Going, Going, Gone

Real Healthcare Reform by from The Weekly Standard, September 2, 2013

In the continuing debate over Obamacare, both the law’s champions and its critics are now focused largely on the mechanics of implementation. This is understandable. The insurance exchanges are supposed to launch October 1, most of the law’s other major provisions take effect January 1, and every week seems to bring fresh news of some delay or dysfunction for critics to highlight and defenders to justify or dismiss.

The technological architecture of the exchanges appears to be behind schedule and below expectations, and concerns about fraud and identity theft are especially grave. Some provisions of the law (most notably the employer mandate, some reporting requirements, and verification of eligibility for subsidies) have been found too difficult to implement and have been put off, at least temporarily, while others (like the CLASS long-term-care insurance scheme) have been found unworkable and abandoned altogether. Some major insurers have opted out of offering coverage in some states as a result of excessive regulatory burdens or price controls. Early premium data from some states suggest huge price spikes for key portions of the population, while employment data suggest the economic incentives created by the law may be undermining hiring and growth.

From here on, the fate of Obamacare obviously hinges on how it works out in practice, so it makes sense to pay close attention to such early indications. But lost in the commotion over these practical setbacks have been two important shifts in the underlying argument for Obamacare—one about how to build risk pools and the other about what insurance is for—that could prove at least as significant over time. Both have involved meaningful, if perhaps not fully intentional, concessions on the part of some of Obamacare’s defenders as they struggle to respond to unwelcome news; both point to the incoherence of Obamacare’s design and to the shape of a compelling alternative.

The health care debate is plainly far from over, and it has changed more this year than a cursory reading of the news about implementation would suggest.

Cost and Value

The first shift has occurred as the result of a chain of defensive arguments surrounding the early data about premium costs in the state exchanges that are supposed to open this fall. Those data have suggested that, in many states, some consumers—especially younger and healthier ones—will see major price increases in the individual market next year.

For instance, comparing detailed data about 2013 premiums compiled by the Government Accountability Office and preliminary 2014 exchange-premium data made available by eight states so far, Investor’s Business Daily reporter John Merline found earlier this month that “the average price for the lowest-cost Obamacare ‘bronze’ plan in eight states is 122 percent higher than the cheapest plan currently available in those states.” Premiums vary from state to state, and different analysts break down the numbers available so far in different ways, but all agree that for people who now qualify for the cheapest plans on the individual market, next year will bring far higher costs. That kind of price shock could make it very difficult to attract the sorts of young and healthy insurance buyers the new system will need to sustain itself.

Some defenders of Obamacare have sought simply to ignore or deny this problem. The president himself, in an August 9 news conference, said that people who are now uninsured are “going to be able to go on a website or call up a call center and sign up for affordable quality health insurance at a significantly cheaper rate than what they can get right now on the individual market.” But for a great many people, that will plainly not be the case.

Many other Obamacare defenders have responded to the premium figures by pointing to the fact that some people will qualify for subsidies in the new exchanges, which will effectively function as discounts on insurance premiums, provided on a means-tested sliding scale. But the emerging pattern of premium spikes suggests that for many young and healthy Americans, the subsidies will not be enough to make up for next year’s premium increases.

In January, a study by Kurt Giesa and Chris Carlson in the magazine of the American Academy of Actuaries estimated that 80 percent of Americans below the age of 30 in the individual market would find themselves with higher premiums next year than this year, even after subsidies. Early data from the states suggest this estimate may not be far off the mark. As the Manhattan Institute’s Avik Roy has found, in California, “if you’re a healthy, non-smoking 25-year-old, and you make more than $18,558, your health insurance will cost more under Obamacare—possibly a lot more.” That means more than 90 percent of such younger Californians who are eligible for subsidies would still pay more after those subsidies next year than they would pay for coverage now.

Obamacare’s defenders tend to respond to such figures by arguing that it would mostly be such relatively young and healthy people who faced higher costs even after subsidies, while the new system would surely reduce costs for older and sicker Americans—especially those with pre-existing conditions who now find it difficult to obtain any affordable coverage. As the Washington Post’s Ezra Klein put it on MSNBC in June, “at its core, health insurance, what we’re doing here, is redistributing from the healthy to the sick and from the young to the old, and we are putting in big subsidies to help people who are poor.” To focus on the higher costs for the young and healthy, such Obamacare champions contend, is to neglect the problems of the sick.

