Can ObamaCare Be Fixed? Part II

The reason we have so many problems in health care is that almost everywhere we look, people face perverse incentives — patients, doctors, employers, employees, etc. When they respond to those incentives they do things that make costs higher, quality lower, and access to care more difficult than otherwise would have been the case.

At the root of those perverse incentives is bad public policy.

Pre-ObamaCare Distortions That Affected Important Choices

Insurance or Uninsurance? Because we were spending far more on free care for the uninsured than we were spending on subsidies for individually-purchased insurance, millions of people had an incentive to be uninsured.

Public or Private? Because we spent far more on such public programs as Medicaid and CHIP than we spent on subsidies for individually-purchased insurance, millions of people had an incentive to choose public insurance rather than private insurance.

Individual or Group? Because employer-provided insurance was generously subsidized through the tax law while individually-purchased insurance received almost no tax relief, the vast majority of people with private insurance had non-portable, employer-provided coverage.

Third-Party or Self Insurance? Because employer-provided insurance was liberally subsidized through the tax law while people’s ability to get similar subsidies for Health Savings Accounts (HSAs) was greatly restricted, people had too much of the former and too little of the latter. This in turn led to third-party payer domination of the entire medical marketplace and the elimination of real market-determined prices.

Choices in the Market for Risk Avoidance. Because normal market forces had been so completely repressed, outside the individual market real health insurance simply didn’t exist.

ObamaCare Distortions

So what did the Affordable Care Act do about these problems? It made every one of them worse!

  • By (1) eliminating individual underwriting, (2) imposing guaranteed issue and community rating regulations, (3) allowing risk pools and other public and private pans to dump their sickest, most costly patients into the exchanges, and (4) imposing weak or non-existent penalties, ObamaCare actually creates greater incentives for millions of people to choose uninsurance over insurance. That is, the cost of insurance has become much higher and the cost of getting insurance after people get sick has become much lower for a great many people.
  • ObamaCare not only encourages Medicaid rather than private insurance, it traps people in what is clearly an inferior health insurance plan. If you are eligible for Medicaid you are not allowed in the exchange.
  • ObamaCare not only makes no effort to level the playing field between individual and group insurance, it makes arbitrary differences even greater. This, in turn, threatens to change the structure of entire industries as employers react to the perverse incentives created by the bizarre subsidy scheme.
  • By forcing people to buy insurance benefits they may not want or need, and by insisting that a whole slew of services be made available with no copayment or deductible, ObamaCare ensures that even less money will be available for HSA deposits.
  • In the market for risk avoidance, ObamaCare makes it easier than ever for people to choose skimpy insurance or no insurance at all while they are healthy and then switch to a very rich plan after they get sick.
  • Plus ObamaCare piles on a raft of additional perverse incentives, including incentives for employers to downsize their workforce; reduce employee hours; turn to independent contractors, temporary labor and outsourcing; etc.

What Can Be Done?

In Part I of this series, I proposed four simple changes to ObamaCare:

  1. Replace all the ObamaCare mandates and subsidies with a universal tax credit that is the same for everyone.
  2. Replace all the medical savings accounts with a Roth Health Savings Account.
  3. Allow Medicaid to compete with private insurance, with everyone having the right to buy in or get out.
  4. Denationalize and deregulate the exchanges and require them to institute change of health status insurance.

Let’s see how these changes affect fundamental choices people have to make.

Insurance or Uninsurance? If people can use their tax credit to buy into Medicaid, there is no financial reason for anyone to be uninsured.

What should we do with unclaimed tax credits? I have long advocated sending them to safety net institutions in the communities where the uninsured live. (See here and here.) That way money would follow people. If everyone in a community opted to be insured, the tax credits would help pay for private insurance. If everyone elected to be uninsured, the money would go to a local safety institution as a backstop in case patients cannot pay their medical bills.

I now think that was too generous. The uninsured consume only about half as much health care as the insured do. Plus they pay about half of the costs out of their own pockets. So if people turn down a $1 tax credit, 25 cents should be sent to a local safety net institution.

Public or Private? If everyone can use his tax credit to buy into Medicaid and everyone on Medicaid can claim the credit and buy private insurance instead, then public and private insurance will be competing on a level playing field.

Individual or Group? With a universal tax credit as the only government subsidy for private insurance, individual insurance and group insurance will compete on a level playing field. It would be even better if we remove restrictions that prevent employers from buying individually-owned insurance for their employees.

Third-Party or Self-Insurance? With a Roth HSA, contributions are made with after tax dollars. With a fixed sum tax credit, any additional premium (over and above the amount of the credit) will be paid with after tax dollars. This puts third-party insurance and individual self-insurance on a level playing field. Since withdrawals from the Roth HSA are tax free, non-health goods and services will trade against health care on a level playing field. And since the Roth accounts grow tax free, future health and non-health consumption will also trade on a level playing field.

