Health Care Reform-BECKER

The American system of health care has many attractive features, and the evidence indicates that Americans of all ages greatly value the large increase in life expectancy and the health quality of life that occurred during the past several decades. In addition, many persons from other countries in all parts of the world come here for advanced medical treatment, while few Americans find it worthwhile to go abroad to treatment. But this system is also the most expensive in the world as both per capita health spending and the fraction of GDP spent on health are larger than in any other nation. Fortunately, many of the problems in the health system are correctable with the right policies. I believe the three most important defects are the over 40 million Americans who are not insured, the weak incentives to economize on unnecessary medical spending by most people covered by some form of health insurance, and the tying together of health insurance with employment as a result of special tax privileges provided to employers. Arguably the best parts of President Bush's State of the Union address are his suggested reforms in the health care system. They do not fully attack all the problems, but they do offer significant improvements. I will concentrate particularly on his proposals to extend Health Savings Accounts (HSAs), and to improve the portability of health insurance when workers change jobs. HSAs were introduced in 2003 to help consumers pay for non-catastrophic health care, and to give them financial incentives to economize on unnecessary medical expenditures. The law allows contributions to these accounts of up to $2700 for individuals and $5450 for a family, as long as their contributions are not greater than the deductible on their health insurance, which is required to be at least $2100 before a person or family is eligible to open such an account. The number of persons with high deductible health insurance has increased rapidly to about three million persons since HSAs were introduced, and some estimates indicate that over one million persons have an HSA. If a company provides employees with an HSA, the company can deduct the amount they contribute each year from its reported taxable income. Employees do not have to report as taxable income either their employer contributions or their own contributions. As a result, the number of companies offering health savings accounts to their employees has been growing rapidly, especially among larger companies. The well-known companies that offer these accounts include Wal-Mart, Microsoft, General Motors, and Daimler Chrysler. Companies are attracted by health savings accounts because of their ballooning spending on the medical care of employees. During the flush times in the past, companies like GM offered health insurance coverage that often had minor or even no deductibles. They discovered much to the damage to their balance sheets that employees can find many frivolous ways to spend money on medical care when they do not bear any of the cost. And since employees have become accustomed to this "entitlement", it is hard to raise co-payments when negotiating with unions. So many companies have started offering HSAs in the few years since the present law took effect. Individuals who take out health savings accounts on their own are at a disadvantage compared to employees since individuals have to contribute after-tax dollars to their accounts. Other tax advantages are common to both individual health savings accounts and those provided by employers. The amount contributed in any year does not have to be spent during that year on medical care, but can be carried over to future years. This distinguishes HSAs from flexible-spending accounts, where contributions in any year have to be spent in the same year. The balance in a health saving account can be carried over to later years without paying any taxes on it, or on the interest earned on these balances. After age 65, dollars in these accounts can be also spent on non-medical items without penalty, but this spending is treated as income and is subject to income taxes. The President proposed several highly desirable reforms in the system of health savings accounts. Perhaps most important, individuals setting up an HSA on their own would also be allowed to deduct their annual contributions before reporting their income for tax purposes. Since this eliminates one major advantage of employer-based HSAs over accounts set up by individuals, it is an important step in the right direction of leveling the playing field between individual and employer-based health insurance. This change, if adopted by Congress, would reduce the number of persons without any type of health insurance. For many of them have jobs at companies that do not offer health plans, and they feel the premiums on insurance that they can take out on their own are too high. The proposed exclusion of contributions to an HSA from taxable income would encourage some of these uncovered individuals to buy insurance and set up an HSA. This would reduce a glaring hole in the American approach to health care. President Bush also proposed raising the ceiling on how much might be contributed each year to a health saving account by tying the limit to the annual deductible in an health insurance policy. This gives families and individuals even greater incentives to economize on their less essential medical expenditures. After all, the purpose of insurance, health or otherwise, is to protect against very large outlays, not against outlays that are more or less expected year in and year out. Of great importance, Bush also proposed allowing companies to offer employees portable health savings insurance that they could take with them if they change jobs or retire. A major defect in the employer-based health insurance that the United States has relied on since World War II is that employees may lose their company-based private health coverage when they become unemployed, when they retire, or when they change jobs to one of many companies without health insurance plans. Studies show that this lack of "portability”"of health insurance coverage reduces job turnover, and makes the American labor market less flexible and efficient than it could be. Indeed, under the present system, virtually the only way people can be reasonably assured of continued health insurance coverage is by remaining throughout their working career with stable employers that offer health insurance. This “"ock-in" effect is undesirable in a dynamic economy where good jobs open up in growing industries, and opportunities in declining industries dry up. In contrast to employees who continue coverage by remaining with the same employer, individuals with their own health insurance plans sometimes lose coverage after contracting a serious illness, or by making too many claims. For various reasons, it is not possible for individuals to buy long-term health insurance, although what they want is protection against future major medical expenditures since it is uncertain how healthy they will be when they get older. Bush's proposal to allow employers to offer portable HSAs is an important step toward providing such longer-term coverage for the many men and women who do not continue to work for the same employer, or who want to maintain their health insurance plans after retirement. If the ceiling on how much can be placed in these plans is raised to high enough levels, HSAs could cover all but the medical claims induced by major illnesses. Under present rules, individuals can have a health saving account only if that is combined with a catastrophic health insurance policy. The President also proposed offering up to $3000 in annual tax credits to help low -income families buy health insurance if they also set up a health savings account. Since tax savings are much less important for lower income families, tax credits seems to be the appropriate way to give poorer families greater incentives to economize on their medical spending. It could also reduce the number on Medicaid since lower income families might prefer to get the tax credit and buy their own health insurance combined with a health savings account. President Bush has proposed changes in the health care system that initially will reduce tax collections and increase federal spending at a time when the US government is already spending too much and running a sizeable budget deficit. However, by making the health delivery system more efficient, this important set of proposals in the State of the Union address might end up raising tax collections, and certainly would improve the efficiency of the American economy. \