Clearly, one of the many things Obamacare is designed to do is to make it cheaper and easier for sicker and older people to get health insurance. This is a worthy and important goal. Any meaningful reform of our health care system would have to offer a serious solution to the plight of people with preexisting conditions, and Obamacare’s supporters are right to insist that this is generally a more significant moral and social problem than the plight of the young and healthy.

But consider the solution they propose. Obamacare’s “redistributing from the healthy to the sick and from the young to the old” happens for the most part not through government taxing and spending, or through the sorts of subsidized high-risk pool arrangements that conservatives propose, but through a redesigned insurance system in which the cost of risk is massively redistributed. The young and healthy are expected to enable that system to function in two ways: They will pay significantly higher rates than they do now, and more of them will buy coverage. But there is an obvious contradiction between these two expectations. If the cost of something goes up, why would more people buy it?

In fact, the problem is even worse than that. Obamacare doesn’t just increase the cost of coverage for the young and healthy, it also reduces the value of insurance for them. The law’s insurance rules mean that a sick person can buy insurance for essentially the same price as a healthy person, so healthy people know that if they get sick they will never be more than one enrollment period away from being able to buy coverage for the same price they would pay while they are healthy. That doesn’t mean they will always be able to get coverage as soon as they need it (if they become sick or injured outside the annual enrollment period, they will have to wait, perhaps even a few months, until the next one), but it still means a major health setback while uninsured will involve far less risk than it does today.

Insurance exists to offer protection against the risk of a medical calamity becoming a financial calamity, and part of its appeal to the healthy has always been that waiting to buy coverage means running the risk that poor health will make such coverage unaffordable later. Coverage rules that dramatically reduce that risk for people who are healthy therefore make insurance less valuable for them.

So young and healthy people who now choose not to buy even the cheapest available insurance plans are expected next year to buy insurance that is both more expensive and less valuable, and the entire system depends on their choosing to do so. To focus on the financial incentives they will confront is not to neglect the system’s redistributive purpose—if the young and healthy stay out, older and sicker Americans will face higher costs and less access to coverage, and the system will fail by its defenders’ own standards. Its mistreatment of the young and healthy is therefore actually a huge problem for the law, and points to the core of the new system’s economic irrationality, or rather to its failure to contend with how people understand their economic options.

In theory, it has always been fairly stupid for young and healthy people not to buy insurance: Coverage has been very cheap for them in much of the country, and the risk of unexpected health costs—which would both deplete their meager resources and make it much tougher for them to get insurance in the future—while statistically low, is financially grave and serious. Low-cost protection against that risk would be worthwhile for most. But in practice, when weighing their particular risks and finances, a great many young and healthy people have nonetheless opted against it. That is a major part of the reason why two-thirds of the uninsured are under the age of 40.

A reform aimed at getting more of them to buy coverage would have to make it even more stupid for them to remain uninsured. Some reformers would do so with a firm individual mandate backed with a stiff penalty. But the Supreme Court last year said a legal requirement to buy coverage would be unconstitutional and transformed Obamacare’s mandate and penalty into a tax on the uninsured. And since forcing people to buy a product they don’t want doesn’t make for great politics, that penalty (now tax) was in any case set much too low to fundamentally change the financial calculation for most people.

A better approach might even further reduce the cost of coverage for the young and healthy while increasing the risk of choosing to remain uninsured (by rewarding continuous coverage while putting it within everyone’s reach), and so make coverage more valuable. This is the approach favored by conservative health care proposals of recent years. But Obamacare does the opposite, making it less stupid to remain uninsured, and yet relies even more heavily than today’s insurance system on the participation of the young and healthy.

In the face of this serious problem, Obamacare’s defenders have tended to shift the focus of their arguments from cost to value. Maybe Obamacare will not make coverage cheaper for the essential young and healthy demographic, they argue, but it will make it more valuable—despite the new insurance rules—because it will make coverage more comprehensive, meaning insurance will cover a greater share of people’s costs and offer a wider range of benefits.

