By John C. Goodman
Originally posted on Forbes, November 2015
It’s been more than 20 years since Hillary Clinton undertook a failing effort to reform the entire health care system. Now she comes forward with more modest ideas: additional free doctor visits and a tax credit for families with high out-of-pocket health care expenses. Yet these proposals have the same problem that permeated the global reform she proposed years ago. They ignore basic economic incentives.
Let’s start with something Secretary Clinton gets right. Millions of people buying health insurance on the (Obamacare) exchanges are facing deductibles that are inappropriate – given their income and their assets. These deductibles tend to be two or three times as high as what is normal in a typical employer plan.
A review by the New York Times has found that in many states, more than half the plans offered for sale have a deductible of $3,000 or more. As Robert Pear reports:
In Miami, the median deductible, according to HealthCare.gov, is $5,000. (Half of the plans are above the median, and half below it.) In Jackson, Miss., the comparable figure is $5,500. In Chicago, the median deductible is $3,400. In Phoenix, it is $4,000; in Houston and Des Moines, $3,000.
In addition to deductibles there may also be coinsurance and other fees. In fact, federal law allows the health plans to charge enrollees with out-of-pocket expenses as high as $6,800 for an individual and $13,700 for families. And almost no one with an exchange plan has a Health Savings Account with funds to help pay these costs.
For young, healthy, low-income families these plans are little better than not having insurance at all. That may be one reason why so many people are still uninsured. For everyone purchasing insurance in the exchanges, there are almost two other eligible individuals who are not buying.
For families with a serious medical problem, there is another cruel surprise. Insurers are creating special out-of-pocket charges for so-called “specialty drugs.” These are lifesaving drugs for such conditions as AIDS or cancer. In many cases, the patient is almost certain to pay the full out-of-pocket maximum in the first few months of coverage.
So what is Clinton’s answer? She is proposing band aides to assuage the pain rather than fundamental changes that fix the source of the problem. Specifically, she is proposing a refundable tax credit of up to $2,500 for an individual, or $5,000 for a family — available to insured families with out-of-pocket health expenses in excess of five percent of their income. Presumably this credit would offset expenses dollar for dollar. In addition, she is proposing up to three free “sick visits,” with no out-of-pocket payment.
Both of these are bad ideas.
As I pointed out in “Why You Have the Wrong Kind of Insurance,” one of the flaws in ObamaCare is that it already regulates health plans in perverse ways. It makes a whole slew of tests for healthy people “free” while ignoring those who have serious health problems. For example, healthy women are entitled to a free mammogram (a controversial test, of questionable value for the apparently healthy), while women with symptoms (who really need the test) often have to pay the full cost out of their own pockets. Insurers could lower the cost of health insurance and raise the quality of care at the same time if they could reverse those priorities: Let the woman with symptoms have the test for free and let healthy women pay the full cost. But to get sensible coverage decisions, we need less regulation of product design, not more.
The second problem is that when services are completely free, patients have no incentive to make cost-conscious decisions. For example the cost of a mammogram varies by $1,000 or more in a typical urban area. But no one has an incentive to save the thousand dollars if someone else is paying the bill. Similarly, does a “sick visit” really require a trip to a doctor’s office? Could it be handled at a MinuteClinic? Or by a telephone call to a Teladoc doctor? Or by over-the-counter remedies? Patients have no incentive to care about the relative costs of these alternatives, if someone else is paying the bill.
There is a similar problem with a tax credit for out-of-pocket expenses. Basically, the Clinton proposal would create another $2,500 of free care for many patients. But if the patient has no reason to care about cost, why choose generic drugs over brand name drugs. More generally, why choose any less expensive therapy over a more expensive one?
These Clinton band aides may provide financial relief for some, but that will be at the expense of raising health care costs for the system as a whole.
A better approach would begin by recognizing that Obamacare creates strong perverse incentives for insurers. If we really want to solve these and other problems those incentives must be changed.
For example, under Obamacare health insurers have strong incentives to attract the healthy (on whom they make a profit) and avoid the sick (on whom they incur losses). The perverse incentives don’t stop at the point of entry. After enrollment, the incentive is to over-provide to the healthy (to keep the ones they have and attract more of them) and to under-provide to the sick (to encourage the exodus of the ones they have and discourage enrollment by any more of them).
One obvious way to avoid the sick is to charge very high out-of-pocket payments for expensive drugs that sick patients require. Another technique is to choose narrow networks. High deductibles are a third technique.
Insurers are convinced that healthy people mainly buy on price and that only people with serious medical problems look carefully at the out-of-pocket charges for specialty drugs, or look at what doctors or facilities are in the insurer’s network, or even look at the size of the deductible. So insurers are trying to get their costs down so they can get their premiums down in ways that make their plans very unattractive to people who seriously need medical care.
Remember the term “pre-existing conditions”? On the eve of the congressional vote on Obamacare, every single supporter gave this as the primary reason why we needed health reform. In fact, as the national debate narrowed down, this was the only argument we heard.
Five and a half years later, we are discovering a monumental bait and switch. True, the health insurers cannot exclude people because of a pre-existing condition or charge them a higher premium. But they can discriminate in their choice of networks and in the design of their cost sharing. Turns out, if they have carte blanche on all these choices, that’s almost as good as being able to exclude sick people altogether.