Wednesday, November 4, 2009

Catastrophic comparison, Part 1

The idea of government-paid - or government-provided - catastrophic health care has popped up here and there recently. It is the heart of David Goldhill’s proposal; Martin Feldstein urged it last month (via Greg Mankiw without comment); and Ross Douthat has advocated it, linking both Feldstein’s proposal and a June 2007 plan from Brad DeLong.

DeLong, Goldhill, and Feldstein have slightly different motivations for their proposals but one thing all three agree on: more consumer exposure to health care costs. Feldstein puts it thus:

A good system should not try to pay all health-care bills. That would lead to excessive demand, wasteful use of expensive technology and, inevitably, rationing in which health-care decisions are taken away from patients and their physicians. Countries that provide health care to all are forced to deny some treatments and diagnostic tests that most Americans have come to expect.

DeLong uses the specific example of cost sensitivity and resultant price reductions in some types of laser eye surgery:

It does seem to matter that consumers are cost conscious and economize when they have financial skin in the game.

Goldhill is concerned with both the cost and the quality issues that arise when consumers don’t pay directly:

I believe if the government took on the goal of better supporting consumers - by bringing greater transparency and competition to the health-care [note: not health insurance] industry, and by directly subsidizing those who can’t afford care - we’d find that consumers could buy much more of their care directly than we might initially think, and that over time we’d see better care and better service, at lower cost, as a result.

So all three proposals are designed to make individuals see clearly what they are paying for their own health care. The authors believe that will result in careful decision making on the part of consumers about what treatments are really worthwhile and which doctors and hospitals provide the best value. It will also result in providers striving to deliver higher quality and lower costs while encouraging transparency in pricing. Those effects on consumers and providers will in turn result in less spending on health care. At the same time all three writers want to make sure everyone has access to care and no one is financially destroyed by medical costs. Their goals are the same; their methods differ. Let’s look at DeLong versus Goldhill first; I’ll throw Feldstein in at the end.

DeLong proposes a 20% government bite of your income. Five percent goes to pay for government-provided catastrophic insurance while 15% goes into your Health Savings Account. You pay for health bills with your HSA. If you don’t spend all your HSA in one year, you can roll the balance into your IRA or you can just get your money back. If you spend all your HSA and you need to spend more, your catastrophic coverage kicks in and the government pays the overage. In this plan “catastrophic health costs” are defined as more than 15% of your income.

Goldhill on the other hand proposes that “catastrophic health costs” be defined as $50,000:

... the real key would be to restrict the coverage to true catastrophes - if this approach is to work, only a minority of us should ever be beneficiaries.

Like DeLong, he proposes a single government pool for catastrophic coverage. Everyone is required to buy this catastrophic coverage. Those who cannot afford the premiums will be subsidized by the government. Like DeLong, Goldhill also wants Health Savings Accounts to which everyone must “contribute a minimum percentage of post-tax income, subject to a floor and a cap in total dollar contributions.” If someone does not earn enough to meet their floor amount the government tosses in the difference. So long as an individual’s medical bills do not exceed $50,000 a year the bills will be paid out of his HSA.

Goldhill also wants premiums for catastrophic care to change with age. Similarly he wants the threshold that must be reached before HSA money can be used for non-health purposes to change with age. Interestingly, he does not specify the direction of the change although I assume in both cases it would increase with age. That is, the older you are the higher premium you pay for catastrophic care since you are more likely to need it. And the older you are the more you must have in your HSA since, again, you are more likely to need medical care. Goldhill does say that the percentage of after-tax income you should be required to contribute to your HSA will increase with age since “wages and wealth typically do.” DeLong’s proposal makes no mention of age.

The big difference between DeLong and Goldhill when it comes to HSAs is that Goldhill wants HSAs to be perpetual: money left in Goldhill’s HSAs at the end of a year simply rolls over to the next year. Once the HSA amount meets some threshold (unspecified but I have some thoughts about that later) the HSA money over that threshold can be withdrawn for whatever purpose the HSA owner wants with no penalty. Any money left in an HSA after death would become part of the deceased’s estate.