Choices in the Market for Risk Avoidance. Just like the Medicare Advantage program, in a well-run exchange insurers should always receive premiums that are actuarially fair. That is, the insurer’s premium should equal the enrollee’s expected medical costs. The enrollees themselves will pay a community rated premium. If there is an additional cost, it should be paid by the enrollee’s previous insurer. Put differently, no insurance pool (whether inside or outside the exchange) should ever be able to dump its high-cost, sickest enrollees on an exchange plan. This ensures that health plans have ideal incentives to compete for all potential enrollees, regardless of health status. It also encourages health plans to become high-quality, low-cost providers of specialized care, say, for heart disease or cancer.

At the same time, individuals should not be allowed to game the system. For example, no one should be allowed to upgrade to a richer plan, paying a community rated premium, after he develops a costly illness. After a one time enrollment, people who wish to upgrade to a richer plan should be charged the full actuarial cost of the upgrade. If they downgrade, they should realize the full actuarial savings.

Similarly, no one should be allowed to remain uninsured until sickness arrives and then buy insurance for the same premium everyone else is paying. As in the Medicare Parts B and D programs and in the Medigap market, people should be penalized if they do not insure at the first opportunity. The ideal penalty is medical underwriting.

In a well-run insurance marketplace, people will pay the full cost and reap the full benefits of every change they make. That leaves them with an undistorted economic incentive to buy insurance and to choose the insurance that best meets their individual and family needs.

The Results. With these four changes we will have started with a health system in which incentives are perverse in every direction and converted it into one in which everyone’s economic incentives are ideal.

Comments (38)

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  1. Devon Herrick says:

    It’s not politically correct to say, but policymakers also make the mistake of assuming everyone has the same preferences and priorities regardless of income, ethnicity, or other demographic factors. Moreover, they assume that identical outcomes among diverse groups should be the goal — even if it’s a uphill battle. Achieving the outcomes that policymakers believe Americans should meet requires a huge public initiative — by definition, this isn’t cheap.

  2. Ken says:

    Another good one.

  3. Thomas says:

    Several mentions of a level playing field, and that is exactly where our health care system is failing. Everything is not on a level playing field, which causes these policies to be inefficient. If everyone is put on level ground, people and insurers, there will less perverse incentives.

  4. Matthew says:

    “ObamaCare not only encourages Medicaid rather than private insurance, it traps people in what is clearly an inferior health insurance plan.”

    Especially for the states who accepted Medicaid Expansion. They will be regretting that decision soon.

  5. Nikolaev says:

    Some healthcare economists repeatedly claim that the ObamaCare mandatory should be replaced by a universal tax credit. Since this substitution looks much more reasonable than the ObamaCare, why didn’t the policy makers of ACA consider this approach?

    • Bill B. says:

      It made too much sense.

    • David N says:

      Because then they wouldn’t have been able to argue that the mandate wasn’t a tax.

    • John R. Graham says:

      It is politically very challenging to make any attempt to eliminate the discrimination against individually owned insurance and in favor of employer-owned insurance. You get accused of “taxing employer-based benefits”.

  6. James M. says:

    This plan is about letting people have choice. Using tax credits to buy in or out of Medicaid or private insurance. Obamacare restricts choice profusely.

  7. Jmitch says:

    Dr. Goodman: why would any poor person want to buy a private insurance policy (using tax credits) when he can get Medicaid for free?

    • Andrew says:

      To improve their healthcare plan. If people can claim tax credits to get in or out of Medicaid, then Medicaid plays on the same level as private insurance.

    • Sam says:

      It is a kind of tax cuts. Let people choose to buy or not to buy.

  8. H D Carroll says:

    John – you have it backwards. The exchanges should explicitly be used for “dumping” society’s chronic high cost claimants, by becoming the nationally orchestrated high risk pools. Society is apparently dictating that we cover factor for hemophilia, transplants with after effects, lifetime treatment for catastrophic accident victims, heroic efforts to keep neonates alive, etc., so society should be the payer of such entitlements, not private insurance/ self-insurance, where 90% of people would reside instead. Private insurance (with vouchers used so that previous Medicaid enrollees can enter the private market) should cover claims that arise from acute conditions, as well as the “first year” of new chronic/catastrophic conditions (private reinsurance can handle this exposure as it is “true” insurance), but then those people with certain “status” conditions should be moved to the exchange/high-risk pools. The private market should be for “newly” incurred conditions/expenses, with transitional conditions being covered by a one-year redistribution accomplished by a special reinsurance pooling. People would be free to move around because all Pre-existing conditions are automatically covered by the insurer who was on the risk when such condition first started, so any new prospective carrier wouldn’t have to pay those “old” claims. Carrier’s would have to “get it right” each year they wish to offer insurance. However, again, if they get hit with a “new” hemophiliac, for example, after the first year of treatment, that condition gets transferred to the “exchange” high risk pool, since no self-insured employer or insurance carrier should have to deal with what amounts to the “financing” of a known situation rather than what is true insurance.

