost expander. Resistance to a cap on pain and suffering might be softened somewhat by allowing the greater of $250,000 or 10% of the total award. It is entirely unreasonable for pain and suffering to be worth about seven times the medical or "economic" damages, as is currently standard in the malpractice insurance industry. There may be other approaches to curing the malpractice problem, but many have been tried, and the medical profession believes this is the only one with proven success. It is very clear that the public does not understand how small a proportion of a typical malpractice award relates to the injury, and how much it relates to appeals to jury sympathy.

Treat liabilities like debts. And transfers from the general fund as liabilities.

Accounting, for Congressmen

PARITY BETWEEN INPATIENT AND OUTPATIENT CHARGES. As a general principle, when a service, device or drug is used in both the inpatient area and the outpatient one has its price exposed to regular market forces in the outpatient arena, the same price should be applied to it in the inpatient arena, plus a (separately negotiated) inpatient overhead adjuster reimbursement which generally applies to inpatients, and a second adjuster for the emergency room. There will be some services which are totally unique to inpatients or emergency room, which will have to be treated as outliers. In this way, a mutually reinforcing restraint is placed on such dual-use items -- with the market holding down outpatient costs, and the DRG ultimately holding down inpatient/emergency costs including outliers. As a general rule, the overhead cost-multiple established for dual-use should apply to the single-use items of either in-patient or out-patient. The key to all of these balancing limits is to permit open competition between hospital emergency services and private competitors, and an absolute prohibition of linkages between providers and emergency vehicle operators. After a brief trial, all such price constraints should be exposed to re-negotiation with an eye toward establishing transparent regional norms. MANDATE DISPLAY OF DIRECT COST MULTIPLES NEXT TO PRICES (FEDERAL PROGRAMS ONLY) (whenever prices are displayed, as in bills, price lists, etc.) FOR ITEMS COVERED BY HEALTH INSURANCE. Some high mark-ups are justified, but the public has a right to criticize them. This would not prohibit, but would considerably hamper, cost-shifting. It should be presented to provider groups as forestalling the prohibition of cost-shifting because of abuse. For this and other reasons, it would enhance provider competition.

REIMBURSE HOSPITALS ONLY ON RECEIPT OF ASSURED POST-DISCHARGE HANDOVER OF MEDICAL RESPONSIBILITY (FEDERAL PROGRAMS ONLY). Unfortunately, hospitals do need increased incentive to improve communication after discharge, which now increasingly occurs on a Saturday. Payment by diagnosis, otherwise a good idea, results in sequestration of medical charts in the accounting department.

Similarly, REIMBURSE HOSPITALS FOR LAB WORK ON THE LAST DAY OF HOSPITALIZATION ONLY AFTER DEMONSTRATION OF REPORTING. Such lab work, frequently obtained within hours of discharge, is sometimes overlooked and may even be unobtainable for the previously mentioned reasons, which in this case also apply to the hospital's own physicians.

ENCOURAGE THE ESTABLISHMENT OF REGIONAL BACKUPS FOR AMBULANCES DRAWN OUT OF AREA. At present, ambulances are limited to going to the nearest hospital, rather than to the hospital of patient preference. The main justification for such behavior is the possibility that a second call might come while the ambulance was in a distant area. Fire departments have long solved this problem by shifting reserve vehicles into an overstrained area, to cover that area while the home vehicle is temporarily unavailable. In some areas, a reserve vehicle backup might require additional ambulances, but mostly it requires a mobile phone network. In areas of extreme distances between ambulances, the main need would be to relax regulations which exclude volunteer vehicles from serving that function. In densely settled urban areas, we now have the preposterous situation of mothers in active labor being stranded at the wrong hospital, only a few blocks away from their obstetrician. When such situations are repeatedly encountered, the current IRS exemption from financial reporting should be rescinded from the ambulance sponsor.

Originally published: Friday, February 07, 2014; most-recently modified: Wednesday, June 05, 2019