Photo by: nmfbihop

The American health care debate has gone completely off the rails.  The Right, ostensibly in defense of small government, is acting as if we have an option to not address this issue.  Meanwhile the Left is unable to present a coherent vision.  Even worse disinformation is flying from all directions and it’s difficult to have an informed opinion.  It could easily make a person tune out this conversation.

Why You Should Care About the Health Care Debate

One of the biggest reasons that you should care is that unless you’re on Medicare, you’re already footing the bill of socialized medicine.  Medicare is socialized medicine and right now about 27% of the population is on some form of government health care.^[1] If you’re not one one of these programs, every dollar of over-consumed or overpriced affects you personally.  However, the situation becomes much more untenable in the near future.  By 2030 it’s estimated that twice as many people, 80 million, will be on Medicare and in the meantime the population will not have grown nearly be nearly as much, bringing the percentage of people on Medicare to 22%, without any other government programs considered.^[2] Then you consider how many people are being added to Medicaid and other government programs due to the economic downturn and you can see the problem growing.  Unless you’re for abolishing Medicare, and that’s not a very popular view, you probably need a solution to the demographic bomb that’s headed our way.

I’ve already covered that we have high costs and outcomes that don’t justify the expense in America.  Almost any method to cover people’s medical bills is going to have a component of “socialism.”  Quite simply, those who are older or have chronic illnesses are terribly expensive to insure.  We know these people are going to have health problems.  Insurance at that point isn’t really providing insurance but simply giving them money for their health care.  If you want people who are older or have chronic illnesses to be able to get healthcare if they aren’t rich, others are going to have to pay for it.

If you’re healthy right now, you should care about healthcare because you’re subsidizing those who aren’t.  If you’re not healthy you probably already do care about healthcare reform.

A Modest Proposal

I thought I’d put out there what I consider to be a reasonable proposal and see what my readers think.  If I were going to address the situation in this country here would be my plan:

• Catastrophic health insurance subsidized by the government for those who can’t afford it.  Everyone will have this but it will be truly catastrophic insurance.  At least $15,000 for example of yearly expense before it applies.   I don’t really care if it’s privately or publicly implemented and the premiums should cover the expenses.
• Some type of Health saving account that everyone must contribute a percentage of their pre-tax income to until they’ve reached the level of their catastrophic insurance.  Thus if the catastrophic insurance kicks in at $15,000 you have to keep contributing until your HSA is at $15,000.   This is how you pay for everything that isn’t catastrophic.  You can borrow against this account as much as you want, so you can have a very negative balance if you have a lot of broken bones or other procedures that don’t reach the catastrophic level.

The reason I like this plan is addresses several things.  It turns the insurance business back into insurance. They are simply around to pool risk and deal with catastrophes.  Obviously those of us without chronic conditions and the young will subsidize others.  That happens already and is part of a well-functioning society if you ask me.

The HSA makes payers actually care about what a procedure costs.  If they want to go spend $2,500 on an unnecessary MRI, that’s their choice, but it’s coming out of their HSA.  You’re never unable to go to the doctor because you can always borrow against this account, but the more you spend the longer money is going to be coming out of your paycheck.  Thus anyone can get medical attention, but they are aware of what it’s costing.  It also turns the patient back into the customer of the doctor, instead of the insurance industry.

I’m not sure this benefits any special interest enough to get any traction, but I think it achieves some of the goals of reform.  It should reduce overconsumption and lead to universal coverage.  There are more issues like tort reform and other changes that could improve things more, but I think this would be a good start.  I’d love to hear your take.

Post from: Personal Finance And Investing

A Modest Health Care Proposal

1. As Private Insurance Declines, Medicare and Medicaid Pick Up the Slack – WSJ.com
2. Medicare Beneficiary Demographics

Photo by: Bolshakov

Like most debates in this country, the health care debate has gone into the weeds.  People, regardless of their point of view, spout disingenuous arguments to further their cause.  Critics suggest that simply providing insurance for everyone will make everything “fair,” while their opposition makes arguments for the continuation of a broken system.  While I have a healthy skepticism of the government’s ability to solve most problems, it seems that there are telling factors that suggest that the status quo is not just unsustainable, but catastrophic.

Why Do We Need to Do Anything?

Before we move forward, this is a question many believe remains unanswered.  Why do we presuppose that something is wrong with the American medical system?  The most basic reason is that we spend more money to get worse outcomes.  While there are areas in which we excel, ultimately we spend almost double that of most industrial nations, but our infant mortality rate, for example, is signifcantly worse than almost all other Organization for Economic Cooperation and Development (OECD) member countries.^[1]

Additionally the care and cost in America are widely uneven.  Interestingly they go hand in hand.  The Dartmouth Atlas of Health Care studied the issue nationwide and found almost a threefold difference in health care costs and an inverse correlation between costs and outcomes.^[2] In other words, the more I’m spending, typically the worse care I’m getting.  All of this suggests that we’re wasting a lot of money, and we need to figure out why.

