In the Washington Post former chairman of the Council of Economic Advisors Martin Feldstein articulates the problems with our current system clearly:
The American health-care system suffers from three serious problems: Health-care costs are rising much faster than our incomes. More than 15 percent of the population has neither private nor public insurance. And the high cost of health care can lead to personal bankruptcy, even for families that do have health insurance.
sets out objectives for a good healthcare system:
A good health insurance system should 1) guarantee that everyone can obtain appropriate care even when the price of that care is very high and 2) prevent the financial hardship or personal bankruptcy that can now result from large medical bills.
and proposes an approach to creating such a system that’s neat, plausible:
Here’s a better alternative. Let’s scrap the $220 billion annual health insurance tax subsidy, which is often used to buy the wrong kind of insurance, and use those budget dollars to provide insurance that protects American families from health costs that exceed 15 percent of their income.
Specifically, the government would give each individual or family a voucher that would permit taxpayers to buy a policy from a private insurer that would pay all allowable health costs in excess of 15 percent of the family’s income. A typical American family with income of $50,000 would be eligible for a voucher worth about $3,500, the actuarial cost of a policy that would pay all of that family’s health bills in excess of $7,500 a year.
The family could give this $3,500 voucher to any insurance company or health maintenance organization, including the provider of the individual’s current employer-based insurance plan. Some families would choose the simple option of paying out of pocket for the care up to that 15 percent threshold. Others would want to reduce the maximum potential out-of-pocket cost to less than 15 percent of income and would pay a premium to the insurance company to expand their coverage. Some families might want to use the voucher to pay for membership in a health maintenance organization. Each option would provide a discipline on demand that would help to limit the rise in health-care costs.
My calculations, based on the government’s Medical Expenditure Panel Survey, indicate that the budget cost of providing these insurance vouchers could be more than fully financed by ending the exclusion of employer health insurance payments from income and payroll taxes. The net budget savings could be used to subsidize critical types of preventive care. And unlike the proposals before Congress, this approach could leave Medicare and Medicaid as they are today.
Lower-income families would receive the most valuable vouchers because a higher fraction of their health spending would be above 15 percent of their income. The substitution of the voucher for employer-paid insurance would be reflected in higher wages for all.
Two related problems remain. First, how would families find the cash to pay for large medical and hospital bills that fall under the 15 percent limit? While it would be reasonable for a family that earns $50,000 a year to save to be prepared to pay a health bill of, say, $5,000, what if a family without savings is suddenly hit with such a large hospital bill? Second, how would doctors and hospitals be confident that patients with the new high deductibles will pay their bills?
The simplest solution would be for the government to issue a health-care credit card to every family along with the insurance voucher. The credit card would allow the family to charge any medical expenses below the deductible limit, or 15 percent of adjusted gross income. (With its information on card holders, the government is in a good position to be repaid or garnish wages if necessary.) No one would be required to use such a credit card. Individuals could pay cash at the time of care, could use a personal credit card or could arrange credit directly from the provider. But the government-issued credit card would be a back-up to reassure patients and providers that they would always be able to pay.
and not only likely wrong but a political non-starter. Why is it a non-starter? His payment mechanism—a tax on healthcare benefits—would result in many union workers, for whom their healthcare benefits constitute as much as a quarter of their income, paying taxes on those benefits. They won’t stand for it and, particularly with the present administration, they’ve got the clout to prevent it from happening.
I think it’s likely wrong for two interconnected reasons. The first is that I don’t think that Dr. Feldstein realizes that a substantial proportion of employer-based healthcare insurance is self-insurance, the insurance companies who administer those plans are generally paid a fixed fee and, consequently, his premise:
Private health insurance today fails to achieve these goals. It is also the primary cause of the rapid rise of health-care costs.
is untrue. Insurance isn’t driving costs, it’s following them. However, Dr. Feldstein’s related claim:
Because employer payments for health insurance are tax-deductible for employers but not taxed to the employee, current tax rules encourage most employees to want their compensation to include the very comprehensive “first dollar” insurance that pushes up health-care spending.
is likely true but it’s also another reason that the plan is a political non-starter.
I think there’s another built-in assumption: that what the government is paying for healthcare is being driven up by increasing healthcare costs rather than the other way around. I’m beginning to arrive at the conclusion that Medicare and Medicaid form floors to healthcare costs and, as they rise, so do the healthcare costs that aren’t being paid by the government. I’d certainly welcome evidence that supported or refuted that idea.
