Its January 2017 and the new, Republican controlled Congress is determined to repeal the Affordable Care Act (ACA) or as many prefer to call it Obamacare. The question arises, is it so bad that it needs to be repealed and replaced or just fixed? The answer lies in whether you think healthcare should be defined as an insurance policy or a defined benefit program. There are pluses and minuses to each direction but they are very different in terms of public policy.
What is Health Insurance?
Health insurance consists of two components that affect the cost of a policy:
- Catastrophic Health Insurance
- Health Maintenance and Preventative Medicine
Catastrophic Health Insurance is certainly the greatest need. It covers the unaffordable cost of a severe illness such as cancer, HIV, COPD and others. Treatments for these “catastrophic diseases” are so expensive that, without insurance, they are a fast track to financial destruction. Health Maintenance and Preventative Medicine are the services most people use on a regular basis and include regular doctor visits for an annual checkup, treatment of a chronic but not debilitating disease, or a severe bout with the flu or food poisoning. This is where the biggest confusion with the consumer begins. Everyone thinks they should get some healthcare in exchange for paying a healthcare insurance premium. The insurance companies play this up to sell expensive policies that include both catastrophic health insurance and preventative medicine. If you carefully analyze the premiums charged for various levels of coverage you begin to see the paradox for a national healthcare policy. Insurance companies are in business to make a profit. They do this by selling insurance for more than the cost of providing benefits.
When you buy a catastrophic health insurance policy, you do so hoping you will never need the benefits. Insurance companies know most people won’t need the benefits and they statistically determine the probability of a payout, legally limit their exposure to a payout, and diversify their risk so the policy can be sold “affordably”. But with no tangible benefits to most of their customers, people tend to discount the value of the policy and won’t buy it. Only the truly sick people want the policy that cost less than the benefits. Young healthy people would rather gamble they won’t get sick while elder people know they are going to get sick if they are not already needing some form of treatment for an existing condition. Insurance companies, prior to the ACA, kept their profits high and payouts low by refusing to insure people who had preexisting conditions and quickly dropping people who got sick. The healthy people never knew the difference and kept on paying premiums. Its when people got sick that they found out how vulnerable they were and how poorly insured they were. This was bad public relations so the Health Insurance industry developed new hybrid products to make even more money and disguise the real evil in the catastrophic health insurance policies.
First thing was to make these hybrid products desirable. The insurance companies lobbied for tax laws that made healthcare insurance a business deduction and designed some really great executive healthcare products. The tax laws allowed companies to deduct healthcare costs for its executives if they also provided and subsidized health insurance to their “full time salaried” workers. So while the executives had their “Cadillac” plans and the workers had their “Buick” plans everyone got used to catastrophic health insurance plus some “benefits” such as an annual physical, prescription drug coverage, doctor visits with a low co-pay, etc. The benefits were add ons to the catastrophic health insurance plan. The insurance company could easily estimate the cost of the “defined benefits” add on an administrative charge and a profit. That cost was added to the catastrophic insurance premium. Premiums were subsidized by employers so executives could get the best healthcare and employees could get affordable healthcare. This worked fine as long as the employees were young and fairly healthy. Different industries were rated differently by insurance companies such that businesses such as restaurants and arts-related industries were charged premiums when they hired gay people (AIDS risk) and young women (pregnancy risk). The cost of the premiums was directly related to the risk of paying out benefits for catastrophic illness treatments. Higher risk businesses were unable to pay the premiums, avoided hiring higher risk employees, and hired more part-time workers who would not be covered by the policies.
Everyone grew to understand health insurance as a benefits program. The insurance companies were happy because they had a guaranteed profit in the benefits side and they could manage the risk for catastrophic illness claims. The insurance model failed to address the growing needs of sick people. It actually made it worse by scientifically excluding potentially sick people from insurance coverage. Comprehensive healthcare was only for the privileged few and it was paid for by the young and healthy. Then came Obamacare which changed the rules and made the insurance companies furious. Before we get into Obamacare, lets further define the alternative to insurance, the defined benefit program.
What is a Defined Benefit [Healthcare] Program?
A defined benefit program is a program where there are certain benefits that accrue to everyone. The cost is driven mostly by the number of participants. Defined benefits are very similar to the coverages in an insurance policy that everyone knows they will likely use; benefits like:
- Free annual checkup
- Free or low copay prescriptions
- Low cost doctor visits
- Free or low cost lab work
- Low cost emergency room visits
- Ambulance services
- Rehabilitative services
- Mental health services
- Maternity and well baby care
- Eating disorders
These benefits are desirable but they are not catastrophic healthcare issues. These benefits are expensive but in most cases can be paid for without the threat of financial insolvency. The overall risk of having an illness that is catastrophic is reduced through preventative healthcare benefits such as those listed above. So it is reasonable to assume that the net economic benefit to a nation of providing preventative and maintenance healthcare to its citizens is positive; meaning it costs less to provide than the overall benefit to society of a healthy population. A defined benefit healthcare program would also provide defined coverage for catastrophic illness such as:
- Extended hospitalization
- Surgical procedures
- Advanced treatments such as radiation and chemotherapy
- Organ transplants
- Full time nursing care and hospice
Elective (“aka non-necessary”) procedures such as cosmetic surgery and infertility treatments are generally included only in the “Cadillac plans”.
