Weird Stateless Healthcare Solutions

Most developed countries have significant involvement in the healthcare market. I have written previously that it’s pretty clear down-sloping demand curves exist in healthcare, and thus we could realize efficiency gains in healthcare if a healthcare pricing system existed where patients could compare procedures and stand to benefit from getting them done for less money. This would not necessarily preclude government intervention. For example, Medicare could offer to pay its rate for various procedures directly to the patient who could then look at several hospitals, go to the one with the best deal and pocket the difference.

However, I’m going to explore a much more difficult thesis, that a completely free market in healthcare could exist outside of state intervention entirely. Nothing should be taken from the following to imply I think such a system is “good”. I have free market inclinations, and so I think some liberalization of healthcare markets would be good, but changes discussed in this post are highly radical. Any such scenario is unlikely in the future unless an unexpected event occurs, such as a global geopolitical destabilization never before seen, or a mass adoption of a cryptocurrency as the reserve currency, rendering taxes on transactions (and thus strong central states) obsolete. In other words, it seems unlikely a healthcare market with no state intervention would be something purposefully implemented. Nonetheless, I think this is an interesting thought experiment to consider, and it may help point us to where the market is least able to provide solutions and thus where government might be most helpful.

Supply Side

Most of this will be a discussion from the patient’s side, but first let’s discuss some of the implications of the supply side. With less government, there are going to be a lot fewer restrictions. That means licensing will still be important (and in fact medical licensing is largely done by non state groups), it just won’t be state enforced. Just for fun, this would be a great application of digital signatures in an area we don’t use them today. Your doctor’s office could have a simple sign indicating all the doctors in the office have been licensed by the governing medical agency, with an accompanying QR code encoding a digital signature from the licensing agency, signing the names of the doctors or something similar. You could then scan the QR code with your phone, using a generic app, or perhaps one you can download from the medical agency, and it would check the signature against the agency’s public key to ensure it was them who issued it. This is similar to how website security works today, just used in real life.

Other things worth mentioning on the supply side is that certificates of need, which today prevent hospitals from being built unless the government allows it (yes this is really a thing), would optimally not be an issue. Additionally, with price pressure from individuals actually interested in price, medical providers would have to compete on price, meaning they would need to offer good services at competitive cost to gain an edge in the market, something they don’t do now. This is an extension of my previous post that downward sloping demand curves exist in medicine. Since they do, and if prices existed, costs would be driven down because patients prefer to spend less money if they can.

Individual Annual Insurance

We’ll now start with an average adult buying healthcare. This is going to be closest in distance to arguments about healthcare today, so the ideas I’m going to suggest aren’t too radical, and you may have even heard them before. In a free market, an average person can probably buy a lot of their procedures, consultations, and check-ups on the market. Perhaps they will buy catastrophic insurance coverage in case something large happens.

Individual insurance could take several forms. It could include catastrophic care, more comprehensive coverage, or perhaps something closer to the HMO model, where you pay a network of healthcare providers a fixed amount for a fully managed healthcare service. There are interesting questions regarding how the market would deal with insurance pools. One is how it would deal with healthy patients who do not buy insurance, an issue Obamacare is seeing today, and a related problem of where insurers could just reject patients with pre-existing conditions. I’m going to get to that in the next section.

What is worth thinking about, and about which I remain uncertain, would be to what extent civil society insurance groups would spring up. Right now, people often get their insurance through their employer, but I suspect many people would gladly take more cash from their employer in our hypothetical free market system, and then buy insurance themselves. They could buy it individually, but perhaps they would join a pool, not necessarily through their employer, but perhaps through other civil society groups, such as church groups, unions, political groups, etc.  I imagine tablet wielding Libertarian Party recruiters offering membership benefits of joining the party insurance pool, as long as you promise to keep up with the libertarian reading list. These pools might be able to buy healthcare in bulk from specific providers, which might be cheaper, but that again separates patients from the price system, which is what is causing so much difficulty in the first place. The one clear benefit is that you could switch insurance purchasers much easier than you could through a job.

