The Health Care Bill: Progress or Retrogression? Becker

Studies show that men and women place a high value on even small decreases in their probability of dying at different ages. Presumably, the same is true of increases in the quality of their lives. This is why, given the rise in incomes over time, and the revolution in the development of blockbuster drugs and the advances in medical technology, the share of national income spent on health care would have risen over time in the US, even if it has had the best health care delivery system. Indeed, the share of income that is spent on health has risen quite sharply over time in every economically developed country, regardless of the nature of their health system.

Clearly, however, the American health system does have many defects, which contributed mightily to the growth of the share of medical spending to 17% of American GDP. Yet when I was recently asked whether I prefer the present healthcare bill to no change in the health delivery system for a decade, I answered “no change”. Even though the American healthcare  system can use many reforms, regrettably the bill that passed the House and Senate is a messy compromise to attract reluctant Democrats that is short on needed reforms. Instead, the bill is filled with many complicated, and generally bad, new regulations, higher subsidies, and greater taxes.

The most important needed reform is an increase the fraction of total medical costs that come from out-of pocket expenses in the form of large deductibles and significant co-payments. Out-of-pocket spending accounts for only about 12% of total American spending on healthcare, whereas the share of out-of –pocket spending is over 30% in Switzerland, a country considered to have one of the better health delivery systems. Partly because of this major difference, health care takes 11% of Swiss GDP compared to the much higher American percentage. As far as I can discover, nothing in the new bill really tries to raise the out-of-pocket share, and some changes would reduce it even further. These include tax credits for individuals and families that earn up to 400% of the federal poverty level (up to about $90,000 for a family of four) that enable them to get coverage through newly created Insurance Exchanges.

Another desirable reform is to reduce the reliance of the American health system on tax-deductible employer-based insurance since tax deductibility has encouraged low deductibles and low co-payments. It has also locked workers with health problems into their current jobs since they may not qualify for insurance at other companies because of these pre-existing health conditions. The bill does propose to phase out tax deductibility for the more expensive plans by 2018, but who knows if that will ever be implemented.

For the most part, however, the bill increases our dependence on employer-based health care by imposing sizable penalties on companies that do not provide their employees with sufficient health insurance. Many companies are already beginning to add to their projected future costs the anticipated increase in the cost to them of insuring their employees. These changes will particularly affect the costs of smaller companies since they are the main ones that do not provide health insurance for their employees. Since smaller companies are responsible for a disproportionate share of additions to employment during recent years, this provision of the bill will tend to reduce the demand for workers and hourly wages.

The US health care market is over-regulated rather than under-regulated. One example is that families in one state are generally not allowed to buy their health insurance from companies located in other states. Another example is the mandates that states impose on insurance companies, such as coverage of the costs of normal birth deliveries. Such coverage has little to do with insurance against unexpected health costs, whereas coverage of extraordinary delivery costs is a desirable protection against unexpected health care risks. The bill generally pushes in the direct of greater regulation, such as the limitations imposed on how much health insurance companies can spend on administrative costs relative to their other costs, the mandated reviews of the premiums charged by health insurance companies, and the mandated provision of health insurance by small companies.

Health savings accounts (HSAs) have been one of the most important innovations in the health care field during the past decade. These accounts require large deductibles, such as $2500, that individuals and families most cover out of their own pockets. Unused portions of the amounts in these accounts can be carried over tax free from any year to future years, and can eventually be phased into their old age pension accounts. HSAs with large deductibles encourage individuals to economize on their normal health care expenses, such as visiting doctors for colds or flu shots that they could get much more cheaply at CVS, Walgreens, and other retail medical clinics. There is little mention of HSAs in the new bill, and certainly no encouragement to their expansion.

The American health care delivery system needs greater transparency and easier access to medical information by consumers. The bill takes a valuable step in this direction by encouraging the development of online medical records and medical histories for all individuals, no matter how many doctors they have seen, or how often they have moved. A few other parts of the bill would also increase information and transparency, but for the most part the bill obscures rather than enlightens consumers about the health area. Many of the most important taxes come early while the additional spending kicks in much later, so that it will appear for a few years as if the new system will cut medical costs. Consumers will get a false impression that they are getting a more efficient medical care system when in fact the new system will turn out to be both expensive and invasive of individual choices.

Proponents of the bill claim it will save hundreds of billions of dollars during the next ten years from cuts in Medicaid and Medicare, but it is far from obvious how such cuts will materialize. Moreover, some changes will clearly increase the costs of these programs, such as the expansion of Medicaid coverage to individuals well above the poverty line, and by additions to drug coverage of seniors under Medicare. I do not see how the bill will lead to Medicare savings since there is no increase in out of pocket payments by Medicare enrollees, and Congress is likely to continue to override any scheduled cuts in payments to Medicare doctors and others. The most likely attempt to cut future Medicare costs will be through greater rationing of health care to the elderly, but lobbying groups for the elderly will fiercely resist these efforts.

Adequate and appropriate coverage for persons with pre-existing health conditions is a challenge for any healthcare system, especially those with private insurance. Although the bill addresses this issue, it makes coverage of pre-existing conditions more difficult in one dimension by expanding rather than contracting employer-based health insurance. The bill prevents insurance companies from dropping individuals if they develop serious sicknesses, and also prevents these companies from imposing limits on how much they will pay to cover an individual’s health costs during any year. In addition, uninsured individuals with pre-existing conditions will be able to obtain health insurance through the new health insurance exchanges run by non-profit companies.

The only truly efficient way to handle the pre-existing condition issue is to try to develop an insurance system in which young adults, who generally have few serious existing medical conditions, can take out long-term healthcare insurance. Long-term health insurance programs have been proposed in the academic literature, but they have been implemented only to a very small extent. Perhaps the bill’s approach to pre-existing conditions is the best that can be expected at this point if nothing is done to wean the system from employer-based tax-deductible health insurance (which at least does provide long term health insurance for employees who stay with the same company for many years).

Although the impact on the costs to taxpayers of the more than 40 million uninsured persons in the US is usually greatly exaggerated, I do support a requirement that everyone has health insurance that covers medical catastrophes. Coverage limited to catastrophes would not be expensive for the uninsured since they are mainly young and are generally in quite good health. They could readily pay the premiums for catastrophic insurance from their incomes. The health care bill does make health insurance compulsory, but it does this in an unsatisfactory way by requiring rather extensive benefits, and by subsidizing coverage for individuals and families with incomes far above the poverty line.

So for all the reason I have given, and many more, no change in the present American healthcare delivery system would be much better than the new bill. The American system has many great strengths and some serious weaknesses. The bill will generally weaken the strengths and strengthen the weaknesses.  

 

 

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