Since we now have a preliminary Congressional Budget Office report on the effects of the American Health Care Act, the Republican replacement for the Affordable Care Act, this seems like as good an occasion as any to address the importance of medical insurance to the construction of an economy of entrepreneurs and entrepreneurship.
Since World War II, most workers have been covered by employer-based health plans
Employer-based health insurance became widespread for a simple, stupid reason: health insurance premiums were deemed deductible from the employer’s income as business expenses, but not treated as taxable income by the insurance beneficiaries. This meant, just as a dollar of tuition scholarship goes further than a dollar of room and board scholarship, employers had a huge incentive to pay their employees in the form of health insurance, rather than wages.
Those group plans also provided some basic protections to the insured: community rating, so sicker workers couldn’t be charged more for their plans, family coverage, so spouses and children would receive insurance through the worker’s plan and, after 1985, the right to COBRA continued coverage under a group plan (with the worker paying the entire premium without employer cost-sharing).
To be as clear as possible about this: there is no intrinsic advantage to offering health insurance through employers. The only reason this system exists is because wage controls during World War II could be evaded by employers who extended tax-free health insurance to their employees, and then the perpetuation of that tax regime in the following decades.
The pre-ACA individual health market was completely dysfunctional
Before the passage of the Affordable Care Act, the health care market did not adequately serve individual health insurance customers. Travel back in time with me to 2008, when the following problems were endemic among individual health insurance plans:
- Individual underwriting. If you were sick, you could not get coverage. If you had ever been sick in the past, you could be denied coverage or have your earlier condition excluded from coverage. If you forgot you had been sick in the past and didn’t mention it on your application, you could suffer retroactive rescission if you became sick in the future, losing your health insurance just when you needed it most. If you were a woman, you could be charged more for the same plan.
- Lifetime limits on coverage. If you were healthy, you might get a health insurance policy with a lifetime or annual limit on coverage, so after paying your deductibles and copays, and exhausting your plan’s lifetime or annual limit, you’d be left paying all your remaining bills out of pocket. This made medical bankruptcy a fact of life for many Americans.
The Affordable Care Act gives everyone access to comprehensive health insurance
Everyone picks and chooses what they want to highlight in the Affordable Care Act, or Obamacare, so I’m going to tell you I think of as the principle benefits of the Affordable Care Act:
- Employer health insurance becomes more comprehensive (this wasn’t the biggest problem pre-ACA, but it’s an improvement);
- Low-income people get access to Medicaid;
- The individual market is subsidized and regulated so all plans have community rating, guaranteed issue, no annual or lifetime caps on coverage, and affordable premiums.
This framework isn’t perfect (if it were up to me, subsidies would be universal and paid for with modestly higher income taxes), but it is exquisitely good at what it does, and what it does is provide universal health insurance.
You are free to quibble with the “value” of that insurance, free to complain about high co-pays and deductibles, free to complain about limited provider networks.
But that is not the point of health insurance: the point of health insurance is to keep people from being financially ruined by medical bills, as they regularly were in the decades leading up to the passage of the Affordable Care Act.
Why would we limit entrepreneurship to the young, single, healthy, male and married?
Before the Affordable Care Act was passed, of course people did leave their jobs to start businesses. And if they were young, healthy, and male, they may even have been able to afford individual health insurance. If they were married, they could remain on their spouse’s health insurance plan. If their business grew fast enough and profitable enough, they could start a group plan to insure themselves and their employees.
That is not going to be enough. We need a society that doesn’t just permit, but encourages entrepreneurs and entrepreneurship. And we are never going to have that society if leaving your employer to start a business exposes you to catastrophic medical debt.
We know what the world looked like before the passage of the ACA. It was a world in which people would do anything to keep their jobs and access to health insurance; when they would take any job in order to keep access to guaranteed employer-based health insurance.
That system never worked well, but it may have worked well enough in a world of lifetime employment for white-collar and blue-collar workers alike and in a world of relatively restrained medical costs. That’s not the world we live in anymore.
Access to comprehensive, affordable health insurance is the only way we can build the society of entrepreneurs and entrepreneurship that we must, in fact, build.
I do not know if the Congressional Budget Office is right that 24 million people will lose coverage under the Republican replacement plan. But I do know exactly what a world looks like without access to comprehensive, affordable health insurance, because that’s the world I grew up in and which I, unlike your cable TV anchor, remember perfectly clearly.
