Trouble Indemnity Redux 1: The House Democrats' Bill

I was hoping to find a nice, point by point summary of the House Democrats’ proposed health insurance proposal, and then walk through the outlines of how the legislation addresses the problems that I posted in earlier segments of Trouble Indemnity. Unfortunately, the bill is so complex and long that that what I’ve found is that most internet-accessible sites focus on the parts of the bill that they want to highlight to make their point. Not to mention that the predictions about the effects of the bill are all over the map. For example, the estimates I’ve seen as to how many people will lose their current health insurance and be forced into the so-called “public option” vary from just a few million to well over half of currently insured Americans. (I know, President Obama says that if you like your current coverage you’ll be able to keep it. I don’t know how to put this delicately, but I haven’t read any serious analysis of the House Democrats’ bill that suggests that the President’s statement is credible with regard to that legislation).

So, while I had hoped to be able to reference a non-partisan, definitive website, I’m going to have to just go with my best analysis of what I have concluded by reading several different news sources (The Wall Street Journal, Brookings, and the Heritage Foundation among others). I will try to update if I find something is really off-base.

Trouble Indemnity 1: Incomplete Contracting and the Third-Party Payer Problem. I see only three general ways to deal with this problem (how do we address issues of “When does someone receive possible almost endless and/or possibly almost infinitely expensive medical treatments?”). One is through an indemnity system: the patient and physician are the gatekeepers, and the incomplete contracting is addressed by deductibles, co-payments, and total payment limits spelled out in the insurance contract.

The second is through a privately contracted HMO-type system where the private insurer has a rationing system, again with the basic parameters spelled out in the contract. The third is a government-rationing system where the political system decides who gets what, and the parameters can change as the political system changes.

Right now we have parts of all three. Indemnity and HMO systems exist, but too often the only choices that an individual can make are those offered by the employer. Medicare and Medicaid have attributes of the political rationing system, and many state governments get into the act with statewide regulations on private insurers.

It’s pretty clear that the House Democrats plan is a much greater reliance on political health care rationing, even for those individuals not forced into the so-called “public option.”

Trouble Indemnity 2: Moral Hazard. In principle, I would say that the House Democrats plan makes moral-hazard more of a problem, but I’m not as convinced as I know others are that moral hazard plays a huge role in health insurance. If anyone has evidence to the contrary, please let me now.

Trouble Indemnity 3: Adverse Selection. It appears that the House Democrats’ legislation would require individuals to purchase insurance (with a tax penalty for those who don’t comply). As I discussed at length, this is a one part of an option to address the adverse selection problem, the other part being that insurers are restricted as to whom they can reject for health reasons. But, another part of the adverse selection problem is how the “public option” will be priced. The House Democrats’ bill seems to mandate that the public option be priced below private insurance rates. This could, of course, provide incentives for individuals (or employers looking at their employees) who are relatively healthy and thus don’t mind the shortcomings of a public system to abandon private health plans. If this happens, then private plans will be stuck with relatively sicker customers, putting more pressure on those plans to either raise rates further or fold.

How do you mandate coverage if you believe that health insurance currently is too expensive, primarily, it is argued, for the “working poor?” That’s where the requirement for federal tax revenue comes in (a system of subsidies), and thus the associated tax increase required to pay for the House Democrats’ proposal.

Trouble Indemnity 4: The Employer Tie-In.

For whatever is left of the private insurance market, the House Democrats’ bill strengthens the historical tie between the employment relationship and health insurance.

Almost all businesses will be required to offer health care to their employees (the threshold for a “small business” exemption appears to be quite low). However, businesses can, in fact, refuse to provide health insurance or even drop existing plans if they pay an alternate penalty. The figures being quoted seem to make that a relatively attractive course of action, leading to the question of how many employers will cancel their current health coverage and switch their employers to the “public option.” This is one of the avenues through which the President’s statement that you can keep your present health insurance coverage is misleading. You can keep it if your employer doesn’t shut it down. (Or, as I read one e-mailer argue on a blog site, the President said "If you like your current plan ..." nobody guaranteed that after all of these changes that anyone will still like their current plan.)

Next on deck is the plan coming out of the Senate, where there appears to be a genuine attempt to design a bi-partisan bill. I will try to do a similar analysis of that proposal.