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What Should Obama Do First? Health Care Reform

05 Nov 2008
Posted by Andrew Samwick

I read with some interest this piece by Jeff Sachs in Slate, "What Obama Needs To Do."  I think there will be a lot of columns like this, so let me add to their number.  The thrust of Sachs' advice is this:

In sum, the recipes since 1981 of small government and small-bore solutions are passé and dangerous for our very survival in the United States and on this planet. While Reagan was crudely ideological, Clinton mildly reformist, and Bush simply crude in the application of these small-government doctrines, none of the recent approaches will do. It's time to stop talking about who can give away more to the public in rebates and start talking about investing in our future in a way that can save the poor, sustain the rest, and build a decent world for our children. Those are the real family values.

I can appreciate his desire to get the government quickly to the size where it can address the problems he thinks are most important.  But I was surprised to see health care reform not mentioned in the article.  I would suggest a different approach -- make some improvements in health care that would build momentum toward the biggest challenges.

Looking again at Obama's health care plan, I think there are some aspects he could implement immediately that would do just that.  I am pleased to see the first bullet point is this:

  • Require insurance companies to cover pre-existing conditions so all Americans regardless of their health status or history can get comprehensive benefits at fair and stable premiums.

Insurance plans that exclude pre-existing conditions are not really insurance plans.  There is no particular reason why they should be subsidized through the tax code.  It would cost more money for everyone (including the federal government through lower taxable income), as premiums rise to now cover those conditions.  This removes the biggest distortion in the labor market from the way we do health insurance through employment. 

Having done that, the next big objective should be to get rid of the biggest distortion in the health insurance market from the way we do health insurance through employment: universal coverage. The rest of his proposals don't necessarily wrap up universal coverage.  The one that comes closest is:

  • Establish a National Health Insurance Exchange with a range of private insurance options as well as a new public plan based on benefits available to members of Congress that will allow individuals and small businesses to buy affordable health coverage.

That seems like a process that starts out too ambitiously and that could go awry in a number of places.  The government does not need to get involved like this in the design of new plans -- it needs to make sure that insurance is available outside of the employment relationship.  I think that taking on too big a health care reform project so early is one of the things that doomed the Clinton effort years ago.

So all the government needs to do is establish a premium schedule for Medicaid and require proof of insurance on the tax form to be exempt from paying that premium.  The premiums should rise with income to the point where any middle class working family with employer-provided coverage would likely prefer the employer coverage.  The premium levels should be high enough so that the taxpayer isn't paying through the nose for someone else's premiums.  That's universal coverage in two straightforward steps, without a lot of disruption to the way health insurance is currently provided or an enormous infusion of government funds.

It doesn't preclude a more comprehensive reform, including Obama's other objectives of price and quality.  In fact, it generates the momentum for it based on some initial success. In this case, the small-bore solution may be just the right medicine.

Setting the stage for change

President Obama won't be able to "fix" anything until he creates a significant Disruption - and finds some White Space to do new things. Those were the keys to success for Kennedy and Reagan. Can Obama find his own "fire the PATCO air traffic controllers" issue that will give him the lattitude to do something new - like experiment with the Laffer curve? Read more at http://www.ThePhoenixPrinciple.com


Pre-ex and insurance

"Insurance plans that exclude pre-existing conditions are not really insurance plans."

Could you explain this more? My a priori perspective is the reverse: "insurance" only exists when the adverse event is unknown or somewhat uncertain. If you require coverage for pre-existing conditions, there is no reason to purchase insurance when healthy, just sign up on your way into the hospital.

But I agree there is a wealth of more innocuous momentum building healthcare reforms that could be implemented. I just don't think the blanket pre-ex prevention is one of them (especially given that such a federal mandate would impact some states much more dramatically than others).


Pre-existing Conditions

Here's what I'm thinking of.  If your next insurance plan won't treat pre-existing conditions, then you have to stay with your current insurance plan.  Since insurance plans are offered through employment in most cases, that means that if you get sick, your current plan will cover you, but you have insurance only for as long as you stay in that plan.  That's the distortion to the labor market that I'd like to see removed.  As long as all plans are required to cover pre-existing conditions, it does not seem like there will be any adverse selection resulting from the requirement.

 


Agreed

I now follow you. I posted a similar idea a few months ago (here).

Currently, HIPAA creditable coverage rules are unnecessarily restrictive (not to mention they require burning through expensive COBRA). As long as you are paying into someone's pool when you get sick, government can play a productive role eliminating that pre-ex exclusion. But you do need that industry-wide rule; no one insurance company can step out alone. You also need a mechanism to get to universal coverage (your step 2) or a transition mechanism to get the currently uninsured and sick into the system without causing problems.

Incidentally, I would like to see more work on your step 2, and how expensive the premiums would be. I suspect the main problem is that there would be a large budgetary outlaw as more people receive subsidized insurance.


That's "budgetary outlay",

That's "budgetary outlay", not "outlaw" in my last sentence. Sorry.


