What is the US health reform about?

for some time now, I have wanted to read a short intelligible piece telling me what the US health reforms actually were about. The problem till now has been that the reforms entail 1200 pages of unreadable legal text referring to more unreadable text, and that the issue became too politicized to be able to trust what news providers said.

Fortunately, Professors Bobbi Wolfe and Bob Haveman provided this very readable piece in a European policy journal on the recent health reforms. It is only 8 pages, but it comes highly recommended as these authors have been in the health economics business for decades and can draw upon many sources close to the fountain for their opinions.

If I had to summarise their summary, the main points of the health plan that are doable are:

1. To extend health insurance in 2014 to about half of the 20% of the Americans under 65 without current health insurance.

2. To tax the big current winners in the health industry via imposing payroll taxes on employer-provided health benefits, to fleece the big pharmaceuticals and medical equipment companies, to make increases in insurance fees subject to government approval, and to cap the amount of health cover that is reimbursed via Medicare (which is the system for the over-65).

3. To impose community ratings, i.e. to force insurers to ensure the kids of those currently insured and to insure people with pre-existing conditions. Also, there is a big move to make it impossible to kick people out of insurance who develop a long-term illness (currently you can lose your insurance if you become too ill!). Most of these changes have already been imposed, presumably to make it hard to undo the legislation.

4. To have more health services be provided by the cheaper health professionals (nurses) and less by the expensive ones (specialists), for instance by extending community care facilities and tweaking the incentives of insurers and patients.

One of the less doable aspects of the plan is the attempt to force private insurers into offering four basic insurance packages and to compete across regions in the hope that this simplification plus competition will lead to lower prices. Without offering state insurance as a means of truly providing a base case however, you are then always susceptible to collusion amongst the insurers and the limited degree to which individuals and firms have an incentive to shop around. Also, the promise to improve hospital and medical efficiency via incentives such that about 160 billion US ‘cost savings’ are made sounds a little over-the-top to me. You have to fire a lot of people to make 160 billion in savings and that kind of job cutting is not easily achieved.

Yet, in its entirety, the plan is one of immense size, virtually certain to change the allocation of something like a quarter of total expenses on health in the US. I am making this number up from the 20 million extra individuals who are going to be insured as well as another 20 million extra projected to be serviced by the expanded community centers, which in total get you some 15% of the current insured population who will be serviced completely differently. Guessing that this group is less healthy and will thus use a disproportionate amount of services and guessing that the other changes will amount to maybe half the size of the sheer expansion, gets you at least a quarter change in total health cost allocation. If you look at the money that the extra taxes are supposed to generate in order to pay for these expansions, you are also looking at around 460 billion US per year, which is a quarter of all health expenses and 4% of GDP. That money is essentially taken from the rich and mainly allocated towards the poor and the really sick.

A transfer of 4% of the nation’s wealth from the rich to the poor is a big Robin Hood reform in my book. No wonder the incumbents in the health industry in the US are squealing.

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Alex
Alex
11 years ago

By improving health all round you will lift productivity, and improve the prospects of children whom no longer have to help care for sick sibling and/or parents/grand parents. These parents would also be able to increase the opportunities that they can offer their kids through increased earnings (after the economy turns around) or through direct engagement.
Whilst it may seem like a robin hood scheme that may transfer 4% of the nations wealth, it may be neutral or positive over the longer term.

Additionally, America is now entering a period of extreme inequality, some commentators placing it on the same scale as countries such as Venezuela. If anything this wealth transfer is late, because it is needed to reform productivity and utility from the bottom-up.

Kien
Kien
11 years ago

Might the following comment apply also to the “MySuper” product proposed by Jeremy Cooper for reducing superannuation fees in Australia?

One of the less doable aspects of the plan is the attempt to force private insurers into offering four basic insurance packages and to compete across regions in the hope that this simplification plus competition will lead to lower prices. Without offering state insurance as a means of truly providing a base case however, you are then always susceptible to collusion amongst the insurers and the limited degree to which individuals and firms have an incentive to shop around.

Paul Frijters
Paul Frijters
11 years ago

Alex,

sure, the changes can have many effects beneficial to the economy. Such effects are not easy to guess in advance though. With more automatic insurance come more moral hazard problems. The ways in which insurers and employers will try to avoid some of these changes and reap in the various new subsidies might not be all that productive either. Having children look after parents might well be cheaper in the long run than having the state look after them. Etc. I dont think anyone would be able to tell you the likely outcome on productivity at this moment. At the moment it is more about equity and an attempt to curtail the spiraling costs.

Kien,

the same issues certainly apply, but the hope is that the ability of regulators to keep industry in line is higher in Australia than in the US! The market for health insurance is very fragmented in the US and thus very hard to regulate. The superannuation industry here is much simpler and hence there’s more chance of success. Having said that, there is something to be said for a discount state provision of superannuation insurance in Australia too.

conrad
conrad
11 years ago

“With more automatic insurance come more moral hazard problems”

Is there any real evidence that this exists in health care provisions for non-chronic diseases?

Paul Frijters
Paul Frijters
11 years ago

J1,

why is it misleading to talk about the health reforms in terms of transfers? The big changes are that some individuals and organisations have to pay more and others get services they didnt get previously. Since health services are predominantly a private good (not entirely, but predominantly), that makes the reforms an enormous wealth transfer. I can understand that there are political reasons not to want to frame it as such, but a rose is a rose is a rose.

Conrad,

some evidence, yes, but its a notoriously hard thing to establish because it turns out that those people who go for insurance are the more risk-averse and are hence also innately more careful (i.e. self-selection problems) which means you generically find in health that the insured behave at least as well on average as the uninsured.

