Politics and health care reform Notes for October 28

Main points

We brought political science into the mix. What does it tell us about how the US got to where it is and whether the political situation has changed?

I quibbled about some of the evidence he used to support his claims, especially concerning business and labor support for universal health insurance.

My main question concerned interest groups. It seems to me that the central difference between Obama and Clinton is that Obama has been focused on doing deals with these groups in a way that Clinton was not. In any event, I’m surprised that they’re left out of the story. We’ll pick them up next time.

Disadvantages of individual market

Like Jon, I see a lot to like about the basic Republican proposal. End the tax exclusion for health care and give tax advantages to catastrophic health insurance plans and health savings accounts. We would get rid of a regressive, bad tax policy. And, if one interpretation of the RAND study is to be believed, people would make better decisions about using the health system. Finally, we would make health insurance more like, well, insurance. I’m not sure why that’s such a great thing. But at least it wouldn’t be like including insurance for gas in your car insurance (to quote Remy).

Alas, there’s a big problem. A really, really big problem. Individual insurance plans carry a lot more administrative overhead than group plans (employer sponsored insurance plans are group plans).

Administrative expenses are twice as high in nongroup markets as in group markets. The costs are higher because insurers in this market spend considerable resources on medical underwriting, and economies of scale are lost. It is much more expensive to sell insurance to millions of individuals one individual at a time than it is to sell to a much smaller number of employer groups, each comprising thousands of employees. For a typical family that moves from group to individual coverage, therefore, the move to nongroup insurance will raise premiums for an identical policy by more than $2,000 per year.** Buchmueller et al. “Cost and Coverage Implications of the McCain Plan to Restructure Health Insurance,” Health Affairs September 16, 2008.

I’ve got more. Our friend Reinhardt interpreted a statement from an insurance industry advocacy group as saying that “unless its member companies are allowed to burn 35 to 45 percent of premiums on marketing, broker commissions, administration, other expenses, and profits, they cannot thrive in the non-group market for health insurance.” “This,” he added, “is a remarkable statement.” I don’t think he meant that it is remarkable in a good way.†† Uwe Reinhardt, “What Portion of Premiums Should Insurers Pay Out in Benefits?” New York Times Economix Blog, October 7, 2009.

As long as we’re talking about insurance industry profits, Reinhardt kindly analyzed one company’s balance sheet and came up with a set of numbers that, he claims, are representative of the industry as a whole.

WellPoint’s net income (profits) after all expenses and the provision for income taxes in 2008 was 4.07 percent of total revenue. In accounting jargon, it is called the “profit margin.” In 2007, that margin had been 5.47 percent. In 2006 it was 5.42 percent.

Were WellPoint’s profits in 2008 high? It depends how we look at it. Profits were not that big a deal as a fraction of premium revenue. …

As a percentage of total assets of $48,403.2 million deployed by the company (measured at the reported book value on the firm’s balance sheet), WellPoint’s profits in 2008 amounted to 5.14 percent in 2008 and 6.42 percent in 2007.

As a percentage of the equity shareholders had in WellPoint (also measured at the book values reported by accountants), WellPoint’s profits in were 11.62 percent in 2008 and 14.55 percent in 2007.

Relative to other industries, these are not particularly high numbers, nor are they particularly low.‡‡ Uwe Reinhardt, “How Much Money Do Insurance Companies Make? A Primer,” New York Times Economix Blog, September 25, 2009.

Should you freak out about demographic trends?

This is something we started with, continuing the discussion from a previous class. While I wasn’t privy to exactly what was said in that class, I tried to say that the numbers aren’t as scary as they sound once you figure in GDP growth. I’ll let Reinhardt explain (as I seem to be doing a lot these days).

Current G.D.P. per capita in the United States is about $46,500 … of which Medicare absorbs slightly over 3 percent, leaving about $45,000 of G.D.P. per capita for other things.

Suppose between now and, say, 2050, inflation-adjusted G.D.P. per capita in the United States grows at an annual compound rate of only 1.5 percent per year, which is conservatively below the roughly 2 percent long-run annual growth rate of real G.D.P. per capita over the past several decades. Even at this low growth rate, inflation-adjusted G.D.P. per capita would grow from $46,500 now to about $87,000 by 2050.

According to the Social Security Trustees’ 2008 Report on the Status of the Social Security and Medicare Programs …, Medicare will absorb about 8.4 percent of G.D.P. by 2050 if it is not restructured.

But even after that 8.4 percent haircut for Medicare in 2050, there would still be close to $80,000 inflation-adjusted G.D.P. per capita left over for other things in that year, which is still 78 percent more than the non-Medicare G.D.P. per capita that we have today.§§ Uwe Reinhardt, “U.S. Health Care Costs, Part V: Can Americans Afford Medicare?” New York Times Economix Blog, December 19, 2008.

Is this a good way to think about it? We now pay a much larger percentage of our income on entertainment than previous generations did. But that’s OK, since we have a lot more money to spend. Similarly, we might wind up spending a very high percentage of our incomes on health care but not find that burdensome if our incomes are much larger.

My own personal hobbyhorse is immigration. I think that demographic imbalances between workers and retirees can be rectified through immigration by a lot of young, productive people (the unproductive either can’t or don’t bother crossing the border). I would feel better about asserting that if I had the numbers to back it up. But the amount of effort that the US puts into controlling its borders suggests that there is a lot of demand to enter. In any event, I don’t think that long range predictions of demographic doom and gloom should leave that out. If we face a demographic imbalance, it’s for social and not biological reasons.

This is something we’ll return to at the end of our class, with Fogel’s paper.

Update: where’s business?

In a tizzy. From David Williams, a consultant on medical stuff.

Revival of the so-called public option in health reform legislation has big business in a big tizzy. I listened in on a Business Roundtable briefing yesterday where two talking points were hammered on repeatedly:

Williams says they’re wrong. Maybe he’s right. But his point about the tizzy is evidence in favor of something I believe (without independent evidence of my own, I might add): that Blumenthal is more right than Hacker about whether business is enthusiastic about this.

Also, note that the reasons he gives for why the business community shouldn’t worry mostly revolve around claiming that the public plan (if there is one) would have higher administrative costs than Medicare, bringing them more into line with the costs of private insurance. I hope he’s at least partly right, given the things Emanuel said about Medicare.

This page was written by Michael Green for PPE Senior Seminar, PPE 190, Fall 2009. It was posted October 28, 2009 and updated October 29, 2009.
Name of website