You do realize the only way to have an efficient insurance marketplace is with purely capitalistic competition right? As long as there is a payer willing to pay inflated prices with taxpayer money, you can’t derive a natural price equilibrium.
Solution: buy health insurance just as you would buy car/homeowner’s/etc. insurance.
This promotes competition and competitive pricing, driving prices lower.
If you can’t afford insurance, work harder, earn more money, and then buy insurance.
NATS,
What, in your view, are the advantages of an efficient insurance marketplace?
—Indy
Lower taxes and lower healthcare costs, in aggregate.
NATS, can you name a single example of country with a market driven healthcare system along the lines of what you’re advocating?
No, do you somehow believe that to be relevant to this discussion?
If I’m a millionaire and have pre-existing condition I can’t get insurance at any price. Or if the pre-existing condition impacts by ability to work it’s tough to pay for insurance. Maybe society is better off if I quit work, quit paying taxes, quit supporting my family and draw on social security disability until I die?
NATS, I believe it to be relevant because you spoke with utter confidence that a market driven system is “the only way to have an efficient insurance marketplace” so I was curious if you had any real-world examples to back up your statements or if you were speaking purely from ideology. If you’re actually interested in learning how a “market based” system could work better than what we have in the US then I’d recommend reading up on the Swiss system, though you will likely be disappointed if your heart is truly set on something “purely capitalistic.”
Insurers, as with most corporations, don’t want competition. So they use their influence through the Government to restrict competition. They make it difficult, for instance, for a nonprofit to offer insurance or risk sharing pools to the public. The ACA gave a great deal of benefit to insurers at the expense of the premium payers.
In order for pure competition to lower prices, we have to actually have it and we never have. There would need to be alternatives like self-insurance (which the ACA removed as a gift to insurers). Of course we need true competition in health care. That would tone down the discussion quite a bit.
I believe that basic healthcare is a reasonable expectation for a civilized society, I don’t believe that for profit health insurance is the solution. That system makes basic care more expensive, it truly works only for less common major expenses.
While there are certainly health insurance company abuses, they are not what is driving the costs of health care coverage in this country. More than 85% of the cost of health care coverage is related to the actual dollars paid to health care providers. How we pay for care – fee for service rather than fee for outcome is what has us in our current situation. As a healthcare provider, I can make huge profit on knee replacements. Therefore, I’m going to build same day surgery centers and do knee replacements more efficiently and do as many as I can. All of my incentives are for replacing knees – not in working on other less expensive modalities that often lead to better results and less profit – i.e. Weight loss, physical therapy. Payment systems need to pay for value and not for doing something. When you’re being treated for high blood pressure, why do you. Need to make an appointment, go to the clinic, take time out of your day/work to see a doctor when everyone and their mother has a smartphone app and monitor that can provide the information the doctor needs to know whether medicine adjustments are needed? Why do we have drug companies who have basically stopped working on any treatment for the masses and instead are almost entirely focused on treating rare diseases where they can charge hundreds of thousands of dollars each year for treatment and know they will never face generic competition?
The answer to DanR’s “why” is the same across the board: bought politicians. And the electorate too prejudiced or unaware that keeps re-electing them on social or racial biases.
The bought politicians enact barriers to generic drug competition through patent protection for minuscule changes to drug formulations, licensing requirements that artificially reduce the number of medical colleges and doctors, avoid enforcing antitrust law against oligopolies in pharmaceuticals/hospitals/HMOs.
The ACA was a small step towards offering care to the poor funded by taxes on the rich & medical companies+an increased deficit. It didn’t fix the other issues above driving up costs in the US for pretty low end care. Now the AHCA reverses that small step to a large extent. Neither one addresses those underlying drivers of high US medical costs. Similar dynamics in military and agriculture and several other industries.
Except there are several provisions in the aca that are beginning the push to reform how healthcare is paid for (reforms to Medicare stars, the Medicare Pioneer ACO, CMMI, PCORI, etc). All of the debate is still around “is healthcare a right or not” and what level of government involvement should there be. The fundamental problem, though, is the costs are rising at an unsustainable rate through no fault of any one group (drug companies, insurance companies, doctors, hospitals, lazy people, government interference illegal immigrants). The solutions are hard and everyone needs to work together – something which is unfortunately not possible in today’s political climate.
