Cbo's Latest Warning--and Whether We Should Listen

You forgot another alternative, and that involves taxes the bottom 60% in the US so that their tax rates are in-line with their counterparts in the UK, Canada, Sweden, etc. Today they are a fraction of their counterparts' taxes in other countries.

That accomplishes a few important things: First, it ensures the bottom 50% have skin in the game. Today, they do not. Second, it generates 500B annually in cold hard cash that we don't have today. That is more than enough to pay to get all 50M uninsured into the healthcare system.

- SeattleEngineer

July 27, 2009 at 2:27am

Or you could start over and adopt reform that would be effective and free of the problems which are legitimately causing the opposition to the current plan. Specifically,

1. Require everyone to have a basic plan the benefits of which are defined by the government but which include a high annual deductible and a required annual examination. Impose a surtax (equal to double the insurance premium on anyone who cheats and doesn't get insurance.)

2. Require all insurance companies to offer the basic plan to anyone who wants it no questions asked with the premium determined only by age, gender, area of residence, smoking (and maybe obesity). Impose draconian penalties on any insurance company who tries to cheat by cherry picking.

3. Allow insurance companies to sell additional insurance beyond the basic plan but only to customers who have already bought the basic plan.

4. Replace Medicaid by having the government pay the premium for the basic plan for those below a defined income level. Provide an additional subsidy which pays for lowered deductibles with lower incomes.

5. Don't touch Medicare because you will get politically crucified if you try to do so.

- dtohmatsu

July 27, 2009 at 4:15am

The health care system needs to be scrapped and rebuilt from the ground up. Instead of attempting to retool a broken piece of crap, we need to start with a definitive goal, "health care for all" and build a system to achieve that goal.

As of now, the moneyed interests and their toadies in congress will prevent any "real" reform. Insurance is a scam. Period. Until we all accept the unequivocal reality that health insurance IS NOT meant to be a solution, nothing will ever truly change. Health insurance is a snake oil. Nothing more. It was a scam devised by clever salesman and promoted by our elected officials as a magical cure-all for controlling health care costs. Health insurance was a lie and will always be a lie.

"Socialist" countries impose tax rates that are higher than ours, but no one seems to be able to do the math. We currently pay 35% percent of our income (%40 if self-employed) in income taxes and get exactly NOTHING in return for our donation. Bupkiss.

On the other hand, England, Switzerland, Norway, Sweden, Denmark, France, and hundreds of other countries who have "Socialist" governments impose taxes that are 10% to 15% higher BUT offer FREE education and FREE health care to ALL citizens.

On average their populations are more healthy, better educated and generally more content than Americans. Sounds damned good to me ... I am more than willing to pay more in taxes if my nieces and nephews are guaranteed an education and I don't have to worry about being bankrupted for a health issue.

How do they do this? Simple, they figured out a long time ago that a happy, educated population is critical to the success of their entire society. Therefore, they took an approach that put their people first and not moneyed interests.

- pburton16

July 27, 2009 at 8:31am

Don't know what the capacity limit is on a post here, but I am going to try pasting in a letter on health care reform that I wrote to Robert Rubin, then economic adviser to President Clinton, a full 15 years ago. I got back a polite reply (he claimed to recall our brief encounter but who knows). Needless to say, no paid the slightest attention then, and no one will now either. But it is amusing to see how little has changed.

- roidubouloi

July 27, 2009 at 8:55am

July 26, 1994

Mr. Robert E. Rubin

Assistant to the President on Economic Policy

The White House

Washington, D.C. 20500

Dear Mr. Rubin:

I write to you with that precious commodity, free advice. Although my letter concerns the President's pending program for reform of the health care system, I am addressing it to you, rather than to the health care task force, in the hope that a very fragile connection between us may gain your attention and because I am certain that you have more than a little to say about the ultimate shape of health care reform.

Twelve years ago, while a young associate at Sullivan & Cromwell, I sought a job with you in the arbitrage department of Goldman Sachs & Co. I recall describing to you my ambition for a ten-year career in the financial world to be followed, I hoped, by a career of public service. I was completely unaware at the time that you were already heavily involved in Democratic party politics and no doubt amused. I did not end up as an arbitrageur. Rather, I joined the leveraged buyout group of [ ], from which I retired two years ago. In the course of my ten years there, I acquired companies in a diverse range of businesses, serving at various times as financial analyst, director, chief financial officer, and chief executive officer. I was compelled to manage two companies through successful financial and operational re-structurings and developed a bit of expertise in cost accounting. I also have a physics background and sit on the board of a private institute devoted to studying the social impact of science.

