Hit the "Reset" Button

I didn't blog in great detail about the Senate's version of the health-care bill. A short summary is that I thought it was superior to the House version in principle but that it collapsed into a morass of special interest deals and unintended consequences that made it one of the worst pieces of legislation I've seen since I worked in the U.S. Senate in the 1970s. The unexpected election of Scott Brown in the Massachusetts U.S. race seems to afford a window for Congress to go back to the drawing board and produce a truly bi-partisan and measured piece of legislation.

So, what would I actually recommend (after all of these posts commenting on what other people have proposed)? I thought about this last night, and I think, if I were the new health-care-reform czar (presumably the President will want to listen to some new advisors after the Massachusetts election) here is what I would propose:

1 ) Get Republicans on board with two things that they think are important:

a ) Use the Interstate Commerce power of Congress to stop states from restricting interstate sales of medical insurance. Specifically, deny the states the power to insist on expensive bundles of mandates. Fire up a market for no-frills insurance, what in my parents' day was called "major medical" insurance. Let the medical insurance companies compete on price and quality like GEICO and Progresssive and Allstate do on automobile insurance.

b ) Include tort reform to restrain the costs of medical malpractice insurance.

2 ) Keep the "Cadillac tax" idea from the Senate bill, but make sure that the cut-offs are indexed for inflation.

3 ) Estimate the revenue gained from # 2) above. Call this revenue $M. Get together a top-rated collection of health economists, and tell them that they have $M to work with, and ask them to design a system with the following three possible uses of that money to find the most effective and least disruptive ways to expand current medical insurance access:

a ) Return the money to the states so that they can increase the Medicaid eligibility limits. In other words, don't impose unfunded mandates on the states such as the ones that led to the infamous "Nebraska exception". If we want states to expand Medicaid, provide them with the money to do so.

b ) Offer a refundable tax credit for individual purchases of medical insurance.

c ) Use the money to require the interstate competitors (see # 1 above) to participate in a "high-risk" pool for people with prohibitive pre-existing conditions. (This is similar to how many states deal with "high risk" drivers.) This might include a new mandated "no-pre-exisiting-condition-exclusion" benefit for anyone who is covered by any sort of insurance policy as a child, and who agrees to stay in some policy as he/she becomes an adult.

Thursday Thoughts

I. Doug and I have just had a short analysis article published in the Presbyterian Outlook. The topic is the review that the Presbyterian Church (USA) is undertaking regarding its Washington lobbying office.

II. I was very interested that President Obama switched away from using the Post Office as his analogy for a government health insurance program to using thepublic/private mix in higher education. Recall that I wrote about that analogy here is Wise As Serpents in "The Post Office Always Rings Twice" back in August. It is an important example (and I think one of the few examples) in which we see a significant, stable mixture of government and non-government providers (it's actually an interesting mix among governments, non-profits, and even some for-profit providers). I raised the analogy to see if we could consider why higher education was so different than first class mail (the Postal Service is protected as a monopoly), Amtrak, and Fannie Mae/Freddie Mac. I came up with three hypotheses, none of which applies, as far as I can tell, to the President's plan for health insurance (even reading texts from his specch I still don't really know what his plan is). As a quick review, the three attributes that I hypothesized were important were:

1 ) The government universities are forced to compete with one another. This certainly wouldn't be the case with a national government health insurance system, and the Administration's proposals to weaken Medicare Advantage means that they are probably going in the opposite direction. It's not clear whether any of the ideas of regional public health exchanges would include government/government competition.

2 ) State governments make only minimal attempts to control the operation of private universities. This is clearly at odds with the various Democratic proposals.

3 ) We have a social norm that accepts heterogenous outcomes in higher education. I question whether we would have that same social norm with regards to health insurance. Attempts to mandate this or that in private plans, again, go in the opposite direction.

So what would a "public option" look like that resembled higher education? Perhaps:

a) regional exchanges that could compete across state line, particularly for the purpose of addressing the adverse selection problems of high-risk individuals;

b ) freeing private providers from government imposed mandates as to what constitutes an acceptable policy, and allowing consumers more choice between limited and complete plans;

c ) accepting a social norm of hetergenous outcomes beyond some core of "major medical" insurance.