This difference exists because under DeLong’s plan there can never be a gap between what is in your HSA and what you must spend before your catastrophic coverage kicks in: you throw 15% of your after-tax income into your HSA every year and if you spend more than that the catastrophic insurance foots the bill. There’s no reason for that HSA money to roll over. In Goldhill’s plan there can be a substantial gap - it’s quite possible to have less in your HSA than the $50,000 that will cause your catastrophic coverage to kick in. Goldhill deals with the possibility of such gaps thus:

What about care that falls through the cracks - major expenses (an appendectomy, sports injury, or birth) that might exceed the current balance of someone’s HSA but are not catastrophic? These should be funded the same way we pay for most expensive purchases that confer long-term benefits: with credit. Americans should be able to borrow against their future contributions to their HSA to cover major health needs; the government could lend directly, or provide guidelines for private lending. Catastrophic coverage should apply with no deductible for young people, but as people age and save, they should pay a steadily increasing deductible from their HSA, unless the HSA has been exhausted. As a result, much end-of-life care would be paid through savings.

The last two sentences confused me at first but I think what Goldhill is saying is that if young people incur medical bills of more than $50,000 they should not have to pay the first $50,000 from their HSAs before their insurance kicks in. If I’m correct in my reading of Goldhill, as soon as your medical bills for a given year exceed $50,000, your catastrophic coverage will pay all your health care costs that year - not just the amount that exceeds $50,000. So while DeLong’s 15% is a deductible, Goldhill’s $50,000 is a trigger.

Let’s say you’re 25 and you have $5,000 in your HSA. You’re in a terrible accident and your medical bills total $65,000. As I read it, Goldhill would have your catastrophic coverage pay the entire $65,000 rather than requiring you to fork over the $5,000 in your HSA and go into debt for an additional $45,000 while your insurance pays only the $15,000 that exceeds $50,000. So long as you’re young, that is. As you age you will be required to pay more and more from your HSA before your catastrophic insurance kicks in. So now let’s say you’re 45 and you have $25,000 in your HSA. You have the same terrible accident and the same $65,000 medical bills. Now you might have to fork over, say, $10,000 from your HSA before your catastrophic coverage kicks in. (Goldhill does not go into specifics as far as amounts.) Now let’s say you’re 85, you have $50,000 in your HSA, and you need a hip replacement. You might have to spend the entire $50,000 before your catastrophic coverage kicks in.

Both Goldhill and DeLong want to make sure everyone gets preventive care and both understand that allowing people to spend their HSAs on stuff other than health care may mean some people will choose not to get preventive care. Goldhill:

Some experts worry that requiring people to pay directly for routine care would cause some to put off regular checkups. So here’s a solution: the government could provide vouchers to all Americans for a free checkup every two years. If everyone participated, the annual cost would be about $30 billion - a small fraction of the government’s current spending on care.


Sin Taxes: on Tobacco, Gorgonzola, Three-Liter Bottles of Liquid High-Fructose Corn Syrup, Tanning Clinics (Melanoma), et cetera: Sin taxes (and, perhaps, someday general revenues) pay for an army of barefoot doctors and nurses and mobile treatment vans roaming the country, knocking on doors, and providing preventive and other long-run lifestyle services for free: Let me examine your prostate. Mind if I check your refrigerator and tell you how to eat healthier? Have you exercised today? I'm a Pilates instructor, and we could do a session now? Are you up on your immunizations? Anybody here have a fever and need antibiotics? Come on out to the van and I'll clean your teeth." The idea is to make the preventive care cheaper-than-free, to insure that nothing with a high long-run benefit/cost ratio gets left undone because people would rather get a bigger check the next April to use to buy an HDTV.

