Health Insurance Reform

1. Health Insurance Reform Stephan F. Gohmann BB&T Professor of Free Enterprise University of Louisville Some of this material is from Peter Ferrara The Obamacare Disaster, Heartland Institute

2. Outline • Government intervention • Costs • Rationing • Innovation • Taxes • Government spending • Quality of care • Growth • Solutions

3. Key Facts: How the numbers add up Total US Population – 301.5M Insured Lives – 255.1 Million – 84.6% of U.S. Private Insurance Coverage* 201.0 Million Government* Coverage 87.4M-29% Employment-Based Coverage 176.3M – 58.5% of all US residents Direct Purchase 26.8M – 8.9% Uninsured – 46.3M – 15.4% of U.S. 11.0M eligible but not enrolled in SCHIP/ or Medicaid 17.7M at or above $50K+ 9. 5M Non-citizens 4.1 to 4.7 M Uninsured Students 5.9M Kids 2.0M Adults 3.1M Parents 13.7M <$25K 14.9M $25- $50K 8.0M $50K+ 9.7M $75K+ ~8.1M undocumented Out of 17.5 M Total Students *Numbers don’t add up because (1) some coverage (Medicare) “counted” as both Government and Private Coverage and (2) possibility of more than one type of coverage in single year (no mutual exclusivity). 3

4. Are we going after the right thing?

5. Insurance Fraud Convictions Source http://www.insurancefraud.org/mediacasesreport.htm

6. Fraud • 80 percent of healthcare fraud is committed by medical providers • Why more government than private?

7. Are we going after the right thing? Net Profit Margin ( Average for 3Qs, 2009) Industry 3.5% Top Ten Managed Care/Health Care Plans Drug Manufacturers Medical Technology Biotechnology Hospitals * 25.5% 15.7% 26.6% 6.9% Source: thestreet.com ratio comparison chart for industry, March 2009 7

8. Government Intervention • 159 new agencies • Best practices and cost effectiveness analysis • QALY’s • MB and MC • Results in less innovation • Insurance companies • Community rating • guaranteed issue • Mandated benefits

10. Mandated benefits • What will happen to premiums? Compare Idaho to Oregon - $2,500 deductible, 20% copay $25 office visit has $316 premium in Idaho right across the border in Oregon $418.

11. Costs • Expand Medicaid coverage – • 24 million new enrollees • $410 billion extra over next 10 years • $3000 subsidy to families make $95,000/year • $457 billion in first 6 years • More coverage – more demand – higher prices for care • Mandates for treatment for alcohol abuse (46 states already have, costs up 1-3%), depression (48, up 5-10%) and obesity (7, up 1-3%)

12. Costs • Guaranteed issue • Must cover anyone no matter how sick • Wait until your house is on fire before buying insurance • community rating • Can’t vary rates based on medical condition • PriceWaterhouseCoopers estimates that a family health plan costing $12,300 today will cost • $17,200 in 2013 • $21,300 in 2016; • $25,900 in 2019

13. Cost • Massachusetts has a similar plan • Premiums are $17,000 or 33% more than US average • Tax rate of 40% on insurance costing more than $10,200 per year, $27,500 family • Tax drug and device manufacturers – cost $26.3 billion per year

14. Rationing • From the truth about health care reform: • “In the past 10 years, health insurance premiums have risen 131%. Without the Affordable Care Act, insurance rates would continue to spiral out of control. “ • “Zero tolerance for unfair premium increases. Under the new law, rate reviews will prevent insurance companies from raising premiums to unsustainable levels.” • How does that affect the quantity of care?

15. Rationing • Medicare Advisory Board • Power to cut Medicare • Federal Coordinating Council for Comparative Effectiveness • Find best practices – what treatment is comparatively more effective? • Similar to the UK • Great for Health Economist job security! • Ignores knowledge of particular situation and time

16. Rationing • From http://healthcareforamericanow.org/ • For insured at work: In 2014 If you keep your insurance, it will get better - If you like your insurance plan, you can keep it, but in January 2014, regulations will take effect to make your insurance better. • What will happen to wages? • What will happen to premiums

17. Rationing • For individual lnsurance • In 2014 You will be required to carry affordable insurance - If you like your insurance plan, you can keep it, but in January 2014, you will be eligible to purchase insurance in your state's health insurance exchange, too.

18. Rationing • Medicare enrollees • Your payments will go farther - Overpayments to insurance companies to support their profits through the Medicare Advantage program will be frozen starting in 2011 and phased down in subsequent years, which means your payments will go farther towards your care and not towards insurance company profits. • Incentives?

