To Implement Or Not to Implement

Republican Governors are already reacting to the Medicaid expansion:

Republicans in at least four states want to abandon an expansion of Medicaid in President Barack Obama’s health care overhaul, and more than a dozen other states are considering it in the wake of the Supreme Court decision removing the threat of federal penalties.

The high court upheld most of Obama’s law, but the justices said the federal government could not take away states’ existing federal Medicaid dollars if they refused to widen eligibility to include adults who are only slightly above the poverty line. Some Republican governors and lawmakers quickly declared that they would not carry out the expansion.

The states considering whether to withdraw from the expansion include presidential battlegrounds Florida, Ohio, Pennsylvania and Colorado. …

The federal government agreed to pay the full tab for the Medicaid expansion when it begins in 2014. But after three years, states must pay a gradually increasing share that tops out at 10 percent of the cost. That may not sound like much, but it translates to a commitment of billions of dollars at a time when many local officials are still anxious about the slow economic recovery.

In Texas alone, where one quarter of the population is uninsured, the Medicaid expansion is projected to provide coverage to 2 million people in the first two years alone. Over a decade, the Texas Health and Human Services Commission estimates the expansion would cost the state an estimated $27 billion. Lawmakers will weigh their options when they return to work in 2013.

Mississippi, which is one of the poorest states in the nation and has more than 640,000 people on Medicaid, could cover an additional 400,000 people if it chose to expand Medicaid. But doing so would cost about $1.7 billion over 10 years and force deep cuts to education and transportation, state officials said.

“Mississippi taxpayers simply cannot afford that cost, so our state is not inclined to drastically expand Medicaid,” Republican Lt. Gov. Tate Reeves said.

Republican Nebraska Gov. Dave Heineman promised to block any effort to expand Medicaid, which he said would require tax increases or education cuts. And Indiana Senate President Pro Tem David Long, also a Republican, asserted that his state “will certainly” opt out of the Medicaid expansion.

Appearing on Meet the Press yesterday, former Vermont governor Howard Dean was asked about the possibility that, given the Supreme Court’s ruling on Obamacare last Thursday, states could choose to opt out of the law’s new Medicaid expansion. He gave an interesting response: “I think this stuff about not accepting Medicaid and not accepting exchanges is crazy.”

Which is ironic, because a May 1998 front-page article from the Rutland Herald profiled how Judith Steinberg, a physician based in Shelburne, had written to her patients that she was no longer accepting individuals insured by the state’s largest Medicaid managed care organization:

Dr. Judith Steinberg told her patients in a letter that Community Health Plan/Kaiser Permanente has cut payments to her practice while raising rates to its insured. The decision by Steinberg’s group means several hundred patients in CHP’s commercial and its “Access Plus” Medicaid plan will be obliged to either switch doctors or switch insurers. The practice is the only CHP primary care provider in Shelburne. … CHP serves about 30,000 of the 51,000 Medicaid clients who are in HMOs in Vermont.

Why is all of this relevant? Because Dr. Judith Steinberg just so happens to be Howard Dean’s wife.

Put it another way: Howard Dean’s wife dropped out of that state’s largest Medicaid plan – while Dean himself was governor – due to low reimbursement rates and onerous bureaucratic regulations. So if Dean wants to go and publicly argue that “not accepting Medicaid … is crazy” – either for individual physicians, or for states looking to avoid Obamacare’s new unfunded mandates – he might want to chat with Mrs. Dean first.

John C. Goodman on why health insurance has larger problems President Obama didn’t even address.

Casualty insurance – homeowners’ and auto insurance, for example – is different. In the casualty market the product being bought and sold is real insurance, providing protection against unanticipated catastrophic loss.

Homeowners insurance, for example, typically pays for losses due to theft, wind, hail, fire and so on. But it doesn’t pay for the normal wear and tear of daily living, such as replacing worn-out carpet or repairing a leaky faucet or an air conditioning system that’s on the blink. Similarly, automobile insurance pays for collision damages, but it doesn’t pay for oil changes, new tires, tune ups or normal maintenance.

Further, casualty insurance typically has a deductible, which makes the policy holder responsible for paying a set amount before the insurance coverage kicks in. A $1,000 deductible, for example, makes a car owner responsible for the typical minor fender bender. By adjusting the amount of the deductible, drivers can decide how much risk they’re willing to accept. In general, the higher the deductible, and the greater the assumed risk, the less the policy holder has to pay per dollar of coverage.

Health insurance is different. The typical employer plan, for example, covers general checkups and such routine screenings as mammograms, Pap smears, and PSA testing for prostate cancer. These may all be worthwhile tests, but they are not the result of some unpredictable, costly event.