Comments

[Elle Wakefield]

I wonder if there is a longer term problem in incentivizing families and individuals to "economize on their less essential medical expenditures." It seems that people are likely to skip routine but non-essential tests that provide earlier detection of health problems and lead to cost savings in the long run.

I agree that the cost of heath care needs to be reduced, but I'm not sure incentivizing families and individuals to get less health care is the solution. Rather, innovation needs to occur in the medical industry that dramatically alters cost structures. This is beginning to occur in third world countries which serve the world's poor--some of their medical institutions are remarkably efficient by not focusing on general hospitals as we do in the US. For example, the Aravind Eye Care System in India altered the processes involved in eye care--including the means by which patients needing health care are identified--and have a productivity level considerably higher than anything in the US at a much lower cost ($50-$100, compared to $2,600-$3,000 in the US).

The question is how to get the medical industry in the US competitive enough so that costs come down. Certainly offering more consumer choice in health care is one way, and something the HSAs accomplish. However, in South Africa where they've had a similar health plan to the HSAs for over a decade, they found that instead of causing competition between hospitals to provide the best/cheapest care for consumers, the increased competition consisted mostly of insurers vying to get the healthiest patients. Costs rose--the insurers had little inventive to control the prices that the medical providers charged, since the patients were paying. Individual patients did not have the same collective bargaining power that the insurers did, and had less of an eye towards controlling their long term costs of care.

Elle

P.S. Thank you for this blog, which is the most intelligent civic discourse I've seen in a long time.

[CJC]

You may be interested to know that according to Microsoft Word's grammar checker, Posner's post has a reading grade level of 13.6 while Becker is 17.3. Bravo, Gary!

[KipEsquire]

Why not simply abolish HSAs and all their inane rules and instead reform flexible spending accounts, particularly the so-called "use it or lose it rule" that requires risk-averse participants to under-utilize the program?