In thinking about this post, I drifted towards the following thought experiment. Would we ever arrive at a system that, once it was in place, we as a society would accept that individuals had enough options that it would not be the federal government's responsibility to step in if someone, after the fact, regretted that they didn't choose some particular features in their health care plan? For example, suppose I chose a plan that excluded payment for organ transplants after I reached the age of 80. What would happen if, when I am 84, a doctor told me that I could extend my life by an expected X years by having a liver transplant? Would I be able to "recontract" by claiming, through the legal or political process, that it was unjust for my insurance company to refuse to pay?

All Kidding Aside II --- More on Health Care Rationing

Lawrence Lindsey of the American Enterprise Institute has a realistic and even-handed discussion of health care rationing in the United States and under the NHS in the United Kingdom in the U.K. Times. One of his most interesting points is that "inequality" of health care access (defined as the gap between the care received by the wealthy as compared to the care received by the typical citizen) might be greater in either the U.S. or the U.K., depending on how we might want to measure it.

The article is in no way a ringing endorsement of the current U.S. system. Lindsey notes that the U.S. does spend much more per person on health than the U.K.. Lindsey gives a full discussion of how the current U.S. system already has large government components. Nor is it a one-sided indictment of the NHS. Lindsey points out that the history of health care was different in the U.K. than in the U.S., and notes that all of the major political parties in Britain agree that the NHS has succeeded in the job it was given following World War II. But, he provides some of the answer to the question of what we get in America for this difference in systems and expenditures. One thing we get is much higher cancer survival rates. Any male reading this post should draw a circle around the fact that, according to Lindsey (and I have seen these numbers cited elsewhere, but I do not have the original sources), "a man with prostate cancer is six times as likely to die within five years in Britain as in America." As an economist who will be lecturing this afternoon on "don't confuse correlation with causality" I'm wondering what other factors besides the health care system could explain such a large gap.

One problem we have in this type of discussion is disentangling many different societal and economic changes that happened at about the same time. What it is that doctors could actually do for major illnesses changed dramatically both after the introduction of the NHS in Britain and the introduction of Medicaid and Medicare in the United States. Is the higher survival rate from prostate cancer in the U.S. due to or in spite of or irrelevant to government programs such as Medicare (federal) and Medicaid (shared between the federal and state governments). I don't know the answer to that question.

I think that these kind of discussions highlight why Christians must be "wise as serpents" in considering the facts and debating important public policy issues such as health insurance reform. The world simply does not fall into a Proverb, Prophecy, or teaching of Jesus that "Woe be to those who oppose single-payer health insurance" --- nor does it script for us "Blessed are those who rely solely on profit-maximizing insurance companies."

All Kidding Aside---Health Care Rationing and the Eldery

The issue of health care rationing has become a hot topic in the current debate over health care reform, with President Obama suddenly on the defensive from concerns that the disabled and elderly will face politically coerced restrictions on access to health care. (I think using the buzz-phrase “death panels” to describe what’s in the House bill is a stretch, but then I felt the same way about the phrase “torture memos,” so I guess people really do reap what they sow).

So let’s go back to the first installment of “Trouble Indemnity” to analyze this.

Because we can not draft complete contracts in health insurance, any health insurance system will have some aspects of what can be called rationing. The only question is how that happens, and what types of procedures are more likely to be rationed.

To restate: I can sign an almost completely defined contract on my car. I can sign a contract such that, if a limb falls on my car and destroys it, I will be reimbursed for original purchase price, current fair marker value, or replacement cost. The associated premiums will vary accordingly. The second concept, “current fair market value,” leaves the most room for post-event negotiation, but even the most generous contract, full replacement value, has a pretty-well defined bound (adjusted for inflation or not, which can be a part of the contract). The existence of deductibles will give me more of an incentive not to park under slash-pines during a tropical storm.

The problem is that no insurance system, private, non-profit, or government, can sign a contract that says “we will cure you of cancer [lupus, MS, ALS, etc.]”.

In an indemnity system, I agree to a multi-part rationing system that typically starts with the requirement that my proposed treatment has to be approved by a physician, and then includes something like a lifetime maximum benefit. Because this creates a third-party payer problem in terms of my incentives and my physician’s incentives, indemnity systems also ration with deductibles and co-pays. A second phase of rationing occurs when the system has to deal with the adverse selection problem (again, see the previous installment of “Trouble Indemnity”).

At the other extreme are single payer government plans, in which rationing is carried out through the political process. For example in Britain, this is called NICE (for a good explanation and defense of single-payer health care rationing ---although not of NICE-­­­­-- see this link in the Times).

