Repeal, catastrophize, permit, universalize

As I said in my previous post, I recently received a letter from my health insurance company, Horizon Blue Cross Blue Shield of New Jersey. That letter informed me that due to the Affordable Care Act, the insurance plan I currently purchase cannot be renewed in 2014. I saw no reason to complain to Horizon about this - there’s nothing my insurance company can do - but I did write to my United States Congressmen: Senator Robert Menendez (D); Senator Jeff Chiesa (R); and Representative Donald M. Payne, Jr. (D). Here’s the email I sent each of them:

I purchase health insurance, as an individual, from Horizon Blue Cross Blue Shield. Today I received a letter from Horizon informing me that due to the requirements of the Affordable Care Act, my current insurance plan cannot be renewed on my anniversary date in 2014. Obviously, President Obama "misspoke" when he promised me that if I liked my health care plan I would be able to keep it.

Ideally, I would like the ACA repealed: there are too many surprises and it fails to achieve its objectives. However, if the ACA is not repealed, I urge you to do three things.

First, modify the ACA so that anyone who wants to can purchase a catastrophic health insurance plan; this will help make health insurance truly affordable. Given that health insurance costs vary by State but ACA subsidies do not, this would be very helpful to those of us in the extremely expensive State of New Jersey.

Second, modify the ACA to permit me and everyone else to keep the insurance plan we have. If the ACA plans turn out to be superior and worth the price, people will migrate to them on their own, without being forced to do so.

Third, if you're going to leave the ACA in place, please pass legislation prohibiting the Executive branch from issuing waivers, delaying the employer mandate, giving Congress a special deal, and so on. If the law is a good idea for some it is a good idea for all.

I would really, really like a law that says the exchanges must include an offer of catastrophic health insurance, preferably with a choice of deductibles, ideally with the ability to choose a policy with a deductible of $1000, $2000, $3000, and so on. I’d pick one with a deductible of at least $10,000. This would let those of us who want to buy actual health insurance rather than ”a spectacularly inefficient prepayment plan” do so. And it should be much cheaper than policies which cover routine expenses I could easily pay for myself.

Catastrophic again

A post at The Corner about unintended consequences of Obamacare got me thinking about health insurance again. The post is worth reading (although it’s bad news for people like me with significant health problems) but that’s not what I’m thinking about. I’m thinking about this from Megan McArdle:

Certainly, this [the Oregon Medicaid study] bolsters my belief that health insurance should provide financial protection from catastrophic events, not wrap-around first-dollar coverage.  Those who used to read me on The Atlantic may recall that the McArdle Plan for Healthcare involved the government picking up the tab for any medical expenses above 15-20% of income: simple, progressive, and aimed at the actual problem we know health insurance can fix.  Unfortunaely, Obamacare made that sort of coverage functionally illegal.  

That kind of plan tied to income would be great but it’s unlikely to happen while Obama is President.* What might be possible, though, is to modify Obamacare to permit true catastrophic health insurance. You know, the kind Secretary Sibelius is so clueless about. Perhaps the Republicans could agree to pass something the Democrats and Obama want if and only if the bill to do so includes a modification that adds catastrophic insurance policies as one of the options under Obamacare. Ideally, I’d like to see these with a range of deductibles: $1,000; $5,000; $10,000; $15,000; and so on. That way they would be available to people with a range of incomes.

Presumably the cost for a catastrophic plan would be less than for those that cover doctor’s visits for annual exams, flu shots, dropping a pot lid on your toe (don’t ask), and kids with colds. That might encourage people to purchase catastrophic plans which would increase our sensitivity to the cost of medical care and that, in turn, might actually decrease spending on health care a little.**

*****

Notes:

* I haven’t found a lot of specifics on the “McArdle Plan for Healthcare” but my impression is that she would set a single percentage to be spent on health care before government coverage kicks in. If I were going to take a serious look at this kind of policy, I’d considered percentage brackets, with those who have less money having to spend a lower percentage of their income before the government steps in - much like the brackets we now have for income tax rates.