Those are the basics of Goldhill and DeLong. Now let’s add Feldstein to the mix. I have to admit I discuss Feldstein with some trepidation. Feldstein is a Harvard economist so I assume he’s both bright and competent. However his plan makes no sense to me which leads me to suspect I’ve missed something crucial and am about to reveal myself as a total moron. I even printed out his article, fearing I had missed something in pixels that would become clear in ink. Sadly I didn’t fare any better with hard-copy so here goes.

Feldstein proposes vouchers to purchase catastrophic insurance in the private market:

Specifically, the government would give each individual or family a voucher that would permit taxpayers to buy a policy from a private insurer that would pay all allowable health costs in excess of 15 percent of the family's income. A typical American family with income of $50,000 would be eligible for a voucher worth about $3,500, the actuarial cost of a policy that would pay all of that family's health bills in excess of $7,500 a year.

How the family covers the medical bills before the catastrophic coverage kicks in is up to them. Feldstein suggests they could pay out of pocket; add their dollars to the voucher to buy a more traditional insurance policy; or join an HMO. What if the family elects to pay out of pocket and then is hit with medical bills that exceed their cash on hand? They use their government credit card:

The credit card would allow the family to charge any medical expenses below the deductible limit, or 15 percent of adjusted gross income. (With its information on card holders, the government is in a good position to be repaid or garnish wages if necessary.)

The families would not have to use the government credit card; they could pay cash or use their own credit cards or take out a bank loan if they preferred. In case none of those options are feasible, however, the government credit card would not only make it possible for families to pay for care they need it would also reassure providers that bills would be covered even if the family does not have the cash or the credit to do so.

Of the three plans, I think Feldstein’s is the weakest. Most importantly, Feldstein’s proposal contains elements that undercut the whole idea of having health care consumers actually weigh the value of the care they receive. First, he proposes a government credit card rather than a mandatory HSA to pay for non-catastrophic medical expenses. Yes, people will be required to pay back anything they charge on the card but many of us find it all too easy to believe that if we pay for something with a credit card it isn’t really costing us anything. (Remember all that consumer debt we’re drowning in right now?) Being able to whip out a government-issued credit card to pay for medical care will probably make many people less sensitive to the cost rather than more.

Plus who among us really believes the government is going to be able to garnish the wages of people who go on television and sob about how their children needed braces and now they’re up to their eyeballs in debt and will go bankrupt if they have to continue to pay off their health care credit card? Please. Government-provided health care credit card debt will be forgiven faster than you can say “cry me a river”.

Additionally, Feldstein anticipates that employer-paid health plans will continue to exist. In fact he counts on them to fund his proposal. Yet employer-paid health plans are arguably one of the mechanisms that keep people from realizing what their health care is costing them.

On the other hand both DeLong and Goldhill require the consumer to spend his own money to pay for non-catastrophic health care. And it’s really his own money because if he doesn’t spend it on health care he gets it back either the next year (DeLong) or down the road (Goldhill). DeLong’s plan is slightly stronger in this regard because he does not allow (does not need) borrowing from future HSA contributions either with or without some type of government backing. Thus under DeLong’s plan the trade-off between health care expenditures and other expenditures is quite clear to the consumer. Goldhill’s plan requires more delayed gratification: the money you don’t spend today could help pay for a house 10 years from now or help pay for a really nice nursing home 60 years from now.*

A second aspect of Feldstein’s plan I don’t like is that he would leave Medicare and Medicaid as is. I assume this means the vouchers would be only for people who are too young for Medicare and not poor enough for Medicaid. I understand why he has to do this - he has no mechanism for covering that 15% before the catastrophic coverage kicks in so poor people can’t cover it and those counting on Medicare would view his plan as a reduction in benefits . I could live with leaving Medicare in place - except for that whole running out of money thing - but I have to agree with Senator Ron Wyden about Medicaid:

”... Medicaid is a caste system. It is unfair to poor people and it is unfair to taxpayers." The system, he says, makes it hard for physicians to take care of the most vulnerable in society.