IRAs have nothing like the strings attached to HSAs. Shouldn't that be the prototype for health accounts?

[Trapier K. Michael]

Re: "The American system of health care has many attractive features...many persons from other countries in all parts of the world come here for advanced medical treatment, while few Americans find it worthwhile to go abroad to treatment."

This is changing with the advent of "Medical Tourism." [1] According to Health Affairs, the prices for comparable procedures can be as much as 800% greater in America than they are in India. [2]. This has caused cost-conscious healthcare shoppers (often without insurance) to travel great distances overseas to get care. [3]

It's just too hard to be a healthcare consumer in the American healthcare marketplace, perhaps because such a market struggles to survive third party command and control practices and policies.

Trapier K. Michael
www.Marketplace.MD
Pres. & Founder

[1] CBS News, "Medical Tourism: Need Surgery, Will Travel," 18 June 2004, http://www.cbc.ca/news/background/healthcare/medicaltourism.html (15 April 2005).

[2] SH Altman, D Shactman, E Eilat, "Could U.S. Hospitals Go The Way Of U.S. Airlines?", Health Affairs, Vol.25, No.1, 11-20.

[3] MF Cannon, MD Tanner, "Healthy Competition: What's Holding Back Health Care and How to Free It," Cato Institute, Washington, DC, 2005.

[ajtall]

Mr. Becker,

Great blog by the way - the best, in my opinion.

I think there are 3 additional reasons why health care is so expensive: 1. Many patients, such as the elderly and poor, receive health care through Medicare and Medicaid. However, these programs reimburse hospitals (or doctors) at a flat (low) rate. To make up the difference, hospitals have to charge their cash-paying patients higher prices. 2. Mandated benefits. States requires insurers to cover all types of treatments, such as acupunture and marriage counseling. This, obviously, drives up the price of health insurance. 3. States do not allow consumers to buy health insurance across state lines. In other words, an insurer in one state cannot sell to individuals in other states.

I'd like to hear your thoughts on these costly measures.

AJ

[Bill]

Bush's proposal does not go far enough, and creates some problems as well.
1. You're on your own, baby, without any barganing power for drug or medical services purchases. One of my hedge fund clients was all in favor of HSA's until he had to purchase some medicine for his wife who had a blood clot. Since he was an individual, he paid list price for the drug. Had he been a member of an HMO with a restricted formularly, he would have paid 40% less.

2. States regulate the "business of insurance", and it is impossible to develop multi-state plans that would enable professionals (such as lawyers, etc.) to collectively purchase health insurance benefits. Unless and until we create a parallel federal system to regulate insurance, supplanting state regulation ala McCarran-Furguson, buyers will not be able to be able to negotiate better insurance pricing by pooling across many states.

3. All in all, though, HSA proposal, particularly with credits for the working poor, should work, but its potential will not be achieve unless other reforms are made. If not, the beneficiaries may well be doctors and drug companies who deal with customers one by one.

[Bill Churchill]

One of the key things that make markets work towards Pareto improvement (economic process optimization for all parties involved) is the free flow of relatively complete and relevant information. Without this flow, rents can be imposed and usually are. The lack of this flow is the primary cause of the excessive economic rents charged by the healthcare industry. Though, ceteris paribus, HSAs can go along way towards remedying the situation with respect to the ÔøΩrational choiceÔøΩ component of the demand side, it does not address the key issue of market information flow, which is the greatest stumbling block to market ÔøΩefficiency.ÔøΩ

Imposing ÔøΩbetter pricingÔøΩ on the suppliers or relying on supplier ÔøΩpeer reviewÔøΩ will not cure matters either. This is already largely in place and the industry is already regulated to the hilt--both internally and by government fiat. So, what are we to do?

We need to apply balanced tension to both the supply and demand side of the equation with the end in mind of creating an ongoing greater Pareto improvement in the system as a whole. On the demand side, the HSAs are already a good idea. So are the existing public health education initiatives already available.

