Tag Archives: health care

Commentary on SCOTUS

I’ve mostly ignored the commentary on the Supreme Court’s blockbuster cases the past couple of days (most of it is not interesting, legally speaking) but I suppose I should offer my thoughts, having followed the court more intensely than ever before this term. (I’m serious. My pump-up mix contains the Scalia dissent from Maryland v. King.) I’ll comment in general, though you’ll see a theme.

King v. Burwell (The Obamacare subsidies case)

The outcome was predictable, of course, and I can’t get too worked up about the result. A few million people get subsidies, which is a rounding error for the bloated federal budget, so whatever; it’s not like forcing the Democrats back to the legislative table would have taken us very far. (Yay politics.)

The real disaster, and there’s really no other way to phrase this, is the precedent this sets for the future. It encourages sloppy legislation at the very least, with the understanding that courts will give you a break if you get it wrong. It will probably encourage intentionally vague drafting with the hope that a court will give you more than you could have gotten in the political process. (Lawyers will sometimes leave a contractual provision vague for the same reason. …I hear.) This has been a trend in legislative interpretation for decades, with doctrines of “saving constructions” and “constitutional avoidance” going out of their way to invalidate or otherwise restrict bad laws. (Bond v. US and Canning v. NLRB are recent examples of this.)

Also, on a personal note, I hate the idea that “established by the State” can also refer to things “not established by the State.” Words have meanings. Please stick with them.

Obergefell v. Hodges (The Same Sex Marriage case)

This wasn’t exactly a stunner, since Kennedy has been telegraphing his desire to be the one to address this issue, but I admit I was surprised by the reasoning of his majority opinion. It’s perhaps the least useful opinion written in the last few years, worse than this year’s Elonis v. US (which passed up an easy chance to pick a mental state requirement rather than saying “the lowest one isn’t it.”). While he can count on being quoted at weddings for the next few decades, the opinion offers very little in terms of legal reasoning that can be translated to any other context. Equivocating between Substantive Due Process and the Equal Protection Clause, Kennedy ultimately concludes that the constitution requires all states and territories to recognize same sex marriages mostly because it would be a good thing to do.

In many ways, Obergefell could be similar to Brown v. Board of Education, another important opinion that suffers from the same legal infirmities but has obviously had a tremendous legal impact. (I would argue, however, that all the hard work for Brown had been done by Justice Harlan’s famous dissent in Plessy v. Ferguson, as tremendous a piece of legal writing as you’ll ever see.)

The four dissents don’t offer much in terms of rebuttal, although I imagine they didn’t really bother to. Thomas and Alito do provide a decent constitutional analysis that makes me think this should have gone the other way, but this was not anyone’s finest writing hour.

I should say, I’m very happy about the outcome, and I definitely think it’s the correct social policy. I’ve voted in favor of SSM in all elections I’ve participated in, and I would have liked to see it go national this way, rather than through a very dodgy legal ruling that could undermine the rule of law and trust in the court as an institution. That said, if I were denied a right, I know I couldn’t care less about those other things if the court ruled my way. So this decision is a good thing.

That said, be worried. Burwell and Obergefell have made the Supreme Court more important than ever. Control of the court will become essential, and it’ll make presidential and senate politics even worse than it is now. (Yes, it’s possible.) It opens the doors to constitutional rulings on religious freedom or gun laws, for example, that should have been left to the states and people. In fact, some early analyses wonder if the court’s reasoning in Obergefell translates to the rights under the Second Amendment. Watch for that fight in the near future.

I’ll skip the other decisions of this term, although there have been some interesting ones, but I will note that the court has not impressed with clarity this year. I’d imagine the early October cases next year being tamer than usual to offset the acrimony of the last few weeks.

Immodest And Not Surprising

Nobel Prize winner Paul Krugman is in a bit of a pickle, having made a claim a few years ago that turns out to have been very, very wrong:

Naturally, then, politicians — Republicans in particular — are determined to scrap what works and promote what doesn’t. And that brings me to Mitt Romney’s latest really bad idea, unveiled on Veterans Day: to partially privatize the Veterans Health Administration (V.H.A.).

What Mr. Romney and everyone else should know is that the V.H.A. is a huge policy success story, which offers important lessons for future health reform. …

And yes, this is “socialized medicine” — although some private systems, like Kaiser Permanente, share many of the V.H.A.’s virtues. But it works — and suggests what it will take to solve the troubles of U.S. health care more broadly.

