Category Archives: Economics

Now We Build

Part of the “My Prescription” series.

But before we do let’s recap. In brief we need a new foundation. The employer based system is not working. So I am suggesting two fundamental changes: Health insurance exchanges and tax reform.

Health Exchanges will provide the pooling mechanism. They would be run by the States and would regulate the plans much like the New York Stock Exchange regulates stocks. The exchanges would have to force the plans to accept all applicants, to have a fairly standardized set of benefits, and I believe use a modified community rating. Community rating is when the premiums are based on the risk of the community as a whole, not the risk of the insured person and their specific circumstances. The modification is that insurers would charge everyone within their plan the same amount, but that each insurer can set that price (and thus compete on price).

I can hear the screams right now, “What about smokers? I don’t want to pay for them?” Neither do I, but I do want to make sure that the cancer survivor has access to good medical care. Further, competition would make smoking cessation programs financially viable. Second, I can anticipate, “You need to let the market operate unregulated.” I believe in the market, but without regulation insurers will only compete by avoiding high risk people, not on quality and price. Under this plan competition is limited in several aspects. I won’t deny it, but there is still competition. The insurer is competing on quality of care and efficiency of providing that care. And, “Won’t this make premiums more expensive?” Yes, community rating makes insurance premiums higher. Insuring sick people costs money, but I do believe that it is the morally correct choice.  Let’s see if this competition can reduce costs over time through directed competition.

So the next big thing is that we need publicly reported information about the quality of health plans, hospitals, physician groups, and physicians. There is an emerging movement already, but it needs to be a national priority. Competition only works when the consumer is an informed consumer. Let’s educate!

So we have exchanges that regulate health plans and use community rating. All people are included and all can choose their own plan. The plans are portable from job to job providing consistency of care and long-term relationships with insurers. The tax credits provide equity in the tax code, but still preserve the employer’s incentive to contribute. Employer’s continue to facilitate health insurance, but no longer sponsor it. Quality measures are reported to the public forcing health care plans, hospitals, and providers compete on quality and price while minimizing selection issues.

Next time we’ll discuss a few nuances of the tax proposals, why an individual mandate may not be necessary, and the need for either re-insurance or risk adjustment.


Why Won’t We Sacrifice?

Big things often demand big sacrifices. When I consider revamping our health care system to a universal or near universal health care system I am aware that it will involve sacrifices. These sacrifices will be well worth it if we redo our system in an intelligent manner. But the sacrifice is too much to ask of us – it would appear. We get scared and leave the status quo in place.

I’m going to deviate from health care for a bit here…

During this political season I have not seen such an avoidance of sacrifice than the latest debate over the gas tax holiday. McCain and Clinton propose that the federal gas tax be lifted this summer to help middle and lower class wallets. They don’t want us to sacrifice by paying higher prices in order to decrease our dependency on foreign oil or to better our environment.

And their proposal is full of pandering and complete bullshit.

I know Obama wants to use that word as well, but can’t give this proposal the descriptors it deserves. All three of them know that the proposal makes no sense, but Clinton and McCain pander so low.

Let me explain why it is bullshit before I go on. If you give a gas tax (especially a temporary one) gas prices will drop initially. Since gas refineries can’t increase output appreciably over the summer there will be no increase in supply. However, since the price will drop initially, the demand for gas will increase and prices will respond by rising. Rising to where it is now with the gas tax. So then who gets that demand driven increase in price? No, not the middle class wallet. They are paying no matter what. Our appetite for oil is too big. It is the oil companies that would reap the benefit. The tax would be shifted from going to the government to the oil companies. Meanwhile we will use more gas, pollute more, and increase our oil dependency. Sounds like a great policy.

I believe Clinton is a smart candidate. She has taken economics 101. Yale has taught her well. She knows her proposal is full of bullshit and she is pandering. She is stooping low and is being deceptive. But back to my point. Why can’t Americans be asked to sacrifice? Why are high gas prices bad? It’s the market speaking. It’s a wake-up call to move away from oil. It may hurt, but it should push us to run from oil, not snuggle up against it.

Why can’t we be asked to sacrifice when we are at war? Why can’t we be asked to sacrifice to save our planet? Why can’t we be asked to sacrifice so that all Americans can have access to health care? Are we too comfortable and lazy? Are our leaders too weak to make the demands? I’m not sure, but I do know that sacrifice is needed at times. Let’s keep an open mind and vote for the candidate that is not afraid to ask of us to do better, to make changes, and to even, if necessary, to make sacrifices.

