Archive for the ‘Economics’ Category
Democrats like to complain about insurers denying claims to boost profits. I debunked that linkage in my immediately prior post. But what I have found truly amazing is that neither the House nor Senate HELP bills propose a mechanism for changing insurer claim denial practices. What’s worse, people think that they have. Here’s ABC News:
The House bill includes a proposal for a so-called health benefit advisory committee, which would include 25 people appointed by the president and the surgeon general to determine benefit eligibility.
“The decisions, right now, are being made by insurance companies. And I think a whole lot of people out there are having bad experiences because they know that recommendations are coming from people who have a profit motive,” the president said in an interview with ABC News’ Dr. Tim Johnson Wednesday. “If I’ve got a panel of doctors and experts whose only motivation is making sure that we get the most bang for the buck in our health care, I think that’s a situation that most Americans would feel pretty good about.”
Notice that this committee, described in Section 123 of the House draft says nothing about approval of specific claims. Instead, what it does is work on benefit design. For the uninitiated, what that means is that the Benefit Advisory Committee will determine whether chiropractic therapy has to be included as part of the basic benefit or whether that is an ancillary coverage insurance companies could voluntarily provide. They will also determine maximum allowable copayments and coinsurance provisions, weighing the impact on “public health” and the ability to reduce “health disparities”, whatever the heck that that means.
What Obama’s channeling about public dissatisfaction has nothing to do with benefit design, however. There will always be those grey areas, however, where a particular person is asking for an advanced treatment or an experimental approach, or a desperate hail-mary treatment. The House bill is silent on those issues, yet those issues proved electric in the recently concluded campaign.
Currently, profit-driven insurers sell what people will pay money for. If they want their lifestyle drugs covered, they will get them. If you don’t like one insurer’s attempt to steer you to generics, you can pick a different copay structure or dump that insurer. To date, state legislatures have borne the burden of requiring coverages when they saw the need. The House’s Benefits Advisory Committee will be the federal voice for mandated benefits. With very big teeth.
I think what we will find is that this committee will become politicized and will do a very poor job of mandating truly public health services, especially relative to the status quo where most of this is already covered somewhere. Instead, I predict that this Committee will become a lobbying target of choice for various practices and require significant attention from insurance carriers, distracting them from the preferred goal of designing benefits that people will value highly as evidenced by voluntary purchase.
The bottom line: there is something called benefit design and there’s something called claims approval. Those are two different functions and the House and Obama seem focused on the first, while the latter is what, I believe, has soured people’s perceptions of insurers.
(for this post I chose to ignore a potential alternative interpretation of Obama’s quote, which is that he believes that people are currently dissatisfied with their insurance because it covers too many things and therefore doesn’t provide sufficient bang for the buck; in this interpretation, they would trust the government to trim their benefits but not private insurers. Possible, but I just don’t see it.)
Update: Section 132 of HR3200 does provide for an additional layer of claim denial review. It’s just three paragraphs long, and I’m not clear at all what it will accomplish that the current insurance department / judicial review process does not. Therefore, I stand by my assertions above, but I thought I’d mention this section, in case people want to dig that out.
The CBO preliminarily estimates the cost impact of the House healthcare bill to be $1,042,000,000,000 over a 10 year period.
The Joint Committee on Taxation estimates that the proposed income tax surcharge and other revenue raising items will raise $583,000,000,000. Superficially, you would think that the House has “paid for” roughly 56% of the cost of the healthcare insurance provisions in this bill. That’s what House Democrats want you to think. But you would be very wrong.
The taxation would begin in 2011. The spending would begin a phase-in in 2013. By the time the spending is fully phased in, the annual tax revenues would pay for less than 45% of the spending provisions. By 2019, there’s a $115,000,000,000 per year hole blown into the federal budget, prior to the anticipated but still unscored Medicare spending reductions. The longer you extend the horizon, the less of this program they have actually paid for.
This is represented graphically below. The next time someone says that these bills will be “paid for”, remember that you can play funny games with the 10-year scoring window. Frontloading revenues and backloading spending is just one of those games. We didn’t hire these people to plays games with us, however. We hired them to govern us like adults. Time they started acting like them.