Meanwhile, although Dr. Feldstein’s plan is fun to think about and I’d certainly prefer it over the non-functional, counter-productive monstrosity that’s likely to be enacted into law to give President Obama a chance to sign a bill labelled “healthcare reform” in a Rose Garden ceremony, I think there’s no chance whatever of something like it being adopted in the foreseeable future.
Dave,
I’ve been searching for a while now for some kind of breakdown on how much of “private insurance” is self-insurance, with no luck. Do you have any figures for that?
Also, I think you’re right about Medicare/Medicaid as a price floor, but I also think it’s probably true that whenever reimbursement rates are lowered that providers respond by accepting fewer of those types of patients. As you’ve said before, no one wants to willingly take a pay cut and as long as there is a provider shortage, they can be choosy about which patients to accept.
Yes, Andy. 60% of all employer-based insurance is self-insurance. There’s a supporting link in one of my posts.
Thanks Dave!
Well I suppose you could prohibit self-insurance, but then that would just add to the non-starter problem.
My view is that any rational/reasonable reform of health care is DOA politically. People want to have their cake and eat it too. They want low deductibles, high coverage, universal coverage, unlimited choice, and low premiums. I submit that you cannot have all of those items, at least not when taking into account other aspects of our health care industry such as the supply side isssues such as the barriers to entry for medical doctors and nurses. Also, the tax preferential treatment of employer provided health care benefits. The fee-for-servcie nature of medicare. All of these things mixed in together make for a very unpleasant picture. Somebody somewhere is going to have to get the short end of the stick, and when it starts to look like one group or another, they will complain…or politicians eager to weaken the other side will use it to their advantage, even if they have to lie, distort, or whatever.
We may get health care reform, but it will suck. In 10 years many of the people in favor of reform now will be complaining, bitching and whining. And I’ll be laughing at them. Becuase they got precisely what they asked for.
Question: When people point out that private insurance has much higher administrative costs than medicare, are people separating the TPA portion of the business beforehand?
The calculation methods vary but they’re usually pretty simple-minded: receipts minus payouts equals overhead. Sometimes they include investment income. Sometimes they don’t.
It’s pretty ridiculous. For one thing, I’ve never seen an estimate of Medicare’s administrative costs that includes the costs of collecting the revenue since that’s not borne by Medicare itself but by Internal Revenue.
I also wonder whether Medicare counts the fraud enforcement expenses from the U.S. attorney’s office?
I’d also add that administrative costs are not necessarily wasteful either. If part of administrative costs are for finding fraud and dealing with it, then it is not a bad thing. Such an argument would be saying that all law enforcement and payments to our legal system are a waste. Also, administrative costs for finding pre-existing conditions is not a waste either since if you already have the condition you are seeking to insure against…insurance doesn’t really work.
I have never seen that included in an estimate.
That’s exactly what the insurance companies have been saying all along. However, the venality of insurance companies is an essential part of the adverse selection critique.
As a practicing physician I can say I don’t worry one little bit about the private insurance companies and fraud. We do worry a lot about Medicare. Private insurance either accepts or denies claims. It is very rare to see them go after anybody after the fact as Medicare does.
Steve
Is the amount being saved from such efforts greater than the cost of providing them? To be bluntly honest, if it’s cheaper in terms of administrative costs to let some fraud happen in the system than to pay for the efforts to cull it, then I honestly don’t care if it gets stopped – you just count it as a price of having the system, like the tens of thousands of deaths in accidents that Americans accept as a price of using cars extensively.
Brett,
Is the savings from going after murders and rapists worth the costs? Where are the cost benefit studies? What data are you using?
You really need to sit down and read this book. See here is the problem, suppose we find that efforts to combat fraud are spending more than they are saving. So we follow Brett’s policy and shut down those operations. Guess what, I am going to engage in insurance fraud and now you’ll never catch me.
Have a nice day. Oh and thanks for all that money.
One thing is not like the other.
If I drive recklessly I might injure or kill myself or a loved one. So even if I did have near sociopathic views regarding the safety and health of other drivers, there is still a strong incentive for me not to engage in reckless driving.
Regarding insurance fraud there is no such dis-incentive. Will my family be hurt? No, because I’ll never be caught thanks to Brett’s new policy. Will my family suffer monetarily? Again no. Sure our health insurance rates might go up, but they’ll go up by less than I’m making via fraud. Will my family benefit? We’ll have more money, so yeah.
With “white collar” crime it isn’t just how much you save (that you know of) but also all the potential criminal activity you prevent as well simply by creating a system of dis-incentives.