Titus North, March 12, 2017

(For an executive summary, please click here.)

Introduction

Obamacare has been a mixed bag for the American people. Some people have benefited greatly, and have gained access to affordable health care for the first time in may years. Other people have seen their own costs increase and are foregoing appointments and procedures in order to avoid hefty out of pocket costs. And the taxpayer is picking up a bill that grows with every year as the system had inadequate cost containment mechanisms.

Unfortunately, the debate over Obamacare, both before and since it’s passage, has been largely partisan and ideological, with serious policy analysis taking a back seat. The new administration has revealed its determination to repeal and replace Obamacare, although President Trump has not yet revealed the specifics of what he wants to replace it with. He has stated that he wants a system that will cover everyone, and given the ideological divide in the electorate my guess is that he played his cards close to his vest in order to capitalize on general dissatisfaction with Obamacare while avoiding an ideological backlash from the Republican base should he propose anything other than market solutions.

Having published a major study of the Patient Protection and Affordable Care Act (now commonly referred to as the ACA) in 2013 and having worked since then as a health insurance agent, I have gained a rare perspective and expertise on the nuts and bolts of the Obamacare system. What I plan to do in this policy proposal is to utilize that experience to analyze the economic and social shortcomings of the present Obamacare system, explain why the ideologically driven market-based alternatives are not the answer, and then finally outline a proposal for a new system that will optimize economic rationality, social fairness, and political logic.

The economic and social shortcomings of the present Obamacare system

Obamacare was bound to fail first and foremost because it did not include adequate cost containment mechanisms. Costs have been rising in the healthcare sector for a variety of reasons, some of which could be contained better and some which are difficult to contain. Some of the major reasons for rising costs include the aging of the population and advances in medical technology. Older people are statistically more expensive to care for, and new and improved technology tends to add costs, although prices for many inputs like semiconductors have been falling over time and technologies that improve efficiency can also lower costs. Still, many things that have become common place over the past decades, like MRIs and radiation therapy, have added costs that did not used to exist.

Another reason for rising costs is the deterioration of public health as evidenced by rising rates of obesity and the spread of lifestyle-linked diseases like diabetes. Poor diet and lifestyle choices as well as greater social acceptance of drug use, promiscuity, and male homosexuality add to public health challenges. These factors have contributed significantly to healthcare spending, and while they could be reversed it would take much more than the passage of a new health insurance law to do so.

However, there are certain factors in the rise in health care costs that could have been addressed by the ACA but were not. These include prices for prescription drugs that are higher than prices for the same drugs in countries like Canada. Also, there is a plethora of plans that chop of the risk pool into small parts that cannot capitalize on economies of scale, have poor bargaining power vis a vis providers, and require great redundancies in administrative expenses by insurance companies and regulatory costs by government. The burden of advertising and high executive compensation may be exaggerated by opponents of the private insurance system, but what burden they do inflict certainly outweighs any benefits they might be imagined to provide. Also, given that the United States is spending 1/6 of its GDP on healthcare, the notion that we can afford to have for-profit insurance companies that need to set aside 5% or so of premium revenue for investor dividends is makes no sense.

Why the ideologically driven market-based or “medicare for all” alternatives are not the answer

Obamacare has been routinely condemned by Republicans and others on the right as being a “government take-over” of the healthcare system and “socialized medicine.” Neither of these charges are on the mark. “Socialized medicine” actually refers to government-owned and run hospitals and provider outlets, like one finds in the British National Health System or even at the Veterans Administration. Obamacare does not even represent “socialized insurance,” as the insurance obtained through the Health Insurance Marketplace is from private companies, not government entities. In fact, progressive opponents of the ACA back in 2009 and 2010 blasted the ACA as a give-away to the insurance industry and called instead for a single payer “medicare for all” system, or at least a public option whereby consumers could chose a policy offered by a government entity.