HMOs are a hybrid in which customers, typically in return for lower deductibles and higher lifetime maximums, agree to a rationing system that over-arches the patient-physician relationship.

However, a key difference is whether the rationing system is disciplined by competition, as it is in the largely private automobile insurance market. There is usually the least customer choice in government single payer systems (although in Britain private care is an option, and Canadians have the safety valve of the USA private system just a few minutes drive away).

Is there a difference in the pattern of rationing of the kind that is the subject of the current debate over “throwing Grandma under the bus?” In my reading, there is no doubt that the NICE system in Britain adopts a rationing scheme that tends to favor younger and otherwise healthier patients at the expense of the less healthy and the elderly.

By way of full disclosure, my Mother was diagnosed with lung cancer at about age 72. She refused the offer of lung cancer surgery, and settled on palliative measures only. She lived about 3 ½ years, probably not as long as had the surgery gone well, probably longer than if she had suffered complications from the surgery. A few years earlier, she had almost died from a nose-bleed because of what must have been an inherited blood-clotting condition. She didn’t want to go through something like that again. I not only supported her decision, I used my power as her health-care power of attorney to insure that, in the last few weeks of her life, she wasn’t put into an ambulance for transport to an imaging facility. Instead, we just increased her pain medication. The point is that this was all her decision. If she had been 52, and had not had real fears of the side effects of surgery, I might have tried to argue her out of it. In any case, it was not the decision of NICE or anything like it.

Currently, in the United States, we have a hybrid system that favors the very poor (Medicaid), the elderly (Medicare), those who have a job with a company that offers a group policy (the majority of us), and everyone else who is healthy enough to obtain reasonably-priced private coverage. The least advantaged U.S. citizens are probably working people who have just too much income and too many assets to qualify for Medicaid, who lose or do not have employer-based health insurance, and who find individual health insurance policies prohibitively expensive, perhaps because they have existing illnesses, perhaps because they have the misfortune to live in states where government regulations drive up the costs of basic personal policies. (I’m setting aside the more difficult question of health care for people who are in the country illegally.)

The point is, because we are dealing with sickness and inherent contracting problems, any system is going to have rationing of something that is beneficial. If I were writing a health care plan, I would try to rely more on lower cost, readily available health care plans. If I were really in a “what-the-heck” mood, I would talk about Christian denominations re-establishing the charity hospitals that they ran for decades before they joined the current health care establishment. These approaches are no less oriented to the “least of” our society than the single-payer government plans being so fervently promoted by the leaders of the mainline Protestant denominations.

Christians and Health Insurance 3: The Post Office Always Rings Twice

Thanks to President Obama, I get to parody the two greatest James M. Cain titles in the same blog series (see “Trouble Indemnity”). I’m referring to President Obama’s claim that a socialized medical system could co-exist with continuation of private health insurance. He gave as his example FedEx, UPS, and the Postal Service. There are a couple of problems with this example. First of all, FedEx and UPS do not compete with the Postal Service in the USPS’ most visible line of business. The Post Office is a government-protected monopoly in first-class mail. Second of all, comparing government –run Obamacare with the Post Office might not be the best P.R. move that the President could make.

Nevertheless, the President asks an important question. When can private and government services of charity or compassion coexist? This deserves an empirical and not an ideological answer.

The critics of Obamacare might reference the well-documented process through which the federal government “crowded out” private religious expenditures on charity and compassion starting during the Great Depression. Fanny Mae and Freddie Mac (remember them) used their portfolios of implicit government guarantees and regulatory advantages to gain huge market dominance in the mortgage industry. (Technically, Fannie and Freddie were “Frankenfirms”: some weird hybrid of being investor-owned yet quasi- government corporation). Amtrak (pretty much by design) displaced virtually all private rail travel in the United States. Again, Fannie Mae and Amtrak may not be the most effective advertisements for government-run health programs.

However, I can think, from close personal experience, one industry in which government and private (essentially non-profit) organizations seem to coexist: research-based higher education. Our list of exclusive research universities certainly includes many private institutions, but think about the rankings of programs at Georgia Tech, The University of Virginia, many of the UC schools, the University of Texas (sorry, Dad) and the University of Michigan. On the other hand, we have a tremendously healthy system of private universities even though in most, but not all, cases the state tuition subsidies are not transferable to private universities. Granted, many of the public schools receive beaucoup federal dollars, but they are still remarkably independent. Here are some hypotheses (not yet proven theorems) about this situation. It would be a good exercise to ask what this model would mean for health insurance reform, so I’ll try at the end.

