POLICY: Gladwell on Moral Hazard, with UPDATE

Go read Malcolm Gladwell on Moral Hazard in the New Yorker.

Gladwell basically thinks that there's some moral imperative on the part of the political right to promote user fees at the point of care and that it's uniquely American.  The bit about it being uniquely American is not quite right, in that I first heard the term from a Japanese health ministry official explaining why they had (very low) user fees in Japan, and in the UK there have been user fees for Rx forever. But there's no question that we have more of them here. The wise Canadians Evans and Barer list user fees at the point of care as one of their Zombies -- bad health care ideas that won't die. Their interpretation of the RAND study is succinct and correct:

Contrary to the rhetoric, the RAND evidence demonstrated clearly that patients could not discriminate between necessary and unnecessary services. User fees were as likely to deter important health-preserving or enhancing care, as “frivolous” abuse. Moreover, the deterrent effects of user charges bear more heavily upon those with lower incomes, as this group is more sensitive to increases in price. In fact, low-income persons reduced use of care that was judged by researchers to be highly effective more frequently than did their higher-income counterparts.

They go on to note that user fees at the point of care are not designed to reduce overall health care costs -- after all here in the US we lead the league in both categories. Instead they're designed by providers to try to spike their incomes. Remember that as it'll be important later....

Gladwell of course acknowledges all that and realizes that the "actuarial" model of health insurance that is being promoted by the HSA and its backers (Hi Ron!) is designed to basically to allow those with the greatest ability to get out of paying for those with the greatest need. Of course social insurance is based on the idea of transferring resources from those who have them to those who need them. In fact there's nothing wrong with the idea at all and if you look at Americans when they're surveyed about it, by and large they agree.  Those of you who read my recent article on Why Hillarycare Failed may remember that Harris got the following answers on the subject in 2003:

By 75% to 21% (including a 66% to 30% majority of Republicans), most people agree that "people who are unemployed or poor should be able to get the same amount and quality of medical services as people who have good jobs and are paying substantial taxes".

By 69% to 27% (including a 63% to 32% majority of Republicans), most people disagree that "it’s fair that people who pay more in taxes (or in health insurance premiums) should be able to get better medical care than those who pay little or nothing."

But despite the fact that apparently Americans prefer the concept of social insurance, Gladwell doesn't really come up with an explanation for why the HSA legislation has done so well, other than the primacy of ideas. He makes a lot of the influence of Mark Pauly. Pauly is a complete idiot respected health economist at Wharton, who earnestly believes both that the individual market works well for 80% of the people forced to be in it and is therefore OK, and that the reason we spend so much money on health care in America is a result of the fact that the rest of our economy is so dang efficient. (Both in serious studies published in Health Affairs -- I shit you not). And his article on moral hazard is supposed to be the most influential ever published in the health policy literature, and that's why the right has bought into it.

Of course those of us in the reality-based as opposed to faith/idea-based world think that there may be a couple of other reasons other than the strenght of ideas as to why the HSA is so popular amongst the right, and why they want to spread it to all programs including Medicare.

The first is purely political. The two big government programs of Medicare and Social Security are very, very popular and identified correctly with Democrats. There is a strong element (e.g. Grover Norquist and the WSJ Editorial pages) in today's Republican party which wants to destroy those programs, or at least eliminate the middle classes' dependency on them, so that their recipients are less likely to identify with Democrats and less likely to elect them to power. Electing Democrats to power of course interferes with those Republicans' view of the real mission of government, which apparently is to plunder the treasury and hand out massive rewards to favored interests in the oil, defense, mining, pharmaceutical, etc, etc, industries, and ensure that the ultra-rich don't have to pay much or any tax. These Republicans see the vast army of baby boomers heading towards Social Security and Medicare as a huge threat to their political future, and rightly so. Putting all Social Security and Medicare into private accounts, and as a side issue removing the social insurance aspect of those programs, is a political solution to breaking what they believe to be (what's left of) a political machine-like dependency of the middle-class seniors on the Democrats. And I'm not convinced they're wrong about that.

The other reason is of course much more basic and is to do purely with money. What creating tax-free HSAs does is to enable insurance companies to sell highly underwritten and incredibly profitable high-deductible insurance policies. HSAs and MSAs were developed by small insurance companies to incentivize the sale of high-deductible plans which cream-skim way healthy people from the big managed care companies. Golden Rule, run by loony Rooney, almost invented this category on its own, and massively funded Gingrich and the VRWC all the way through the 1990s. See this Mother Jones article on Rooney and Golden Rule in 1996 and one from 2004 on their success in getting HSAs through in the Medicare legislation.

