Scott Sumner  

Initial thoughts on Obamacare 2.0

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Tyler Cowen directed me to several commentaries on the new GOP health care proposal. My initial impression is mostly negative, as the GOP seems to have avoided tackling the biggest problem in health care, excessive costs due to subsidy and regulation. Here's Ezra Klein:

It's worth noting that the GOP's main idea for reducing health care costs -- ending or capping the tax break for employer-provided insurance -- has been left out of this legislation. There is simply no theory of cost control in this bill at all.It's worth noting that the GOP's main idea for reducing health care costs -- ending or capping the tax break for employer-provided insurance -- has been left out of this legislation. There is simply no theory of cost control in this bill at all. . . .

A core Republican complaint when Obamacare was passed was that the law delayed many of its provisions in order to reduce public outcry and manipulate the CBO's score. The GOP bill is similarly aggressive with such tricks, delaying changes to the Medicaid expansion until 2020 and pushing Obamacare's tax on expensive insurance plans out until 2025.


The biggest problem with our current health care system is cost, and one of the biggest drivers of excessive costs is the tax deductibility of employer provided health insurance benefits. This tax provision essentially means that the Federal government absorbs about 40% of the cost of health care for Americans with private health insurance (and of course a far higher share for those on Medicare, Medicaid, etc.)

Some libertarians are confused about the "Cadillac tax", which isn't really a tax in the ordinary sense. Rather it essentially removes the government subsidy to health insurance currently provided to the most expensive health care plans. The original hope of reformers was that over time health care inflation would cause this tax to affect more and more health care plans. It was the single best provision of Obamacare, and now the GOP has delayed it until 2025. That tells me that Congress has no intention of ever allowing the tax to be implemented. The delay of the Medicaid reforms until 2020 also leads me to doubt that they will ever be enacted, and in any case they've been greatly watered down, with high spending states now losing only 1/4th of their extra Medicaid spending. This still might be a net plus, but it's a very small one.

What about GOP plans to lower health care costs through reduced insurance market regulations?

Because Republicans aren't even trying to win Democratic votes, they're stuck designing a bill that can wiggle through the budget reconciliation process (another thing they complained about Democrats doing). That means they can't make major changes to insurance markets like repealing Obamacare's essential benefit standards or allowing insurance to be sold across state lines. That last part is particularly striking, given that it was one of President Trump's five demands in his speech last week. I've always been skeptical about the savings Republicans could wrest by changing those regulations, but now they can't get those savings at all -- which means sacrificing a key part of their theory of cost control.
Unlike Ezra Klein, I believe that deregulation could have produced big savings. It's a pity the bill won't contain these ideas. The original purpose of insurance was to protect against unexpected catastrophic expenses, like treatment for heart disease or cancer. It makes no more sense for insurance to cover the cost of giving birth than it would to cover the cost of buying your first house or car.

I'm 61 years old and have used health insurance many times. Never once was it for an activity for which I actually needed health insurance, and many of my health care expenses would never have been chosen without government subsidized health insurance. To take one minor example, when I was much younger I found out that daily wear contacts costs $600/year. At first I wasn't going to adopt them, even though they are more comfortable. The cost was too high. But when I found out that the Federal government would pay 40% of the cost, I said to myself---"A dollar a day, why not?" Are eyeglasses a medical "emergency" requiring insurance?

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Avik Roy is slightly more favorable toward the proposal, but still finds lots of problems:

As I wrote last month, the AHCA creates a steep benefit cliff between those on Medicaid (subsidizing approximately $6,000 per patient per year), and those just above the poverty line who will get tax credits of about $3,000. People just below poverty will be strongly disincentivized to make more money, effectively trapping them in poverty.

Unlike in the February 10 leaked draft, in which the tax credits were available to everyone regardless of income, the AHCA begins to phase them out for those earning $75,000 a year, or $150,000 for joint filers. For every $1,000 in earnings above those thresholds, the value of the credit phases down by $100. Hence, for a single 40-something, the credit would phase out at $105,000 in income.

Amazingly, these thresholds are far more generous than Obamacare's. Obamacare's tax credits phase out at 400 percent of the Federal Poverty Level, or $48,240 in 2017. The AHCA's tax credits would phase out somewhere above 850 percent of FPL.


