Before you start asking what kind of government bailout I may have received or if I have taken a blow to the head recently, I would urge you to read through this entire article. Yes, there are many things that I like about the proposal, but I still have some big concerns. Please hear me out. Let me begin by walking through some of the highlights of the proposal and providing you with my professional opinion on them. I will break these down into the following categories: Expansion of Coverage, Financing, and Cost Control.
I. Expansion of Coverage
The president’s proposal makes the claim that it will make insurance more affordable and it will help over 31 million Americans to afford health care. This expansion in coverage is to be accomplished through a series of tax credits, insurance reforms, government oversight in premium increases, penalties for those individuals who don’t carry insurance, and penalties for those businesses that do not provide health insurance.
The first part of the President’s proposal is to offer tax credits for families making less than $88,000 per year to help them afford the cost of health insurance. This is a very similar approach to the ones included in both the House and Senate bills. While I am sure that many will argue about the level at which these tax credits will kick in, I think that it’s reasonable to provide tax relief for those families at the lower end of the income scale to help them afford health insurance. Score one for the government.
The President’s proposal also includes tax credits for small business to help them pay for insurance coverage for their employees. Another good idea in my opinion.
The next part of the President’s plan is to include a series of insurance reforms. These reforms are designed to protect consumers by either eliminating or reducing an insurance company’s ability to deny coverage through pre-existing condition exclusions and other so called “unfair practices of insurance plans.” Again, this seems like a reasonable approach. My problem with the government’s approach to insurance reform is not the idea of getting rid of the rating and underwriting games that insurance companies play, but rather, I have a problem with the possible unintended consequences of this type of legislation. We’ll address this point later.
II. Financing
You may be wondering, “How is all of this expanded coverage going to be paid for?” The President’s plan includes a variety of tax increases and projected cost savings to pay for this coverage expansion. There are penalties for individuals making over the poverty threshold who do not carry health insurance. There are also employer-based penalties for any employer that has more than 50 employees and does not provide health insurance. Both of these approaches seem to make sense to me.
The President’s proposal also includes an increased tax on high income tax payers. Under his proposal, there would be a 5.4% surcharge (because tax is such a dirty word) on high income tax payers just like in the Senate bill. In addition, the President’s proposal adds another 2.9% assessment (because tax is a dirty word and we have already used surcharge) on high income tax payers’ income from other sources like interest, dividends, annuities, royalties, rent, etc. Now this is an approach that concerns me. Let me begin by saying that I am not in the tax bracket that the President calls “high income,” but I do hope to be there some day. So, my comments here are not self-serving since neither of these tax increases would affect me right now.
My concern with this “tax the rich” approach is two-fold. First, when is it going to stop? Currently, if your Adjusted Gross Income is over $250,000, which is the rough threshold for the President’s new surcharge and assessment, then you are in the top 2% of the income earners in this country. Good for you, you have achieved the American dream! But that also means that you belong to the very small group of people who pay almost 50% of all income taxes in this country. That’s right; the top 2% in this country pay almost 50% of all the taxes. So how much can we tax the rich before they either stop being rich or even stop being Americans? It’s kind of like killing the goose that is laying the golden eggs, isn’t it? My second concern is whether or not it’s wise to put new taxes, oops; I mean assessments, on investment incomes during a struggling economy. Investments by their very nature carry risk. We make them because we expect the return to be greater than the risk itself. If we start taxing the returns on investments, this may have a negative effect on the amount of investment that takes place.
Another idea for financing this proposal comes from the so-called “tax on Cadillac health plans.” This approach was developed in the Senate and would put a significant tax on high cost insurance plans. The President’s proposal would delay the implementation of these taxes until 2018. My problem with this proposal has less to do with the idea of taxing high cost health plans and more to do with the notion of whether or not it will actually result in any tax revenue. For example, a business facing a massive tax on its health insurance benefits has two very easy ways to avoid paying this tax. First, they can reduce the benefits by adding things like deductibles and co-insurance levels to lower the cost of the policy so that it falls below the threshold. Or they can simply convert the coverage to being self-funded. Either of these simple actions will avoid the massive tax they would face otherwise. Given this, do you think we will actually see any of the projected $67 billion dollars in tax revenue?