I find it hard to believe that sales commissions, overhead and profit amounts to just 15% at major insurers. Even accepting that figure, the unnecessary cost is there. There is no profitable way to insure for routine care. Economically, insurance makes routine care more expensive. Risk sharing only works for less common events.
Wasteful spending is common, and only so much division of labor can reduce costs. Pay for what you use is the general model in any market, but of course affording healthcare is about risk, not just markets. We all know this, but some of us pretend that ALL of healthcare is about risk, which is a gross misinterpretation leading to oppressive policies.
There are costs that should be expected & saved for, and bought off a menu, completely independent of any sort of risk, and this should look like in every other arena of life. In that realm, one way to reduce wasteful spend is to eliminate the cost shifting introduced by unnecessary “plans.” Plans (not inclusive of a savings account) are mixing the insurance concept of covered-risk with normal model of using savings. This is BAD. Just as pensions (vs 401k) were bad because they created a huge centralization of power in an un-trustable agent (like GM), so too are plans which too greatly empower insurance companies (or the government) to act on behalf of individuals. In the car company case, it created a liability of defined benefits that stangled these aging companies. In the insurance company case, it is more complex, leading some to shout for single-payer (even worse…).
The simplest way to eliminate the cost shifting without government over-reach is limit the amount of Insurance plans to wield inappropriate monopsony power. For the uninitiated, monopsony is when discounts are given to large plans because they have a large volume of customers. It’s the opposite of monopoly power, and it’s what Wal-Mart exercises when it sources it’s low-priced goods on our behalf. To be clear, in some cases volume legitimately does create efficiency. However, when the discounts are too deep, that means that the individual without insurance pays more than true cost. Just like we reap benefits from the negligent credit card users, rich plans reap benefits from the uninsured, and under-insured.
How could this be solved? Easy, government should prevent rampant price discrimination. Right now insurance companies dictate what they’re willing to pay for procedure X. Doctors take whatever they can get, and then regular people uninsured, or with worse companies often get caught paying several multiples of X. The government should disallow this — not price fix (as insurance companies are doing), but restrict the range and amount of cost shifting that happens. It’s not fair for the same service to cost more, and that’s not legal in other arenas. But in healthcare, it’s the norm.
Single-payer at first glance might level the playing field, but it suffers all the problems of socialism. It certainly cannot reduce waste and over-consumption of healthcare. It may make it easier to get your videophone call to your KP doctor, but that’s not risk-based care, and people should know the difference.
It’s well known that you can’t have an efficient insurance marketplace with a purely capitalistic system.
See Ackerlof (1970).
Should we get rid of government sponsored monopolies via patent protection too?
And isn’t it usually required to have auto insurance?
The barrier that health care put on entrepreneurship prior to the ACA is definitely something that I felt personally. Well articulated piece, thank you for writing it.
Sol O,
Thanks for reading. We’ll never know the number of businesses that were never started because of job lock pre-ACA, but even one is one too many if we’re going to save capitalism from itself.
—Indy
One of the fundamental flaws in discussion of American health insurance is thinking of it as insurance. If you buy car or house insurance you do it annually but hope you will never need it. Health “insurance” on the other hand is a way to spread health care costs out in a predictable way, and hopefully if there is a true catastrophe not go bankrupt. PArt of the problem is that for many poorer americans, a major deductible plan that picks up after a large deductible like $5000 may prevent total bankruptcy, but does not get them access to care for the simple things that they need like blood pressure, diabetes on a regular basis. The Republican might think about going back to the drawing boards and try a new model of cost sharing health care. I am not a fan of universal, single payer “insurance,” but it is a direction that they might look.
the other missing thing in this discussion is that having ACA insurance, or Medicare, does not assure you can get care, except at the ER where they have to take you. More and more practices are closed to these clients. The result is “Federally Funded Community Health Centers” (CHCs) which see medicaid patients. They try hard to do good care, but for most it is not the same has havnig a Primary CAre Provider (PCP). And the clinics are liberally funded by Feds. (Hopefully Trump will not learn about these!)
They make it very confusing on purpose to figure out what is covered and what will cost you out of pocket. That said, it is unlikely that any plan requires you to meet your deductible for routine care.
You are wrong. ACA requires insurance to pay for some “preventive” things like mammograms, but not for first dollar routine care. One of many things that public doesn’t understand about why American health is so much worse than most of comparable countries. Not to mention the costs of maintenance medications.
