Last week, I posted a synopsis of the Republican counterproposal to the PPACA, which was formulated during the 111th Congress. In light of the decision issued this week by Judge Roger Vinson, a Reagan appointee, it’s all the more valuable to examine the expected impact of replacing the PPACA with the Republican proposal.
Let’s start by looking at the elements the proposal would add.
Tort Reform: As we discussed back in the comments section of “Health Insurance Isn’t Really Insurance At All”, malpractice insurance represents only 2% of healthcare costs. This means that a “best case” scenario of eliminating all malpractice insurance (which is not proposed), we’d be looking at a 2% direct reduction in healthcare costs. But only about half of the cost of medical malpractice insurance premiums go toward malpractice claims, so any reduction in claims would be expected to reduce healthcare costs by a maximum of 1%. Naturally, the more realistic outcome is a reduction of far less than 1%.
But wait, what about the defensive medicine practiced because of the malpractice suits? While I agree that there is a lot of defensive medicine practiced in the US (estimates are around 15-20% of total healthcare costs), absence of malpractice suits would be unlikely to appreciably reduce defensive medicine. Since neither the doctor nor the patient directly bears the full cost of the additional testing and treatment, neither of them have sufficient incentive to reduce the costs. Furthermore, they both have incentive to increase the costs, because both want the doctor to do everything possible to eliminate uncertainty and provide the best possible treatment.
In other words, tort reform would be expected to have, at best, a few percent reduction in healthcare costs. That’s not to say that there might not be some benefit, but it’s hardly the panacea that the marketing would lead us to believe it is.
Interstate Insurance: The official impetus here is to increase competition by increasing the number of insurers. However, there is little reason to believe that this would be the long-term outcome. To understand why, I’ll illustrate with an example from the airline industry.
When the airlines were deregulated, they learned that most of their passengers focus on price, to the exclusion of all else. Survival became a function of managing costs, which manifested itself in a steady erosion of customer service. A big contributor here is the combination of relatively infrequent interaction and a significant delay between purchase and use of the service, which creates a mental disconnect between the money paid and the service rendered. This is compounded by a similar delay between the time service is rendered and the next time money is paid. People end up shopping almost entirely based on price. In the end, we have seen a reduction in the number of competing airlines, with airline service reduced to the point that it’s a mere shadow of its former self, albeit with far better airfares than we otherwise might have had.
Health insurance exhibits very similar disconnects between purchase and services rendered, which pushes people to choose based almost exclusively on price. In such a market, profits are based entirely on cost control. By far, the largest cost to a health insurer is payment on claims, so that’s where the bulk of the focus on cost cutting resides. To the extent that the law allows them to deny claims, then, their profits rise.
Now, the states will want the insurance companies to reside within their jurisdictions, because that means jobs, and jobs mean happy constituents and more tax revenues, both of which mean happier governments. In order to get those companies, the states will be competing with each other to set up rules favorable to the insurance companies’ profits. In other words, the states have incentive to make it easier for insurance companies to deny claims. When the states have to compete against each other for the limited number of insurance jobs, that race to the bottom is virtually guaranteed.
Now let’s look at the existing elements the Republican plan would eliminate.
Minimum Standards for Policies: This was put in place in PPACA as a means of protecting against the use of taxpayer dollars to cover costs for the underinsured. It becomes more important in the case of allowing interstate policies, yet it’s being eliminated altogether as part of the plan.
Mandatory Coverage: This, too, was put in place in PPACA as a means of protecting against the use of taxpayer dollars to cover the costs of healthcare. As long as we have agreement as a society to cover, with taxpayer dollars, heroic medicine, regardless of one’s coverage or ability to pay, we are obligated to ensure that we are getting the best results for our money. It is far less expensive to deal with medical issues early, but the system has been set up to push for treatment late. Getting everyone covered reduces the costs. Getting everyone covered with their own money reduces the tax costs still further. Therefore, eliminating this requirement cannot avoid costing more in taxes.
Insurance Subsidies: These are, of course, necessary if there is an insurance mandate, in order to cover those who otherwise cannot afford the minimum coverage. But it’s also of value even if there isn’t a mandate. As I said above, getting people covered reduces the incidence of expensive emergency care, and getting people covered with their own money reduces the tax costs even more. To the extent that the subsidies represent a portion of the premiums, the tax burden is reduced. Naturally, in the case where someone is fully subsidized (e.g., under Medicaid), there is no effective change.
So what do we have in the case of a replacement of PPACA with the GOP plan? Medical costs might be reduced a bit by the tort reform. Insurance premiums would probably be significantly lower over time, at the expense of having worse real coverage, causing substantial unpredictable economic hardship for many Americans at times when they are least able to address it. The upshot would be a long-term greater burden on Medicaid and catastrophic emergency care, though perhaps with a lower short-term tax burden.
But for the time being, over half of Americans are covered by health insurance through their employers. For those people, there would be no appreciable difference between the two plans, provided they aren’t the victims of medical malpractice. They won’t see any appreciable difference in their premiums, and they won’t be in the market for individual insurance. It is only the minority who are in the individual insurance market that will see any difference between the two models. For that minority, the differences are stark.
In a future article, I’ll discuss what I’d like to see as the future of health insurance, and why. Today is about this analysis. Comment away.
- Yes, Virginia, There Is a GOP Plan (538refugees.wordpress.com)
- Moving Beyond Health Care Reform Repeal to Revision (alankatz.wordpress.com)
- Politics, Math and Premiums (alankatz.wordpress.com)
- Tort Reform Means You Pay For Others’ Errors (my.firedoglake.com)
- GOP Health Agenda Includes Medical Malpractice, Cost Concerns (medicalnewstoday.com)
- Patient safety important in medical malpractice reform (medcitynews.com)