On the supply side I believe we need to have a better means of public information exchange in place in the form of competing Dunn and Bradstreet type clearing houses of information about healthcare providers that cover such areas as: prices charged, methods of care, billing and resource allocation practices, disciplinary actions imposed, etc. (If such healthcare information clearinghouses existÔøΩI donÔøΩt know about them, and I would venture to say, neither do most other healthcare ÔøΩend-users.ÔøΩ) No single clearinghouse should be given a monopoly in this task. Neither should the majority of them be lead primarily by ÔøΩmedical review boardsÔøΩ--A prerequisite to relevant and complete information is its independence of source. The only further impositions I would make on the healthcare provider community are that they should be a primary source of the financing and development of such clearinghouses, and that sanctions be imposed on anyone interfering with the independence or effectiveness of the information clearing process.

Posted by Bill Churchill, 02-06-06

[Arun Khanna]

HSA proposal with credits for poor will decrease uninsured Americans. However, the underlying agency problem on the cost side of medical care has not been addressed. There are three levels of agency problems on the cost side. First, the person deciding purchase (i.e. doctors deciding treatment) does not have incentives to decrease costs for patients with adequate health insurance. Second, patients do not have incentives to shop around for lower costs unlike in other product and service markets. Third, insurance companies (and most hospitals) themselves suffer from agency problems due to divorce between shareholders and management interests.

[David Bacon]

Re us vs them, quality of care. We pay more, but I'm not at all sure we get more. Basic measurements such as infant mortality and longevity suggest we don't, altho that sort of data is pretty raw. And, more and more of us do go overseas for certain types of expensive and more or less elective care, like hip replacements. One can combine a trip to, say, Bangkok, with surgery done by US trained physicians, often with years of experience here, get nicer rooms and more sympathetic care, for significantly less money.

David Bacon, MD
Denver

[Matt Wimble]

I am wondering if the greater problem is that there seems to be an error in the assumptions regarding how health care should be financed? Why should health care have to be financed through either 1) insurance or 2) savings? Why doesn?t an active credit market specifically tailored to health care spending exist? Governments facilitate credit markets for goods that society deem worthwhile, such as home ownership and education. Why not healthcare loans? While some costs of healthcare, such as catastrophic care and cost associated with growing old, would seem to need an insurance component...others would seem to be able to be financed through some sort of government sponsored loan scheme similar to student loans. Insurance seem to be a very bad way to pay for anything. Loans would seem to have a very large advantage in that it would expose the buyer (patient) to the true cost of care and would presumable decrease what would seem to be a very large moral hazard cost. Government loan schemes tend to be very low cost to the public relative to the amount of financing they facilitate (think student loans)...so why not healthcare loans? The assumption that healthcare must be funded using either insurance or savings is rather dumb, especially in the United States where everyone borrows, in my opinion. This problem seems to be a failure of credit markets more than anything else.

--Matt Wimble
East Lansing, Mi

[Mike Petrik]

I have had an HSA (previously MSA) for quite a few years. I think it works very well. The concern expressed above that such plans would not allow those covered to benefit from insurance company discounts for prescription drugs etc does not comport with my personal experience. My high deductible plan (through BC/BS) has always given me the benefit of such discounts. I see no reason to assume that many companies wouldn't negotiate to offer such plans for employees. Of course, some companies will offer less rich plans, but that is the case in the status quo environment as well -- I don't see why HSA's present greater risk in this respect.

[Joe Merchant]

One of the bigger weaknesses of a highly capable health care system, such as the United States', is that the potential for abusive pricing is high, not just rents but outright highway robbery.

If an individual, with no collective bargaining power, presents at a health care facility in need of services, they need those services, immediately, and any price shopping will likely be counterproductive due to worsening of their condition. Furthermore, it is easy to identify specialists - those in their field most able to help a specific need, but it is nearly impossible to negotiate. My experience with private pay situations is a "compassionate response" of a 10% discount, when those covered by major insurance carriers command a 70% or higher discount.

