Last note on Health Care

…before moving on to something less spirit-destroying.

Though either of the two health bill options to be reconciled had to ensure the long-term necessity of the health insurance industry in order to exist, the House bill is slightly more populist than the Senate bill, mainly in the contentious area of cost controls (though not in abortion). Therefore, the Senate bill’s provisions are more likely to pass. And like magic, a sizable chunk of its defenders have moved on to specifically praise the Senate bill.

One thing the two sides are crossing swords over is the excise tax (or loophole fix, if you buy one of the accounts making its rounds), which is designed to control costs by taxing insurance plans that exceed $23,000 for families and $8,500 for individuals. This is supposed to incentivize cheaper premiums and more efficient care: the elimination of extra tests, unnecessary return visits, etc. The House provision, on the other hand, will make hundreds of billions more than the Senate version’s highest estimate by taxing the rich. That this is a bit too direct for some people is perhaps understandable. But as Bob Herbert explains in the NYT (with more analysis here), inflation’s a bitch, and the first thing to drop as the ‘Cadillac tax’ applies to more and more people will be the quality of health care, not just its cost. And employers, who hold the purse strings, will pocket the extra cash.

The idea that money saved in insurance premiums is money earned in wages has been most influentially promoted by Jonathan Gruber (big upped by Ezra Klein). Gruber is the White House’s answer to the infamous industry-sponsored critique of the SFC bill published in October. According to him, the Senate excise tax is

a policy that provides the necessary financing to pay for subsidies to low-income families; induces employers to buy more cost-effective health insurance, lowering U.S. health-care spending; offsets a bias in our tax system that favors more expensive insurance; and raises wages by $223 billion over 10 years. To put a twist on an old saying: The Senate assessment on high-cost insurance plans doesn’t walk like a tax or talk like a tax — because it is not a tax. It is an innovative way of financing the health reform we so desperately need.

Like any excise tax — the one on tobacco, say, or carbon emissions — this one is not ‘just’ a tax. It is a prod to encourage ethical behavior. The problem with this is one of perspective: from an aerial view, one man’s cosmetic surgery is another man’s melanoma treatment. The ‘bias’ toward overspending on insurance is at the same time an incentive for employers not to make medical decisions for their employees. This proposed solution is the mirror image of the problem it sets out to solve — and a funhouse mirror, at that.  According to an independent study from the National Opinion Research Center (via Timothy Noah of Slate), less than 4% of expensive health plans include the sort of care that would justify the use of the label ‘Cadillac.’ There are, surprise, more janitors who rely on employer-based health insurance than hedge fund traders.Labor unions are a more conspicuous target than the high income.

And while it may be true that more money spent by employers on insurance is less spent on income, the reverse does not follow. This theory of a one-to-one relation between income and employer health insurance spending is (as Gruber acknowledges) a leftover from the heyday of managed care in the 1990s, when U.S. workers simultaneously (and unevenly) enjoyed a brief reprieve from the 30+ year stagnation of real wages. The smartest men in the room back then announced the former to be the cause of the latter, right in the middle of the popular ‘backlash‘ against HMOs. Here’s something from the single-payer advocates PHNP:

Between 1991 and 1996, annual inflation in health insurance premiums dropped precipitously, from 10.9 percent to 0.5 percent, before soaring back to the more usual annual rise of 5 to 10 percent. A large part of this drop was due to a historic 50-percent drop in the underlying (or economy-wide) inflation rate that began in 1991. But the reduction in health insurance premium inflation exceeded the reduction in underlying inflation. What caused this reduction?

The insurance industry and their allies claimed, precisely as Klein and Cutler do now, that the widespread use of managed care tools should get the credit. But those who made this claim could not cite any research showing that managed care in general, or any one of its tools in particular, saved money; they could only point to the rapid takeover of our health care system by managed care during the 1980s, and then the sudden decline in premium inflation beginning in 1991. What the research did show was that insurance companies that adopted managed care tactics tended to cut medical expenditures and drive up administrative costs, for a net effect of approximately no change in total costs.

