Thursday, September 17, 2009

Red/Blue health dialog, part n

Colin's latest entry is here. Be sure to read it.

This discussion has been very worthwhile, and I've improved my understanding of the rationale behind the proposed bills. With a brand new bill now emerging, quite different from the previous ones, there will be a whole new set of issues. I think that we have pretty much exhausted the points we were discussing, so I'm not going to keep following them point by point. Instead I want to lay out an alternative approach based on my principles of free markets and capitalism.

Before I get there, I want to say that Colin has convinced me that some of my statements about tyranny were too strong. I do believe that the actions our government takes can affect where it falls on the spectrum between liberty and tyranny. I stand by my original statement that the argument of using one case of government exceeding its authority to justify a bigger excess will eventually lead to tyranny. Our government has incrementally exceeded the limits described in the Constitution, and Obamacare would be another step in that direction. But on the continuum between liberty and tyranny we are still much closer to the side of freedom, and most countries are less free than we are. However, the argument that most countries are less free and still maintain a comfortable living standard does not convince me that we ought to move in their direction of more government. Michael Moore can say what he wants about capitalism, but until he gives back the millions of dollars he has made in the capitalist system it is not ringing true. Capitalism remains the best system for creating wealth and distributing it fairly (which is not the same as distributing it equally).

Defining goals is a good place to start the process of laying out an alternative to Obamacare. My goals are very different than those stated by the President or by Colin. Here is what I would be trying to achieve:

1. Medical insurance should be affordable to those who want to purchase it.
2. Insurance companies should provide good service, clearly communicate their policies and coverages, follow through on what they promise, and treat their customers fairly. Those who don't should go out of business.
3. Consumers should have many options for medical coverage and be free to pick the one which best meets their needs.
4. Insurance companies which commit fraud or breech of contract should face severe consequences.
5. There should not be a tax penalty for those who buy individual insurance rather than get it from their employer.
6. There should be a safety net for Americans who genuinely can't afford insurance, to help them pay for private insurance. For most people who are able to work, it should be short-term.
7. People who can afford insurance and choose not to buy it should not be entitled to free treatment.

The central key to the first three items is competition. I don't mean phony competition with a government "public option" or the repackaged "co-op" which doesn't play by the same rules as everyone else. The way to increase competition is to remove barriers which are currently preventing competition. Other types of insurance which are not bogged down by the regulatory maze which already exists for medical insurance offer a far greater array of options to consumers. For instance, the life insurance market provides countless varieties of coverage, making it likely that you will find one which best suits your needs. Competition in the life insurance market has driven costs way down. I was surprised how little I had to pay for a term life insurance policy, and a broker was able to show me rates, terms, and credit ratings for dozens of different companies side by side. There is no reason consumers shouldn't have that kind of choice when buying medical insurance.

One way that we have already discussed is to open the market nationwide for purchasing insurance. Current law prevents people from purchasing insurance across state lines. As a result, many states are dominated by one or two insurance companies. You shouldn't find it ironic that this law was passed to help insurance companies. The law protects big insurance companies from significant competition from small companies. The big established companies can afford to operate branches in many states, but small startup companies can only compete with them in one state. The best way to "keep insurance companies honest" is to break down barriers to competition so that consumers can give their business to companies which treat their customers well. Opening the market to allow insurance policies to be issued across state lines would also allow people to keep their current policy when they move from one state to another, in many cases.

Transparency is important in establishing fair competition. Insurance companies should be required to clearly define their costs, policies, and coverages in a way which makes it easy to compare one policy to another in an "apples to apples" way. Such requirements were recently placed on mutual funds, and it made reading a mutual fund's prospectus and annual report much more understandable.

Many of the anecdotal horror stories used to sell reform would be resolved with real competition. Insurance companies who use technicalities to treat their customers unfairly would quickly develop a negative reputation and lose market share or be forced out of business. When everyone is informed and has multiple options, treating your customers well is good business. I would like to know more about the cases that Obama cites in his speeches. He mentions "one woman in Texas" whose policy was dropped because she had acne. I hope that there is more to the story. Why not put the insurance company executive on the hot seat and ask him to explain what happened? Let the media examine the facts of the case. If any laws were broken, deal with that in the legal system, and if the company acted legally but unfairly let the public know.

