Wednesday, August 13, 2008

Fourth-Party Payer Problems

Two of the core concepts in analyzing health insurance reform are 1 ) the so-called "third payer" problem and 2 ) the historical accident in the United States which has tended to tie group health insurance to the employment relationship. Each of these factors has its own attendant distortions. What I want to argue here is that they interact in a particularly perverse fashion.

The "third payer" problem is not unique to health insurance. It occurs with other kinds of insurance, and even other types of economic activity. Consider automobile insurance. If you are rear-ended, suppose the payment for repairs falls to the other person's insurance. What typically occurs in the negotiations over the repairs? Because you are not paying the bill for the repair, you have every incentive to instruct the paint and body shop to provide for essentially a gold-plated repair job, perhaps even beyond what is needed to return your car to its pre-crash condition: brand new own-brand replacement parts, possibly repairing damage or wear that existed before the accident, and so forth. The insurance company which is footing the bill naturally has an incentive to resist at every turn. Anyone who has ever been involved in one of these disputes knows they can be unpleasant. For a more mundane non-insurance example, suppose you told your teenager "I will buy you five new shirts for back-to-school." If nothing else transpires, the person who chooses the clothes is not the person who pays the bill. This "third party payment problem" is endemic in health care, where the people who choose the level of services are typically not the ones who pay the bill.

But this is where the tie to the employer comes in, with what I call the "fourth party payment problem." In the automobile insurance example, the consumer does have some long-run choices to be made. If it is your insurance company that is balking, you can shop around for companies with better reputations. Some even advertise how they help you get what you are entitled to from the other companies. Certainly through advertisements, word of mouth reputations, and well-respected independent ratings sources (such as Consumer Reports) a consumer may obtain information that allows him to exercise competitive pressure before the "third party" problem is an issue. In health care, however, even that minimal level of competitive pressure is distorted because we employees often don't have any choice (or only very limited choices) over our health carriers. Very few employers offer a full "cafeteria" plan of all available health insurers and HMOs, many provide a small set, some simply make a single choice for all employees. And, the criteria that employers use to choose health plans may not be the ones that employees would wish. Taken at the limit, an insurance or HMO plan that held down costs by being aggressive in fighting health-customer wishes might be the one favored by a cost-conscious employer. Many times, employers use their employer contributions to distort the underlying rate structure. How many automobile insurance companies that you know of simply have two rate levels: one for individuals, and one for "family" coverage, where "family coverage" could mean anything from you plus one spouse, or you and one non-spouse partner, or you and one spouse and four teenage drivers? Furthermore, if you don't like those rate classifications, you can always go shop around. That's almost never the case with employee-provided health insurance. With the fourth party payment problem, at best you incur the incredible transactions costs of switching employers, and that supposes that your new employer doesn't alter its plan after one year. Trying to argue with your human resources department that you and your spouse shouldn't pay the same "family" premium as a family of eight is just spitting in the wind. Can you imagine if we paid for restaurant food under this same system? (In Florida, the system is even worse. As an employee of Florida State University, I pay money to Florida State, Florida State has its own rules and bureaucracy and pays money to an independent contractor for the State of Florida, the independent contractor for the State of Florida has its own rules and bureaucracy and then pays the insurance company, which has its own rules and bureaucracy. I effectively have "fifth party" payer problems! I have three different health care ID numbers: one at Florida State, another for the State of Florida, and a third for the insurance company. I can't threaten even to move to a different employer if that other university is also a part of the Florida system. And, when as has happened to me repeatedly, a computer error threatens to cancel my health insurance, I end up with three bureaucracies pointing fingers at one another.)

All of this is a reason that I believe that the most important part of health insurance reform is to pry apart the welding of the employment relationship and the individual's decisions about health insurance coverage. This involves moving the tax deduction for health insurance away from the employer and to return some competitive pressure to the employee.* Employees could buy individual policies, or, for favorable group ratings, continue to associate with the other employees of their current firms. We might see a return to non-employee based group ratings that existed long before our current system. Group ratings could be available for fraternal organizations, affiliation groups (AARP hosts various types of independent insurance plans), churches, trade associations (the American Economics Associational already hosts group rates from outside life insurance companies for its members) and so forth. Something very much like this was the model for many years for membership in credit unions. With this reform, I believe that a major anxiety about health insurance ("If I lose my job, I lose my employer-provided health benefits") would be significantly attenuated.

Please do not misunderstand me. Moving health care choices to individuals and away from employers is not a win-win situation. Employee-provided health care insurance packages have served as a social vehicle to force comprehensive ratings pools that avoid, to a large but not complete degree, the problem of "individual rating." In car insurance, we tend to accept individual rating. Young male drivers with a lot of speeding tickets tend to pay much higher premiums, and sometimes getting any insurance may be a problem. I believe that we accept this because many of the rate disparities are tied either directly to individual behavior (lots of crashes and tickets) or indirectly to unseen attributes that have obvious basis in statistical reality. Every parent may believe that their 16 year old son drives more safely than 95 percent of the 16 year old girls they see around town, but the aggregate statistics are pretty compelling. With health care, if we re-boot the system to tie health insurer choice to individuals, what do we do with the people who already have cancer, heart disease, MS, Cystic Fibrosis, and so forth? How do we handle the incredible advances for genetic screening, even probabilistic genetic screening? This is the Achilee's Heel of such a switchover, and I will consider some possible solutions in a later post.

*Because about half of all American pay very little in income tax, we might have to move to a refundable tax credit system.

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