Philadelphia Reflections

The Deal Breaker

Much ink has been spilled by arguments about Obamacare, compared with almost anything else. That's a pity, because the Affordable Care Act ends up as only a variant of how it originally started, with correcting the defects of employer-based health insurance. No matter how the Obamacare dispute turns out, it fails to address the central cost problem. So, without getting into a detailed history, let's focus on what needs to be addressed, hoping it will help the present cost escalation.

If an employer gives health insurance to his employees, the insurance necessarily terminates when the employee changes jobs. The employee, in short, doesn't own his own policy. The result is "job lock" where an employee dares not change jobs for fear he might lose the renewability of the insurance he paid for, along with the associated hospitals, doctors, etc. with whom he affiliated during the course of his employment. Either that, or go through the grief of re-assembling his medical care under new insurance with new attachments he either fears or has good reason to reject. And all this, at a moment when he is applying for a new job and is necessarily reluctant to make demands.

His employer's grandparents created the problem for benevolent reasons, but the present generation of employers now finds itself blamed for its details, largely steered by his finance department exploiting tax loopholes. Discovering the tax loophole -- remembering the income tax itself was started at about the same time as Blue Cross -- it really is pretty hard to devise a system which is paid for by employers, and tax-deductible by them as a corporate business expense, while still respecting the interests of the rest of the community. Naturally, the employer resists arrangements which would either absorb costs growing out of illnesses occurring before employment ("pre-existing illnesses"), or after an employee is terminated, becoming pre-existing illnesses for the following employer. Furthermore, ever since World War I, family domination of businesses has become unusual.

While the employer community, now largely selected by head-hunters, had a century to devise a cross-generational pooling system, a satisfactory one has trouble emerging in an intensified antitrust atmosphere, involving huge expenses by employers whose stockholders regard healthcare as a minor concern. The Obama Administration was determined to take a stab at it. At first, their solution was essentially to have the government pick up the cost above a certain level (now about $7000), and the opposition Congress became equally determined to frustrate this doorway into eventual total cost control by the government. The business sponsors were also indifferent or displeased with this maneuver because they had devised ways of having the government pay most of the bills by tax deductions of a "gift" while leaving effective control in the hands of business management. And anyway, a recession was not the best time to add new cost centers.

Buried among these details was a dominant payment system based on "service benefits" instead of indemnity, or cash, benefits. Everyone understands that ten dollars is less than a thousand, but not everybody agrees a blinding migraine headache deserves less attention than a hopeless brain tumor. The indemnity system had its flaws, but over the course of a century, labor negotiations readjusted to insurance coverage focused increasingly on illness episodes, rather than on the itemized price of treatments. This was much more advanced in hospitals than doctors' offices, but it fitted specialization better than general practice. To a certain extent, this arrangement originally did make it possible for employees to choose their own doctors and hospitals, regardless of price variation. Fine points could be overlooked, but the ability to draw a line could never be surrendered to a counterparty in wage negotiations. "Service benefits" were particularly unable to migrate into a blank check for the illness, regardless of when it had been contracted. That still left high-cost outliers, particularly those extending after employment had been terminated. If the employee left his employer on bad terms, the line could still be invoked, even if it was often ignored.

Two responses ensued: The government made assurances to insurers they would stand as re-insurers to cover cost over-runs ("risk corridors"), a feature which the political opposition greeted with great suspicion. And secondly, luxury treatment was able to exploit the tax-shelter, eventually becoming sufficiently expensive to permit less reckless insurance to undercut it. Younger employees were cheaper than older ones, certain geographic locations, ethnic groups, and employer advantages became health advantages as well; a ruthless employer could injure a more generous competitor by concentrating on health costs by indirect approaches. In other words, a benevolent system imposed disadvantages on a benevolent employer, and retained customer control in the hands of employers. Over time, employers lost control of a major cost center and had to stand by, while the interests of employees and employer took different directions. Over time, employers solved their cost problem by taking a tax deduction at higher tax rates than individuals, shifting much of the cost problem to the government without losing control. The government promptly responded to accepting more of the cost by demanding more of the control. Underlying much of this evolution was the decline of the family-owned business, gradually replaced by much less benevolent stockholders and headhunter-selected managers.

