Dear NYT: Yes, Health Care Coverage Should Differ

"Should someone in Idaho or Nevada have significantly different health care coverage from someone in Massachusetts? That, essentially, is one of the biggest questions Congress will be wrestling with as it tries to meld House and Senate bills into a single law to revamp the nation's health care system," the New York Times reports.

Yes. And so should my neighbors, my friends, and my coworkers. Our health insurance coverage (or lack thereof) practices ought to be individual decisions consistent with our particular values and preferences.

There's no good reason for politicians, bureaucrats, or, for that matter, employers to make these decisions: none of them can adequately cater to individual wants and needs. The market isn't perfect either, but it's far better and keeps improving.

On Health Bill, Lone GOP Supporter Got Played

One of the most surprising aspects of last night's House vote on the Democrats' plan to deepen the distortions in the health care sector was the lone Republican vote for it.



That vote came from none other than first-term Rep. Anh "Joseph" Cao (R-LA-02). He got played. The Democrats--including personal entreaties by the President--secured his vote by promising him lots of goodies to take home to his constituents.



He doubtless hopes it'll get him reelected. Remember, the first priority for the vast majority of elected officials is...to get reelected. And keeping the people who vote for you happy is the best way to do that.



But Louisiana's 2nd district has a Cook Partisan Voter Index Rating of D+25. That's a "safe seat" for Democrats. The only reason Cao won last year is that he was running against a deeply corrupt incumbent. He's a one-termer, plain and simple.



So why do I say he got played? Because his vote makes it marginally more likely for Democrats to be successful in the Senate without really affecting his likely defeat next year. One of the moderate Senate Democrats is Mary Landrieu of Louisiana, whose reelection victory margin last year was underwhelming in the Year of Obama.



Now, Landrieu is only one of several moderate Democrat holdouts in the Senate who may ultimately prevent comprehensive healthcare legislation this year--despite their supposed filibuster-proof majority--but the bipartisan patina Democrats will now be able to claim can only make their efforts easier.



Despite having been played, Cao is no fool. Rather, his vote last night is symptomatic of the corrosive power-at-any-cost mentality that plagues political life. Instead of gracefully accepting his brief stint in Congress, he has abandoned principle in the vain hope of prolonging his tenure.

Where are the Real Health Care Reforms?

For all of the rhetoric about reforming health care in the United States, Senator Baucus' proposal—like the other Democrat bills—is striking in how little reform it incorporates, at least in the right direction.

The root cause of many problems facing American health care today is the reliance on third party payment for medical expenses. Currently the government pays for about half of U.S. medical expenses. Roughly forty percent is paid by employers and insurance companies. Only about ten percent comes directly from health care consumers.

At the time of care, patients on average bear only about a tenth of the cost directly—the rest of the episode's cost comes from others: the insurance company to which the patient pays premiums or the government. Spending other people's money on oneself does not diminish a patient's concerns about quality, but incentives to be cost-conscious are weak. The result is excessive consumption of marginally useful or even potentially harmful procedures.

While risk sharing is an appropriate strategy for unexpected and potentially catastrophic care episodes, such insulation from having to confront the costs and benefits of alternative options systematically biases patients towards accepting more expensive and risky procedures with little or no net benefit than they otherwise would.

Would the Democrats' proposals help to properly realign the incentives facing consumers? No, they would make the problem worse.

Compelling all Americans to purchase insurance either through an employer or individual mandate—especially when combined with guaranteed issue, community rating, and minimum benefit requirements—would further entrench this overconsumption cost death spiral, as would more explicit government takeovers such as single-payer, government insurance, and co-ops. And since medical services would no longer be rationed by price, they would ultimately have to be rationed by quality degradations like long waiting times and denial of care.

When politicians and bureaucrats direct the allocation of resources, they are spending other people's money on other people, which gives them insufficient reason to monitor quality or cost as carefully as private actors spending their own money.

Another approach would empower consumers to make their health care decisions with full knowledge of the relevant costs and benefits. They would be free to choose the kind of plan that best fits their preferences, whether that would take the form of fee-for-service, prepayment (the health maintenance organization model), or catastrophic insurance with out-of-pocket payment for routine and expected care. After all, ‘government funds’ come from taxes, and ‘employer contributions’ mostly come out of employee compensation, so why not just let individual consumers control the money that funds their medical needs?

Two major (and many minor) obstacles prevent this consumer-driven market from becoming a reality: the preferential tax treatment of employer-provided health insurance purchases and poorly designed government programs.

Since employers can deduct health benefits from their taxable income but individuals cannot, workers are pushed into accepting whatever plan their employer happens to offer. Giving individually purchased health coverage the same tax treatment as employers receive would allow workers who prefer a different type of plan to cash out the portion of their compensation that employers currently divert into the so-called employer contribution to their workers’ health care. Policymakers have several options: tax credits, tax deductions, or, even better, large HSAs.