It takes a certain ingenuity to simultaneously make the poverty trap worse, while making the benefit scheme more regressive. Usually there's a clear equity/efficiency tradeoff. Admittedly at higher incomes there is less of a disincentive to earn more money, but overall I don't see how these changes improve things. And this might also result in less Medicaid reform than otherwise:

The irony is that the AHCA's stubborn insistence on a flat tax credit has put its promising Medicaid reforms in jeopardy. As I noted above, the Medicaid expansion offers enrollees subsidies of about $6,000 per year. The ACA exchanges, wisely, carry that subsidy along and phase it out gradually at 400 percent of FPL. By creating a benefit cliff, the AHCA gives Medicaid expansion states a strong incentive to oppose repeal of the Medicaid expansion. If the AHCA simply used the above table to means-test its tax credit, states could walk away from the Medicaid expansion, knowing their residents would have robust options for private health insurance.
And with repeal of the health insurance mandate, the death spiral is intact---but now it will be "owned" by the GOP:
Worse still, the bill contains an arbitrary "continuous coverage" provision, in which those who sign up for coverage outside of the normal open enrollment period would pay a 30 percent surcharge to the normal insurance premium. This surcharge is an arbitrary price control. While 30 percent represents an approximate average of the additional health risk of late enrollees, the 30 percent provision incentivizes those who face much higher costs to sign up, forcing insurers to cover them at a loss. This seems like a recipe for adverse selection death spirals.
There is one sort of good provision in the bill; it would repeal the tax increases for Obamacare:
The American Health Care Act repeals nearly all of Obamacare's taxes, save the postponement of the Cadillac tax. But Obamacare's tax hikes comprised about 60 percent of its funding for the law's coverage expansion. So the $2 trillion question is: does the AHCA explode the deficit, or is it relying on steep Medicaid cuts to keep the deficit in line? We won't know until the CBO scores the bill.
But even this is a mixed bag, as the deficit will get larger, and some of the extra taxes (such as an extra 0.9% payroll tax on high wage earners and taxes on medical equipment) were good ideas, indeed those taxes probably should have been even higher. The big gain here is eliminating the 3.8% tax on investment income.

As far as my overall reaction, Peter Suderman put it best:


In general, it's not clear what problems this particular bill would actually solve.

Cynics like Matt Yglesias will probably say something like, "It's intended to solve the problem of America's rich paying too much taxes." I'd like to disagree with him, but the GOP bill doesn't give me much ammunition.


Comments and Sharing






COMMENTS (32 to date)
pyroseed13 writes:

Good post, however I am confused as to why you think the "medical device tax" was a good idea. I thought that was one of the worst taxes in the bill, along with the NIT.

mike writes:

No doubt one thing it accomplishes is being able to legitimately claim "we repealed and replaced obamacare". To their electorate its important that its delivered, almost similar to why building the wall is so important for trumps credibility because its very obvious "did they or did they not do that?"

Also, this policy helps the young (through changing age rating to 5x old vs 3x maximum variance in pricing), the healthy, and the moderately well off. Before income cutoff at 400% and no the subsidy isn't totally phased out until around 800%. Also for people under 40 the subsidy was pretty low after about 250% of current income.

So the healthy 34 year old married couple who doesn't have insurance through work that makes 60-100k is WAY better off in this proposal. This is a massively important swing / leaning conservative group.

And obviously the weatlhy and business owners will enjoy not paying obamacare penalties for not offering insurance and also having their tax rates on an investment side lowered.

I completely agree that regulatory reform, insurance across states lines, and removing tax-free status of health insurance through a company are needed policies for real reform, but this policy isn't terrible at least from a political core constituancy group analysis. Hope I helped lay that out!

Hazel Meade writes:

It's a very depressing outcome.
Even with control of both houses and the White House the GOP doesn't have the guts to do anything vaguely controversial like ending the tax deduction for employer provided insurance.

They didn't even have the guts to neutralize it by adding a deduction for all individual insurance policies. Unless you are self-employed, you can't opt out of your employer-based plan and buy your own on the exchange, which would at least make it tax-neutral to buy your own insurance. But not even that is included.

It was basically the weakest, most watered down version of reform they could have come up with.


bill writes:

The reform I'd like to see is this: the prices for care provided to uninsured should be the same as those charge to the insured (a small surcharge would be OK). My wife was hospitalized once and the bill was $50,000. My insurer's EOB said that $5,000 was reasonable (yes, 90% less) and paid that. We paid the deductible. That made me realize that the main reason I needed health insurance wasn't for regular care, and not for catastropic care per se either. I needed them to negotiate with the hospital. Another surgery in the family went similarly: $69,000 charge but the hospital and doctor accepted $17,000. Same with physical therapy. Standard charge of $324 per hour but the insurance company pays $80. And here is where the reform becomes super important. When the coverage ran out, we offered the physical therapist $80 per hour directly. They turned it down - they said that the insurer Requires them to charge cash payers $324.