** Under this modification to Obamacare, as opposed to the McArdle Plan, the insurance companies would still insulate people from true health care costs. When I get a medical procedure, my insurance company decides how much my provider will be paid. So long as insurance companies continue to do so, the insured will continue to pay less than the true cost - and the uninsured will continue to pay more.

*****

Reading:

These were the Atlantic posts I found that talk about the “McArdle Plan for Healthcare”. They date from February of 2010.

The Benefits of Health Benefits - This began as a response to an Ezra Klein post. The Klein post has links to a number of other McArdle posts, all of which are interesting.

The Limited Benefits of First Dollar Health Care Coverage- Follow up to previous post.

Oh, I like this

Cardinalpark is pushing for Medicare and Medicaid to become defined contribution plans rather than defined benefit plans, citing the success his company has had in doing that with its own health insurance. This is a sort of variation on the types of plans I discuss here and, obviously, I think it’s a great idea.

However, what really caught my attention was this idea from one of the commenters:

I think HSA for medicare would be a great way to go. In addition we should do away with the current estate tax and replace it with an end of life health care bill. So that the heirs receive a bill for a % of the medical cost for the last three years of life up to a % of the estate. Combining these two would go a long way to reduce health care costs as families ration their own care. Dr visits & MRI's with HSA's and massive end of life care with the estate bill.

I really like this. It lets the person who is at the end of his life decide whether he wants to spend his money on extreme measures or would prefer to leave a larger estate to his heirs.

We would need to build in safeguards of course; we don’t want a greedy heir to be able to take control of his infirm grandmother’s finances and decide to preserve his inheritance by consigning Grandma to the tender mercies of Shady Farms CutRate Hovel for the Aged. In a mild bit of irony the best safegaurd would be detailed end of life instructions like, oh, I don’t know, maybe an expansion on the basic Order for Life Sustaining Treatment?

Catastrophic comparison, Part 2.2

In this series of posts I’m taking a look at three proposals for government-paid or government-provided catastrophic health care. I explained the proposals and compared them in the first post in this series. In my most recent post, I looked at whether the proposal by Martin Feldstein was paid for and concluded it was not. In this post, I’ll look at whether the proposal by Brad DeLong is paid for. You can read about his plan in detail in my first post but here’s a brief summary to go on with:

Brad DeLong proposes government take 20% of everyone’s income. Five percent goes to pay for government-provided catastrophic health insurance/care. The other 15% goes into a Health Savings Account. If you spend everything in your HSA in one calendar year, the catastrophic insurance kicks in. If you don’t spend everything in your HSA in one calendar year, you can roll what’s left into an IRA or just get the money back to spend as you please. He does not explicitly propose any type of government assistance for those with low incomes. Very, very simple.

So is DeLong’s plan paid for? Again, this is a different question from whether we can afford it, either nationally or as individual taxpayers. Here I’m just examining whether the income stream DeLong’s plan depends on is sufficient to cover the costs of the health care it must pay for. Let’s do a little math.

I’m looking at two sources for my calculations. First, Historical National Health Expenditure Data (hereinafter “NHE”). The Website is here; I’m using the pdf you can download via the “NHE Web tables (PDF, 1.1 MB)” link. The other source is the Congressional Budget Office Data on the Distribution of Federal Taxes and Household Income (hereinafter “CBO”). The Website is here; I’m using the pdf you can download via the “All of the Above Information” link under “Historical Effective Federal Tax Rates and Income, by Income Category (1979-2006)”. I’m looking at 2006 numbers since I believe that is the most recent CBO data available. Here we go.

According to NHE, in 2006 the United States spent $2.1127 Trillion on health care; our population was 265.4 Million. A little quick division and we discover we spent $7,960.44 per person for health care; I’ll use $8,000 to make life easier. What’s $39.56 among friends? Okay.

According to CBO (page 7), in 2006 there were 116,100,000 households in the United States. A little more quick division and we discover that each household contains 2.29 people. So each household is going to need $18,320 worth of health care in a year - on average, or course.

The CBO has graciously reported its average income numbers in quintiles with each quintile having approximately the same number of households. We can, therefore, pretend there are only five households in the country when we do our math. So.

