Tag Archives: healthcare

Trumpcare: Bad Policy, Even Worse Politics

The Obamacare replacement plan offered by President Trump and Paul Ryan is scheduled for a vote in the House today. Even though the Republicans have a significant majority in the House, the vote is expected to be a close call as several GOP Members have opposed the legislation.

Indeed, this gets at perhaps the most impressive aspect of the Trumpcare proposal: that it manages to disappoint on almost every criteria imaginable. It’s bad policy and bad politics at the same time. Failures of this magnitude don’t just happen; it takes planning and hard work. And for that, House Speaker Paul Ryan deserves a lot of credit. Not praise mind you, just credit (or blame, if you prefer).

Continue reading Trumpcare: Bad Policy, Even Worse Politics

Large Health Insurer Withdraws Further from Obamacare and the Economics of Pre-existing Conditions

Bad news for the Affordable Care Act this week as United Healthcare–the country’s largest health insurance company–announced it’s going to withdraw from two more state healthcare exchanges, this time in California and Illinois. This comes on the heels of announcing plans to withdraw from most of the other states as well, as Zero Hedge reports.

This is all occurring after health insurance companies discovered that the expenses of covering new enrollees on the healthcare exchanges greatly exceeded the new premiums. It was well understood that many of the people that gained coverage on these new exchanges would tend to be sicker people–the exchanges exist, in part, to increase accessibility to people who didn’t have coverage before. One of the main reasons they did not have had coverage before is that they may have had an expensive pre-existing condition that meant insurance companies either wouldn’t cover them, or wouldn’t cover them for an agreeable fee. Obviously, taking on many new sick patients is not a good business proposition from the perspective of insurance companies. However, the hope was that there were many uninsured healthy people as well, who would flock to the exchanges as well for fear of paying the tax penalty imposed on those without coverage. This was intended to offset the losses from taking on new sick patients. And in case even this force proved insufficient to make the insurance companies whole, there was also the vaguely named risk corridor program, that was designed to cap losses of the insurance companies that participated in the exchanges (that is, subsidize them).

In practice, covering new patients on the statewide exchanges generally proved to be even more unprofitable than originally anticipated. The risk corridor program quickly ran out of resources to subsidize insurers hit hardest, and thus, health insurance companies are basically left with two options: rapidly raise premiums or withdraw from these exchanges altogether and focus resources elsewhere. They have been doing a combination of the two. And the pace of the premium hikes being planned shows just how dire the situation is. Here’s a chart of some of the most incredible increases planned around the country, courtesy of the Wall Street Journal:

From a policy or economics perspective, perhaps the most important issue here is the question of pre-existing conditions. The case for disallowing insurers to discriminate on pre-existing conditions is, I’ll grant, superficially persuasive–the idea of a senior with cancer getting denied care precisely because they have cancer is clearly appalling. But understanding economics often means tracing things through, recognizing how we got here, as well as the likely short-term and long-term effects of any given solution. Economic laws take effect over a period of time, so it’s best to avoid making decisions based on a snapshot.

To understand the issue properly, we must first ask what is the purpose of insurance? The answer is that it is intended to protect us against unforeseen events and tragedies. Individuals occasionally have tragedies befall them, but on the whole, our society is remarkably safe, healthy, and prosperous. Thus, insurance allows us to share the risk with all these other people, most of whom will go relatively unscathed, so we all bear a small cost but no one will suffer a massive loss. The insurance company earns a profit for coordinating this risk-sharing mechanism.

When we think of pre-existing conditions, it’s best to consider an analogy with less emotional baggage to see the issue clearly. Let’s try homeowner’s insurance.* This exists to protect against, among other things, the possibility of a fire burning down your house. It doesn’t happen often, but if it does, homeowner’s insurance will give you the money to rebuild. In my experience, when you go to buy homeowner’s insurance, they will have you fill out a form to describe your house (square footage, bedrooms, garage, year built, closest fire station, etc.) and they may even conduct a brief inspection to see if your home appears to be a reasonable risk. And obviously, it goes without saying that, if your home was already burned down / burglarized / etc., they would not insure your house against that damage. To do so would be financial suicide.

Now suppose the government passes a law prohibiting insurers from discriminating based on existing fire damage. Obviously, everyone with a recently burned down house will apply for coverage. The insurance companies will be forced to provide coverage, promptly pay out large amounts of money, and go bankrupt. If the policy exists long enough and is thoroughly enforced, the end result is that no home insurer will be left standing.

Bringing it back to health insurance, this is essentially what we’re doing with respect to pre-existing conditions. Effectively, the Affordable Care Act forces insurance companies to place bets (that is, provide coverage) that they know they will lose. The economics of this are straightforward. If it persists long enough, it will destroy all health insurance companies, unless they can find legal ways to deny coverage to sick people, which many are currently attempting to do.