Dave and mom,
I think you may be talking past each other somewhat. The distinction I think mom is making between routine care and preventive care is like this: an annual physical that includes some blood work is both preventive and routine, and ACA plans will cover without out of pocket expenses, but being referred to a heart specialist to follow up on irregular results is routine but not preventive. In fact even bringing up a “non-preventive” concern with your doctor during your physical may cause him to code that conversation as “non-preventive,” even though nothing could be more routine than bringing up health concerns with your doctor!
Similarly kids routinely get ear infections and strep throat (at least I did as a kid). Treating those conditions is perfectly routine, but you have to pay co-pays and deductibles for that treatment.
There are lots of kinds of routine treatment that are in response to specific conditions (step on a piece of glass, go to urgent care to get it removed). Even the most routine pregnancy and delivery will require out of pocket expenses, and people have been doing that for millennia!
—Indy
Actually I think the confusion is between the various options under ACA. There is a means test on the exchange that may offer you Medicaid sponsored health insurance. There are also individual options that may be offered with or without a subsidy. This isn’t really different than before ACA. The difference is the expansion of Medicaid eligibility and a possible subsidy for individual coverage.
It has always been purposefully confusing to figure out what is covered and that hasn’t changed. My experience (the only thing I have to go on) is that both routine and preventive care may be not subject to a deductible under an individual plan (in my case QHDP silver). There are co-pays at times and certainly $20 a shot is more than some can afford. There has always been tremendous variability in coverage by region and by insurer.
BTW, I have a copy of the bill for my delivery and it was $75 for a C-section and a week in the hospital! That was five decades ago, but still quite a bargain.
Meh, couching the need for healthcare as something needed to promote entrepreneurship is a horribly weak argument. Silicon Valley did just fine before the ACA was enacted.
I’m all for what Drumpf is doing. His uneducated base is exactly who the Trumpcare cuts will hurt the most. While the richer liberal elites (ie, educated) in the Giver States will enjoy tax cuts and more disposable income to afford healthcare. Let the Deplorables get what they deserve….
I once interviewed at one of those splendid startups. They wanted me to keep Cobra from the job I was quitting while they were working out a group plan (and they had already 50+ employees). There is a reason people doing startups are young (as indfinance pointed out). Now I work for a company owned by one of the big private equity firms and we are hoping to shift our health care to the group plans PE has negotiated for all their portfolio companies. So I would assume VCs would offer the same “service”…
German,
Thanks for sharing your experience, that sounds brutal. No one should have to work for someone else just to be able to pay their medical bills.
—Indy
Banning pre-existing condition disqualifiers needs to be maintained pre age 65 and still needs to be ENACTED for those age 65+!
My mother has mental health issues which prevented her from qualifying for ANY health insurance for most of her life, until ACA. Then after she turned 65, I learned that though she qualifies to choose a health plan initially, she cannot switch between health plans over the years because of having a pre-existing mental health condition. So if she signs up for a slimmer plan now, while she’s healthier, she’s primarily stuck with it. Or we pay for the expensive insurance now and for the next 25-30 years of her life, which is unduly expensive. Other folks without “pre-existing” conditions can switch around yearly. This needs fixing. A lifelong mental condition should not be biased against as such. Her physical body will live and age just the same as everyone else’s, and longevity is in our gene pool.
Lela,
That’s interesting, I don’t know nearly as much about the Medicare marketplace as I do about the individual marketplace. Thanks for your sharing your experience.
—Indy
I suspect that everyone looks at this system through their own experiences. I buy individual health insurance as I did before ACA. The premiums are higher now, but I can get a subsidy if I choose to. Interestingly, prior to ACA the premiums for individual family coverage were lower than my group insurance had been. The deductible was also lower! Group rates were based on claims history and younger/healthier employees paid a higher rate than they would have in the individual market. (Though there would be no employer subsidy, of course) There are enormous differences between regions, since health insurers are locally regulated. Just as there is a difference in the number and quality of treatment facilities.
Dave,
Reading through the comments I also see that people’s strongest feelings about health insurance and health care are connected to their own most terrible experience interacting with it. I don’t consume much (any) health care, but am a sole proprietor so I see the most pressing issue as universal access to affordable comprehensive health insurance so that people feel safe enough with their health care to take risks with their livelihoods and pursue entrepreneurship. People who have more health issues (or people with employer-sponsored health insurance) are more concerned with access to treatment.