(note: it is possible that the Medicare cuts they come up with will exponentially grow in size; I am skeptical, however. Congress doesn’t have a good history with long-term and effective cuts in Medicare, nor are the truly serious delivery system reforms on the table any longer, as best as I can see. I also don’t believe that magic prevention improvements will ever end up giving us long-term cost savings, let alone exponentially increasing cost savings as required to pay for this sort of program.)
(BTW, this is a bipartisan maturity problem; the Republicans rammed through an entirely unfunded Medicare Part D program using similar budget gimmicks)
Schumer offered some very strange logic on the latest tax plan offered by Senate Democrats:
He said there is “broad support” among Democrats on the finance panel to include new fees on insurance premiums, and “some of the Republicans” have said they will consider it. While he declined to discuss how the plan might be structured, he said lawmakers want to find a way to prevent insurers from simply passing the fees on to their consumers.
“If there’s real competition, there’s less likelihood and ability to pass it through” to consumers, Schumer said.
If Schumer’s right that real competition is sufficient to prevent passing taxes through to consumers, then why isn’t the “competition creation” in his proposals sufficient? Either the public plan and Exchange ideas aren’t going to provide real competition, or he’s blowing smoke about competition protecting the consumer from a tax pass through. Unfortunately, I think both may be true.
And since when does a competitive market place make it harder to pass along a tax hike? Higher taxes would normally reduce the quantity supplied and/or raise the price. However, if you legislate that the quantity supplied can’t decrease — like in this same proposal to pass individual mandates for health insurance — the tax incidence will almost surely be squarely on the consumer.
Therefore, what Schumer is really saying is that he’s going to raise the cost of insurance in order to pay for insurance.
And if that makes sense to you, you’ve been reading too many healthcare reform proposals.
The CBO has issued a preliminary analysis of the Kennedy healthcare reform plan. The following points are useful in understanding the estimates.
1) 30% of the direct cost is assumed to be offset by increased wages from reduced healthcare coverage. About 14 million people who would be covered by their employer under current law will not have employer based coverage under the Kennedy bill. The CBO believes that their wages will rise to maintain competitive compensation. I think this is a bad assumption for budgeting purposes.
- It is highly uncertain and therefore an example of budget arbitrage, although it comes from within the CBO itself.
- 10 of the 14 million will voluntarily decline coverage that is offered to them. It is not plausible that those individuals will receive additional compensation. We can’t know for sure if the $257b in increased revenues over six years comes from wage increases on just the remaining 4 million individuals.
- Pricing the value of health insurance as a “compensating differential” is difficult. I would suggest that many of the current features of employer based health insurance are poorly understood in such a model, thereby casting doubt on the validity of using that approach to project future revenues.
- I am concerned about long-run slack in the labor market and “paying” for healthcare reform by assuming that employees are in a strong negotiating position may not be prudent.
2) The direct cost of this bill was surprisingly low. Premium subsidies were granted to those with incomes of more than $110,000 for a family of four. Presumably, these subsidies must grow with healthcare costs. We don’t know the assumed growth rate in those costs. Also remember that these subsidies must make relatively rich federally-defined plans affordable. The CBO assumes that the subsidies will be effective at doing this, causing 10 million people to decline their current employer-based coverage. Much of the increase in healthcare costs in 2013-2015 will be due to this legislation and the corresponding stress on our health care delivery system. I therefore want to see more specifics on the average size of the subsidy.
3) The “clawbacks” within this approach are going to be a significant deterrent to work. I don’t see this effect estimated. To illustrate, let’s assume that a family of four earning $40,000 in 2014 gets free healthcare insurance (not free healthcare since there is cost-sharing in the federal plans). Let’s also assume full-phase out of the subsidy by a $120,000 income. This subsidy is likely worth something on the order of $15,000-20,000 (for the entire family; again in 2014). This means that any increase in pay between $40,000 and $120,000 will result in an effective 18%-25% tax as the subsidy is gradually withdrawn. This feature also has the possibility of significantly affecting family structures, the desirability of two-earner households, and the willingness to save and invest for the future.
I am opposed to the Kennedy bill for many reasons, include some expressed by Keith Hennessey. I find this cost estimate unfortunate not because of the low price tag but because I believe the assumptions and modeling structure to be very, very optimistic running real fiscal risks. I hope these issues and others are fixed before final scoring.
