![Curly Howard didn't design our healthcare system, but his plumbing misadventure helps explain why it's such a mess -- before and after Obamacare. [Credit: wondersinthedark.com]](https://i0.wp.com/www.dougsbriefcase.com/blog/wp-content/uploads/2014/01/Credit-wondersinthedark.jpg)
Curly Howard didn’t design our healthcare system, but his plumbing misadventure helps explain why it’s such a mess — before and after Obamacare. [Credit: wondersinthedark.com]
Howard, the most creative of the Three Stooges, set out to fix a leaking pipe. His solution: add a length of pipe. Each time he did, the flow of water was temporarily interrupted, only to resume, this time out of the pipe he’d just added. Undeterred, he added another length of pipe. By the end of the episode, a frustrated and soggy Curly is enmeshed in pipes. And still the water flows.
So it is with healthcare. The leak, in this case, is the basic premise of insurance – that risk is inevitable and its cost must show up somewhere. Curly’s pipe is regulation – the unceasing attempts by government to divert and disguise the cost of that risk. The system that resulted from perpetual intervention resembles the one Curly produced – costly, cumbersome, inefficient and confusing.
Two papers by conservative economists trace how the numerous flaws that antedated Obamacare came about and help explain both why the public hasn’t yet warmed to the new health care law and why efforts by Republicans to replace it would face a similarly cool reception.
The Pacific Research Institute this week reprinted a paper by Rituparnu Basu called “The Broken State of American Health Insurance Prior to the Affordable Care Act.”
The paper argues that government regulation is to blame for the sorry state of health insurance well before Obamacare’s introduction. “We must be willing to entertain the possibility,” she writes, “that … the patient’s illness stems not from too much freedom but from too many controls” (p. 4).
To make her point, Basu notes how the rise of employer-sponsored health insurance coverage, itself the result of World War II wage and price controls, contributed to the pre-existing condition problem that Republicans and Democrats alike aim to solve (p. 6). Because such benefits are not taxable to businesses or workers, the workplace quickly became the preferred source of coverage for the vast majority of Americans. So when people lost their jobs or changed them, they lost their health coverage as well. If they’d developed medical problems in the meantime, insurers in the individual market had little choice but to charge them high premiums, exclude coverage of their pre-existing conditions, or shun them entirely. As with Curly’s plumbing, a seemingly benign government intervention (exempting employer-based health benefits from taxation) created an expensive system (an estimated $213 billion this year) that rendered health insurance less affordable and more difficult to obtain for millions of people.
Basu also showed how state laws designed to de-link premium from risk led to higher premiums for the sick and healthy alike (pp. 7ff). Restrictions on underwriting – a process insurers use to estimate the risk presented by a potential customer – required insurers to charge higher rates, making their products less attractive to people in relatively good health, driving premiums ever higher.
Then there are mandated benefits, requirements that all insurance policies cover certain services or classes of provider (pp. 10ff). The first such mandates were passed in Pennsylvania in 1949, obliging insurers to cover osteopathy and dentistry (p. 10). By 2013, there were 2,000 such mandates in state-regulated policies, ranging from the routine to the costly. Those mandates were politically popular and pricey, driving up premiums by an estimated 15 percent or more (p. 11). They also were politically popular. Basu quotes economist Greg Scandlen as saying imposing such mandates gave state legislators the opportunity “to enact social policy on the cheap – at no direct cost to the taxpayers” (p. 10).
“Health insurance in America,” Basu concludes, “has not been a remotely free, market-based industry for decades. Government manipulation thoroughly pervades the whole process” (p. 12).
An older paper by Scandlen argues that government regulation has been distorting the health insurance marketplace for more than a century. Like Curly’s plumbing, the accretion of regulation has produced “an industry that is too expensive, too bureaucratic, and too indifferent to the needs and desires of consumers” (p. 1).
Scandlen’s tale begins in the early twentieth century, when the American Medical Association (AMA) effectively seized control of state licensing laws and medical education. The result was to reduce the number of medical schools by half and eliminate five of the seven schools that primarily trained African-American physicians, simultaneously reducing the supply of physicians and increasing their average income (pp. 2–3).
A few decades later, it was the hospitals’ turn to improve their financial standing. The Great Depression had substantially reduced medical spending and, with it, their revenues. In 1929, Baylor Hospital in Dallas began the prototype Blue Cross plan, providing school teachers with coverage for 21 days of inpatient care for $6 per year (p. 4). The spread of these “prepaid hospital service organizations” constituted a “collaborative effort of hospitals to ensure their own revenue” (p. 5), helping fuel increases in health care spending.
Next came the IRS decision during the 1940s to exempt employer-sponsored coverage from taxation, followed quickly by federal seed money for hospital construction, an antitrust exemption for the health insurance industry, and the Taft-Hartley Act, which spread employment-based coverage to new categories of workers (pp. 6–7). While each development had its merits, they cumulatively “created a system of high-tech, high-cost employer-financed health care, which greatly disadvantaged people not connected to an employer,” Scandlen writes. “Not only were these groups left out of the subsidies available to employer-based groups, but the upward pressure on costs and the emphasis on expensive institutional care made health care more difficult for them to afford” [p. 8].
