Friday, March 26, 2010

Why I Am Happy About Health Care Reform

While the Health Care Reform bill is far from ideal, I think it's a big step in a mostly good direction. Let me explain why I think so.

First, I think the status quo was untenable, for two basic reasons: cost and structure. Health care costs currently represent 16% of our GDP (that's higher than any other nation), and have been rising at a rate nearly double the rate of inflation and much higher than GDP growth. For people who have insurance, the rising cost of health care is initially buffered by the insurance companies, although it is eventually reflected in rising premiums. For people who purchase their insurance directly on the individual market (a market in which they have no leverage), they are feeling the premium pain acutely. Several of my friends are among the Californians who got whacked with a 39% increase in their premiums from Anthem Blue Cross this year. For those lucky enough to work for a large employer, the insurance costs are partly absorbed by the employer and the rest buried in an automatic payroll deduction. But the employers are feeling the pain of the rising insurance premiums, which are rising even faster for small and medium-sized businesses than for the large ones. In one recent survey, large companies (more than 50,000 employees) saw their premiums increase 5% in 2009, while small (less than 5,000 employees) and medium-sized companies saw premiums rise as much as 10%. For the employees, that eventually translates into a lack of raises, and lack of new jobs. Some friends have experienced effective pay cuts due to no raises and increased payroll deductions for those rising insurance premiums.

Some would say that the answer to rising costs is less regulation and to let the free market do its thing. Now don't get me wrong, I'm generally a free market fan, but our current system of mostly-employer-provided health insurance bears little resemblance to a functional market. For one thing, I can think of no other segment of the economy where both the consumer and provider of a service are so dysfunctionally disconnected from the cost. Anyone who's on a PPO insurance plan like me is familiar with the insanity: you go to the doctor just for a basic office visit, maybe get some blood drawn and/or an X-ray. The result is three to five bills from your doctor, a lab, the X-ray technician, and maybe some other doctor who reviewed the labs or the films. Then you get a flurry of "explanation of benefit" statements from your insurer saying "the blood labs billed $750, but our negotiated rate with them is $300, of which $78 was unallowable (reference mysterious codes), $113 was covered, $63 goes against your deductible, and you owe 20% of the remaining $46." If I'd have just walked in off the street without an insurance card, that basic office visit would have had a nominal cost upwards of $1,000. (Of course part of that is because the doctor has to employ at least one full-time person just to keep the insurance billing sorted.) It's a bit like airline tickets, where you can find three people sitting on the same flight in the same row who paid $212, $756, and $1640 for their tickets. But at least on an airplane, you know the cost before you buy the ticket. With medical care, you don't know the cost, you usually don't even ask up front (cause you're not paying it), and you don't even know the destination or the length of the flight. When was the last time you cost-comparison shopped a doctor, or asked about the cost-effectiveness of a recommended test or treatment? So how exactly is the "unseen hand" going to get any grip on this?

You might say that you don't need to worry about cost, because your insurance company has done the cost comparisons and cost-effectiveness studies. That's somewhat true, but that just shifts the focus to the insurance market. There you have a number of factors at work. First, there is the negotiated cost of services, which comes down to the relative leverage between insurers and service providers (doctors and hospitals). In areas where an insurance provider has a large number of subscribers and there is a choice of hospitals, the insurance companies can negotiate more competitive rates with the hospitals. In areas where there are fewer hospitals (or the hospitals are nearly all owned by one company, e.g., as in northern California), and where an insurance company has less of a local market, they are in a weak negotiating position and can't get as competitive rates. The key observation to be made here is that increasing competition among insurance companies can work to drive costs up rather than down, insofar as it weakens their leverage to negotiate with service providers. Another factor is the market for selling health insurance, which is very uneven. Rather than a large market of individual consumers, the health insurance market is a lumpy amalgam of large companies buying group plans, small and medium businesses buying group plans, and individuals buying individual / family plans. Large companies obviously have the leverage to get relatively good rates. Small and medium businesses, not so much. And individuals totally get the shaft. These submarkets also operate under very different terms. In the large company sub-market, the insurance company typically agrees to accept all employees regardless of pre-existing conditions, while the company promises to enroll all employees in the plan. The scale creates a broad enough pool such that the insurance business model makes sense: you have enough healthy people in the pool to cover those who are sick. In the individual market, it's a different story. If people could buy individual health insurance policies at any time, regardless of pre-existing conditions, nobody would buy insurance until they got sick, and only sick people would buy insurance. Obviously, that would make the individual insurance pool unsustainable, which is why the insurance companies need to screen for pre-existing conditions to make the current system work.

This uneven insurance market incentivizes some counter-productive behavior in the labor market. Some employees may stick with a job for the sole reason that they can't give up the medical coverage. They may have a child with a pre-existing condition, and if they left their current job, they would be unable to replace the coverage. This may prevent them from moving to a more effective job, or it may prevent them from venturing out and starting a new business. Employee mobility is a key efficiency for an effective economy, and especially so in our modern information and services economy. We recognize the importance of entrepeneurship, and of small and medium business in job creation and economic growth. Our system of employer-provided healthcare insurance made more sense in the 1950s and 60s when the majority of people worked for large employers and often stayed with the same employer. Today, employer-provided insurance is not only a quaint relic of that bygone era, but it is a source of structural inefficiency and distortion in our modern economy, insofar as it hampers employee mobility and entrepeneurship. We'd be much better served by scrapping employer-provided insurance altogether, and creating a robust and level individual insurance market. But massive change like that is politically infeasible, and our economy is like a battleship that needs to be steered slowly.

