By Neil H. Buchanan
Justia (Mountain View, Calif.), April 10, 2014
To the surprise of many people, and to the great consternation of Republicans, the Affordable Care Act (ACA, or the dreaded “Obamacare”) failed to fail. Last week, to much fanfare, the Obama Administration announced that the ACA’s enrollment target had been met, which means that the health care law will not collapse from lack of adequate participation.
This was surprising, of course, because of the early software problems that emboldened the ACA’s opponents, and which raised the possibility that technical problems would doom the new law before it could even get started. Now, however, we know that we will proceed to the next stages of our national experiment with a broad expansion of profit-oriented, subsidized health care.
Despite this success, we must now plan to get rid of the ACA, and replace it with something much better. The ACA is inherently incapable of solving the larger long-term problems that our country faces in providing health care to all of our citizens. It was an important step forward, and we should be happy that it did not die a premature death, but we cannot now allow ourselves to believe that the current system is sustainable, or even acceptable.
That is why it is essential to say, clearly and unambiguously, that the United States needs to adopt a system of universal, single-payer national health insurance, as soon as possible. The ACA is as good as it gets, when it comes to basing a health care system on private insurance, and it is simply not good enough. Even as the ACA takes effect, therefore, we need to start planning to make it disappear.
The success of the ACA, and the importance of its component parts
The reason that the ACA was at risk of failing to launch is actually a somewhat complicated story, but the explanation is ultimately about the nature of private insurance. If, against all logic, we decide to continue to run our health care system through competition among private insurers, the system must be designed with several key elements, in order to avoid what economists call a “death spiral.”
Insurers, even those that are not-for-profit companies, need to make sure that they do not ultimately have to pay out more in benefits than they take in from customers’ premiums. This means that insurers will try to separate people into different categories, on the basis of how expensive they are likely to become in the future. Smokers, for example, are treated differently from nonsmokers, for obvious reasons.
It is this simple logic that causes insurers to refuse to insure people with pre-existing conditions. If, for example, you have late-stage cancer, and you want to be covered by a health insurance policy, it would make no sense for the insurer to agree to take you on as a customer. Short of charging you exactly as much as you would have to pay directly for your cancer treatments, the insurer cannot help but lose money on you.
If you fail to disclose to the insurer that you have a late-stage cancer, then the insurer would need a way to protect itself from the economic loss that your deception would create. That is why insurance contracts generally exclude coverage for treatments related to pre-existing conditions. The problem is that insurers, over time, perfected increasingly aggressive ways to define what counts as a pre-existing condition, such that too many people who were insured suddenly found (after paying premiums year in and year out) that their insurers were canceling their coverage because, for example, a cancer patient had failed to disclose that she once had an unrelated illness (such as psoriasis).
Public outrage against such abuses grew, and the result was that even most opponents of President Obama understood that the insurers had overplayed their hands regarding pre-existing conditions. This meant that, when serious discussions began in 2009 regarding health care reform, one of the fundamental elements required of any such plan was that Americans could not be denied coverage due to pre-existing conditions.
This, however, raised a further difficulty. If everyone were to know that they could never be denied insurance coverage for an illness, then there would be no reason to take out insurance in advance of getting sick. This meant that people needed to be required to sign up for insurance in advance. Healthy policyholders, in particular, are an essential part of the economic model of private insurance. Without them, no private company could stay in business for long, because it is the currently healthy people’s premiums that finance the benefits that are paid on behalf of currently sick people.
The so-called mandate, which was the subject of the much discussed NFIB v. Sebelius Supreme Court decision two years ago, was thus an inextricable part of the ACA, because without it, no one would have any reason to sign up for health insurance in a world where they could not later be turned away, no matter how sick (and thus expensive) they became. Without the mandate, the entire insurance system would collapse. Hence, the term “death spiral.”
Finally, in order to allow everyone to become part of the insurance pool, the law had to recognize that some people could not afford to pay for their insurance. They would need to receive subsidies, allowing them to sign up, and thus to make the system nearly universal.
When this was all turned into law, however, it turned out that there was still some possibility that a large number of people would choose to pay the tax (or penalty) that was designed to push them into the insurance pool. Hence, the drama leading up to March 31’s enrollment deadline, which was entirely a matter of seeing whether the insurance pool would be large enough – and include enough currently-healthy people – to avoid the death spiral. Happily, it worked.