Alas, turns out that wasn’t, y’know, true:

Workers at a Veterans Affairs clinic in Fort Collins, Colo., regularly falsified documents to show that patients were seen by doctors within 14 days of requesting an appointment. In fact many had waited months for medical care.

Nearly half of the Fort Collins clinic’s 6,000 veterans were behind on scheduled appointments, the report found. Staffers were instructed to fake paperwork to make it seem like the VA was meeting its 14-day goal, and those who reported longer wait times were put on a “bad boys list,” the paper reported.

…A retired doctor claimed that 40 veterans died while waiting for care at a Phoenix hospital, an allegation that USA Today said the VA couldn’t corroborate, but which it was investigating. The doctor said the Phoenix staff had also entered false data to hide the delays in care.

I don’t post this to comment on the VA scandal, which is an abomination – Jon Stewart and Stephen Colbert are doing that already – but to completely discredit Paul Krugman.

That’ll teach him to call my senior thesis “modest but not surprising.”

Why Surgery Doesn’t Cost A Billion Dollars

Yesterday, I asked why lifesaving surgery doesn’t cost a billion dollars (discounted down to whatever an individual can pay), in light of the argument advanced by Jon Stewart and many others that market mechanisms aren’t appropriate for health care because consumers can’t make informed choices. If you have no choice and would pay anything to save your own life, prices should be much higher than they actually are. I’d pay more than $100,000 for lifesaving surgery, and yet most lifesaving procedures cost less than that.

The answer is one of the most interesting insights I’ve read in recent years. Here’s where it comes from:

Megan: But this is precisely the argument that health care wonks make: when I need a lung transplant, I don’t have the time, or the emotional ability, to comparison shop. So there’s no price discovery mechanism.

Wilson: Does the government know or have the ability to comparison shop for me? Do they know my circumstances?

Also, for some healthcare services, you do have the ability to comparison shop. Those services will then discipline the healthcare market in general.

I want try the example of electric power and then see how it is much different than healthcare. When Intel is making computer chips, they need a secure line of power. At any moment, they don’t have luxury to comparison shop. They need the power now.

I, on the other hand, have a choice to turn my clothes dryer on at noon on the hottest day of the year, or wait until 10pm.

When people like me see the price spike, we will cut off our demand thereby lowering the price that Intel will have to pay. So the example of the lung transplant sounds like to me the position of Intel. At some point in healthcare there must be a margin, like me and my clothes dryer. The problem is how to find it.

When I do not have the incentive to look for alternatives for electric power, I and everyone like me will demand power and drive the price up for Intel.

Is the argument that there is no margin to be discovered in healthcare?

There is a lot packed into this exchange, and it’s at the heart of why people attacking the application of market principles to health care are missing the point. There is a point at which consumers do have a choice: if you have a runny nose, a rash, a headache, you can choose where you go (if anywhere). This brings prices of those medical procedures down as suppliers compete for customers.

The same isn’t true of emergency procedures: you don’t get to exercise choice as a price control mechanism. However! There is another force at play here: because non-emergency procedures are not very profitable (due to competition) and emergency procedures are profitable (because there is no competition), more providers will get into providing emergency services. In a market environment, this means that the price of emergency services would come down.

The problem in the American system is that there is no way that the extra supply translates into competition. Fixing that would bring down health care costs, but it doesn’t seem to be on anyone’s agenda. Shame.

A Question For Jon Stewart

“When you get sick, you don’t ask the ambulance where it’s taking you.”

Jon Stewart utters this line to his guest Steven Brill, and it’s just the latest in a long line of such statements Stewart has made. (For example, in his previous interview with Brill.) The objection, presumably, is that the market doesn’t work in health care because the consumer can’t make informed decisions about supplier, mostly because the consumer is having a heart attack or whatever.

Let’s assume, arguendo, that Stewart is right: health care consumers, most of the time, aren’t able to decide and have to take whatever’s given. This gives the suppliers (doctors, hospitals) tremendous bargaining power so they can charge whatever they want. Let’s imagine that exact scenario: someone has a heart attack, is picked up by an ambulance, and taken to a hospital for emergency surgery. Here’s my question:

Why don’t the doctors charge a billion* dollars for the surgery?

*”Most people won’t have a billion dollars!” you say. Fine, set the price at a billion and give discounts to the maximum anyone can pay. Set the price to 50% of the patient’s income for the rest of his life. Set it to their firstborn. The exact number isn’t the point.

