Explaining the Health Care Reform Bill By Mac Zilber
For those of you who know my mother, she has been advocating for universal health care since she moved to this country from Canada. She wanted me to write a guest blog for her to explain to her readers why, even though the health care reform that was passed yesterday is not quite universal, per se, it is a truly wonderful accomplishment for our country.
For those of you who know me, I am a policy wonk, so, rather than opinionate on the magnitude of this accomplishment, which, to be clear, I think is perhaps the greatest social achievement of our congress since Medicare, Medicaid, and Civil Rights, I am going to exercise my comparative advantage, which is to clarify to readers what exactly it is that this health care bill does.
The problems of the existing health care system that this bill sets out to remedy are the unparalleled costs of seeing a doctor in the United States (this is a good graph http://voices.washingtonpost.com/ezra-klein/2010/01/america_spends_way_way_way_mor.html) and the number of uninsured in the United States (about 50 million today, with another 20-30 million underinsured).
The uninsurance issue is dealt with by a tripod of regulating, mandating, and subsidizing insurance. Each leg of this tripod is necessary or the framework falls apart, as I will explain.
The regulations are numerous, and largely consist of piecemeal fixes to specific abuses by insurance companies. Insurance companies will no longer be able to take away your coverage if you get sick (While Carla has kept her coverage, nearly 50% of people who have medical expenses as high as hers lose their coverage), deny you coverage if you have a pre-existing condition, or charge you more because you’re a woman. There are a host of other regulations (the “doughnut hole” in Medicare is closed, youths like myself are allowed to stay on their parents’ health plan until they’re 26, and plenty more things that nibble around the edges), but these are the regulations that have received the most fanfare. The other important step towards ending the worst practices of insurance companies is reinsurance and risk-adjustment. Essentially, when an insured individual starts to cost large amounts of money to insurance company, there is a financial incentive for the insurance company to try to find a loophole by which they can drop that individual (though that will be much harder now). To remedy this, the government will set up a risk adjustment framework so that a sick person will be of the same expected value to an insurance company as a healthy person, thus removing that incentive. The final regulation I will discuss in this section is that there will be no more annual or lifetime caps on how much coverage you can receive, and out-of-pocket payments will be capped (at $5000 per year) as well. This is of incredible import to those of you in the ALS community whose out-of-pocket payments can extend above $100,000 per year. If this bill had been in effect when Carla got sick, she would likely have saved tens of thousands of dollars from the combination of all of these regulations.
Now, one of the most misunderstood parts of the plan is the individual mandate, which requires people to get health insurance, or, more aptly, creates a slight personal incentive towards getting health insurance. This has been mischaracterized as, alternately, a corporate buyout or a government takeover, but it is truly no such thing. Essentially, it says that, if you can afford health insurance (if the cheapest insurance plan available to you is less than 10% of your income), you need to buy it, or you will pay a penalty equal to 1% of your income. The reason for this is to prevent people from taking advantage of the new regulations by not signing up for insurance until they get sick.
Imagine a simplified insurance plan in which there are 5 people. One of them, say, Carla Zilber-Smith, costs the insurance company $50,000, and the other four cost the insurance company an average of $2,500, because they’re young and healthy, like, say, me. The insurance plan ends up costing $12,000 for each person (we’re removing administrative costs for this model), and, while it ain’t cheap, nobody goes bankrupt.
Now, imagine an alternate scenario in which I decide that, because I’m not currently sick, I won’t buy health insurance. Suddenly, the premiums of the remaining four people on the plan jump to about $15,000, and one of the other people can no longer afford the plan, and they leave the plan. The plan now costs $18,000 per person. Then I get sick, and my medical expenses are $50,000. Since the insurance company can’t deny me for pre-existing conditions, I re-join the plan, and the price per-person is now $26,000. At this point, the remaining two healthy people drop the plan, and the risk pool falls apart. This is known as the insurance death spiral. If you don’t allow insurance companies to deny for pre-existing conditions, you need to mandate “young invincibles” like me to buy insurance or the entire system goes into a death spiral, with only sick people buying health insurance.
Now, when you’re mandating people to buy a product, especially one as expensive as health care, you need to make it affordable, and that is where the subsidy part of the framework comes into play. For the first time ever, Medicaid will be available to any adult making under 133% of the poverty line (about $29,000 per year for a family of four), and, as a result, 17 million low-income individuals who are currently uninsured will be on Medicaid by 2016. People who aren’t poor but aren’t rich will receive a sliding scale of tax credits to make health care affordable for them, to the tune of about $80 billion dollars per year. This change will insure millions more people. This whole regulate-mandate-subsidize mechanism will ultimately reduce the number of uninsured Americans by around 32 million, meaning that, by 2016, 95% of Americans will be insured. It is also worth emphasizing that the bill requires that every insurance plan meet a certain standard of quality, so no only will 30 million people who would have been uninsured now have insurance, but tens of millions who are underinsured will now be more adequately insured. Finally, of the remaining 20 million or so who will be uninsured after this bill comes into effect, millions of them will be eligible for insurance, and will be able to enroll free of hassle if they become sick, and millions more are illegal immigrants. Indeed, if an immigration reform with a path to citizenship is passed, the number of people who aren’t either insured or operationally insured will drop to about 1-2% of the country.
To control costs, the health reform bill does a number of things, but there are three main ones: Bundling payments, an excise tax on high-dollar insurance plans, and the breaking up of insurance monopolies.