In addition, many health plans cover the full cost of such tests, with no deductible or co-payment. Under the Affordable Care Act, first-dollar coverage for routine primary and preventive care is required by law.

The perverse nature of health insurance goes further. Many employer plans that provide first-dollar coverage for routine care at the same time leave employees exposed to tens of thousands of dollars of out-of-pocket expenses in the case of catastrophic illness. In other words, the policies pay for routine expenses most families easily could pay themselves, but leave the families exposed to large bills – and possible bankruptcy – in the event of a major accident or illness.

Another unique feature of health insurance is the degree of control insurers have over the services that are provided. If you’re in an automobile accident, you typically take your car to an approved auto body shop. The insurance company doesn’t tell the auto body shop how to make the repairs, it merely pays for the loss. Similarly, if your house is destroyed by a fire, the insurer doesn’t insist that you rebuild it exactly as it was; it writes you a check for the value of your loss.

Modern health insurance, by contrast, doesn’t write checks based on loss, it writes checks to doctors, hospitals and other providers based on the services they provide. Instead of reimbursing for losses, health insurance pays for consumption – and the amount it pays depends on how much we consume.

An interesting new paper from the American Enterprise Institute:

The past several decades have witnessed extraordinary consolidation in local hospital markets, with a particularly aggressive merger wave occurring in the 1990s. By 1995, hospital merger and acquisition activity was nine times its level at the start of the decade, and by 2003, almost 90 percent of Americans living in the nation’s larger metropolitan statistical areas (MSAs) faced highly concentrated provider markets. This wave of hospital consolidation, predictably, was alone responsible for price increases for inpatient services of “at least five percent and likely significantly more,” and similarly responsible for price increases of 40 percent where merging hospitals are closely located. A second merger wave from 2006 to 2009 significantly increased the hospital concentration in thirty MSAs, and the vast majority of Americans are now subject to monopoly power in their local hospital markets.

In economic theory, monopolies are objectionable because they enable sellers to charge higher prices and thereby cause some consumers (who would be willing to pay a competitive price) to forgo enjoyment of the monopolized good or service. Fortunately, such output-reducing effects are greatly lessened in health care markets because the many patients covered by health insurance can easily pay monopolist providers’ asking prices rather than being induced to give up these desirable goods and services. But unfortunately, precisely because there is no output reduction in response to monopoly price increases, health insurance both amplifies the redistributive effects of provider and supplier monopolies and inflicts allocative inefficiencies that are arguably more distortive and costly than those caused by typical monopolists.

Supra-Monopoly Pricing. In the textbook model, a monopoly redistributes wealth from consumers to powerful firms. The monopolist’s higher price enables it to capture for itself much of the welfare gain, or “surplus,” consumers would have enjoyed if they had been able to purchase the valued good or service at a lower competitive price. In health care, insurance puts the monopolist in an even stronger position because consumers do not face, and therefore are not deterred by, monopoly prices. This effect appears in theory as a steepened demand curve for the monopolized good or service. Whereas most monopolists encounter reduced demand with each price increase, health insurance mutes the marginal consequences of rising prices.

If health insurers perfectly represented their subscribers’ preferences, their policies would reflect consumers’ demand curves and pay for services at prices that individual insureds would, absent insurance, be willing to pay themselves. But deficiencies in the design and administration of real-world health insurance prevent insurers from reproducing their insureds’ preferences and thus heavily magnify monopoly power. For legal, regulatory, and other reasons, health insurers in the United States are in no position (as consumers themselves would be) to refuse to pay a provider’s high price even if it appears to exceed the service’s likely value to the patient.

Instead, insurers are bound by both deep-rooted convention and their contracts with subscribers to pay for any service deemed advantageous (and termed “medically necessary” under rather generous legal standards) for the patient’s health, whatever the cost. Consequently, close substitutes for a provider’s services do not check its market power as they ordinarily would for other goods and services. Indeed, putting aside the modest effects of cost sharing on patients’ choices, the only substitute treatments or services insured patients are likely to accept are those they regard as the best ones available. Unlike the ordinary monopolist that sells directly to cost-conscious consumers, the rewards to a monopolist who sells goods or services purchased through health insurance may easily and substantially exceed the aggregate consumer surplus patients would derive at competitive prices.

Thus, health insurance enables a monopolist of a covered service to charge substantially more than the textbook “monopoly price,” thereby earning even more than the usual “monopoly profit.” The magnitude of the monopoly-plus-insurance distortion has sometimes surprised even its beneficiaries. Of course, since third-party payers (and not patients) are covering the interim bill, these extraordinary profits made possible by health insurance are earned at the expense of those bearing the cost of insurance. Insureds, even when their employers are the direct purchasers of health insurance, are ultimately the ones seeing their take-home pay shrink from hikes in insurance premiums caused by provider monopolies.