Answer tomorrow.

Childbirth, Health Care, Men, And Women

I’ve addressed a couple issue regarding men and women the last couple of days, and a related issue appeared on my Twitter feed today. I had alluded to the issue of women and medical care, and several people posted about a feature of Obamacare that’s been getting some play: the fact that men will have to pay for insurance coverage of maternity. This mixes with the topics I’ve addressed in this space, particularly the physical differences between men and women that are bound to play out in the real world. Obviously everyone involved addressed the issue with an open mind and the subtlety that such a topic requires.

Just kidding. Mostly, people hated on Republicans for pointing out that this is stupid. Two articles in particular made the rounds. First, Lucia Graves (a woman!) of the National Journal:

[Obamacare] doesn’t allow for health plans to carve out certain things that might have allowed a health plan to price a product lower in the past—like allowing men to not pay for maternity care. That’s a policy known as gender rating. … Gender rating is prohibited under the Affordable Care Act.

…The argument for gender rating, in the days before the Affordable Care Act, had always been that women cost more to insure.

“When you get older, men cost more to insure than women.” .. Later in life, men are more likely to have a variety of conditions including heart attacks, lung cancer, and liver cancer. They’re also more likely to smoke, drink, and get in accidents, according to experts.

You’d expect insurers to charge men more as they got older, if they were in fact charging premiums based on actual usage. Graves gives us that answer, too:

insurers have historically charged younger women more than men in the individual market, even though those plans rarely covered maternity services. “That tends to reverse at older ages, when men have generally been charged more than women,” he said. “It’s reasonable to assume that insurers set those premiums based on the patterns of health care use that they saw.”

So, when allowed by law to do so, insurers charge each gender based on the expected health care usage. Seems fair.

In 2008 the average expenditure per person with an expense, including expenses covered by insurance and those paid out-of-pocket, was slightly higher for women ($5,635) than for men ($4,952), according to data from the Agency for Healthcare Research and Quality. But the difference in expenditures is largely attributable to childbirth.

Alright then, let’s address childbirth and the associated costs. Graves links to and endorses an error-riddled article by Jonathan Cohn at The New Republic. He makes four arguments to claim that men should be charged for maternity care under their insurance policies.

1. Healthy mothers and babies are good for you. Society has a legitimate, and very clear, financial stake in the health of pregnant women and young children. As Eduardo Porter noted recently in the New York Times, the U.S. has fallen behind peer countries when it comes to prenatal health. That has long-term consequences for prosperity and inequality, primarily because of the long-lasting effects it has on children as they develop. Obamacare’s requirement of maternity benefits won’t fix that problem, Porter notes, but it offers a chance to make the problem less severe. You can think of it as a public investment, just like roads, schools, and power lines—goods for which we all help pay, regardless of actual use.

I’m happy to concede that good pre-natal and neo-natal care has potential long-term benefits for the affected children – the literature on that is persuasive but not conclusive. I’m also generally willing to concede that certain public investments deserve government funding, though I draw these lines narrower than the mainstream. Charging insured men for maternity coverage, however, is a terrible way to fund such an investment. First, it’s regressive – all men are charged similar amounts, while investments funded from general taxes are funded more by the rich, who are taxed more heavily. Second, it hides the costs and the responsibilities of the program. Voters and taxpayers have no idea how much of any given premium goes to maternity, and can’t hold anyone accountable if they are dissatisfied with any of this program’s features. If the political goal is to publicly subsidize childbirth costs as a public investment, such costs should come out of general taxes, be a line item on the budget, and subject to voter scrutiny. As it is, they’re hidden away as premiums from private companies. This is a bad thing.

2. You may never bear children. But your mother did. …In this case, men who help pay for pre-natal and maternity costs are helping to shoulder the burden for costs that their parents bore, many years before.

This is pretty stupid. By paying for a stranger’s pregnancy I’m somehow repaying my mother? No. I buy my mother nice things to repay her for everything she’s done.

3. She supplies the womb, but you supply the sperm.

Yup. You should definitely contribute to the well-being of a woman with whom you intend to have a child. Anything else makes you an asshole. Don’t be an asshole. I’m not entirely sure why you bear responsibility for every other pregnant woman, too, though. What have you been up to, exactly?

Anyway, as I’ve said, if we are trying to subsidize a particular activity, we should do so explicitly through the budget.

