Sally C. Pipes is President and CEO of Pacific Research Institute in San Francisco. In addition to her Oregon State legislative testimony below, she was the feature speaker at Cascade’s Legislative Leadership Forum at the Capitol on March 28th talking about the quest for universal health care coverage.
Thank you for the opportunity to share my thoughts on health care reform at the state level today. I am an economist, until recently a Canadian economist, who has studied health care systems my entire professional life. As a former Canadian, I have much experience with how government financed health care works in practice.
As a economist, I am trained to examine incentives, take a full view of costs — not just monetary costs — and be very skeptical of claims that efficiency can be maximized by substituting public and political decision making and administration for private transactions.
I will provide a summary analysis of each bill, commenting on what can be known about the provisions.
I will then step back and examine the broader issues of health care reform and highlight the experience of Massachusetts, of which much has been written and equally much has been omitted.
SB 27
My reading of this bill is that its intent is to establish the framework for a single-payer health care system, a Medicaid or Medicare for all model. It is perhaps the most ambitious and the least likely. At its core, it seeks to roll in Medicare and Medicaid money into a state run bureaucratic system that has explicit rationing. This is unlikely.
It explicitly calls for the centrally planned allocation of health care resources. It would destroy the private insurance market with guaranteed issue insurance on all plans, not just small group plans with under 50 employees. This would have the effect of raising premiums so high that healthy people would drop insurance.
It appears to grant general taxing powers to the newly created bureaucracy, “The Oregon Heath Fund Board.”
It is generally unwise policy to provide individuals with the power to tax other individuals to support the former individuals’ livelihoods.
SB 329
Like the previous bill, it places faith to design and run a significant portion of the state’s economy in a newly created bureaucracy.
It will suffer all the same problems. In addition, it calls for the explicit government setting of prices.
It establishes unattainable goals: “Ensuring that the costs of health care in this state are shared proportionately and equitably by the state, employers, health care providers, and individuals.” How are these players even defined? How is the state separate from taxpayers and individuals?
How is it that producers share in costs, other than accepting diminished revenues?
In addition, it mandates that individuals buy into the plan under penalty of losing a tax exemption.
It puts the board in direct charge of regulating day to day practices of health plans. (Section 13, (2).)
HB 3368
It is unclear to me exactly what is gained by this bill other than the creation of a new government bureaucracy — The Health Insurance Exchange — that will do little that a general insurance agency functioning under sensible regulations would do in the private market.
It appears to be merely a means to collect taxes. It has a general power to tax, as outlined in Section 3 (3): “The Health Insurance Exchange Corporation may establish, impose, collect, and use fees and other mechanisms to ensure sustainable and internally generated funding.” I reiterate my previous comment about the danger of granting bureaucracies, and hence bureaucrats, blanket powers to tax others to support themselves.
It contains other job-killing taxes as well. It appears to extract 2 percent of payroll from employers, not that this won’t simply be passed on to employees in lower wages or fewer jobs. It then also taxes the employees on their reduced wages at a clip of 2.8 percent.
Having taxed employers and employees, it would then fine employees if they don’t purchase insurance, yet another tax that simply appears to be a mandate. This can’t be good medicine for Oregon’s economy.
HB 3341
Like the previous bill, the purpose appears to be to create a new government bureaucracy to be a health insurance brokerage. It suffers from the general taxing power, regulation of price and plan design, and the drawback of guaranteed issue and what that tends to do to premiums.
Each of the bills under discussion today would establish a larger role for government in the provision of health care. I must also note that for the vast powers they grant, they are not very detailed. That is, they leave extreme amounts of discretion up to the boards that they create. I would encourage you, the elected officials, to examine the scope and costs of the decisions you will be asking these boards to make.
At least two of the four, and almost certainly any solution that comes to passage, would compel residents to purchase some state mandated health insurance package. In other words, they would create new programs and finance these programs with taxation. Calling it an individual or employer mandate to purchase insurance sounds better, but at the end of the day it is a tax, a compulsory transfer of money from an individual to fund something he or she may or may not find of value.