    Of course, nothing will work at all if we don’t fix the marketplace by requiring a sensible pricing mechanism for medical care, services, and products, through transparency and non-discriminatory pricing by providers, and the establishment of certain national standards for what the recognized charge level will be, and accepted by third-party liability payers, for things such as non-elective treatment like emergency care.

    • Jimbino says:

      Your last paragraph is quite correct. But I ask you, wouldn’t simply forcing all healthcare providers to post all their pricing per ICD-10 solve those problems without any gummint intervention at all?

      I can now guarantee fair and ever-lower pricing for just about everything BUT health care at Walmart or Amazon, whose prices are NOT regulated by an incompetent gummint.

      • dennis says:

        I agree with the notion that transparency leading to competition in medical pricing would apply downward pressure; however there are legal barriers to physicians publishing their prices which need to be abolished. Once that impediment is lifted, providers will have to deal with the fact that there are over 70,000 procedure codes in ICD-10 and nearly as many diagnosis codes, CPT coding is also woefully behind current medical treatments and hospitals are frequently unable to accurately determine their costs for specific procedures/diagnoses preferring to cost shift to address price deficiencies. Restoring a true competitive market system while attractive will require massive deregulation.

        • Jimbino says:

          What are these “legal barriers” to docs & hospitals publishing their pricing that doesn’t apply as well to Walmart and Amazon?

          How many ICD-10 codes there are is beside the point. The point is that a doc performs procedures that deal with some 1% of those codes. A second point is that all med providers will have to use those codes to get a nickle of reimbursement from insurance providers, Medicare and Medicaid.

          The important thing to note is that what med providers are doing is colluding with each other and the gummint in keeping the consumer in complete dark about pricing, the OPPOSITE of what Amazon, Walmart and eBay are doing!

    • H D Carroll says:

      By the way, I should have indicated that the Exchanges, as high risk pools, would be subsidized so that their “premiums” for participants are similar to the open market by continuing special reinsurance assessments against all market insuring entities – be they carriers or self-insured employers – in a similar manner that state high risk pools are subsidized now. So, the general public would, via this mechanism, provide the “pooling” that society has called for in order to cover these “financing” needs (they are really no longer “medical insurance” needs once they start). Those market entities will not be burdened by the baggage of chronic status financial needs, and if their coverage is written on a “claims occurred” basis as I have described, they will be more innovative and creative and competitive in attempting to write “new” business because they no longer have to worry about the “renewal” risk.

    • John R. Graham says:

      This is what Robet Lazsewski calls the “ghetto” approach: Dump the sick into high-risk (actually high-cost) pools.

      Your proposal has unstated assumption that insurable illnesses are those which present for no longer than 365 days (366 in a leap year, I guess). That is hardly comforting to a healthy person who buys health insurance who then gets diagnosed with, e.g., cancer. The plan she paid for is in force for the rest of the year and then she gets dumped into a high-risk pool?

      Now that I think of it, a person in a bicycle accident which results in some broken bones but no long-term problems will also get thrown into the high-risk pool, if his accident happens in December.

      “Society” does not want to pay for expensive illnesses. Individuals want protection from their costs. The better solution to this problem is “change of health status” insurance, a.k.a. insurance against being re-underwritten, a.k.a re-insurance, which would arise if the individual owned his own health insurance.

      • H. Carroll says:

        John Graham – There wasn’t time or room to go into the actual full details of the “per occurrence” insurance coverage – it would actually provide a benefit period for all claims that would run for, say, up to three years based on certain criteria, but could be shifted to the high risk pools if particular status is met, after the originating carrier had expended a minimum amount in dollars and time of coverage. When you say “in December” you are still thinking in the old policy year, cliff edge way – this approach would have policy coverage follow from the beginning of an event – think Worker’s Comp – but would provide a societal reinsurance program, if you will, to allow for the risk bearer to have a realistic time horizon. On the “change of health status” insurance idea, you and John Goodman still apparently don’t understand that no insurer is going to write that for medical insurance with an unlimited maximum “as such.” It would essentially be embedded inside my occurrence based insurance, however – there would be no need for it. The German system has it inside their private health policies which are effectively “whole life” health, with nonforfeiture values building up like a “cash” value – they are very expensive however. You can’t get something for nothing, and change of health status insurance written as a separate item would be excessively expensive, and unnecessary.

