Tuesday, November 22, 2016

Can Paul Ryan Save Obamacare?

With the election of Donald Trump, Paul Ryan is starting to look "not so bad".

Paul Ryan did something Donald Trump hasn't been able to do - put forth a concrete plan on how to improve on Obamacare.   Note I said "improve" not "Repeal and Replace" as it appears that whatever plan is put into place, it will incorporate aspects of Obamacare.

To recap, Obamacare is like a three-legged stool.   You take out one leg and the whole thing collapses.  One leg was pre-existing conditions.   The idea was, if your pre-existing conditions were covered, you could "shop around" for health insurance and get the best price.  Well, that was the idea, anyway.  The reality is, there is little competition in many States (in some States, none) and premiums have skyrocketed.

The second leg was the mandate - forcing people to buy insurance or pay a "fine" (tax) instead.  The idea was, if everyone had insurance then everyone would be paying into the system and this would bring average premium costs down.   Again, this did not work out quite as expected - a lot of people are still uninsured, and some even pay the fine even though it is more expensive than actual insurance, to "make a political statement" (after being baited by others).   And of course, even with all these new payers in the system, premiums have not gone down.

The third leg was the subsidy.   One reason so many people were (and are) uninsured is that the cost of premiums was too high.   So a tax credit that kicked it at 100% to 400% of the poverty line (about $20,000 to $65,000 for a married couple) would pay most or all of the premium.   This does create an additional expense for the government, as a tax credit can sometimes exceed your tax bill.  It ends up being a handout.   Again, there were problems with this aspect, as since the credit cut off abruptly at the 400% level, a lot of slightly upper-middle-class folks were socked with huge health insurance bills and no subsidies to pay them.  Many were forced to abandon coverage.

So what is Ryan's plan?  Well, some are calling it "Obamacare Lite" as it incorporates some aspects of Obamacare, such as pre-existing conditions.   However, it eliminates the mandate and adds two new features - a high-deductible policy and a health savings account (HSA).

I have had personal experience with these latter features, and they were a mixed bag - but perhaps a step in the right direction.

One reason why premiums for Obamacare did not go down as expected is that all those new people who now are on Obamacare are actually using it, which means they go to the doctor and run up bills.   Now in any medical care system, if treatment is free (as in the UK and Canada) or subsidized below cost, there will be people who go to the doctor for every little thing - real or imagined.

And a lot of doctor's visits are unnecessary.   People go to the doctor for a cold or the flu when the best thing they should do is stay home.   By going to the doctor, they infect all the people in the doctor's waiting room.  And the anti-biotics often prescribed don't cure viral infections, but do add to the increased resistance of many bacteria.

If going to the doctor costs you $50, $100, or $200, you might think twice before going.  If it is free, well, take the day off and sit in the waiting room and read Highlights for Children.

A high-deductible health insurance plan, on the other hand, forces you to make hard choices about health care - while still providing catastrophic coverage.   I had a $10,000 deductible plan, and it worked well for me.   Although I had to pay more out-of-pocket, I was able to get the insurance company's pre-negotiated rates, which made the cost more palatable.   So there are advantages to such a plan, even if you don't hit that deductible.

And it may actually save you money in the long run.   When I had that plan, a friend called me "crazy" for having such a high deductible.  He had a gold-plated low-deductible plan that cost him $10,000 more a year than I was paying for my $10,000 deductible plan.  "What happens if you get sick?" he said, "where will you come up with $10,000?"

"The same place you do, when you pay $10,000 more every year for premiums!" I replied.   In fact, over a period of years, if your health is good, you will come out tens, if not hundreds of thousands of dollars ahead - more than enough to offset the prospect of having to pay that deductible.   But he couldn't see it, as most people can't.   Most folks can't add up a column of numbers or think about things in detail.   All he knew was, $10,000 was "a lot of money" so he paid that much more every year to avoid maybe paying it once in his lifetime.   Fear is never an emotion to be trusted.

Going to higher deductibles would cut the premiums on Obamacare (or Trumpcare or Ryancare or whatever you want to call it) as it would cut out all but catastrophic medical coverage (trips to the hospital, serious illness) and eliminate all these small claims that cost more to administrate that they pay out to the doctor.  It would be more efficient.

More efficient, yes, but what about the little people?  What about the folks who don't have cash to go to the doctor at all?   Well, enter Medical Savings Accounts - an idea Republicans have been batting about for a while now.   And the idea has been sabotaged at every turn.  Maybe now it will get a real chance to work.  But it will still have problems, as we will see.