Let's summarize the evolution, to state that patients will not tolerate it when decisions about what is important are made by his employer, his insurance, or his government. In turn, those entities can not tolerate a blank check. The only solution left was for the third party to set a price limit and leave other decisions to the patients and their doctors. That is, patients, doctors, and insurance companies were better off with an indemnity insurance system and should return to it. Unfortunately, the twists and turns of the process have left all three participants without much say in the matter. This is what you get when you allow lawyers to describe your employer's tax dodge, as a gift.

Lots of other things changed materially in the course of a century, and a variety of approaches might mitigate the bad things. Giving health insurance to everyone might solve matters, but it would surely cost more, and the present Obamacare controversy is already largely whether we can afford it at 16% of Gross Domestic Product. You can blame 16% on the haste of Lyndon Johnson and Wilbur Cohen, to the extent, it isn't 8%. It's that extra 8% this book is struggling to recover, the rest of the waste is often transfers, not real expenses.

Mr. Obama's abandonment of the limitation on pre-existing conditions, however, additionally undercuts a traditional expedient the insurance industry, one it suspects it cannot cope without. Insurance companies were given assurance of government support in case an alternative didn't work. That might be a separate issue. None of these, however, prevented standard care from migrating from wards to semi-private rooms, and semi-private to start to migrate toward single rooms. It's rather chilling to imagine what would happen if events continue in that direction. Expanding Medicaid to cover all poor people might facilitate this particular flaw in the present system, but falls foul of the Tenth Constitutional Amendment, which was the original basis for fifty Medicaid programs rather than one national one. And so it goes. The proposal I make is far simpler and is admittedly not a total solution to any problem except pay-as-you-go. And even pay-go existed for fifty years before 1965.

Market-Based Outpatient Costs as a Cornerstone. It is to try to approach a cash or debit-card system for paying for outpatients at market-set prices, thereby greatly reducing processing costs, while constraining insurance payment and review to the helpless inpatient -- with an improved DRG coding system, related to true costs by overlapping with the market-based outpatients. The dual nature of the Health Savings Account readily suits itself to a dual system of this sort. As far as the insurance is concerned, if cost and portability are seen as the main problems, the change with least disruption seems to get back to indemnity insurance with a high front-end deductible, which coordinates better with a second more or less invisible, reinsurance. That's such a concentrated summary it will take the rest of the book to explain its reasoning. So, let's come back to the re-insurance part in a later chapter, and concentrate on the indemnity insurance for ordinary hospital costs. Should the hospitals be consulted? Obviously, yes. Should they be given veto power? No, because they have a rather daunting conflict of interest. You can't blame hospitals for preferring a blank-check approach to any alternative which isn't a blank check for hospitals. But the nation is more or less united on the idea, we now have to be more careful with public money -- because in the long run, it's our own. High-handedness destroys this image, so they would do well to act humble.

The case for indemnity insurance also boils down to this: the premiums are collected in cash, and the providers are paid in cash. All that expensive processing in the middle is on trial as redundant, time-consuming, and ultimately ineffective in suppressing costs. The burden of proof is on it, that it can justify its own costs, let alone restrain an army of bill-collectors. Demonstration projects are welcome, stonewalling is useless. I suspect it has a minor utility for preventing fraud.

Medical Reform Through Payment Reform, not Payment Reform as a Club. Affordable Care, the nation's current "healthcare reform" really concentrates on the payment mechanism for healthcare. It may nurse grander ambitions, but it directly confronts only one of many problems with healthcare delivery -- whether poor people can afford it. Much is made of the electronic medical record but its impact is mostly one of user annoyance with increased overhead. Instead of calling doctors rigid resisters, consider their point of view: The electronic record adds four hours a week to the doctor's limited time. The extra overhead cost means more employees, which means the doctor never takes a vacation. Working harder means he can quit, but he can't slow down. After six years, EMR still hasn't justified itself. And so it remains in a class with driverless cars -- it's coming, but it isn't here. The fundamental structures of hospitals and medical practice, growing out of the much older employer-based system, are pretty much unchanged. The configuration remains mainly the employer-based system.

