Thursday, September 10, 2009

45 Minutes of Nothing

I’m not exactly the most succinct writer, but for my assessment of Barack Hussein Obama’s September 9th speech to Congress I will forgo my usual verbosity. Bottom Line: the President said nothing we haven’t already heard.

I have addressed the issues he claims are misinformation previously; you can read that post here:

Here are some quick summaries regarding some of the things I didn’t address in that post:

1) Republican input – FALSE. The 5 committees working on the health care bill have not included Republican input and Republicans have systematically been denied input throughout the process. Recall comments such as, “You don’t even matter, so I’m not going to talk to you.” [Democrat talking to Republican]

2) Coverage not provided for illegal immigrants – FALSE. In the July 14th version of HR 3200 it specifically excludes illegals, but more recent committee versions provide insurance for illegals. Regardless of the approach, the illegal immigration issue MUST be addressed to curb health care costs because they leave the American taxpayers to pay their way if they’re given subsidized insurance or if they use our hospitals without paying.

3) Obama will consider tort reform – FALSE. He said he would initiate a study, but (assuming he actually does) it is completely separate from the health care bill. Note he said nothing of including it in the bill.

4) Obama let go of the government option – FALSE. He said he wanted a triggered gov’t option in the event private insurance isn’t affordable enough. Hmm…wonder who decides if private insurance isn’t affordable…couldn’t possibly be the government? This was purely political pandering with no substance. Obama spoke at length about the necessity of a public option to “compete” with private insurers. Furthermore, the provisions of the health care bill will cause insurance premiums to rise – guaranteed. When they rise the government “trigger” would activate and the public option becomes reality.

5) The public option will not compete unfairly – FALSE. I’ve already debunked the “fair competition” lie in my previous posts, but I’ll add a little to it here also. The President claimed the public option would only make money from premiums, but this is false for three reasons (a) the bill sets aside appropriations to get the public option started, (b) the bill allows the public option to hold an undetermined (unlimited?) reserve for unforeseen circumstances while expressly limiting private insurers loss ratios, and (c) if the public option is triggered because private insurance isn’t affordable and is likewise necessary to make it affordable, then the government would not be allowed to let the public option fail, aka government subsidies.

6) The Health Care Bill won’t add to the deficit – FALSE. Sorry…had to stop laughing before I wrote this… The President is flatly ignoring the CBO estimates that predict the Bill would increase deficits by several hundred billion dollars. In addition, he is making his claim based upon the notion of savings from efficiency gains – the kind of nonsense that government has been promulgating for decades but remains elusive.

Throughout this debate it is critically important that we remember the distinction between health care and health insurance. Obama is proposing health insurance for everyone (CBO estimates also say there will be several million people left uninsured by this bill) but this is not the same as health care for everyone. In fact, further insulating people from the market price of health care treatment and medications will only cause costs to increase. I’ll use a few examples and analogies to illustrate the problem.

First, let’s understand the costs related to health care, pre-HR 3200:

For simplicity, assume a family income of $100,000 per year. That means the wage earners and their employers will contribute $2,900 in FICA taxes to the Medicare system (1.45% employee and 1.45% employer contributions). On top of that the family might pay $2,400 in health insurance premiums while their employer pays about $12,000. In addition, the family might pay $2,000 for cost-sharing, i.e. co-pays and deductibles. The insurance company may pay out $14,000 in health care claims for the family. That means the total health care costs paid for the family are $33,300 per year, or 33.3% of their pre-tax income.

The point is to illustrate that health insurance is not free and the cost of health care extends beyond health insurance. Just because you provide health insurance to someone doesn’t mean health care costs go away – the insurer is paying the majority of those costs; likewise, employers are bearing the brunt of the cost of the insurance. Additionally, almost 9% of the total annual health costs are going to a government health plan (Medicare) which is of no present benefit to the taxpayer.

Second, more health insurance will not reduce health care expenditures – it will likely increase them:

Recognize that the health care purchased during a given time period is not reduced by the existence of more widespread health insurance (there are some caveats I’ll get to soon). We can categorize the health care purchased into one of three categories: (1) what’s purchased and covered by health insurance; (2) what’s not covered by health insurance but medically necessary and is thus purchased anyway; (3) what’s not covered by health insurance, is not medically necessary, but is still desired sufficiently to pay the costs directly, e.g. cosmetic surgery.