As to the evidence that health behaviour and insurance are indeed related, see for instance the 2010 paper by Weisburd, of which I here paste the abstract:

“This paper capitalizes on a unique situation in Israel where car insurance coverage is often distributed as a bene…t by employers. Employer-determined coverage creates an environment where individuals are “as if” randomly allocated to different insurance contracts regardless of their preferences. In this situation, the confounding e¤ects of adverse selection are removed, and the effect of car insurance on driving behavior and on car accidents
reflects moral hazard. Using data provided by an insurance …rm in Israel (2001-2008) and controlling for state dependence and unobserved heterogeneity, I …nd evidence of moral hazard: employees bene…ting from company insurance –holding higher insurance coverage at a lower cost –are 3.6 percent more likely to have an accident. This estimate increases when considering a subsample of newly insured employees.”

MikeM
MikeM
11 years ago

The article by Atul Gawande to which J1 linked provides an excellent snapshot of why US health care is so expensive. The gist of it is that El Paso and McAllen are two border towns in Texas with very similar economies and demographics. Yet Medicare cost per capita in McAllen is twice that of El Paso. Indeed, it is more than the average per capita income in McAllen. Yet the people of McAllen have no better health outcomes than those of El Paso.

Gawande is a Boston-based surgeon and writer for The New Yorker. In a subsequent blog post he responds to critics of the article.

In another article last December, Gawande discusses how measures in the Senate health care bill were designed to reduce health care cost.

In a more recent article he discusses end-of-life care, noting that:

[…] The soaring cost of health care is the greatest threat to the country’s long-term solvency, and the terminally ill account for a lot of it. Twenty-five per cent of all Medicare spending is for the five per cent of patients who are in their final year of life, and most of that money goes for care in their last couple of months which is of little apparent benefit.

Spending on a disease like cancer tends to follow a particular pattern. There are high initial costs as the cancer is treated, and then, if all goes well, these costs taper off. Medical spending for a breast-cancer survivor, for instance, averaged an estimated fifty-four thousand dollars in 2003, the vast majority of it for the initial diagnostic testing, surgery, and, where necessary, radiation and chemotherapy. For a patient with a fatal version of the disease, though, the cost curve is U-shaped, rising again toward the end—to an average of sixty-three thousand dollars during the last six months of life with an incurable breast cancer. Our medical system is excellent at trying to stave off death with eight-thousand-dollar-a-month chemotherapy, three-thousand-dollar-a-day intensive care, five-thousand-dollar-an-hour surgery. But, ultimately, death comes, and no one is good at knowing when to stop.[…]

This is of course a topic that is also relevant in Australia. I don’t believe that end-of-life medical care goes to the extremes that it can in the US, but appropriate provision of hospices and end-of-life care doesn’t seem to be a major agenda item here.

Paul Frijters
Paul Frijters
11 years ago

MikeM,

I recall that the end-of-life costs have been estimated to be as high as 60% of all health costs for the last 2 years of life (I believe Bob Gregory had a paper on this with similar results for Oz). The problem is always that you dont know in advance that you are treating a patient with less than 2 years to live.
Talking about the skewness in the expenses is very sensitive politically though. No politician dares touch it.

Alex
Alex
11 years ago

Frijters, public services do not constitute wealth transfer, but wealth creation. By lifting spending on items such as healthcare and education you improve the productive capacities of each individual, and thus improve the wealth of society. And hell if you look at the distribution of income, especially trends that point to increasing inequality in income you could bet that this constitutes an investment in those of lower income, which will in the end only pay dividends to the rich.

Is this the middle ground that club troppo seeks? Because I’m sick of IPA members or followers saturating the media.

Paul Frijters
Paul Frijters
11 years ago

Alex,

public services most certainly do constitute wealth transfers. Facsia even used to bring out charts of the total wealth transfers in our society by group (lone parents, middle income families with kids, etc.), including education, health, and other mostly private goods produced and disseminated by the government. The fact that health and education have some effect on productivity doesnt negate that at all.

I resent the name calling with regards to club troppo. You are not the judge and jury of reasonableness and middle ground.

Alex
Alex
11 years ago

You are right it was wrong of me to say those words. I am a little disheartened that an opinion that I disagree with fundamentally appeared on a website accepting of all ideas reasonable to the mainstream.

These frustrations aren’t with your post, but with the US media/Tea party, it’s attack on the public sector (with fears that this paradigm may be exported), and its attack on wealth transfers as a way of creating a society.

Although I fully apologise for the IPA comment and all inferences, I stand by my personal opinion that wealth transfers are economically beneficial for society (at current levels), and we could gain even greater economic surplus when accounting for the intangibles.

All the best.

Paul Frijters
Paul Frijters
11 years ago

Alex,

thanks.

For what its worth, I dont see wealth transfers as something negative at all and apologise if i gave that impression. I clearly didnt express it sufficiently well that I would on the whole support this health plan on welfare grounds: from a utilitarian standpoint, as soon as one accepts the proposition that a poor man has more to gain from the extra dollar than a rich man, one becomes in favour of more transfers as long as they are not too distortionary. Since the production effects of this plan are more likely to be positive than negative, the plan has a double bonus (more equity and probably a bit more output too), though, if one is a particular type of environmentalist this would make one oppose the plan for indirectly generating more pressure on our limited natural resources.

Alex
Alex
11 years ago

Thank for completely revering my opinion on the article. I definitely see how the environmental constraints can interact with increased distribution to increase negative externalities, however there is enough waste in our system, in our mass produced, throwaway culture, that I am sure that savings can be found elsewhere to offset redistributions.

I also take your point that the wealth spent to prolong life for a short period of time definitely does not seem like the key challenge facing our society as well.

Thanks for explaining your position, next time I read something similar without further evidence I will suspend judgement.