ColoComment writes:

No expert here, obviously, but could it possibly be that they've decided to start with the quickly- & politically-possible, e.g., what can be passed with reconciliation, and moving to the more politically difficult as they assess & adjust to the effect of the changes? Perhaps to soften the bridging effect on the population?
They do need to prove to their supporters that they will, indeed, dismantle Obamacare. However, recall that that law & related regulations almost completely destroyed the status quo ante of the entire healthcare/health insurance industry(ies). It seems to me the better part of [political] valor to go somewhat slowly so as not to re-enact the haste/waste efforts of Obamacare.
To me, it's the difference between destroying an existing edifice by dynamited implosion, and slowly & carefully dismantling an historic house while saving the antique windows, tin ceiling, and woodwork.
Also recall that this is the initial proposal -- it still is subject to amendment and conference adjustment.

ColoComment writes:

Recall that the medical device tax was imposed on gross revenue. ...not particularly encouraging for R&D in the field.
Also, the tax was imposed on dual-purpose devices, human and veterinary.
That is, you the pet owner paid the tax on the dual use device when it was used for your cat.

How is that a good idea?

Thaomas writes:

I agree about the failure to remove the tax subsidy for employer "provided" health insurance even for the most expensive plans. Other problems are 1) removal of the prohibition on discrimination against those with pre-existing conditions, 2) less funding for Medicaid, repeal of tax on high income earners, and 3) failure to make the subsidies for purchase of insurance progressive.

In favor of the bill, it basically validates the premise of ACA of getting more people insured by giving them subsidies. The bill reduces the subsidy and the number with insurance and passes the savings on to high-income people, but that can be reversed in time if, as I suspect, that is what voters want.

Glenn writes:
There is simply no theory of cost control in this bill at all.

While it is true that there is little in the Republican bill that directly reduces costs (by tightening the vice on various federal subsidies), the bill does a great deal to indirectly attack costs.

The bill eliminates most (all?) of the new taxes imposed on the sector by ACA. This should translate into lower costs.

The bill dramatically loosens federal regulation of the health insurance and healthcare delivery markets. The big mandates remain - pre-existing conditions, 'children' through 26, pricing neutrality between genders - but all of the little stuff is gone. This should lower the cost of insurance and care.

The bill dramatically increases access and usability of tax-sheltered personal savings accounts (HSA's). By inducing more consumers to save for and purchase their healthcare directly from tax sheltered accounts, this should improve price signaling, and drive down costs.

Given political realities, this bill could be a lot worse. Let's try to acknowledge what it does right.

Scott Sumner writes:

Pyroseed, I'll address the medical device tax in another post.

Mike, If you don't have mandates to buy insurance, and people can't be turned away for pre-existing conditions, why would anyone buy any health insurance? I wouldn't.

This is a deeply unserious proposal. If this is all they could come up with, they should have just abolished Obamacare.

If the voters feel the GOP has done what it promised, they simply aren't paying attention. The death spiral will continue, now it will be blamed on the GOP, and next time the Dems take power they'll push for a single payer system.

Hazel, I completely agree. The GOP punted on the issue.

Bill, That's why we need to deregulate health care, to get some price competition into the system. Plastic surgery is payed out of pocket, and that system works fine.

Colocomment, You said:

"They do need to prove to their supporters that they will, indeed, dismantle Obamacare."

This proves they are not going to do so. It's just a different, more regressive, version of Obamacare.

I expect any amendments to make things even worse.

Glenn, You said:

"The bill eliminates most (all?) of the new taxes imposed on the sector by ACA. This should translate into lower costs."

Which taxes are those? Removing the medical devices tax will increase health care costs.

Maximum Liberty writes:

"The biggest problem with our current health care system is cost, and one of the biggest drivers of excessive costs is the tax deductibility of employer provided health insurance benefits."

While this is not quite false, it misleadingly implies that the cost of healthcare in the US is unjustiably excessive. In fact, it is largely in line with what one would expect of a society as well off as ours.