1 ) Whether we like to think about it or not, the public schools are essentially vouchered and thus are forced into intense competition with one another. We take for granted that K-12 schools are organized by “districts” or “attendance areas”: proposals for school choice are all about breaking up those geographical monopolies. But those of us who teach at state universities are all too aware that no such in-state monopoly protection exists for us. We at Florida State must compete for the best and the brightest students from Miami to Pensacola. I conjecture that the quality of public universities would be much lower if Florida, Texas, Oklahoma, Virginia and so forth drew attendance boundaries for their universities, taking away the dramatic disciplining power of competition.

2 ) On the other hand, the operators of the subsidized public university systems, the states, exercise very little regulatory control over their rivals: private universities. Except for such basic items as fire safety in the buildings and so forth, the State of Texas has essentially zero control of the day to day curriculum, hiring, and other academic policies at Rice, Baylor, SMU, TCU, and so forth.

3 ) In part because of # 2 ) above, and also in part because of strong cultural norms, we as a society accept that different people will want, be able to afford, and ultimately receive very different experiences in higher education. I personally think that the massive extra dollars spent by parents who think that their offspring have to go any private university rather than any public university are, in many cases, a joke…if you are talking about the actual quality of undergraduate classroom instruction. However, there are other factors. At one point in time, an undergraduate student at Georgetown entered into a unique religious environment. And, many parents (rightly or wrongly) may believe that they are paying for more lifetime networking at Leland Stanford Jr., University compared to, for example, the University of Arizona. The point is: we as a society accept the heterogeneity of outcomes as legitimate.

If my model is correct, then compare this to the ideas of a federal public option floating around in the current House bill. First, the federal government will compete with no other public entity. Secondly, the bill pretty clearly expands, not reduces, federal control over the operational choices of its rivals, private health insurance. Finally, I conjecture that there will be a tendency to discredit, rather than honor, heterogeneous outcomes. Whether there is another approach in which public/private coexistence is possible is a question for further consideration.

But I want to make one final observation about the university example. Unfortunately, over the past decades many, many private universities founded by religious communities have forfeited their religious heritage in order to "compete" in the educational marketplace. That’s an issue for discussion in a future blog, but it’s a serious concern to me regarding the future of Christian health missions if forced to compete with a “public option.”

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.

Trouble Indemnity 4

CHRISTIANS AND HEALTH INSURANCE: HOW DID WE GET HERE?

One of the most unusual, and most troublesome, aspects of our current health insurance system is that, for many Americans, health insurance is provided through our employer. This causes many problems. If you lose your job, you will eventually lose your health insurance coverage (the COBRE program provides limited extension). If workers are satisfied with their current insurance, it is likely to make them hesitate before changing jobs, particularly if they are in a period in which they are receiving benefits for ongoing health problems. It means that workers often have few choices as employers prefer to negotiate “one size fits all” packages with insurers. Natural diversity among consumers puts a great deal of competitive pressure on automobile insurance companies to innovate, to compete on rates, and to discover what customers prefer in terms of non-price attributes such as service. This competitive force is largely not in play in the health insurance market.

How did we get to this point? The starting point would be my last post on adverse selection. One alternative for insurers to avoid problems of adverse selection is to provide group insurance at group insurance rates to a large collection of customers who, on average, are unlikely to exhibit enough adverse selection to make the group plan unprofitable to the insurer. The move towards group insurance began with fraternal organizations and then picked up steam with Blue Cross and Blue Shield programs in the 1930s.

Recall that Double Indemnity was released in 1944 (www.imdb.com):

Neff: Back in my office there was a phone message from Mrs. Dietrichson about the renewals. She didn’t want me to come tomorrow evening. She wanted me to come Thursday afternoon at three-thirty instead. I had a lot of stuff lined up for that Thursday afternoon, including a trip down to Santa Monica to see a couple of live prospects about some group insurance.

The transforming event in group insurance in the United States was World War II. The Roosevelt administration imposed wage and price controls throughout the economy. Expanding defense plants had difficulty attracting workers form other cities, and they could not compete on wages. So, some of the companies began advertising “fringe benefits” such as group health insurance, and were, for whatever reason, able to avoid prosecution under the wage controls. As these fringe benefits became more common, they were awarded the various tax exemptions they now enjoy (and thus are distinct from wages for tax purposes).

