When @Conrad Hackett tweeted an OECD graph of life expectancy at birth vs. health spending per capita I wondered how hard would it be for me to reproduce the same graph in R using the same data. Here is my version with the addition of confidence bands and the equation on the chart. If look at the chart we can see that Denmark(DNK) achieved the same life expectancy result for about $4000 less person. Considering how much we are spending we should be getting life expectancy similar to Italy or Japan. 
healthcare
What is a Well-Functioning Insurance Market?
Brian attempts to answer that question in the post, “Why healthcare exchanges are not well-functioning markets”, as the first part of a three part post on healthcare costs. The idea of a well functioning market is an intriguing question about the Affordable Care Act. Here was my comment.
Thanks for posting your thoughts. I have been thinking about this subject for some time and am very interested in your methodology since I was planning a similar analysis to try and answer the question, “What is the price of self-insuring?” It should be interesting what insight your use of statistics can provide us for a non-linear market. Most of the intriguing strategy questions ask what do we do when we cross a certain boundary. In my case it is the classic customer is always right question. At what price have they gone too far? Maybe after reading your third post I will have more answers.
To me the idea of a well functioning exchange is a moot point. It was born a political animal and will never overcome the inherent problems with subsidizing one group of the middle class at the expense of another part. As much as I would like a competitive market because it would not only be good for me but a good foundation for a sustainable health care policy, it is just not going to happen. Good economics was destined to lose this battle.
Brian has inspired me. Last week I researched pre-existing conditions and tonight I finished creating a spreadsheet of my last five years of medical expenses. Tomorrow I will attempt at connecting the dots and making a stab at answering the question, “What is the price of self-insuring?”
Can We Put The Individual Insurance Market Back Together Again?
Yesterday John Goodman wrote an informative post called, What Republicans and Democrats Don’t Understand About the Insurance Company “Bailout”. As a person who buys health insurance in the individual market I always thought the market worked pretty well despite the rhetoric. John Goodman confirmed that I was not alone in this assessment.
Wharton school health economist Mark Pauly and his colleagues have studied the individual market in great detail and discovered that despite so much negative rhetoric in the public policy arena this is a market that worked and worked reasonably well. Despite President Obama’s repeated reference to insurance plans that cancel your coverage after you get sick, this practice has been illegal for almost 20 years and in most states it was illegal long before that. And despite repeated references to people denied coverage because of a pre-existing condition, estimates are that only 1 percent of the population has this problem persistently. (Remember: only 107,000 people enrolled in the federal government’s pre-existing condition risk pool ”” out of a population of more than 300 million people!) At most, Pauly puts the pre-existing condition problem at 4% of the population.
The gist of John’s article is that he thinks we can fix the individual insurance market with something he calls “health status insurance.” It sounds worth trying but I remain very skeptical. As a 60 year old gym rat my insurance premium is going to be three times that of a healthy millennial and my grandfathered insurance premium. Community rating is a double edged sword. When you do the math my insurance premiums is equivalent to buying a three year old used car every year and crashing it on New Year’s Eve. Insurance premiums this high only makes sense if they give me a subsidy, too. If they do not give me a subsidy the money or my wife will beckon me to find another way to level the playing field. There is just too much money in play. We have gone from a market that worked reasonably well to one with competing subsidies. If Detroit dumps its retirees or high cost employees into the Michigan exchange and the exchange is threatened, does anyone think the government will let the exchange collapse? Once we start down the subsidy path, it is politically impossible to stop expanding the subsidies. Distorting a functioning market for political reasons has its consequences. Despite the efforts by John and others, I doubt we will ever pay a fair price for health insurance or return to a market that works reasonably well.
All of this reminded me of this old nursery rhyme.
Humpty Dumpty sat on a wall,
Humpty Dumpty had a great fall.
All the king’s horses and all the king’s men
Couldn’t put Humpty together again.[1]
Why Does the Affordable Care Act Discourage People From Buying Health Insurance?
I read the Yahoo article, Millions Trapped in Health-Law Coverage Gap, and was reminded of one my pet peeves with the Affordable Care Act. Why does the ACA push people into Medicaid if they want to buy subsidized health insurance on the exchange? If someone whose income is less than the Federal Poverty Limit wants to buy health insurance rather than receiving “free” Medicaid, it sounds like they think they belong in the middle class, their income problem is temporary, and they are taking personal responsibility for their health. This is the type of behavior health care reform should be encouraging rather discouraging.
Pulling out of Obamacare an option? Huh!
My inner MBA was piqued when the Aetna CEO talked openly about pulling out of exchanges as an option. Here is what he said in a CNBC interview.