There are some who assume a disproportionate amount of (2) could be moved into (1) if more people were insured by plans that paid for regular preventive care and screenings. While this may be true in part, it ignores that those screenings still cost money. It may sound draconian, but from a purely economic standpoint, the assumption also misses the medical costs paid for a person who survives a life threatening disease and purchases health care for the remainder of his or her life that wouldn’t have been purchased had the disease ended their life. (Cass Sunstien, Ezekiel Ehmanuel, and Obama realize this and thusly advocate for “taking a pill” instead of getting treatment.)

In addition, lower co-pays and lower co-insurance would be likely to increase the purchases of health care under category (1). For instance, when my family had lower co-pays and no deductibles we would take the kids to the doctor with far less ominous symptoms than we do now as a result of a more expensive plan. Similarly, we could expect currently uninsured to purchase more health care once they become insurance because of the cost-shift to the insurance company.

Finally, health care purchases under category (3) would likely change as the economy changes, but do not contribute to economic trends in medically necessary health care because they are paid for in advance and there is no cost-shifting.

The Health Care bill would induce no change in total health care spending, at best, and would likely increase the overall spending on health care. In addition, there is nothing in the bill that would influence prices down; in fact, the effect would be quite the opposite because costs are hidden from the purchaser through the insulation of insurance. In the next few sections, you will see why this will cause everyone’s costs to rise.

Third, Moral Hazard explained:

Insurers are all too familiar with moral hazard. Insured are too, but often don’t realize they are. To better illustrate the phenomenon I’ll use an analogy.

Assume I offer you a Car Purchasing Program. Here’s how it will work… you pay me $3,600 per year for the plan. You are then allowed to get a new or used car from any one of our in-network dealers; you pay 10% of the costs up to your $2,000 co-insurance limit. It has to be classified as a passenger car – we don’t permit trucks or SUVs. You have a $500,000 lifetime cap on how much you can buy, but we don’t restrict you on price, make, model, etc.

So what are you going to get? You know you’re going to get a car of some kind because you’re paying into the plan and you don’t want to waste your money. At most, it’s going to cost you $2,000 for the car plus the monthly premium for the plan. There’s no restriction on what you buy, so you can purchase a used Chevrolet Caprice, or you could purchase a Lexus LS. You might divide the $500,000 lifetime limit by the number of cars you expect to purchase over your lifetime and arrive at a price. On the other hand, you may just take it one car at a time. Either way, you’re going to get the most car for your money, right?

Likewise, you can go to any in-network dealer. So…are you going to go to the dealer with the old, cruddy building that’s across town or the one with the new building three blocks from home? I’ll bet you already decided even though I didn’t tell you the closer dealer charges $5,000 more per car, on average. I’ll bet again that you didn’t change your mind after I told you that. Why? Because price doesn’t really matter to you under the plan…and that is moral hazard.

Fourth, why insurance companies and the government MUST ration health care:

Continue with our car purchasing program plan. Initially, you probably thought about that $500k lifetime cap and wanted to make sure you wouldn’t be driving a Bently for the rest of your life (nice car, but are they really that reliable). But what if the government came along and said I can’t put a lifetime cap on the plan? Bugatti here you come!!! The problem is that I can’t make money anymore, but I can’t cancel your plan either. So what am I going to do? I will now put restrictions on the plan. You can now only purchase a car once every 7 years. Furthermore, it has to be a Fiat or Hyundai. Finally, it can’t cost more than $25,000 or you make up the difference.

I have to put on these restrictions or else I won’t make money. If I don’t make money, or I lose money, I can’t stay in business. Similarly, if I’m the government, Congress somewhat arbitrarily decides how much money I have for the program for the year (we’ll ignore things like deficits and tax revenue because Congress ignores them too). Because I have to be “fair” to everyone I will divide the budget by the number of people covered and base my terms and conditions on those numbers. These are the reasons why government and insurance companies ration – because money is finite.

