Bending the Curve: Redefining Health Insurance

Over the past few months, a politically-diverse group of health policy experts has been pondering a key question: what are the “specific, feasible steps” that policymakers could use to reduce the growth of health spending? In short, how can we bend the curve?

The fruits of their labor were published by the Brookings Institution on Tuesday as Bending the Curve: Effective Steps to Reduce Long-Term Health Care Spending Growth.

I encourage everyone interested in health policy to give it a close look.

The report’s recommendations for fixing health insurance particularly caught my eye:

Governments should ensure proper incentives for non-group and small-group health insurance markets to focus on competition based on cost and quality rather than selection. Achieving this requires near-universal coverage and insurance exchanges to pool risk outside of employment, augment choice, and align premium differences with differences in plan costs.

[Therefore, these insurance markets should be restructured to] focus insurer competition on cost and quality through requirements for guaranteed issue without — or with very limited — pre-existing condition exclusions; limited health rating, such as those related to age and behaviors only; and full risk-adjustment of premiums across insurers based on enrollees’ risk. For market stability, these reforms must be undertaken in the context of an enforced mandate that individuals maintain continuous, creditable basic coverage.

In short, the report recommends a combination of an individual mandate and reforms that eliminate both the ability of and the incentive for insurance companies to try to enroll only the healthy and low-cost.

In a series of thoughtful posts over at Capital Gains and Games, Andrew Samwick has argued that such reforms could form the basis for bipartisan health insurance reform. I think he’s right, in the sense that there are numerous Republicans as well as Democrats who favor these changes. How that fits into today’s much larger and heated debate over health policy, however, is anyone’s guess.

Also, as Keith Hennessey emphasizes in a lengthy post on legislative strategy, an individual mandate almost certainly requires new subsidies for low-income folks who would otherwise have difficulty purchasing insurance. Paying for those subsidies could be problematic.

One of these days, I will find time to write about what I think is the obvious solution to the budget question: the subsidies should be paid for by rolling back the current tax exclusion for employer-provided health insurance (a change, by the way, that’s also included in the new Brookings report).

But rather than get into those details, I’d like to close by elaborating on the rationale behind the recommendations for an individual mandate and insurance reforms to eliminate selection.

From the individual’s point-of-view, the problem is clear: If they develop a costly, chronic disease, they may not be able to get or keep health insurance. That undermines the entire point of insurance (and is the source of some of the worst individual horror stories about our current system).

From the insurer’s point-of-view, the problem is also clear: If individuals have the ability to go without insurance when they are healthy, but then demand insurance when they become sick, the insurance rolls will be dominated by the sick and the expensive. That adverse selection drives up the average cost of insurance (making it less affordable for healthy people), and thus undermines the entire point of insurance from the other direction.

The way out of this box is to eliminate the ability of individuals to wait until they are sick (e.g., via an individual mandate), to eliminate the ability of insurers to decline coverage for sicker beneficiaries (e.g., by limiting or forbiding exclusions for pre-existing conditions), and to eliminate the incentive for insurers to find subtler ways to screen their enrollees (e.g., by using risk adjustment to offset the costs of serving different populations).

Put these together and, at least in principle, you are left with a private insurance market in which essentially everyone is covered and insurance companies compete on cost and quality, but not selection.

That solution isn’t perfect (not least because risk adjustment can be difficult and making any such changes will create losers as well as winners), but it’s almost certainly an improvement from where we are today.

13 thoughts on “Bending the Curve: Redefining Health Insurance”

  1. I assume that you’re talking about reducing or eliminating the tax preference for health insurance whether it might accrue to the employer (as it does currently) or the employee (as many have suggested).

    That represents a significant tax increase for a lot of middle class folks. My own health insurance runs over $13K per year, and another pre-tax couple of grand go into an HSA, because our plan has a high deductible. My combined federal and state income tax rate is north of 30%, and with the coming Obama tax increases after 2010, I’ll likely be closer to 40% or more. That’s $500 per month or more out of my pocket, if the entire deductibility is eliminated.