The ACA is obviously a lot of things to a lot of people, but one of the things it does is empower people to walk away from their employer-provided health insurance with the certainty they’ll be able to afford comprehensive health insurance, and in my view that’s the key to keeping American capitalism dynamic.
—Indy
I guess I don’t understand this. I own a farm and run a sole prop business. My choices and benefits are the same after ACA as they were before. The only difference is that I am offered a subsidy for my premiums now. The deductible is lower than it was under my old group plan. Plans are now medically underwritten which they couldn’t do before ACA.
Dave,
The choice of plans and the benefits offered vary greatly depending on state and even county. Many places already had insurance regulations that included consumer protections prior to the ACA, but many places didn’t, so whether or not you saw big changes in your local insurance plans after passage of ACA depended in large part on what the local insurance industry looked like prior to ACA. ACA raised the “floor” on benefits in the individual market, so it made the biggest changes in places with the weakest insurance regulation existed prior to passage. In highly regulated markets like Massachusetts the changes were less dramatic.
—Indy
For me, the bottom line is that the USA has THE highest costs of healthcare in the world, with stunningly mediocre results. Our maternal/infant mortality rates are near the bottom for industrialized countries, as are our mortality rates, in general.
Decades of various types of government backed healthcare, either single payor or a combination of single payor and strictly controlled insurance, as is the method used in Germany, have demonstrated both cost savings and better outcomes when healthcare is accessible to all. Are there abuses? Quite possibly.
But there are always people and organizations that will abuse any system. Most of you are too young to remember the levels of waste and greed demonstrated by DoD contractors in the 1980’s, an era we seem to be returning to. I remember it.
As a country, we need to make a choice. To facilitate entrepreneurship, or to put enormous, costly barriers in its way, true. And also to support the right to each American having affordable access to necessary healthcare, or to follow the self-serving, every person for him/herself beliefs of the right wing. It’s pretty clear which the new bill is following.
MickiSue,
One thing the ACA did was take a number of steps to try to “bend the cost curve” so that health care costs don’t accelerate so much faster than the rate of inflation, and there seems to have been some success on that front.
On the other hand, America is the richest country in the history of the world, and I don’t think it’s unreasonable in general that we spend a lot of money on health care, especially if it actually succeeded in making us healthier, which it does not appear to be doing.
The absolute worst combination to have is incredibly high health care costs and a large uninsured population that would be financially devastated by a single serious illness or hospitalization.
—Indy
Indy, when we are spending money on INEFFICIENT healthcare, that’s just waste. We are wealthy, yes. But as a country, not, necessarily, as individuals. The single largest driver in this country for bankruptcy is medical bills. And that’s reprehensible.
As a wealthy country, we COULD be using our dollars to maintain and improve infrastructure. But we don’t. Living in the Twin Cities, I will never forget the day that the I 35W bridge into downtown Mpls collapsed.
Many areas of this country have even more crumbling infrastructure. There are the people who, in the face of piles of evidence to the contrary seem to believe that pure capitalism is the cure for every social ill. But healthcare is not well served by treating it as a profit center, nor are the people who need it.
What’s the cost on the economy of limiting labor mobility by tying health insurance to employment? There should be one national insurance market w/min. policy standards and a gov’t backstop option that’s higher cost and less desirable if someone wants it, but is at least available. Those with lower incomes get subsidies or tax credits to purchase insurance or are covered through Medicare. No one is trapped from getting a better job (or limited from starting up a small business) just b/c they want to keep access to health insurance and small businesses don’t get stuck with high cost insurance bills for small pools and the HR overhead of managing those plans every year.
It’s the same reason people don’t individually procure access to roads or airports or national defense or police or fire departments. Should it be up to each individual to decide whether they want those items as well? If so, can I opt-out of my annual tax contribution to the $650BN per year defense expenditures, in addition to foregoing my new iPhone, and use that money to go to my insurance premiums?
Frankly, I’ll take the reduced taxes on investments and Cadillac health plans, keep my current employer-provided health insurance, and hope some Trump supporters who can’t afford insurance under his plan pass away before the 2020 elections.
Wow you need to do your research. Health insurance through employers did not start because they are pre tax. They started because of wage controls during WW2 did not extend to benefits. This would take thirty seconds to verify on Google not goodbye today spread wrong information.
Shonuffharlem,
I get that it’s fun to be angry on the internet but I didn’t say they started because they are pretax. I said they became widespread because they are pretax.
—Indy