Monday, January 31, 2005

The Coming Healthcare Boondoggle

In comments here, Ryan Bradley points us to this story.

Yeah, this would be a catastrophe. It would save business a ton of money up front, but would end up costing the taxpayers huge amounts of money. Why? Glad you asked.

First of all, the employer-provided health insurance model stinks. A state system of some kind (either one payer federal or individual state plans) would be far superior. But this "ownership society" plan for health care would be worse than either.

If you are a high-dollar health care consumer (disabled or chronically ill, e.g.), you are able to get medical care because your rate is folded into these great big employer pools. The employer (and to an extent, your coworkers who are healthier) are subsidizing your health care by paying slightly more than it would cost to insure themselves as part of a fully healthy pool of similar size. It's not really much more, since employer plans also benefit from economies of scale that wouldn't exist if each consumer bought an individual policy from the insurance company. Also, under the current system, employers bear a huge chunk of the costs, which they wouldn't have to do if everyone bought their own insurance.

A system that encourages consumers to opt out of employer plans in favor of high deductible insurance partnered with tax-deductible health savings accounts would be of questionable benefit on health care spending but would certainly cause some very serious problems for the kind of broad coverage that Americans expect.

Proponents claim that such a system would save on costs because people would be more savvy shoppers for health care services when they have a high deductible and they are paying out of pocket. This is probably actually true, system wide. But I suspect the system-wide cost savings would be offset to some degree, possibly totally. First, the ownership system encourages people to wait until they need to go to the doctor, but in many cases that means people will be much sicker when they finally do see a doctor. It's generally cheaper to prevent an illness or to treat it early. Second, those who are unable to pay for their high-deductible insurance (since there will now be no employer match, which typically picks up 60% or more of the premia) will be forced to use emergency services on the taxpayer dime. Emergency rooms are, by far, the most expensive method to deliver basic healthcare, as opposed to a prevention model. Hospitals in low-income areas could be wiped out by the increase in the amount of charity care, which is already a problem.

It's an even worse plan for sick people than it is for poor people. There are two main possibilities.

If the ownership plan encourages people to opt out of employer plans but basically leaves those plans intact, you get an adverse selection spiral. Basically, that means that as healthy people leave the plan to take advantage of cheap high deductible insurance, the plan will contain a higher percentage of those who consume a lot of health care services. This raises the premium for everyone still in the plan, which will cause more healthy people to opt out, which will raise the premia... You get the idea.

If the ownership plan abolishes employer provided care altogether (or "phases it out"), there will be a large pool of people previously insured who are suddenly uninsurable. An insurer that agrees to provide care to a whole company has to take the company's employees as it finds them. Trying to get an individual health insurance plan with a chronic illness would be as hard (impossible) as getting life insurance; any actuary will tell you that the insurance company knows that they will have to pay out too much to make taking on such a policy financially feasible.

Essentially, this would be a massive tax shift boondoggle from employers and corporations to middle and lower class families. Par for the course with the Bush administration, but still a steaming pile of malodorous excrement, policy-wise.


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