Incidentally the AMA and America's doctors also started supporting HSAs because they thought it would enable them to get out from under their PPO and managed care contracts and charge their patients directly (and get more money, as Evans and Barer suggested earlier). Unfortunately for the doctors, now that Wellpoint, United et al have taken over the game, the high-deductible plans of now and the future will have the same negotiated contracts, the same confusion over who owes what, and will just change their office managers from chasing health insurers for big lump sum payments to chasing patients for tiny ones instead. Tough break, guys.

Meanwhile, back to the insurance side. The big insurance companies went down the managed care path in the 1990s because both they thought that they would get the continued support of the employers to beat up on the providers (which they didn't when the economy got better) and because they thought that Hillarycare would put everyone into big pools. Big pools are of course the world where managed care plans come from and they destroy the advantage of the smaller insurers -- their ability to underwrite on an individual patient basis. As it turned out the big guys were wrong (slightly in part because of what the HIAA and Golden Rule's money did to the Clinton Plan), and anyone who knows the story of the Aetna turnaround can see that it was by adopting much tougher underwriting that Aetna became the profit machine it now is. Imitation is not though the most sincere form of flattery, not when United Healthcare showed its admiration by buying Golden Rule for $900 odd million in 2003 and making loony Rooney even richer and even more able to spread his money around wacko-political operations.

Gladwell, however, fails to explain why putting HSAs into a social insurance program like Medicare is the beginning of the end for the program, and if you read the THCB comments section you'll see plenty of information from Ron about how HSAs are all sweetness, light, and crumbly candy bars.  So -- hopefully once and for all -- I'll explain why they are not. This will involve numbers, so pay attention.

Let's assume that Medicare has 100 people in it. Let's also assume that it costs $5,000 per person. (I'm using the $5,000 number because it's practically identical to the numbers and in the same ratio that Ron Grenier used when he tried to sell me a policy yesterday before he found that he can't in California, so we know they're correct for high-deductible plans). So in the HSA dreamtime world each of our 100 seniors gets $2500 in an HSA account, and then the remaining $2,500 goes into a pool totalling $250,000 which will pay for the care of anyone who's individual expenditures exceed $2,500. Now you need to know something about population health costs. They roughly follow the 80/20 rule, in that 80% of the money gets spent on 20% of the population. So in our 100 person Medicare, 80 people need $100,000 worth of care, while 20 need $400,000 worth of care.

Here's the maths problem that no one on the HSA-backing side will admit to. The 80 people spending $1,250 each are fine and happy and have a further $1,250 left in their accounts. The 20 sicker people have spent their full $2,500 each and in total need a further $350,000 from the pool to pay for their care. But there's only $250,000 in the pool because the rest of it is in the HSA accounts of the healthy 80. So now we have to make up the extra $100,000. So we can increase taxes, and spend $600,000 to provide $500,000 worth of care -- not too likely to be popular (although something like that happened in Medicare managed care in the 1990s). Or we can pay providers less money for caring for the sick. Or we can look to the sickies to come up with the extra. Or we can not provide them with that care.

Any which way you look at this, we are essentially starting down the track of destroying the social insurance nature of Medicare, and the willingness of providers to take part in it. We've basically already done it with every other form of health insurance with the exception of the unionized, large employer market, and so in the commercial market the HSA/high-deductible plan looks similar but better than what's already available. Unless of course you are sick, and then you run into those nasty underwriting trends because, guess what, insuring sick people breaks a pool financially -- even if it's a private-sector high-deductible underwriting pool. Which is why Golden Rule, Aetna and the rest don't do it much any more.

And although Gladwell doesn't seem to quite get the politics, the incentives or the mechanism, he does understand the overall impact.

The issue about what to do with the health-care system is sometimes presented as a technical argument about the merits of one kind of coverage over another or as an ideological argument about socialized versus private medicine. It is, instead, about a few very simple questions. Do you think that this kind of redistribution of risk is a good idea? Do you think that people whose genes predispose them to depression or cancer, or whose poverty complicates asthma or diabetes, or who get hit by a drunk driver, or who have to keep their mouths closed because their teeth are rotting ought to bear a greater share of the costs of their health care than those of us who are lucky enough to escape such misfortunes? In the rest of the industrialized world, it is assumed that the more equally and widely the burdens of illness are shared, the better off the population as a whole is likely to be. The reason the United States has forty-five million people without coverage is that its health-care policy is in the hands of people who disagree, and who regard health insurance not as the solution but as the problem.

I agree with the sentiment, but I though prefer the language of this great American hero who described essentially the same problem in 1945.

No, but you . . . you . . . you're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house . . .(to one of the men). . . right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?

Apparently we're all leaving Bedford Falls and going to live in PottersVille.