Harry Reid Turns Insurance Into a Public Utility

[Torie]

Below is an extract from an essay which appeared in the WSJ yesterday by Richard Epstein. One question that I have, is if it indeed is so ineluctable that the matrix of regulations will effectively put insurers out of business, except for large group plans, why didn't the insurers point that out?  If what Epstein says is true, this program will have a short half life indeed. Voters are not going to tolerate their private insurers tanking.

Harry Reid Turns Insurance Into a Public Utility
The health bill creates a massive cash crunch and then bankruptcies for many insurers.
 
By RICHARD A. EPSTEIN

As Harry Reid's 2,000 page health-care bill is being rammed through the Senate, most of the public debate has been focused on its expanded coverage, its now defunct public option, and its high taxes. Lost in the shuffle has been its intensely coercive requirements on health insurance issuers, especially in the individual and small group markets. Taken together, these restrictions are likely to drive them out of business and run afoul of the constitutional guarantee that all regulated industries have to a reasonable, risk-adjusted, rate of return on their invested capital.

The perils of the Reid bill are made evident in a recent Congressional Budget Office (CBO) report that focused on the bill's rebate program, which holds that once an insurance company spends more than 10% of its revenues on administrative expenses, its customers are entitled to an indefinite statutory rebate determined by state regulatory authorities subject to oversight by the Secretary of Health and Human Services. Defining these administrative costs is a royal headache, but everyone agrees that they are heaviest in the small group and individual markets, where they typically range between 25% and 30%, without the new regulatory hassles.

The CBO concluded that this one restriction turned the Reid bill into "an essentially governmental program." In other words, the targeted health insurers would become de facto public utilities whose profits are gutted when the huge compliance costs under the Reid bill are piled on top of the hefty costs inherent in running a labor intensive health-care insurance business.

Worse still, the statutory rebate is only the tip of a larger regulatory iceberg that permeates the bill. Normally, insurers have the power to underwrite—to choose their line of business, to select and to price risks, and to decline unattractive risks. Not under the Reid bill. In its frantic effort to expand coverage to the uninsured, the bill will create state health-care exchanges supported by generous federal subsidies to unspecified millions of needy and low-income individuals. Any health insurance carrier that steers clear of these exchanges cannot keep its customers. Any insurance carrier that enters Mr. Reid's inferno will lose its financial shirt.

[article lists the bill's coverage mandates]

Ostensibly, the Reid bill does not impose any direct price controls on what health insurers can charge for this veritable cornucopia of services. But the bill's complex, cooperative federalism scheme authorizes state regulators, after recommendations from the federal government, to exclude insurers from the exchanges if their prices are too high, which would again be a competitive death knell. Exile from the exchange does not, however, restore traditional underwriting controls, as the Reid bill and other federal and state regulation continue to apply to these firms.

One common talking point of proponents of the Reid bill is that competitive markets don't really do a very good job of reining in costs. ...

By this twisted logic, rent control is the perfect path to efficient competitive markets. Unfortunately, here no insurer can simply cut back on services provided given the minimum standards. And if it raises rates, the rebates cut ever more deeply during the next period. So essentially, there is no viable option for these firms either on the state exchange or off it.

The economic chaos that is likely to follow the disruption of private insurance health-care markets draws no attention from its Democratic supporters. Oddly enough, it has also been overlooked by the opponents of the bill who are so appalled by this hydra-headed monster that they don't have the patience to parse its mind-numbing provision.

[Epstein than makes his legal arguments that regulating insurers so that they go out of business is an Unconstitutional taking]

Mr. Epstein is a professor of law at the University of Chicago and a senior fellow at the Hoover Institution. This article is based on a longer study released by the Manhattan Institute at www.medicalprogresstoday.com.

[Sbane]

Cost controls are sorely needed in the health insurance markets. This article implies that the private market will be able to control costs the best, but this ignores what has happened in reality for the past 20 years. Costs have been going up 10% a year and insurance becomes too expensive for families with each going year. This shouldn't be surprising for a service that has an extremely inelastic demand curve. When insurance companies raise rates they don't see a corresponding decline in demand as in other normal industries. Thus costs have to be controlled in another fashion such as mandating 80% of all expenses are spent on health care. If a company can't even do that, it is evident they are fat and bloated and wouldn't survive in any other industry and don't deserve to survive in the health insurance industry either.