Fifth, why insurance premiums would go up with the HR 3200 bill:

If you accept that the total amount spent on health care wouldn’t change (or would increase) if more people are insured, then it logically follows that premiums must go up. Let me illustrate:

Assume total medically necessary health care purchased in a given year is $1 T (I’m making up numbers for the sake of example). Of that, $700 B is paid by health insurers. Now assume there are 300 Million insured and 30 Million uninsured. Therefore the total collected in premiums and Medicare taxes must be no less than $700 B plus the costs of overhead (contrary to Obama’s rhetoric, the government has a very high overhead cost – it’s just not subjected to the same GAAP accounting rules and therefore associates its costs differently). Assuming the overhead is 15% of outlays that means total premiums and taxes must be $805 B. That means the premium/tax burden per person would have to be $2,685 for this hypothetical example.

In fantasy land, everyone would be covered by insurance with the proposed health insurance reform; therefore the total premium/tax revenue must be equal to $1.15 T for a new premium/tax burden of $3,833 per person.

In reality, the people already paying premiums would receive disproportionately more of the new tax burden from passage of the health care bill PLUS a disproportionate share of the increased insurance premiums. Additionally, we know from ample past experience that government programs ALWAYS cost more than expected (and they always under-deliver). Add to that the inevitable increase in medical costs caused by increased moral hazard and you have all the elements for making health care cost substantially more for everyone through increased insurance costs; increased direct, out-of-pocket health care costs; and increased rationing.

Sixth, no pre-existing condition exemptions sound good, but what’s the ramification?:

Nothing sounds more cold-hearted than an insurance company refusing to insure someone with a pre-existing condition. However, keep in mind that health insurance does not equal health care. Health insurance is a service provided to people for the purpose of protecting their financial well-being against unforeseen health circumstances which require expensive health care. Bankruptcy is another mechanism by which people can recover from unforeseen financial ruin via release of debt holds and creation of a repayment plan, albeit an unfavorable option.

Waiting to buy health insurance until you have cancer is like trying to buy life insurance just before they disconnect you from life support. From the perspective of those already insured, having a someone recently diagnosed with cancer trying to get insurance is like the person who didn’t want to pay into the lottery pool suddenly demand to buy in after the pool wins the jackpot. Health Insurance is not a magical source of health care; it is a risk pool. If everyone in the risk pool has the same amount of medical expenses then there might as well be no pool because paying those expenses directly would save the cost of insurance company overhead. Similarly, when someone with higher medical expenses enters the pool it costs everyone in the pool more money.

For instance, assume there are ten people in an insurance “pool” with hypothetical annual health care costs of $4,000, $12,000, $28,000, $2,000, $500, $3,500, $11,500, $8,000, $9,500, and $3,000. The total health care costs paid by their insurance provider are $82,000. Using the same 15% overhead cost rate, the insurance company should have charged $9,430 per year per person if it wants to remain viable (in reality, they don’t know these numbers in advance and use actuaries to estimate their risk from a statistical analysis and thereby determine premiums.) It would not be unlikely for a person needing cancer treatments to spend $250k or more per year on health care. If he wants to enter the risk pool with the 10 original insureds it would cause the rates to jump to $34,709 per year per person, although, actuarially speaking, it would be less because the statistical risk to the insurer would not increase by my simplistic algebraic formula. Regardless, you see the impact of eliminating the pre-existing condition exemption.

I absolutely do not condone insurers from dumping seriously ill customers on the basis of undisclosed and unrelated pre-existing conditions. There should be a statute of limitations beyond which the insurer can no longer dump customers regardless of what undisclosed pre-existing condition they dig up.

Lastly, Obama’s health care plan STILL misses the point:

I’ve made this argument before, but I’ll repeat it because it is so important. The health care reform that MUST be passed is reform that reduces the cost of health CARE. Nothing in the plans floating about the labyrinth of Congress addresses the rising cost of health care in America. In fact, their plans will increase the cost of health care while also reducing covered services and reducing access.

People who claim conservatives have no alternative are either not listening or are too committed to their Marxist philosophies to admit the utter failure of their plans to solve the real problems. A health care reform plan that addresses the root causes of high health care costs must do the following:

1) Address illegal immigration – Illegal immigrants can take advantage of our medical facilities ONCE; upon leaving the medical facility they will be handed over to the INS for immediate deportation. We should streamline the citizenship process (not necessarily make it easier) and we should improve our worker sponsorship process. Any such policy must also make improvements to the system for tracking people who overstay their sponsorships or “vacations.”