Implications for Social Policy
If we choose to address national healthcare with insurance, we are agreeing that there will be profits achieved at the expense of providing universal coverage. Some people will get better care than others based on their ability to pay and some insurance companies will make bigger profits than others. The profits, by definition, will reduce the resources available to provide healthcare and therefore will produce a lower quality national healthcare outcome than a non-profit model. Insurance, as it works today, is one of the key factors resulting in the US having the highest cost per capita of healthcare in developed nations and one of the lowest quality outcomes.
According to the The Commonwealth Fund study, “Mirror, Mirror On The Wall” — 2014 Update:
The report included prior surveys and national health system scorecards as well as data from the World Health Organization (WHO) and the Organization for Economic Cooperation and Development (OECD). The report also included a list of major findings — including these:
Access: Not surprisingly — given the absence of universal coverage — people in the U.S. go without needed health care because of cost more often than people do in the other countries.
Efficiency: On indicators of efficiency, the U.S. ranks last among the 11 countries, with the U.K. and Sweden ranking first and second, respectively. The U.S. has poor performance on measures of national health expenditures and administrative costs as well as on measures of administrative hassles, avoidable emergency room use, and duplicative medical testing.
Equity: The U.S. ranks a clear last on measures of equity. Americans with below-average incomes were much more likely than their counterparts in other countries to report not visiting a physician when sick; not getting a recommended test, treatment, or follow-up care; or not filling a prescription or skipping doses when needed because of costs. On each of these indicators, one-third or more lower-income adults in the U.S. said they went without needed care because of costs in the past year.
Healthy lives: The U.S. ranks last overall with poor scores on all three indicators of healthy lives — mortality amenable to medical care, infant mortality, and healthy life expectancy at age 60. Overall, France, Sweden, and Switzerland rank highest on healthy lives.
Perhaps the biggest single takeaway was this one:
“The most notable way the U.S. differs from other industrialized countries is the absence of universal health insurance coverage. Other nations ensure the accessibility of care through universal health systems and through better ties between patients and the physician practices that serve as their medical homes.”
The intention of Obamacare was to improve the overall effectiveness and availability of healthcare for all Americans by implementing a universal healthcare plan. Universal healthcare does not imply or require government run healthcare, it means everyone gets affordable healthcare. The options as how to achieve that outcome are varied. The possible models identified by economist Praveen Ghanta follow:
- Single Payer: The government provides insurance for all residents (or citizens) and pays all health care expenses except for copays and coinsurance. Providers may be public, private, or a combination of both.
- Two-Tier: The government provides or mandates catastrophic or minimum insurance coverage for all residents (or citizens) while allowing the purchase of additional voluntary insurance or fee-for service care when desired. In Singapore all residents receive a catastrophic policy from the government coupled with a health savings account that they use to pay for routine care. In other countries like Ireland and Israel, the government provides a core policy which the majority of the population supplement with private insurance.
- Insurance Mandate: The government mandates that all citizens purchase insurance, whether from private, public, or non-profit insurers. In some cases the insurer list is quite restrictive, while in others a healthy private market for insurance is simply regulated and standardized by the government. In this kind of system insurers are barred from rejecting sick individuals and individuals are required to purchase insurance, in order to prevent typical health care market failures from arising.
Obamacare is an Insurance Mandate model; where it failed was when Republicans insisted that the exchanges operate without regulation. The insurance industry, like the public utility industry, is not a fundamentally competitive industry. There are economies of scale that naturally create higher profits for bigger companies while huge barriers to entry prevent new companies from being able to enter a market and compete. One of the most obvious issues is the challenge for new competitors to build a large network to attract enough new customers away from established firms. New entrants are also more likely to get new, higher risk, customers who were rejected by established players due to pre-existing conditions.
For the insurance mandate to work, profits must be regulated and overhead costs must be contained to prevent the price gouging abuses we have experienced. Additionally the mandate must be enforced to create an actuarially sound diversification of the risk pool. This is not hard to fix but I ask, “Do we really want to fix Obamacare and keep the insurance mandate OR do we really want a more efficient and effective model?”