The problem with market-based solutions based on competition in the health insurance industry is that competition does not work the same way in insurance as it does in manufacturing or other service industries. In other industries, competition fuels innovations and continual improvements in the production of the product. While the health insurance industry has taken on the aspect of a protection racket in that it negotiates prices with providers who will otherwise charge uninsured consumers ridiculous bills with no basis in the cost of providing the service, the core function of insurance is the spreading of risk throughout a risk pool. This is done through statistical probability. No amount of competition can change the mathematical laws of probability.

Furthermore, there can be no functioning market for health care services because the prices for these services are unknown at the time of purchase. Typically it is only when the bill arrives from the provider that the consumer has any idea of the cost for a particular service. No one could shop for a car without knowing how much the car will cost until a month after it is purchased. Likewise, a rational health insurance market is hard to develop because the value of different policy designs are impossible for the typical consumer to assess. Even when actuarial values (a measure of what percentage of services received by enrollees are paid by the insurer, on average) are known, they are based on standard populations, and for a given individual who may not conform to the population average, policies with the same actuarial value may be completely unequal in their ability to pay for that person’s medical benefits. For instance, for a person who consumers a great deal of healthcare, a policy with a higher deductible but a lower out of pocket maximum would be better than a policy with a low deductible but a high out of pocket maximum, even if their actuarial values are identical. Few consumers have the ability to make a meaning assessment of their policy options.

Ironically, especially before Obamacare, competition in the health insurance industry is more likely to lead to LESS efficiency and higher costs. Without being capable of improving the spread of risk, which is entirely a matter of statistical probability, the insurers instead strove to manipulate the risk pool itself. This can be done through dividing it up geographically, and before Obamacare to a great extent it was done via the exclusion of people with various per-existing conditions. The result has been massive and costly redundancy in administration and regulation as each insurer in each state issues countless policies in various parts of the state with different designs for individuals, small groups, and large groups and marketed to emphasize lower premiums, richer benefits, stronger networks, and what not. In addition to unnecessarily inflating premiums, consumers are faced with far more choices than they can possibly wrap their heads around, and are thus LESS likely to wind up with a policy that makes sense for them than if they had just a few choices.

This is not to say that Medicare for all is the answer, although it does have a great deal of economic logic. One of the problems of Obamacare has been the social unfairness of it. In addition to the expansion of Medicaid to make it available to most people with incomes under 138% of Federal Poverty Level (FPL), Obamacare tax credits and cost sharing subsidies were so generously skewed towards lower income people that many actually find moving from Obamacare to Medicare a hardship. However, the tax credits and especially the cost sharing subsidies fade out rapidly for people with incomes above 200% of FPL, so many people with modest incomes derive little benefit from policies even if they can afford their share of the premiums, while people over 250% of FPL get no help with out of pocket costs, and what tax credits may be available to some of these people (mostly the older ones) suddenly disappear at 400% of FPL. Meanwhile, premiums, deductibles, and other out-of-pocket costs rose sharply, due to the additional Obamacare-mandated benefits and abolition of pre-existing condition exclusions, and also due to the decades-old trend towards higher costs that Obamacare did not sufficiently address. Tax credits largely kept pace with premium increases for eligible lower income people, but many middle income people have been hit hard.

So Obamacare can be looked at as a massive transfer of resources from middle and upper income taxpayers and premium payers to lower income recipients. While this may seem in line with the redistribution priorities held by many progressives, the fact is that many middle-income hard working people are finding it more difficult to afford medical attention than low income people, who may or may not be hard working. Reinforced by the different demographics of these income categories, a great deal of resentment resulted.

Medicare for all does have an economic logic, in that putting everyone in the same risk pool provides economies of scale in administration, reduces regulatory burdens associated with the current myriad of policies, and gives the single risk pool incredible bargaining power vis a vis providers. Still, there are some very practical problems with it. First of all, the existing medicare system is, at least in principle, largely prepaid. Eligibility for Part A (which covers doctors office visits) is usually based on years of a worker or his or her spouse having paid payroll taxes. Part B (which covers hospitals) is partially funded by a premium of about $130 (typically deducted from a Social Security check) for most people, which is higher than what lower income people pay for their Obamacare policies that cover doctors, hospitals, AND drugs. The rest of Medicare is mostly funded through general tax revenue.