    I’m not sure that’s going to fly politically. I know I’d vote against any congresscritter who voted to raise my taxes by $500 per month, on top of the already-set tax increases I’ll be seeing.

    Don, do you have any sense of how much of the deduction would need to be eliminated to provide enough revenue to sufficiently subsidize poor folks?

    I’ve seen polling that suggests that most folks aren’t willing to pay more in taxes than the loose change in their pockets to provide something closer to universal coverage.

    1. David — I think you’ve hit the nail on the head regarding the politics of the tax part of the health discussion. The authors of the Brookings piece argue that the best way forward is to adopt all of their suggestions (of which there are many) at once. In part, that’s because some of the changes reinforce one another. But I bet they also have the political concern in mind. I think they would argue that yes, you would pay more in taxes, but you would also benefit from the “bending of the curve” on health care costs. It’s unlikely the bending the curve part would offset the higher taxes for you particularly, since that would require reducing health care costs by 30-40%. But that benefit would make the tax increase more palatable for some of those voters.

      Speaking for myself, I would say simply that someone has to pay for a health care expansion and I would prefer it to be a truly incremental source of funding, rather than one of the sources that I have earmarked (in my mind) to be used to deal with our larger fiscal crisis. In practice, that leads me to believe that health expansions should be paid for, to the extent possible, by health-related spending reductions or tax increases (which seem politically do-able as part of health reform, but less so otherwise). Assuming the political process reaches its limit on health spending reductions, the next thing is the tax exclusion.

      I don’t have a handy answer to your question about magnitudes, but here is a link to one study I would use as a starting point to answer:

  2. Donald,

    Re: think they would argue that yes, you would pay more in taxes, but you would also benefit from the “bending of the curve” on health care costs.

    The oft-used phrase “bending the curve” is ambiguous and potentially misleading. Focusing for the moment on our federal long-term fiscal imbalance, the bottom line question regarding impact of “reform” on federal spending is…how will it impact federal spending. We should distinguish between two factors. (1) “Reform” includes these large-scale subsidies, which we could think of as increasing the base and shifting up the baseline spending curve (net of some degree of savings from reduced cost-shifting for care provided to the currently uninsured). (2) Then, cost-containing measures applied to this new, higher base that reduce the spending growth rate from that new base could be said to “bend the curve” downward (decreasing slope of the curve), but not necessarily to ever lead to lower spending over the long term in NPV terms (considering the direct and indirect cost of incremental debt incurred during the period of higher net spending, and considering the relative probability of the higher spending in the short term vs. anticipated net reductions in out years).

    Can you refer me to any projections of long-term federal healthcare spending that compare spending under some “reform” scenario with continuation of the status quo (and/or with some third alternative scenario that contains some of the cost-containment measures of “reform” — medical IT, comparative effectiveness, perhaps even a public option, but without subsidies for achieving universal coverage [which would preclude an individual mandate, of course])? And/or can you refer me to any analyses regarding the NPV budgetary impact of “reform” based on such projections? (Note that I’m speaking only of the impact on spending of the “reform” itself, not including offsets from incremental revenues or spending cuts elsewhere that are in bills and proposals)


    1. Just to add a bit regarding the “so what” of my comment above, if the NPV impact of a “reform” package is a greater fiscal imbalance, then it is misleading for advocates to assert or imply that it is even a partial solution to our long-term fiscal imbalance, since it exacerbates rather than mitigates that problem.

      And as a note (and something to which I think you are alluding in your post), even if the NPV were neutral or a net reduction of the fiscal imbalance, it could still make it harder to solve our fiscal imbalance problem, since any savings from the intended cost-containment measures that could be implemented without subsidized expansion of coverage (to achieve universal coverage) would be used to fund these subsidies rather than to reduce the fiscal imbalance we already face, thus eventually requiring even greater (and more politically-difficult and thus further delayed) sacrifices than we would face without spending on these subsidies UNLESS there are somehow sufficient incremental savings linked to achieving universal coverage via these subsidies to essentially pay for the investment in these subsidies in NPV terms (in other words, unless spending would be lower, in NPV terms, with these subsidies than without them)…and if anyone has made such a claim and has analysis to back it up, I’d like to see it.