Bundling payments is arguably the most promising of the ways in which this bill controls costs. Currently, when you go to the doctor, your insurance company pays for each procedure individually, based on its marginal cost of the hospital. In economics, the cost of a service is typically the same as its marginal cost to the provider of the service, but, as Ken Arrow explained in his work on health and welfare economics, there is moral hazard and adverse selection at play when it comes to health payments. Say whaa? Essentially, what this means is that there is a financial incentive for a provider to give you insufficient treatment, or to over-treat you, because it means more treatments and more money. For instance, when I had a painful hot-spot on the bottom of my foot, it was misdiagnosed three times, I was given three prescriptions, three tests, sent to a specialist, and it turned out to be plain old athlete’s foot. I am not at all impugning the motives of the doctors involved, as they are great individuals, but the reality is that when you create an incentive scheme where such misdiagnoses are rewarded with more payment, you are going to have worse results. What this bill does is it creates a pilot program in which hospitals begin to be paid based on results, and what the cost should be, rather than the marginal cost is to them. In other words, a health care provider, if this is ultimately implemented systemwide, will know “I am going to receive X dollars to treat this specific symptom, therefore, I have nothing to gain by not doing it due diligence the first time around.” A provider of psychiatric health, who I will leave nameless, once told me that he sometimes feels the temptation to tell people that they aren’t cured, because his employer gets paid for each additional visit. By removing these incentives, this bill will allow doctors to have their good intentions and their financial incentives be aligned.
The excise tax on high-dollar insurance plans has been an oft-criticized part of the plan, and, much like the individual mandate, it is because it isn’t well understood. Essentially, every dollar over $27,500 that your employer spends on your health insurance plan is taxed at 40%. That means that, if your health insurance plan costs $28,000, the last $500 of it will be taxed, and you’ll pay a $200 tax on it.
The reason that this will control the growth of health care costs is that the current system, in which health insurance costs are exempted from taxation, creates a massive incentive towards overconsumption of health care, resulting in national per-person expenditures on health care that are over 70% above those of any other country in the world. How does this incentive work?
Imagine that Goldman Sachs has $500,000 to spend on a valuable and well-off employee. Each marginal dollar spent on her salary is taxed at 32%, whereas each marginal dollar spent on her health insurance plan is currently taxed at 0%. This means that, in a simplified model, without taking into account any of the nuances of the tax code, if this employee is given $490,000 in salary and $10,000 in health insurance, she’ll receive an after-tax salary value of $343,200. On the other hand, with the current incentive scheme in place, if she receives $450,000 in salary and $50,000 in health benefits, she will receive an after-tax salary value of $356,000. For any employee, health benefit spending will increase until it reaches an equilibrium in which the employee values $70 dollars of additional salary more than they value $100 of additional health benefits. This distortion in the incentive scheme is a huge reason that our health care costs rise at 7% per year.
Now, here is how the excise tax helps fight that. Going back to the example of the high-paid executive for Goldman Sachs, in the first year of the excise tax going into effect, her incentives, and the company’s incentives, point towards her health benefits dropping to $27,500, and her salary increasing to $472,500 to pick up the slack. Over time, this tax begins to affect more and more people, and, thus, squeezes more and more overconsumption out of the system.
The final way in which this bill will reduce costs is to create a competitive market for insurance. Currently, the vast majority health insurance markets would be considered to be in violation of anti-trust laws if the insurance industry didn’t have an anti-trust exemption. This will change that. Essentially, when you’re purchasing insurance, you will be able to go onto a website similar to Amazon.com (product placement, yay) in which all insurance plans in your state are compared side-to-side, with reviews, ratings, benefits, etc. Imagine if you called every car dealer within a 50 mile radius and said “I am going to buy a car, and I am calling every car dealer in a 50 mile radius. Whoever makes me the best offer will make the sale.” It would be pretty hard for a car salesman to gouge you on the price, huh? Similarly, by listing all plans next to each other in a competitive market with community rating, insurance companies won’t be able to jack up prices or reduce benefits without you, the customer, being able to switch plans. By 2019, 8 million people will have switched from their current plan to purchasing health insurance on the exchanges, and an additional 16 million people who were uninsured will have purchased health insurance on the exchange. By giving the consumer power, costs will be controlled, and insurance companies will have to compete in the good old fashioned way; by offering a better deal than their competitors.
The last question people typically ask is how we are going to pay for this. The costs per year, once the plan is in place, will be about $160 billion per year, or about 1% of our economy. The tax on Cadillac plans, a small payroll surtax on the wealthy, and certain fees to be payed by insurance companies, drug companies, and hospitals, will yield about $70 billion per year (though this number will increase substantially after about 10 years). Targeted cuts in Medicare waste and fraud, as well as some of the aforementioned cost controls, should save about $100 billion per year, though this number will also increase over time. Over the first ten years, this bill will yield a surplus of about $138 billion dollars (a relatively small amount, over ten years, but a surplus nonetheless). Over 20 years, this bill will reduce deficits by over one trillion dollars, though many economists believe the number will likely be even larger than this. This bill on its own will not prevent a sovereign debt crisis, barring further action, but it will be the most fiscally responsible bill that congress has passed since the Clinton budget of 1993.
At the end of the day, though hundreds of billions of dollars, tens of millions of insured people, and tens of thousands of saved lives will all be nice perks, I think that Carla has the best sales pitch for what may prove to be the crowning social achievement of our generation: “For the first time in our country’s history, if you’re sick, no matter who you are, you can see a fucking doctor.”
Mac Zilber is Carla Zilber-Smith's son. He is studying American Politics and Comparative Politics at the University of California at San Diego, and is the Director of Policy for the UCSD Student Government. He is a huge nerd. The kind who you would probably push into a locker if he wasn't six feet tall, funny, and good-looking. And yes, he wrote this blurb, and is just talking about himself in the third person. Feel free to ask him any further questions, as he is willing to talk ad nauseum about policy, and he figures he probably has at least one unclear sentence, given that this blog is ten pages long and wasn't really edited.