The recent Health Care Reform bill is a positive step in that direction. By organizing the individual insurance market into state-run insurance exchanges, this key structural change will enable the individual insurance market to effect the same bargain as large group coverage: everyone participates in order to create a rational insurance pool and no one needs to be screened for pre-existing conditions. Those who had been urging incremental change failed to understand how these things need to come as a package in order to work. In order to eliminate pre-existing conditions, you need to make sure the insurance pool is rational by mandating that everyone be in the pool. And in order to make a mandate reasonable, you need to provide premium subsidies for those least able to afford them. The elimination of pre-existing condition screening only makes sense together with the mandate, and the mandate only makes sense with the subsidies. It could not have been done incrementally. (Likewise, those with hopes for a repeal are going to realize that you can't repeal the mandate without also restoring the pre-existing conditions screening.)

Thus, I see this as a positive step toward reforming the structure of our health care insurance market. Regretably, it appears not to address the overall healthcare cost problem, except for a few small but promising gestures (such as a Medicare pilot to explore alternatives to payment-for-service). Even so, I see it as a huge accomplishment. I think the opportunity to make such a change occurs only once or twice in a generation. The last grand attempt at healthcare reform was in 1994, and if this effort had failed, it would have been another 15 or 20 years before anyone would take it up again. The political process was messy, but Washington is messy on the best of days, and one can't expect filet mignon from a sausage factory. Despite the mess, I would say the process worked the way it is supposed to, in that a wide range of views were accommodated in the final bill. Anyone who thinks the entire Democratic delegation has a monolithic view that can be meaningfully labeled "the left" simply hasn't been paying attention. I was also glad to see that the final wrangling to get the needed votes in the House was focused on the actual substance of the bill, and we didn't see the kind of obscene special deals (like the Nebraska tax exemption -- shame on you Senator Nelson) that took place in the Senate. (Thankfully, the most egregious of those were deleted in the reconciliation.) Even the Republicans, with their complete stonewalling, played a role in shaping the bill, by forcing the Democrats to come to a complete consensus across their intra-party spectrum. (Tolkien tells us that even Golem had a role to play in the Lord of the Rings. I reckon the GOP played the Golem role here.)

Frankly, I'm puzzled by the people who are proclaiming that HCR represents the end of life as we know it, or that it implements some revolutionary radical leftist ideas. Compared to the fears many on the right have expressed -- of a government-run healthcare system, or the government as single payer -- what we got is not that, not even close. It didn't even include so much as a public option. What we got was a way to enable a viable independent insurance market without adverse selection and pre-existing conditions, preserving the framework of a free-market competitive private sector to provide the insurance and to provide the healthcare. Anyone who looks at that and sees "socialism" or "government takeover" is just deluded. This was a completely market-oriented reform. Even in the context of market-oriented reform, the reform wasn't all that revolutionary. It did not abolish employer-provided healthcare and immediately establish an individual market for everyone. It did not even tax employer-based health benefits (which I'd love to see them phase in, shifting the tax deduction to individuals). The reform was heedful of people who like what they have now, and it enabled the reform in a minimally disruptive way. Many of the significant reforms don't take effect for several years, allowing people and businesses to plan for the transition. Not exactly the French Revolution here.

What is sad is the apparently intense polarization of attitudes in this country along the alleged left-right divide, when in fact there are broad areas of agreement. I think most folks would agree that healthcare costs are out of control, that the practices of pre-existing condition screening (and rescission) are ugly, and that market-oriented solutions are better than government central planning. The Health Care Reform that passed, with an absolute zero of Republican support, contained many elements that Republicans themselves have pitched in the past. It's like the Republicans and the Democrats are about six inches apart in the middle of a twenty-foot ruler, and they're arguing about the dire chasm of "right" and "left" between them. How pathetic is that? In reality, it serves only to enrich the pundits who thrive on fanning the flames.

Some folks are offended by the idea of an insurance mandate, or question its constitutionality. On the practical side, I'd like to ask those folks: would you have preferred a single-payer system, or direct government-provided healthcare (a la Britain or Canada)? We could eliminate the mandate, and do one of those instead. We only need the mandate if we want to do a market-oriented reform. But if you're really bothered by that mandate, we can go Canadian style. No? I didn't think so. On the constitutional side, while I admit the idea of a mandate does chafe a bit at my libertarian bones, I also concede that it's not really outside our Constitution as it has been interpreted for quite some time. The government has the power to compel things: paying taxes, educating children, serving in the military. Like it or not, the Supreme Court has been pretty deferential to the constitutional power to regulate commerce, as well as the power to levy taxes. I know the challenges are already being filed, but it would be surprising if the Health Care Reform bill is found to have exceeded those well-established powers.

Some folks are just generally nervous about the growth of federal government, and I share that sentiment. But I do believe that it is the proper role of the government to regulate the healthcare market, to ensure that it functions effectively. Just as it is appropriate for government to have a significant role in infrastructure (think roads and airports), as a key enabler of a vibrant economy, I think that healthcare and education are the "infrastructure" of an information economy workforce. In the 1950s it made sense to everyone that your employer should provide your healthcare. It was a reasonable investment for the employer to make sure that the employees were healthy and secure. Today, almost nobody has a single employer their entire life. We move from job to job, place to place, career to career, re-train, start new ventures -- the labor mobility that an effective 21st-century economy requires. But it still makes sense to invest in the health and security of our workforce, so that people can focus on their work and not be distracted by health insecurity. It's just that employers are no longer the logical source for that investment. Given labor mobility, the government is the logical source for that investment, as it is the only stable long-term constant. I think this is what is required for the American economy to remain competitive in the 21st century.

So, that's why I am happy about the passage of the Health Care Reform bill.