Monday, November 18, 2013

What Should Replace Obamacare

A recent post on the Forbes site offers a convincing explanation of what was wrong with the current system of health insurance before Obama, hence what both it and Obamacare ought to be replaced by. Its central point is that what we call medical insurance is in part actual insurance, protection against low probability/high cost risks, in part prepayment of ordinary medical expenditures. The reason insurance policies take that form, also the reason that most of them are provided by the employer and so not portable, is that employer provided health insurance is bought with pre-tax dollars, ordinary medical care with after tax dollars. 

One result is that individual consumers have little incentive to be careful shoppers for health care services, since for the most part they are not the ones paying for them. A second is that insurance companies, in order to provide a substitute for careful shopping by customers, require a lot of paperwork from providers, driving up their costs. Costs are also driven up by state regulations that require insurance companies to cover things that the customers might prefer not to pay to have covered—the same problem that Obamacare produces on a national scale. In my state, California, for example, health insurance must cover acupuncture, and in Connecticut it must cover hair prosthesis.

One implication is that tax law should be changed to put employer provided insurance, privately purchased insurance and payments for uninsured medical expenditures on the same footing. To get the economics right, all should be treated as ordinary consumption expenditures. From the standpoint of the relevant politics, however, what the Republicans ought to propose is to make all three tax deductible, at least up to the level of what most people now pay. It's a lot easier to sell a tax cut than a tax increase.

A second implication is that insurance companies should be allowed to sell policies interstate. That would eventually eliminate inefficient regulatory requirements, since state insurance regulators would have to compete with each other to provide regulations that generated the policies consumers wanted to buy. In this case as in many others, competition is a good thing.

A well written and informative article by someone I am pretty sure I interacted with online many years ago. It's a small world.

18 Comments:

At 7:32 PM, November 18, 2013, Blogger jimbino said...

Not only should health insurance be allowed to be sold interstate, insurance and self-pay dollars should be allowed to be spent overseas, where the cost for procedures is often less than 1/3 of that in the USSA. Ditto for Medicare Part D and foreign drugs.

 
At 7:10 AM, November 19, 2013, Blogger Paul Hsieh said...

David:

Thank you very much for the kind remarks!

Yes, we did interact online back in the Usenet era, and I remember you as a courteous, thoughtful, and intelligent writer even when we disagreed.

I appreciate the exposure for my Forbes piece.

Best,
-Paul

 
At 7:41 AM, November 19, 2013, Blogger Paul Hsieh said...

(Alas, didn't mean to sound like we disagreed all the time! *remove foot from mouth* Again, many thanks for the post!)

 
At 11:06 AM, November 19, 2013, OpenID undertallen said...

Please forget a Swede, but I thought that the Commerce Clause forbid trade barriers between the States. Or?

 
At 11:14 AM, November 19, 2013, OpenID undertallen said...

forgive a Swede...

 
At 11:45 AM, November 19, 2013, Blogger jimbino said...

--also "...forbade trade barriers...."

The commerce clause, like the Ninth and Tenth Amendments, are known primarily for their emasculation.

It would seem that a person who did not want to participate health insurance whatsoever would not have any commerce for the Feds to regulate.

Alas, common words, like "affordable," and common sense have also been emasculated in the USSA.

 
At 1:14 PM, November 19, 2013, OpenID undertallen said...

jimbino, thanks! I am in the software business, but I only recently learned that "glitch" means "completely unusable".

It is strange that in the US, your constitution appears to become harder and harder read the better the university you go to.

 
At 2:17 PM, November 19, 2013, Anonymous Patrick said...

untertallen,

I may be mistaken about how it works, but I think that the way the states are able to impose effective trade barriers is by internal regulations. Basically, if state A wants to prevent competition from out-of-state insurers, state A just requires that any insurance company providing insurance in state A must cover X and Y and Z. Meanwhile, state B requires that insurance companies cover U and V and W. So companies that are in compliance with state A's regulations aren't in compliance with state B's and vice versa. This isn't technically a trade barrier: a compliant company *could* be from out of state. But practically speaking, it won't be.

The natural outcome is that you get 50 different sets of insurance companies: one for each state. Usually, they're wholly-owned subsidiaries of some parent organization. E.g., according to their website, the Blue Cross and Blue Shield Association owns "37 independent and locally operated Blue Cross and Blue Shield companies."

 
At 3:44 PM, November 19, 2013, Anonymous Anonymous said...

David:

> careful shoppers for health care services

Yes, when you have a heart attack it is a good time to do some careful shopping for the health care services. Checking references also helps.

> in order to provide a substitute for careful shopping by customers, require a lot of paperwork from providers, driving up their costs.

And for careful shopping we would not need any paperwork since we have innate knowledge which provider will do a good triple bypass and which will charge 10% less but kill you.

> require insurance companies to cover things that the customers might prefer not to pay to have covered

I prefer to have nothing covered. This way hospital emergency care physician is my primary care specialist - and all service is free!

I expected better from you

 
At 4:54 PM, November 19, 2013, Blogger Stevo Darkly said...