Competition can also be reintroduced into the actual purchase of medical services to drive down the costs of the care itself. Today the consumer is largely insulated from the price of the services they receive. When I go to my doctor, I pay a co-pay, usually $10 or $20, and never even see the bill for the rest of the cost. There are various ways that this could be accomplished. One is for insurance companies to return to covering a percentage of the cost for smaller, routine treatments. An 80/20 or 90/10 coverage provides an incentive for the consumer to control the cost. Large expenses such as major surgeries wouldn't apply, because 10% of the cost of open heart surgery is still more than most people can afford. I like this approach better than the use of price caps, which seems to be the most common method today. Price caps are somewhat arbitrary and can't account for the uniqueness of each situation, and price caps don't provide any market pressure below the cap. I am open to other ideas for how to reintroduce market forces to control costs.

Today there is an inequity between the tax treatment of people who get insurance through their employer and those who buy it individually. When an employer pays part of the cost of medical insurance, it is paid using pre-tax dollars. The cost of the insurance does not count as income to the employee, and thus is not subjected to income tax. When an individual buys insurance, they pay with after-tax dollars. Take two people, each with total compensation from their employer of $50,000. The first is paid $44,000 and receives a medical insurance policy which costs his employer $6,000. The second is paid $50,000 and buys a $6,000 policy. The first pays income taxes on $44,000, and the second pays income tax on the full $50,000. I propose that it would be fair to allow the second person to deduct the cost of his insurance from his income when he figures his income tax. Then both people would pay income tax on the same $44,000. Medical savings accounts which allow tax deductible deposits and can be carried over year to year, allowing people to use untaxed dollars to pay for insurance premiums, co-pays, prescription drugs, and other out of pocket medical expenses would be a good way to implement this.

There is one area where increased regulation is necessary. Insurance companies should not be allowed to deny coverage to a policy holder or cancel policies for non-material reasons. A non-material pre-existing condition is not a valid reason to reject an application for a new policy, but a material pre-existing condition is a valid reason. A non-material error in an insurance application is not reason to cancel a policy, but material fraud is a valid reason. There need to be standards on what is material and what is not, and some sort of independent arbitration system to resolve disputes between customers and insurance companies. This small measure should stop many of the anecdotal cases used by Democrats to justify massive expansions of government power.

Tort reform is essential to any effort to control cost. Reforms must be made in a way which allows legitimate cases of negligence or malpractice to proceed but stop frivolous law suits. I don't support a common Republican proposal of capping damage awards. To understand the danger of that approach, look at the case of the Ford Pinto. After hundreds of people died due to the propensity of that car's gas tank to explode in a rear collision, it was revealed that the company discovered the defect when production of the car had just started. Actuaries estimated the number of people who would be killed and compared the cost of paying out settlements in those cases with the cost of fixing the problem. They concluded that it was cheaper to pay the settlements. Capping damage awards makes it easier to reach that conclusion. Juries need the latitude to slap companies who do that with damages severe enough to make sure that it is not cheaper to let people die than to fix the problem.

There are better options. One is to establish "safe harbors" for doctors who use nationally recognized and adopted best practices, protocols and standards of care. Following those procedures would be a defense in a malpractice lawsuit. This would limit the cost of "defensive medicine" to a well-defined set of precautions.

There should be minimal standards for physicians who serve as expert witnesses, to prevent unqualified opportunists from making a career out of testifying against doctors in frivolous suits.

The best idea I have heard is to give courts a third option in their verdict for malpractice cases. In addition to the option of finding for the plantiff or for the defense, the court should be able to rule that a case was frivolous, in which case the attorney who filed the case is responsible for paying the legal bills of the defense. This would put a quick stop to the practice of a few unscrupulous attorneys who file hundreds of law suits every year, most will little merit, hoping to get a big settlement on one or two. These lawsuits cost a huge amount of money to defend against, and that cost is passed on to the consumer in higher medical bills.

Right now we have a sort of safety net, but it is very expensive and not very effective. There is a patchwork of government programs to cover people who can't afford insurance, and there is the Federal law which requires that hospitals treat anyone who comes regardless of their ability to pay. As Obama correctly points out, this is an expensive hidden tax which we are already paying. America is a compassionate nation, and we don't let people die in the streets for lack of medical attention. But I think that we can make the safety net more cost effective. Subsidizing basic private insurance based on genuine need is better than using ERs as a distribution system for indigent care. This should be implemented as advanceable and refundable tax credits to low-income individuals for the purpose of buying private medical insurance.