There is so much uncertainty about Obamacare that Aetna, the U.S.’s third-largest insurance provider, may be forced to double its rates or opt out of the program, the company’s CEO, Mark Bertolini, told CNBC on Thursday.
What action Aetna will take is still up in the air, but the company doesn’t plan to set its 2015 Obamacare rates until May 15. Between now and then, though, Bertolini said he’s trying to get the necessary information from the Obama administration to properly price its insurance products.
I think I understand Aetna’s strategy in Ohio where they have opted to not participate in the exchange. Since they are not one of the top two health insurers for the state, they have limited marketing power. It makes sense that they adopted a wait and see strategy toward participating in the Ohio exchange. Aetna’s strategy is important to me. My AARP-Aetna Essential Healthcare plan is scheduled to be canceled in 2014. If the early exchange enrollment data ends up to be better than expected then I think Aetna will participate in the exchange in 2015. If the price is right then I will continue to insure with them. However if the exchange enrollment data is ugly and the government fixes scares Aetna then there is high likelihood that they will pull out of Ohio. Like most people I would like to keep my health insurance plan but I really want the number of insurance companies competing in Ohio to go up not down. More insurance companies competing in the market is probably as close as we get to getting better insurance rates in the next couple of years. On the other hand I understand Aetna’s predicament. The market is telling them to consolidate and focus their efforts on better markets.
What surprises me about Mr. Bertolini’s comments is that he is talking about exiting exchanges in one of those better markets. Let’s be honest here. Aetna has better managers and data than the government. That is just how businesses roll. I cannot help but speculate that his early warning is because the early enrollment data and administrative costs he is seeing is ugly. He goes on to say that Aetna has about four months to figure out how to make money in the exchange market. You cannot say that he didn’t warn us. Although each state will have different results, if Aetna does not think they can be profitable in their strong market states then this does not bode well for weak markets like Ohio. The best I can hope for is the administration will have another panic attack about insurance polices getting canceled and end up telling the insurance companies that they can continue those grandfathered policies for another year.
Variations on an All-Payer System
For some time I have been toying with a single rate solution for some of our healthcare problems with the poor and the elderly. The disparity in prices paid for the same health care service between Medicaid, Medicare, insurance companies, and uninsured patients is the definition of insanity. It is hard to believe that we actually believe we can reform health care when we keep pricing the services the same stupid way over and over again. Pricing insanity equals lots of unintended consequences. After reading a blog post on The Incidental Economist I realize that this system is called an “all-payer rate setting”. So here are my ideas:
- All-Payer Rate Setting for the Poor
- All-Payer Rate Setting for the Elderly
- All-Payer Rate Setting for the High Cost Patients
All of these groups suffer from price insanity. My inner MBA say that a mutually acceptable price for a health care service exists between the Medicaid, Medicare, and the insurance company prices. The all-payer rate setting for the poor would close the gap between Medicaid, the insurance companies, and the uninsured. Hopefully this would minimize the financial impact of coverage gaps caused by Medicaid churning. Likewise the all-payer rate setting for the elderly would close the gap between Medicare, the insurance companies, and the uninsured. In this case I am referring to the elderly as older than 55 and hopefully it would reduce the impact of community rating on individual insurance group market and take advantage of Medicare pricing power. The all-payer rate setting for the high cost patients is an attempt to control or cap costs. If we combine all-payer pricing with a discount schedule based on income and family size like they have at Trihealth, we probably have a pretty sane pricing solution for the groups who have the greatest financial risk from a health care disaster. The loser in all of these cases is the hospitals, doctors, and drug companies but these are the folks who benefited from the price insanity. This is what you should expect when the U.S. total health expenditure (PPP) per capita leads the rest of the world by a considerable margin.
Why Did So Many People Sign Up For Medicaid Through The Exchanges?
The more I learn about Medicaid the more I am puzzled why so many people signed up for Medicaid through the exchanges. With all of the churning Medicaid causes I doubt the people who are already familiar with Medicaid are thrilled that they are signed up again. Despite the web site problems they came in droves. I suspect they were hoping for free health insurance and got Medicaid instead. That has to be disappointing. It is the old bait and switch routine. So the sales technique we find reprehensible for used car dealers is okay for government health exchanges? So now we are left with the question, how many of these Medicaid signees are actually benefiting from Medicaid expansion or are most of the Medicaid signees benefiting from better health care in name only?
Fixing The Affordable Care Act Requires Us To Ignore The Sunk Cost Fallacy
Over the weekend I was amused listening to the Plant Money podcast, Dear Economist, I Need A Date. On the show they had the economist and author, Tim Harford, using economic theory to give love advice. While chuckling at his advice I was struck with the idea that most of the proposed fixes to the Affordable Care Act requires us to ignore the Sunk Cost Fallacy. For those who are unfamiliar with the concept of the Sunk Cost Fallacy, here is a nice synopsis from The Skeptic’s Dictionary.