This is one possible equilibrium for annual healthcare markets, but it doesn’t take into account long term factors outside of a single year. Let’s explore that.

Individual Multi-Year Approaches

Suppose you buy catastrophic insurance on the market for a single year. There is a significant issue you could run into, namely a catastrophic injury or a diagnosis of a chronic illness. Now, when you return to buy insurance for the next year, the free market I’ve been bragging about creates an incentive for the insurance company to charge you much more or refuse to cover you. Not to worry, there’s a market solution here: you were just under-insured.

What is needed is a long term insurance policy that offers as a reward the option to buy insurance for years at a given rate, rather than actual coverage. This is a re-insurance market. This could be purchased early on and last for years, more similar to life insurance than health insurance.

Re-insurance is also a useful policy for allowing healthy people who don’t want to bother with insurance the ability to buy into the market. Today, many younger people aren’t joining Obamacare exchanges because they feel the coverage is too high for what they want to pay. Re-insurance could offer them the ability to buy insurance later if needed, but skip the higher premiums for now as long as they’re ok with no coverage. On the other hand, perhaps this wouldn’t be needed as they could purchase lower coverage insurance plans more appropriate to their risk level.

The question insurance is solving generally is how best to spread risk. The way we are looking to spread risk today is through involvement of more people. The long-term re-insurance solution mentioned here applies the principle of spreading risk over longer periods of time. Government’s approach is theoretically to spread risk across time and people, just unfortunately under the management of a sprawling organization that doesn’t have an incentive to manage it well. The interaction between risk spreading between time and people will be difficult to predict in a free market. Individuals won’t just be allowed to join an insurance pool opportunistically, as that would punish the people who paid in over the long term. Perhaps non-monetary trades would exist to allow opportunistic joiners (e.g. Mormons allow you to join their insurance pool if you convert, and yes this is creepy), although they can be hard to enforce. Other options might include packaging (your dues cover several services including insurance, but perhaps also advertising for the group or funding a rec center), or paying in over several years before being allowed access to the insurance pool.

One could also imagine a different strategy for charities, such as health NGOs that instead of offering only free primary care to the needy, they also buy transferable re-insurance options. When someone comes in with an infection, they can provide free care, but when someone comes in with a chronic illness, the charity can transfer one of their re-insurance options which would allow the patient to buy affordable coverage for the long term.

It’s also worth noting that while annual insurance policies in this regime don’t really have an incentive to get you to go for preventative healthcare (since if your doctor finds something, they have to pay for it, while you might switch to a different provider next year), long term re-insurance plans would actually pay you to obtain preventative care to catch something early since they are on the hook for long term costs if you wait.

So far, a patient actually has a lot of choices in this hypothetical system; they should be able to compare and measure different procedures and providers for various healthcare services; these providers could have different licensing regimes, and be less supply restricted resulting in lower costs. Competition on price should also drive down costs and drive up patient benefits. Unexpected expenses that are still too expensive could be covered by insurance policies purchased by patients. Various levels of coverage could be offered, including long-term re-insurance options to buy coverage at a set price. These could be combined with insurance pools to spread risk further both among different people and longer periods of time.

Insurance Information and Genetics

While patients want to spread risk, insurers don’t face the same incentives. They will get as much information as they can about a patient in this hypothetical world to charge them for risky behaviors. We could, of course, go back another layer and talk about “hobby insurance” or something like that; motorcyclists have higher health insurance premiums or something, so when people are young and don’t know what activities they will engage in later, they buy some insurance that covers them if they get into a dangerous hobby. However, this doesn’t work that well, as these risks are much more agent-driven than others; people can know they want to get into mountain-climbing or motorcycles, so they may buy the “hobby insurance” knowing they are going to do dangerous hobbies, which immediately provides a payoff. There are some ways around this; maybe you can only get coverage for several years in the future if you are still doing that hobby, and you take the full risk now.