How We Can Fix Obamacare
To fix Obamacare, the insurance industry must be regulated to limit excessive executive compensation, price gouging, denial of benefits, and insurance fraud while ensuring a competitive marketplace. Profits of insurance companies must be based on selling more policies because their profits are tied to a regulated per policy margin. Doing business the old way by selling premiums and denying claims would be abolished. There would be no need to deny claims, refuse coverage, or price gouge. The business model would become competitive for new clients. Companies would compete by creating larger, more inclusive, networks of hospitals and physicians so customers would have more options and more patient centered care.
Fixing Obamacare requires creating a national health insurance regulatory agency that either directly regulates the insurance industry or empowers state agencies to perform the auditing and regulation. Regulatory agencies would perform similar functions to public utility regulatory agencies. Regulation of the insurance industry would include the following tasks:
- Set a minimum percentage of premiums that must be paid out in claims/benefits, say 80%
- Enforcement of eligibility nondiscrimination, everyone is eligible
- Prevent actions to remove sick people from the insurance roster
- Establish standardized benefits for insurance policies
- Review and evaluate the financial stability, liquidity, and ability to pay claims by all insurance companies
- Review and approve policy premiums, ie the prices and cost of insurance policies
- Investigate reports of insurance fraud
- Establishing a national schedule of healthcare products/services with potential pricing models and national supplier contracted rates
- Audit actual performance, oversee refunds for excessive premiums, and rate increases for higher than expected claims
- Establish and maintain the electronic exchanges for shopping and comparison of insurance policies
Fixing Obamacare will create a thriving competitive health insurance industry and it will provide for more patient driven healthcare solutions but it will not be the lowest cost or most efficient system for delivering healthcare services. Achieving the highest possible outcome for each dollar spent on healthcare would require driving overhead and administrative costs to a bare minimum; and that includes executive compensation as well as corporate profits. It would require replacing the insurance companies with government agencies. That may be a desirable outcome, especially for the democratic socialists, but it will be met by extreme resistance through insurance industry lobbying and disinformation campaigns (like the death panel scares) as we saw during the legislation of the ACA. So it is highly unlikely we will replace Obamacare with a better system.
How We Can Replace Obamacare
If we want to improve our public policy toward universal healthcare we must look at ways to provide services to everyone and keep the cost affordable. We must consider whether we want to make basic healthcare a right and not a privilege. We must decide what level of healthcare is a right and how, we as a nation, pay for it.
Medicare for All
The fastest and simplest way to replace Obamacare with universal healthcare coverage is to leverage our existing single payer system, Medicare, and make Medicare available to everyone. We have a system that works. It is available to everyone 65 and older. It would be simple to extend the program to everyone and pay for it through taxes. The single payer system is a powerful mechanism for containing healthcare costs as the single payer negotiates or regulates all prices. Patients are given significant freedom to select the providers (hospitals, physicians, etc.) they desire. A single payer system also simplifies the process for providers to get paid. There is a standardized set of fees, services, and payment gateways.
Medicare for All would likely be a tiered system of benefits. The government would provide a basic level of services such as catastrophic health insurance plus a limited plan for preventative health services. Additional tiers of medical services might be available as partially subsidized options such as prescription, vision, and dental plans. Higher tiers might be available as fully paid options that provide for elective surgery, private rooms, in home healthcare, etc.
The public option is a hybrid system with the insurance industry. A hybrid that is both competitive and focused on patient outcomes. The public option would be offered side by side with a regulated insurance industry. The government agency that serves as insurance agency would be held to the same cost control standards as the regulated private companies. The government agency would serve to insure the most difficult customers; the indigent, the terminally ill, the elderly, the chronically ill, the mentally ill, and veterans. Taxpayers would foot the bill for the public option, through large subsidies, since it would be nearly impossible for that sector to be affordable. The public option would also be available to anyone who wanted to sign up. This would be especially beneficial in rural geographies where there are small populations to serve, limited providers, and few insurance options. Anyone signing up for the public option would receive subsidies based on income levels and competitive prices in low risk pools. The public option would be a subsidized insurance option not a government run healthcare provider.
Higher premium costs associated with a regulated, for-profit, industry would be comparable to non-profit (government offered insurance) premium costs serving high risk pools. The subsidy would make it affordable the same way subsidies work under Obamacare.
So do you really want to fix Obamacare which implies you want a less efficient healthcare system or do you want to replace Obamacare with something better? Something that effectively eliminates the insurance industry and creates a single payer system. I think that most people (conservatives) who are saying repeal and replace Obamacare really want to fix it and keep the insurance industry as the payer for healthcare. Conversely, I believe that most of the people (progressives) who say fix Obamacare would really rather replace it with Medicare for All. Its complicated, lets see if our elected officials can figure out just what they promised and how they are going to deliver it. Worst case, which is most likely, repeal Obamacare and do nothing further plunging our nation down the list of developed countries for quality of life and expected lifetime. We might soon start competing with third world nations for quality of life.