III. Cost Control
The final area up for discussion is cost control. If I remember correctly, this is where this whole debate started in the first place. We have a significant problem with Medicare costs, especially since the Medicare program is projected to go bankrupt by the year 2017. Since the increasing burden of health insurance costs has been a significant problem for American businesses as they try to compete in a global economy, how is the President’s proposal going to solve this problem? I’m not sure it will.
When it comes to Medicare, the proposed bill would crack down on fraud and abuse and reduce or eliminate the profit that insurance companies make on Medicare Advantage plans. Again, I think both of these approaches are reasonable. My concern is that this may not be enough. What I mean by that is, “Can the government effectively drive out fraud and abuse without creating so much bureaucracy and red tape that is offsets the gains?” We have seen several examples of government programs spending a dollar only to recover fifty cents. Is this approach going to turn out the same way? The bottom line regarding the Medicare problem is that I think it’s much bigger than just fraud and abuse alone. The President’s approach seems a little bit like treating cancer with an antibiotic. It’s not simply sitting around and doing nothing, but it sure isn’t going to keep the patient alive either.
The final area of cost control (and in my opinion what is likely to be the most misunderstood) is the President’s new proposal for rate regulation on insurance premiums. Under the President’s proposal, “Health Insurance Rate Authority would be created to provide needed oversight at the Federal level and to help States determine how rate review will be enforced and monitor insurance market behavior.” Simply put, we would create a new Federal government body that would have rate regulation authority over insurance companies and would decide if their rate increases were unreasonable and unjustified. If this new Federal government body determined that an insurance company’s rate increases were unreasonable, they would force that insurance company to lower their premiums, provide rebates, or take other actions to make premiums more affordable. This is called price control, and it’s a bad idea on so many levels. Now, before you spin out of control and wonder why I am defending the insurance companies, please read on.
I am not defending the insurance companies’ profits or even saying that they don’t charge excessive rates when they know they can get away with it. I know for a fact that they do. My problem with the President’s approach is that price controls simply don’t work. They have never worked and should only be pursued in the case of a necessary monopoly like the power companies. We have seen time and time again that the best form of price control is competition. The reason why American Airlines or any other airline doesn’t increase the price of its flights by 50% is Delta, Southwest and its other competitors, not because of the government.
The other problem I have with this approach to controlling cost is that it will inevitably result in less choice and less competition in the insurance market, and this impact will be felt in the small business and individual market where the choice and competition are needed the most. What am I talking about? Well, consider this. Let’s take a large national insurance company. They offer two main products: insured products which are typically purchased by small employers, and self-funded health plans which are only offered and purchased by large employers. This company has 30% of its covered lives in the small employer “insured” market and the other 70% in the self-funded market. Let’s say the President’s proposal passes and now this company realizes that there are a whole host of new regulations and restrictions on the small employer “insured market.” They also realize that even if they are successful in dealing with these restrictions and they produce profits for their shareholders, the Federal government could decide these profits are unreasonable and force them to issue refunds. What do you think that company is going to do? I can tell you what they will do. They will drop their insured lines of business, give up their state insurance or HMO licenses and only offer insurance to the large group self-funded market. Why would they do this? Because the self-funded market is not “insurance,” and it is not regulated by the states. It’s regulated by the Federal ERISA legislation. Since it’s not really “insurance,” there are no “premiums” to dispute or regulate. This means that there is no possibility for the Cadillac health plan tax, no rate regulation and no restrictions on things like pre-existing condition exclusions, etc. You see, if we make health insurance an unattractive business with huge risk and little profit, the insurance companies will simply exit the market. The result will be a reduction in choice and competition in a market segment that needs choice and competition the most.
So, where does this leave us? What we have before us is a proposal that the President believes will give him the best chance of getting something, anything passed into law. It expands coverage, taxes the rich, beats up the evil insurance companies, gets rid of fraud and abuse in the Medicare arena, and provides tax credits for individuals and small businesses. These are all things that will sound great on the evening news, and the proposal is strategically designed to corner the Republicans and force them to support this new version of health care reform.
The problem is that this proposal won’t really solve anything because it won’t control health care costs. It won’t fix the huge unfunded liability that is known as Medicare, and in my opinion, it will have some very serious negative side effects which include driving insurance companies out of the insurance market. It will eliminate choice and competition. I believe the President knows this, but unfortunately, it has become more important to win a really big political battle than to actually solve a really big problem.
No comments:
Post a Comment