Note that the above line of reasoning is making no moral judgments whatsoever. It’s not saying that people with major pre-existing conditions are bad people, deserve to suffer, are mooching off the system, or anything of that sort. It’s simply analyzing the predictable economic consequences of such a policy, consequences which are unfortunately beginning to show. And here’s where the divergence between short-term and long-term effects is quite striking. In the short-run, requiring companies to cover pre-existing conditions is likely to be beneficial to those sick patients in reducing their immediate costs and/or increasing their care. But in the long-term (which isn’t that long), it’s liable to destroy health insurance for everyone, sick and healthy alike.

Now we can bring in the moral dimension properly. Supporters of the Affordable Care Act certainly try to claim the moral high-ground on this subject by pointing to the short-term benefits noted above. Meanwhile, opponents are cast predictably as heartless, insensitive, greedy, etc. But is it really morally superior to support a system that offers some short-run benefits at a cost of total collapse in a few years? The answer probably depends on where you’re sitting. If you’re a very sick person with only a couple years to live anyway, and won’t be around for the collapse to follow, it’s a good deal. For society at large, however–even counted in purely utilitarian terms–it’s difficult to see how deliberately putting health insurers on a unsustainable course will make us all better off.**

Economist John Maynard Keynes once famously dismissed criticisms of the long-term consequences of his ideas by saying that “In the long-run, we’re all dead.” However, one wonders if he would have felt the same if he knew that the “long-run” turned out to be just a few years hence. In healthcare, that increasingly appears to be the reality.

*I apologize if you’ve heard this analogy before as it’s far from original. But it illustrates the point well, so hopefully you’ll forgive the redundancy.

**I should note here that I’ve heard speculation that this was actually the deliberate plan of the Obama Administration all along, to bankrupt the insurers and thus make way for a single-payer system by default. If that is the true intent, then requiring coverage of pre-existing conditions makes perfect sense strategically. The above discussion focused instead on the more official justifications offered for the policy. Also, we should note that a single-payer system is unlikely to be the panacea its supporters hope for, for many of the same reasons that other central planning activities tend to fail, but we’ll leave a full discussion of that to another day.

The Greedy Stoic Capitalist Fallacy and Bernie’s Healthcare Tax

The Greedy Stoic Capitalist seems to be everywhere these days. She lies at the root of nearly every economic problem that faces us. And she is also central to most of the proposed solutions. From the minimum wage debate to rising healthcare costs, the Greedy Stoic Capitalist is there. Grasping and rapacious enough to cause income inequality and exploit her workers, yet also passive and patient enough to submit to new regulations and taxes without protest or evasion.

If this seems an unlikely description, that’s because it is. Common sense tells us that the Greedy Stoic Capitalist doesn’t really exist. And yet, their existence is taken as a given–used to wish away basic principles of economics.

To see what I’m talking about, let us consider a recent article that discussed the likely effects of Presidential Candidate Bernie Sanders’ new single-payer health plan. Note that our source for the article is US Uncut, which is a left-leaning publication that appears to openly favor Sanders over Clinton. Here, we’re going to be specifically interested in the taxes Bernie has proposed to pay for the plan. The article claims that Bernie’s plan will save the average American over $5,000 a year on healthcare costs relative to the status quo. But the way it reaches this conclusion is very questionable, as we’ll see in a moment.

Now, if you’ve followed presidential politics much this year, you are probably familiar with Bernie’s general worldview. On economic issues, he’s about as progressive as they come, and he refers to himself as a democratic socialist. He is very concerned about income inequality, the decline of the middle class**, rising tuition costs, healthcare costs, and in general, the plight of the poor. He also rails against Wall Street and the billionaire class, which he believes wield too much political power and do not pay enough in taxes. Thus, most of his proposed reforms rely on more progressive tax hikes where tax rates go up for the highest earners. His plans for paying for the new healthcare system certainly follow this model.

Here’s how US Uncut summarizes Bernie’s healthcare tax plan:

First, Sanders would impose a 6.7 percent payroll tax on employers, along with a 2.2 percent healthcare tax on those making less than $250,000 per year. Sanders includes higher percentages for incomes above $250,000 in his legislation (the richest 2 percent of the U.S. population) and a 5.4 percent surcharge on the wealthiest Americans whose modified adjusted gross income is above $1,000,000 (literally less than 1 percent of Americans). Sanders’ bill also includes a 0.02 percent financial transactions tax on Wall Street trading.

Obviously, that’s a lot of new taxes. But you’ll notice that, true to form, the majority are directed at the rich. The rich represent a small minority of the population, and presumably have money to spare by definition. Neither Bernie nor his liberal supporters care too much about this group. Bernie is more interested in the impact on the average American. Fair enough. We’ll focus our attention there as well for the sake of this discussion.

Since the average American makes around $50k per US Uncut, this means we can disregard the taxes on the $250k+ and $1M+ groups. Additionally, since people making $50k are also unlikely to be able to invest much in the stock market, we’ll also assume the financial transactions tax doesn’t impact them. Meanwhile, Bernie’s plan is designed to eliminate all healthcare premiums and insurance and simply pay for everything. Thus, it appears to be a relatively straightforward calculation to determine the savings. Here’s what the article came up with:

At first glance, this looks pretty impressive–$5,000 in expected savings would surely be a big deal to someone making $50k. It’s like a 10% raise. But one reason it looks so good is because they calculated the tax wrong. Yes, the 2.2% employee healthcare tax times $50k is $1,100; you’re not going crazy. But what about the employer’s 6.7% tax? Where’d that go?

