Consumer Power Report #202

Published November 17, 2009

Well, now. Since our last visit Mrs. Pelosi did indeed come up with the votes needed to pass her bill in the House. Congratulations are in order. For her, but not for the American people, who clearly oppose this legislation. And not for the rank-and-file Democratic Congressmen who will now be voted out of office in a mere 12 months. I hope she was able to promise them something that made it worthwhile, like cushy jobs in the last two years of the Obama administration.

Now it is on to the Senate, where things get more complicated. The rules in the Senate are far more complex. Maybe you noticed that only two amendments were allowed to be offered on the floor of the House: the Republican substitute, and Rep Stupak’s abortion amendment. There is no limit to the number of amendments that can be offered in the Senate–assuming there are the 60 votes needed to even take the bill to the floor.

That is no sure thing, especially since Harry Reid has filed a motion to place the House bill on the calendar for early next week. That is about all he can do, since at this writing the CBO has not scored Mr. Reid’s bill and he says the bill won’t even be written until after he gets the CBO score. It is unlikely there are 60 votes to take up consideration of the House bill by the Senate.

But who knows? Senate votes aren’t sold as cheaply as House votes, but Mr. Obama has plenty of goodies in his bag of tricks. There was a rumor this week that Joe Lieberman might be named ambassador to Israel if he cooperates. That would likely be too crass a move even for these Chicagoans, but these days nothing would surprise me.



The Gallup Survey finds 38 percent of American adults would “advise their member of Congress to vote against a health care bill this year,” and only 29 percent would want them to vote in favor. The survey is especially remarkable for its finding that twice as many political independents (44 percent) are opposed as in favor (22 percent). The survey also finds 36 percent of people think the current bills would make their own health care situation worse, while only 26 percent think it would make it better.

SOURCE: Gallup

The Pew survey also found a strong plurality (47 percent) opposes the legislation, while only 38 percent support it.



The AMA met in Houston, and the Washington Times reports that although some dissidents tried to overturn its support for Nancy Pelosi’s bill, “the resolution was voted down by a wide margin. As a result, the AMA continues to back the health care legislation passed in the House last weekend.”

Some AMA members seem to think they have managed to soften the organization’s support, but as the Times writes, “The AMA has changed dramatically since the Gipper spoke to America about the dangers of socialized medicine.” While it once represented the vast majority of America’s doctors, it is now down to less than 20 percent, and most of its income is from contracting with the federal government for use of its diagnostic codes, not from membership dues. It’s depressing to see.

SOURCE: Washington Times

I’ve been worried about the National Association of Health Underwriters (NAHU) for some time. But I just learned the group has elected an old friend, Russ Childers of Georgia, as its president. And it came out solidly in opposition to PelosiCare in a letter to the entire House. It writes, “the National Association of Health Underwriters (NAHU) wishes to express our formal opposition to this measure.” It adds, “H.R. 3962 will do little to reduce the cost of medical care and improve health coverage affordability.”

It complains specifically about the “public option” and the lack of any serious measures to lower the cost of care. It says, “regardless of how ‘fair’ a market reform idea might seem on its surface, it is not at all ‘fair’ if it prices people out of the marketplace.” It also doesn’t care for the employer mandate or the idea that the Small Business Administration would replace brokers in some aspects of health insurance marketing.

On the other hand, NAHU’s CEO Janet Trautwein had an opinion piece in The Wall Street Journal, which came out strongly in favor of an individual mandate and criticized Max Baucus’s bill for being insufficiently punitive. She writes, “Congress has rightly set out to both expand insurance coverage and reduce health-care costs for all Americans. But without an effective and enforceable individual mandate that guarantees the participation of everyone, neither goal is attainable.”

Curious that the letter of opposition is pretty dense reading and not given very prominent play on NAHU’s Web site, but the statement praising the wonders of mandates is very readable and published in The Wall Street Journal. Wouldn’t want to sacrifice that ol’ “Seat At The Table,” would we?

SOURCE: NAHU Opposition Letter; Wall Street Journal

While NAHU seems to be groping for a clear position, so are the insurance companies. The Washington Post reports the carriers are trying to enlist their employees in contacting members of Congress to oppose some of the provisions in the current proposals. It writes that UnitedHealth e-mailed 75,000 employees to encourage them to write their Senators to oppose a public option and Medicare Advantage cuts, but also to “advocate higher financial penalties for individuals who do not buy health insurance.” Yikes!