[Torie]

Cost controls are sorely needed in the health insurance markets. This article implies that the private market will be able to control costs the best, but this ignores what has happened in reality for the past 20 years. Costs have been going up 10% a year and insurance becomes too expensive for families with each going year. This shouldn't be surprising for a service that has an extremely inelastic demand curve. When insurance companies raise rates they don't see a corresponding decline in demand as in other normal industries. Thus costs have to be controlled in another fashion such as mandating 80% of all expenses are spent on health care. If a company can't even do that, it is evident they are fat and bloated and wouldn't survive in any other industry and don't deserve to survive in the health insurance industry either.

Cost is mostly due to the invention of costly medical procedures. There seems to be this belief that somehow we can all have these costly medical procedures without paying for them. Most insurance companies meet the 80% threshold as it is, except maybe with some individual plans, where there are no economies of scale. The single payer system in the end, is mostly about finding a hidden and politically acceptable means to ration.

[Sbane]

Cost controls are sorely needed in the health insurance markets. This article implies that the private market will be able to control costs the best, but this ignores what has happened in reality for the past 20 years. Costs have been going up 10% a year and insurance becomes too expensive for families with each going year. This shouldn't be surprising for a service that has an extremely inelastic demand curve. When insurance companies raise rates they don't see a corresponding decline in demand as in other normal industries. Thus costs have to be controlled in another fashion such as mandating 80% of all expenses are spent on health care. If a company can't even do that, it is evident they are fat and bloated and wouldn't survive in any other industry and don't deserve to survive in the health insurance industry either.

Cost is mostly due to the invention of costly medical procedures. There seems to be this belief that somehow we can all have these costly medical procedures without paying for them. Most insurance companies meet the 80% threshold as it is, except maybe with some individual plans, where there are no economies of scale. The single payer system in the end, is mostly about finding a hidden and politically acceptable means to ration.

If most insurance companies already meet the 80% threshold then there shouldn't be a problem. I doubt it though. Of course there is the whole issue of what exactly is administrative expenses.

Costs are definitely rising due to innovation as well and I suspect some of that may have to stop. The bottom line is that health care costs can't keep rising at 10% a year when the country is growing at an average of about 2% a year.

[anvi]

Rise in medical costs is not "merely" due to increases in the cost of treatment.  It's the biggest culprit in rising health care expenditures, but it's hardly the only one. 

Administrative costs are lower in large coorporate plans than for small group or individual plans, the former average a little above 9% and the latter a little above 12% and 16% respectively.  Large plans have bigger pools and can defray their MLRs much more effectively than smaller plans.  Some states already impose MLR caps on insurance companies, and some companies try to keep them down in order to maximize capital and attract investors.  A lot of the MLR in health insurance companies is however not just represented in administrative expenses, but in executive salaries and dividends, ect.

But, none of this is at what I believe is at the heart of the matter.  As far as I'm concerned, health insurance should be a public utility.  Why, in principle, should health insurance be a for-profit business?

[Southern Senator North Carolina Yankee]

Rise in medical costs is not "merely" due to increases in the cost of treatment.  It's the biggest culprit in rising health care expenditures, but it's hardly the only one.  

Administrative costs are lower in large coorporate plans than for small group or individual plans, the former average a little above 9% and the latter a little above 12% and 16% respectively.  Large plans have bigger pools and can defray their MLRs much more effectively than smaller plans.  Some states already impose MLR caps on insurance companies, and some companies try to keep them down in order to maximize capital and attract investors.  A lot of the MLR in health insurance companies is however not just represented in administrative expenses, but in executive salaries and dividends, ect.

But, none of this is at what I believe is at the heart of the matter.  As far as I'm concerned, health insurance should be a public utility.  Why, in principle, should health insurance be a for-profit business?

Ah and hear with have the usually leftist boogieman of private Health Care's Administrative costs. The reason for these administrative costs is that private health care companies cannot afford the mistakes and waste that exist in Gov't programs. There is no perfect system and there will be no free lunch as it were.