See https://randomcriticalanalysis.wordpress.com/2016/09/25/high-us-health-care-spending-is-quite-well-explained-by-its-high-material-standard-of-living/

AlanG writes:

Bill's point hits it out of the park. Pricing is pretty arbitrary and you rely on your insurer to negotiate what is appropriate and as long as you stay in plan and follow the rules life is good. You go out of plan and you are on the hook for some serious money depending on the procedure.

I will take issue with Scott's point about pregnancy. Sure most deliveries go off without a hitch and maybe a C-section is needed. If the pregnancy is complicated as one of ours was cost go up big time. A premature birth triggers the cash register with multiple zeros after the integer and there is no predicting when this might happen (assuming no drug use and so forth). We had some personal experience here and were quite relieved when the insurance company paid out $55K in 1986 dollars (IIRC, my salary at the time was about $40K).

Everyone talks about cost control but the blunt fact is you either get this through negotiation (by the govt or the insurance company). Individuals can do very little at present because of the lack of transparency in pricing or quality. I needed a lumbar MRI last year and as a lark tried to get prices from three radiology practices. they would not give me the price. Maybe if we require medical practices of all types to post prices on the Internet things will change but for someone who has been observing this issue for over 30 years now I doubt that will happen.

Paul Ellwood is still around and I wonder what he makes of all this.

Maximum Liberty writes:

Intriguingly, bill writes:

Same with physical therapy. Standard charge of $324 per hour but the insurance company pays $80. And here is where the reform becomes super important. When the coverage ran out, we offered the physical therapist $80 per hour directly. They turned it down - they said that the insurer Requires them to charge cash payers $324.

Surely this would be price-fixing in violation of anti-trust laws. I'm betting the real problem is far more nuanced than this, to the point that the doctor's own personnel can't explain it. It is probably more like the insurance company gets a dollar reduction in their rate for every dollar of reduction in the cash-pay rate, which would encourage doctors not to lower their cash-pay rates (and thus make the insurer look better).

Plus, the real problem might be medicare and medicaid, which adopt all kinds of rules that make no sense to the outside, but often do once you understand where they came from.

My experience is the opposite, however. In the medical practice my wife works at (if I understand correctly), their initial charge to the insurance company is higher than to cash-pay patients, though the net charge after negotiated reductions is probably lower. The negotiated rates are so complicated that they don't know what they will get paid until later.

Maximum Liberty writes:

Here's the standard against which I measure all healthcare reform proposals, and find them lacking. Most of it is a more generalized version of this plan: http://www.goodmaninstitute.org/topics/health-reform-bill/.

1. Tax employer-provided health insurance (including retiree health plans) as income.

2. Abolish all existing health-care related deductions and credits in income taxes (no more HSAs or FSA's, no deduction for medical expenses, etc.).

3. Abolish the Obamacare mandates and taxes.

4. Give people (presumably limited to citizens, nationals, and some other visa holders) money (potentially a voucher, a tax credit, or something similar) that is somehow progressive (presumably by taxing the voucher or reducing the credit) and variable (presumably based on age, sex, or both) that can only be used to buy health insurance (presumably subject to some -- hopefully minimal -- limitations, like it must cover vaccinations and can't be prices based on pre-existing conditions). If a person does not direct their voucher or tax credit to a health insurer, the government assigns them to an insurer that writes in the area. The amount of the voucher or credit should be based on actual data on relative cost of care by age and sex, rather than the made up tiers in the Republican bill.

5. Privatize the federal Obamacare exchange. If there are no buyers, shut it down. States can keep running theirs if they want to.

6. Stop funding state Medicaid and CHIP programs directly, but permit states to require the voucher or tax credit to be paid to them for participation in Medicaid.

7. Eventually, stop funding Medicare, but extend the voucher or tax credit program to seniors. Initially charge them the full, age-and-sex-based cost of Medicare, but allow them to apply the voucher or tax credit against it. Eventually discontinue new enrollments into Medicare; people would stick with their private insurers into old age.

8. Top up the voucher or tax credit for veterans, and privatize the VA's insurance and hospital functions.

9. Distract the politicians. This is actually important, because they will screw up anything that works, so the plan has to give them something to position over. Create some ridiculous mechanism for adjustment of the amount of the voucher or credit every two years, so they can have their partisan positioning, but have an automatic adjustment when they fail to act. Also appoint some commission to propose top-ups for health conditions to which behavior does not contribute, and which significantly raises the cost of health care (which then gets spread out to all insured). An example would be type 1 diabetes; give them a voucher top-up. Then let Congress argue about who else gets one. Meanwhile, they leave the core of the plan alone.

