THE BUMBLING COLOSSUS  By Henry F. Field                                              
The Regulatory State vs. the Citizen; How Good Intentions Fail and the Example of Health Care;
                                  A New Progressive's Guide    
  (available at amazon.com)

Obamacare's Replacement

Obamacare Repeal should be simultaneously Accompanied By Legislation which Does the Following:

(From Appendix A to
The Bumbling Colossus
:)

1. Promote Significant or "Catastrophic" Insurance Coverage for all through Health Savings Accounts (HSAs)

    Contributions to HSAs should be generous and fully tax-deductible, both by the individual, the family, and the employer, if any. Sums within the HSA are invested and compound tax-free. The HSA is by law tied to a high-deductible health insurance policy covering all "catastrophic" or substantial expenses. Not included are all routine or ordinary costs, such as doctor visits, drug charges, minor tests and the like. People preferring all-expense covered policies may retain them, but these are not given any tax preference and are outside the HSA.

The goal is to vastly reduce the role of soup-to-nuts coverages such as are omnipresent under current employer-provided plans. Allowing the patient or family to control all lesser expenses opens up the health market to competition and cost-consciousness. This drives down expenses across the board, as providers and suppliers are forced to compete to deliver the best service or product at the best price. 

Giving everyone at birth and later access to an individual or family HSA, like we do with social security for everyone who works, creates universality while building in cost-consciousness from the get go. Too poor? Federal credits or vouchers, usable only with legitimate providers, fill the poverty gap. Let competition and markets do the work.

What makes us think this formula will work? Because it does everywhere across all areas, times and places wherever markets are allowed to function. Given the incentive to do so, people are remarkable shoppers in their own interest and that of their loved ones. Costs are driven down by competition and service is maintained because that is what people demand and want. Only people, not government, can maximize price and quality this way. Government can only provide an unholy and ineluctable trade-off: either lower costs with lower quality, or higher costs. Obamacare offers the worst of both worlds: ever higher costs AND ever lower quality. Single-payer systems deliver lower costs and lower quality. See
The Bumbling Colossus (amazon.com) at 89-119.

2. Provide Federally-funded Vouchers or Credits Scaled to Income

For those unable to fund HSAs out of their own resources, the federal government must fund them via vouchers or credits placed in their accounts as needed. This is the best way to achieve true universal health care coverage. It is the only real way. Obamacare leaves some 30-40 million people uninsured. To use the Obamacare approach to cover the rest would break the bank; costs would be prohibitive, crowding out all other priorities for public spending. Moreover, such an effort would be counter-productive, as the need to rein in costs would mean restrictions on drug pricing, which would curtail drug innovation, and hospital and doctor charges, which would have disasterous effects on service availability and quality. Lower what someone can get for their service or product makes them lower their inputs -- time spent with patients, quality of parts in the product, R & D for improvements, etc. 

 Since the amounts put in an HSA are redeemable only for recognized health purposes, the vouchers or credits are payable only to a recognized legitimate health care provider, product or service. The amounts put by government into a person's HSA should be scaled to provide adequately for expenses below the high-deductible coverage. In this way, universality AND adequacy are achieved in one simple step. The individual or family is in control and free to make a wide range of choices among insurance plans in a freed-up regime (see post). Bureaucracy and the enormous overhang of the administrative state are minimized and these costs eliminated. 

This plan fits best the American tradition of self-reliance and individual spirit and avoids the kind of creeping dependence on welfare and government which characterizes many European states, with ever-deepening crises based upon government workers demanding ever more through strikes and violence which cripple their economies. Economists call this "rent-seeking" and the more people become tied to the public trough, the more unfair advantage they take in this way.

3. Equalize Tax Treatment Regardless of Employment Status

Our system has been increasingly distorted ever since WW II when tax advantages were decreed for employment-based health plans. The employee was not taxed for the income received if paid for a health plan, but the employer continued to get a deduction. Starting slowly, over time it grew until it is now a Bumbling Colossus of swelling costs where every health item and charge is included in the plan, although recently cost pains have caused some minor readjustments. This group insurance through employment typically covers everything including routine visits and drug charges, soup-to-nuts. Although it is called "insurance", it is not true insurance, it is a form of guaranteed coverage. Insurance has always been to protect against the unpredictable, unexpected and catastrophic, not the predictable, routine and usual. As explained at pp 69-75 of
The Bumbling Colossus, this change occurred as an unexpected consequence of wartime measures seeking to make wartime employment easier by circumventing wage and price controls. Over time, it distorted our whole way of financing health.

Presently, those not employed, or changing employment, or starting fresh, get no deduction for their health insurance cost. This discriminates without any reason against the self-employed, unemployed, or marginally employed. Moreover, it hurts even the employed. Employed persons feel ever tied to their job for fear of losing their coverage. This system is unfair and counter-productive. 

The most direct fix is to tax the income employees get for employer contributions to their group health plans. This would have to be phased in over a long period to avoid a harsh impact. Better is to provide everyone, not just employees, with a tax deduction for contributions for health plans. This is what is accomplished through the HSA-based approach here. Employers should get a deduction for contributions to HSAs. Equalizing all persons regardless of employment status and providing similar tax effects solves much and makes less attractive the use of soup-to-nuts plans, especially as the cost of such escalates over time. 

This unlinks insurance from employment, encourages contributions to HSAs, and directly solves the non-portability problem, so all persons are covered all the time regardless of employment or whether they change or lose jobs. 