Perverse Incentives

The fundamental problem in American healthcare boils down to one simple issue: perverse incentives. A perverse incentive is one in which those who are creating the incentives are creating unintended and typcially counterproductive effects.  They are essentially creating their own negative consequences.  As we’ll see almost every component of our system is rife with these types of incentives:

Overconsumption

The opponents to changes in the system constantly raise the “grim” visage of rationed care.  Americans fear loss of control when they look at other countries in which residents have to wait for procedures, even though those countries generally have better health outcomes than does America.  However the flip side to a lack of rationing tends to be overconsumption.

Everyone in the current system has an incentive to allow patients to over-consume medical attention.  Assuming a patient has insurance, it really costs him or her very little out of pocket to get an MRI — even when the doctor may consider it largely unnecessary.  Meanwhile the doctor typically makes money because the patient gets an unnecessary MRI.  The insurance company is likely indifferent as they have already priced their insurance plan assuming this kind of over-consumption.  In the end, we’ve spent considerable money on this MRI and no one’s health is any better.

As the Bear Mountain Bull points out, the structure of many current insurance plans is likely to cause overconsumption.  Because the patient has no “skin in the game,” they opt for procedures that are very unlikely to be useful.  All kinds of diagnostic tests can be taken on the assumption that it’s “better to be safe than sorry,” without taking the cost into account at all.

The Way America Rations

Even as we show such aversion to rationing, America has a different kind of rationing that is far more insidious.  In an extremely perverse incentive, the number of doctors in the United States is decided upon indirectly by the American Medical Association.  That is, current doctors decide how many new doctors there should be.  In the 90’s, despite the oncoming wave of baby boomers reaching old age, the AMA somehow decided that there were going to be a glut of doctors and actually recommended to cut the number of internships available.^[3] Much of the current shortage now can be attributed to this decline in the number of doctors.

It is rarely in the best interest of the consumer for the provider of a service to decide how many people should be allowed to provide that service.  Even providers with the best intentions are likely to err on the low side.  That doesn’t even take into account those who may be intentionally self-serving and trying to increase demand for their services.

The Doctor’s Profit Motives

Because America’s system works around a fee-for-service model, doctors have an incentive to do procedures.  They don’t have an incentive to get good outcomes.  As we mentioned above, if your patient wants a procedure, you have no incentive to suggest against it.  In fact, if you can perform the procedure, you have every incentive to provide it.  Additionally if you look at other kinds of cost-cutting measures, doctors have the incentive to resist them.  For example, if you look at the option of having most primary care provided by registered nurses and physicians assistants, studies have found this to be a low cost comparable alternative.^[4] Once again however, doctors are expected to be selfless and advocate for this, even though it could very well cost them income.

Long Term Savings

All of these factors suggest that there are ways to realign the incentives of the parties in the system, but it doesn’t look like it can be an incremental change.  The reason such an invasive change is necessary however is the aging population of America and its overall health.  While an overhaul will likely be very costly in the short term, it may save trillions of dollars in the long term if it is implemented rationally.  The spectre that Medicare and Medicaid could be consuming 20% of GDP by 2050 looms over the current situation direly.^[5]

The Dangers of Reform

Naturally, when the government is tasked with solving a problem, many of us have an immediate skepticism.  There are very good reasons to be wary of government reform of health care:

The Government Gets To Control Everything

One suggestion that has some resonance with me instinctively is that the provision of government sponsored health care gives the government authority in almost every aspect of your life.  Whether you smoke, drink or are overweight all suddenly becomes the government’s business.  While I have an immediate distaste for this idea, sadly I think the idea of independence of action is a fallacy to begin with.

This is largely a moot point, since we’re already paying for other people to live unhealthy lives; it’s just abstracted.  They simply get emergency care and other kinds of benefits for those who cannot afford their own care.  Also, group plan rates are often increased by the cost of other members in our plan.  In the end, the unhealthy lifestyle of others is already costing me money; I just can’t see it directly.  Thus this argument doesn’t seem to hold that much weight, however there are other more compelling arguments.

No Profit Motive

Once we create a government entity to compete with private companies, it will be dominated by one motive: to grow.  If there is a government program that competes with private insurers, it doesn’t care if it is profitable.  It only cares whether everyone there gets to keep their job and even better if it can get new people in its ranks.  It seems difficult to imagine a government run insurance provider that is competing fairly with private insurers, when they are subsidized by tax payer dollars.  Moreover it has a perverse incentive to keep winning, even if it’s losing money in the process.  This is a dangerous recipe.

Single Payer

As this government bureaucracy grows, you move closer and closer to a single payer system.  While the outcomes of our “free market” approach haven’t been optimal, I feel reluctance towards having the government provide all health care.  Unfortunately many politicians don’t agree.  In fact President Obama has said that if we were starting from scratch he feels a single payer system would be optimal.^[6] While our current system seems to argue for some form of government intervention, absolute government control has rarely resulted in good results in the long term.