Cost controls are sorely needed in the health insurance markets. This article implies that the private market will be able to control costs the best, but this ignores what has happened in reality for the past 20 years. Costs have been going up 10% a year and insurance becomes too expensive for families with each going year. This shouldn't be surprising for a service that has an extremely inelastic demand curve. When insurance companies raise rates they don't see a corresponding decline in demand as in other normal industries. Thus costs have to be controlled in another fashion such as mandating 80% of all expenses are spent on health care. If a company can't even do that, it is evident they are fat and bloated and wouldn't survive in any other industry and don't deserve to survive in the health insurance industry either.

The reason for the lack of competition is largely due to two primary issues.

1. The Anti-Trust Exemption which should have been removed and isn't.

2. Lack of Competition accross statelines.

Of course the private market won't compete when the gov't has basically created Health care zones and let one company operate freely within them. You have set the private insurers up to fail here.

Now don't you dare come after me, like I am some flaming libertarian or something because we have discussed this numerous times and you know perfectly well what I support, and if you can't remember then I suggest you refrain from responding to avoid making a fool out of yourself.

[Sbane]

Cost controls are sorely needed in the health insurance markets. This article implies that the private market will be able to control costs the best, but this ignores what has happened in reality for the past 20 years. Costs have been going up 10% a year and insurance becomes too expensive for families with each going year. This shouldn't be surprising for a service that has an extremely inelastic demand curve. When insurance companies raise rates they don't see a corresponding decline in demand as in other normal industries. Thus costs have to be controlled in another fashion such as mandating 80% of all expenses are spent on health care. If a company can't even do that, it is evident they are fat and bloated and wouldn't survive in any other industry and don't deserve to survive in the health insurance industry either.

The reason for the lack of competition is largely due to two primary issues.

1. The Anti-Trust Exemption which should have been removed and isn't.

2. Lack of Competition accross statelines.

Of course the private market won't compete when the gov't has basically created Health care zones and let one company operate freely within them. You have set the private insurers up to fail here.

Now don't you dare come after me, like I am some flaming libertarian or something because we have discussed this numerous times and you know perfectly well what I support, and if you can't remember then I suggest you refrain from responding to avoid making a fool out of yourself.

Haha wow you really need to calm down. I don't think you have been unreasonable in the health care debate so stop being paranoid.

Now I absolutely agree that anti-trust exemptions should be abolished but the reason it didn't happen is due to your friends Joe Lieberman and Ben Nelson. I also don't disagree with the idea of competition across state lines, I would just hope the guidelines for health insurance was more uniform across state lines.

[anvi]

Administrative costs are lower in large coorporate plans than for small group or individual plans, the former average a little above 9% and the latter a little above 12% and 16% respectively.  Large plans have bigger pools and can defray their MLRs much more effectively than smaller plans.  Some states already impose MLR caps on insurance companies, and some companies try to keep them down in order to maximize capital and attract investors.  A lot of the MLR in health insurance companies is however not just represented in administrative expenses, but in executive salaries and dividends, ect.

But, none of this is at what I believe is at the heart of the matter.  As far as I'm concerned, health insurance should be a public utility.  Why, in principle, should health insurance be a for-profit business?

Ah and hear with have the usually leftist boogieman of private Health Care's Administrative costs. The reason for these administrative costs is that private health care companies cannot afford the mistakes and waste that exist in Gov't programs. There is no perfect system and there will be no free lunch as it were.

Well, first of all, I acknowleded in what I wrote that health insurance companies do try to keep their administrative costs down in order to be competitive and increase their profits. 

Secondly, other health care systems that employ various forms of non-profit insurance waste far less of their expenditures on health care than we do.  So, invoking the waste argument to defend our system of health care financing against others requires one to turn all the evidence on its head.

Let's just face it.  Almost every other industrialized country on earth has basically solved the problems of providing both universal access to heath care and controlling health care costs.  The systems are not perfect, I agree, and still need ongoing adjustment.  But the basic formula for solving this problem is clear, it's not magic.  The reason we don't solve this problem in the United States is that, for some morally and economically indefensible reasons, we believe that an industry should exist that allows people to profit from paying, or in our case very often not paying, people's medical bills, not just for elective procedures, but for necessary ones as well.  Leaving 16% of the insurable population out of coverage, allowing tens of thousands of families every year to go broke because of medical costs associated with necessary care, allowing tens of thousands every year to die from treatable diseases, and still having to pay twice as much as any other industrialized country on our heath care--all this makes our health care financing system not just imperfect, but disgraceful. 

