Cutler D. Gearing Up for the Health Care Debate. JAMA Forum Archive. Published online December 14, 2016. doi:10.1001/jamahealthforum.2016.0053
A new administration is coming to Washington, promising yet another health care reform. Although the debate over health policy will surely be more unpredictable with President-elect Trump than it has been with most other politicians, that does not mean it will be entirely novel. Indeed, the past half-century of health debate likely provides a good road map for what is coming.
In preparation for Trumpcare, therefore, here are a few economic lessons.
Trump promised more health care choices, lower costs, and universal coverage. Of course, he cannot deliver this package any more than a physician can restore perfect health to a chronically ill patient. Indeed, it will be far easier to make things worse than better.
Health care follows a modified version of the 80-20 rule: about 80% of medical spending is incurred by 20% of the population. Many who use large amounts of care have complex chronic illnesses, significant disabilities, or persistent mental health problems. Left unregulated, insurers will charge these people more for insurance or exclude their conditions from coverage entirely—a hallmark of individual insurance markets before the Affordable Care Act (ACA).
The ACA prohibited insurers from taking such preexisting conditions into account in pricing or coverage decisions. Trump has indicated that he wishes to continue this practice, and most Republicans and members of the public agree.
The economic consequences of such a policy would be disastrous, however. If people with health conditions are guaranteed coverage at average rates, the price to healthy individuals has to go up—discouraging many of them from buying coverage. Furthermore, when healthy people know they can buy insurance at average prices when they get sick, there is little reason for them to buy coverage when they are healthy. Thus, coverage among healthy individuals will decline even further.
The resulting price increases will lead to a “death spiral” of even more healthy people dropping out, premiums rising further, and so on. This pattern has occurred in several instances, and it would almost certainly happen if a requirement to cover preexisting conditions was enacted without other policies in place.
The ACA’s solution to the death spiral is the individual mandate, which requires everyone to have insurance or pay a fine. The ACA’s designers understood that healthy people would pay more than their actuarial cost for insurance, but figured they would gain the reassurance of guaranteed coverage if they become ill. Not surprisingly, this mandate is one of the ACA’s least popular elements, and most Republicans have vowed to eliminate it.
Without the mandate, Republican lawmakers must find another solution to the death spiral. The trouble is that almost all possibilities involve eliminating required coverage of preexisting conditions. One common proposal is that only those who are moving from insurance to insurance would be guaranteed preexisting conditions coverage. People who were previously uninsured would forfeit this right.
However, even this limitation is not enough to protect those with existing coverage if insurers are allowed to sell insurance across state lines without federal guarantees on what is covered—measures many Republicans support. As was explained in a recent JAMA Forum, in such an environment insurers would not have to cover conditions that are common among the chronically ill—mental health care, oncology, or other expensive areas.
The knowledge that many people with preexisting conditions will have difficulty buying insurance leads to a related proposal: creating a separate “high-risk pool.” Think of it as the policy version of quarantine: keep sick people from “infecting” healthy people with higher costs. Alas, the economic quarantine makes less sense than the medical one. When people enter a high-risk pool, they move to a different insurer, which means changing primary care physicians, specialist networks, and drug formularies. Furthermore, high-risk pools are often underfunded, effectively limiting access even further for those with serious needs.
There is no escaping the math: making life easier for healthy individuals requires making it more difficult for people who are ill. Trumpcare will almost certainly harm patients with chronic illnesses—and thus their providers too.
Imagine that a new drug is developed that slows the progression of Alzheimer disease and costs $10 000 per year. Who should pay to treat potentially millions of elderly patients who would benefit? There are several possible payers: the entire population, through higher taxes for Medicare and Medicaid; patients with Alzheimer disease, through higher Medicare premiums or direct payments to pharmaceutical companies; or physicians and other care providers, whose fees might be reduced to offset the greater spending on prescription drugs.
Current policy generally uses all of these methods. In some cases, higher spending is matched by higher taxes. Sometimes the increase in medical costs in one area is offset by cuts in others – witness the much-lamented sustainable growth rate. In still other cases, people pay more for insurance, or governments deny care to people, as many state governments did by restricting access to the hepatitis C drug Sovaldi.
A central tenet of most Republican health proposals is that beneficiaries should pay for all of the costs of innovation. For example, Speaker Ryan’s plan for Medicare vouchers suggests a voucher amount that rises with overall inflation but not with medical costs. Thus, if the hypothetical Alzheimer drug were approved, patients would bear all of the drug’s cost. Turning Medicaid into a block grant proposal has the same effect for low-income people, though it forces state governments to do the rationing.
There is no obvious answer as to who should pay for the costs of innovation, though I suspect most would agree that low-income people should not pay for all of the additional cost. But the more general point is to beware of any proposal that claims to solve the issue by simply passing the buck to others.
One alternative solution would be to discourage pharmaceutical companies from setting higher prices for the US market, perhaps by pegging prices here to those paid in other developed countries. This saves US consumers money, but it is not without possible adverse effects on biomedical innovation (though this is much debated). Trump has proposed that the United States allow drug reimportation from other countries, but Republicans are generally opposed to this, and Trump has steered away from the issue since the election. If costs are not to be cut, look out for who gets left with the bill.
In remarks that are now enshrined in the headquarters of the Department of Health and Human Services, the late Sen Hubert Humphrey once said that: “the moral test of government is how it treats those who are in the dawn of life, the children; those who are in the twilight of life, the aged; and those in the shadows of life—the sick, the needy and the handicapped.” The American people are soon to find out how the Trump administration will treat those groups. I fear they may not like what they find.
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David Cutler, PhD David Cutler, PhD, is the Otto Eckstein Professor of Applied Economics in the Department of Economics and holds secondary appointments at the Kennedy School of Government and the School of Public Health at Harvard University...