In the far future, control of payments may eventually be used as a hammer to control healthcare, but that goal has never been articulated, and the slow pace of the past six years suggests any such goal is distant, indeed. For practical purposes, the Affordable Care Act (ACA) reduces to a payment mandate -- universal health insurance for everyone regardless of cost, subsidizing those whose insurance costs exceed 8% of income (presumably, a pretty elastic number). Opponents reply: Since 87% of the people who bought insurance on a Federal Exchange did so with subsidies, the cost could seemingly bankrupt the country, at least crippling more important priorities. In general, I sympathize with both emotional responses (care for the poor but don't wreck the economy), except for one essential point. In almost every foreign health plan, the government becomes generous with trivial items and stingy with expensive ones. Plenty of cough drops, but not many chest x-rays. Or plenty of chest x-rays, but woefully few MRIs. When you see what others have done, you get a clearer idea of what we might be facing.

The deal-breaker for me is the kind of insurance selected to be mandatory. Catastrophic (high-deductible) health insurance without frills would be far more suitable, and considerably cheaper. Linking it to a tax-exempt savings fund makes it even more flexible with first-dollar coverage, and doesn't raise the cost of the insurance standing behind it by one penny. Somewhat to my surprise, cash overfunding leads to retirement income and creates the incentive for the patient to be frugal.

Its bare-boned catastrophic insurance has both a top limit and a bottom limit and uses money as an indemnity measure, not elastic definitions like "service" benefits. (Indemnity pays for your itemized bills, not your disease.) Without prior experience, new insurance entrants cannot guess at their risks, either individually or collectively. Service benefits might be considered after the long and stable experience, but for a beginning new program, they tilt the balance between patient risk and insurer risk, entirely too much in favor of patients whose real client is the elected politician. If diagnostic payments have any utility it is in detecting odd-ball charges, but it would take a lot of persuading to convince me the fraud in the system amounts to 8% of GDP.

The deal-breaker for me is the type of insurance made mandatory.

The problem with the Affordable Care Act is not that it excludes too much, but that it scolds too much, improves too little, and never comes even close to identifying the central problem. By utilizing the principle that the higher the deductible, the lower the premium, the flexibility of catastrophic coverage could almost rest its case. By adjusting the premium, anyone might afford it; by adjusting the deductible, anything might be a covered service. But the final philosophy we would hope for is to cover no non-essentials until the last essential service has been covered. But let's settle for less. The choice of deductible threshold defines the coverage by simultaneously defining the premium, allowing both the paying public and the subsidizing public to bid in the same auction. Deficit financing is much harder to conceal if you play by indemnity rules, and is a whole lot more difficult to prevent than allowing your relatives to sit on your bed. Nothing else I know of can make a similar claim. I tend to resist anything with the word "mandatory" in it, but high-deductible indemnity health insurance offers a flexibility which might justify an exception.

The higher the deductible, the lower the premium.

High-Deductible Catastrophic Insurance

Of course, flexibility is only valuable if you use it. With its high deductible, catastrophic coverage excludes small-cost items. Like birth control pills, I'm sorry to have to say. High-cost automatically means expensive but relatively infrequent health issues, which in present circumstances leans toward inpatient hospital care. Defining low-cost benefits as "service" benefits usually undermine the high-deductible part of Catastrophic insurance. It converts the ACA into scarcely more than a collection of small mandatory benefits, all of which combine to defeat the purposes of a high deductible.

The effect of all this seems to suggest high-cost items are the enemy, but in fact, they are the most important benefit to insure. Collecting all small benefits into Health and Retirement Savings Accounts substitutes patient choice for unlimited bureaucracy, shifting the selection burden to the subscriber, and if uncertain, his doctor. High deductibles make them turn to their doctors for advice when they are worried. That's quite different from requiring a slip of paper from a doctor whenever things are expensive.

Originally published: Wednesday, May 20, 2015; most-recently modified: Sunday, July 21, 2019