The CBO (still page 7) tells us that average household pre-tax income looks like this:

Lowest quintile: $17,200; 20% of that is $3,440
Second quintile: $39,400; 20% of that is $7,880
Middle quintile: $60,700; 20% of that is $12,140
Fourth quintile: $89,500; 20% of that is $17,900
Highest quintile: $248,400; 20% of that is $49,680

So if we take 20% of the pre-tax income from each of our five households, we’ll have a total of $91,040. If we distribute that equally across our five households, that’s $18,208 per household. We need $18,320 to pay for their health care so we’re very, very close - short $112 per household. Or at least we were in 2006. We can easily make up the difference by having the richest household pay 20.25% rather than just 20%. I know we don’t want to soak the rich but an extra 0.25% is not really soaking them. So I say DeLong’s plan is paid for.

Now that’s using pre-tax income. DeLong doesn’t specify pre-tax or after-tax when he talks about 20% so let’s take a look at the numbers if we assess the DeLong fee on after-tax income.

The CBO (now page 8) tells us that average household after-tax income looks like this:

Lowest quintile: $16,500; 20% of that is $3,300
Second quintile: $35,400; 20% of that is $7,080
Middle quintile: $52,100; 20% of that is $10,420
Fourth quintile: $73,800; 20% of that is $14,760
Highest quintile: $184,400; 20% of that is $36,880

When we take 20% of the after-tax income from each of our five households, we have a total of $72,440. If we distribute that equally across our five households, that’s $14,488 per household. We need $18,320 to pay for their health care so we’re short $3,832 per household. If we want to make up the difference only from the wealthiest quintile, now they’re going to have to toss in 30.4% of their income rather than 20%. That doesn’t sound too workable especially given that whole “no tax raises for anyone making under $250,000 per year” thing.

When I thought about it, though, I realized that my numbers weren’t quite right. If we implement the DeLong plan, our after-tax income will go up: the amount that now gets taken out of each paycheck for Medicare should disappear. Not even the greediest Federal government could justify continuing to remove that amount once Medicare ceases to exist. So that boosts our after-tax income a little right there.

Beyond that, though, are other taxes that should disappear under the DeLong plan although I’m sure we’ll have to fight our governments tooth and nail to make them do so:

- Some part of our Federal income tax goes to fund Medicaid.
- Some part of our State taxes go to fund Medicaid.
- Some part of our Federal, State and possibly local taxes go to fund health care for those who have no form of insurance and are too poor to pay for care.

If we implement the DeLong plan we should insist out tax burden drop by whatever amount now goes to these health-care related expenses.

And there’s the other side of this, too: under the DeLong plan we hand over a chunk of our income but at the same time some of the expenses we incur now drop. Most obviously, we will no longer be paying health insurance premiums ourselves. Less obviously, we currently forego some wages because our employers contribute to our health insurance in the form of premiums and administrative overhead. Theoretically, we could write the DeLong legislation to require employers to “’cash out’ the money they currently pay for health benefits and distribute it as wages”; alternatively, we could just let the market do its work. It will take time - particularly so long as unemployment is up - but eventually companies will start using their extra breathing room to raise wages. Last, but not necessarily least, if some corporate income tax revenue goes to pay for health-care related expenses, we should insist that the corporate tax burden by cut by that amount. Since individuals end up paying these taxes in the form of higher prices, eliminating them will raise our disposable income.

At this point I began to wonder if the reduced taxes and increased disposable income I was thinking about might actually add up to the amount the DeLong plan would take from all of us. That was when I had one of those head-slapping, V-8 moments: of course it did. I wasn’t working with some theoretical cost of health care; I was working with the actual amount we spend on health care. This meant that - one way or another - we all do actually pay 20% of our before-tax income for health care. Maybe you don’t individually - although I think each of us might be surprised if we did the math - but on average we all do. We have to: that’s how much we spend.

Although there is, of course, one way around this: if we as a nation are borrowing to fund our health care. In which case, yes, we can argue we aren’t actually spending 20% of our before-tax income on health care and, yes, we can claim we can’t afford to pay that much for our health care. I’m just not sure the future generations that will have to pick up the tab are going to be much impressed by that argument and that claim.