Coverage of pre-existing conditions has been a hot issue. Insurance cannot exist if people can go without coverage while they are well and then if they get sick, buy insurance at the same price as everyone else. Mandating that insurance companies offer coverage at the same price regardless of material pre-existing conditions would kill the insurance industry. But there are ways to allow someone with existing insurance coverage to move to a different company in spite of a pre-existing condition. An insurance policy covering a person with a chronic, expensive condition represents a liability to an insurance company. The present value of that liability can be computed using the same kind of actuarial formulas used to price insurance. If a group of insurance companies were to negotiate a set of formulas based on all the relevant factors, they could agree to accept customers from the other companies in that group in return for a payment from the current insurer of the present value of the liability as computed by those formulas. As an example, if I am currently insured by company A, and I have a heart condition which will cost $100,000 to treat, I could switch to company B, provided that both A and B are members of such a group. Company A would pay company B to take me. In most cases, thousands of people would be moving each direction, so it would be a wash, more or less. Being a member of such a group would be a major selling point for insurance companies, because it would mean that your coverage would be much more portable. I understand that such an arrangement is not possible with the current regulations, but with the proper changes to the regulations, it would be possible.

Obama says that he will pay for his proposed reform by reducing waste, fraud, and inefficiencies in the current system. I'm all for eliminating those expenses which don't contribute to the goal of providing quality medical care. Saying that we are going to use that money for something else is not reasonable, because as long as we are running a deficit, it is money we don't actually have. So we should work hard to eliminate waste, fraud, and inefficiencies as a means to reduce government spending and bring down the deficit.

There are many people and think tanks from across the ideological spectrum with all sorts of ideas for how the medical system could be improved. Allowing states to experiment with different ideas and find out which ones are the most promising has been very successful in other areas, such as welfare reform. It could work here too.

As a general rule, decisions made closer to the affected people are better than centralized control. If I am being taxed for the school up the street, I can see if I'm getting my money's worth, but if my taxes are going to the Department of Education in Washington to be doled out across the country, there is very little connection between what I pay and what I get back. All I know for sure is that we get back less than we paid because there is always overhead in a huge bureaucracy. The same applies to medical care. The best way to help people is to look out for your family, you neighbors, your co-workers, your friends, and your church members. I see these people every day, and I know when they are in genuine need. When I help them, I can see if the help is effective. Local assistance is the next best thing, with voluntary giving to charity being preferred to government assistance. Charities are accountable to their contributors, which helps to keep their overhead low, so that most of their budget goes for the purpose it was given. Welfare spends $1.11 in overhead for every dollar it pays in benefits. Bureaucrats doing paperwork and adminstrative expenses eat up more than half of the Welfare budget. Many private charities have less than 5% overhead. Central control is the least effective level to offer assistance. The faceless bureaucracy is inefficient and impersonal, not well-suited to reach out to people with compassion to meet their individual needs. The lack of accountability reduces people to lists of figures in a database, which opens the way for fraud and abuse. But over time, people have accepted Washington as the primary provider of assistance to people in need. Society no longer feels obligated to help their neighbors or give to the local charity organizations because they pay their taxes to the government, which has programs to help people. The Federal Government happily supports the tendancy to look to Washington for help, whether it be for relief after local disasters, help with financial needs, medical care, and even fixing school classrooms, which we now learn is the President's job. When your only tool is a hammer, every problem starts looking like a nail. We need to get away from the notion that the Federal Government is the best place to solve every problem and start returning responsibility to individuals, communities, local charities, churches, local government, and state government.

Obama talked about his grandmother worrying about getting coverage for her medical needs, and struggling to fill out the forms. At the time, Obama was professor of constitutional law at University of Chicago Law School, associate attorney with Davis, Miner, Barnhill & Galland, and published author of his first memoir "Dreams from my father" for which he reportedly had received a six-figure advance from Simon & Schuster. Obama, instead of waiting for government to take care of his grandmother, could have told her "I have good eyesight, arthritis-free fingers, and thanks largely to your generosity, a law degree from Harvard. Let me help you fill out those forms. And don't worry; if your insurance doesn't pay for it, I've got you covered." Delegating your responsibility for your family and community to Washington -- now THAT's coldhearted.

1 comment:

Colin said...

here's my response:

sorry for the delay!