SOURCE: UnitedHealth

Meanwhile WellPoint has created a new Web site it calls the “Health Action Network” to be a resource for grassroots activism. When I first looked at this site I noticed it said, “Successful reform will build on the strengths of America’s voluntary, private-sector system while ensuring there is a greater variety of affordable private health plan options in the marketplace for all.” That gave me hope that WellPoint had moved away from supporting mandatory coverage. But I can’t find that statement now, so perhaps not.

SOURCE: WellPoint Web Site

But AHIP seems to have moved further than its member companies in its position. In a statement released after the House vote Karen Ignagni said, “The current House legislation fails to bend the health care cost curve and breaks the promise that those who like their current coverage can keep it. A new government-run plan will cause millions to lose their existing coverage and draconian Medicare Advantage cuts will force millions of seniors out of the program entirely.”

She adds, “This bill imposes inflexible mandates before getting everyone covered and new regulations that duplicate what is already in place at the state level. Many of these reforms begin in 2010 after employees have already chosen their plans and contracts have been negotiated. The result will be increased costs and massive disruptions in the quality coverage individuals and families rely on today.”

Alrighty, then! AHIP is opposed to “inflexible mandates!” Yahoo! But, wait a minute. It turns out the mandates it is opposed to are not mandates on working people, but mandates on insurance companies, such as, “certain market reforms, such as new rules for pre-existing condition exclusions, a ban on lifetime limits, an extension of COBRA coverage, new benefit mandates, and allowing individuals through age 26 to remain on their parent’s coverage as dependents.”

SOURCE: AHIP Press Release

Writing in the New Republic, Jonathan Cohn thinks he has found the reason for PhRMA’s support of the current legislation. Apparently back in March the “global research and consulting firm” IMS Health projected negative growth for the drug industry from 2008 to 2013. But now, with the prospects of health legislation growing, it is projecting annual growth of 3.5 percent for the same period. That level of growth makes the $80 billion in concessions by the industry seem like a good investment.

SOURCE: New Republic


There are two primary reasons that an individual mandate is supported in health reform, not just by Democrats, but by many Republicans as well.

The first one is the notion that the only legitimate way to pay for a health care service is through insurance. And the other is that the uninsured are a bunch of “free riders” who sponge off the rest of us by consuming but not paying for health care services. So our premiums go up in the form of a “hidden tax.”

These arguments sound compelling–until you dig a bit deeper. Let’s take them one at a time.

Insurance is the best–in fact, the only–way to pay.

Insurance generally has been used as financial protection against unexpected and rare occurrences. It is typically a two-party contract that pays a benefit when a loss occurs. This is true for auto, homeowners, life, and virtually any other kind of insurance you can think of.

But health insurance has become something entirely different, thanks to my former employers at Blue Cross. In fact Blue Cross insisted for many years that it was NOT “insurance” but “prepaid health care.” Because of Blue Cross market domination in the 1930s and 1940s, commercial carriers ended up replicating the Blue Cross model.

Today, all health insurance is a combination of “insurance” for adverse events and “prepaid health care” for services that are low-cost and predictable.

The object of this coverage is to pay for health care services. There is nothing wonderful or magical about having a health insurance policy in itself. The reason to have it is to pay for the services you consume and the bills you incur.

But there are many ways to pay for those services. If I need a service that costs $2,000 I can slap down my insurance card on the counter and the insurance company will pay the bill. But I could also slap down my credit card and my bank will pay the bill.

The only difference is how the insurance company or the bank gets the money to pay the $2,000. In the case of the insurance company, it can pay the $2,000 because I (or my employer) have been giving it $100 a month for the previous 20 months. If the bank pays the bill, I (or my employer) will pay off the debt by sending the bank $100/month for the next 20 months. The only difference is pre-payment versus post-payment.

So the question becomes which is the more efficient way to finance the $2,000? The bank will charge me interest (possibly 8 percent). But the insurance company also has a charge in the form of a loss ratio (also in the time value of the money it has been holding.) So, how does the insurance company load compare to the interest rate the bank charges? If the loss ratio is 93 percent (7 percent load), it is probably a good deal, but if it is 80 percent (20 percent load), it is not such a good deal.