19. Rationing • Comparative Effectiveness Research • Always lags behind innovation • Such studies are expensive and take time • Relates to cost effectiveness analysis • Will reduce the adoption of new technologies until proven • Most other countries that have government takeover of insurance have rationing

20. Innovation • If new innovations are not allowed, there are fewer incentives for profit maximizing firms to invest in these new innovations • Nobel Prizes in Medicine • US 57 (population 307 million) • EU, Swiss, Canada, Japan Australia 40 (pop 681M)

21. Innovations • Top 10 (27) medical innovations 1975-2000 • US 9 (20) • All others 5 (14) – some are joint • Top 29 pharmaceutical innovations 1968-2007 • US 16 • All others 15

22. Taxes • Individual mandate – constitutional? • Price of insurance will range from 2% of income to 9.5% of income for those 400% above poverty rate • Same as a tax • Tax penalty weak • No incentive to buy – instead pay the penalty and buy when needed

23. Employer Mandate • Employer with 50 or more employees must cover workers or pay $2,000 per employee for every employee over 30 employees • Estimated to raise $52 billion • If an employee receives insurance through the exchange, then the employer must pay $3,000

24. Taxes • Insurance benefits $6 billion/year • Medical device manufacturers $26.3B/year • Prescription drugs $27B/year • All will increase the cost of health care • In 2013 • 3.8% Medicare payroll tax surcharge on investment income $123.4 billion over 7 years • Medicare Hospital Insurance payroll tax increased 31% on income over $200K/250K single/married

25. Spending and Deficits • In 1965 when Medicare was adopted projected it would cost $12 billion by 1990 • Actual – $109.7 billion – nine times the projection • CBO projects the costs in the next 10 year at $1 trillion (this is for only 6 years since it does not start until 2013) • Estimates from 2010 to 2029 actual cost will be $5.3 trillion

26. Deficits • In 2014 subsidies for a family of 4 earning $59,000 are about $7,200 and a family earning $71,000 gets $5,200 • At $95,000 the subsidy is $3,000 • By 2018 these values change to • $64,000 - $10,000 • $77,000 - $7,800 • $102,000 - $5,000 • Employers can drop coverage, pay $2,000 penalty give their employees a net pay raise and the government will subsidize instead.

27. The cost of employing a worker is more than you think • An employer in NJ documents the cost of hiring Michael Fleischer in Wall Street Journal 8/9/2010

28. Salary $59,000 • Take home pay - $44,000 • Deductions • $2,376 medical and dental insurance • $126 state unemployment • $149 disability insurance • $856 Medicare • $1,893 state income taxes • $3,661 Social Security • $6,250 federal income taxes

29. Salary $59,000 • Employers’ cost also includes the portion they put toward insurance and other benefits • $9,561 employee/spouse health and dental • $153 life insurance • $56 federal unemployment coverage • $149 disability • $300 workers comp • $505 state unemployment insurance • 856 Medicare • $3,661 Social Security

30. Salary $59,000 • Take home pay $44,000 • Benefits worth $12,000 • Total pay plus benefits $56,000 • Cost to the employer to give the employee this package • $74,000 • Amount taken by governments • $18,462 • How does this affect the incentive to hire and grow a firm? • Drop insurance, pay $2,000 fine and give the worker an additional $7,561

31. Insurance for those denied coverage • In July HHS estimated it would insure 375,00 by now and 400,000 more every year until 2014 • Actual amount – 8,011 • Chicken Little • This plan is operating at a loss and still cannot attract enrollees • In response they are reducing premiums by 20% and expanding benefits

32. Quality of Care • Recent study finds that U.S. Medicaid enrollees are less likely than Canadians to have access to physician, however, after accounting for differences in demographics – no differences in satisfaction with the quality of care or services • U.S. privately insured are much more satisfied than Canadian counterparts.

33. Growth • The burden of the federal debt in 2008 according to USA Today was $546,668 per family an increase of 12% from 2007 to 2008 • By 2012 with Obamacare this is projected to be $1 million per family and $4 million by 2020 • Obvious negative effects on growth • Is this ethical?

34. Solutions • Individual responsibility and freedom • Repeal the current plan • Change Medicaid to block grants • Spending incentives change relative to matching where if states spend more they get more • Use vouchers for poor families • State high risk pools to cover those 8,011 who have signed up so far.

35. Solutions • Get rid of the tax deduction for employer based insurance coverage • Either give it to all taxpayers or eliminate • More incentive to shop around • Insurance companies may develop new ways to insure • Use HSA’s with catastrophic coverage • Changes incentives • Allow interstate purchase of insurance • Incentive for states to remove mandates • Cap malpractice awards