Taken as a group, I must sadly concede that these plans represent the latest thinking in health policy circles, among those on the center left and far left of center. They follow, at least in outline, some successful and some unsuccessful attempts at passing reform at the state level. SB 27 and SB 329 follow in a proud, if doomed lineage, of bringing a comprehensive, compulsory, and, ideally, at least in the view of many advocates, a monopoly system of government health care financing. These systems are attractive in the abstract.
Who wouldn’t want to simply pay a tax and have the best health care available for them, all without the profits and overhead expense of private companies? When examined closely, however, they always fail under the harsh light of political debate. Most people, it turns out, are quite satisfied with their health care plan and feel they pay enough taxes.
They are rightfully dubious of claims of government efficiency, they understand that they often get substandard products from the public sector, government schools compared to private schools, the United States Post Office compared to Federal Express, and they suspect that they will end up on the wrong end of a rationing decision.
These fears are legitimate and born out in experience. It is an innovation of the Oregon political body to confront these realities honestly.
You know that resources are scarce, and that when something of value, like health care, is free at point of consumption, that there will be unlimited demand. Queues will form, funding will be exhausted, and people will suffer. The Oregon experience with creating a rational, rationing list, if I may call it that, is also instructive. While intentions were sound, there is rarely a consensus on what is appropriate care, cost benefit analysis can be done in the political sphere without actually considering costs, and, if lists appear to discriminate against protected groups, the disabled, either by virtue of chronic intoxication or inability to conceive, the federal government will withhold its consent, as, by definition, it feels protective of its protected classes.
Such “Medicaid for All” expansions are therefore not practical.
They make promises that can’t be kept, as the federal government will not likely roll all of its funding — including that for seniors in Medicare who do, by the way, have many choices, between public and private plans — into an annual check to subsidize an explicit rationing scheme. There is, after all, no real cost containment in these plans other than controlling budgets and prices paid to providers, which is to say price controls. Government set price controls in Medicaid and Medicare are already serious problems in the medical provider community.
These systems reimburse, on average, a respective $.92 and $.95 for each dollar of care provided. Much is made of the supposed costs the uninsured foist on the health care system. Yet as a total cross subsidy, it doesn’t come close to the bill the government sector hands private payers.
The other bills represent the cutting edge of a new health consensus, that the problem of the uninsured can be solved by mandating that they simply purchase insurance. It’s a compelling theory, especially for those in the business of addressing problems by telling people what they ought to or must do. It won’t, however, work.
The example often used is that of automobile insurance, which is mandatory in all but three states for anyone who wishes to transport from the driver’s seat of a car. It’s required to protect society from the costs of individuals being uninsured. It’s all nice and neat, except for the facts.
25 percent of drivers don’t have insurance, even though they face penalties for not doing so. The law is so ineffective at protecting innocent drivers that most people choose to pay extra on their own insurance for provisions that protect against the under and uninsured.
The reason people don’t purchase insurance is either because they don’t want it — that is, they don’t perceive value in it — or they can’t afford it.
Forcing people to purchase something they don’t want on threat of fine diminishes their welfare and will upset them, a strange result for elected politicians to be seeking.
Massachusetts was the first state to pass such a law nearly a year ago. California and many other states are attempting to follow suit, not the least because of the lavish praise Governor Mitt Romney earned in the press and the uncritical examination the program received.
The original promise was that universal coverage could be achieved without a tax increase, without an employer mandate, but by reallocating $1 billion the state already spent on uncompensated care, providing a centralized location for people to purchase standardized plans, and to purchase them with pretax dollars, and relax mandates on plans for young adults.
It must be noted that Massachusetts is perhaps the ideal state for such a scheme to work. It has a relatively small uninsured population, a high level of existing subsidy to be redistributed, and a large number of uninsured who were in fact eligible for government insurance but just hadn’t signed up or could afford it but chose not to purchase it. The idea was to subsidize private insurance not actual care. And those who could afford to pay ought to.