Overall this isn’t very satisfactory, and that’s because we are thinking about this backwards. Setting aside things we can’t control, like genetics, engaging in dangerous hobbies voluntarily seems like something we would want to respond to incentives. After all, we are restricting this by definition to things the patient can control. The analogy is that the state wants us to be healthier especially if the state is covering our medical bills. But when the state haphazardly tries to promote healthy things or safe driving, it feels quite coercive and frustrating. The insurance solution is to just charge people more for risky behaviors. Sidestepping the libertarian-Marxist debate about coercion, this outcome doesn’t seem that bad from a consequentialist perspective. Motorcyclists get injured, which costs resources in our health system, even this free market health system we are describing. If fewer people did dangerous activities, there would be fewer resources needed to fix their medical problems, which means those could be used elsewhere.

This type of thinking seems much more unfair if we expand it to include other things such as being overweight, or being sexually active. In today’s world, it seems likely insurance companies would consider being sexually active to increase risk or health costs, not to mention likely cost discrimination against gay men. I’m not sure there is a good solution to this. There will also be debates between insurers and customers on what counts as “controllable”. We can hope that the market will efficiently figure out what can be insured against (things that are not controllable), and offer insurance accordingly. This will most certainly be unsatisfactory to people caught in the system without as much coverage as they would like.

On the topic of things you definitely can’t control, genetic factors affect health, and it seems in this unregulated environment, customers will be forced to take genetic tests in order to be offered coverage. Of course, what is needed here is a form of “genetic insurance”. But when exactly would you buy that? Your genes are part of you already! There is no time you can buy insurance to avoid risk of a state that you’re already in. Well, it turns out there is still a good time to buy it, and that’s before you’re conceived. Parents can purchase “genetic insurance” for future children. In all likelihood, it would probably be combined with long-term chronic health insurance as well, as chronic problems could arise because of genetics. There may be different approaches to this, as you’d want the insurer holding the other end of the policy to be able to pay out potentially many decades into the future.

Finally, the pre-conception insurance piece would probably include pregnancy related complications as well. Or perhaps that will remain the domain of the health coverage of the mother. Exactly where it falls though is important for understanding the incentives which can be quite disturbing; since parents are looking to gain coverage for various genetic problems, insurance companies may calculate that it’s cheaper to pay for abortions of fetuses that are diagnosed with very expensive genetic problems. Pregnancies themselves can cause lots of complications though, so perhaps companies won’t want to have women go through lots of pregnancies. However, this depends on whether the same company is covering the mother and the child. If they don’t have the correctly aligned incentive, they could offer discounts to mothers who put their lives at risk. In an efficient market, the mother’s insurance company would compensate them for not doing that, so it would work out. Of course, markets are never as efficient as we would like.

Conclusion

I’ve constructed a complex series of possible insurance schemes, however I suspect an individual could roll most of them into a single long term life/health/genetic insurance policy initiated as early as possible, preferably by their parents before they’re even conceived. There’s a chance this approach will be too risk inclusive, and it will end up being a re-insurance scheme, but that’s really up to the market to decide. The main point is that insurance schemes can be constructed to properly shift risk around and avoid catastrophic and unplanned health issues. There are some lingering risks about how best to utilize risk pools or how to deal with insurance companies that go bankrupt, but generally speaking, there seems to be a framework for a free market solution to exist.

Nonetheless, the ability of insurance companies to use every possible way to gather information about you means that there will be a real “tax” on freedom to live our lives the way we want. I suspect from a consequentialist perspective, there is a lot to gain here, like people having financial incentives to exercise more, drink less, do fewer drugs (since drug laws probably won’t be enforce). On the other hand, from a libertarian ideal, having to pay for more expensive insurance because you drink a lot or have lots of sex seems patently unfree. Yet, this seems better in many ways than how government might deal with risky behaviors: bans, massive public relations campaigns that might not work, or simply doing nothing and letting the problem build. Social solutions, like public shaming for risky or different hobbies also seems fairly aggressive and unfree. Perhaps this is an acceptable middle ground where risk averse people are compensated by risk takers through the method of insurance.