Government programs fail to give their beneficiaries ownership of the funds that finance their care. Giving Medicare recipients the option to choose a health-status-adjusted voucher and allowing states more flexibility in serving needy populations would further develop an individual insurance market.

Removing barriers to interstate competition in health insurance could also spur lower costs, more innovation, and more regulatory competition between the states.

Unfortunately none of the Democrats' proposals would empower health care consumers in these ways or much otherwise. They would instead consolidate the status quo of third-party payment for routine expenses and further concentrate the power of the political class.

Another Problem with Employer-Provided Health Insurance

As my wife and I prepare for the birth of our first child, we've become familiar with some of the truly marvelous technology that has emerged over the last few decades.

Among the most astonishing and promising possibilities is the harvesting of blood from the umbilical cord just after the baby is born. The stem cells contained in the cord blood already have the potential to treat or cure a host of diseases, not only for the child, but also for the mother and her close relatives.

The price of collecting the blood typically exceeds $1000 with an annual storage fee of over $100. Considering their potential benefits, investing in preserving these cells strikes me as a heck of a bargain.

Since the potential to save money in the long run is quite substantial, you would expect health insurers to pick up part of the tab.

I was surprised to learn that my wife's employer-based health coverage does not include this, except in the limited circumstances where a potential beneficiary already has an applicable condition.

In other words, unless a close relative is afflicted by something nasty at the time of the infant's birth, the parents get to pick up the full tab or go without. And should the cord blood not be preserved, the insurance company could later be on the hook for a more expensive alternative.

Businesspeople are not stupid (or at least they don't leave money on the table). If health insurance companies actually expected to save money on cord blood therapies, they would doubtless cover and even promote it.

What's going on? Is the potential effectiveness of cord blood exaggerated? No--the current benefits are quite impressive--but that's irrelevant.

Young workers typically change jobs every few years, which means their health insurance coverage changes as well. If the chances of coming down with something (the sum of the probabilities of cord-blood-treatable ailments over the remaining years of coverage) and the resulting savings from cord blood therapies outweights the cost of cord blood collection and storage, insurers will cover it.

That they don't suggests that the benefits do not exceed the costs to the insurance companies over the time horizon they expect their beneficiaries to be with them.

What's to be done? Mandating coverage of this option would solve this problem, but only by increasing costs to other people and introducing other unintended consequences.

Perhaps the emergence of additional treatments would push the insurance cost-benefit estimation over the tipping point, making a policy response irrelevant.

In the final analysis, however, the linkage between employment and health coverage prevents insurance portability, which prevents the insurers' incentives from being aligned with our long-term health status. Equalizing the tax treatment of health care for all purchasers and removing other institutional barriers to a more competitive health insurance marketplace would go a long way towards getting our insurers to worry about preventive measures.

In our current world of distorted incentives, however, my wife's insurance won't cover this potential life-saver. So we will. After all, it's our baby.

Alabama's Health Transformation

From the Associated Press last week:

Alabama, pushed to second in national obesity rankings by deep-fried Southern favorites, is cracking down on state workers who are too fat.

The state has given its 37,527 employees a year to start getting fit -- or they'll pay $25 a month for insurance that otherwise is free.

Alabama will be the first state to charge overweight state workers who don't work on slimming down, while a handful of other states reward employees who adopt healthy behaviors.

Alabama already charges workers who smoke -- and has seen some success in getting them to quit -- but now has turned its attention to a problem that plagues many in the Deep South: obesity.

There's nothing wrong with people having the incentives to be healthy, but this proposal is a rather crude attempt to go about it. It could be thought of as part of the employer-employee contract, but it misses the point of that relationship: to produce something of value for the employer. Being concerned with workers' health distracts from and takes resources away from fulfilling the mission of the organization. Employee health should be left to the individual.

Since health care costs are "free" to Alabama state employees, however, and at taxpayer expense, it's reasonable for the state to seek ways to manage its labor costs. If that includes charging more to cover additional projected expenses based on health indicators, that might be okay. But block fees for two particular unhealthy habits? Aside from the resources diverted to compliance, these fees are likely to undermine collegiality and trust at work.

A better, less intrusive approach to improving the health of state employees (and saving taxpayer money) is to empower them to take care of themselves. A possible first step would be to convert each person’s health benefit into a high-deductible insurance plan (like an HSA), where the monthly premiums are individually rated (underwritten) based on physical examinations of the covered persons. If a worker decides that higher premiums are worth paying to continue smoking, to avoid losing weight, or otherwise risking their health, individuals should be free to make that decision, but at their own expense.