Certainly, it could be extended to everyone, but other people didn’t prepay Part A, and other people don’t have a Social Security check to deduct premiums from. Many might also say that other people who did not spend a career paying taxes are not as deserving of having their insurance underwritten by general tax revenue. Still, theoretically premiums and additional revenue sources could be devised that would be socially fair and would allow the rest of the population to enroll in Medicare. But the problem is that if the numbers are not right the first time, the whole system could become destabilized and seniors could find themselves at more risk than they have experienced in half a century. This makes it risky and politically difficult.

What would be preferable would be some sort of national health insurance system that has a single risk pool for everyone involved. Medicare would remain separate, at least until such time as the new system has proven itself successful and stable. Group and other existing private policies could remain, but a successful national system might reduce or eliminate the economic logic for private policies. And just as Jesus said, the poor shall always be with us. Medicaid should probably remain in some altered form for the purpose of ease of transition to the national system, since even if it is merged into the national system the poor will not be able to afford their share of the costs and would have to be subsidized in some way or another.

Outline for a new system that will optimize economic rationality, social fairness, and political logic.

So what would this national system look like? First of all, in order to get passed it has to contain elements of fairness, both to the enrollees and to the people paying for it. Something that looks like an unsustainable, budget-busting welfare program wouldn’t and shouldn’t be passed by Congress. While the claim by many on the left that “healthcare is a right” has an emotional appeal, the provision of healthcare takes up one-sixth of our GDP. In other words, one-sixth of the work that people in America do is to provide healthcare. Nobody can claim the right to have others work for them. Thus, the mantra should be “healthcare is not a right, but a priority.”

The minimum objective is to provide everyone with reasonable access to healthcare while not burdening the productive population with oppressive costs. Everyone with any ability to do so should be expected to help shoulder the costs. And one thing that requires emphasis from the start is that no national health insurance system is possible in a situation of open borders. Large-scale immigration of low-skilled workers with large families is absolutely incompatible with a national health insurance system. The idea of a transfer of wealth from the rich to the poor has been an obstacle to the establishment of a national health insurance system for 70 years now, although any system, including the pre-Obamacare system, is bound to include a certain amount of wealth redistribution. However, the idea of a transfer of wealth from middle-class working families to the Guatemalan or Somali peasantry is a complete nonstarter.

About 35% of the funding for Obamacare comes from taxes on insurance companies or suppliers who can pass on the taxes to healthcare consumers. (See Appendix A.) These higher expenses enable or even require insures to raise premiums, which then require greater subsidies from the government, which then require more tax revenue. This is a death spiral that makes the system unsustainable in the long run.

Given the already enormous costs associated with the quality of health care we have come to expect and the fact that low income people simply cannot contribute enough to an insurance system to actually cover their costs, no serious person can expect any national health insurance system succeed unless we clamp down on immigration, especially unskilled Third World people.

The best way to set up a national health insurance system would be to divide it into two parts, like Medicare. However, rather than dividing it based on type of services (doctors office/hospital/prescription drugs), the new system should be divided based on how it is funded. Part A should include the most cost efficient and the most necessary elements.

The absolutely most cost-effective element would be to extend Medicare medical service pricing to the national health insurance system. Medicare currently establishes a fee schedule for all services and procedures, updated periodically with input from providers. If providers insist that they do make enough money on Medicare pricing and cannot afford to offer it to all patients, then some reasonable mark up, perhaps 10%, could be added. But just as the wheel does not need to be re-invented, the work of negotiating prices, which is currently so redundant in the health care system, should be left to Medicare. Indeed, as President Trump has often stated, Medicare should also negotiate with prescription drug companies. Everyone residing in the United States legally should be issued a discount card which allows them to receive medical services and prescriptions based on the Medicare fee schedule. This major first step would add virtually nothing to the budget, but would go a long way towards reining in costs.

Part A should also include the preventative services currently mandated by Obamacare. These annual physicals, mammograms, immunizations, etc. are relatively low cost and are extremely useful in preventing much more expensive ailments down the road, and are thus among the most cost effective measures. While the provision of these services could well cost a few hundreds of dollars per year per person, it should not cost thousands, and it is certainly not unreasonable to expect even poor people to contribute to some extent towards these costs.