There are serious issues though. The most obvious is that many people would have trouble buying insurance, especially if anything needs to be paid ahead of time, or all at once. In response, many would probably forego insurance altogether. This would result in poorer health outcomes and more expensive costs in the long run. The solution here, if the state were available, would be something like government transfer payments, or health credits.

Another issue is that people are poor planners. If cultural norms were changed such that everyone purchased some insurance plan when having children, that would probably help the situation. With today’s technology, they probably wouldn’t even need to do it prior to conception because genetic data on fetuses in the womb is scarce apart from diagnosing trisomies (like Down Syndrome). Of course, this stateless healthcare system would only come about through serious upheaval as mentioned in the intro.  The “correct” social norms surrounding this new insurance model may not properly take hold, as tons of social norms will be overthrown.  Even though it would probably help fix other issues we see today like mothers who can’t afford pre-natal care (since long term insurance companies would be heavily invested in making sure the pregnancy goes well), hoping social norms are correct seems optimistic.

Finally, the takeaways are that insurance is a pretty powerful tool, and where government could perhaps be most useful is in fixing income problems so that those with few means can participate in the market. The system described here is radical, and probably not something anyone but the most radical libertarians would choose to move society towards. At the same time, it also shows that there is room for significant improvements in insurance incentives even while keeping the high amount of government involvement in the healthcare market today.

 


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Free Market Assumptions in Healthcare

I’ve encountered an unexpected concept when debating and discussing healthcare solutions in the United States.

Healthcare in the United States contains both public and private actors, but it’s most important characteristic for a libertarian critique is its lack of price signals. Healthcare is not purchased in an open market. Patients select healthcare providers based on reputation and what their insurance covers, but most patients do not choose their insurance provider. That is usually done by their employer or the government (in the case of Medicare and Medicaid). Conversely, healthcare providers do not charge patients, they charge insurers where prices can differ by provider and by procedure. EconTalk recently had Christy Ford Chapin on to discuss the history of American healthcare and I would highly recommend the episode.

The libertarian position (and mine) is that healthcare could be improved with prices. There are many ways to do that, you do not necessarily need patients to pay those prices, but you need them involved in the decision making process. Otherwise, there is no downsloping demand curve, and therefore there is no incentive to improve efficiency in the market. Thus, we see higher prices over time instead of the usual results of technological innovation: higher diversity of choices, higher quality goods, and lower prices.

This post is not a defense of whatever Republican healthcare bill is now being floated to replace or repeal Obamacare. This is only an argument that having known prices and price transparency would allow for demand and supply curves in the health care market. Such a characteristic could be part of a host of possible healthcare policy landscapes, and I’m only saying that a landscape that has prices is likely better than one that does not. Today, and for most of the history of healthcare in America, the healthcare industry has not been governed by an openly priced market.

Such a libertarian critique is separate from the argument that a “free-market” system with prices would hurt the poor. This is a valid critique that could be addressed with direct cash grants or other form of government subsidy that avoids having healthcare prices set by the government (refundable tax credits, health savings accounts, etc).

The remarkable argument I’ve heard is that if we allowed healthcare to be purchased in a market with prices, it would fail because you “can’t have” a free market in healthcare. It’s hard to nail down exactly what these people imagine would happen, but it seems that they believe prices themselves would not obey the laws of demand and supply. I will now list some arguments I have heard, some of them several times, and why they are incorrect. Certainly these arguments are poor and perhaps I am wasting time with them, but apparently they are common enough that I have run into them several times and therefore must be addressed.