Then governor Mitt Romney and legislative colleagues promised affordable plans in the premium range of $200 a month for young people.
Critics of the plan argued that the problem in Massachusetts was an overregulated health care sector. Guaranteed issue and modified community rating made private insurance unaffordable. Many of the young didn’t buy because it was a bad bet. The solution was to deregulate insurance markets, not build more bureaucracy and tighter regulations.
We predicted that the new bureaucracy, the connector, would be a de facto regulator and designer of health plans in Massachusetts, as they set the standard of plans that individuals must purchase or face fines. We argued that cost estimates were far too low. Since private insurance cost $10,126 for a family plan in Massachusetts and $5,257 for an individual, it was unrealistic to predict that similar plans could be developed for $200 a month. Examining the data, we also challenged the notion that the young, healthy, and uninsured were foisting the majority of costs onto the system.
It is clear that only 6 percent of spending from the uncompensated care went to individuals living in families with incomes greater than 200 percent of the poverty level. Only 14 percent went to individuals ages 19 to 24. Seventy-one percent went to people earning less that $12,728 a year. Forty-two percent went to people with no income. These are individuals who are not going to purchase insurance upon the threat of losing a tax deduction or paying a fine.
(As a side note, it is not the uninsured, but rather Medicaid recipients, who are disproportionate users of expensive emergency room services instead of less expensive doctor or clinic visits.) We also predicted that since many of the plans won’t in fact be affordable for many families, politicians will be forced to increase taxes and subsidies and will not, in fact, have the will to enforce the mandate. Instead, they will blame private insurers for failing to achieve the impossible — provide a $5,257 service for $2,400 — and further regulate and control prices.
What has happened so far in Massachusetts? The first thing was the establishment of the Connector Board and its bureaucracy. True to form, it staffed up and paid well, adding many six figure jobs to the government payroll.
The Romney administration reported expected costs in a Wall Street bond filing, which made it clear why political consensus was achieved among providers, politicians, and health advocates. Costs were not the $125 million explained to voters and the press, but rather $276 million. More instructive, the plan provided $386 million for rate increases for “hospitals, physicians, and managed care organizations.”
The Connector then went to work creating fully and partially subsidized plans. Enrollment is less than 100 percent, and activists have complained that premiums for these plans are too high. The lowest premiums for these subsidized plans start at $18 a month and end at $106 per person, or roughly 4.3 percent of income for just the insurance. Advocates maintain that these premiums are unaffordable and therefore the individual mandate and its accompanying fine of half of the premium, should not apply to this group.
In February, the Connector board released the premiums for the unsubsidized plans, the ones that the non-poor uninsured would have to purchase or face fines. Although the campaign for passage claimed premiums of $200 a month were likely, the plans started at $380 per month. The Connector board sent the plans back to the design room, the new governor became involved, and the next round found premiums more reasonable. The cheapest plan, which provides care at a network of local clinics and facilities, is $156 a month for a person between the ages of 35 to 39, the average age range of the uninsured.
As we predicted, the Connector board has become the de facto design center for all health insurance in Massachusetts, as its definition of Minimum Creditable Coverage determines whether individuals are fined. Currently, there are 250,000 people with health insurance that isn’t generous enough to meet this test. They will have to change their plans or face fines.
It is still early, and we don’t have results on how many of the uninsured will actually commit a significant portion of their income to insurance. I predict it will be far short of the target, that costs will increase, quality will degrade, politicians and bureaucrats will blame the private plans working within the confines of the government’s design, and the next step will be further regulation and price controls.
And we know those are bad for everyone’s health.
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Listen to the entire hearing. Ms. Pipes testimony occupies the first 23 minutes, then two state workers testify, then Ms. Pipes and the state workers answer questions beginning at 34:30 into the hearing. This portion of the hearing ends at 59:00 into the two hour session.