Subsidy and Regulation

The data seem to suggest that while the American system is broken, the culprits are fairly obvious.  If we can find ways to remove the perverse incentives of the system, it doesn’t seem necessary for the government to take control of all our health care decisions.  At the same time, I think we run the risk of accepting that outcome instead of making the hard choices to build a superior system.  In lieu of deciding to make an exceptional American system, we are flirting with the idea of adopting mediocre ideas from elsewhere.

The two components for reform that seem necessary are subsidy of insurance for those who can’t afford it, whether through tax breaks or direct payments, and regulation changes to break the cycle of perverse incentives.  Moving doctors to salaries, making sure that consumers bear some of the burden for their overconsumption and changing the way internships are allocated seem viable ways to make significant differences without introducing a competing government entity.  In the end however, the status quo seems completely unviable.  Those who don’t want a competing government entity need to start making quality suggestions, instead of simply advocating sticking with the current broken system.

Post from: Personal Finance And Investing

Why Everyone’s Wrong About Fixing Health Care

1. OECD Family Database – Infant Mortality
2. Dartmouth Atlas of Health Care – Health Care Spending, Qualty and Outcomes
3. USA Today – Medical Miscalcuation Creates Doctor Shortage
4. Health Affairs – Use Of Physician Assistants And Nurse Practitioners In Primary Care
5. CBO - Health Care and the Budget: Issues and Challenges for Reform
6. The New Yorker – The Concilitator

Photo by: gwire

For many of us, particularly the self-employed, choosing health insurance can be a difficult proposition.  Laws and rules tend to vary by state, so it is difficult to make general guidelines for buying insurance.  In fact, state legislation is one of the biggest factors in the availability of affordable health insurance in the state.  As such, it’s difficult to write a comprehensive guide to analyzing health insurance, however there are several guidelines that can make it easier.

Do You Need Health Insurance?

The first question many of us ask is:  Do I even need health insurance?  The short answer is “yes.”  Insurance can be a bad deal for us.  Ultimately if the odds weren’t stacked in the company’s favor they wouldn’t be offering the product in the first place.  While this logic may be true, the real reason we buy insurance is to offload catastrophic risk.  We don’t want to have our lives ruined if we get a serious illness, so it makes sense to protect ourselves from such a fate.

That’s an important point to remember when you’re making decisions about your health insurance.  You’re not buying health insurance because you want every medical procedure to be free.  You’re buying health insurance because you don’t want to be ruined.  If you’re paying $300 per month so that you can get a $100 doctor visit for free, you’re not doing yourself any good.  We’ll look at this more closely when we start crunching numbers.

Should You Buy Through Your Company

Another thing to remember about health insurance is that even if your company offers a health plan, you don’t have to buy through them.  Health insurance when offered through your company is a “group” plan.  While there are many nuances, ultimately the group plans often subsidize the more expensive members of the group with the premiums of the less expensive members.  Companies that pay the entire premium are becoming rarer each year.  Thus there is a decent chance that you could actually get better health insurance more cheaply from an external source if you are young and in good health.  It’s worth checking this out before you sign up for your company’s policy.

Doing the Math

The details of plans are largely determined by State regulations; an example like the following can give some insight into how to determine the desirable variables when you make a purchase.  Some health plans I’ve investigated recently have the following variables:

• Monthly Rate – The amount you pay monthly for coverage.
• Deductable – The amount you have to pay out of pocket before the coverage kicks in.
• Coinsurance Amount – The percentage the insurance will pay once the deductable is met.
• Out of Pocket Maximum – The most you would have to pay on your own in any given year.  This is often the deductable plus some fixed amount.

Now looking at the two most expensive versions of 75% coinsurance, we see the following information:

Plan A
Monthly Payment: $178
Deductable: $500
Out of Pocket Max:  $3,500

Plan B
Monthly Payment: $128
Deductable: $1,000
Out of Pocket Max: $4,000

In analyzing these two plans an interesting comparison arises.  If you look at Plan A, the absolute worst-case scenario is that in a year you pay $2,136 in premiums and $3,500 out of pocket, for $5,636.  For Plan B your worst-case scenario is $1,536 in premiums and $4,000 out of pocket for $5,536.  These numbers are very interesting because essentially for Plan A you are paying more for worse coverage.  While there are a few scenarios where you might have a better cash flow situation, essentially your maximum benefit in Plan B is $100 more than Plan A.  That doesn’t even take into account the possibility that you don’t go to the doctor at all, or very little, and pay $600 less in premiums on Plan B instead of Plan A.

This is just one example of the kind of situational analysis you should do on health insurance.  Think about the various situations and see what kind of benefit each plan would give you.  Don’t assume that more insurance is always better.  Also don’t forget to include the cost of the premium when determining the benefits.  Just make sure you wrap your head around what you’re really buying before you commit.

Post from: Personal Finance And Investing

Analyzing Health Insurance