“Healthcare Demand is Inelastic”

This is by far the most common point I’ve heard. It’s not usually stated in economic terms, but more like “if you are in need of emergency medical care, you’ll pay any amount, and this breaks normal market assumptions”.  However, I’ve also heard it stated that evidence of competitive markets working in elective procedures (Lasik or plastic surgery) does not apply to regular medicine because of demand inelasticity.

Firstly, the assumption that demand for medicine as a good is totally inelastic (i.e. quantity would not respond at all to price) is obviously wrong. That would imply there are no unnecessary procedures done ever.  Yet we all are aware that because doctors are often paid per procedure, they are often incentivized to conduct tests because there is very little downside (i.e. it costs neither the patient nor the doctor anything to run the extra test). If there is no elasticity, then there is no room for reducing the amount of procedures done by doctors. I doubt that.

Nonetheless, let’s grant the assumption, or at least let’s say that demand elasticity is very low.  That means at higher prices, you’re likely to consume a similar amount of medicine. That sounds more reasonable; if you’re sick, it’s not your choice.

Ok well…so what? We can have competitive markets with marginal revenue very close to marginal cost even if demand elasticity is low. Gasoline is a classic example of an inelastic good, yet the gasoline market is highly competitive. Prices work without issue here. Again, we’re not saying that poor people would be really happy with prices, we’re just saying that prices would exist if patients could purchase healthcare in a market.

Another related point is that if you have a medical emergency, you’re not really in a position to negotiate prices. This, however, is not just due to demand inelasticity, but also monopoly pricing.  If you’re injured, you can’t just go to a different hospital, so the ER you arrive at is pretty much the only place you can go. This is a fairly good argument for government intervention in the ER. However, insurance is also a pretty good solution; if you won’t be able to make a choice in the moment, you buy insurance so that when the moment comes, you are already prepared. There is no economic reason that medical emergency insurance could not be purchased in a free market. Additionally, medical emergencies are a small part of the medical industry. The vast majority of medical procedures are not emergencies, and so for most situations, monopoly pricing is not an issue.

“Knowledge is imperfectly distributed in medicine”

Again, the fact that market actors have imperfect knowledge does not mean a market cannot exist. It may mean there are market failures, but government interventions are subject to government failures which may or may not outweigh the benefits of trying to fix the market failure. Moreover, this proves way too much, as it implies that you can’t have any market with imperfect knowledge, yet all markets suffer from this, and plenty are functioning just fine. In fact, I’d argue that prices are the single best way to spread knowledge.

Imperfect knowledge is usually fixed through regulation, like accreditation or inspections. You don’t have the knowledge to know that your airplane doesn’t have mechanical problems. Nonetheless, you are quite capable of comparing the prices of different airplane tickets, and you’ll likely respond to market forces when purchasing a ticket. Certainly imperfect knowledge is an argument for regulation, and I’m sure I’d disagree with plenty of people on how much regulation is necessary, but there is no world in which it then makes sense to argue that imperfect knowledge precludes a functioning price system.

“People are irrational”

First, people don’t have to be economically rational, nor do markets have to be free from regulation in order to create accurate economic modeling. To make the claim that economic analysis can’t be done with healthcare because the market is not perfectly competitive, or actors are not perfectly rational, again proves too much; economic analysis would be “fatally flawed” in all markets. The only question that needs to be asked is whether it’s possible patients might call two different places for a quote on a chest CT or an MRI. If some of them would do this, there would be competitive pricing, even if most don’t know what an MRI actually does.

