Tuesday, March 23, 2010

Maclen Muses – Explaining The Health Reform Bill

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.

22 comments:

April said...

Bravo, Maclen! I'm going to paste this link everywhere, because you've made the reform bill so easy to understand that everyone I know should read this post.

PS: Please hug your mom for me. I've never met her, but by example she constantly inspires me to be a better person and I check here daily to see how she's doing.

Wally said...

Mac, you are a fucking genius! I know people twice your age with 3 times your education that couldn't have explained it as well.

Angel said...

This is more informational and clearer than a lot of reporting that is coming from major news outlets. Good job, Mac!

This may be another blog post but I'm curious about how changes in the current system could've made the process of ALS diagnosis and treatment a little easier. My grandmother was diagnosed very late in the game -- two weeks before she died. She had been sick and growing weaker for several months (about 1.5 years) but was just bounced around between primary physican and specialists for more tests and no answers. I know this is common for those with ALS. I want to believe that a reformed system could've help us come to an answer sooner (even if the outcome would've been the same.) I want to believe that reform also means better communication among all the doctors, hospitals, family members, etc.

Any thoughts from y'all?

As for cost -- AMEN. It still haunts me that my grandmother and family considered the out-of-pocket cost of long-term care (and how it would've bankrupted my 70-something grandfather) while we all contemplated the decision of staying on a vent or letting go. Decisions of life or death should be based on more than bills.

AdamChi said...

I am relatively young and healthy, too old to be on my parent's plan, and earning too much to qualify for subsidies. The mandate would likely force me to pay a wildly disproportionate share of the costs relative to what I use because of community rating, gender rating, and bloated minimum coverage requirements. Actuarial tables go out the window to "spread risk", so I would end up subsidizing the obese, the lazy, and those who choose unhealthy lifestyles. Do we force safe 40 year old drivers into paying auto premiums at the level of a 17 year old male driver with 3tickets? I would also be subsidizing the welfare population, anchor babies, and women who pop out 10 kids.
Not gonna happen. I'm opting out and paying the fine instead of paying artificially inflated premiums. It makes economic sense as I would save thousands! Also under this bill, preexisting conditions must be covered so if something ever happens, I'll just buy insurance when I need it.
If enough people like me get shafted, adverse selection might get out of control and penalties for opting out might be increased. If that happens, I might be forced in, but I will feel compelled to greatly over-utilize the healthcare system as I refuse to be a low cost cash cow for the insurance companies, paying inflated premiums but getting nothing in return except piece of mind.

Anonymous said...

I wish I'd birthed you.

NorskyMom said...

That was the clearest explanation of the bill and its ramifications that I've seen anywhere. Thank you so much!

Rebecca Landes said...

Wow. You just explained an enormously complicated issue clearly and succinctly. Awesome.

Anonymous said...

I gather you are planning a political career? You have the verbosity part down.....

Maclen Zilber said...

I'll answer some questions as I promised:

Angel - There are two aspects of the bill that I could see being of some use to your grandmother. The first is electronic medical records. Essentially, by making all medical records electronic and easily accessible, numerous extraneous tests are avoided, and productivity is increased by about 6%, if the experience of the Veteran's Administration is a guideline. The second is bundling of payments. As I mentioned in my post, currently, doctors are paid for every additional test, every additional visit, etc, which creates exactly the wrong type of incentives and leads to inefficient diagnoses. By bundling payments to doctors, the bill would create a system in which their incentives were flipped: to deal with an issue in the most efficient and effective manner, rather than the manner that costs the most.

AdamChi - I think your objection is to the concept of insurance, not this bill in general. However, to clarify some issues to other readers, I will explain how this bill helps even Adam. 20 years from now, when Adam will presumably be working, our economy-wide annual health care costs will be $8.9 trillion, or $4.9 trillion in 2010 dollars, if they keep growing at current rates. If this bill slows the growth of health care costs by 2% per year, systemwide health care costs will only grow to only $6.1 trillion, or $3.4 trillion per year in 2010 dollars. That means a difference of $5092 per insuree. Now, even if you don't intend to purchase insurance, what makes this potentially helpful even to somebody such as Adamchi who doesn't want to purchase insurance is that, as long as the employer health benefits tax exemption is in place, his employer will have an incentive to give him a health insurance package in lieu of salary, meaning that Adam can expect about $5000 more in salary per year down the road based on this bill. What is more important, however, is that if and when Adam gets a costly sickness, such as cancer or ALS, he will be able to purchase affordable health care, with no annual or lifetime caps, and with a cap on out-of-pocket expenses. This seems like a pretty great deal for somebody who will have been opting out of the system for 20 years, huh? Somehow, I think that is fair value for a fine of under a hundred dollars per month.

Christi said...

Maclen,
I second that you are a fucking genius. I'm a DC-based consultant in health care IT and access for the uninsured...and you knocked it out of the park with that explanation. You should be a national hero. I am as proud of you as your mum. Well, maybe not that much. Absent my penchant for hyperbole, you are both amazing and inspiring individuals and I am delighted to have e-found you both.

Anonymous said...

i am a nurse practitioner (NP) and can honestly say that i did not fully understand this whole matter until i read this post. fucking awesome, maclen. thank you! you are, indeed, a genius (just like your mother). thanks, again, from the NP...

Anonymous said...

hey mac, thank you for your amazing explanation, given with such simplicity & clarity! power to the well spoken nerds!!!!! wen xoxoxox

Hugo Martin said...

Thanks Maclen!

Anonymous said...

Maclen, I want you in Congress...

RN Bob

Joanna said...

Maclen's mind is the product of brilliant genes and his own amazing ability to synthesize information and then express it without fear or hesitation in a way that gets directly to the heart of things. Thank you Maclen. I am posting this on Facebook.

Anonymous said...

Now why did it take Congress 2300 pages to write a document that doesn't explain things that well?

However, because I am no longer young and idealistic, I don't believe it will all go down as you expect it to, Maclen. Insurance companies have nothing to do with health care; they are in the business of risk management, period. They are so prosperous in their corruption now, there is simply no way they are going to give it up. They will find a way around the new laws, or go out of business and onto something else that rakes the money in the way they've gotten used to.

Candid Cameron

Anonymous said...

Not only can Mac explain complicated things clearly, he has a great knack for clear calm and pointed rebuttal. Thanks, Mac, and thanks,Carla, for sharing him with us.
Love, Helene

Anonymous said...

Here, here!
The best account I've read. Thank you for making it sound so simple.


Christina

Julie Zilber said...

Hi Maclen,

I'd like to echo what so many others have said. This is the clearest explanation I've seen or heard. Why the heck can't any of the media commentators explain things like this? If they did, we would all be a lot better off.

Anonymous said...

the dean of a college prep school read this and says: "This young man has it pegged. She [meaning Carla] should be proud."

Anonymous said...

Mac, can you put this into line format with 500 words or less? i would love to know what this is all about but my attention span for the news or public information of any type is about as large as a two year olds.....

Anonymous said...

Really informative - thanks so very much. I'm wondering about that bundling part - yes, it sounds like it will curb cases with round-about inefficient processes of diagnosis, but what about the many very legitimate long-road experimental attempts at diagnosing difficult situations -- do you think efficiency and quick answers will limit time and taking less-traveled roads where they're genuinely needed? Would love to hear thoughts on that.