And dismissing all of that by just labeling it "leftist" solves nothing. 

[Vepres]

Secondly, other health care systems that employ various forms of non-profit insurance waste far less of their expenditures on health care than we do.  So, invoking the waste argument to defend our system of health care financing against others requires one to turn all the evidence on its head.

They probably wouldn't were it not due to all the paperwork from a government with redundant and (in some areas, though in others it's the opposite) over regulation.

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Of course, you're assuming that private insurers are inherently worse, but that is fallacious. Firstly, universal coverage is certainly possible with very few people on government plans. Secondly, while 16% don't have coverage, the 84% that do have coverage usually get better results than other industrialized nations (don't bring up life expectancy or infant mortality, as many other factors contribute to those). The US has one of the highest rates of survival of cancer in the world and the US gets cutting edge treatments before most other countries.

Even if you don't factor that in, what do these countries give up for these lower costs? Well, many ration (I've heard many stories both personally and through the news), you have no choice because places that specialize in certain areas of medicine don't exist. Long waits, decreased pay of physicians, the list goes on and on.

Also, consider the fact that the vast majority of medical research occurs in the US. Have you ever heard of a medical breakthrough from Canada

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True, but I have yet to see a plan from the left that seems to have any promise, and I think Yankee would agree.

The market is superior if it has the correct regulations and many of the redundant ones removed, you don't have to tear down the whole system, but simply reform it. Most people see this debate as black and white when it clearly isn't.

[Torie]

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Ya, they did it, through more Draconian rationing in large part (and I agree that rationing is essential in any system), and pursuant to the US subsidizing most drug research via the mechanism that US consumers pay far more for prescription drugs than the rest of the planet because other rich nations with single payer systems are monopsony buyers.

As to the latter point. one reform I have long favored, is that drug companies should be prohibited from price discrimination except to the extent justified by the cost savings attendant to volume sales. That would at least put an end to US consumers (and the US government that subsidizes many or most of them), from being the financier of that particular worldwide ex-US subsidy.  Just why the political class has not moved on that particular fix is a great mystery to me, and yes, it's damn frustrating to me as well.

Addendum: One other thought occurs to me. My impression is that US MD's still make considerably more on average than MD's in other rich nations. If that ends, over time, will the quality of MD's in the US decline?  That may be a necessary evil, but the point is that there is no free lunch here, that will expand medical services without substantially increasing costs, or degrading the quality of same. There just isn't that much fat in the system, and very little fat in the private insurance mechanism. Heck effecting rationing in a more Draconian fashion will entail substantial administrative costs, as a triage system is created, and continually evaluated, and enforced.

[anvi]

Yes, I have heard of medical breakthroughs in Canada.  The discovery of insulin and the invention for its process (essential for diabetes sufferers), the pacemaker, the Cobalt-60 cancer cell treatment machine, and an instrument used now in lots of medical and other scientific research, the electron microscope, to name a few.

Rationing is necessary in any system of medical treatment.  The difference between other developed nation's systems and ours with respect to rationing is they decide what procedures to ration, and not which people to ration, as we systematically do.  To call their rationing process Draconian in comparisson to ours in view of that fact is ridiculous.  Despite all of its flaws, the fact that the current health care legislation in congress abolishes the people-rationing decisions made by insurance companies (in exchange for mandates for individuals to buy insurance, which is the only thing that can make it economically possible), is an important acheivement. 

There is an alternative to "single-payer" financing, and that is the multipayer Bismarck system, such as is found in Germany and Japan, which features hundreds of private insurance companies and plans, but mandates that these be non-profit.  I continue to believe that such financing systems are superior to ours.

Absent that, combined with the government's ability to negotiate costs with providers, I think Torie is right, the most we can do is find ways to trim around the edges of the constant rise in costs.  Some of the reforms he mentions are good ideas.  So is, lest you continie to dismiss me as a "lefty," Tort reform, especially as malpractice laws both mandate and encourage doctors to massively overtest.  Even the best reforms to our current system will only slow expenditure growth, they won't cut it.  But hey, if we have to spend 25% of our GDP on health care and pay twice as much per person as any other country on it, I'd at least prefer that we cover everybody for necessary care while doing it.     