Anonymous above:

Oh, come off it. You're implying that the only time we buy health care is in an unforeseen emergency. By the same reasoning, you could argue that it's impossible to shop carefully for an automobile, because the only time people buy automobiles is when the car is totaled, and because a car is needed to get to work, the need to buy one is an emergency, therefore it is impossible for car shoppers to compare quality, cost, etc. Likewise it would be impossible to be a careful shopper for major car repairs (for similar reasons), or food (because if you don't eat you'll starve, so who has time to shop?).

In the real world, people can anticipate their future needs, and do some planning and shopping in advance of the actual time of need.

It is true that, for various reasons, it has traditionally been very difficult for consumers to acquire and compare cost and quality information about health care providers. Fortunately, this is now changing. Because many employers want and encourage their employees to be more careful shoppers for health care services, they contract with companies like (for example) Castlight Health to gather and provide this information. Employees can go online to get both price and quality information (including patient testimonials) about doctors, hospitals, labs, etc. and the various services they provide. I know of one person who was able to save 95% of the cost of a test by going to one provider versus another, as a result of getting this information online.

No paperwork required, by the way!

Employees are also encourage to use this information to plan ahead - where would they go in an emergency? A hospital ER? An urgent care center? Which specific one?

If the bulk of health coverage were not provided by employers, it is still possible that this type of information could be gathered and sold to individuals, either directly or through their insurance companies, and the incentives for shopping around and saving would probably align even better.

As for foregoing coverage and having the local hospital ER "be your primary care physician," I'm not sure what point you're trying to make their. Even if you manage to get all your ER care for free, there are substantial non-monetary costs for going to the ER for treatment -- such as waiting hours and hours for care, especially if your condition is not an urgent emergency, and sometimes even if it is.

I'm not sure you're being serious.

 
At 6:10 PM, November 19, 2013, Blogger Jim Oliver said...

One thing often overlooked is that when medical care was only 3 or 4 percent of GDP it made some sense for companies and even government to provide prepaid healthcare but now healthcare is 18% of GDP and it makes little sense to delegate that much of your spending to your employer and insurer or government.

 
At 6:12 PM, November 19, 2013, Blogger jimbino said...

Right Stevo,

And the Medicare allowances (prices) for all medical procedures are available per CPT code, different for each of the states. But why did I have to file a FOIA here in Texas to get that list? We must live in the Non-information Age of health care.

Furthermore, Stevo, since the Feds subsidize the health industry here in Amerika to the tune of about 50%, anybody who walks into an ER for treatment has already paid half the costs. The real healthcare deadbeats are employees, especially the unionized, who pay for their cadillac health care with pre-tax dollars, for a savings of up to 60% when you consider the top marginal tax rate and FICA.

 
At 11:13 PM, November 19, 2013, Anonymous Rex Little said...

Ordinary medical care (including directly purchased health insurance) isn't entirely bought with after-tax dollars, since it's deductible above a certain percentage of income. I forget the exact number, but it's low enough that medical expenses have been my biggest single tax deduction every year since I retired. And most years those are only my Kaiser premiums and co-pays.

 
At 2:15 PM, November 20, 2013, Anonymous Anonymous said...

This does not really "replace" obamacare. And the idea that selecting coverage in systems is an actual market is simply laughable.

The aethernal anti-obamacare pretension that obamacare is not free market based and that it's not a proven model that has already proved to work continues...

 
At 2:49 PM, November 20, 2013, Blogger David Friedman said...

"The aethernal anti-obamacare pretension that obamacare is not free market based"

I don't know what "based" means. Obamacare forbids people from buying insurance that covers only the risks they want to insure against. That is not a free market.

Obamacare penalizes people who choose not to buy insurance. That is not a free market.

 
At 4:11 PM, November 20, 2013, Blogger Will McLean said...

I think your argument is mistaken. It seems to me that an individual with a health insurance policy with a $5,000 deductible is indeed paying for most of the ordinary expenditures himself, and such policies are ACA compliant.

http://willscommonplacebook.blogspot.com/2013/11/what-should-replace-obamacare.html

 
At 11:09 AM, November 21, 2013, Anonymous eMarkM said...

Paul's article concentrates on the demand side and all the suggestions are excellent and seem pretty obvious to me. What his article does not cover (though I'm sure he's aware of) are these "certificate of need" restrictions in many states, including my own in IL. In order to open a new hospital or clinic, or even buy new medical equipment, you have to go before a board and prove that this is needed. Entrenched hospitals can appear at these hearings and essentially veto by saying it will hurt their bottom line.

How does that work out for competition on the supply side? Well duh. It's like having a the local TGI Friday's determining if it's ok for an Olive Garden to open across the street.

For an excellent treatment that covers more than Paul can in a short magazine article please check out John Cochrane's "After the ACA".

http://faculty.chicagobooth.edu/john.cochrane/research/papers/after_aca.pdf

 
At 9:11 PM, December 19, 2013, Blogger David Friedman said...

Will McClean writes:

"It seems to me that an individual with a health insurance policy with a $5,000 deductible is indeed paying for most of the ordinary expenditures himself, and such policies are ACA compliant."

Apparently not. At least, according to a news story on the latest change in the rules:

"People losing coverage also will be eligible to buy high-deductible “catastrophic” plans that the law normally limits to those under age 30."

 

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