The Math of Health Care Reform

The House Leadership’s plan for repealing and replacing the Affordable Care Act is now public for all the world to describe, dissect and debate. Entitled the American Health Care Act, the legislation first stop will be the House Energy and Commerce Committee. At the same time, the House Ways & Means committee will consider budget language to support the Republican repeal and replace effort. For articles on what it does, please check out my Flipboard magazine.

To call the legislation dead on arrival is unfair. However, even ahead of its first hearings, the proposal is looking under the weather. Conservatives in the House have long expressed their displeasure with key elements of the Leadership’s proposal like the inclusion of refundable tax credits to help Americans pay their health insurance premiums. And four Republican Senators with what the House bill would do to Medicaid. If the four Republican Senators hang together and together they could block any health care reform bill. Majority Leader Mitch McConnell needs at least 50 votes in the Senate to repeal the financial aspects of Obamcare through the budget reconciliation process. There are 52 GOP Senators in his caucus. If he loses four of them he’ll need two Democrats to come to his rescue. The price for their assistance will be extremely high.

In short, as I’ve posted previously, what Speaker Paul Ryan and the Republican Leadership put forward this week is highly unlikely to be what emerges from Congress … assuming health care reform does emerge from Congress.

Which may be a good thing. Because the American Health Care Act fails to address in any meaningful way what should be a critical goal of any health care reform proposal: making health care affordable. Washington is fixated on how Americans get health care coverage. Should there be government exchanges?. Should premiums be subsidized? Should there be restrictions on how insurers set premiums for coverage? And so on. All of these are vital, important issues. But they’re playing around the edges of public policy when the real solution is at the core.

This isn’t just opinion. It’s math. Consider: the Affordable Care Act requires carriers to spend the vast majority of every premium dollar they collect for medical care. In the individual and small group markets, 80% of premiums must go to cover medical care or carriers must refund enough premium to reach that level. For larger employers, the medical expense target is 85% of premium. The remaining premium dollars are what carriers can use for paying claims, customer service, negotiating discounts with medical providers, advertising, legal expenses, staffing, HR departments, distribution costs, profit (or retained earnings for non-profits) and any other administrative costs. (Incidentally, I don’t see any reference to these provisions of the ACA, which, I assume, means they stay in place. If I’m wrong, please let me know in the comments section.)

If lawmakers want to make health insurance coverage affordable, they’re going to have to make medical care affordable, because that’s where the money is. Zero out insurer’s operational expense and overall premiums would go down less than 20%. That’s a sizeable amount. However, in three or four years we’re back where we are today thanks to medical inflation. And there’s no way to eliminate all administrative costs. Someone has to process the claims or answer consumer’s questions. And they expect to get paid. And someone has to pay for their phone, desk and computers. And someone has to support their equipment. And so on.

Yet medical care representing 80-to-85 percent of health insurance premiums. Reduce this side of the ledger by 20% and premiums fall 17% — roughly the same as eliminating 100% of insurer’s operational costs.

If President Donald Trump and Congress are serious about reducing the cost of health insurance, they need to figure out how to reduce the cost of medical care. There’s plenty of ideas out there (a topic for a future post). And, to be fair, they’ve mentioned a few. But there’s a political reality that explains why most of the rhetoric around Pennsylvania Avenue concerns the cost of coverage: no one has lost an election by attacking health insurance companies. They’re one of the safest pinatas in American politics. On the other hand, doctors and hospitals are politically dangerous to take on. Voters actually like them.

Regulating health insurance so consumers get a fair deal is important. Lowering the cost of medical care is critical while also reducing insurance premiums. It’s just harder.Perhaps that’s why the Republican proposal is called the American Health Care Act. It would be wrong to use the word “affordable.”

 

6 thoughts on “The Math of Health Care Reform

  1. Alan, “interstate insurance sales” was not introduced in today’s Republican proposal but will be in Phase II or III of proposal. Perhaps then they will explain how this will work in practice using competitive forces.

