Consumer Power Report #149

As we mentioned recently, consumer-driven health care (CDHC) has reached the “tipping point” of 20 percent of the under-65 population. This was reported by the CDC’s National Health Information Survey (NHIS) and is confirmed by the latest Kaiser Family Foundation (KFF/HRET) survey of employer plans, which found 18 percent of all workers are now in high-deductible health plans. The difference can be explained by the fact that KFF/HRET looks only at employer plans while the NHIS survey looks at the whole population, including those in individual plans. Virtually the entire individual market is in high-deductible plans these days.

Not everyone will agree, but I argue that a HDHP is a consumer-driven plan even if it does not include an HSA or HRA. The goal of consumer empowerment is to take money away from third-party payers and put it in the hands of consumers to spend as they wish. You don’t need a tax-favored savings account to make that happen. If someone doesn’t pay income taxes (which is the case for 40 percent of the population), there is no particular reason to have a tax-favored account. These folks will still be paying cash for services but they may keep their cash anywhere–in a regular savings account, a checking account, or in their mattress. This latter option is looking pretty attractive after the past year of a bear market.

Some critics call an employer-sponsored HDHP cost-shifting–mean and nasty employers make employees pay for services that used to be covered by the health plan. But as Mark Pauley insists below, employees pay for the health plan in the form of reduced wages. It doesn’t much matter if the payment for the health service comes from the health plan or directly from the employee, employees are paying for it either way.

Except it is, first, far more efficient to pay small claims directly rather than going through an insurance mechanism, and second, the opportunity to save money changes behavior on the part of patients. They become better-educated and more reluctant to waste money than they are when somebody else is paying the bill, or seems to be.

Now that we have 20 percent of the population paying some of their own bills, we should begin seeing a profound effect on the service side of the ledger. Every physician, every hospital, every pharmacy will have a fair number of cash-paying patients and will have to adjust their billing procedures and customer service departments accordingly. They will become literally invested in serving a cash-paying retail market. They will want to defend their investment. And that changes the political dynamic substantially.

This is a whole new reality and one that Washington will not be able to tamper with lightly. Congratulations!

Writing in Health Affairs, Mark Pauley of the Wharton School of Business at the University of Pennsylvania makes a case for a hybrid plan between what Obama and McCain have proposed in their campaigns. Whether his hybrid would go anywhere depends on the extent ideology would take a back seat to economics. I rather doubt it could. Politically driven people use economics as a cover for ideology. The priority seems to be who ends up with power rather than whether an idea would actually work.

But Mr. Pauley reminds us of a number of important economic principles that cannot be spun away. He relies on research for his analysis–something that is inconvenient for any politician. He says of the “cost-shifting” argument, for instance, “The economic analysis of employment-based benefits is as clear in economic theory and empirical work as it is muddled in the public debate: Theory and econometric studies both say that workers pay for the majority of health insurance costs, through lower money wages as well as through explicit premiums.”

He compares the two campaigns on this issue–“The McCain approach is thus based on the view that workers pay for and get the tax breaks from their health insurance but that those tax breaks need to be reformed and rearranged. The Obama plan, in contrast, generally seems to view employer payments as the employer’s money, which would otherwise become part of profits if it were not paid out for health insurance. It proposes a play-or-pay employer mandate.”

Mr. Pauley seems to like McCain’s tax credit–“(A uniform tax credit) would not inappropriately push people into or away from group insurance, or bias choices for or against high-deductible insurance. Rather, it would push choices toward insurance that the consumer judges to be worth its true (unsubsidized) cost. This neutrality is important because group insurance is usually less administratively costly than individual purchase, and sometimes managed care is better than high cost-sharing to limit overuse. However, individual insurance can give different individuals the coverage they want, and managed care makes some people angrier than high deductibles. Neutrality allows these trade-offs to be made properly.”

He weighs in on another issue–how to insure people with high risks. He says, “What are the pros and cons of a high-risk pool/guaranteed renewability combination (McCain) versus a community rating/reinsurance subsidy combination (Obama)? Community rating is equivalent to financing a subsidy to all high risks with an excise tax on insurance purchased by low risks, regardless of income. Like other excise taxes, this regulation-produced tax scores poorly on both efficiency and equity. It inefficiently induces below-average risks to drop insurance or cut the coverage they buy.”

He is also skeptical of the cost savings promised by both candidates by better use of heath information technology, prevention, and pay-for-performance. “There is little evidence that there are known methods to cause the (changes in) behavior to occur, and to occur quickly on a large enough scale to matter. Few of the innovations relate directly to controlling the new technology that is driving spending growth, so they cannot promise the kind of large and permanent reduction in spending growth that is needed for true cost containment.”

Health Affairs is not the only publication comparing the Obama and McCain health reform ideas. CHCC member John R. Graham of the Pacific Research Institute has published a 58-page booklet comparing the two plans. He summarizes his findings in a press release, which says of the two plans:

Senator John McCain:

• His tax reform will result in a raise of about $9,000 for every working American family.

• While this raise will be taxable, it will be supplemented by a universal, refundable tax credit of $5,000 per family or $2,500 per single person that will eliminate the “job lock” caused by employer-based health benefits, and significantly reduce the Medicaid poverty trap that holds back many Americans.

• Combined with his plan to allow a national market in health insurance, these reforms will result in about six million currently uninsured Americans buying health insurance voluntarily, within an estimated range of two to 12 million.

• If people choose not to buy health insurance, their unused tax credits can go into a fund that states use to finance their uncompensated care and “safety nets.”

• Senator McCain has made a commitment to protect people with pre-existing conditions during the transition, so they retain coverage as Americans find new ways to organize themselves to share the financial risks of health care.

Senator Barack Obama:

• His health insurance “reforms,” namely guaranteed issue and community rating, will cause about one million people to lose their individually purchased health insurance over the short term.

• His new, job-killing taxes on businesses will hurt lower-income workers especially.

• He will spend an extra $100 billion a year of our health dollars on health goods and services that serve the government’s priorities, not a family’s needs.

• Combined, these three reforms are likely to lead to a “death spiral” for privately chosen health insurance.

• His medical-malpractice insurance “reform” threatens to make it impossible for physicians to pay for liability insurance, threatening patients’ access to care and legal rights.

Mr. Graham concludes, “When many Americans have lost faith in both Washington and Wall Street, it is encouraging that Senator McCain intends to take health care dollars away from Big Business and Big Government and give them to the families who need them. Senator Obama’s plan will deepen the problems of the current system–leaving you one paycheck away from losing both your job and your health care, and more likely to become dependent on the state when that happens.”

Investors Business Daily thinks the future of HSAs rests with the coming elections. It argues, “the two campaigns amount to a referendum on the question of where the economic power in health care will reside. In the GOP model, the power should lie with price-conscious individual consumers choosing among health care providers and insurers. The Democrat way is to shift that power toward government through mandates and the expansion of public insurance.”

It doesn’t expect a Democratic Congress will repeal HSAs because of the market penetration they have gained, “But their growth is likely to be crimped by new limits on who can open them and how easily they can be used.” It might restrict the tax advantage of the plans or bring back the “substantiation” provision that passed the House this year but died in the Senate.

More likely, IBD argues, Obama’s publicly financed plan would include first-dollar coverage and be subsidized so much that an HSA could not compete against it.

The article concludes, “We doubt that most Americans (and certainly the 6 million-plus HSA beneficiaries) want so little freedom in their future. But right now they are on the verge of voting such a future into being.”