Adverse Selection

One problem is that you would have an extreme adverse selection issue. Any industry that has a high proportion of low paid workers (e.g. grocery stores, big box stores, waste management etc.) would immediately dump their health insurance plans and place all of those low paid workers on the gov't payroll, causing large spending increases. This would make economic sense from both the employer and the employee as both would face lower health costs. The taxpayer gets to pick up the tab. It could end up like Medicare and Medicaid, with low reimbursements restricting access and causing de facto rationing. In the meantime, high earners will have private insurance that will cover them, thus creating a two tier health insurance system. Maybe that's not too different than what we have now, with emergency rooms for the uninsured and health insurance for everyone else.

Additionally, the pricing issue is quite tricky. It's easy to say "all you need to do is get the pricing right," but this requires complicated actuarial calculations and the data necessary probably won't be available because it will be impossible to predict who ends up on the plan and what their risk profile will be. If you get the pricing wrong you cause all sorts of distortions (subsidies too high and middle income employees have their health coverage dumped and end up paying higher premiums, subsidies too low and not enough people participate) and there's no guarantee that the gov't will ever get it right as the "right" price changes constantly based on demographics, who is in the private pool and who is the public pool. Further, healthy people will have a high incentive to cheat and go without, as has occurred in Massachusetts and absent a draconian and expensive enforcement policy, this would drive costs up even more.

Further, what do you do with the 15 million households/individuals who do not file a federal tax return (IRS Data). Do you mandate that everyone must file a tax return and if so, how do you enforce the provision? Presumably, the very people you most want to reach fall disproportionately into this category.


All Good Questions

I think that the non-discrimination rules get a stress test as we implement the universal Medicaid option -- if a benefit is offered for any class of workers, it is offered for all classes of workers.

I think we also have to acknowledge that the 15 million households who don't currently file will now have to file.  Obama had some good ideas in his tax policy speech from last September about sending people their returns with most of the key information pre-filled.  In this day and age, I don't think it is an unreasonable computational burden to have each citizen in contact with the government once a year, considering all of the social insurance being provided.  But almost any universal coverage provision, or any plan to give refundable tax credits, has this problem.  In fairness, it isn't necessarily 15 million each year -- the number of people outside the system goes down unless we manage to lose track of people over time.

As for getting the price right, that is trial-and-error like any market.


Adverse selection makes some

Adverse selection makes some good points. The basic problem is that the insurance model in inapplicable to the problem. For instance, no one has a problem with fire insurance companies charging firetraps higher premiums than buildings with good fire prevention measures. The natural extension to health insurance is genetic testing for susceptibility to various conditions; but, this makes people queasy.

The real solution is to stop trying to fit a square peg into a round hole and impose either a universal mandate or, better, single payer. This also avoids the problem of what to do with the unemployed. There are other models (e.g. France) that work well, but they all have mandatory coverage for everybody. Obama didn't want to campaign on mandates; Krugman rightly criticized him for this. Without that attempts to game the system will never stop.


The Universal Mandate

This is true, but perhaps it is out of reach for the first 100 days.  I think it is important for Obama to make some constructive changes, mindful of the cost, but to try to deliver some tangible improvements soon.  As I said in the post, nothing here precludes a more comprehensive reform later.

Wyden-Bennett Bill

The Wyden-Bennett bill seems far more preferable to the Obama plan. The thrust of Obama's plan is to subsidize the existing system of health care finance and delivery more generously. However, it seems the existing system of finance and delivery constitutes a large part of what makes the rate of growth in health care costs outstrip inflation. If you do subsidize the existing system then you are simply exacerbating that long run trend.


Aren't we trying to soak up capacity that just became excess?

I.e., there aren't many laid-off nurses out there at the moment. If Obama is going to be stimulator-in-chief, shouldn't he focus on protecting existing jobs, e.g., in autos and in state/local government?

I agree that you don't get to buy fire insurance after the flames start to rise, and that therefore there is a flaw at the heart of the health insurance concept. How about paying for pre-existing conditions in an entirely different way, such as with an income-adjusted copayment with the balance coming from taxpayers? That way health "insurance" would actually be insurance! Its price would be far less, enabling healthy people to have affordable coverage.


In reply to my comment about

In reply to my comment about mandates/single payer Mr. Samwick said:

"This is true, but perhaps it is out of reach for the first 100 days."

My view is that if we don't get a real, functioning system all at once we'll never get it; all incrementalism does is give the insurance companies and their allies time to dig in. Yours is the opposite: small steps are easier than large ones and will (or at least might) eventually add up to a comprehensive system.

I wish I really knew which is correct. Or maybe they're both wrong and we just get to pick our poison.

Or, as Woody Alan put it: "More than at any time in the past mankind stands at a great crossroads. One path leads to despair and utter hopelessness, the other to total extinction. Let us pray we have the wisdom to chose correctly."


Health Care wouldn't be of

Health Care wouldn't be of use if the government hasn't got any resources left. Uplift the current economic state first. Jobs are needed.




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