Written by John Goodman
The reason we have so many problems in health care is that almost everywhere we look, people face perverse incentives — patients, doctors, employers, employees, etc. When they respond to those incentives they do things that make costs higher, quality lower, and access to care more difficult than otherwise would have been the case.
At the root of those perverse incentives is bad public policy.
Insurance or Uninsurance? Because we were spending far more on free care for the uninsured than we were spending on subsidies for individually-purchased insurance, millions of people had an incentive to be uninsured.
Public or Private? Because we spent far more on such public programs as Medicaid and CHIP than we spent on subsidies for individually-purchased insurance, millions of people had an incentive to choose public insurance rather than private insurance.
Individual or Group? Because employer-provided insurance was generously subsidized through the tax law while individually-purchased insurance received almost no tax relief, the vast majority of people with private insurance had non-portable, employer-provided coverage.
Third-Party or Self Insurance? Because employer-provided insurance was liberally subsidized through the tax law while people’s ability to get similar subsidies for Health Savings Accounts (HSAs) was greatly restricted, people had too much of the former and too little of the latter. This in turn led to third-party payer domination of the entire medical marketplace and the elimination of real market-determined prices.
Choices in the Market for Risk Avoidance. Because normal market forces had been so completely repressed, outside the individual market real health insurance simply didn’t exist.
So what did the Affordable Care Act do about these problems? It made every one of them worse! By existent penalties, ObamaCare actually creates greater incentives for millions of people to choose uninsurance over insurance. That is, the cost of insurance has become much higher and the cost of getting insurance after people get sick has become much lower for a great many people.
ObamaCare not only encourages Medicaid rather than private insurance, it traps people in what is clearly an inferior health insurance plan. If you are eligible for Medicaid you are not allowed in the exchange.
ObamaCare not only makes no effort to level the playing field between individual and group insurance, it makes arbitrary differences even greater. This, in turn, threatens to change the structure of entire industries as employers react to the perverse incentives created by the bizarre subsidy scheme.
By forcing people to buy insurance benefits they may not want or need, and by insisting that a whole slew of services be made available with no copayment or deductible, ObamaCare ensures that even less money will be available for HSA deposits.
In the market for risk avoidance, ObamaCare makes it easier than ever for people to choose skimpy insurance or no insurance at all while they are healthy and then switch to a very rich plan after they get sick.
Plus ObamaCare piles on a raft of additional perverse incentives, including incentives for employers to downsize their workforce; reduce employee hours; turn to independent contractors, temporary labor and outsourcing; etc.
In Part I of this series, I proposed four simple changes to ObamaCare:
Replace all the ObamaCare mandates and subsidies with a universal tax credit that is the same for everyone.
Replace all the medical savings accounts with a Roth Health Savings Account.
Allow Medicaid to compete with private insurance, with everyone having the right to buy in or get out.
Denationalize and deregulate the exchanges and require them to institute change of health status insurance.
Let’s see how these changes affect fundamental choices people have to make.
Insurance or Uninsurance? If people can use their tax credit to buy into Medicaid, there is no financial reason for anyone to be uninsured.
What should we do with unclaimed tax credits? I have long advocated sending them to safety net institutions in the communities where the uninsured live. (See here and here.) That way money would follow people. If everyone in a community opted to be insured, the tax credits would help pay for private insurance. If everyone elected to be uninsured, the money would go to a local safety institution as a backstop in case patients cannot pay their medical bills.
I now think that was too generous. The uninsured consume only about half as much health care as the insured do. Plus they pay about half of the costs out of their own pockets. So if people turn down a $1 tax credit, 25 cents should be sent to a local safety net institution.
Public or Private? If everyone can use his tax credit to buy into Medicaid and everyone on Medicaid can claim the credit and buy private insurance instead, then public and private insurance will be competing on a level playing field.
Individual or Group? With a universal tax credit as the only government subsidy for private insurance, individual insurance and group insurance will compete on a level playing field. It would be even better if we remove restrictions that prevent employers from buying individually-owned insurance for their employees.
Third-Party or Self-Insurance? With a Roth HSA, contributions are made with after tax dollars. With a fixed sum tax credit, any additional premium (over and above the amount of the credit) will be paid with after tax dollars. This puts third-party insurance and individual self-insurance on a level playing field. Since withdrawals from the Roth HSA are tax free, non-health goods and services will trade against health care on a level playing field. And since the Roth accounts grow tax free, future health and non-health consumption will also trade on a level playing field.
Choices in the Market for Risk Avoidance. Just like the Medicare Advantage program, in a well-run exchange insurers should always receive premiums that are actuarially fair. That is, the insurer’s premium should equal the enrollee’s expected medical costs. The enrollees themselves will pay a community rated premium. If there is an additional cost, it should be paid by the enrollee’s previous insurer. Put differently, no insurance pool (whether inside or outside the exchange) should ever be able to dump its high-cost, sickest enrollees on an exchange plan. This ensures that health plans have ideal incentives to compete for all potential enrollees, regardless of health status. It also encourages health plans to become high-quality, low-cost providers of specialized care, say, for heart disease or cancer.
At the same time, individuals should not be allowed to game the system. For example, no one should be allowed to upgrade to a richer plan, paying a community rated premium, after he develops a costly illness. After a one time enrollment, people who wish to upgrade to a richer plan should be charged the full actuarial cost of the upgrade. If they downgrade, they should realize the full actuarial savings.
Similarly, no one should be allowed to remain uninsured until sickness arrives and then buy insurance for the same premium everyone else is paying. As in the Medicare Parts B and D programs and in the Medigap market, people should be penalized if they do not insure at the first opportunity. The ideal penalty is medical underwriting.
In a well-run insurance marketplace, people will pay the full cost and reap the full benefits of every change they make. That leaves them with an undistorted economic incentive to buy insurance and to choose the insurance that best meets their individual and family needs.
The Results. With these four changes we will have started with a health system in which incentives are perverse in every direction and converted it into one in which everyone’s economic incentives are ideal.
John C. Goodman is president and CEO of the National Center for Policy Analysis and author of the new book, Priceless: Curing the Healthcare Crisis. He is widely known as the “Father of Health Savings Accounts,” and Modern Healthcare named him as one of four people who have most influenced the modern health care system. He is also the Kellye Wright Fellow in health care. The mission of the Wright Fellowship is to promote a more patient-centered, consumer-driven health care system.