Outdated Employer-Based Health Care

Part of the “My Prescription” series.

There was a day when a typical employee was loyal to a company for the length of a career. Or maybe there was a time when the company was loyal to the employee. I don’t know, but there was a day when an employee stayed with an employer for many years and often decades. Increasingly today’s workforce is mobile. Today a quarter of the workforce changes jobs every year. In 1983 two-thirds of men in their fifties had been with their current employer for ten or more years. In 2004 that number dropped to 50% (Department of Labor). I’m willing to speculate that this number will continue to drop as my generation approaches their fifties.

Further, the workforce is becoming increasingly independent meaning independent contractors, freelancers, etc. Over the past ten years people with these work arrangements have increased by 20% to about 11% of the workforce today.

So the workforce is mobile and mobility is good. It means entrepreneurship. It leads to creativity, advances, and growth. But I would argue that we do a poor job of supporting this independent spirit by making health insurance practically immobile. If you change jobs you change your insurance. Maybe you have to change your doctor? Maybe your prescriptions?

Let’s role-play. A talented MBA grad working for a large fortune five hundred company who feels stifled by the corporate world. He has ideas, but is scared to go out on his own. He is scared to be without insurance, and until he gets up an running he cannot afford to pay his own. What would you do? What if you have kids? Tough choice.

Another problem. Small businesses do a poor job of providing health care. Companies with a 1,000 employees provide health care to 80% of their employees. Companies with 10 or fewer employees offer insurance to less than 50% of their employees. It all has to do with increasing risk when pooling small number of people, and as long as health insurance is strictly based on ones employer, this scenario will continue.

I think it pretty clear that the employer-sponsored insurance system that we have today is eroding and is no longer capable of being the foundation of our health insurance system.

Employer-Based Health Care, How Come?

Part of the“My Prescription” series.

Only in the U.S. is health insurance linked to a specific job. Why have we chosen this path? The truth is we have not chosen it at all. We have literally stumbled upon it. Here are a few key events that lead us to our current system (a watered-down and simplified history):

I. Prior to WWII there was very little in the terms of health insurance in the U.S. Meanwhile many European countries had already moved to universal coverage in an attempt to maintain a healthy workforce. The U.S. was behind. During WWII the government implemented wage controls. However, U.S. business found the loophole and started offering fringe benefits to get around wage controls (health insurance began as a wage insurance – the insured retained wages when they were sick, but had limited coverage of medical costs).

II. Medical advancement gave legitimacy to medicine (many advancements came out of the war effort especially trauma care – improved anesthesia and sterile practices. Antibiotics were also instrumental in establishing legitimacy). Hospitals began the transformation from a place for the poor and indigent to a place where medical care was sought by the middle classes.

III. A 1948 ruling by the National Labor Relations Board allowed for health benefits to be a subject of collective bargaining. The Unions ran with it to legitimize their presence.

IV. A 1954 federal tax law exempted many of these fringe benefits from taxation providing an incentive to bolster employment-based benefits including health coverage.

V. Medical advancements have accelerated what is possible making quality care more and more expensive. As more conditions are treatable more money is needed to treat them. Insurance begins to fill that gap after WWII.

That’s the history in brief. Here are maybe the more important reasons it worked (fairly well) for a few decades. Pooling people based on place of employment – not health status – makes the insurer less vulnerable to adverse selection. Thus people are enrolling based on employment (healthier people) and not based on illness (unhealthy people). Any pooling mechanism has to minimize adverse selection and employment-based coverage does that for a majority of our citizens. Second, employers offer economies of scale. Employers can administratively manage health insurance cheaper than other settings would be able to based on volume. Also, based on volume, employers (especially large ones) have the leverage to negotiate prices. Economies of scale definitely played a role in making employer-based health insurance cheaper than individual-based health insurance.

This is why we have employer-based insurance. Employer-based insurance certainly is not the result of a great vision of how to achieve optimal health care. It is more of a reaction to a lack of vision. As a nation we stumbled and patched together a system that met temporary needs left by the void of inaction.

My Prescription

In the past I’ve been asked to lay out my health care plan straight and clear as if I was riding in that magical bus with McCain himself. Over the next few posts I am going to lay it out there for all to critique.

But first I must give credit to where credit is due. All proposals are built on previous proposals, previous ideas, previous studies, etc. Mine is no different. In order to do the academically responsible thing – the transparent thing – I must first cite an influential paper. The paper comes from – make sure you are sitting – The Heritage Foundation.