4. So you ended up XY instead of XX. Get over yourself. Even conservatives generally stipulate that insurance should protect people from the financial consequences of random events. But they seem not to recognize that being born a woman is a random event. Sorry, dudes, you had no control over that. Allowing insurers to discriminate based on gender means penalizing half the population, just because those folks ended up with one type of chromosome instead of another.

Yeah, this is just very, very wrong. Yes, being born a woman is a random event. The proper role for insurance in that case is to insure BEFORE the event. Basically, if being a woman is costly (as it is claimed to be), you should insure against being a woman before you’re born. This is obviously impossible (though I bet there could be an insurance market for parents in this case), but it’s not something that can be addressed by insurance AFTER the random event. If certain houses in a neighborhood randomly burned down, insurance shouldn’t come in after the fact and equally spread costs over those who lost houses and those who didn’t. In any case, I’ve already made my point above how we should deal with the fact that one gender has potential costs associated with it that the other does not.

Of course, if you acknowledge point number 4, it has some implications for the rest of the health care debate. If we’re not going to make people pay higher premiums because of genes that determined their gender, then what about people born with genetic abnormalities? Or predisposition to diabetes, heart attack, or cancer? Pretty soon you end up arguing that it’s wrong to charge higher premiums to people who, through no fault of their own, happen to need more medical care—thereby conceding one of Obamacare’s core principles.

I concede nothing – nothing! While I’m generally sympathetic to those who suffer through no fault of their own – I’ve been lucky in that regard – any help we offer the unlucky should be explicit in the budget as I mentioned above, so that it can be properly evaluated to determine whether it fulfills its function in a cost-effective way. Second, most health conditions can be traced to genetics, even lifestyle ones – how do we know whether someone’s laziness and poor diet is a true choice and not influenced by genes that coded for poor willpower and a sweet tooth? Genes and nurture, neither of which you can choose, determine much of your adult health. Thus, to protect everyone from all random events, you must equalize all healthcare, and, as I’ve noted before, all wealth, and this must be repeated constantly. Now we’re back at communism, and I win.

It’s true that women beat most of the financial costs of pregnancy and childbirth. If we want to help them out, we should give them money when they’re pregnant.* We should not secretly charge insured men for something they won’t use.

*Assuming this is a behavior you want to subsidize. Many do not and think women who want to have children should first be able to afford them, with partner or not. It’s not the crazy wingnut position the two journals above would have you believe.

Matt Yglesias Compares Obamacare To Katrina; Stupidity Ensues

Matt Yglesias, frequent blog antagonist, writes an entirely worthless piece about how Obama’s mishandling of the Obamacare implementation is less harmful that Bush’s bungling of the Katrina response in 2005. While I enjoy the admission that Obamacare is akin to a natural disaster, the comparison is, of course, utterly pointless. The more interesting part of the post is the one that is completely wrong in many ways. Specifically, at least two.

The administration and the Democratic Party writ large had very high aspirations for the Affordable Care Act, viewing it as a legacy-defining major pillar of the American welfare state that would massively improve the lives of millions of people. If they can’t make the basic infrastructure work, none of that will happen and it’ll be a huge failing. But even in the worst case, they’re not going to get anyone killed. That’s a big difference.

First, when Obamacare was being sold to the public, many people claimed that lack of insurance makes death more likely (because the uninsured received bad health care). One such person was Matt Yglesias: “Lack of insurance is associated with low-quality health care which is associated with enhanced risk of death.” Considering that the failure of the exchanges combined with Obamacare “minimum standards” is causing millions to lose insurance without being able to get new insurance, by MY’s own factual assumptions, the Obama administration will get someone killed.*

*Someone who matters, like American voters. Obama is having plenty of innocent people killed in other countries.

Second, MY seems completely unaware of the concept of opportunity cost. Billions of dollars have been spent on Obamacare, in direct costs, in time spent complying with it, in stress and uncertainty. This is true for the government and many private enterprises and citizens that have had to adjust to expansive new regulation. Don’t forget the energy and money spent fighting it and lobbying for it on all sides. These billions of dollars and these years of effort and energy could have been spent on many better things. Money could have helped the poor or unlucky, and people could have spent time on much more fun things than learning new regulations, building a failed website architecture, or navigating that failed website. These are real costs, and that means that by definition, lives were lost. Statistical lives that we find difficult to care about, but lives nonetheless.