The DeLong plan brings us face to face with the intractable truth at the heart of health care reform: if we’re horrified at how much the DeLong plan will cost us and argue we can’t afford it then we’re forced to admit we can’t afford what we as a nation are spending on health care now and we have to cut back. If we argue we can afford what we’re spending now then either we can afford the DeLong plan or we have to admit that we’re fine with getting health care we’re not paying for and leaving the bill to our children and grandchildren.

You pick ‘em.

*****

Reading:

William McGurn in the Wall Street Journal - What Singapore Can Teach the White House

Making someone else pay : This Milwaukee, Wisconsin, Journal Sentinel article is from October of 2009 which means it’s practically antediluvian in health care bill terms but it’s a nice, brief look at the idea that everyone wants Congress to ask - and thinks Congress is asking - someone else to pay for health care. It makes me think of that ditty attributed to Russell Long:

Don’t tax him. Don’t tax me. Tax that man behind the tree.

It’s also worth noting that - at least according to this article - under the Baucus plan (remember that?) the average family in Waukesha Country would be looking at premiums of 12% of income. That’s not far off DeLong’s 20% and under the Baucus plan taxpayers would still be footing the bill for Medicare, Medicaid, and whatever the government throws into paying for health care for the uninsured.

Catastrophic comparison, Part 2.1

Now, where as I? Ah, yes. Before getting side tracked into my Five Health Insurance Issues series I was discussing three proposals for government-paid or government-provided catastrophic health care. As I said in my previous post:

So all three proposals are designed to make individuals see clearly what they are paying for their own health care because, the authors believe, that will result in careful decision making about what treatments are really worthwhile and which doctors and hospitals provide the best value which 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; the methods differ.

The question for today is: Are these plans paid for? Please note that this is a different question from whether we can afford them, either nationally or as individual taxpayers. Here I’m just examining whether the income streams they depend on are sufficient to cover the costs of the health care they must pay for.

Let’s start with Martin Feldstein's proposal since there’s no math involved. Feldstein proposes that the government give everyone a voucher to buy catastrophic health insurance from a private insurance company. The catastrophic amount would be 15% of the individual’s or family’s income. He would pay for this by taxing employer health insurance payments. He does not address the issue of low income individuals; that is, those with employer-paid health insurance and low incomes.

I simply don’t see how Feldstein’s plan can possibly be paid for. I said in my earlier post that I discuss his plan with trepidation because it makes no sense to me and that’s even more true when it comes to the question of paying for it.

Feldstein relies on taxing employer health insurance payments to pay for the vouchers everyone is going to get:

My calculations, based on the government's Medical Expenditure Panel Survey, indicate that the budget cost of providing these insurance vouchers could be more than fully financed by ending the exclusion of employer health insurance payments from income and payroll taxes.

But surely the value of employer health insurance payments will drop like a rock under his plan. Employer health insurance payments are based on the value of the coverage: the better the coverage, the higher the payments. Yet Feldstein himself anticipates - indeed, hopes - that the value of coverage will be squeezed from the bottom:

Because employer payments for health insurance are tax-deductible for employers but not taxed to the employee, current tax rules encourage most employees to want their compensation to include the very comprehensive "first dollar" insurance that pushes up health-care spending.

Clearly Feldstein anticipates that once employer payments for health care are being taxed, the plans will become less generous. In fact, he counts on this effect to reduce overall national health care spending. But less generous coverage - the higher deductibles he hopes for - means lower employer premium payments which means less revenue from taxing those payments. So based just on Feldstein’s own anticipated consequences for his plan, the revenue stream he’s counting on is already reduced.

Even worse for his revenue stream, the value of coverage has - by definition - been squeezed from the top. Right now an employer-paid health plan must cover the possibility of extremely large health care costs; the higher the possible health care costs, the higher the premiums; the higher the premiums, the more money you collect when you tax them. Under Feldstein’s plan, employer-paid health insurance plans will never have to cover more than the catastrophic deductible: no more than 15% of payroll. The possible health care costs go down, the premiums go down, the money you collect when you tax them goes down. Now not just Feldstein’s hopes for less generous coverage but the economic reality of such coverage will erode his proposal’s own funding base.

