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Tuesday, October 13, 2009


AHIP, the health insurance industry lobby just commissioned a study from Price Waterhouse Cooper (PWC) which asserts that the Senate Finance Committee draft bill would cause a huge increase in insurance premia. The analysis is total nonsense. Importantly the PWC report says so. The plan seems to have been that journamalists will report the headline number and not read the report.

update: Well now that's clear. TPM reports, you decide. PWC considered only reforms which would cause increased premia. For example, their explanation includes no hint that they considered the expansion of medicaid, although they definitely considered the reduction of medicare reimbursement rates. They did not consider the effect of the employer mandate. They seem to have assumed no individual mandate at all. That is they agree that the analysis was a joke. I think that AHIP and PWC went too far in messing with the numbers.

As noted by Jon Cohn and Ezra Klein (click the link) PWC calculates the headline number by assuming that measures whose aim is to reduce total health care spending will have no effect on health care spending. Thus they assume that the tax on gold plated health insurance will not lead to even one person having more modest health insurance. They assume that all medicare cuts will be balanced by increases in premia paid on private health insurance. That is that financial pressure on health care providers will have zero effect on health care spending.

That is blatant cheating. But even granting that, I still don't get it.

1) Assume that the Finance Committee bill won't bend the curve at all. Why would it cause increased premia ? It seems to me that PWC must have looked at the effect of reforms which would cause increased premia and not the reforms which would cause reduced premia.

Consider the flow of funds. For now I am assuming that the flow of funds out as costs of health care, administrative expenses and profits are fixed. How does the reform reduce the inflow of funds so that premia will have to increase?

There are 3 main sources of funds for the health sector. The largest is public money (medicare plus medicaid). This will be cut. The smallest is patients out of pocket spending. This will be cut as fewer are uninsured and regulations will restrict out of pocket expenses for the insured. The remainder is private health insurance equal to the average premium times the number insured. This flow would have to increase if total spending stays the same. This does not mean that the average premium will increase, since more people will have private insurance.

Yes money will be take out with taxes and yes less money will flow as part of the medicare budget. However that income will not be devoured. One small change is that the Federal budget deficit will be reduced (by 81 billion over 10 years according to CBO). This is not a real cost to the USA. The federal deficit is not a flow of income. It is the illusion of a flow of income. The 81 billion isn't reduced income for the USA except for the federal government. It is moving our beliefs 81 billion closer to reality. This is a benefit not a cost.

Aside from that the tax revenues and medicare cuts will flow out as increased medicaid or as subsidies. Some of that money will escape the health sector. People who would have health insurance anyway who get the subsidies will have more income at the expense of the health sector. In contrast, people who would not have insurance and will purchase it and receive subsidies will send the subsidy plus some of their own money to the health care sector. Some will be forced to do so by even the watered down individual mandate. Others will chose to do so. Furthermore large firms which do not provide health insurance will be forced to provide it. This is another huge increased flow into the health care sector. So we have some subsidies leaking out probably more than balanced by more spending on premia by individuals and small firms who get subsidized insurance plus more money for insurance for the (few) rich uninsured and the many uninsured employees of large firms.

The net changes are
1) 81 billion of reduced illusory wealth (not a real cost to anyone)
2) Lower patients out of pocket spending
3) some people have more money left over after paying for health insurance since they get subsidies for insurance they would have bought anyway
4) some people send the subsidies back plus some of their own money as they get insuance they wouldn't have had
5) Walmart stops free riding.

I just don't see how there could be a huge reduction in the total flow of cash towards the health care sector. The chairman's mark (gang of 6 draft) implied a huge increase in health insurance company profits. The watering down of the individual option implies a moderate reduction in the increase in the number insured. The arithmetic doesn't work.

2) OK so would the Finance Committee draft cause an actual increase in health care spending ? Well more people will be insured. They will demand care they wouldn't demand if they had to pay out of pocket. Also out of pocket expenses for the insured will be reduced. Again more demand for health care. On the other hand, the uninsured do get some health care and it is delivered in a very inefficient way: emergency room visits for things that could be handled in a doctors office. Lack of insurance and stingy insurance reduce demand for preventive care. Preventive care is a more efficient way to provide health (it is better to treat high blood pressure and diabetes than to wait for kidney failure and then dialise). The overall increase is not so huge.

Furthermore the reform should reduce administrative expenses. Hospitals send lots of money to collection companies trying to force people to pay out of pocket. The legal expenses of personal bankruptcy are high. Insurance companies pay people to screen for pre-existing conditions and find grounds for recission. All these things are worth doing for the hospital which has been stiffed, the person who is bankrupt or the insurance company because the administrative expense is less than a transfer from someone else. However it is still a huge flow of money from health care to something else (most of which is still in the health sector, since fighting over who pays for health care appears alongside the cost of actual health care in national income and product accounts health care spending)

Obviously international comparisons and comparisons of medicare and medicare advantage suggest that, totally aside from the channels which were ignored by PWC as mentioned above, the Finance committee bill is more likely to reduce than to increase total spending on the health sector.

My conclusion. The PWC tricks which have been described on the web are a tiny fraction of total PWC tricks.

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