Yglesias may wish that his preferred party’s policy become a rousing success, and it’s telling that he feels the need to defend it from comparison with a deadly natural disaster. It’s also telling that he feels the need to hide this policy’s real costs. (Either that, or Matt Yglesias doesn’t know anything. which is also possible.)

Go Fact Yourself

I’ve been meaning to address an extremely insightful (if probably incomplete*) proposition by David Friedman. In discussing different moral conclusions people draw, Friedman noted proposed that moral truths are akin to physical truths, such that different people perceive them in roughly the same way, and that the moral sense is analogous to the physical sense like sight or hearing. This proposed moral sense has many of the same features as physical senses, including situations where the sense is fooled by an illusion, or individuals whose sense is wildly divergent from most people’s. Like other senses, I suspect the moral sense has a normal distribution, with a few people like psychopaths at the extremes and most people in a narrow range. I’ve found this proposal fascinating, because it explains why much of moral argument isn’t in the moral intuition themselves, but the underlying facts.

*I find the proposal incomplete because it fails to address a common counter: we can ascertain the origin of physical objects, and perceive their interactions as physical truths. Moral truths aren’t based on objects, so there needs to be an explanation for the origin of moral truths. The answer easy for the religious, but Friedman and I need a different source. I believe it’s been adequately explained by Hitchens, Dawkins, Dennett, and the like, and in any case it’s off-topic here.

Friedman illustrates the argument thus:

I have been arguing politics for a long time. In arguing with people on the left, I find it is very hard to come to an agreement on the assumed facts surrounding the situations we are judging. My imaginary capitalist has capital because he worked hard clearing part of the boundless forest while his employee to be was being lazy and living on what he could gather–so it is entirely just that the capitalist gets part of the output of his land and his employee’s labor. But the leftist doesn’t like that hypothetical. His imaginary capitalist inherited his capital from a father who stole it. I don’t like that hypothetical. I conclude that our moral intuitions are similar enough so that the same assumed facts push both of us in the same direction–and since we want to go in opposite directions we want so assume different facts.

This has strongly resonated with me. As any reader knows by now, my worldview is not particularly mainstream, and I get into a lot of debates about it as a result. More often than not, the arguments made tend to be based on values (“You don’t care about the poor!”) when in reality our disagreement is about the facts (“Do free markets benefit the poor?”). I commented recently in a post about health care:

a relative of mine suffered a mild heart attack, after which he, a lifelong meat eater, became a vegetarian and started exercising. It’s troubling to me that such a person would be taxed to pay for treatment for someone who drinks, smokes, and lives off junk food. In conversations, it’s become clear to me that the law’s proponents deny that such people exist – I literally had a person tell me “I just don’t think that people would do that.” People do that NOW. They won’t do it less when health care and medication are even cheaper to them.

You see that the person I talked to didn’t even try to address the question of whether it’s fair or moral to charge a responsible person for the benefit of an irresponsible person – it was easier to deny the underlying fact that such a scenario could happen because “there are no such irresponsible people.”

Similarly, I recently commented on Russell Brand’s “thoughts” on politics, and it led to an extended discussion on Facebook about my take. One commenter strongly disputed my claim that poor impulse control contributes to poverty, and thus explains why drug use (also dependent on low patience) rises with poverty. He said:

generational exposure to structural forms of violence and inequality will lead to higher rates of mental health issues, drug abuse etc in marginalized populations. Claiming that *this itself* is the *cause* of their poverty, however, is a laughable.

Again, the disagreement isn’t on moral values – I suspect they would push us in the same direction if we agreed on the facts. The disagreement is on the facts: “Structural violence and oppression cause poverty and drug use.” vs “The same things that cause poverty cause drug use.”

This disagreement seems to permeate most arguments otherwise considered moral disagreements. Teaching creationism in schools isn’t wrong IF creationism is true. In the extreme, fundamentalist terrorism isn’t shocking if the facts believed by those people were true (an omniscient God responsible for the universe who decides what is moral instructs you to kill and die to fight the great Satan). That’s not to say that there aren’t legitimate disagreements in moral values, not unlike disagreements on the bitterness of kale or the pleasantness of a particular shade of blue, but I am convinced that the range of moral disagreement is far narrower than normally assumed.