Finally, Part A should include catastrophic coverage, meaning all costs incurred after some high deductible. Currently, the deductible for Obamacare catastrophic policies is over $7000 for an individual, and twice that for a family. The logic to catastrophic coverage is to at least prevent a middle-class family from falling into bankruptcy due to medical bills. Poor people may not have the ability to raise $7000 to pay for medical bills, but usually have little to lose from bankruptcy.

In essence, Part A would resemble an Obamacare catastrophic policy with some important caveats. First of all, the medical bills from any given procedure that the consumer would be on the hook for would be much smaller than is currently the case because they would be based on Medicare pricing. Also, there would be no networks for these services.

Under Obamacare, catastrophic policies, even for young people, are still rather expensive at well over $100 per month. While most people in a given year do not have enough medical bills to meet the high deductible, those few that do wind up costing enough to keep premiums high for everyone. The key under this plan is that Medicare pricing would lead to fewer people meeting the deductible and lower spending on those that do. As a result, the cost of financing Part A should remain reasonable.

All citizens and legal residents with an eligible visa status should be enrolled in Part A with no premium. The program should be financed by earmarked excise taxes on items that lead to poor health and a small but broad sales tax to make sure that every one is contributing at least something.

The first category of taxes, those on unhealthy products and activities, should be set in such a way as to cover the healthcare costs associated with their consumption, but no more. People partaking in unhealthy habits should not expect others to pay the medical bills that result. On the other hand, one only has to think back to Soviet President Gorbachev’s anti-alcoholism campaign to understand the dangers of overtaxing a vice that people use anyway. The Soviet government was so dependent on alcohol tax revenue that the initial success of Gorbachev’s anti-drinking drive almost wrecked government finances. If accurately set, the products, tobacco for instance, can be combated with public health campaigns without destabilizing the financing of the national health insurance system. Products subject to such taxation should not be limited to tobacco and alcohol, but anything that can have a measurable adverse impact on health, including unhealthy foods and pornography.

Congressman Jason Chaffetz, who is pushing the Ryan plan, recently remarked that poor people should have to choose between insurance and iPhones. Some observers point out that smartphones have become such a necessity nowadays, especially for young people, that it is not reasonable to make the poor choose between insurance and iPhones. Certainly, the point of national insurance is to not to allow people the option of opting out of health insurance, seeing as we live in a society where nobody is turned away from the emergency room. But it is not unreasonable to make the poor choose between smart phones and beer.

Not all health problems are caused by beer, cigarettes, and junk food, so a broad sales tax should be levied to raise enough revenue to cover the rest of Part A. Most states already have a sales tax, although they differ in whether they are levied on all products or exempt necessities such as food and clothing. For ease of administration, the rate of the earmarked sales tax could be adjusted from state to state depending on which products are exempt. For states with no sales tax that do not want to implement one, some equivalent alternative could be found. The exact size of each tax would have to be established by a body with the means to do to, such as the Congressional Budget Office.

Part B of the system would be voluntary and in principle would require a premium. It would be modeled on the Medicare supplement plans (Medigap plans) that have been sold to Medicare beneficiaries for decades. The Medigap plan policy designs are established by the government, and currently there are 10 plans available. The companies that sell them cannot alter the designs. However, whereas the Medigap plans are sold and underwritten by private health insurance companies, the proposed Part B plans would not be underwritten by private companies. The insurance companies could act as agents of the government to sign people up for the plans and receive a commission for doing so (thus avoiding the need to set up a new bureaucracy to oversee enrollment), but the premiums would be paid to the national system and the national system would pay providers. All the plans, regardless of which company enrolled the consumer, would have a single risk pool.

