Wednesday, March 24, 2010

What's next in healthcare, part 1

A number of people have been forecasting what must inevitably happen to US healthcare now that the Democrats have passed this bill. I include interesting points, and then a number of my own.

"Many Americans will receive subsidies for insurance, from what I understand roughly in the range of 6k to 12k.  Many other Americans -- namely those who already have health insurance -- will not receive direct subsidies of this nature.  Yet the subsidy-receiving and non-subsidy-receiving Americans will very often belong to the same income classes.
This disparity does not bother me personally (I have other worries about the subsidies), but I believe it will be very unpopular once it is publicly understood.  One way or another, the "firewall" between the exchanges and the employer-supplied system will break down.  Some people will want to spread the subsidies, others will want to limit them.  Yet the former is budgetarily problematic and the latter will be politically difficult.
A second and related issue is that the differences in reimbursement rates -- across private insurance, Medicare and Medicaid (highest to lowest) -- will become a more pressing issue.  For one thing, Medicaid patients will be crowded out by those buying private insurance on the exchanges, plus they will be crowded out by the growing number of Medicaid (and Medicare) patients.  There will be pressure to fix this problem and the difference in rates will lead to growing supplier gaming, queues, quality differentials, and so on.
Over time, reimbursement rates across programs (insurance subsidies, Medicare, Medicaid) will converge to an increasing degree.  Subsidies will be increasingly determined by income class rather than previous insurance history. 
In the limiting case (I'm not suggesting we will get there), everyone will receive means-tested subsidized vouchers for regulated private insurance.  In this strange way, Medicare and Medicaid could end up partially privatized and Ezekiel Emanuel -- a voucher advocate -- will end up being more influential than his brother Rahm.  We will have to live with the problems of means-testing to a higher degree than today, but we will have something closer to a unified system, as do most other countries with universal coverage.  There will be political pressure for compulsory health care savings, as they have in Singapore, to lower costs of finance.
It would be good if such vouchers could evolve in the direction of emphasizing catastrophic care and eventually they will have to.
Massive pressure will be put on such vouchers if either health care consumes 30-40 percent of gdp or income inequality continues to rise.  In the former case, subsidies become increasingly expensive and involve extraordinarily high implicit marginal tax rates (earn more, your subsidy declines in value).  In the latter case, it becomes increasingly difficult to ensure "near-equal" levels of health care access at feasible subsidy levels.  Those pressure points are not unique to the Obama bill, but they become especially critical under the evolutionary scenario I am outlining.  Perhaps we would give up the ideal of near-equal access, but that day is a few decades away.
Addendum: Here is Bryan Caplan's scenario, which means the bill will not work; my above post is assuming that problem is solved by raising the penalty."

1. It provides "immediate access to insurance for uninsured individuals with a pre-existing condition," creating a big adverse selection problem with one swoop.  The provision "ends when Exchanges are operational" in 2014.  But beginning in 2014, "Health plans can no longer exclude coverage for treatments based on pre-existing health conditions."  So apparently consumers will be free to play "Heads I win, tails I break even" from now on.

2. A while back, Krugman loudly insisted that if you ban pre-existing conditions clauses, you also have to mandate insurance.  While the new bill has a mandate, it doesn't begin until 2014, and the penalty clause is absurdly small.  Here's what passes for "promoting individual responsibility":
Requires most individuals to obtain acceptable health insurance coverage or pay a penalty of $95 for 2014, $325 for 2015, $695 for 2016 (or, up to 2.5 percent of income in 2016), up to a cap of the national average bronze plan premium. Families will pay half the amount for children, up to a cap of up to a cap of $2,250 per family. After 2016, dollar amounts are indexed. If affordable coverage is not available to an individual, they will not be penalized.
In practical terms, then, "Heads I win, tails I break even" remains the winning strategy.  And as adverse selection drives up the price of insurance, paying the uninsured penalty until you're seriously ill gets smarter and smarter.