[Torie]

You don't think it is fair to suggest, that say vis a vis, Britain, 80% (or some such percentage) of the medical services consumers in the US get more rapid access, (assuming there is any access at all in some instances in single payer systems and the like), to expensive medical procedures? You have not read that in the UK, you often have to wait months to get an MRI, while for example, just last week, I got one in 2 days (of which my insurance company will pay the bulk of the $1,400 cost)?  That is one of the prime reasons, if not the prime reason, that medical care in the US is so much more expensive. We just get more, and for that reason primarily, the system is collapsing from a fiscal standpoint. Granted, about 20% are royally screwed in the US as to even minimally adequate  medical care, and that is neither sensible, moral, or sustainable, either.

[Sbane]

I wonder what the wait times for MRI's are in Germany or Japan or any country that uses the Bismarck model. That is what we are going towards, not what Britain has. Using Britain as an example in the current health care debate is irrelevant.

[Torie]

I wonder what the wait times for MRI's are in Germany or Japan or any country that uses the Bismarck model. That is what we are going towards, not what Britain has. Using Britain as an example in the current health care debate is irrelevant.

It would be great is someone did some research on that point. Granted I don't understand either the German or Japanese system, which is a handicap. And I was not suggesting that the bill which was passed was the British system obviously. Nor am I sure the bill that was passed will really contain costs. Heck, I am not sure of anything!

[anvi]

I think it's fair to point out such things about the British and Canadian systems, but, once again, I'm not advocating those systems.  I'm advocating a Bismarck system, like Japan's.  In Japan, people can get MRIs practically without an appointment, and Japanese utilization of MRIs is routine.  Best of all, the MRI that cost your insurance company $1,400 would cost about $100 in Japan.  

The reason for the dramatically lower price of course is that the government sets the price for MRI tests and how much can be spent on machines.  Companies that produce MRI machines that want to compete in the Japanese market just have to meet the price, and since they want to compete in that market, they do.  

A brief comparisson of Canada's and Japan's systems:
http://www.fraserinstitute.org/COMMERCE.WEB/article_details.aspx?pubID=3497

[Torie]

I think it's fair to point out such things about the British and Canadian systems, but, once again, I'm not advocating those systems.  I'm advocating a Bismarck system, like Japan's.  In Japan, people can get MRIs practically without an appointment, and Japanese utilization of MRIs is routine.  Best of all, the MRI that cost your insurance company $1,400 would cost about $100.  

The reason for the dramatically lower price of course is that the government sets the price for MRI tests and how much can be spent on machines.  Companies that produce MRI machines that want to compete in the Japanese market just have to meet the price, and since they want to compete in that market, they do.  

A brief comparisson of Canada's and Japan's systems:
http://www.fraserinstitute.org/COMMERCE.WEB/article_details.aspx?pubID=3497

Would it be possible to attract MRI services in Japan for $100, if those who invented MRI's and sell them, and use them, could not charge $ 1400 in the US, just like the prescription drug issue?  Just asking. Maybe the US subsidy drug research syndrome is a syndrome that reaches beyond prescription drugs. It is fine to charge less at the margins, where you just need to make a marginal profit, as long as your overhead and research costs are paid for elsewhere.

[anvi]

The U.S. is not the only place in the world that produces MRI machines.  Lots of Japanese companies, Toshiba and Hitachi foremost among them, produces MRI scanners, and because of their low production costs, their scanners are popular exports througout the rest of Asia and sometimes here.  The resonance levels are different with different machines, but the electronic-crazy Japanese do produce high-quality machines.  These companies simply produce lots of other electronic products to generate the necessary revenue to produce medical equipment.

[jokerman]

Cost controls are sorely needed in the health insurance markets. This article implies that the private market will be able to control costs the best, but this ignores what has happened in reality for the past 20 years. Costs have been going up 10% a year and insurance becomes too expensive for families with each going year. This shouldn't be surprising for a service that has an extremely inelastic demand curve. When insurance companies raise rates they don't see a corresponding decline in demand as in other normal industries. Thus costs have to be controlled in another fashion such as mandating 80% of all expenses are spent on health care. If a company can't even do that, it is evident they are fat and bloated and wouldn't survive in any other industry and don't deserve to survive in the health insurance industry either.