Furthermore, I can see employer-paid health insurance disappearing completely under Feldstein’s proposal. Once employer-paid health insurance is taxable (both income and payroll - ouch) it’s rational for employees to decide they’d rather have the money as salary. They can spend it on health care if they need it but if they don’t it’s available to them for other purchases. This would completely eliminate the money Feldstein is counting on to fund his catastrophic insurance plan.

As I’ve now said twice, I fear I’m missing something since the problems in Feldstein’s plan seem so obvious. Unless someone can explain what that something is, however, I consider Feldstein’s plan unworkable and will not consider it further.

In the next installment, I’ll look at whether DeLong’s plan is paid for.

Five health insurance issues: Back to the grocery store

After I finished my Grand Finale post on five health insurance issues I began to worry I had not distinguished clearly enough between health care and health insurance and the role of the free market in each of these. Grim’s comments to that post confirmed my concerns on that score. So let’s return once more to the grocery store and see if I can make myself clearer.

I do most of my grocery shopping at Kings Supermarket, the one on Route 23. It’s bigger than the one in Upper Montclair so there’s a larger variety and it’s less claustrophobic. At the same time it’s smaller than the ShopRite and PathMark stores near me and usually less crowded so it’s a more pleasant place to shop. I think Kings’ prices are in line with those of the larger stores perhaps a few cents cheaper but it’s been worth it to me to have a nicer shopping experience. Now Kings is revamping its product line, however, and attempting to bring prices down. I still do most of my shopping there but I’m beginning to feel like they have too many products on the shelves with too-short expiration dates and I’m not always totally happy with their meats. I just found a butcher shop in Upper Montclair so I may try buying meat there next time. I think they’re a little more expensive but I’ll have to do some comparison shopping to be sure - and then decide if the extra money is buying me better quality.

I don’t do all my shopping at Kings. I like the 365 Day brand olive oil from Whole Foods so I’ll run in there every so often and stock up on that. When I’m in there I also like to pick up a bag of their 365 Day Salt and Pepper Potato Chips - yum! I used to buy more groceries from Whole Foods but once Kings realized how popular some of their stuff was they started carrying it. So now I can buy my soy sour cream from Kings. And, of course, almost every store now carries soy milk. That’s still cheaper at Whole Foods than anywhere else but it’s not enough cheaper to make a separate trip worth the gas and time. I made a wonderful Five Cheese Penne for my husband’s birthday last year and Whole Foods had the best selection of the cheeses I needed for that.

If I need a lot of canned goods - tomatoes, beans - or a lot of non-food items - aluminum foil, laundry detergent - I’ll run to ShopRite. I really don’t like their meat at all but I think they have slightly better prices on non-perishables so it’s worth it to me to make a trip there if I’m going to stock up. They also have a much better selection of Duncan Hines cake mixes than Kings so I’ll pick up a bunch of those while I’m there. ShopRite’s produce is usually quite good so if I’m in there anyhow I’ll buy what I need in the way of lettuce, apples, and so on. And if I want a wide selection of frozen foods - pizza, yum - ShopRite is much better than Kings. It used to not be worth it to run in there just to pick up a California Kitchens Margherita but now that they’ve installed self-checkout - and gotten the bugs out - it’s a breeze especially if I’m already in the area.

I used to hit the FoodTown further up Route 23 because I love Spice Islands spices and it was the only place around here that carried them. They don’t anymore so I never go there. I’ve pretty much adjusted to life with other spice brands - most of the Morton & Bassett brand spice are really good, their bay leaves are great, and the name of the spice is on top of the lid which is very handy is you’re looking down at rows of spices trying to find the one you want. Still I’ve never found a garlic powder that comes anywhere near Spice Islands; luckily I can order that over the Internet.

