Incentives matter

The recent health care reform did too little to improve incentives.  It takes a bundle of warped incentives that were driving up costs faster than inflation, and makes them much worse.

What will the various players do, given the environment of choices they face?  The simplest example to understand:  we all delay seeing a doctor if we are on the brink of getting insurance coverage.  The system is chock-a-block with perverse incentives like this – for patients, for doctors, for employers, for insurers, for hospitals, for device manufacturers…

The inestimable Robert Samuelson, writing in the WaPo, describes the slow motion train wreck occurring in Massachusetts and predicts a similar fate for the nation.  From As Massachusetts health ‘reform’ goes, so could go Obamacare:

The state did the easy part: expanding state-subsidized insurance coverage. It evaded the hard part: controlling costs and ensuring that spending improves people’s health. Unfortunately, Obama has done the same…

Similar forces will define Obamacare. Even if its modest measures to restrain costs succeed — which seems unlikely — the effect on overall spending would be slight. The system’s fundamental incentives won’t change. The lesson from Massachusetts is that genuine cost control is avoided because it’s so politically difficult. It means curbing the incomes of doctors, hospitals and other providers. They object. To encourage “accountable care organizations” would limit consumer choice of doctors and hospitals. That’s unpopular. Spending restrictions, whether imposed by regulation or “global payments,” raise the specter of essential care denied. Also unpopular.

The best incentive – profit – is destroyed.  Recall that the combined annual profits of the 10 largest insurers is $8.3 billlion, which is less than 1/7 of what Medicare loses to fraud every year and just 0.4% of the $2.5 trillion the country spends each year on healthcare.

Samuelson is a little off when he says the system’s fundamental incentives won’t change.  I suspect what he meant was that they won’t change for the better:

Expense account healthcare:  Most costs are paid by a 3rd party – an employer, an insurance company or a government agency.  A patient’s monthly premium is paid (in whole or in part) by his/her employer, and at the point of service he/she pays a small co-pay and then over-eats whatever is served because someone else picks up the tab.

The employer mandate:  Employers are given a choice: purchase insurance for employees or pay fines.  They will pay the fines, which cost less than premiums, and skip the hassle of providing insurance to their employees.  Small businesses will stop hiring to ensure they stay small enough to avoid the mandate.  More people will lose their insurance and join the government-run “exchanges.”

The individual mandate:  People are given a choice: purchase insurance or pay a fine. The healthy will pay the fines (which cost less than premiums) and just wait to purchase insurance until they’re sick (since insurers can no longer deny coverage for any reason).  Anyone with one foot in the grave and/or the other on a banana peel will pay for the more expensive insurance rather than the fines, and then drop coverage and pay the fines again once they’re healthy.  As a result, insurers will be forced raise premiums to reflect rising costs, which will cause more people to opt out and pay the cheaper fines…  lather/rinse/repeat.

Mandated benefits in plan designs:  Legislators eager to curry favor with voters can require all plans offered in their state to offer benefits that some people would rather not pay for:  social workers, massage therapists, acupuncture, hair prostheses (wigs), and yes – abortions.  Such a one-size-fits-all approach raises premiums for everyone.  Which would do more to lower costs: (a) allowing insurers to sell across state lines, thereby creating national markets for low-cost/no frills plans; or (b) forcing every state to mandate more benefits?

Guaranteed Issue/Community Rating:  Since they’re no longer allowed to deny or limit coverage (“guaranteed issue”), insurers will also be forced to charge everyone close to the same price (“community rating”), which will increase just about everyone’s premiums (especially the young and the healthy).

Defensive medicine:  America is a litigious society, and doctors will protect themselves just as we all do.  They purchase malpractice insurance to protect themselves from trail attorneys, and order extra tests and visits to cover their glutei maximi.   The costs of these defensive measures are passed along to patients and insurers, with estimates that range from 10% to 25% of total health care expenditures depending on specialty, region, and insurance.

Size Matters: Smaller players will not have the resources to administer all the new rules and regulations.  In addition to being unable to afford compliance, they will also lack the economies of scale and buying power of the bigger players.  Insurers, hospitals and doctors in private practice will consolidate in order to survive, leaving fewer choices for care and longer lines.  If you don’t lose your doctor, you’ll have to wait longer to see him.

Drug and device manufacturers: New taxes and fees charged to these companies will  be paid for by layoffs and R&D cuts, and passed along to consumers in the form of higher prices.  There will be less innovation and fewer devices and drugs that save our lives.

Politicians I:  When costs do not fall as hoped, Legislators will respond by capping premiums/fixing prices, demonizing producers, and taking more control.  Price controls lead to lower supplies and higher demand, and so, inevitably, longer lines and denied care.  See any other nation’s centrally planned health systems for reference.  Those systems do not lower costs, merely refuse to acknowledge them in their new form: lines, waiting times, poorer service, unavailability of certain tests and procedures, lower quality of life, and government rationing of end-of-life care.

Politicians II:  The way in which Obamacare was passed poisons the process, divides the country, and ensures that future battles will be even dirtier.  Once taboo tactics become the new normal – “the means live on, but the ends are ephemeral.”

Politicians III:  The administration’s own actuary recently reported that these outcomes are likely – and we’ll still leave 23 million uninsured.  It’s hard not to conclude that they understand all this, so what could they be thinking?

Politicians IV –  The Hidden Agenda:  A long term goal for some has been a single-payer plan.  Here’s the process.  From the horses’ mouths:

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