This highly non-level playing field leads to gross inefficiencies and general chaos. I have witnessed hospitals which made such glorious profits that they neglected collections for years - then when hard times hit they realized that they were only collecting 30% of what they were billing - in effect, each paying patient was carrying the load for two deadbeats. Correcting this situation has been an ongoing and unpleasant process for the last 5 years.

If HSAs, or FSAs without the use-it-or-lose-it provision, or any similar concept can be widely adopted, and doctors and patients put on a 1-1 provider to payer relationship universally for "minor" procedures, say less than $5000, perhaps the accepted pricing of these procedures can get back to a more reasonable level, where everybody pays 40-60% of the current "list rate", instead of some paying 100% and others paying 20%.

Then we can get around to a workable tort reform where physicians don't have to charge patients to pay for exhorbitant malpractice insurance.....

[human growth hormone]

Gary I think you missed one major flaw in the current system of healthcare. This is the "glitch" that exists between patentable and nonpatentable substances used for medicine.

Substances that can and are patented are researched and put through the phase I, II, III, drug approval process. Substances that can not be patented are never tested in this matter.

For all we know an inexpensive vitamin regimen could more effective than many of the prescription drugs. It would only stand to reason that this would be the case. There are literally billions of natural compounds that are unable to be patented and only a few thousand made made substances that are patented. It only stands to reason there are more natural compounds that could be effective in treating disease than there are "unnatural" compounds.

We need a system that forces drugs like Lipitor to compete with a good quality natural fish oil extract.

[Laurina]

I am a 54 year old single mother trying to live on social security but my medical expenses cost more than I receive from social security. I spent all of my savings, retirement funds and mortgaged my home. Can you please refer me to someone who will purchase a kidney or other appropriate organ. I am very serious about this so please take my question seriously. There are no other options for me at this time. I can't work for medical reasons now.I used to be a professional with an MSW from the University of Chicago contributing extensively to society through social work and activism but circumstances of illness prohibits me from continuing to contribute. At least an organ can help us survive and help the person who needs the organ to survive as well. Please let me know as soon as you can.
Thank you very much.
Laurina

[Elle]

I talked to someone who actually has a HSA. He said that being part of a PPO is included in the HSA, so the concern that I and some others brought up isn't valid--people with HSAs aren't paying retail prices.

[Mike Petrik]

Didn't believe me, hey Elle? ;-)

[Arun Khanna]

In regards to Matt Wimble's post: American Express has a new credit card called American Express Healthpay Plus which combines a HSA, a healthcare payment card and a credit line.

[Chris]

I am always amazed that people are willing to spend more to fix or maintain their car than they are willing to pay to fix or maintain their own bodies. It seems like most people will drop $1000 on repairing a car, but would expect comparable medical charges to be paid by insurance. Of course, you can scrap a car, but you can't scrap your body, which is why at least catastrophic coverage is needed.

I wonder why companies have chosen to compensate employees with fringe benefits rather than just a monetary salary. Why would a major corporation choose to divide compensation into a wage plus healthcare instead of just paying a higher wage and letting employees purchase whatever health care they want? This has to contribute to over-consumption of healthcare.

Finally, I was a bit disappointed that nothing was said about prescription drugs. Rationing prescription drugs by insurance makes absolutely no sense. It leads to massive overconsumption of drugs (see the high percentage of Americans using prescriptions) and high drug prices. What incentives do drug companies have to compete on price if the patients never see a bill, or only pay a small co-payment?

Another effect of this rationing method is preventing prescriptions from becoming over-the-counter, since people will complain that the "price" of the prescription will increase since insurance will no longer cover it, even if the over-the-counter price is lower than the prescription price. This limits access to drugs and further drives up medical costs since the insurance company has to pay for a doctor's visit plus prescription for the drug, rather than the patient just going to the local drugstore to buy it.

At any rate, the market for health care seems so screwed up because the market has never been allowed to function freely.