There is a PathMark near us but I really don’t like shopping there. Their shelves always seem to be understocked and they’re often out of the one thing on my list that I just have to have. However there’s a very nice little Italian deli close by that has wonderful bread and is often a stop to pick up rolls and turkey for lunch.

I love Trader Joe’s but there isn’t really one all that close - and the closest one is near a super-busy mall. I have vegan friends who shop there a lot and also hit a lot of Indian and Asian markets for more exotic ingredients. We do have a farmers’ market in town where I can find wonderful corn and those fabulous Jersey tomatoes during the summer. They also have a brief but incredibly delicious few weeks of peaches.

I buy flour tortillas at Kings but for corn tortillas I like the little corner store up the street. They sell them in packs of 25 or more and they’re always super fresh. There’s also a small liquor store very close to us but their selection is limited so for wine I go to the Wine Merchant. It’s handily in the same shopping center with the ShopRite so sometimes I run in there, too.

I’m sure that by this time you’re fascinated by my grocery shopping adventures - or at least ravenous. But you may be asking what this all has to do with health care and health insurance.

Health care is - or should be - like groceries: a great variety that can satisfy all needs at the best possible price. Health insurance companies are like grocery stores: they don’t produce health care but they are to all intents and purposes where we purchase it. Unfortunately health insurance companies function nothing like grocery stores. We can’t flit from company to company looking for the best deal on a treatment we want or need; we can’t comparison shop; we can’t decide we’ll pay a little more for this treatment because we want this particular doctor.

When I buy health insurance as it is currently structured, it’s as if I can now shop at one and only one grocery store. I get only the products that store chooses to carry. If I need something it doesn’t have, I’m out of luck - no Five Cheese Penne for a birthday dinner. If the store decides to start cutting corners on products, I’m out of luck - dinner may have to be whatever is going to expire tomorrow. If Spice Islands decides to stop doing business with the store I’m committed to, I’m out of luck - I spend my life eating inferior garlic bread.

If I get my health insurance through my employer, the situation is even worse. Now it’s as if I’m forced to buy all my groceries from a store I didn’t even get to pick myself - if my employer picks PathMark, too bad for me.

A free market in health care - like a free market in groceries - is a Very Good Thing. Consumers (patients) must decide whether a treatment is worth them spending their own money on. If they decide it is then they will pay careful attention to exactly what they are getting and exactly how much they are paying for it. They will comparison shop; they will seek out innovative products that provide better quality or lower costs or both. On the other side, many producers (health care providers) will compete to make their product better and lower priced. Others will strive to make their product outstanding so they can charge more for it. Some will find innovative ways to deliver services. Both consumers and producers benefit.

A free market in health insurance may or may not be a good thing but to me that’s irrelevant. Health insurance as currently structured deforms the free market in health care. It doesn’t matter if we’re talking about private health insurance or public; traditional or HMO; catastrophic or first dollar. All our existing forms of health insurance are incompatible with a truly free market in health care.

In contrast, I believe the catastrophic health insurance plans of DeLong and Goldhill - if correctly structured - offer the possibility of providing the advantages of a free market in health care while avoiding the great danger of such a market: that in catastrophic situations, people will be unable to purchase the health care they need. That’s why I’ve already spent so much time analyzing their plans and why I’ll be spending even more time doing so.

*****

Reading:

Health 'Reform' Gets a Failing Grade: Read the whole thing but this is what jumped out at me:

Our health-care system suffers from problems of cost, access and quality, and needs major reform.

[snip]

The system we have now promotes fragmented care and makes it more difficult than it should be to assess outcomes and patient satisfaction. The true costs of health care are disguised, competition based on price and quality are almost impossible, and patients lose their ability to be the ultimate judges of value.

The headline says it all (via TigerHawk): This post quotes Milton Friedman’s observations on the four ways to spend money. I contend that health insurance functions like a combination of the second and third ways. The insurance companies think like this:

Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I'm not so careful about the content of the present, but I'm very careful about the cost.

The policyholders think like this:

Then, I can spend somebody else's money on myself. And if I spend somebody else's money on myself, then I'm sure going to have a good lunch!

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.

DeLong:

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.