I anticipate, but would not require, that insurers would significantly modify the normal health insurance policy in three ways:

a. Deductibles and out-of-pocket limits would be based on a rolling period, rather than calendar years. Why? Because there's nothing in the logic of health insurance that says it has to be written on an annual basis. That's a side effect of existing law. Some clever insurer would start poaching consumers mid-year, and everyone would have to figure out how to adjust deductibles and out-of-pocket limits.

b. Insurers would plan for the insured not paying the premium that exceeds the voucher or tax credit. Most likely, they would automatically raise the deductible, and maybe the out of pocket limit; maybe they would lower the percent that they pay. They would be under competitive pressure to come up with good solutions to keep the consumer, but profitably.

c. Insurers would be more willing to pay for genuinely preventive health measures because people would probably switch health insurers a lot less frequently than they do now. As an approximation, I read that people in some age cohort changed jobs 11.7 times over the ages of 18-48. That is once every 2.5 years or so. I think that amounts to a retention rate around 75%. By comparison, J.D. Powers reports that auto insurers' retention rates are about 90%. A 90% retention rate means that the average person changes auto insurance about once every 6.5 years. That (big) difference would also change the insurers' incentives to invest in preventive healthcare, compared to what they do now.

Jamie writes:

Scott, out of curiosity by who you cited, Ezra, Matt and Avik, do you listen to the Vox podcasts?

bill writes:

Competition works well in areas where the buyer has time to shop and price compare. It fails in areas where an emergency response is required.
With respect to my experience with the physical therapist, I think it would be more appropriate to say that something needs to be done to stop the anti-competitive behavior of the insurance companies.

Lorenzo from Oz writes:

Every time I read about US health policy, I am glad to be an Australian.

We have the 4th highest life expectancy in the world according to the WHO (despite Aboriginal health being a bit of a continuing disaster).


While our per capita health expenditure is less than half the US's.

Hazel Meade writes:

As an alternative to repealing the employer deduction, they could add an individual health insurance deduction, for all employees, regardless of whether they are self-employed or not. So you get the deduction whether you pay for your employer-based policy or buy your own. (again, right now you can only deduct health insurance if you are self-employed, otherwise, you have to buy the employer-based plan.)

Then kill the employer mandate, neutralize it by crediting back the fine for employees that go on the exchange. Or just have Trump sign an executive order to stop enforcement. Or kill the subsidies in states that don't have their own exchange. Same effect.

Eventually, people should start dropping their employer provided insurance and move into individual policies. Younger people will jump first and cause a death-spiral in the employer-based system, but it will save the individual market, because all those younger healthier wealthier people will be entering that market at the same time they are exiting the employer-based system. It may be fairly slow but that can be considered a feature, not a bug, as it avoids a massive shock - you just make it tax neutral for individuals and employers and wait for people to make their own choice about when to switch.



Brian writes:

HSA's are a poor substitute for the subsidy. People lack the information necessary to negotiate prices for procedures. It takes years of medical training to understand whether a procedure is necessary or not. That's why either government or private negotiators are valuable services being offered by the health care industry. Whether it's done privately, or publicly is of less concern, but the the information gap rises as your income lowers generally as the education level usually falls off with lower income levels. Even if the poor have the money necessary to pay for necessary medical services (they won't without the Medicaid expansions offered by the ACA) they are the least qualified to efficiently request the medical goods and services.

And, of course, HSA's aren't particularly valuable to people living paycheck to paycheck regardless.

Hazel Meade writes:

@Brian,
i don't think anyone is advocating that people have only HSAs. What you have is a high deductible health plan (HDHP) combined with an HSA. All of the charges go via the insurance company and you get the insurance company negotiated rate, even if it comes in under the deductible.

I used to have a HDHP, although not a formal HSA to go with it, so I saw this first hand. I had an emergency appendectomy that was originally billed at over $30K, which came down to around $7K due to insurance company negotiated pricing. I ended up paying the $7K out of pocket, because it was under the deductible, but it still saved me $3K.
(That health plan only cost $60 a month, by the way. Without subsidies. )

MikeP writes:

I will take issue with Scott's point about pregnancy. Sure most deliveries go off without a hitch and maybe a C-section is needed. If the pregnancy is complicated as one of ours was cost go up big time. A premature birth triggers the cash register with multiple zeros after the integer and there is no predicting when this might happen...