[anon]

Why quibble about fine-tuning the allocation of financial responsibility for the bloated cost of our obese healthcare system? Let's recognize comparative advantage where we find it, eliminate our protectionist trade barriers and hand over our healthcare system to a leader who has indisputably delivered world-class healthcare to his constituents at a rock bottom cost. And we needn't travel far to find our healthcare czar because Fidel Castro is a mere ninety miles away.

Castro and his communists are clearly the most efficient healthcare providers in the western hemisphere, if not the world. According to the CIA Factbook, the per capita GDP of Cuba is about $3.3K and that of the U.S. is about $41.8K. And yet, despite this disparity in income and the consequent disparity in resources that can be allocated to healthcare, the life expectancy of Cuban born today (77.23 years) is virtually identical to that of American born today (77.71 years). And the life expectancy of a Cuban male is actually a bit longer than that of an American male.

America spends about 15% of its GDP on healthcare and that amounts to about $6,000 per person. Even assuming that Cuba spends a whopping 20% of its GDP on healthcare, that's only about $600 per person. In other words, Cuba is approximately ten times more efficient than the U.S. at delivering equal longevity to its citizens.

Any system that can deliver a comparable good or service at a cost that is an order of magnitude lower than a competitor is doing something right. Lets swallow our pride and give Fidel a call.

----------

CIA Factbook URLs for GDP and life expectancy data:

http://www.cia.gov/cia/publications/factbook/print/cu.html
http://www.cia.gov/cia/publications/factbook/print/us.html

[Arun Khanna]

Anon said: "Castro and his communists are clearly the most efficient healthcare providers in the western hemisphere, if not the world."

Hi. Is the Internet link working fine or is it slow today in Havana?

[David Well]

Great blog. The internet is truly a miracle, allowing us to converse with such brilliant minds. A few comments:

1) re: out of pocket expenses being high. It stands to resaon that this will not be an issue. Insurers will do their best to prevent people from hitting their deductible; hence, they have an incentive to keep prices low.

2) re: support for testing vitamins. I have though similarly for a long time. The government should really do much more to explore potential therapeutics which companies will not touch because they are not patentable. This applies to many therapeutics besides vitamins. Treating stoke victims with hypothermia would have been explored decades ago if someone could make money off it.

3) re: "Bush's proposal to allow employers to offer portable HSAs is an important step toward providing such longer-term coverage for the many men and women who do not continue to work for the same employer, or who want to maintain their health insurance plans after retirement." I didn't watch the SOU address, so this may be way off, but why would an employer want to encourage an employee to find another employer??

[David Well]

This post is simply to determine if my previous post didn't work, or if posts in general are not posted immediately.

[Adam H]

HSA's sound like a good idea for the people who expect to be able to economize on their healthcare expenditures, the healthy. But doesn't this leave an adverse selection problem for traditional insurance markets now? The people who expect to be unhealthy will be the ones left purchasing traditional insurance because they expect their expenses to be greater than the deductible. But now premiums that the unhealthy pay have to rise to keep the insurance companies solvent.

[Richard Mason]

An anecdote about how the Internet will empower the medical consumer...

I recently needed someone to look at my badly sprained ankle. I first tried using the "Physician Finder" on the Blue Cross website. This is fairly useless for selecting physicians by any criteria other than location, and my lack of information led me to a suboptimal choice.

I next tried Google. I believe I ended up with a much better result through Google.

I agree with Bill Churchill that it would be nice to see more sophisticated information clearing houses. (Startup anyone?)

[c&d]

I agree with Adam H that adverse selection is an issue left unddressed by Becker.

I think that many people (perhaps Becker included) would like to see HSA and adverse selection undermine the current healthcare system (but don't want to admit it) so that it can be replaced with something more to their liking.

Other commentators have argued for less government regulation of what insurance companies must provide. This would provide opportunities for insurance companies to price discriminate between the healthy and the sick; good for the presently healthy, but bad for the sick, and bad for everyone in the long run.