    Or the opposition will explain why it is a hollow political talking point and carriers won’t participate.

    I hope it turns out that this does offer great advantages which are still unclear to us. Thanks

    • Maurice: Yes, I heard that about interstate sales, too. I’m firmly in the “this is a hollow political talking point” school. Selling health insurance sales across state lines works only if State A is forced to accept State B’s regulation of the insurance carrier. Leave aside how this tramples state’s rights to set their own consumer protection laws, it means that one creative state will set-up a carrier-friendly regulatory scheme and that’s where carriers will domicile their interstate plans. So the first problem with this approach is that undermines consumer protections. Another problem is that virtually all networks direct consumers to preferred providers. So a carrier located in State B wanting to sell into State A will need to set-up a network if it wishes to be competitive. That’s an expensive proposition. Carriers who already sell across state lines have made that investment. Will this bring in many more carriers? I tend to doubt it.

      One thing HHS Secretary Price said today is that the approach the administration takes on interstate sales might be to allow individuals and small businesses to join associations set-up for the sole purpose of purchasing coverage. This is an interesting twist. I, for one, am thinking of creating the “Association of Young Healthy People” to see what kind of discount we could get carriers to offer. Unfortunately, at my age I won’t qualify, but it’ll be a heck of an association!

      • Alan, that statement about forming associations for the “sole purpose of purchasing insurance” jumped out at me too, since we were taught and underwriting forbade specifically that!

        They talk about this concept of “association” business … as if this is a great new concept. Of course, association and Chamber insurance have been around forever. They, too, can implode in a death spiral if they don’t watch their pricing.

        I would also like to join the “Association of Young Healthy People”, but I think they might discriminate against a 64 year old. How about we join the “Association of Older Folks Who Want Young Invincible Rates”!

        • Maurice,

          Thanks for pointing that out. It is infuriating to listen to them bring up proven failures. Next thing they will say is that Associations can Cherry Pick via underwriting.

          Paula

  2. Alan,

    You are correct as usual. Nothing changes until the cost of healthcare is reduced. If there was an answer to this problem, you would have stated it here. I have never heard anyone come up with an answer. Health Care is not like any other product.

    You touched on the MLR and it;s effect. The mere existence of the MLR allows the insurers to determine their income by making sure the portion of that 20%, that they keep as profit, is what their shareholders want to see. They do this by through healthy provider contracting. The more they payout in claims, the greater the chunk of cash when they determine their percentage. The MLR is exacerbating the cost driver. Until we get rid of the MLR and force some uniform pricing (aka transparency), we all continue to be overcharged.

    As for the Subsidy vs. RHITC. I like it because the fraudulent subsidies SHOULD be reduced. With a refundable tax credit, you are actually proving your income as you apply for this generous credit. I don’t like it because it’s not politically pretty. The people that really need it either don’t file taxes or have any idea how to file taxes. Most certainly don’t understand tax credits and the media isn’t going to properly explain it to them.

    As for this drop. This appears to be a throwaway to me. (diversions and trial balloons) It just something to throw out there to obtain the CBO rating on the effect of the tax and subsidy changes. We will see the meat of their picture of Health Care in subsequent legislation.

    And one more thing…..the Q&A attached to this dropped a few bombs as well. The abortion question and answer seems needlessly wrong. It states no one can purchase abortion coverage under the new system. If you can clarify this for me. If you are purchasing “whatever you want” in a free market and without public subsidy, why not? Why on earth would they publicize that even if it is their intention. (I get it on the subsidized portion and they will certainly lose that in the end.) Seems like they are trying to lose the fight right up front. Then again, the Art of the Deal requires you put everything you want out there first.

    The ultimate fight (IMHO) will really have nothing to do with health care. It will be about the money. Democrats will want to keep their social grab while the Republicans will try to undo the mugging.

    Thanks for this blog. MAGA!

    Paula

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