Policy makers operate on the assumption that having insurance (pre-paid health care) is inherently a Good Thing and superior to not having insurance and post-paying for the exact same service. Why? If I can pay for the same services at a lower cost, why is that a bad thing?

If the goal is to pay for health care services, we should be interested in finding the most efficient way to get that done. In some cases it may be through insurance coverage, but in other cases it may be through bank financing. Neither is more virtuous than the other.

Free Riders

Let’s first remember “free riding” is at most a trivial problem, amounting to something like 2 percent of all health spending in the United States. But the “solutions” that have been proposed are massively intrusive on the lives and freedoms of 100 percent of Americans.

Consider …

  • It is not the uninsured clogging hospital ERs, but the fully insured, especially those on Medicaid.
  • There is indeed a “cost-shift” to the insured from uncompensated care, but it pales compared to the cost-shift from underpayment by Medicare and Medicaid.
  • The “cost-shift” would still have to be paid out in the form of subsidies in any event. Money is not saved.
  • The uninsured do in fact pay for a large portion of their own consumption, and would pay an even larger share if they were charged at the PPO rate for services (or Medicare +25 percent).

Consider also …

  • Getting rid of “free ridership” means massive policing of the insurance status of 100 percent of Americans–this means substantial administrative costs added to the system.
  • It also involves massive subsidies, including to those who are not currently subsidized, and penalties for those who are not.

Consider finally …

  • There is not yet a proposal that would end “free ridership.” All of the current proposals will continue a large number of people who are uninsured and getting free services, including illegal immigrants and people who simply don’t pay their bills. For all of the contortions and intrusions, the current proposals would at best reduce the problem, not solve it.

My conclusion: The issue of free ridership is a lot of Sturm und Drang about very little. Our time would be better spent helping reduce the problem with a series of steps to make coverage more attractive and more affordable and prices more realistic for people who self-pay.


Before we wrap this up, the good news continues on the Consumer-Driven front.

Writing in the Puget Sound Business Journal, Peter Neurath tells about a new company that “gives businesses a way to help out their workers with health insurance or expenses as these companies struggle to afford the ever-mounting cost of employee coverage.” The way he describes it is a classic “defined contribution” model:

“LyfeBank enables employers to contribute pre-tax dollars to employee trust accounts at Wells Fargo Bank. If people work part-time for several employers, each business can contribute to their accounts. Working families can ask their employers to contribute to their pooled accounts. Workers draw on their accounts to buy health insurance, to pay for deductibles or co-pays, and for vision, dental and prescription-drug expenses. The money belongs to them, and they can use it to buy medical care in any way they wish.”

He says the company is now operating in “Washington, Oregon, California, Alaska, Utah, Pennsylvania, and Virginia, and also in Washington, D.C.”

SOURCE: Peter Neurath

Canopy Financial expects robust growth in account-based plans in the next few years and has issued an advisory to banks on how to make the most of this growth opportunity. It says, “The first financial institutions to enter the HSA market have not all been successful, as many early HSA products were often treated like traditional deposit products with a compliance modification. In fact, many of the first HSA accounts were traditional demand deposit account products, using the exact same platforms that service retail bank branch customers.” But it goes on to advise, “Financial institutions that wish to make healthcare banking a significant revenue stream must invest in developing and maintaining capabilities reflective of and in support of needs requirements associated with the current healthcare ecosystem. Additionally, these capabilities, built into robust, client-centric HSA account management platforms, must enable them to partner with and in many cases seamlessly support a wide variety of constituents in the rapidly evolving healthcare banking value chain.”

SOURCE: Canopy Financial

And a magazine called Inside ARM [accounts receivable management] also predicts rapid growth of HDHPs. It reports, “According to Mercer LLC, a global provider of consulting, outsourcing and investment services, 18 percent of the early respondents to its 2009 National Survey of Employer-Sponsored Health Plans said they are eliminating high-cost or more generous health plan options in 2010 as a way to move employees into lower-cost consumer directed health plans tied to health savings accounts or health reimbursement accounts.”

This growth presents an opportunity for AR services because, “Although employees enrolled in HDHPs will benefit from lower annual premiums, Celent estimates that their out-of-pocket expenses will more than double, leaving health care providers to collect not just partial payment, but in many cases, full payment for the services they provide.”