Hmmm... What's the name of that thing that you get to protect you against unpredictable events that could cost more than you can afford? It's on the tip of my tongue. What could it be?

It's not "insurance", as that term has been coopted to mean "prepaid all inclusive health care". It's not "banana", as that means "inflation".

Let's call it "mango".

So what you could do is pay a flat charge to the doctor and hospital for a low complication pregnancy and delivery that admits certain upcharges for minor complications such as C-section and then have mango to cover high-cost complications or events incident to the pregnancy and delivery.

Of course, it would be much easier to call "mango" "insurance" since it protects you from unpredictable events that cost more than you can afford. Maybe if we used "mango" to mean "prepaid all inclusive health care", we could have the word "insurance" back.

Thaomas writes:

What's wrong with pre-paid health care (whether you cal it "insurance" or "mango") so long as its financed progressively?

MikeP writes:

What's wrong with pre-paid health care...

What's wrong with it is that if seeking and receiving care has no cost, then it will be overconsumed.

That's all well and good if people elect to do that in a transparent unsubsidized market. Some may be encouraged to get a needed physical if they paid for it in advance. Indeed, dental plan premiums pretty much cover two cleanings a year plus some high-deductible insurance for anything else -- including a third cleaning. And I myself prepaid for the scheduled maintenance on a new car because otherwise I would not make the time to go in. But that plan does not cover maintenance of the car outside the scheduled intervals unless there is some problem under warranty.

If prepaid health care covers everything -- if there are no restrictions on exactly what is prepaid or exactly when it can be used -- health care will be overdemanded, overconsumed, and very much overly expensive.

...so long as its financed progressively?

But where did this notion of progressive financing come from? Pre-paid health care is something state policy should absolutely not encourage. Prepaid health care should not be subsidized at all -- including by the awful differential tax treatment we experience today, which is very much at the root of everything wrong with health insurance in the US.

Brian writes:

@Mazel
The thing is, even if your HSA can be used through your negotiated insurance prices, people going paycheck to paycheck will not be able to use them. The ability to actually use them relies on have significant disposable income to set aside (at an extremely low interest rate compared to where you could have otherwise invested it).

Not only that but you have to accurately estimate your future medical expenses for it to be useful, which is nearly impossible aside from expected yearly checkups.

Finally, the tax savings versus just taking the money after taxes is extremely low for people in the lower income brackets

HSA's are purely a policy to lower taxes on the extremely wealthy for their otherwise high tax bracket earnings. They do next to nothing to help provide healthcare to those without it, their stated purpose.

Jim Glass writes:

"There is simply no theory of cost control in this bill at all"

Why would there be? It's not the law's purpose -- which very plainly is to enable the Republicans, after six years of proclaiming to their base "We'll repeal that damnable Obamacare the day we are elected!", to be able to say that they have, ASAP. Without getting killed by taking away benefits from 20 million people and Medicaid subsidies from a whole bunch of Republican states, as provided by Obamacare. That's a tough enough square to circle.

Beyond that, why would they waste effort even considering any "theory of cost control"? It is totally irrelevant to their problem at hand.

"it's not clear what problems this particular bill would actually solve."

To the contrary, it is obvious -- the problem mentioned above.

Jim Glass writes:

The original purpose of insurance was to protect against unexpected catastrophic expenses, like treatment for heart disease or cancer. It makes no more sense for insurance to cover the cost of giving birth than it would to cover the cost of buying your first house or car.

If we had National Car Care the government/insurer would pay for gas, tires, oil changes, a new car every five years -- but if you had a head-on crash and went through the windshield, you'd be on your own, no coverage for that. (While the cost of gas, tires, oil changes would rocket up because of the lack of point-of-purchase pricing, third-party program administration of gas fill ups, subsidies, the sapping of competitive markets, etc.)

With actual Medicare the government pays for check ups, routine tests, all the medical stuff people normally buy -- but if you have a stroke or are disabled in maybe a car accident and need long-term care in a nursing home, you are on your own. No coverage for that.

Now it may seem this "makes no sense", but of course it makes perfect sense in terms of politics, and Medicare is a politically designed program. Everybody knows they will have many routine medical expenses after age 65, and wants the government to pay for them. Nobody believes they will be stuck long term in a nursing home, so they see no need for the government to pay for this for them (and certainly don't volunteer to pay taxes for the steep costs that might be incurred by strangers). So the politicians give the voters what they want. Simple.