DeLong does not mention either Medicaid or Medicare; my assumption is that he would include everyone in the United States in his plan.

Goldhill would explicitly bring Medicaid patients into his plan:

If we abolished Medicaid, we could spend the same money to make a roughly $3,000 HSA contribution and a $2,000 catastrophic-premium payment for 60 million Americans every year. That’s a $12,000 annual HSA plus catastrophic coverage for a low-income family of four. Do we really believe most of them wouldn’t be better off?

And Goldhill’s plan was developed partially to substitute reliance on ones own savings for reliance on Medicare but he acknowledges that:

It would take a full generation to completely migrate from relying on Medicare to saving for late-life care; ...

(Goldhill also thinks it will take a generation to migrate “from Medicaid for the disadvantaged to catastrophic insurance and subsidized savings accounts” but I’m not sure why given his point about abolishing Medicaid.)

Third, I don’t like the fact that Feldstein is going to give his catastrophic insurance vouchers to everyone not covered by Medicare or Medicaid. This means a guy making a million dollars a year who has a soup to nuts insurance plan with a super-low deductible and super-good coverage totally paid for by his employer will get a voucher. First of all, why are we taxing the health insurance plans of people making minimum wage and getting minimum employer health insurance in order to hand money to someone who doesn’t need it? Second of all, what is the rich worker supposed to do with that voucher? Sign it over to his employer to defray costs?

My fourth and final objection to Feldstein’s plan is that he wants us to buy catastrophic insurance from private companies. That sounds odd, even to me, but it strikes me as a recipe for disaster. Here’s why.

After stating that his plan will insure the uninsured; remove the risk of bankruptcy due to medical costs; and remove the “structure of insurance” as a cause of rising medical costs, Feldstein makes an interesting claim:

All of this would happen without involving the government in the delivery or rationing of health care.

Um, no. The reality is that any time you have the government involved in payment the government is also going to be involved in determining what is and is not going to be paid for. Feldstein’s plan makes that determination indirect but it’s still there. Someone is going to have to decide which medical costs can be charged to that credit card and someone is going to have to decide which medical costs count toward that 15% of income you have to spend before your insurance policy kicks in. Under Feldstein’s plan the logical approach would be for your insurance company to determine both - it should be the same group of charges. That’s fine as far as it goes but I predict it will take about 30 seconds before patient groups and medical groups start demanding that the Federal government require insurance companies to cover this, that, or the other.

If we’re going to go down that road anyhow, I’d rather cut out the middleman and just let the government decide. I’ve read in a couple of places that the Baucus bill is to all intents and purposes going to make insurance companies public utilities. It’s heretical to say so but I’m increasingly inclined to believe that would be worse than single-payer: we’ll get the costs and disadvantages of insurance companies combined with the costs and disadvantages of government-run anything. It’s a double whammy. Plus it allows the government to run health insurance while still blaming the insurance companies for all the problems. The government has the power, the companies get the grief. There’s not much accountability in that setup.

The Feldstein approach has the same drawback. Once the government is paying, the government will decide what will - and will not - be covered. We will still get rationing or over-coverage or probably some bizarre combination of both but with two layers of bureaucracy instead of just one and with little understanding that at least half the problems result from the government. If we’re going to have true catastrophic coverage for everyone then just make it a government plan. Forget the fig-leaf of private insurance companies.

This question of what’s covered is more interesting under the DeLong and Goldhill plans. They assume there are no private insurance companies** and no government credit cards; you will have to actually spend some of your own hard, cold cash before the government’s catastrophic insurance kicks in. This gives us a range of alternative ways to address the issue of what is and isn’t covered, ranging from least to most restrictive.