The logic is to eliminate the motivation for cherry picking and chopping up the risk pool in order to maximize profits. The larger the risk pool the greater the economies of scale in terms of administration. Also, by having the government design a limited number of plans, the states would be relieved of the considerable burden of regulating the myriad of plan designs submitted each year by the dozens of insurers that operate in their states. It would also eliminate entire bureaucracies within the insurance companies that design the plans and guide them through the regulatory process. It would eliminate legions of insurance coding and billing employees at providers and insurers. This would represent an enormous savings to the system. Of course, a large number of people would lose their jobs, but they would not lose their insurance. And since their work was part of the waste of the old system, it would be no more of a burden (and a temporary one at that) to pay them to look and train for other work as to keep them in their current jobs.

Under the current system people often are confronted with more choices than they can possibly wrap their heads around, making it impossible for them to make a truly informed and rational decision. It would be a benefit to the consumer to have a limited number of genuine choices that make sense for people in different situations. Many employers who currently provide insurance would want to offer to pay for one of the plans, and they could be incentivized to do so in order to maximize enrollment.

These Part B plans would be guaranteed issue, meaning that no one can be denied due to health conditions. Also, enrollment would be open all year long, although people who go without Part B coverage would face a penalty when they enroll. The moral hazard of going without insurance until services are needed and only then enrolling has required companies to restrict enrollment periods or impose medical underwriting. However, because everyone will have Part A catastrophic coverage, the financial risk of this moral hazard will be greatly limited and can be covered by the levying of a surcharge on premiums for a period of time, a period of time in which the consumer would be “locked in” they way they are with a cell-phone contract, with legal or tax penalties should they stop paying premiums before the end of the surcharge period.

These plans would likely be priced based on age and geography, although this is ultimately a political decision. Many low income people would still find the plans unaffordable. A residual Medicaid system, utilizing some but not all of existing fiscal resources devoted to the program, could provide assistance to low income people seeking to enroll in these plans or in a special plan eligible only to qualified low-income people. Aside from that, the Medicaid system will become unnecessary, and the rest of its funding sources could go towards subsidizing Part B for everyone. The current tax deduction for health insurance premiums could be maintained or modified to lessen the burden for middle-income people.

Like Medigap policies, these Part B policies would have no networks.

In the 1990’s the health insurance companies successfully lobbied the government to outsource the administration of Medicare to them in the form of Medicare Advantage policies. Unlike Medigap, where the patient shows the doctor’s office two cards – one from traditional government-run Medicare and the other from the Medigap insurance carrier, with the doctor billing Medicare for what it will pay and the Medigap company for the remainder of the bill – with Medicare Advantage the government provides the insurance company with a monthly payment, which is usually augmented by a premium from the consumer, and then all transactions with providers go through the insurance company and not the government, although the patient typically faces a copay or some other charge. Medicare Advantage plans often restrict patients to a network of providers, with which the company presumably can negotiate lower prices.

Insurance companies claim to be able to administer medical benefits so efficiently that they can add prescription drugs and certain other benefits, sometimes without even charging the patient a premium. In fact, there is some evidence that the government is actually overpaying the insurance companies, and this is what allows them to add the extra benefits.

Ideally, the national health insurance system would operate just with Part A and Part B as described above. However, that mostly leaves the politically powerful insurance companies out of the picture, which is something they are sure to resist. If politically necessary, something similar to Medicare Advantage plans could be allowed whereby consumers would have the choice to enroll in plans with insurance companies that would be largely paid for by the government, Medicare Advantage-style, with some additional premium from the consumer also being possible. These could include, or even be limited to, special needs plans for low-income people similar to current D-SNP plans available to Medicare-Medicaid dual eligibles. If the companies can successfully utilize networks of providers to hold down costs, then this could become an alternative especially from lower income people and medical assistance recipients. However, care must be taken to make sure that the government does not overpay insurers for these policies, which have the adverse effect of chopping up the risk pool.

Conclusion

Currently some 16% of the American GDP goes towards healthcare, which is more than double practically any other country. Even government spending on healthcare (Medicaid, Medicare, CHIP, VA, Indian Affairs, Tricare, etc.) is much greater than almost any country with nationalized health insurance. By moving to the national health insurance system described in this paper, the United States will realize enormous savings. (https://data.oecd.org/healthres/health-spending.htm)

Even if we could just half-way close the gap between us and the number two country in terms of per capital spending on health care (Luxembourg), it would represent a savings to the economy of some $250bn per year. If we could achieve parity with countries like Japan, France, and Canada, we would cut our healthcare expenditures in half.