2) Address tort reform – I don’t necessarily condone caps on medical malpractice awards, but I do support making the plaintiff pay the defendant a sum equal to the damages they were requesting should the judge or jury find the lawsuit to be frivolous. This would help reduce the number of malpractice suits; thereby, reduce malpractice insurance costs, settlement costs, and reduce defensive medicine.

3) Reduce moral hazard – Health care reform must make patients more responsible for managing the costs of their treatments. Health savings accounts are an excellent, and proven, means to accomplish this. In addition, it allows individuals to save towards their inevitably higher health care costs as they advance in age. Catastrophic coverage could supplement this plan.

4) Improve the new drug certification process – Reduce the cost and duration of the drug certification process through the FDA. For all the talk of inefficiencies in the health care system, nothing has been said about the bureaucracy of the FDA processes. I’m not advocating reducing requirements, but I am suggesting we could do much better.

5) Health care exchange and portability – I actually like this aspect of the current plan. Note that it is only about 1% of the page count in HR 3200.

6) Reduce government involvement – Obama talks incessantly about waste, inefficiency, and the overhead/profit costs of insurers. Does he REALLY think the government doesn’t have overhead costs? His plan drastically increases the size of the government machine, reporting requirements, and adds a multitude of new government agencies. Efficient government is like saying lean lard – it makes no sense. I propose they dismantle much of the existing web of bureaucrats as they serve no purpose.

7) Provide the right tax incentives - the government should allow individuals to write off the cost of independently purchased health care, not just businesses. Instead of paying more efficient medical facilities more government money, they should give tax breaks for investments in efficiency and efficiency improvements. Why route the money through government only to give it back, minus the cost off all that government overhead (I know the reason – politicians want the control)?

Let’s face it, the real change that’s needed isn’t going to happen under Obama or a Democratic Congress. It’s not likely under a Republican president or Congress either, which is all the more reason to oppose Obama’s “health care” plan because once it’s enacted there will never be enough politicians with the fortitude to repeal it and make the right choices. For my last analogy: remember that taking power away from a politician once he has it is more difficult than pulling light out of a black hole. Keep fighting Obamacare, our nation’s survival depend on it.


  1. Wow - this is the "non-verbose" version?

    Seriously - good stuff, Aaron. On pre-existing conditions, there is a reason the insurance companies have lobbied to pair that with an individual mandate, and it's pretty simple really. If you have to have insurance, there won't be any uninsured people with or without pre-existing conditions. That maximizes the risk pool (good for the insurance companies) but reduces freedom, and, combined with community rating requirements, forces the young and healthy to pay far more than the actuarial tables could justify for more insurance than they are likely to need.

  2. The real problem with Obamacare is actually not the misguided President and Congress. The real problem, IMO, is that US citizens have evidently not been teaching the Constitution and its history to their children for many generations, particularly the enumerated principle of state sovereignty evidenced by the 10th Amendment. Otherwise, schoolchildren would be able tell us that, since the Constitution is silent about public healthcare, the 10th A. automatically reserves government power to regulate and lay taxes for healthcare to the states, not the Oval Office and Congress.

    What's going on is that generations of state sovereignty-ignorant voters have been electing lawmakers to both the state legislatures and the federal senate who are as state sovereignty-impaired as the voters are. Consequently, these lawmakers have not been doing their jobs to protect state sovereignty by protecting citizens from illegal federal taxes and unconstitutional federal government interference in their lives.

    Finally, the following link should help give people an idea as to how state sovereignty-ignorant voters have shot themselves in the foot with big, corrupt federal government.

  3. I certainly agree with both comments. In the bill, it requires no greater than a 2 to 1 ratio of the lowest premium to the highest premium. In other words, the elderly or more sickly would not pay more than twice the premium of the healthy, younger insured. This may sound good on paper, but it translates to higher premiums for almost everyone.

    There is no doubt the Feds have overstepped their constitutionally mandated bounds. The Interstate Commerce Act should never have been allowed by the Supreme Court and we have been paying the price ever since. It's no surprise that our public education systems would not include 10th A lessons when the Federal government is so busy meddling with schools through the Dept. of Education.

    Thank you for your comments.