“Healthcare is too expensive for a market to function”

This point sort of ignores the thesis that we are arguing, as all I’m trying to say is that prices can exist in the healthcare market. However, this is related and while it’s a bad argument, I want to address it briefly.  Healthcare is pretty expensive, although I suspect that it would be cheaper if market prices were used. The obvious answer to me would be to imagine if the government gave a large amount of money to an individual to pay for their healthcare for a year. That would fix the endowment issue where the poor are excluded from the market. In this hypothetical, my thesis suggests that there would be a variety of options for healthcare spending, such as paying out of pocket, buying a high deductible insurance plan, subscribing to a doctor network, etc. All of these would be examples of functioning markets in healthcare. Additionally, if recipients were allowed to roll over funding into the next year, they’d be incentivized to find good deals this year.

My thesis is not that the government should stay out of healthcare, but that interventions that keep prices in place are preferred.

“Morally, patients should not have to pay for healthcare”

Again, this isn’t really an argument against my thesis, but I have heard it. It’s a bad argument, so I’ll address it briefly.

If we take a consequentialist utilitarian moral standpoint, there is no a priori humanitarian reason why patients should not pay for part of their healthcare. In other words, if patients paying for part of their healthcare creates benefits for all of society, including almost all patients and future patients, then the moral thing to do (from a utilitarian perspective) is to have patients pay for some of their healthcare.

So would there be benefits if patients paid for healthcare? Well, first you have to establish that prices can exists. We’ve done that for the theoretical, but how about the empirical?

Empirical Data

The first point is that in the area closest to healthcare where there are transparent prices, elective procedures, we see functioning markets with costs going down over time.  Highlights include:

1. For the top ten most popular cosmetic procedures last year, none of them has increased in price since 1998 more than the 45.4% increase in consumer price inflation (the price for the hyaluronic acid procedure wasn’t available for 1998), meaning the real price of all of those procedures have fallen over the last 18 years.

2. For three of the top five favorite non-surgical procedures in 2015 (botox, laser hair removal and chemical peel), the nominal prices have actually fallen since 1998 by large double-digit percentage declines of -25.2%, -43.8% and -23.5%. That is, those prices have fallen in price since 1998, even before making any adjustments for inflation.

3. Most importantly, none of the ten cosmetic procedures in the table above have increased in price by anywhere close to the 93% increase in medical care services since 1998. The 23.2% average price increase since 1998 for last year’s top five most popular surgical procedures, isn’t even close to half of the 93% increase in the cost of medical care services over the last 18 years.

However, there are some doctors who just take cash for normal, non-elective procedures. These would be procedures where there is “inelastic demand”. What happens to these doctors? Do they go bankrupt immediately? Is everyone confused and bewildered? Not really, it just works like any other market. They post their prices online, and people come and pay for their procedures directly, without insurance. The Oklahoma Surgery Center is one of the more well known health centers with this approach:

The Surgery Center would charge $19,000 for his whole-knee replacement, a discount of nearly 50% on what Villa expected to be charged at his local hospital. And that price would include everything from airfare to the organization’s only facility, in Oklahoma City, to medications and physical therapy.

And once that happened, lots of groups were incentivized to send their patients there, making other Oklahoma hospitals compete.

While no organization keeps track of how many cash-based medical centers have cropped up nationwide in recent years, Smith and Lantier say they’ve witnessed an explosion. In Oklahoma City alone there are roughly three dozen centers that are all or partly cash based, specializing in everything from radiology to oncology.

The RAND institute ran an RCT in the late 70s that found patients who cost shared saw a reduction in unnecessary procedures. Obviously it’s pretty old, but I’m doubtful human nature has changed that much from the late 70s; if people have an opportunity to save money, they will do so. Healthcare policy should utilize that.

More recently, in 2008, Oregon had a Medicaid experiment, where several people were given access to Medicaid based on a lottery. Thus, a study was conducted to determine what the affects were of having access to Medicaid. As you would expect, patients with Medicaid coverage were much more likely to utilize healthcare generally, and more likely to go to the ER. The price of medical care went down when this group was enrolled in Medicaid, and consumption of medical care went up. This supports the notion that healthcare has a downsloping demand curve…just like every other market that has ever existed.

