Perspectives

Also see our Economic Commentary which supplements the Laufenberg Economic Quarterly and primarily focuses on more recent economic developments.

Greece has been in the news recently. In 2010 Dan wrote an essay on Greece and the European Union which you may find interesting and still relevant. Go here to read it.

This page is designed to offer you my perspective on economic fundamentals, ranging from business cycles to yield curves. It will provide more detailed economic analysis than is generally available in the Quarterly. For the most part, the essays provided here will attempt to discuss timely fundamental issues related to the forecast but are expected to have a longer shelf life than the content on either the Quarterly or Commentary pages. I hope that over time you will consider the information on this page as a source of reference when debating economic issues in the future.

Daniel E. Laufenberg, Ph.D.
LaufenbergQuarterly.com

Health Care Legislation: Essay No.1-Expanding Benefits Will Not Lower Health Care Costs

[April 13, 2010. This is the first in a series of four essays discussing various aspects of the health care legislation enacted recently. The first discusses the expanded benefits and their impact on the future cost of health care, both in terms of price and quantity. The second essay will discuss the revenue provisions in the legislation and their impact on economic activity. The third essay will discuss the impact of the new legislation on federal deficits and debt, and what it implies for the long-run health of the economy. The final essay will try to summary the various features of the legislation and assess their net impact on the economy in the short-term, as well as in the longer-term.]

Recent passage of the two pieces of health care legislation-the Patient Protection and Affordability Care Act (H.R. 3590) that included the major provisions and the Health Care and Education Affordability Reconciliation Act of 2010 that reconciled some of the differences between the Senate and House versions-expands the existing health insurance structure used to pay for health care, provides tax credits and subsidies to lower income households to help them pay for health insurance, imposes new regulation on the health care and insurance industries, and increases the health insurance tax paid by higher income individuals. It is called health reform, but it seems to fall far short of that label.

Moreover, the provisions in the legislation designed to reduce the overall cost of health care, especially through incentives to improve efficiency, are marginal at best. Indeed, the provisions to increase the overall supply of doctors, nurses and other health care providers seem suspect. More doctors may be induced to be general practitioners or open a practice in a particular area because of the bonuses proposed, but I doubt that the provisions will increase the supply of doctors or nurses in any meaningful way. The only way to increase the supply of doctors and nurses is to pay them more and to reduce the regulatory hassles that health professionals face. The legislation may fund scholarships and loan repayment programs, but it also increases the administrative costs of being a doctor through added regulations and reviews by administrators of public assisted health plans.

With regard to the average health insurance premium, I suspect that individuals will eventually pay more for insurance under the provisions mandated in the legislation, despite the claim by proponents of the legislation to the contrary. As far as I know, the laws of supply and demand have not been repealed. More people will be demanding more health care thanks to the tax credits and government subsidies that will be available to those who could not afford health insurance before.

Also, new government mandates will add to the overall cost of care. In particular, eventually no one will be denied health insurance because of a pre-existing condition. This effectively forces everyone into the same insurance pool, which in turn makes it possible for those who had health issues and had to pay a very high premium for insurance coverage in the past-too high for some--to pay less now. On the other hand, it means that the others in the pool will pay higher premiums than they would have under the old rules. For the most part, there is very little opportunity for insurance companies to price discriminate based on risk. In other words, the penalty for making bad life-style decisions is relatively small. And, of course, it is always easier to spend someone else's money than it is to spend your own.

In addition, there is no longer a life-time limit on the total cost of health care for any one person. The implication of this change is that the total exposure of health insurance companies under the new legislation is now unlimited, which means that policyholders will have to pay for this potentially higher cost to the insurer one way or another.

Proponents of the legislation argue that it will allow more people to have access to affordable health insurance. But what about affordable health care? Based on my assessment, the primary cost saving feature of the legislation is to reduce waste, fraud and abuse in the health care industry. Indeed, the legislation has funded $250 million to be spent over the next decade for increased enforcement. If the past is any guide, the savings likely to come from this effort is greatly exaggerated. I only hope that they find at least $250 million in waste and abuse to pay for the added cost of enforcement. Congress has turned to this source of savings whenever it did not have the stomach to cut benefits or raise taxes sufficiently to actually pay for the new or expanded entitlement program that it created. The health insurance legislation seems to fit nicely into this category.

There is a difference between health care costs and health care inflation. Health care costs represent the total bill paid, including both the volume and price of care received. Health care costs can increase because more care is being used or because the prices of care are going up. Health care inflation measures the increase in the price of health care only.