The question previously framed as different moral values now becomes why people prefer certain facts to others. That they do so is undisputed and very common, as you know if you’ve ever tried to convince someone older than you that the evidence disproves something they’ve always believed. In what ways people differ has also been studied at length, and I highly recommend Jonathan Haidt’s The Righteous Mind as the definitive work on this. The underlying logic is best described by Robin Hanson’s work on signaling and status-seeking, but that’s a whole field unto itself; I’ll summarize by saying that humans care about their status, and thus prefer to believe that the truth also matches what they happen to prefer already. There is still some work to be done to fully explain why people have these different preferences, but I think Friedman’s insight goes a long way toward explaining what we observe in the real world. And on Facebook.

Bad Arguments: Guns And Health Care

The government shutdown over health care continues, and I continue not to care about the politics of it. However, one fun part of politics for a cynic like myself are the stupid things people say in a political “crisis.” Twitter is full of people contrasting the Republicans’ apparent views on guns and health insurance/care. Here’s a sampling:

Gun TweetsOf course, these people are all wrong.

Under current law, guns are treated roughly the same as health insurance or health care. Namely, they’re heavily regulated, but you’re permitted to have both. You can’t have all kinds (true of both) and some people can’t afford them (also true of both). But in no case is the “right to own a gun” translated into a “right to have someone else pay to buy you a gun,” which is where the analogy by the blissfully ignorant tweeters above breaks down. You can’t blast someone who says “people should be allowed to own guns, and we’re against major subsidies of health care” by implying that they’re saying “we want the government to buy people guns but not health care.”

Imagine a constitutional amendment that reads:

A well regulated Medical industry, being necessary to the health of a free State, the right of the people to purchase health care or health insurance, shall not be infringed.

Ignoring the comma-happiness, this would not change much about how health care/insurance are treated in the US. The “right” under the second amendment isn’t one that entitles you to anything; it’s merely one that permits a particular type of property. Since contracts and commerce are protected under the law, so is health care and health insurance. There is no great contrast, no matter how smug it makes you feel when you point it out.

I’m in a hurry, so I won’t bother explaining why “free healthcare” is a nonsensical term. But it’s a nonsensical term.

The Medical Loss Ratio and Bad Incentives

I mentioned in my last post that my least favorite part of Obamacare is the 85% (80% for some firms) medical loss ratio (MLR). First the definition:

A Medical Loss Ratio (MLR) is the percentage of money a health insurance plan spends on health benefits from each premium dollar. Obamacare sets a minimum MLR of 85% (80% for plans that insure individuals or small groups). If an insurer’s MLR falls below this percentage, it must issue refunds to its insured for the difference.

Basically, an insurer must spend 85% of all premiums it collects on actual medical expenses, or refund the difference. As a consequence, administrative costs and profits of insurers must combine to be at most 15% of premiums collected. (I’ll omit the mind-numbing debate over what is a legitimate medical expense and what is administrative). The MLR is bad because it creates bad incentives for insurance companies, or, more accurately, it removes good incentives for them to keep you healthy.

Imagine an insurer, the Sample Insurance Company in the following situation (all numbers chosen for convenience): the company collects $100 million in premiums each year, and administrative expenses run $5 million every year, and payouts average $85 million. Without the MLR rule, its profits every year, then, are 100-5-85=10. (10/100 gives us a 10% margin.) This gives the company a big incentive to minimize medical payouts. One of the legitimate concerns about insurance company behavior is that they try to avoid paying even when they’re contractually obligated to do so. Fighting these fraudulent denials is a legitimate concern of insurance law, and I think the MLR is partially attempting to discourage this practice. However, in the process, it destroys a valuable service insurance companies provide.

Specifically, there is a second way that that Sample can minimize medical payouts, and that is by keeping its customers healthy. If they help their customers be healthier and require fewer medical care, the insurer can increase its profits. A few years ago, I was practically badgered by my parents’ insurer into taking the annual physical that they basically mandate. It was a guaranteed expense for them, but presumably they had learned that physical exams catch problems early so they can be taken care of more cheaply. Similarly, I believe they offered discounts for proof of gym membership (and usage), and they sent us brochures with education materials about diet and exercise. These are all up-front expenses to the insurer that reduce profits, but presumable they expect them to reduce payouts and thus increase profits in the long run.