John McCain proposed moving shifting the tax exemption for health insurance from the employer to the employee (either as a tax deduction or as a refundable tax credit). The incentives to engage in careful consideration of what would be an individual’s optimal insurance policy would likewise move to the employee. If individuals owned their policies, they could take them with them if they changed jobs. Recall that the Obama campaign launched a blistering advertising campaign against the McCain plan calling it a tax increase. (It did increase taxes on firms, but it offset them with tax reductions for individuals). Now, advisers to the Obama administration and to the Congress admit that the idea of increasing the tax on employers is being seriously considered (that is, at least the tax increase part of the McCain plan).

I believe that there are a lot of advantages to plans similar to those proposed by Sen. McCain. I see the biggest difficulty in the McCain-type plans being in retaining group insurance pools so as to avoid adverse selection problems. As I have discussed with students interested in market-based reforms of health insurance, a big problem is what to do, during such a transition, with people who are obviously high-risk or even very sick.

A series of polls over the past couple of days have shown that somewhere in the range of 70 – 90 percent of Americans are happy with their current health insurance. Christianity is neither majoritarianism nor utilitarianism, so this is not a mandate to do nothing. But it is a signal that the size of the “crisis” we are supposedly fixing may not be as large as advertised, and it is also a signal about utilizing all of our virtues of wisdom and prudence in how to proceed.

So, what would I do if I could design the new health insurance legislation? I would follow with something like the McCain plan, relying on greater competition and flexibility in private health insurance plans. I would restrict the ability of state governments to mandate special provisions that many individuals don’t want. I would have the government (federal or states) playing some kind of role to deal with high-risk individuals in a manner similar to what some states do with regards to automobile insurance. For people whose current medical condition makes obtaining health insurance a non-starter, there are a couple of choices. These people could be folded into the various state Medicaid programs, or the government could act as an assigned risk agent, conducting a random process to assign high-risk individuals to existing pools.

I think the hardest question I wrestle with is whether the government ought to require people to purchase health insurance. I’m more comfortable with such a requirement in automobile insurance because a) it only applies to liability insurance, that is, with regard to our harm to others, and b) many states have an opt-out provision based upon a driver’s ability to demonstrate that he has enough capital that could be attached in a successful tort suit. Reason a) does not apply in health insurance. Here is the moral question I will put on the table for people to think about. Suppose a reform such as I have outlined, together with Medicare and Medicaid, makes health insurance practically available, for purposes of this discussion, to everyone. Consider the following admittedly extreme case. Mr. X makes $170,000 per year in a self employment situation. He could purchase a catastrophic expense private health insurance policy for a couple of hundred dollars per month. He chooses not to, because he spends all of his paycheck on expensive cars, clothes, and entertainment. This means that he has no savings. One day, he realizes that he has developed a debilitating, perhaps even fatal disease that eliminates his ability to earn an income, but this disease can be cured for $1,000,000 in health care expenses.

As Christians, how should we answer the following questions? Should he be treated, or should he be turned away? If he is to be treated, who should pay for it? Is there anything that should be required from Mr. X in return? If the decision is to treat him, what incentive do any of us have to act any differently than Mr. X.

This hypothetical is not as far-fetched as it seems, because currently there are many people in the United States who choose not to purchase health insurance even though it is available to them. (Although few of these non-insurers are in the extreme situation I created for this example, not all of them are by any measure “poor”). Eventually, I suppose that if Mr. X lives long enough and is destitute for long enough he might pass the eligibility screens for the taxpayers to pay his treatment through Medicaid. After all, he has paid taxes to his state government. Is that fair? What if everyone behaved the same way as Mr. X?

One answer to these questions that doesn't involve the government is, as Doug has been discussing in his previous posts, a Christian sense of obligation, based upon love of neighbors. I think of my grandfather who, in the midst of about 10 years of unemployment during the Great Depression, had to deal with medical bills for my grandmother who died from a lingering bout of cancer somewhere around 1940. My grandfather and I used to get into lively political discussions; his beliefs were somewhere between those of a liberal Democrat and a conservative socialist. He was a Christian (a member of the Church of the Nazarene) and quite literally a card-carrying member of the AFL-CIO (somewhere in my files I have his card). I am sure that if he were alive today he would be lecturing me on the need for a single payer, government operated health care monopoly. But one of the things he was proudest of was that he worked out a repayment plan with my grandmothers' doctors, never accepted a penny of governments handouts, and clearly remembered the very date on which he paid off the last of those bills, about 15 years after my grandmother died.