3. While new regs penalize firms that don't offer insurance, the penalty seems to asymptote to $2000/employee:
Requires employers with 50 or more employees who do not offer coverage to their employees to pay $2,000 annually for each full‐time employee over the first 30 as long as one of their employees receives a tax credit. Precludes waiting periods over 90 days. Requires employers who offer coverage but whose employees receive tax credits to pay $3,000 for each worker receiving a tax credit up to an aggregate cap of $2000 per full‐time employee.
I have a feeling that post-recession jobs are going to be a lot less likely to offer health insurance. 

4. The "Cadillac tax" doesn't kick in until 2018.  But given the regulation-induced adverse selection problem, plus many other provisions to hobble discount insurance, I wouldn't be surprised if half of the insured ended up paying it:
Tax is on the cost of coverage in excess of $27,500 (family coverage) and $10,200 (single coverage), increased to $30,950 (family) and $11,850 (single) for retirees and employees in high risk professions. The dollar thresholds are indexed with inflation...
Notice that the thresholds are indexed to inflation, even though medical costs have increased at a much faster rate than inflation for ages."

And now my take:

Adverse selection and cream skimming are two very obvious problems with the current bill. General economic slowdown is another; it has just become much more expensive to employ someone because of the required benefits or penalty, and wages can't easily adjust down. Additionally, the bill increases taxes substantially.

Something people don't mention is "brain drain". Wealthy people tend to flee high-tax areas, and the US just became a much higher-tax area (the investment tax and income taxes work poorly - a cadillac tax would have been better). Additionally, the quality of US healthcare on a per-patient basis will almost certainly go down amidst significant pressure on doctor reimbursements (cutting the number of doctors in the industry) and a substantial number of new patients (most likely in the 20 million range on a net basis). Supply down, demand up, and no ability to independently price more? The only place to cut is cost of servicing a patient, which means seeing more patients (and thus less time with each patient). I also think you'll probably see cost of care go up, as Medicare can only ignore the problems with supply/demand imbalances for so long. Anyway, the US has been the best place in the world to get sick (almost undeniably - mortality rates from each disease in the US are among the lowest in the world, uniformly), which is a reason for rich people to stay. That doesn't exist anymore, so I'd imagine the US begins seeing more wealthy Americans leaving for lower-tax locales.

Furthermore, with doctors leaving the industry, you end up with a de facto uninsured problem, where people have insurance but can't find a primary care doctor (me, for one... I live in MA, with universal healthcare, where primary care doctors have 44 day waiting lists, and 56% of doctors refuse to take new patients...I live in an urban area, which means the problem is worse than the MA average. I suspect I have conjunctivitis today but I have nobody I can go to other than an emergency room, which I refuse to do, meaning that despite my health insurance, I am de facto uninsured for a number of conditions.). You may not have solved much of the problems you were trying to address - you may have been able to achieve the same things at lower cost and better incentives with vouchered catastrophic care.

In addition to doctors leaving the industry, I suspect you'll see a substantial reduction in "rare" disease research over the next decade and beyond. When you restrict the prices an insurance company can charge, increase the costs of care (both through supply/demand, the adverse selection problem and the fact that we still have a bunch of nearly-completed research into amazing but expensive technology coming online), restrict deductible adjustment and set a lower bound on reimbursement rates for doctors (as functionally, there must be - we may see private reimbursement rates approach Medicare's), then the only other area for insurance companies to adjust is in what they will cover. I suspect you'll see a lot of treatments not get covered, and the government will be very inconsistent in managing to force insurance companies to cover new procedures. This adds substantial risk to the process of developing something new and rare, because insurance companies may not cover it directly because they don't have to, or someone may come up with something cheaper than what you're doing, leading insurance companies not to cover what you do because they can meet their mandates with cheaper services. R+D will thus very likely crater as private capital dries up, and public capital remains incapable of commercializing research (or even funding it intelligently - see the average age of NSF grant recipients over time - but that's a different set of issues).

This ignores the national debt impact of the bill, which will certainly be substantial, because that'd likely be a problem with ANY healthcare plan, and some sort of healthcare reform would have been a good thing.

Thus, you end up with a Cerberus of reduced doctor incentives, reduced R+D and a weakened economy.

So how will the government respond? See part 2...

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