Finally, there was a study done in 2015 looking at the healthcare system and it’s lack of prices. It found that transaction prices, that is prices negotiated between hospitals and insurers, still accounts for much of the differences in private inpatient healthcare spending. It also found that even after controlling for several different variables, hospital monopoly power was responsible for higher prices. This seems to indicate to me that if we had significantly more price transparency in a functioning market, hospitals and patients would respond to those incentives, creating incentives for lower prices and better, more efficient care.

Conclusion

This isn’t revolutionary by any means, but there’s seems to be plenty of empirical and theoretical reasons that if we had transparent pricing systems in the healthcare industry, it would function similarly to prices everywhere else in the economy. Certainly the use of insurance complicates things, but the way we use medical insurance is a result of the unique way we created the medical payments system as detailed in the EconTalk episode mentioned at the top of the post. There is no technical reason we need to retain that system, and I think transitioning towards more procedures having known prices would be beneficial, whatever that system would be.

 


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Against Hillary: Healthcare

This is the third post in my series opposing Hillary Clinton’s candidacy. See the introduction in Part 1 here. Read my opposition to Trump here. Read why you should mathematically vote for a third party here.

Healthcare

Now we’re turning to a subject where there may be an unavoidable Fundamental Ideological Disagreement. Nonetheless, I think there may be some agreement that the current healthcare system has many problems.

In 2009, the Democrats had complete control of the presidency, the House, and even had a super-majority in the Senate. Their priority was healthcare reform: the American system was prohibitively expensive, spent too much money even when patients were covered, tied your healthcare to your job, denied coverage to people with preexisting conditions and others who could not pay, and did not properly align preventative care incentives. They took a fundamentally left-leaning, centralized, top-down approach to solving these problems. The Obama administration specifically stayed out of the legislative process allowing much of the law to be patched together through Congress. They solved some of the problems in the American health system (and those steps are to be commended), some they tried to solve, but didn’t, and some they ignored altogether. Ironically, for a piece of legislation often called the “Affordable Care Act”, one of the problems Obamacare largely didn’t touch was the lack of market forces and pricing pressures on healthcare, guaranteeing the price problem would worsen.

When it comes to allocating resources, incentivizing cost saving and innovation, and producing the best quality goods for the lowest possible prices, there is no better system than a competitive free market with unregulated prices. Sellers seek to provide the best product at the lowest cost so that buyers will want to purchase them.  I’d hesitate to even call it a system, since, apart from pricing systems and private property, everything is driven by individuals making decisions, according to their own priorities and needs. Markets do have problems, but the biggest one is that poor people won’t have the money to get the product (i.e. healthcare) they need. Unfortunately, instead of just fixing that problem by giving government healthcare subsidies to the poor, Obamacare tried to solve all the problems of the entire healthcare system through legislation. Obama had an unprecedented opportunity to encourage both market reforms and increased coverage for the poor, but instead opted for the (politically easier) increased regulation on a system already heavily strained by bad rules.

Instead of making it easier to purchase healthcare as an individual, Obamacare cemented the relationship between employment and healthcare. Instead of allowing consumers and doctors to figure out some prices with high deductible insurance plans, Obamacare mandated many more items be specifically covered by insurance plans, thus hiding their costs from patients. Instead of allowing insurance and consumers to follow their own incentives to promote preventive care, Obamacare mandates one-size fits all preventative care regulations which encode waste into the system. For more critiques of the system, check out this review in the Cato Journal.

The result is a system that solved the problem of coverage for the poor and people with preexisting conditions, but did not fundamentally solve the lack of market pricing and bad incentives. The mandates on insurance companies and hospitals (besides creating waste) increased the cost of providing care. The increased cost was supposed to be alleviated by subsidies and more young people entering the system, but the costs have been higher than expected and thus fewer people have signed up than had hoped. Perhaps more subsidies would get more people to sign up, but that doesn’t really solve the fundamental issues, just puts the burden of cost onto the taxpayer instead of healthy consumers. As a result of a lack of healthy young people in the system, insurance companies are raising premiums, despite downsloping demand curves (you drop prices to bring people in, not raise them). Clearly, the problems will only continue, and we’re stuck in a political situation where some parts of Obamacare are popular and now can’t be politically taken back, despite them being unsustainable.