First, at the least restrictive end, we may find there is no need to specify what medical treatments do and do not count toward the catastrophic amount (except for excluding cosmetic surgery based solely on vanity). In order for the government catastrophic insurance to kick in an individual is going to have to spend a significant amount of his own money first. I would hope that the number of people who are willing to burn through 15% of their income (DeLong) or $50,000 (Goldhill) purchasing ineffective treatments is vanishingly small. Those who are convinced that non-traditional forms of treatment are desirable are free to pursue them and if they manage to burn up a significant amount of their own money doing so, the catastrophic insurance will kick in. The consumers will, in other words, have to put their money where their mouths are before getting the rest of us to fund their non-traditional ideas of health care.

Second, if the strictly market approach doesn’t work and a lot of people are in fact churning through their entire HSAs purchasing dung beetle carcasses to cure acne then we could decide that you can spend your HSA on whatever you want and it will all count toward your catastrophic deductible/trigger but only certain treatments would be covered under your catastrophic insurance. If you pay 15% of your income to a charlatan who chants incantations at sundown to cure diabetes, that’s your call. Once you’ve burned through that 15% the catastrophic insurance will kick in if you need an approved treatment but it won’t pay for more chanting.

Third is a harsher alternative: you can spend your HSA on whatever your want but not only will your catastrophic insurance only pay for approved treatments, only those same approved treatments will count toward the catastrophic deductible/trigger. So now if you spend $50,000 of your HSA money on non-approved treatments and then need an approved treatment, you’re out of luck. As far as your catastrophic insurance is concerned, you haven’t spent a dime.

The fourth possibility is like the third but now the government limits how much of your HSA you can spend on unapproved treatments that don’t count toward your trigger. This is probably more doable under the Goldhill plan than the DeLong one; DeLong has no working room from year to year. Under the Goldhill plan, however, the government could allow a certain percent of your HSA to be used for medical services that don’t count toward your catastrophic trigger. That percent could rise depending on how much money was in your HSA and would probably have to fall as you get older. So if someone wants cosmetic dentistry at the age of 35 that wouldn’t count toward his catastrophic trigger but he could fund some of it out of his HSA if he had enough in there.

The most restrictive alternative is that you can only spend your HSA money on approved treatments - which puts us back where the Feldstein approach did but with government making the decisions directly rather than acting as the man behind the curtain vis-a-vis the insurance companies.

I hope we’d start with the least restrictive and see how that works out. After all, part of the reason to have people spend their own real money on health care is to encourage each of us to make tough decisions on what health care is worth our hard-earned cash. There’s no reason to believe that the health care I’m willing to spend money on is always going to be the same as the health care you’re willing to spend money on.

Okay, these are the basics of the three plans. In the next installment I’ll look at whether the plans are paid for; how they do at handling other health care issue like chronic illnesses and end of life costs; and whether I think any of them are worthy rooting for.


* Goldhill appears to walk close to Feldstein’s idea of government credit cards when he says:

Americans should be able to borrow against their future contributions to their HSA to cover major health needs; the government could lend directly, or provide guidelines for private lending.

However, I believe the ideas are substantively different. Under Feldstein’s plan the money spent on health care and charged to your government credit card would have to be repaid from your general funds, funds that could instead be used for food, clothing, or a trip to Disneyland. Under Goldhill’s plan the money spent on health care and fronted by a government loan or a government-backed loan would be repaid from funds already earmarked for health care.

** Note that the Goldhill plan does not necessarily mean the death of private insurance companies. If someone wants to spend his HSA buying health insurance to cover his costs up to that $50,000 trigger there is no reason the government could not make that an acceptable use of the HSA. I don’t think Goldhill anticipates that happening and I don’t think he would like it if it did but it’s possible.

1 comment:

Grim said...

I like the idea of market-based reforms. However, I'm not sure why a government plan would be better at simulating the market than, you know, the market.

For example, the DeLong plan that I surrender 20% of my income for health care expenses? The market as it currently exists offeres much better deals than that.