4. Include Medicare, CHIP, Medicaid and other such programs

Over time, and protecting current retirees and those nearing retirement, public health care programs -- principally Medicare, Medicaid, and CHIP (children's health) -- should follow suit, substituting HSAs for our current blank-check open-ended subsidy approach. This must be done in a way that does not ruffle set expectations and reliance on the existing way. Hence it must be gradual over time and income level. Currently about 50% of all health care expenses fall within these programs, so making this change is critical to the long-term health of the system. Persons over, say 55, should be able to opt for the existing arrangement. HSAs however can be funded and structured to encourage their attractiveness even for this group. 

5. Allow Interstate Sales of Health Insurance

There is no substantial justification for stopping insurance sales at state lines. States continue to monitor the stability and strength of insurers based in their state. The increased competition created just by simply lifting this restriction against interstate sales will bring huge rewards in decreased prices and increased options.

6. Eliminate Most State and Federal Mandates and Controls on What Insurers Can Offer

The elephant in the room when it comes to insurance costs is the ever-increasing number of mandates requiring insurers to cover this or that condition, service or drug. See
The Bumbling Colossus
at 60-64. As of 2008 there were about 2000 state insurance mandates dictating particulars of health insurance coverages. Obamacare made this even worse. What these have done is broaden the pool of insureds and their conditions so it is no longer possible to select a low-cost plan which is tailored to individual or family circumstances. You have to pay for all sorts of marginal or unproductive things like drug-dependency treatments, morbid obesity, naturopaths, dependent students and the like.

Obamacare extends this to extreme lengths, requiring all plans to cover all preexisting conditions for example. But if conditions preexist, they are known. They are not unexpected and unpredictable. Therefore they are not the proper domain of insurance, but need to be treated separately (see post).

Increasing mandates like Obamacare does drives up costs to everyone, narrows or eliminates profit margins, and insurers quit the market. This is happening everywhere. Fewer options and increased costs are the wages of increasing mandates so the pool of insureds includes almost everyone. This is a formula for failure.

Better far to eliminate these mandates entirely. The only requirements needed are those which make the choices clear and suitable for individuals or their families. Insurers are adept at creating policies tailored to the various risks and conditions people face, and when the market allows them to do so, this creativity will cause a wide variation in what is offered and a spectrum of pricing tailored to the submarkets and their actuarial experiences. 

The provision for Vouchers or Credits in HSAs eliminates the need for mandates entirely. Everyone has insurance coverage by definition. No need for particular special interest coverages remains.

Mandates were imposed to aid particular constituencies which were deemed better off (lower their costs) within a larger pool, which absorbed and spread their added cost. Taken singularly, this was not a big deal; it is the mass or combination of myriad such which kill the golden goose. But if everyone has an HSA and the government support to use them where needed, each such person within each of these constituencies stands on his/her own footing, and there is no need to impose their cost on others in a larger pool. Freeing the insurance market of mandates allows insurers to align risks with costs, incentivizes healthy behavior, and lowers costs across the board. The increased competition for the consumer/patient dollar forces providers to do what the market alone can do -- provide the best for the least. 

7. Promote State Exchanges for Pre-existing Conditions

Pre-existing conditions are by definition known and predictable, thus not properly the same kind of subject for insurance as generally, which deals with the unknown and catastrophic. Insurance is for risks, not certainties. But pre-existing conditions should be subject to some form of coverage, if outside the broad scope otherwise. The best way to handle these are through state-based insurance exchanges, where coverage of uncertain aspects of a person's health profile may be possible given the creativity of insurers and actuarials, and subsidies should be available to make possible what is otherwise doubtful. The social choice to cover these conditions requires some form of taxpayer subsidy. The subsidy covers the known pre-existing conditions, the insurance company covers those aspects which are unknown. 

8. Promote Information on Prices and Costs

Today, patients and doctors proceed largely ignorant of prices and costs. All they know is the amount they have to pay for coverage. Nobody knows the true cost of any particular service or procedure, as these are hidden by all the distortions and interferences with the market. Can you imagine shopping for groceries or cars without knowing the price? 

A law requiring open pricing for all health services, products, procedures and other costs is needed to rectify this. In time, these prices will become easier to locate and disseminate. Given the demand for information of this kind, private sources will quickly spring up to fill the void. Government should help promote, and not supplant, these private sources. 

9. Include a Super-Catastrophic Fund to Protect Against Personal Bankruptcy

In a few cases, insurance for catastrophic events may climb to exceed the limits of even the moist generous catastrophic policy. In these few cases, a fund should exist to help avoid bankruptcy. This fund would need to be carefully designed to avoid over reliance on its existence by low top limits. A simple rule requiring a minimum top-limit to coverage should do the trick. 

There are other items which a carefully-designed HSA-for-everyone approach may need for implementation, but these are the major features I see. Obamacare's top-down, top-heavy regulatory approach should be scrapped in its entirety as counterproductive and heading us in the wrong direction. 

10. Consider Deferring Tort Reform

The plaintiff's bar has thrown a pike into many state efforts to limit pain and suffering damages and punitive damages, which together are enormous drivers of medical malpractice premiums, and hence patient costs. But including such in Obamacare replacement may unduly bog down the effort. It can be tackled later. Necessary as it may be, unless the stars realign, important to solve the biggest problem -- Obamacare -- first, and get America on the right foot again.

*************************************


For a full analysis of why the HSA approach solves the top-down regulatory trade-off of costs and service, and what the experience we have with similar regulatory regimes informs us, see The Bumbling Colossus, by Henry F. Field, available on www.amazon.com, and go to other topics here at www.thebumblingcolossus.com.
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