My first MSA was at a law firm and it was a "use it or lose it" plan which is the most idiotic thing imaginable.   You set aside pre-tax money into an account for medical bills, and if you went to the doctor, you submitted your bills to the company which paid them out of this account.   Since the plan had co-pays and other coverage, the premiums were pretty high and all the MSA did was allow you to avoid taxes on medical expenses - something that could be done in existing tax laws by eliminating the "threshold" for medical expense deductions.

The really stupid thing about that plan was at the end of the year, you lost whatever money was in your account if you did not spend it.  I was only on the plan for a year, and I foolishly put over $1000 into the plan.  At the end of the year, I bought two pairs of glasses, had an eye exam, and had my dental appointment moved up (and x-rays done) to eat up this money before it evaporated.

As you can imagine, the "use it or lose it" MSA account was not very popular.  There were no real savings for the users (your marginal rate times the amount spent) and you could end up losing money entirely if you were healthy that year.   If you did not allocate enough money for the year, well, the plan failed as well.   And maybe some in Congress wanted it to fail - on both sides of the aisle.

My second experience with an MSA account was a little better.   This plan allowed you to put money into the MSA account like an IRA or 401(k) and it rolled over every year until you retired, and as I recall, you could you then withdraw the money.   It was not a popular plan for a number of reasons.  Congress thought it was such a "giveaway" that they limited the number of people who could sign up and as a result, few insurance companies bothered to offer plans and when they did, they were more expensive than conventional plans.

A libertarian friend suggested the plan to me (so you see where this is coming from) and we tried it for a couple of years.  Trying to explain the plan to staff was a nightmare, and again, the savings were not all that great, although I suppose you could use the MSA to "save up" for a coronary or stroke.

I switched to a "regular" health insurance plan later on, as it was cheaper.  The insurance companies didn't know what to make of this beast, so they set the premiums high to discourage people from signing up for it.  It was set up to fail, so it did.

My experience points out another problem.   While I was eager to put cash into this plan to lower my tax bill (being in the 30%+ brackets at the time) my lower-paid employees were less keen.  Like with the 401(k) they did not want to contribute as they needed the money for daily living expenses.  And they could not afford to contribute as much as I did, on a weekly basis.  Even if they paid in the same percentage of income, they would have far less money that I had to pay medical bills.

So there is a weakness of the plan.   The very poor (below poverty line) are on Medicaid.  But the near-poor can't afford to pay into their company's 401(k) plan (or if they did, not afford to pay much) and certainly not afford to pay into a Health Savings Account.

But the idea has some merit, at least for middle-class and upper-middle-class people, as it would "incentivize" them to spend their medical dollars wisely, consider carefully before going to the doctor, and reduce the payouts from the insurance companies for all but serious illnesses (going back to the old-style "hospitalization insurance" we had in the 1950's).

Ryan's plan also eliminates the mandate, but retains some sort of subsidy - to be announced.   And there is the key right there.  One problem with the Obamacare subsidy is that it kicks in at 100% of the poverty line (below that level, you use Medicaid) and pays almost all the premium.   It gradually reduces until you reach 400% of the poverty line at which point it vanishes completely.  The net result, as I noted before is that a guy making a dollar more than 400% loses a $20,000 a year subsidy, effectively making his income less than the guy making thousands less.  It made no sense.  I can only hope Ryan doesn't do something as stupid.

But is this the right solution for Republicans to be pushing?   This is where it gets interesting.  Because the GOP has been pushing things like "small government" and "simplifying taxes" and whatnot, and Ryan's plan is, if anything, more complex that Obamacare.   While it will likely reduce the amount of paperwork for routine office visits and whatnot, the insurance companies will have to create and manage these health savings accounts, and it will make people's taxes more complicated, as there will be yet another line in form 1040 for HSA deductions.

And of course, the system has to be policed, so that people don't pay for spa treatments with their HSA money - or just spend it on whatever.   With my old HSA accounts, the insurance companies were charged with this task - which is one reason I think the premiums were so high.

It may be a "solution" to Obamacare (except for the poor) but it is not really the free market solution that libertarians and Republicans like to crow about.

What was that "free market solution?" - well it was no intervention in health insurance at all.  And the problem with that concept is that if you are self-employed, well, you have to pay your own premiums and they are not cheap.  In fact, they basically are your actual health care costs plus administrative fees.   If your expenses go up or you get sick, they would cancel you.   It was like not having health insurance at all.

If you worked for a big company, they could amortize the cost of sick employees over the vast number of healthy ones - and the system sort of worked, although it wasn't cheap.   And since pre-existing conditions were not covered, if the company changed plans, you as the sick employee, were screwed.  One firm I worked for refused to change plans, even though the costs were skyrocketing, as one employee had a chronic condition.   Few companies are this generous.

I wish Speaker Ryan luck with this.   Maybe he should start with something easier - like peace in the Middle East.   Because health care and health insurance, is not an easy thing to figure out!