I find myself deeply disturbed by what I read in the press about the direction that health care reform seems to be taking. The political climate is such that there appears to be an historic opportunity to solve a profound problem of our national economic and social life. But the solutions proposed under the rubrics of "managed competition," "health care alliances," and "employer mandate" will, I believe, not only fail, but will create problems far worse and far more widespread than those from which we currently suffer. The problems that I foresee result, in my opinion, directly from the failure to frame the problem correctly.

At least rhetorically, there appears to be no recognition that the "health care crisis" consists of a number of very different problems. While the solutions to these problems certainly bear on one another, successful solutions to these diverse problems are likely to come from very different sources, and are even potentially inconsistent. There is no global problem with the health care system, and there is no global solution. Among the distinct problems that I can identify are: (1) wide disparities in the quality of care available in different communities and to people of different means, (2) inadequate and very uneven quality assurance for medical care, (3) over- and under-consumption of health care resources, (4) persistent real increases in the cost of health care, (5) the fact that some Americans are too poor to purchase commercial health insurance, (6) the fact that some Americans are uninsurable through commercial channels due to the current state of their health, (7) the withdrawal of insurance coverage or benefits from people who develop expensive illnesses, (8) lack of transportability of health insurance, (9) the fact that some Americans are not served at all by the commercial health insurance market, (10) discrepancies between Medicare and Medicaid compensation levels and commercial rates, (11) the extent of fraud in the payment system, (12) the percentage of health care expenses consumed by administration, and (13) the interaction of health costs, which are often borne by employers, and the competitive posture of both business and of job seekers.

Before continuing with my free advice, I wish to state my opinion that it is principally the health insurance system, and not the delivery of health care, that is broken (except insofar as the insurance system has had some very negative consequences for the delivery of care). In short, in my opinion, most of the identified problems are actually problems of, or caused by, the structure of health care finance, which ought to have a financial solution. A sweeping reorganization of health care delivery to address those financing problems is far too ambitious and completely unnecessary, creating the strong likelihood that the "solution" will (A) not solve the "problem" and (B) will create hitherto unforeseen and potentially much greater problems with the delivery of care. The part that ain't broke don't need fixin'.

Those problems that relate to the technical quality of care require scientific and medical-organizational-educational solution, and they are absolutely certain to be gravely aggravated by the governmentally imposed creation of monolithic health care delivery systems in a misguided effort to address the financing problem. A proper system of financial/profit incentives could, however, go a long way to stimulating the market to solve the technical problems.

The problem of the unaffordability of health insurance for a portion of the population has nothing whatever to do with the health care system. For those unable to afford health insurance in a competitive marketplace, we have only a few options: raise their income until they can afford health insurance, provide for their care (the system "self-insuring" for them), subsidize their insurance, or leave them with inadequate care. None of this has the remotest thing to do with the "health care system" any more than the fact that they cannot afford expensive new cars has to do with the "car production system." I believe it is our historical practice of making this problem of poverty into a "health care system" problem that has caused a great deal of the trouble we are now in.

The financing problems (as distinct from the problem of financing health care for the poor) result, I believe, from the failure to recognize that the health care system functions in the economy as if services were subsidized and as though providers having oligopoly pricing power, because demand for consumption, which is virtually costless for the insured individual, is so highly inelastic. As a practical matter health care is subsidized in the market sense because, through the medium of insurance, the consumer never faces the real costs of furnishing his or her care. Moreover, unless we are going to eliminate the insurance concept from the financing of health care (which would make the cost of serious illness unaffordable for most people much of the time), this aspect of the system can never be eliminated. Insurers, who form the real demand side of the market, cannot easily control either the cost, or the level of consumption, of medical services without profound ethical problems and enormous resistance from both insureds and providers. Given the inelasticity of the demand for insurance, it is easier for the insurers, ultimately, simply to intermediate between the providers and the consumers, at great social cost.