Let’s imagine Sample Insurance realizes (before other insurers do) a new developed body scan reliably predicts a number of problems in their earliest stages, and they start mandating their customers to take one annually. It works, and their customers are healthier, so their payouts fall to $42.5 million. Their profits now are 100-5-42.5, or $52.5 million. However, their customers are vastly better off! They’re significantly healthier, they’re more productive they’re less stressed about their health, their families are less affected, their income less endangered, etc. This is an unambiguous win for consumers: they pay the same amount as before to get way more health. This is also a win for Sample, now rolling in profits. [In the longer run, Sample would probably lower its premiums to woo away customers from other firms, or other firms would duplicate their method, until Sample’s risk-adjusted profit margin is back to industry norms, but we don’t need to worry about those complications for now.]

Let’s think about the same scenario with MLR in place. Payouts fall to 42.5, with administrative expenses still at 5. However, because payouts are 42.5, the sum of profit and administrative expenses can only be (42.5/0.85) – 42.5 = 7.5. Given that administration is 5, profits can only be 2.5 in this case. The company would have to return $50 million in premiums to customer, and have 2.5 profit of 50 in premiums (5%). Even if administrative costs were cut in half, they’re looking at 5/50, or 10%.

Now the law leaves us in an awkward position: it is not in the company’s best interest to keep its customers healthy! Sample Insurance no longer has the incentive to research the effective body scan and help its customers lead healthier, happier, more productive lives. The law has basically made them at best indifferent between the two positions, and possibly favoring the former – administrative costs can’t fall forever and executives tend to prefer being in charge of larger firms. Of course, this is a huge loss for the consumers relative to what might have been.

You can play with the numbers, but the underlying principle is undeniable: by essentially capping health insurer profits to 15% of premiums less administrative costs, MLR has removed the insurer’s profit motive to make people healthier. This is, unambiguously, a bad thing. For a contrary view, click here.

Mandatory Obamacare Post

The Patient Protection and Affordable Care Act, henceforth Obamacare (because it’s shorter and because everyone says Bush tax cuts), opens its insurance exchange website today. I haven’t gotten as worked up about it as many have, but I think that’s partly because so many people are actively opposing it. I prefer to put my energy toward neglected causes like bad phrasing, spelling, or the penny. Nevertheless, some thoughts on Obamacare:

1. The government’s website is misnamed TWICE. “HealthCare.gov” is simply incorrect – the site is about purchasing insurance, not actual care. Except that site isn’t actually about purchasing insurance – the sort of coverage mandated by the law is more akin to a pre-paid service plan than actual insurance. Sadly, the law basically prohibits actual insurance, usually referred to as “catastrophic” plans. The administration really doesn’t seem to understand what insurance is.

2, I opposed Obamacare on the law: I still think the tax aspect of the Supreme Court decision was incorrect, and I think the decision leaves a cloud over the more important constitutional question regarding federal regulation of inactivity.

3. I also opposed the law on economic grounds. It’s a giveaway to a lot of undeserving people: the American Medical Association backed it for a reason, and its members are already well compensated. It also benefits the richer old people at the expense of the generally poorer young. This is a bad thing, and it’s both a cause and a symptom of my well-documented hatred for the elderly.

4. My recent rant against complexity at the end of this post will be tested by the new law. The law will be easier to deal with for smart people and those who can afford advice; it will be a big time and energy suck for the poor.

5. Finally, I opposed the law on moral grounds: by requiring community rating and coverage of pre-existing conditions, the law makes insurance cheaper for people regardless of their effort to stay healthy. I think this is a highly underdiscussed issue. Opponents of the law tend to focus on the cost or the intrusive nature of the mandate. Proponents of the law tend to talk about sick people who die because they can’t afford health care. Moral hazard, however, weighs heavily on me. I’ll use a personal anecdote: a relative of mine suffered a mild heart attack, after which he, a lifelong meat eater, became a vegetarian and started exercising. It’s troubling to me that such a person would be taxed to pay for treatment for someone who drinks, smokes, and lives off junk food. In conversations, it’s become clear to me that the law’s proponents deny that such people exist – I literally had a person tell me “I just don’t think that people would do that.” People do that NOW. They won’t do it less when health care and medication are even cheaper to them. If we’re trying to protect people from arbitrary risk – bad genes – there are much better ways to do it (money) than a massive federal bureaucracy. In order to help people who would naturally have higher health care costs (because of genes), the law encourages bad behavior by those who could avoid it, and it asks the prudent to pay for it. These are all bad things.

6. My least favorite part of Obamacare is the 85% Medical Loss Ratio, which deserves a discussion of its own in an upcoming post.