In this telling, the more comprehensive an insurance plan is, the better it is. Ideal insurance would presumably be first-dollar coverage that renders even the most minimal care free at the point of delivery in return for a high premium in advance, while insurance with low premiums and high deductibles that provides protection against catastrophic costs is disdained as less than real coverage. Princeton economist and New York Times columnist Paul Krugman wrote in June that such catastrophic plans can be cheap “because they don’t provide much insurance.” In trying to explain why next year’s premiums look so much higher than this year’s low-cost individual-market plans in many states, HHS secretary Kathleen Sebelius said this spring, “Some of these folks have very high catastrophic plans that don’t pay for anything unless you get hit by a bus. They’re really mortgage protection, not health insurance.”

Thus, evidence of high premium costs in the exchanges has driven some defenders of Obamacare in recent months to acknowledge that the new system, which depends on getting young and healthy uninsured people to buy coverage, depends in turn on the value and appeal of particularly comprehensive coverage. Maybe insurance will cost these people more next year, but it will be worth it.

Here, however, we find the second of the major recent liberal confrontations with unpleasant facts, which has undermined precisely the case for fully comprehensive insurance coverage.

Real Insurance

The story begins a few years ago, when Oregon officials decided to expand their Medicaid program but did not have the funds for a simple expansion of income eligibility, and so set up a lottery by which some eligible Oregonians could gain access to the program. That policy created an unusual natural experiment, allowing for a comparison of two groups of similarly situated people, one of which had won the lottery and so had Medicaid coverage while the other remained uninsured. A group of economists from Harvard and MIT carefully tracked the two groups’ finances and health and published two years’ worth of results in May.

They found that having Medicaid coverage yielded major financial benefits but could not be shown to have  yielded major medical benefits. Such coverage “nearly eliminated catastrophic out-of-pocket medical expenditures” and was correlated with a significant decrease in self-reported depression, but appeared not to have a statistically significant effect on three key health measures often used in assessing physical health outcomes. That doesn’t mean it had no effect, as no such study could prove a negative (and the sample was not large enough for great confidence) but it means that in terms of health, the difference between having comprehensive coverage and being uninsured was not readily discernible by the best available analysis to date.

The response to this study, on all sides of our politics, was largely focused on Medicaid, and whether the enormous state and federal government expenditures on the program (expected to surpass $7 trillion in the coming decade) could be justified given these findings. But the study’s results do not suggest something unique about Medicaid. Rather, they raise the question of the health value of health insurance more generally.

The findings are in line with a series of studies reaching back to a famous experiment by the RAND Corporation in the 1970s. RAND divided several thousand families into five groups, each provided with health insurance with a different level of co-insurance and out-of-pocket costs—from very comprehensive to essentially catastrophic coverage. They found that while the financial situations of families in the different groups ended up differing, and the degrees to which they used the health care system differed, their actual health outcomes did not.

The expense and complexity of this kind of study has made it difficult to repeat, though subsequent analyses and smaller studies have tended to confirm the basic findings, just as this year’s Oregon study did: Insurance can save you from financial catastrophe, but not medical catastrophe. This has hardly been an uncontroversial claim in the field, but it appears to be in line with the available evidence.

In a 2009 review of the literature in the journal Health Services Research, Richard Kronick found that “it is not possible to draw firm causal inferences from the results of observational analyses, but there is little evidence to suggest that extending insurance coverage to all adults would have a large effect on the number of deaths in the United States.” In 2005, economists Amy Finkelstein and Robin McKnight studied the effects of the introduction of Medicare on the elderly in America and concluded that “in its first 10 years, the establishment of universal health insurance for the elderly had no discernible impact on their mortality. However, we find that the introduction of Medicare was associated with a substantial reduction in the elderly’s exposure to out of pocket medical expenditure risk.”

The response of many defenders of Obamacare to this spring’s Oregon study mostly involved reverting to this well-supported argument to insist that the study should not bring Obamacare’s Medicaid expansion into question. Paul Krugman published a post on his Times blog that read, in its entirety:

Fire Insurance Is Worthless!

   After all, there’s no evidence that it prevents fires.

   But strange to say (as Mark Thoma points out in correspondence), people seem to think it’s a good idea anyway.

   I leave the relevance of this thought to the Medicaid discussion as an exercise for readers.