Hillary Clinton wants to keep much of this situation intact. This is a terrible policy. We need real market reforms or this cost growth will continue. This isn’t even to suggest that an insurance mandate would be bad policy, or that the poor shouldn’t be able to get healthcare subsidies; but if there is no price competition, no ability for consumers to choose their healthcare provider, then there are no ramifications for patient or doctor’s actions that are inefficient or unnecessary. The costs are just socialized by the system and the problems never fixed. And it’s not like we are out of ideas for fixing the healthcare system: ending healthcare ties to your employer, allowing for more widespread use of HSAs, scaling, split benefits, and reforming scope of practice laws are just some of those. Over the last 15 years, American middle class wages haven’t improved much. Yet healthcare costs (and spending as a part of GDP) has gone way up. Perhaps if these costs were better controlled (and not paid by employers), more of the productivity gains would return to middle class incomes. But we’ll never find out when Hillary is president.


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Picture Credit: Gage Skidmore, licensed under CC BY-SA-2.0

Follow-up: Not that wrong about Obamacare

Anytime we see something that challenges our worldview, it’s important to acknowledge it, and investigate whether our model of the world is incorrect, or at least to acknowledge our mistake. Otherwise, we cease to be engaging in discussion and building on knowledge. About a year ago, Josh, one of the former authors on this blog, wrote an excellent piece about how his predictions of massive failure for Obamacare did not seem to be coming true:

I Was Wrong About Obamacare

But now, a year further along, it seems the healthcare system isn’t doing so hot. The Wall Street Journal wrote in October:

Among this population of the uninsured, HHS reports that half are between the ages of 18 and 34 and nearly two-thirds are in excellent or very good health. The exchanges won’t survive actuarially unless they attract this prime demographic: ObamaCare’s individual mandate penalty and social-justice redistribution are supposed to force these low-cost consumers to buy overpriced policies to cross-subsidize everybody else. No wonder HHS Secretary Sylvia Mathews Burwell said meeting even the downgraded target is “probably pretty challenging.”

Late in December, Reason reported:

United announced during an investor briefing Thursday that it was expecting a whopping $425 million hit on its earnings this year, primarily due to mounting losses on its Obamacare exchange business. “We cannot sustain these losses,” United CEO Stephen Hensley declared.

And also in January:

Aetna, for example, has already dropped out of the exchange market in two states. A dozen of the 23 non-profit co-op plans backed by the law have already closed up shop, causing about 600,000 people to lose health plans, and a Politico analysis indicates that most of the remaining co-op plans are in trouble. Blue Cross Blue Shield of Texas and North Carolina both lost a sizable chunk of money on its exchange business during the program’s first year. The financial outlook for a number of insurers participating in Obamacare, in other words, doesn’t look good. And there are few signs that it is set to improve in the near future.

February:

Yet, the mandates aren’t working as planned. My colleague Brian Blase recently summed up the difference between the projected numbers of people who were expected to enroll in the ACA during this third open enrollment and the people who actually did. He notes a high estimate of 12.7 million people signing up for an exchange plan. But Blase actually thinks there will only be an average of 11 million enrollees this year. That’s 16 million fewer than the Rand Corporation predicted, 11.8 million fewer than the Centers for Medicare and Medicaid Services predicted, 12.1 million fewer than the Urban Institute predicted and 10 million fewer than the Congressional Budget Office projected.

It seems more likely than not that there will need to be some sort of change to the health system. Perhaps Josh’s predictions were too dire, but overall, I would retitle his post “I was still mostly right about Obamacare”.