This is where we see the Greedy Stoic Capitalist subtly working her magic. You see, one of the underlying progressive themes in the healthcare debate is that the employers are just too greedy to pay for their employees’ healthcare costs. This piece from ThinkProgress captures the sentiment well, for example. So, if employers aren’t willing to voluntarily pay for it, obviously the solution is to just force them to do so with a tax. What could go wrong?

Well, the problem is that “who pays the tax” does not determine “who bears the costs”. To see this, let’s consider an example that isn’t as convoluted as payroll tends to be.

Let’s imagine Bill’s Food Truck is able to make a burrito for $5, and Bill wants to make $5 on every burrito so he sells it for $10. Bill also happens to be a deeply greedy and spiteful man. So if he can’t make at least $5 on a burrito, he’s just going to shut down his truck and do something else. Now suppose the government has decided it needs to collect at least $0.50 per burrito to fund a new program. Most commonly, it could do this through a 5% sales tax and require the vendor to collect it. In this case, the customer pays $10.50 per burrito, Bill still gets his precious $5 profit, and he eventually sends the government $0.50 in taxes. If you saw prices before and after the tax, it would probably be obvious that the customer was bearing the brunt of the tax.

Of course, the customer might get a bit irritated by such a tax. Thus, the government might try to be a bit sneakier about it by applying the tax directly to the seller instead–this is what a value-added tax does. To keep it simple, let’s assume there’s a 10% tax applied to burrito-makers based on the cost of their burrito. In our example, this would mean a $0.50 tax directly on the producer, that the customer doesn’t see. Now what will the price be? Of course, the answer is still $10.50. We established upfront that Bill’s a greedy Scrooge of a burrito-maker who demands $5 per burrito to get out of bed in the morning. So ultimately, even though the producer literally paid the tax to the government, and the customer may not have even known it existed, they still really bore the cost of the tax.

Bill was our archetypal greedy capitalist. He wanted to make a profit before the tax was imposed, and strangely enough, he still wanted to make a profit afterward. The government’s decision to tax his transaction didn’t inspire a religious awakening within him or a new political ethos. He’s the same guy with the same priorities. So he adjusts his behavior and his prices to account for the tax and moves on with life.

The concept of “who bears the costs” is described in economics as the incidence of taxation, and it is very well understood. In the real world, who bears the costs is rarely an all or nothing situation; buyer and seller will usually each suffer some of the burden. Without having all the facts, it’s impossible to know exactly how much will be absorbed by each group. But the general rule is that the party that is more desperate for the transaction to occur will bear a higher portion of the tax, because they are more willing to tolerate price changes.

Now we return back to the payroll taxes in Bernie’s plan. We can’t assume that the employer will bear all 6.7% of the employer tax, and we actually can’t assume the employee will bear all 2.2% of the employee tax either. Instead, the right way to look at this is as a new 8.9% tax on salaries. We don’t know exactly how much will fall on each group. But if the employee is making just $50k, chances are they are not in a highly skilled position, which means they may be easily replaceable. Further, if they have any kind of family obligations at $50k per year, they probably are pretty desperate to keep that job. So if we follow the general principle that the more desperate party pays more, that means the employee will probably bear more burden than their employer. That is, the employer will reduce the employee’s salary to accommodate the new taxes. The employer will still literally pay more tax, but much of the real cost actually falls on the employee. If we’re starting from the premise that the employers were greedy bastards that helped create the uninsured problem in the first place, we have to also assume they’d be willing to cut salaries.

Ultimately, we can’t know for sure how the burden of the payroll tax would fall between employers and employees, and, frankly, it’s probably the least important part of a massive single-payer overhaul. But we can say with some confidence that Sanders’ claimed savings of $5,000 for the average American is almost certainly exaggerated. Even if we grant generous assumptions about the effectiveness of a single-payer system itself, there’s no way to defend excluding the employer tax from consideration. It’s tough to know whether this was done out of ignorance or as a clever political ploy, but either way, it’s still wrong.

Of course, the larger point is the importance of the Greedy Stoic Capitalist in modern political discussions. Bernie may be the most frequent offender, but he is far from the only one. This assumption arises in many different areas, yet it’s wrong in every instance. Fortunately, like so many other topics in economics, common sense gives us the right answer. We can’t assume that people are greedy jerks in general but magically become generous and compliant when we draft policies that target them. The Greedy Stoic Capitalist doesn’t exist, and we need to stop pretending otherwise.

*To keep ourselves on task, we’re taking for granted that a single-payer system would not dramatically increase healthcare costs, diminish healthcare quality, etc. In our view, there’s good reason to assume it would not work this well in practice, but we’ll leave that subject for another day.

**As a matter of statistics, it’s correct to say that the middle class is smaller today than it was many years ago. However, an important piece of context is often omitted from this sound byte. More people have graduated from the middle class to the upper middle class than fallen back into poverty.