Trouble Indemnity 3

CHRISTIANS AND THE ADVERSE SELECTION PROBLEM IN HEALTH INSURANCE

Night Watchman: How’s the insurance business, Mr. Neff?

Neff: Okay.

Night watchman: They wouldn’t ever sell me any. They say I’ve got something loose in my heart. I say it’s rheumatism.

Neff (Scarcely listening): Uh-huh.

Night watchman looks around at him, turns away again, and the elevator stops.

Night Watchman (Surly): Twelve. *

The insurance industry lives and dies by numbers and probabilities. They are making a bet you and I won’t die in the next 90 days, won’t run our car into a tree, won’t have a house fire. In order to survive, they need to know how likely each of those is. In what have to be two of the only movie scenes that make insurance actuarial statistics seem really cool, in Double Indemnity Barton Keyes (Edward G. Robinson) first recites an ode to claims adjusters:

“To me a claims man is a surgeon, and that desk is an operating table, and those pencils are scalpels and bone chisels. And those papers are not just forms and statistics and claims for compensation. They’re alive with drama, with twisted hopes and crooked dreams. A claims man, Walter, is a doctor and a blood-hound and a cop and a judge and a jury and a father confessor all in one.” **

Keyes later rattles off (by my count) twenty-eight different actuarial categories of suicide (“suicide by poison, subdivided by type of poison, such as corrosive, irritant, systemic…”) and then concludes “Of all the cases on record there’s not a single case of suicide by leap from the rear end of a moving train.”

A crucial economic problem behind all of these numbers is that individuals may have differences in how likely they are to generate a claim. The differences are typically unobservable ( a driver's inherent skill and care in driving) but perhaps correlated across the population with things we can observe (look at what happens to the automobile insurance rates of young men when they get married). Or, they could be directly observable (a person's accident record). And, depending on the particulars of how a policy is crafted and priced, the actual probabilities of a claim of the people who buy the policy maybe higher than that of the general population. This is called the adverse selection problem, and it’s why the Night Watchman couldn’t buy life insurance (at least not at a price he was willing to pay). It isn’t just in the movies. Dealing with the adverse selection problem is a responsibility of being a good steward of resources if you are in that business. And, I think it’s one of the thorniest problems in the health insurance debate.

As I’ve followed the discussion of different proposals on health insurance, I keep seeing the adverse selection popping up like Whack-A-Mole. In proposals to move to more competition in health insurance, making the market look more like other kinds of insurance, a question that can’t be avoided is the following: “If we re-boot the nation’s health care system to a more-market oriented approach, what do we do with the people who are already sick? Who will sell them insurance (or otherwise pay for their medical needs)?” As Christians we have an explicit Biblical mandate to worry about this problem.

One historical solution to adverse selection has been group ratings. The insurance company sells to an entire category of customers large enough that there is little adverse selection relative to representative groups in the population (or at least the level of adverse is manageable). But this is one of the historical forces behind why we have employer-based health care. (It’s not by any means the only such reason, as I’ll discuss in the next installment). On the other hand, health care economist Scott Harrington argues that one of the reasons that the Obama administration’s “public option” will inevitably produce something close to a single-payer government monopoly is “the fixation of many reform proponents on attempting to ensure that no person's premiums or coverage terms will be related to health status.” If health status plays no role in setting premiums, we have abandoned the idea of health “insurance” and simply have a system of bureaucratically rationed socialized health care.

To me, the trick, economically, politically, and as a matter of Christian morality, is to come up with some system that is informed by our successes and failures in how we deal with similar problems in areas like bad drivers in automobile insurance and special geographical conditions (flooding, hurricanes, earthquakes, wildfires) in homeowners’ insurance. This could involve using some of the same institutions. Or, it could involve Christians thinking outside of the 20/21^st century box, and returning to ideas of private cooperative religious institutions that once flourished in the United States.

* ) Screenplay by Billy Wilder and Raymond Chandler, based on the novel by James M. Cain. Available at www.imsdb.com.

** ) As a mea culpa, economists (among others) should admit that we missed the fact that mortgage documents tell stories of real drama of real people, and that 1000 banks each owning 1/1000 th of 1000 mortgages does not create the same incentives as 1000 banks each owning one mortgage.