      1. Was I only alluding that? Well, that’s what I meant. But I’d also like to reiterate something I emphasized in my second post of preventative care. Finding cost-reducing policy changes should not the sole goal of policy. The ultimate goal should be to increase the net benefit we get from the health system. That certainly means finding cost reductions. But it should also allow for the possibility that some increased spending can make sense.

    2. Hi Brooks — First, I should note that the Brookings folks are considering the entire health system, not just the federal part, so their comments (and my guess as to their thoughts) about bending the curve apply to the whole system. Thus, in principle, David might pay more in taxes, but pay less for his private health care. And if we are really talking curve benders rather than shifters, the savings part would get larger. I personally haven’t seen any compelling NPV-style calculations at large scale (although there are probably some that look at the curve-bending properties of reducing the tax exclusion). A nice study on diabetes preventative care recently came out in Health Affairs: . It’s the most rigorous study I’ve seen, and you can probably guess the results: good programs don’t save money in NPV terms, but they can achieve health gains at modest cost. In other words, there is more to do in undertaking cost-effective care, but it’s very hard to make spending go down.

      1. Donald,

        Yes, certainly some government (and private) spending is worth the price. I certainly wouldn’t suggest otherwise, and accordingly I don’t presume that we should reject any proposed form of federal spending that doesn’t pay for itself as an investment. Some new form of spending could generate a net increase our welfare, and therefore could possibly be desirable (“our” being an oversimplification, of course, disregarding distribution of gain/loss across segments).

        I’m just making what I consider a few important distinctions that I think is getting lost in the phrase “bending the curve”. I think many advocates of this “reform” are misleading people into thinking that, if this reform will slow the growth rate of federal healthcare spending (after shifting the spending base up), that translates into a mitigation of our long-term fiscal imbalance problem, while the opposite seems to be the truth per my comments upthread.

        I’m not saying our fiscal policy should be “Don’t buy it because it’s not free”, just “Don’t buy it thinking that it provides benefits AND saves us money, or thinking that it’s cheaper than it really is”. Try to get the price right, then decide if it’s worth it for the benefits (utility) it delivers.

        As for the net impact on total (public and private) healthcare spending of this “reform”, the same question applies (even though, as you point out, the numbers change), mainly because there is still an upward shift in the cost base, since insured people (other things equal) consumer more healthcare in dollar terms than uninsured people (even net of efficiency gains, such as those from people not using emergency rooms for care that is more efficiently provided in a doctor’s office), which means (1) more total spending, and I presume (2) higher prices for healthcare (since aggregate demand shifts up).

        As for NPV analyses, after posting my comments above I Googled a bit and came across this paper , but I consider Laffer (and Stephen Moore of Arduin, Laffer & Moore) to be partisans and therefore the findings suspect. I’d be interested in any comment you may have regarding their analytical approach and findings. But I’d be more interested in analysis by a less/non-partisan source than Laffer or even analysis by advocates of “reform”, since the latter would perhaps serve as a bound on the favorable end.

        I saw that diabetes study. As an FYI, for whatever it’s worth in terms of assessing potential bias, per the Washington Post, “The study was funded in part by the National Changing Diabetes Program (NCDP), which is primarily funded by Novo Nordisk, a maker of diabetes medicines.” NCDP seeks to shape federal legislation to “invest” more early diabetes treatment, from which perhaps would be in Novo Nordisk’s financial interest.

        Other studies/articles which may interest you regarding preventive care:
        The latter two indicate that even smoking does not have a negative overall long-term budgetary effect after factoring in the federal savings from people living fewer years receiving Social Security and Medicare benefits (not saying that’s a good thing; just talking numbers).

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