Krugman’s point, which he evidently believed was very cleverly made, was that insurance provides financial protection from catastrophic costs, and such protection is nothing to sneeze at.

He was certainly right. Protection from catastrophic health costs is extremely important, and public policy should aim to make it available to everyone. But consider what this means for the case for comprehensive health coverage. If health insurance does not prevent ill-health, just as fire insurance does not prevent fires, and both are simply financial products that offer a hedge against the risk of extreme unexpected costs, then why should coverage for medical services that do not involve extreme costs add significant value to an insurance policy?

In fact, such coverage is not quite insurance at all. Secretary Sebelius’s complaint about catastrophic coverage, noted above, has things roughly backwards: Protection from financial disaster in case of medical disaster is what insurance is for. Coverage that merely acts as an intermediary for small, routine expenses—which you pay for through high premiums and the insurer then turns over to a doctor—mostly acts to make the delivery of health services less efficient, but does little to improve either your physical or your financial well-being.

This model of comprehensive insurance particularly lacks appeal for young and healthy people, whose routine medical costs are very low. For them, and for many others, the model of health insurance that could best balance cost and use would probably look like most other kinds of insurance: coverage for unusual and particularly expensive needs and a range of options and prices for more routine and cheaper services.

Real Reform

A Functional health reform might therefore begin with universal catastrophic coverage and build from there. It could involve a highly competitive market for both coverage and care, with today’s preferential tax treatment for employer-provided coverage turned into a universal credit that would cover the premium for at least a catastrophic plan for all and allow individuals to purchase more coverage or care on their own or through their employers (or, for the poor, with the aid of a Medicaid program transformed into an add-on to the credit). It would keep the young and healthy in the system by making coverage far more valuable for them through lower costs and protections for those who are continuously insured, as described above, and would enable Americans with preexisting conditions who have not had continuous coverage to buy insurance through subsidized high-risk pools.

This approach would aim at a model of coverage that encouraged consumer choice and provider competition, rather than eliminating price signals and encouraging overspending. It would require far less public spending than Obama-care, and could make coverage available to as many people as Obamacare without the mandates, taxes, and irrational insurance rules because its organizing principle would not be forcing people to buy products they don’t want but rather making insurance more appealing and affordable.

Such plans exist, of course, and have been advanced by some conservative policy experts for many years. But the last few months have seen the advocates of Obamacare implicitly acknowledge some of the key premises of this conservative approach, as the law they enacted confronts some significant practical difficulties.

These early difficulties do not by themselves prove that Obamacare will be a train wreck. Predictions at this early stage are inevitably speculative, and the Obama administration has shown itself willing to engage in frantic (and often lawless) ad hoc transformations of the system to avoid near-term catastrophe. But the early signs do suggest serious problems that run deep, and that will be difficult to juggle for long. They suggest, above all, that America’s health care debate is very far from over.

This is a fact that many Obamacare defenders have found difficult to accept. Passage of the law has neither made it more popular nor settled the basic dispute about it, as both the law itself and the case for it continue to weaken and shift. Obamacare as it is now being implemented could not have been enacted in 2010. Shorn of the short-term fiscal fig leaf of the CLASS Act, absent the revenue and insurance-market stabilization of the employer mandate, stripped of eligibility verification for subsidies costing billions of taxpayer dollars, saddled with an assault on religious liberty—all of which has been done by the law’s own champions and defenders—the bill would never have had the votes to become law even in the heavily Democratic 111th Congress.

But more than that has been lost. The basic case for Obamacare now looks much diminished. Its flaws, as made evident by the liberal confrontations with reality of the past few months, point toward a different model of insurance reform. But that model will only become apparent to the public if conservative politicians articulate and embrace it, and help voters see how it could address the real problems of American health care. Obamacare stands to leave our health care system significantly worse than it was before the law’s enactment, but that system was itself badly broken. Real reform that made reliable coverage and high-quality care available to all would move well to the right of the pre-Obamacare status quo.

The practical problems of Obamacare’s implementation mean the debate will go on. But only a forthright public case for a serious alternative that would replace Obamacare by addressing the problems that preceded it can enable Republicans to win that debate.

© 2013 by The Weekly Standard. Reprinted with permission.