I personally think reformers looking at facts like these should stop complaining "it makes no sense" and start relying on relaying the truth, "it makes perfect sense".

When my parents turned 65 I took them to their first ever check-up on Medicare's dime. Their doctor said "Let's give them both a stress test, see how their hearts are doing." Just previously the Medical Authorities Who Be had decreed that such stress tests should not be given to people showing no risk symptoms, as for healthy people they were unreliable and prone to false positives requiring expensive re-testing. I mentioned this to the doctor and he said, "That's true and I wouldn't give this test to someone paying for it, but since it's on the government it is free to your parents while there is a possibility it might catch something, making it a good deal." Multiply by, oh, millions of events large and small.

Twenty-odd years later my father suffered a long series of strokes, and following his death my mother slowly failed to vascular dementia. Both needed a lot of nursing care. But there wasn't very much towards it from Medicare. Multiply...

And it all makes perfect sense.

Jim Glass writes:

The biggest problem with our current health care system is cost, and one of the biggest drivers of excessive costs is the tax deductibility of employer provided health insurance benefits

Dating back to a loophole in WWII wage controls that enabled employers to give raises by providing medical benefits. A small event with huge unexpected consequences. The rest is history. And future history, because it's not going to change. There is *zero* political constituency for eliminating the tax benefits for health benefits. "Zero constituency" is mild.

In the very first pre-organizational meetings about Obamacare this obvious issue was brought to Max Baucus, chair of the Senate Finance Committee, who responded 'dead before conception, don't waste my time'. Politicians don't intentionally commit suicide. Senator Ron Wyden did talk about not eliminating the tax break but changing the exclusion to a less bad deduction, mildly reducing the tax benefit for Cadillac plans to give a more equal tax benefit to the poorer. See what happened to him.

the "Cadillac tax", which isn't really a tax in the ordinary sense. Rather it essentially removes the government subsidy to health insurance currently provided to the most expensive health care plans. The original hope of reformers was that over time health care inflation would cause this tax to affect more and more health care plans. It was the single best provision of Obamacare

Which shows what a disastrously inept hack at reform Obamacare was. The Cadillac tax didn't have Tinkerbell's chance in Sodom of ever collecting a dime. As shown by the fact that it was killed even before Obamacare was enacted (its effective date kicked over the horizon) upon the insistence of the big unions as their condition for supporting Obamacare. Cadillac benefits are their most valued gifts to their members, and they were never, ever, going to allow the tax to take effect. But if they hadn't killed it the corporations that hate it too would have, and millions of upper middle class executive would have. The repeal on the way to is totally bipartisan. Every constituency, left and right, Dem and Repub, is against it.

Now it's bad enough to have the health care sector of the economy designed by politicians, it's a lot worse to have it designed for politicians by academic wonks who don't know the first thing about politics - like, gee, political programs need constituencies. So they make their grand design's most important reform and key revenue source something that was totally predictably utterly dead before day 1. Good work! Obamacare is full of gaskets blowing off like this. (Here's a tip to future wonks: if it was politically possible to "remove the government subsidy to health insurance", they could have just *removed the subsidy*!)

But this lesson should not be lost on the next wave of reformers of reform, who always have a tendency to drift into intellectually sophisticated politically naive wonkery. Changes must be *politically viable* to work. So forget all grand ideas that "should" be, like eliminating-slashing the health insurance tax exclusion. Go for incremental improvements that will find political support. From things like deregulation to emulating the Social Security example of including Medicare benefits in taxable income. Want to attack the nonsensical employer tie to health care provision? Create a market in which workers can *by free choice* get health insurance on their own on terms competitive as from an employer. Especially young workers. Then wait 30 years. This is how 401(k)s did in defined benefit plans. It's not easy to push ideas like this to get popular support, and it's a lot more fun
to push grand designs that have no chance of getting popular support so one doesn't have to worry about it. But incremental improvements with a constituency base are what can work.

Hazel Meade writes:

@Brian,
That makes no sense. Both HSAs and health insurance are tax deductible, so there is no tax burden difference whether you put money into an HSA or buy an insurance plan with a lower deductible. What HSAs allow you to do is save money by buying a cheaper insurance policy and then (maybe) not spending the money in the HSA so you can roll it over to the next year. You might be thinking of a FSA (flexible spending account) which is use-it-or-lose-it. FSAs do not roll over, HSAs do. If you're lucky and you don't use all of the HSA, you keep the money and put less in next year. Of course, then you don't get as much of a tax deduction, but that's still money you can spend on something else. In other words, if you are a relatively healthy person, HSAs save you money by letting you buy less insurance coverage. But you are still protected by the HSA to cover the deductible in case you do get sick.