Trouble Indemnity 2

CHRISTIANS AND THE MORAL HAZARD PROBLEM IN HEALTH INSURANCE

The concept of “moral hazard” in any insurance situation is easy to describe. Moral hazard is a possibility when the insured person and/or beneficiary can, after the signing of the insurance contract, engage in undetectable actions that make a loss more likely (or have a higher payout). A classic extreme case is the driver who doesn’t lock his car because it is insured for theft.

The entire plot of Double Indemnity is one giant moral hazard scheme. Phyllis and Walter take action to increase the probability that the Pacific All Risk company pays off on Phyllis’ policy on her husband. But, before Walter gets involved in the web of murder, notice what his friend Barton Keyes says to him about the problem of insurance salesmen who don’t pay attention to the problem of moral hazard:

KEYES: I get darn sick of picking up after a gang of fast-talking salesmen dumb enough to sell life insurance to a guy that sleeps in bed with a rattlesnake.

It’s a major source of controversy as to how much of a problem moral hazard is in health insurance. Yes, people smoke cigarettes, drink to excess, overeat junk food while lying in front of the TV, take drugs, engage in unsafe sexual practices, and jump out of helicopters on skis, just to name a few things. Less obviously, people avoid unpleasant diagnostic tests such as prostate exams and colonoscopies. The question for economists is whether any of this is moral hazard. Do people do more of these bad things (or fewer of these good things) because they have health insurance? This blog is not the place to answer that question, but there are many empirical studies that attempt to address them.

In the United States, one of the purported advantages of HMOs is that because of the more informal and more frequent contact between the HMO and the patient, the managed care system is in a better position to promote so-called preventive care, that is, an antidote to moral hazard. For example, my HMO will pay a part of my gym membership. Again, we would need to turn to more extensive statistical analysis to investigate whether these effects were more than anecdotal. But as long as we are dealing with anecdotal comments, never forget the immortal words of Mickey Mantle: “If I had known I was going to live this long, I would have taken better care of myself.”

** If anyone knows any annuity actuaries, I’ve always been fascinated by the concept of moral hazard in annuities. Because the annuitant is paid benefits because he is still alive, his moral hazard is to quit smoking, eat healthy, and run marathons well past the age of 80. The moral hazard of the insurer is to hope that he ruins his health to an early grave. A frequent comedic version of this in the movies is the elderly person with an annuitant right to live in a house or apartment that someone else wants.

Trouble Indemnity: Christians and Health Insurance Part 1.

The U.S. Congress is already beginning the debate on radical transformations of our nation's health insurance and health care markets (I will argue that the two terms are not synonymous). Many Christians are following this debate. Some have already made up their minds about what constitutes a faithful response, but I suspect that there are many who are still uncertain. In this and a few subsequent posts, I am going to outline four economic points that are important special considerations in the debate over health insurance: 1) incomplete contracting and the third-party-payer problem, 2) moral hazard, 3) adverse selection, and 4) “how we got here.” To keep things a little bit more lively, I will repeatedly reference examples from what is arguably the greatest movie ever made about the insurance business, Double Indemnity (Paramount, 1944). The story/screenplay are the combined work of three of our greatest storytellers: James M. Cain, Billy Wilder, and Raymond Chandler *. In this classic American thriller, insurance salesman Walter Neff and bored housewife Phyllis Dietrichson conspire to murder Phyllis’ husband and collect a handsome insurance payment, all the while staying out of the way of crack insurance investigator Barton Keyes.

PART 1: INCOMPLETE CONTRACTING AND THE THIRD-PARTY PAYER PROBLEM

When I sign a contract to buy a car, the approximately simultaneous transfer of money and the car fulfills the basic contract. An insurance contract is different. When I buy insurance, money and the policy obligation change hands, but the agreement is in reference to some risky future event which, if it occurs, will require the seller (the insurance company) to compensate me. The simplest of these contracts include life insurance (if I die, my beneficiaries receive the contracted amount) or an annuity (if I am still alive, I receive my monthly annuity check). Notice that in these cases the conditions of fulfilling the contract are relatively unambiguous and easy to monitor (although some desperate people attempt true fraud). I am either dead or alive, and the amount of payment is specified in the policy.

Sometimes, however, there is ambiguity as to whether or not the conditions triggering the payment have been met, or what the payment should be under those circumstances.