The system is inherently wasteful, even when the ACA is running as planned
The success of the ACA will, ultimately, be seen in its expansion of coverage to people who were otherwise uninsured (a long-standing national shame), as well as its elimination of the risk that people will lose their insurance coverage due to abusive practices by insurance companies. This is no small accomplishment, because health-related tragedies have long been one of the leading causes of personal bankruptcies and family ruin.
Even so, the very difficulty of explaining why the ACA had to include its three component parts – (1)universal coverage, (2) mandated participation, and (3) subsidies – gives us some sense of what is still wrong with our system now. Private insurers are still in the business of sorting customers, and trying to get them to take on more of their own health care expenses, so that insurers can spend less money on benefits.
However, this effort to get people to take on more of their own costs up front, and to bear more risk of higher expenses later, is itself an expensive proposition. Even if insurance companies can no longer kick people who become sick off of their rolls, insurance companies still have every reason to try to extract more money from people.
The most direct way in which we can see these additional costs in action is, in fact, in the sign-up process itself. The insurers were allowed to create different types of plans (Gold, Silver, and Bronze) on the basis of costs, deductibles, and so on, for people who were willing to take on different degrees of risk. People then needed to figure out which of the available options was best for them.
Every step of this process involved needless expense. Designing the choices was expensive. Building the website was expensive. Advertising the coverage was expensive. Helping people navigate the exchanges was expensive. And, going forward, insurers will spend a great deal of money trying to poach their competitors’ best customers, by spending money on promotional materials, hiring attractive representatives to talk to the public about why Insurer A is better than Insurer B, and so on.
Why is that expense “needless”? Because, if there were only one insurer, there would be no need to get people to sign up for one insurance company rather than others, and there would be no reason to spend money and resources getting people to choose insurance as if they were choosing among different brands of breakfast cereal.
The potential savings from adopting a single-payer system
How much extra money do we spend in the U.S. because of our commitment to keeping private health insurance companies in business? In 2012, we spent nearly 18% of total U.S. gross domestic product (GDP) on health care, or about $2.8 trillion. The Congressional Budget Office estimates that this amount will rise to 22 percent of GDP by the year 2038.
By comparison, the next most expensive health care system, among our economic peers, is France’s, which devoted less than 12 percent of its GDP in 2012 to health care. If the U.S. had been able to accomplish that feat, we would have spent almost one trillion fewer dollars on health care in that year.
The United States government could take on the role of “insurer” in the sense that it would use revenues to pay doctors, hospitals, and others for providing treatment to all Americans. It would, like other advanced countries’ governments, become the single payer, making it unnecessary to have private insurers engage in destructive competition that wastes so much of the nation’s resources.
We already have such a system for a sub-group of Americans. It is called Medicare, and it is extremely popular. It is true that Medicare faces possible financial difficulties, but any such problems loom only because we insist on treating Medicare as a stand-alone system financed by payroll taxes, rather than admitting that it is simply a well-run government program that provides insurance for nearly everyone over age 65. It has extremely low administrative costs, and its costs for paying for medical care have risen more slowly than those for private insurers.
Is Medicare’s success expandable, such that we could cover the entire U.S. population? There is, in fact, a proposal in Congress that would put the United States on the road to a single-payer system. The Expanded & Improved Medicare For All Act (H.R. 676) would expand our current elders-only single-payer health care program into a universal program, available to all regardless of age.
But would such a program actually save money in the United States? The economist Gerald Friedman, of the University of Massachusetts, has studied H.R. 676. He estimates that, by 2023, the U.S. could shave 7 percent of GDP off of the costs of our health care system, compared to the costs of continuing current law. At that point, that will amount to almost one and a half trillion dollars.
There are many subordinate questions regarding the adoption of a single-payer health care plan for the United States, which are beyond the scope of this column. For now, however, it is important to remind ourselves just how much we are wasting because Republicans as well as Democrats (very much led by President Obama in this regard) peremptorily ruled out any consideration of transitioning to a single-payer system.
People who oppose single payer thus need to confront a simple question: Do your reasons for protecting private insurers justify the diversion of over one trillion dollars per year, rising every year in perpetuity, from other productive uses into unproductive health care expenses?
As happy as we should be that we now have moved our country forward, coming closer to the laudable goal of universal health care coverage, we cannot let that accomplishment obscure just how absurd our health care system is, at its core. It is expensive and wasteful, and we have the means to change it. It is time to get started.
Neil H. Buchanan, a Justia columnist, is an economist and legal scholar, a professor of law at The George Washington University, and a senior fellow at the Taxation Law and Policy Research Institute, Monash University (Melbourne, Australia). He blogs at DorfonLaw.org.