October 11, 2015

President Obama’s Health Care Speech

Many people sought my reaction to President Obama’s health care speech. I had a mixed reaction. It was reassuring to see him take a decisive position in staking out the case for reform, his priorities, and the common-sense proposals on which there appears already to be agreement. I also think that he was more eloquent than I have ever seen him on any issue, and I felt inspired by his leadership skills, and his obviously sincere and deep moral values that drive his passion on health care.

While I believe that we should attack the health crisis first, then the health care delivery crisis, and then attack health insurance, rather than his obvious prioritization of health insurance, his decisiveness and strong leadership has value independent of how he prioritized the issues.

There are two fundamental problems with his plan:

  • The proposed public option is a flawed solution to the problems he outlines; and
  • The proposed methods for paying for expanding care to tens of millions of additional Americans are highly unlikely to yield the revenues he has projected for them.

The Public Option

The public option has been justified on three bases: its ability to expand coverage to people who do not have it, its ability to provide affordable coverage, and its ability to creative a competitive offering to “keep insurance companies honest.” Every one of these goals can be met without a public option and at far less cost and risk.

The President proposed a combination of guaranteed coverage for everyone, with a prohibition on insurance companies denying or dropping coverage based on medical conditions, and logically proposed that everyone purchase coverage. Those proposals, combined with subsidies for low-income Americans will solve both the coverage and affordability issues, although the prohibitions on coverage denial and termination will make insurance more expensive for everyone, because they will increase the risk in the participant pool.

While the President is correct that there are pockets in this country where there is insufficient competition among health insurers, the biggest barrier to insurance competition is the combination of state-by-state insurance licensing laws that create barriers to insurance companies entering the market and over-reaching state regulation that causes insurers to exit markets. If health reform legislation allowed Americans to purchase insurance from carriers licensed anywhere in the country, there would be ample competition. We would not need to create a public insurance entity.

The President strongly believes that Americans should be able to retain the employer-based coverage they already have, but the only way a public option can work is to have a risk pool that includes healthy Americans currently covered under employer-sponsored plans. Any public option that just targets the currently uninsured or underinsured is highly likely to be a more expensive risk pool which will require more taxpayer subsidies. Therefore, one of the risks of a public option is that it will weaken those health insurance programs that work well and in which participants are highly satisfied.

Financing of Health Care Reform

The President identified several additional sources of funds for financing of this additional coverage:

  • Taxes on insurance companies
  • Premiums from individuals mandated to buy coverage
  • Taxes on employers mandated to buy coverage
  • Elimination of waste, fraud, and abuse in Medicare, Medcaid and SCHIP programs

The idea that taxes on insurance companies will be offset by the profits obtained from covering tens of millions of additional Americans is flawed. Those Americans not covered today, except for the healthy young part of the uninsured population, could drain profits from the insurers, rather than adding profits that could be taxed to pay for health insurance coverage expansion. If insurance companies could have profited from covering these additional Americans, they would have already done so.

Individual mandates will add funds from the healthy uninsured, but it will also trigger subsidies to the poorer uninsured, so it is not clear that this will be a net source of funds.

The employer mandate is far riskier as a source of funds. If the mandate is set too low, many large employers will drop coverage and pay the tax, which will increase the financial burden on the public plan. If the mandate is set too high, the cost will be a job killer and will drive us back into a more severe economic downturn. An employer mandate can work, but it has to be designed with great care and precision.

The savings from reducing waste, fraud, or abuse the President indicates we need are highly unlikely to materialize in a government-run system like Medicare, Medicaid, or SCHIP. These systems regulate the price paid on individual encounters between doctors and patients. I have seen two bad ways to save money: cutting payments to doctors, which then causes them to stop taking public plan patients or to game the system by increasing the number of transactions; or setting out detailed rules on authorized treatments, which reduces care quality.

My family experienced the horrible impact of detailed and misguided treatment rules. I remember when my dad was getting rehabilitation on a broken hip the year before he died. The nurses at the rehab center unanimously agreed that he needed two 50-minute sessions per day, but Medicare would only pay for and allow one session. It shocked me that I was not permitted to pay for the additional rehab, even if I wanted to, because Medicare prohibited the Center from billing me for the difference between what it covered, and what he needed. He never recovered from his broken hip (in fact, he fell and broke the other hip during his prolonged stay in the rehab center) and died a year later, still wheelchair-bound. When I hear that elderly adults love Medicare, I can only surmise that they have not experienced its inflexibility, but only its generosity.

There is a saying I have quoted in this blog: “One person’s waste is another person’s income.” I do not remember who said it, but it makes the point simply and eloquently. When government sets out to reduce waste, someone in the healthcare system loses either a job or a source of income. That person or population will not accept a reduction without a major fight. There needs to be a transition plan to make sure that the individuals and groups adversely affected have some other way to win or, at least, minimize their losses. This is neither simple, nor fast, so I am skeptical that, even with the best program for ferreting out waste, we can save much money.

Increasing our deficit to reduce health care costs just means that we pay higher taxes or carry a higher national debt that eventually results in higher borrowing costs that ripple throughout the economy.

I wish the President all the best in driving for comprehensive reform, which we need, and believe he gave a well-crafted, well-designed speech, with eloquence and moral clarity that I deeply respect and admire, but the difficult work is just beginning, and the risks of poor execution are high.