The creation of Medicare and Medicaid in 1965, Scandlen writes, “resulted in an unprecedented surge of new spending on health care.” That spending surge, in turn, provoked a series of regulatory adventures by the Nixon Administration, including wage and price controls, the Federal HMO Act, and the National Health Planning and Resources Development Act, which required hospitals and other facilities to obtain government approval before making capital outlays (p. 10). Perhaps the greatest distortions resulted from the enactment of the Employment Retirement Income Security Act (ERISA), which further distanced larger employers from state-regulated health insurance markets (p. 10).
The parade of regulatory deformations continued through the 1980s and 1990s, bearing acronyms like COBRA, HIPAA and CHIP. With each intervention came new costs, new burdens, new complications, new sources of confusion for consumers and businesses alike. Government and private spending on health care grew; premiums and the number of uninsured grew with it.
“If the health care system doesn’t work like a well-oiled marketplace, it is due to the financing system we developed, and that in turn is due to misguided, shortsighted, and often inadvertent attempts by the government to control the market,” Scandlen concluded [p. 18].
We have, in short, built a system that recreates Curly’s plumbing project.
Then came Obamacare. Its tsunami of regulation – thousands of pages of legislative language backed by tens of thousands of pages of administrative interpretations, waivers, exemptions, delays, outright rewriting of the statute and roughly $2 trillion in new spending, which comes with its own requirements and stipulations – aims to make health insurance more affordable and uninsurance less prevalent. Early returns are mixed. Policies sold through the exchanges generally carry higher premiums, more burdensome cost-sharing and narrow provider networks. Fewer people have so far signed up than projected and most that have enrolled tend to be older and previously insured, Obamacare having required cancellation of their prior coverage.
In the unlikely event that Obamacare fails, Republicans hope to replace it. Their most recent entry, a bill sponsored by Richard Burr (R‑NC), Tom Coburn (R‑OK) and Orrin Hatch (R‑UT), is called the Patient Choice, Affordability, Responsibility and Empowerment Act (CARE Act). It begins with a repeal of Obamacare. It proceeds to reinstate some of its more popular provisions – preventing insurers from imposing lifetime limits on benefits, rescinding coverage or refusing to renew it, as well as letting kids stay on their parents’ policies through age 26 – while extinguishing such things as healthcare.gov, health insurance exchanges and the individual mandate.
In its place, the proposal would guarantee coverage for people who are “continuously insured.” A worker who lost her coverage because she changed jobs, for example, could not be denied an individual policy, would have her pre-existing conditions covered and could not be medically underwritten. There also are subsidies for people with incomes under 300 percent of the federal poverty line (around $35,000 for an individual). Current law provides subsidies to those with incomes up to 400 percent (around $46,700) of FPL. The proposal also would provide federal money to states that operate high risk pools and reform their medical liability systems.
As with any intervention into the tangled world of health care, the CARE Act would create some losers. Among them would be some who have employer-sponsored coverage. According to a one-page description released by Senator Coburn’s office, employer contributions to health insurance premiums would no longer be entirely excluded from taxation. Instead, those contributions would be taxable to the worker to the extent that the cost of the coverage exceeded “65 percent of the average market price for an expensive high-option plan.” So if the average market price for such a plan was $5,000, the employee would have to pay a tax on any employer contribution to his premium in excess of $3,250 (65 percent of $5,000).
Because it would repeal Obamacare, the proposal also would repeal its Medicaid expansion. So those living in states that extended Medicaid coverage to single adults below 138 percent of the federal poverty line (FPL) would lose that coverage but would instead receive a tax credit to help pay for private insurance. Medicaid also would be restructured, with the federal government providing states with a fixed amount of money that they would use to assist eligible populations.
The proposal, in short, is less ambitious than Obamacare, but also less intrusive. It would eliminate some of Obamacare’s least attractive features, along with some that benefit millions. Although it has yet to be officially analyzed by the Congressional Budget Office, it likely would require the government to spend less, but would insure fewer people. It would, however, make it possible for people with pre-existing medical conditions to find affordable coverage without levying a tax on the uninsured or creating additional cumbersome regulatory superstructures.
Its chances of serious Congressional consideration depend on whether Obamacare survives its season of turbulence. Most importantly, insurers show no sign of bailing from the program, relying on the Administration’s largesse of corporate welfare to pad their bottom lines and cushion their losses. If insurers change their minds and pull out of the exchanges, Obamacare will falter and something will be sought to replace it. The CARE Act is a serious candidate.
What almost certainly won’t happen is the emergence of truly market-based system. Regulations and distortions that have accrued over more than a century are impossible to break through. They frustrate the Left, which prefers a purely government-run system, and the Right, which seeks a market free of regulatory distortion.
The US seems permanently stuck somewhere between, with a system that preserves some features of a market obscured by a thick fog of regulation. It is, in some ways, the worst of both worlds. But behind each regulation, each distortion, is an industry or group of people that would be worse off without it. In Obamacare, it was the cancellation of coverage for individuals and small businesses, a provision that was necessary to reward insurers that sell through the exchanges with millions of new customers. Should the CARE Act ever receive serious consideration, those with employer-sponsored coverage will likely object to its restrictions on deductibility, which are necessary to fund the proposal’s tax credits and risk pools.
The result is that every effort to reform our costly and inefficient system inevitably involves the introduction of new costs and inefficiencies. Reforms can improve our health system but never truly repair it.
It’s so distorted and complicated that even Curly couldn’t fix it.