Cost is mostly due to the invention of costly medical procedures. There seems to be this belief that somehow we can all have these costly medical procedures without paying for them. Most insurance companies meet the 80% threshold as it is, except maybe with some individual plans, where there are no economies of scale. The single payer system in the end, is mostly about finding a hidden and politically acceptable means to ration.

Hmm?  What is the difference between rationing something and making it so expensive that no poors can afford it?

[opebo]

... medical care in the US... We just get more,

Not precisely true.  In the US a few people get more care than in the UK, but a large segment of the population gets none at all.  In the UK there may be a 'wait' for certain things (though I tend to doubt such stories), but the main point is that for the lower half of the population, they get far more health care than the lower classes in the USA.

In other words their system is better if you're not rich, our system is better if you're rich.  Since at least 90% of us qualify as not rich, a UK system is better, for us.

Oh, and regarding the original point made about 'public utilities' - why should we accept any 'private' industries being run any other way?

[Filuwaúrdjan]

As the NHS has been mentioned, I should mention that as general rule (I'm sure that exceptions and horror stories can be found if someone were to look hard enough - the same is, of course, true of any and all healthcare systems) long waits only occur for routine procedures, minor operations and so on. When patients are seriously ill things can happen very quickly - when I was in hospital earlier this year an emergency CT scan was booked and done within a few hours of the consultant deciding that I needed one.

[Badger]

There is an alternative to "single-payer" financing, and that is the multipayer Bismarck system, such as is found in Germany and Japan, which features hundreds of private insurance companies and plans, but mandates that these be non-profit.  I continue to believe that such financing systems are superior to ours.   

Forgive my ignorance here, but what is the incentive to form and perpetuate a private health insurance company if it must be non-profit? The impetus to invest would seemingly be nil, and administrative salaries would presumably be significantly lower than management positions in other for-profit industries. No?

[muon2]

There is an alternative to "single-payer" financing, and that is the multipayer Bismarck system, such as is found in Germany and Japan, which features hundreds of private insurance companies and plans, but mandates that these be non-profit.  I continue to believe that such financing systems are superior to ours.   

Forgive my ignorance here, but what is the incentive to form and perpetuate a private health insurance company if it must be non-profit? The impetus to invest would seemingly be nil, and administrative salaries would presumably be significantly lower than management positions in other for-profit industries. No?

The US has a significant part of its health care system already set up as private non-profit companies.  Most hospitals are organized as non-profits, and there seems to be sufficient incentive for new investment at those. They are not mandated to be organized as such, but most do so. Some Bismarck-model countries such as the Netherlands permit a mix of profit and non-profit hospitals and insurance companies as the US does with hospitals today.

[anvi]

There is an alternative to "single-payer" financing, and that is the multipayer Bismarck system, such as is found in Germany and Japan, which features hundreds of private insurance companies and plans, but mandates that these be non-profit.  I continue to believe that such financing systems are superior to ours.   

Forgive my ignorance here, but what is the incentive to form and perpetuate a private health insurance company if it must be non-profit? The impetus to invest would seemingly be nil, and administrative salaries would presumably be significantly lower than management positions in other for-profit industries. No?

The incentives involved depend on the system.  In Germany, the richest 10% of the population is permitted to opt out of standard coverage plans and purchase more expensive ones, and the non-profit companies compete to craft special coverage for them.  In both Germany and Japan, private plans still compete over the available customer pool and administrators get modest bonuses from the company for their success.   Insurance companies in these systems are relatively successful and stable, and the job security associated with working in such companies, especially in countries with otherwise substantial unemployment (more the case in Germany than Japan) or jobs which offer permanent benefits rather than temporary work (more the case in Japan) are attractive pircs.

But, the other answer to this question gets back to the subject of this thread.  Doing something as important as providing people health coverage is considered a public service in these societies, and in societies where community and service are valued just as highly if not more than pursuing wealth (especially the case in Japan), there is social value in such work.