When one makes a hopeless investment, one sometimes reasons: I can’t stop now, otherwise what I’ve invested so far will be lost. This is true, of course, but irrelevant to whether one should continue to invest in the project. Everything one has invested is lost regardless. If there is no hope for success in the future from the investment, then the fact that one has already lost a bundle should lead one to the conclusion that the rational thing to do is to withdraw from the project.
To continue to invest in a hopeless project is irrational. Such behavior may be a pathetic attempt to delay having to face the consequences of one’s poor judgment. The irrationality is a way to save face, to appear to be knowledgeable, when in fact one is acting like an idiot.
The Affordable Care Act supporters and a majority of the people in the United States would like the Affordable Care Act to be fixed despite the fact that most of them acknowledge that the www.healthcare.gov website and those narrow network insurance plans look like hopeless investments. The idea that we cannot keep our existing health care system of doctors and insurance plans with these new plans begs the question whether this investment has no hope for success even with additional tweaks. The problem is simple. I can understand why insurance companies want me as a healthy person to buy their plans. I do not understand why I should. If we remember one of the important characteristics of health care expenditures in the United States, half of all health care costs in the US is concentrated in only 5% of the population. If you are not part of that 5% and you are financially disciplined, the odds of you being successful with self-insurance is pretty good. All you are doing is copying the same plan the insurance companies are using to pay for the 5%. The high cost of the ACA insurance premiums becomes a very powerful incentive for self-insuring. If you are successful with your self-insured health care plan, you get to keep the rewards.The Sunked Cost Fallacy reminds us that it is irrational to continue to invest your money into the Affordable Care Act web site and health care plans and hope that things will get better. Here is an old graph from the Kaiser Family Foundation for you to ponder.
Things That Make Me Go Hmm… Did Sen. Coburn lose his cancer doctor because of Obamacare?
I was reading Sarah Kliff’s article, “Did Sen. Coburn lose his cancer doctor because of Obamacare?”, explaining the circumstances why Senator Coburn’s long time cancer doctor was not covered by the Affordable Care Act and I started to wonder where we went wrong. I really like the idea expressed by the President that most of us would be able to keep our doctor and insurance plan while at the same time help the uninsured get coverage. This was a win-win situation. Now we find that Senator Coburn’s experience is far from a win-win situation. This was not supposed to happen.
For the moment let us assume that the President honestly believed that the Affordable Care Act would allow most of us to keep our doctor and insurance plan. This was both good politics and policy. The Affordable Care Act was passed in 2010 and according to Sarah’s reporting that was “how insurance markets worked before the health care law and how they work after it.” So if the President wanted people like Senator Coburn to keep their doctor we have to ask the question, why didn’t anyone try to minimize this problem in the last three years with some good policies? In the not to distant past we used to have a class of bureaucrats who could turn almost any dog piece of legislation into a workable policy. Where have all of the good bureaucrats gone? Did they look at the Affordable Care Act and give up? Three years out of the starting gate and all we have to show for it is a lousy web site and a bunch of narrow network insurance plans. When do we start winning?
Will we get the 60 year old gym rats?
“You talkin’ to me? You talkin’ to me? You talkin’ to me?” That is what I thought when Larry Levitt asked the question, “Will we get the 60 year old gym rats?” over at Wonkblog. He went on to make the point that the “health mix of ACA enrollment is much more important than the age mix”. His comment hit home since my wife and I turn 60 this year and probably qualify as gym rats. Her gym is riding horses while my gym is spread between riding, calisthenics, and running. Since I make most of the meals from scratch, we eat healthy. The last time we checked our cholesterol it was good. It is not surprising that we rarely go to the doctor. As I have said before, we are the perfect customer for an insurance company. Considering that we would pay two to three times what a millennial would pay for their health insurance on the exchange, the 60 year old gym rat is an important marketing segment to get right. What is amazing is that the health wonks have finally realized that they should not chase off their best customers if they want the exchanges to work! The Affordable Care Act supporters have arrogantly declared for some time that healthy people do not matter. It was a trade off the Affordable Care Act supporters were willing to make if they could extend health insurance to more people. Now they are getting nervous. They need a lot of people who are paying more than they are taking out for this scheme to work. They committed a massive marketing faux pas and are beginning to realize that people like me continue to look at health insurance as a financial decision that is not much different than the decisions we make for auto or home insurance. If you want us to buy then you must use a different marketing strategy than you would use for a person with a pre-existing condition. If you want the exchanges to work, you have to at least act like you are talking to me. They failed marketing 101. In our case the prices for health insurance on the exchanges tell us to opt out. If you want my business, show me the money!