Budget Arbitrage — n. the act of “paying for” relatively certain short-term spending proposals by “reducing” highly uncertain longer-term spending. Budget arbitrage takes advantage of the fact that CBO scoring does not risk-adjust scored spending based upon the likelihood that the underlying assumptions are accurate.
Budget arbitrage is the natural result of a political process that attempts to find the politically least costly method of “paying for” current spending. The more uncertain the estimate of the future, the less likely there will be political opposition to the future cut. In contrast, the more certain the short-term spending is, the more certain is the short-term political gain.
One classic example was HR6331, where an increase in physician payments beginning immediately (July 1, 2008) were “paid for”, in part, by asserting a network requirement on Medicare Advantage providers. This network requirement was estimated to reduce the attractiveness of Medicare Advantage and, therefore, reduce enrollment and corresponding costs to CMS. This requirement is to become effective on January 1, 2011, 43 months after the increased expenditures were to begin. This was estimated to save substantial sums of money despite the possibility that many Medicare Advantage providers might move their membership from FFS plans, regardless. If that would have happened the deficit would have been lower and Congress would have had to find alternative means to fund the short-term and immediate spending increases.
The net effect of “paying for” the physician fee increase was to increase the short-term deficit and potentially increase the long-term deficit, as well.
Notably, the Medicare Advantage “cuts” in the bill were estimated to more than pay for the short-term physician fee increases. Rather than “apply” the estimated excess to future deficit reduction, the difference was “spent” in a “Medicare Improvement Fund” that would accumulate significant funds. In that manner a highly uncertain savings estimate for the years 2014-2017 was transformed into a guaranteed source of future revenues in case additional spending is desired in future Congresses. This is true regardless of whether or not 2011 Medicare Advantage enrollment validates or invalidates the estimates used by the CBO in 2008.
A summary of HR6331 is here.
Update, 2/22: The provision referenced in this post was removed in conference and did not become law.
The $15,000 homebuyers credit in the Senate version of the stimulus bill needs to be opposed. The CBPP and Kash Minori have this exactly right. What drives me to post is that there are even more reasons to oppose it than they suggest.
1) The credit could increase the supply of houses because it applies to existing homeowners. Risk-averse owners looking to “trade-up” are likely to put their homes on the market before entering the market themselves. This would not only undercut the rationale for the credit, it might even make the housing situation worse.
2) For most owners, the price of your house today isn’t nearly as important as the price of your house at the time you wish to sell. Temporarily propping house prices up today — which I don’t think this credit will effectively do — does nothing to change the price of houses tomorrow. At the end of 2010, we’ll be in basically the same position we are today; the bill just encourages likely 2010 sales to get bumped forward in time to 2009.
The one possible exception is the degree to which this credit can draw in marginal new purchasers, increasing the demand for homeownership in total. If we assume that home prices have not yet bottomed out, however, the more likely scenario is that there just aren’t many buyers for whom the credit itself is the difference between successful home ownership and foreclosure.
3) The credit may destroy economic well-being. Here’s how. Let’s put some numbers with this, and suppose that I’d have to be compensated at least $10,000 to go to the trouble to move. This credit may, therefore, induce me to move. I’ll be $5,000 better off. However, the government is $15,000 worse off. As a nation, therefore, we’ve just burned $10,000, net, to churn homes and disrupt lives.
The CBPP and Kash have very good, first-order reasons to oppose the credit, mine are secondary. The main point is that we are going to spend a lot of money to “boost” the economy. Let’s be sure that these “boosts” are cost-effective and actually help people. We have enough time to make sure we do that.
From this morning’s USA Today a few choice quotes:
Some people feel helpless, as if no matter what they do — how hard they work, how many times they write their Congress members — they can’t control their fate (emphasis added).
but then you read this …
Cox says most students lack sympathy for blue-collar autoworkers, an attitude he summarizes as, “You can’t expect to make $65,000 for a job you can learn in a month.”
and you think that maybe it’s not so bad. But the conclusion is scary:
He [12-year old son Michael] shakes his head [indicating that he won’t become an autoworker himself]. “I’m going to run for political office,” he says, decisively. “There’s always going to be a government.”
What it will govern is apparently yet to be determined.