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Thursday, March 25, 2010

Breaking Down Health Care Costs

Here is a rather thorough analysis of the health care law from a progressive perspective. RGN

March 24, 2010
ObamaCare by the Numbers: Part 1
Posted by John Cassidy

The New Yorker

Addendum added.

Here goes another post destined to make me unpopular in some quarters. (You can find my previous contribution on the same subject here.)

From a political and historical perspective, the passage of health-care reform is a major victory for liberals, moderates, and even conservatives with a social conscience. It has long been a national disgrace that a country as rich as the United States failed to provide basic health care for tens of millions of its citizens. President Obama, to his credit, finally exploited the Democratic majorities in Congress to tackle this problem, and, in the process, demonstrated that he has an inner resolve and determination that I, for one, had doubted. In getting something—anything—done in today’s Washington, he has reinvigorated his Presidency and transformed the political calculus for the rest of his agenda.

But what about the economics of it all? In general terms, as I’ve said before, the case for reform is unassailable. Health care provides a textbook case of an industry plagued by numerous forms of market failure, including moral hazard, adverse selection, and free riding, as well as ad-hoc government interventions. The result is a horrendously costly mishmash, which manages to combine excessive expenditure in some areas (diagnostic testing) with too little expenditure in others (preventative care), and overall health outcomes that are middling, at best. According to Wikipedia, the U.S. ranks 38th in the global life-expectancy league table, just below Cuba (!) and just above Portugal.

Unfortunately, the reform bills that Congress has passed don’t tackle some of the system’s underlying problems, such as the lack of incentives to limit health-care expenditures. Yes, there is financing for pilot schemes that might eventually generate some savings, and, yes, a new independent board of experts will be tasked with identifying possible cuts, but to conflate these initiatives with a guaranteed cure for cost inflation is to fall victim to wishful thinking. Unless I am mistaken—and I hope I am—the reform will end up costing taxpayers considerably more than the Congressional Budget Office is predicting, and it won’t cover nearly as many people as hoped for. In another decade or so, Congress will be back at work, trying to provide genuine universal coverage at a more affordable cost.

The problem is fundamental. Setting aside the expansion of Medicaid and some long-overdue restrictions on the egregious behavior of health insurers, this isn’t really health-care “reform”: it is a significant expansion of the current system of private insurance, with the taxpayer footing the bill. It is Mitt Romney’s Massachusetts experiment writ large, a peculiar amalgam of egalitarian intent and corporate welfare: egalitarianism in the form of providing health care to those who can’t afford it; corporate welfare in the form of paying corporations such as Aetna and Wellpoint generously to take on millions of new enrollees. If the average American doesn’t realize this, people on Wall Street do. Since Obama’s election, in November, 2008, Aetna’s stock has gone from $20 to $35; Wellpoint’s has gone from $30 to $63.

Even now, I don’t think most people realize the size and scale of the subsidies involved in the new system. Take a typical family of four earning $45,000 a year, which is about twice the poverty line and slightly lower than the median household income. (No, you didn’t misread that statistic. More than half the households in the United States earn less than $50,000 a year.) Come 2014, such a family will be entitled to buy a health-care policy for just above six per cent of their income, or $2,800, with the government picking up the rest of the cost. (If you want to see the figures for other incomes and family sizes, check out the excellent health-care calculator at the Washington Post.)

But what will be the excess cost that the taxpayer has to shoulder? Here is where things get murky. After failing to find any definitive figures, I did some back-of-the-envelope sums of my own and came up with some rough estimates. My actual figures should be treated with skepticism—if anybody knows of better ones, please let me know—but I hope they are accurate enough to illustrate the general point. Using private insurance to expand health-care coverage is inordinately expensive!

According to the Kaiser Foundation, in 2008 the average health-insurance premium for a family of four for employer-based coverage was $12,680. Allowing for the subsequent inflation in costs, today’s figure is probably close to $14,000. By 2014, assuming health-care costs rise by five per cent a year, it will be about $17,000. If insurance companies on the new health exchanges were obligated to offer equivalent coverage, the subsidy per family would be at least $14,300 per family. Put another way, the federal government would be providing the typical lower middle class American family with a new entitlement worth roughly thirty per cent of its pre-tax income.