Also you don't have to be extremely wealthy to benefit from the tax advantage of an HSA as it is not an itemized deduction. Unless you're already paying zero taxes (and that's considerably into the lower middle class), you benefit from the deduction. Anyway, all it does is make it tax neutral to have an HSA instead of an insurance policy with a low deductible.


gda writes:

Republicans HAVE to pass a bill which conforms to the restrictions they are under - i.e. they do not have 60 votes to do as they wish.

I see very little recognition of that fact, other than from ColoComment.

Constructive criticism on amendments which will still allow the bill to pass with 51 votes in the Senate is one thing, but I don't see a lot of that being bandied about.

rcafdm writes:
Every time I read about US health policy, I am glad to be an Australian.

We have the 4th highest life expectancy in the world according to the WHO (despite Aboriginal health being a bit of a continuing disaster).


While our per capita health expenditure is less than half the US's.

As countries get rich they allocate an increasing share of consumption to health. US has significantly higher disposable incomes and higher consumption per capita than Australia does and viewed from this perspective Australia doesn't look particularly cheap. Analysis of recent purchasing power parity data also suggests that these patterns are best explained by rising volume (quantitive and qualitative increase) as opposed to rising prices. more on this here

As for aggregate health outcomes like life expectancy, you might try reading this. Health outcomes are determined by much more than health provision alone, but terribly naive bivariate specifications imply they are subject to diminishing marginal returns such that there is little to suggest the US is obviously getting worse marginal returns than other rich countries. Countries like Norway and Luxembourg spend more than twice as much as Israel and Malta with nothing to show for it if you assume otherwise identical populations.

There is also massive heterogeneity in these outcomes the US, despite the fact that the systems, standard of care, and like are broadly similar throughout the country and there is little evidence to suggest these factors explain this variance (uninsurance rates, physician activity, etc) Lifestyle factors like obesity, smoking rates, inactivity rates, and the like, on the other hand, are massively predictive at this level of analysis and they tend to agitate towards significantly worse outcomes in the US as compared to most other developed countries. I, for one, believe these patterns are significantly explained by endogenous factors that some particular US migrant groups brought with them and have persisted for generations, especially those living further away from other populations/more cosmopolitan areas (see: borders/scots-irish in Appalachia and beyond) and that this is supported by a fair amount of evidence. Other people argue that differences in social expenditures can explain a great deal, which I'm not yet convinced of (perhaps a topic for another day),.... but if you do happen to take this sort of reasoning seriously social expenditures probably ought to be included in the "efficiency" equation too.

Hazel Meade writes:

As a tweak to my earlier suggestion - tweak the employer mandate regulations to allow employers to offer a voucher or subsidy to purchase individual market insurance instead of offering an employer-based insurance policy. Trump can do this via executive order. Between the tax deduction for all individual policies and allowing employers to offer a voucher in lieu of insurance, that would neutralize the employer mandate and the tax advantage of employer based coverage.

Bob Murphy writes:

I understand why Scott thinks the tax code is distorting U.S. health care prices--and I make a similar point in my own talks/writings--but I think he (and many other economists) are putting too much weight on the tax deductibility. I spell out my concerns here.

Hazel Meade writes:

@Bob Murphy,
You are missing an important facet of the problem with employer-based plans, the group pricing. By analogy, if employers purchased cars on behalf of the employee - suppose the employee had the right to pick ANY car and that all employees would be charged the same deduction from their salaries regardless of which car they chose. Obviously, employees will opt to purchase the most expensive car they can. This would drive up the amount deducted from everyone's salary, but that would only increase the incentive to "get the most" from the deal they can - nobody's going to want to be the one sucker who buys a Honda while everyone else is buying a Mercedes. Analagously, this is what drives employer-based plans towards all-encompassing pre-paid health care which incentivizes overuse. Your analogy, by contrast assumes that the salary deductions are different for each individual - the total cost of car purchasing is not socialized within the company, the way it is in a group health insurance plan. The problem is not just that it's tax deducted, it's that it's group insurance and people are shielded from the effect of their consumption on their premiums.

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