Most people seem to focus on health care inflation as the problem. And they tend to look only at health care inflation as measured in the consumer price index (CPI). However, the CPI measure of health care is a narrow measure of prices paid. It measures only the prices paid by consumers for the health care they receive, which includes deductibles, co-pays, insurance premiums, and out-of-pocket costs of the uninsured. For example, if employers decide to shift more of the burden of health costs to their employees by either increasing the share of the premium paid by employees or the deductible under the plan, it is reflected in an increase in the price of health care as measured by the CPI.

A more comprehensive measure of health care inflation is provided by the personal consumption expenditures (PCE) price index. The PCE price index for health care measures the prices paid for all health care provided to consumers regardless of who paid for it. This includes payments by Medicare, Medicaid, insurance companies, employers, and as well as individuals. If employers shift more of the burden of health care to their employees, this change alone would not have any impact on the PCE price index.

According to the CPI measure, the out-of-pocket expenses paid by consumers for health care have increased at an average annual rate of 3.9% from 1995 to 2008. However, according to the PCE price index, health care costs have increased at an average annual rate of 2.9% over the same period. The difference between the two is in large part due to the fact that the government pays one price for health care, insurance companies pay a slightly higher price, and individuals without insurance presumably pay an even higher price. However, many uninsured pay nothing, which the White House website said added one thousand dollars to the average health insurance premium (I assume that estimate was an annual cost but the White House website did not say) to pay for the uninsured. In other words, medical care providers get paid one way or another. The government may be able to negotiate or set a lower price for some services but it is offset by higher prices paid by others.

The proponents of the new health care legislation contend that since the government is able to negotiate a lower price, overall health care inflation will fall if the government’s role is expanded. This seems to be more of a hope than a fact. Indeed, according to the assessment of the legislation by the Congressional Budget Office, there are a “number of policies that might be difficult to sustain over a long period of time. Under current law, payment rates for physicians’ services in Medicare would be reduced by 21 percent in 2010 and then decline further in subsequent years; the proposal makes no changes to those provisions....At the same time, the legislation includes a number of provisions that would constrain payment rates for other providers of Medicare services….The projected longer-term savings for the legislation also reflect an assumption that the Independent Payment Advisory Board established by H.R. 3590 would be fairly effective in reducing costs beyond the reductions that would be achieved by other aspects of the legislation.” 1 The point is that the savings estimates from Medicare assumed in the calculation of their impact on the budget are unsustainable. As an increasing number of boomers reach 65, Medicare’s share of health care costs will increase. It is unrealistic to think that the health care services demanded by aging boomers will be available if physicians are not getting paid to provide them. Indeed, as the government assumes a bigger share of the health care expense, politically it will be more difficult for the government to expect such large discounts.

Finally, the legislation expands Medicare's drug benefit by phasing out the "doughnut hole" in that benefit. Once again, this simply increases the share of health care costs going to Medicare, which means that Part D premiums will rise, health insurance taxes will be increased further, or budget deficits will increase even more. In other words, nothing is free. Eventually, someone pays.

Like most people, I will benefit from some aspects of the new health legislation, but I am also pragmatic enough to know that eventually I will pay far more for health care than I would have otherwise, either in higher insurance premiums, higher deductibles, higher co-pays, limits on care available, or higher taxes. The implication is that people with access to health insurance will be healthier because they are more likely to practice preventive care and therefore cost less in the long run. I contend that if people who make bad life-style decisions feel more secure about their health care, they will have even less of an incentive to change behavior. Moreover, many people will not make the connection between the benefits received now and the price paid later until it is too late to turn back. Some will never make the connection. They will become addicted to the benefits long before they will be asked to pay for them. Such a strategy improves the chances that the health legislation will gain public support just in time for the politicians to be re-elected.
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1 Letter, Douglas W. Elmendorf, Director, Congressional Budget Office, to Speaker Nancy Pelosi, March 20, 2010

Go Here for Health Care Legislation: Essay No. 2—Revenue provisions of the new legislation

 

The views expressed here reflect the views of Daniel Laufenberg as of the date referenced. These views may change as economic fundamentals and market conditions change. This commentary is provided as a general source of information only and is not intended to provide investment advice for individual investor circumstances. Past performance does not guarantee future results.


Special Report: Health Care Legislation
Essay No.1 - Costs
Essay No.2 - Revenue
arrow Essay No.3 - Budget Deficits
Essay No.4 - Things to Watch

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