In practice, the cost might be somewhat lower, because the health plans offered to individuals won’t be as comprehensive as group plans are. Exactly what they will look like remains to be determined, but they will come in four varieties: bronze, silver, gold, and platinum. The bronze plan will cover sixty per cent of all medical benefits; the platinum plan will cover ninety per cent. Since individual insurance generally offers fewer benefits and involves more cost sharing, in the form of deductibles and out-of-pocket expenses, it tends to be cheaper. According to the Kaiser Foundation, the typical premium for non-group coverage for a family of three in 2006/2007 was $5,800. Adding a fourth member of the family (to keep things comparable) and allowing for inflation, brings this figure up to about $10,500 by 2014.

But that figure doesn’t include the cost of expanding coverage to include things the federal government (quite reasonably) wants covered. The Senate bill says this: “All plans must provide preventive and primary care, emergency services, hospitalization, physician services, outpatient services, day surgery and related anesthesia, diagnostic imaging and screenings (including X-rays), maternity and newborn care, pediatric services (including dental and vision), medical/surgical care, prescription drugs, radiation and chemotherapy, and mental health and substance abuse services…. In addition, plans could charge no cost-sharing (e.g., deductibles, copayments) … for preventive care services…. Plans could also not include lifetime limits on coverage or annual limits on any benefits.”

Even with cost-sharing on things other than preventative services, such plans won’t be cheap. All told, it seems reasonable to assume that the price of a typical policy on the new health-care exchanges will be about midway between the price of existing group and non-group coverage, which would put it at roughly $13,750 in 2014 dollars, of which the family earning $45,000 would contribute about $2,800. (See addendum.)

The bottom line: a government subsidy of slightly more than $11,000—or close to twenty-five per cent of the family’s income—all of which will make its way into the coffers of a private health-care company.

Now, that is what I would call redistribution. Off the top of my head, I can’t think of another federal program (or tax policy) that has been so generous to the working and lower-middle classes, at least at the outset. As I noted in my earlier post, and as the Times’s David Leonhardt points out in his column today, health-care reform dwarfs other recent programs designed to help the embattled, such as the Earned Income Tax Credit. And given the way it is being paid for—or not paid for—it is far more progressive than Social Security, which is financed in a regressive manner.

What we have, then, is a historic and overdue effort to provide sound health and peace of mind to a needy segment of the U.S. population. But how will it affect economic incentives, and can it be sustained financially? I will be writing on these questions, and others, in Part 2.

ADDENDUM: After putting up this post, I did some more research into the cost of non-group health-care plans, and it suggested to me that my top-of-the-head sums may have been somewhat off, at least for some parts of the country. In New York City, for example, the current cost of a typical non-group family HMO plan is about $10,000, and in Buffalo it is about $7,500. Allowing for annual health care inflation of five per cent, by 2014 these prices would have risen to about $12,150 and $9,120, both of which are considerably below my guesstimate of $13,750.

As I noted, however, additional government mandates could raise the costs of non-group plans offered on the new exchanges compared to existing non-group plans. For example, current non-group HMO plans often come with high deductibles—up to $3,000 per family—and limits on total coverage. Without knowing how the new health exchanges will operate, and what types of plans will end up being offered on them, it’s impossible to say exactly what level of subsidies a typical uninsured lower-middle-class family will receive. But it is probably fair to take my $11,000 guesstimate as an up

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1 comment:

Varsha Pawar said...

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A group health policy is not necessarily for individuals or individual people. It is acquired by employers who desire to supply their useful workers with health protection. For worker to choose into the corporation health insurance plan, she or he ought to work a specified amount of time each seven days or far more.

All insurance policy plans are different. They will come at various costs and will cover several kinds of factors. To uncover out what your insurance policy specifics are, you will require to request your boss about your insurance policy, so you can discover out how it works.

Group Health Insurance Plans