NEFF: Look, baby. There’s a clause in every accident policy, a little something called double indemnity. The insurance companies put it in as a sort of come-on for the customers. It means they pay double on certain accidents, the kind that almost never happen. Like, for instance, if a guy got killed on a train, they’d pay a hundred thousand instead of fifty.

What ultimately tripped up Walter and Phyllis was that theirs was not a simple life insurance policy; it was an accident insurance policy. As such, the Pacific All Risk Insurance Company did not have to pay if they believed that the death was not an accident. And Barton Keyes did not believe for a minute that this was an accident. Following his lead, Pacific All Risk refused to pay. Pacific All Risk and Phyllis disagreed as to whether the conditions requiring the payment had been met.

Any of us who has automobile or homeowners' insurance faces this problem. If there is any ambiguity or incompleteness in a loss situation our interests as policy holders (first party) differ from those of the repair shop (second party) or the insurance company (the third-party payer). Most of us have had experience or know about typical examples. If our car is damaged, we believe that repairing the car involves choosing our preferred paint shop and using original manufacturer replacement parts. The insurance company, the third-party payer, will want to use independent parts and their own “in house” paint shop.

Despite the annoyances that these incomplete contracts can cause in automobile or homeowners’ insurance, the range of dispute is relatively bounded. If a tree falls on my car, it is not credible to believe that it was worth nothing. Likewise, regardless of what ever kind of emotional attachment I have to my car, it’s easy to find an upper bound of liability: the current retail price of an equivalent brand new car. Virtually all of the disputes over the inability to write all-encompassing, unambiguous policies will be within these bounds.

The problem with health insurance is that there are no such natural bounds. What is the responsibility of my health insurance company to pay for surgery, drugs, hospitals, doctor bills, and so forth if I come down with a serious disease…one that threatens my life or my ability to continue in my daily activities? Is the insurance company obligated to pay for continually more and more expensive (perhaps highly risky) treatments until I return to exactly my previous condition of health? Unless the policy simply requires pre-arranged lump-sum payments ($250 for bronchitis, for example) there is likely no simple upper bound reference amount (such as the value of the new car) that all parties can agree upon after such a medical emergency. The situation in the 1930s may have been different. But following the advent of modern miracle drugs and surgeries, the range of possible contracting disputes in health insurance is daunting. There are two traditional approaches to answering this inherent problem in health insurance.

In an indemnity system, the gatekeeper is a health professional that both sides ex ante agree can authorize approved expenditures. At its simplest extreme, in an indemnity system if a licensed physician prescribes the treatment, the insurance company will pay for it. Indemnity insurance companies are not going to leave themselves exposed to payments almost without limits except those limits chosen by the person being paid, so indemnity systems are disciplined by deductibles, co-payments, and lifetime aggregate payment limits. (When I have been covered by an indemnity system, I tended to worry about physicians prescribing unnecessary or needlessly expensive procedures or drugs).

In a managed care system, the third-party payer problem is addressed by giving the payer (for example, the HMO or the bureaucracy of a socialized medical insurance system such as that in Great Britain) the authority to decide what treatments it will or will not pay for. Both Americans covered by HMOs and people living in Britain under their National Health Service are aware of what it means to have the managed care gatekeeper say: “This treatment is too expensive given the probabilities of success; we will not pay for it.” (When I have been covered by an HMO, I tended to worry about the plan paying for less treatment than I desire). What is the discipline on the managed care gatekeepers? In a market system, such as with automobile insurance, customers can evaluate competing gatekeepers and vote with their pocketbooks. That is why automobile insurance companies advertise not only low rates but also how easy they are for policy-holders to deal with. In a single-payer socialized system, the discipline is often political. It's easy to Google the British press and read about how the news media and members of parliament react when some drugs or medical treatments are denied by the NHS.

My point in this blog is to argue that in our current world of miracle drugs and surgeries, the very idea of asking someone other than the patient to foot the bill for the medical expenses faces unavoidable contracting problems. Different systems attempt to deal with this problem in different ways, but in any system the institution footing the bill (an indemnity company, an HMO, a charity, a government) will be unable to operate with unbounded and ambiguous contractual liabilities. Nothing that Congress can do will change that for any system that asks for payments to be made by someone other than the patient.

NEXT INSTALLMENT: Phyllis and Walter’s sinister plot.

* the script is available on www.imsdb.com

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.