For those who don’t know the Heritage Foundation it is a staunchly conservative think-tank, and I am well, not staunchly conservative. I lean a tad left, but I liked what Stuart M. Butler has to say in his paper, “Evolving Beyond Traditional Employer-Sponsored Health Insurance.”

The basis of “my prescription” is that the foundation of our health care system is flawed. Superficial changes alone (even if they are big changes) will not cut it. Currently, our system is an employer-based system with a large safety net underneath it. The problem is that as the employer/employee relationship has evolved and the old employment-based health care system no longer works. It is leaving more and more people out to either fall into the ever growing safety net, or in the case of 45 million people, straight past the safety net.

So before we consider individual mandates, SCHIP renewal, privatization of Medicare and Medicaid, consumer-driven health plans, or whatever other fix-of-the-day let’s fix the real problem. In future post I am going to discuss why we have an employer-based system and why it no longer works. I’m going to argue that employers should no longer be sponsors of health insurance, but should act as facilitators. I’m going to discuss the need for tax reform. I’m going to argue that these changes should occur first, and then we should move toward universal coverage.

Costs Put into Perspective

I was in class last night and my professor quoted a statistic:

“For the first time insurance premiums for a family are now higher than the gross income of a person working full-time on the minimum wage.”

Let’s assume that this is a family of four, based on the federal minimum wage, and that these are nationally averaged insurance premiums. And for skeptics out there, let me be forthwright. I have not researched whether this claim is true, but my professor is a leading health care policy expert and is very well respected. The point is that costs have gotten prohibitive and this has monstrous ramifications. Think about one thing. If we are to have universal coverage without significant cost savings we will need a huge redistribution of wealth.


There my few friends is why creating such a system is politically so difficult.

I did some quick off the cuff calculations: Minimum wage is $5.85/hour * 40 hours *52 weeks = $12,168 annually. According to the Kaiser Family Foundation in 2006 the average annual premium for a family was $11,480. Lets assume that premiums are a bit higher in 2008 as annual increases range from 7-13% (roughly $13,000 assuming a 7% increase annually). It seems that this assertion above is true, or – at least for the most skeptical – very nearly true.

Technology’s Two-Sided Sword

Technological advances in medicine are and have been astounding.  This includes pharmaceuticals, surgical techniques, diagnostic equipment, various implants from stents to joint replacements, and a whole onslaught of therapies that can only amaze.  Medicine today looks very different than the medicine of the 1970’s let’s say.  The amount of life saved, diseases cured, and hope given to those who have benefited from such advances is remarkable and practically immeasurable.  We are blessed to live in a time filled with the miraculous wonder of medicine today. 

So what’s the issue, you ask? 

You know me too well. It’s the other side of that sword. Advances cost money. Even advances that save money cost money.  For example, various new heart procedures save money per procedure, but since they are also less invasive, have fewer side-effects, and are cheaper, more and more people are having them performed.  Overall, the costs are higher.  It’s all about: Costs = Price X Quantity.  Often when the price drops the quantity rises and this more than offsets the price reduction.  But surely the overall cost is worth all the benefits?  I would argue that it is. 

But what if the therapy isn’t really proven (at least not yet)?  What if the costs per procedure are higher and the benefit small or not known?  Is that advance still a positive thing for society?       

Imagine that a company invests millions of dollars into a new treatment and it’s proven to be safe.  The company will obviously market the new technology to everybody and anybody to recoup its huge investment.  The company will tout its new proton, laser-guided, micro-fabulous device that has such great promise to treat <insert disease of your choice>.  The company will discuss why this therapy is the next thing. The company will talk about how the protons are better than the x-ray or how the laser is more powerful than its predecessor.  Maybe it is.  The theory could be sound, but as of yet its effectiveness is unproven (how much health does it provide?). Meanwhile, the marketing campaign by the company is a smashing success, and hospitals are building new wings for such devices. Millions more pour into this device.  Hospitals buy in and the company turns a profit.  Hospitals now need to create demand so they can recoup their investments.  Before the science is in, the device is deemed effective by professionals. It’s too late now to turn back.  The investment needs to be recouped. The fancy new device is a go and there is no turning back. 

This scenario does happen.  Is it a bad thing?  Is this how progress is made?  Or is this responsible for our rising health care bill? Question one is difficult.  The answer to question two is a firm YES.

Check out this article for a real, well-funded, unproven, proton, cancer-treating therapy. Or this article.