So if managed care wasn’t the cause of the early 1990s inflation lull, what was? In a paper published in Health Affairs in 2000, I reviewed the evidence indicating managed care saved no money, and then listed four factors having nothing to do with managed care that explained the lull (“On the ‘efficiency’ of managed care plans,” Health Affairs 2000;19(4):139-148):

All four of these factors, as well as the decline in the underlying inflation rate, ceased to have a downward effect on premium inflation at about the same time – about 1996. Accordingly, premium inflation began to rise in 1997, just as the “HMO backlash” materialized. Just as some less-than-astute observers thought managed care should get the credit for the decline in insurance inflation rates that began in 1991, so some observers thought the “HMO backlash” should get the blame for the return of higher premium inflation rates in 1997. Those observers were wrong on both counts.

The mid-1990s lull was caused primarily by the short-term reactions of the industry to the near-simultaneous occurrence of four events: (1) a downturn in the three-years-up, three years-down health insurance pricing cycle; (2) the delayed effect of the 1990–1991 recession; (3) the endorsement of managed competition models of health reform by the White House and numerous state and federal politicians; and (4) the merger fever triggered by these political endorsements. The latter three phenomena deepened and lengthened what otherwise would have been a shallower and shorter downturn in the usual insurance-pricing cycle. (Page 144)

Just like the excise tax, the cost-containment measures of yesteryear were attempts to change practices by tweaking market mechanisms. Their agents are therefore owners: of capital, skilled labor, and resources — employers, insurers, doctors, and pharmaceutical companies. The blindness of these policies isn’t a bug, it’s a feature. If the ‘Cadillac tax’ didn’t indiscriminately target (majority) necessary and (minority) luxury spending, if it were accurate and not primed to expand along with inflation, it wouldn’t raise very much money, or affect market behavior.

Something about this debate is reminiscent of right-wing reactions to the overhead brought on by malpractice suits. The same inflated claims of ‘luxury spending’ (suing for babies born ugly and the like) are used as a way to justify abandoning expensive protections, which were themselves mere band-aids for a failing system of understaffed hospitals and escalating costs. Just as needed treatment makes up a far greater percentage of health insurance costs than ‘Cadillac’ services, an oft-quoted Bureau of Justice statistic from 2001 states that 90% of medical malpractice trials were fought over claims of death or permanent injury (here’s Klein with other fun facts).

As defenders love to finger-waggingly insist, not everyone comes out of reform a winner. These legislative battles are not waged over what policy will ‘work’ the best, though they may look that way from the top. They determine who is going to suffer for the collective failure to fix a broken system. And it’s not between degrees of responsibility that the decision is made — the most responsible decide for everyone else, and legislation tends to keep it that way  — but between degrees of consumer ‘privilege,’ a criteria somewhat more open to interpretation.

7 Responses to “Last note on Health Care”

  1. anxiousmodernman Says:

    I prefer to have my spirit destroyed, thank you.

  2. I like this best of all your policy posts this year, I think, Traxus. Excellent stuff. Spirit destruction? I don’t think so – an analysis that makes clear the actual, practical goals to fight for as this system gets up on its legs.

  3. traxus4420 Says:

    thanks roger! and congratulations on your recent award.

  4. Onward and upward, now!

  5. traxus4420 Says:

    obviously obama LOVES it,0,4576144.story

    (the cadillac tax, sadly, not roger’s post)

  6. butch cazza Says:

    Yes, congratulations Roger, but I don’t know exactly what the award is, so one of you can specify. I looked at the blawg and couldn’t find it; shouldn’t you shamelessly promote more? Always good blawg, but much too taxing for superficial types like me.

  7. Hey, it is for the other blog – News from the Zona. And I put up my little charm prize!

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