All of the proposed "managed care" solutions that I have read about do nothing whatsoever to alter these economics. They simply put the insurers in the business of not only financing care but providing it. If large organizations could provide competitive, quality "managed" medical care on an integrated basis, undercutting the cost of health insurance, there is absolutely no reason to believe that the market would not long since have generated such a solution. If they are to be organized as "cooperatives" there is not a shred of historical evidence that they will succeed. I have competed against cooperatives in some of my businesses, and they are lousy competitors who grow only more and more inefficient with time and would generally fail in competition with commercial providers if they were not "politically" protected. You of all people should realize that even so-called "not-for-profit" organizations still need capital and that someone must still pay the economic cost of that capital. The real difference between the cooperative and a commercial organization is that the cooperative is not held to account by the provider of its capital. The current Empire Blue Shield/Blue Cross scandal in New York is a perfect example of the problems which eventually overwhelm "cooperatives" that are not responsible for returning a profit to an owner. Surely, the general trend in the insurance industry away from mutual companies in the direction of stock companies ought to say something relevant to this debate. What is certain is that monolithic providers will be increasingly unresponsive to both medical care workers and medical care consumers.

Much has been made of the relative success of large employers in controlling medical costs for their employees. This is held out as an analogy for managed competition. Of course, their success is only relative to the widespread failure of insurers to control health care costs. And the only reason they are remotely successful is that, unlike the health insurers, they cannot pass on their costs, demand for their products being generally much more elastic than health insurance.

Totally lost in all of the discussion about the "out-of-control" cost of medical care is any analysis by anyone of just what it is that has caused the increases. We read that the increase in the cost of medical care has been outstripping inflation. But why? Have the incomes of medical professionals increased in real terms (The New York Times recently reported that, over the last ten years, the real incomes of doctors increased by 40% while the real incomes of almost everyone else in the economy were nearly unchanged.) Has there been an increase in the real services provided? If so, are the increases justified by improved medical outcomes? Are the increases necessary for the medical outcomes? Are more people participating in the system on a subsidized basis inflating the apparent cost for those providing the subsidies? Is there in fact an over-capacity of medical care which, through the media of insurance and governmental regulation, has passed on its excess costs to the consumer?

I believe the answer to all of these questions is that there does not exist a functional market for health care, as a direct consequence of the existence of health insurance. And so long as there is health insurance, there cannot be a normally functioning market for health care. That leaves us with only three options: (1) abandon health insurance, (2) abandon private medical care, or (3) create a pseudo-market in those parts of the system that do not and cannot naturally behave as a functioning market. Understandably, all of the health care reform proposals addressed in some manner only the last alternative. But they fail to take note of just which aspects of the system fail to function as a market, and fail to limit intervention to the creation of a functioning market in those areas. Thus, the scope of all of the plans is simultaneously way too ambitious and inadequate to solve our problems.

With that introduction, I suggest that a comprehensive solution to the "health care crisis" can be achieved as follows:

1. Establish on a national basis a cost accounting system for health care based entirely on conventional techniques. This requires estimating the consumption of various services, the capacity (including standby capacity) required to provide those services, the capital costs of creating the capacity (including medical education), the cost of inputs where the industry is a price taker, and the standard income for practitioners with an average volume. Inputs can be priced on an indexed basis that takes account of local variations in cost of living and of goods and services that are available only in local and not national or regional markets.

2. All medical insurers, government and private, should be precluded by law from paying above the standard cost of goods and services indexed for local cost of living variations. Deductibles and co-insurance should be permitted.

3. Medical providers should be permitted to charge whatever the market will bear, provided that there is a clear written consent by the consumer to pay above the standard rate.

4. To facilitate market management, medical providers should be required to report instances in which they charge above or below the standard rate. Where they charge below the standard rate, the consumer should be permitted to apply 100% of the short-fall toward co-insurance and deductibles. This will give and incentive to providers to cut their rates where there are surpluses and encourage consumers to shop. The extent of above- and below-standard rate charges can be used to gauge when and whether shortages or surpluses are developing and adjustments to the standard rates are required to induce capacity into or out of the health care market. Thus, a standard cost system can still play the essential role of market prices in signaling the need for more or less supply.

