MASSACHUSETTS IS CONSIDERING HEALTH INSURANCE reform to address the problems of the uninsured. The federal government is pressuring the state to do something or lose several hundred million dollars in Medicaid funding. Two competing ideas are single-payer health care, favored by some on the left, and a multilayered insurance reform proposed by Republican governor Mitt Romney.
Single-payer means that the state government would provide health insurance to all citizens. Single-payer appeals to those who oppose private enterprise in general and private health insurance in particular. It is an article of faith on the left that a state monopoly on health insurance would reduce private-sector inefficiency by eliminating duplicate overhead and doing away with profits. Those on the left believe so strongly in the efficiency of government-provided insurance that they think single-payer would reduce premiums paid by consumers and businesses by more than enough to offset any increase in taxes.
Romney’s plan instead would deal with the state’s estimated 460,000 uninsured without tearing down the existing insurance system. In fact, parts of the reform package are designed to make it easier for employers to provide health insurance by reducing regulatory mandates for coverage. Other reforms are intended to ensure that workers retain health insurance when they lose or change jobs.
More dramatically, the Romney plan does not take a one-size-fits-all approach to the uninsured. After all, there are three gaps that account for the uninsured population in Massachusetts today:
* About 110,000 people who are below the poverty line and are eligible for Medicaid but not enrolled;
* About 150,000 people with incomes up to three times the level of the poverty line (“near poor”), meaning that they still cannot afford coverage without assistance;
* About 200,000 people with incomes at least three times the level of the poverty line, who choose to self-insure, meaning that they do not purchase health insurance.
The poor would be enrolled in Medicaid. The challenge for Massachusetts, as for all states, is that many poor people know that they will receive free medical care without enrolling in Medicaid, simply by showing up at the emergency room. Romney’s plan would change this by enrolling eligible recipients whenever they obtain medical care, while abolishing state programs that support free medical care for the uninsured.
The near poor would be provided with Safety Net Care–a means-tested subsidy to purchase private health insurance. For example, a single person with an income of roughly $24,000 would pay just under $1,000 a year for coverage. The total cost of the policy is envisioned to be about $4,000, so the taxpayers of Massachusetts would pay about $3,000 a year in subsidy payments for this individual. Someone with lower income would receive a higher subsidy and pay less, and someone with higher income would receive a lower subsidy and pay more.
Those who self-insure could continue do so only if they posted a $10,000 bond in case they needed medical care. The bond guarantees that if they get sick, they will in fact pay for their own health care rather than “free ride.”
To encourage the recalcitrant to purchase health insurance, the Romney plan envisions private insurance with somewhat higher deductibles than are common today. One briefing for the Romney plan suggests that deductibles should be in the $250 to $1,000 range, rather than no deductible, which the briefing implies is the standard currently.
THE ROMNEY PLAN seems designed to solve a problem of uninsured consumers “free riding” by obtaining health care services without paying for them. The “free riders” leave the tab to be picked up either by state programs or by health care providers padding the bills of the insured. I have not seen data on how much “free riding” costs the taxpayers of Massachusetts, but in other states the figures are not large as a percentage of total health care spending.
Another problem that concerns many people is the cost of health insurance. People on the left blame this on insurance companies. However, the dollars absorbed by insurance company overhead are only about 6 or 7 percent of total health care costs.
Health insurance is expensive for two reasons. The main reason is that we consume a very expensive mix of health care services. This “premium medicine” consists of specialists and advanced technology. For example, since 1975, while the U.S. population has increased by only 35 percent, the number of gastroenterologists has risen by 433 percent, the number of pulmonary specialists by 472 percent, and the number of diagnostic radiologists by 704 percent. Since 1980, the number of CAT scans per year has risen from 3.6 million to over 50 million, and the number of MRI exams per year has risen from 0 to about 25 million.
Is premium medicine worth paying for? It is hard to say. Today, if you were to see a doctor after you hurt your back moving furniture, whether you got sent for an MRI would likely depend on whether you had insurance. Is the uninsured patient missing out, or is the insured patient getting an unnecessary procedure? If we knew the answer to such questions, then we would know whether our health care system is the best in the world or whether it is simply the most profligate.
The other reason that health insurance is expensive is that it is not really insurance. Instead, it acts more like a prepaid health plan, which insulates consumers against even low or moderate health care expenses. Real insurance would pay for expenses that were unusually large, rather than reimburse providers procedure by procedure.
The potential for real health insurance is based on the fact that 5 percent of the population incurs 50 percent of health care costs. In theory, all insurance reimbursements could go to the sickest 5 percent, so that in a typical year 95 percent of consumers would pay premiums but not make any claims. That is how other insurance markets work. However, the cutoff for being in that top 5 percent is over $10,000 a year in medical bills. Hardly any health insurance policies today offer deductibles as high as $10,000.
Romney’s plan, with its deductibles of $1,000 or less, is not even close to real health insurance. Most people on his plan will meet the deductible. In the United States, average spending per person on health care is over $5,000, and in Massachusetts the average is over $6,000. Instead of a catastrophic deductible that will be met by 5 percent of the population, Romney is proposing a deductible that will be met by over 50 percent of the population. That is not going to produce affordable health insurance. Instead, it seems likely that health insurance companies will find it uneconomical to offer insurance with the combination of premiums and deductibles envisioned in the governor’s plan.
Realistic market-oriented reform would have to push deductibles much higher, in order to provide true catastrophic health insurance. However, high deductibles would be a much tougher sell politically.
ROMNEY’S APPROACH is commendable insofar as it advances the principle that health insurance should be a personal responsibility rather than an entitlement. However, it does not do enough to steer the uninsured toward real health insurance.
Moreover, if I were going to pick a state in which to attempt an experimental health care financing reform, it would not be Massachusetts. Massachusetts, with its outstanding medical schools and world-class hospitals, is rich in the suppliers of premium medicine, and abundant supply has been shown to drive up usage.
Health care is often debated under the mistaken assumption that the high cost of health insurance and the rising number of uninsured reflect a market failure in health insurance per se. Instead, the disarray in health insurance is due to premium medicine, which is more entrenched in Massachusetts than in other states.
Any experiment in health insurance in Massachusetts is more than likely to fail. Because of the prevalence of premium medicine, Massachusetts is almost certain to rank near the top of states in terms of health care spending while not showing measurable differences in health care outcomes. Other states will observe the results in Massachusetts and say, “Whatever we do, let’s not do that.”
If the experiment in Massachusetts is labeled “market-oriented,” then failure will boost the prospects for single-payer, and vice versa. Given the Bay State’s prognosis, those of us who favor market-oriented health policy prescriptions might prefer to have Massachusetts go the single-payer route.
Arnold Kling, an economist and contributing editor to Tech Central Station, is author of a forthcoming book on health care policy, A Crisis of Abundance.