This national healthcare proposal would save enormous amounts of money through the following means:

• Eliminating unneeded or redundant work within insurance companies, provider offices, and state regulatory organs.

• Encouraging preventive care that reduces more costly future problems.

• Creating a giant risk pool that capitalizes on economies of scale, bargaining power vis a vis providers, and the elimination of administrative expenses by insurance companies and regulatory costs by government.

• Containing costs through reliance on the Medicare fee schedule and government negotiation of drug prices.

It would meet the main objectives of healthcare access advocates by:

• Guaranteeing that everyone has preventative care, catastrophic coverage, and reasonable prices.

• Being affordable for middle- and lower-income people.

• Establishing lower prices for health care services that are known in advance.

• Eliminating medical underwriting and pre-existing condition exclusions while containing moral hazard.

It would address the concerns of fiscal conservatives by:

• Not establishing a large new bureaucracy

• Making sure that everyone, including low income people with poor life style choices, will be contributing to the system

• Financing the system through earmarked sales taxes and premiums with limited subsidies and tax write-offs, thus reducing dependence on existing revenue sources

It would address the concerns of social conservatives by:

• Minimizing the wealth redistribution aspect of the health insurance system.

• Encourages personal responsibility and giving no one a free ride.

• Not being accessible to undocumented aliens

This system was devised with economic and social rationality foremost in mind, with consideration given to political realities. It represents the best last chance to move to the kind of national health insurance systems that all other advanced economies have adopted. Without such a move, it is just a matter of time (and likely not a very long time) before the entire health care system falls apart. Such a collapse would have a devastating impact on the economy as a whole, on social cohesion, and even the integrity of the American state.

Conclusion

Currently some 16% of the American GDP goes towards healthcare, which is more than double practically any other country. Even government spending on healthcare (Medicaid, Medicare, CHIP, VA, Indian Affairs, Tricare, etc.) is much greater than almost any country with nationalized health insurance. By moving to the national health insurance system described in this paper, the United States will realize enormous savings. (https://data.oecd.org/healthres/health-spending.htm)

Even if we could just half-way close the gap between us and the number two country in terms of per capital spending on health care (Luxembourg), it would represent a savings to the economy of some $250bn per year. If we could achieve parity with countries like Japan, France, and Canada, we would cut our healthcare expenditures in half.

This national healthcare proposal would save enormous amounts of money through the following means:

• Eliminating unneeded or redundant work within insurance companies, provider offices, and state regulatory organs.

• Encouraging preventive care that reduces more costly future problems.

• Creating a giant risk pool that capitalizes on economies of scale, bargaining power vis a vis providers, and the elimination of administrative expenses by insurance companies and regulatory costs by government.

• Containing costs through reliance on the Medicare fee schedule and government negotiation of drug prices.

It would meet the main objectives of healthcare access advocates by:

• Guaranteeing that everyone has preventative care, catastrophic coverage, and reasonable prices.

• Being affordable for middle- and lower-income people.

• Establishing lower prices for health care services that are known in advance.

• Eliminating medical underwriting and pre-existing condition exclusions while containing moral hazard.

It would address the concerns of fiscal conservatives by:

• Not establishing a large new bureaucracy

• Making sure that everyone, including low income people with poor life style choices, will be contributing to the system

• Financing the system through earmarked sales taxes and premiums with limited subsidies and tax write-offs, thus reducing dependence on existing revenue sources

It would address the concerns of social conservatives by:

• Minimizing the wealth redistribution aspect of the health insurance system.

• Encourages personal responsibility and giving no one a free ride.

• Not being accessible to undocumented aliens

This system was devised with economic and social rationality foremost in mind, with consideration given to political realities. It represents the best last chance to move to the kind of national health insurance systems that all other advanced economies have adopted. Without such a move, it is just a matter of time (and likely not a very long time) before the entire health care system falls apart. Such a collapse would have a devastating impact on the economy as a whole, on social cohesion, and even the integrity of the American state.