5. Localities should be permitted to request waivers for insurers to pay above-standard rates where shortages can be demonstrated, thereby inducing additional supply into the local provider market.

6. Once a system is created in which medical providers are price takers, they should all, including hospitals, be permitted to exit the market freely through normal bankruptcy proceedings.

7. The federal government should sponsor the development of a national diagnostic computer system. Protocols can be developed by the top medical research and clinical institutions under contract. Practitioners being paid by insurers would be expected to input the results of examinations, patient reports, and tests in order to be paid. The protocol would state on a probabilistic basis the possible diagnoses and the recommended procedures. Authorized procedures would automatically be authorized for payment. Atypical procedures could be authorized upon consultation. Outcomes would also be required to be input. Patterns of unusual consumption of particular procedures or unusual incidence of diagnoses would provide a basis for fraud audits. As a side benefit, the nation would develop an extraordinary database for evaluating practitioners, procedures, and the incidence and ultimately the causes of medical problems.

8. The structure of policies that insurers are permitted to offer should be regulated so that they can be readily compared. Each insurer should be required to offer a standardized basic minimum package.

9. Insurers would be prohibited from discriminating in their rates on any basis other than age. The tax code should support an analog of whole-life insurance that, through inside build-up on a tax-deferred basis, would smooth the premium payment stream over the life of the insured. It might incidentally help the anemic U.S. savings rate. Insureds moving from a more restrictive to a less restrictive benefit policy would be excluded from enjoying the higher benefit on any medical condition in existence in the year preceding the change. But, as is now the case in New York, anyone switching carriers would be given credit for time covered under another carrier's policy.

10. The government should sponsor re-insurance pools for excess incidence of expensive conditions.

11. All industrial companies should be prohibited from providing medical insurance via self-insurance programs. All medical insurance would have to be provided by licensed insurance companies satisfying normal regulatory requirements for solvency and management. Insurers would be prohibited from providing group discounts. All policies should be available to any comer on the basis of the same published tariffs. Insurers would be permitted to negotiate a large contract and then reduce their tariffs to fit, provided that all of the insurer's clients are then given "most favored nation" status.

12. Tax subsidies for employer provided insurance should be eliminated.

13. All taxpayers should be charged a tax on adjusted gross income based on the number of members of the family, and their age. All taxpayers should receive a credit, payable directly to a licensed insurer, toward the cost of medical insurance -- "Take or Pay." In the aggregate, the taxes and the credits would be equal. Anyone not enrolled with a private insurer would be insured for minimum basic coverage purchased in the market by the federal government on a blind auction basis analogous to the marketing of Treasury securities. The total tax collected less the credits issued would be expected to finance the purchase of insurance for all those not purchasing private insurance. Insurers would be expected to report directly their enrollees in order to be paid.

14. Medical insurance, rather than employment or anything else, should be taxed to provide the revenues necessary to finance the purchase by the federal government of commercially available insurance for people too poor, too young or otherwise not paying income taxes. Taxation of health insurance rather than some other part of the economy would have the collateral benefit for health care of limiting the pricing power of insurers. Everyone with a social security number would be insured either via the income tax credit system or as part of a default pool for which the government would purchase basic minimum coverage. All insurance, whether privately or government purchased, would pay exactly the same rates under all policies, instantly eliminating substandard care for the poor! Indeed, we could expect aggressive competition for poor customers to emerge rather quickly.

15. Health care alliances, managed care systems, and the like should not receive any sort of government preference. Once a functioning price system is created for health care, the private sector will find the best means of balancing cost and quality through normal competition. Government intervention can do nothing but mess it up.

That is it. These things are sufficient to solve the entire problem of health care financing without creating distortions in the labor market. Equally important, such a system will provide to health care all of the benefits of market competition without the need for a large government bureaucracy. About 20 health care economists, 100 cost accountants, a dozen systems programmers, 100 computer application programmers, 20 purchasing agents, and 500 computer clerks should be able to do the job. Done right, figure on 1,000 people total.

Best of luck.

Sincerely,

cc: Senator Daniel P. Moynihan

Senator Edward M. Kennedy

Mr. Ira Magaziner

Ms. Hillary R. Clinton

- roidubouloi

July 27, 2009 at 9:08am