        • John R. Graham says:

          Thank you. But that sounds even more complicated than the health-status insurance that we at NCPA recommend!

          I don’t recall we or anyone proposing no lifetime cap on health-status insurance. Rather, the market decides the level of reinsurance attached to each health condition.

    • Wanda J. Jones says:

      If we “fix the market place” by settng price standards at the national level, it is no longer a market place. There should be no standard price just as there is no standard set of costs. We are being hacked and hewn by a national program now;;yet you encourage more micro-management by government fiat. Not good. Out government is incompetent and venal.

      The healthcare dollar should flow, as much as possible, from the person who earns it to the organization that provides the care. To have that dollar make the trip from the earner to the Federal government, then through an approved health plan and then to a provider (or several) is bound to distort decision-making and leave too much power in the hands of people who won’t suffer the consequences of their remoteness.

      John–the coming election will show the country moving in one of two directions: 1) Continued Democratic control with a continuation of Obamacare, or 2) A clean sweep by Republicans, and therefore a chance to overhaul or repeal Obamacare. As many of the commentators about the 7.1 enrollments show that the net net of that figure is only 1.5% of the uninsured, I think that it will help Republicans to go for broke, and tell the truth about what Obamacare is leading toward. And Republicans need to havae some creative cost/access solutions other than just insurance coverage. Think of three tiers of the uninsured. I: Competent, with income, II. Chronically poor, but mostly competent, and III, Not competent, by either education, illness or mental incapacity. The latter group should be served by more community health centers with sliding scale fees and outreach workers. The middle group can have simple, pared down insurance, and allowed to become members of an organized healthcare system that bids for the business, and the first tier should have traditional insurance and be able to seek care wherever they wish, possibly with incentives for judicious use.

      Keep up the fight…

      Wanda J. Jones
      San Francisco

      • Val says:

        Wanda, very good. I so fear the micromanagement of government. Health insurance should be affordable and rarely used.

  9. Sam says:

    “Replace all the ObamaCare mandates and subsidies with a universal tax credit that is the same for everyone.”
    It leads to tremendous budget cut. Is it doable?

  10. Roger Waters says:

    So, the most perverse incentive is that of the “ruling elite” (the set of individuals, either in government or previous government workers now lobbying, who have never run anything in the private sector, don’t really know how the real world works, and live in a policy ivory tower) whose incentive is to self-preserve and actions are “meta-functions” designed to prolong their perverse view of the world and create fictions they hope will work, but never do and require continuous “technical corrections” as the rest of the world innovates and goes on by them.

  11. Juan P says:

    This post shows exactly how the Obama administration took advantage of some “holes” in the system and exploited them to pass their legislation. Those five items that are presented as situations that affect choices are the problems that the industry faced before Obamacare. It outlines what should have been addressed with the reform, in order to have a working system. But instead of addressing the real issues, Obama’s administration and his fellow Democrats passed the ACA, which made a complete overhaul to the system, compiled into a thousand page text. The fact that the legislation was so long, inhibited stakeholders to actually know what was changing (we only heard the pros and cons, exposed by both parties), and that lead to the approval of the bill without enough analysis. The problems of the law, as we are starting them to see them, are exactly the same as we had before (except they are now worse), plus a long list of other problems that aroused with the law. Obamacare tried to do a broad reform and left the industry worse off. If the reform was narrow and specific to the issues, perhaps today we would have a working system, comparable to the other developed nations in the world. But, because some wanted a major reform, we are stuck at the same place we were before.

  12. Wanda J. Jones says:

    John and All..

    We have to start thinking of what the health system can do to preserve its capacity to give care. Doctors are already dropping out. Hospitals are already laying off staff by the hundreds. I expect to see hospital closures soon. Hospitals planning replacements in California re reducing the number of beds being replaced.



  13. Bob Hertz says:

    Note to Sam (and others):

    Universal tax credits have many virtues, but being cheaper than Obamacare is not one of them.

    The Obamacare subsidies and Medicaid expansion is predicted to cost $180 billion a year. (not this year, but eventually)

    Let’s say that the tax credit is $2500 per individual and $8,000 per family.

    Further assume that the tax credits go to any adult American under 65.

    Further assume that this means 80 million individuals and 40 million families getting credits.

    That means $520 billion in tax credits.

    I have never read a detailed account of how we can cover this, even with taxing employer benefits. I believe that Holtz-Eakin admitted as much in 2008.

    • Bart I. says:

      Another concern is that when group plans are dropped, as they will be when preferential treatment goes away, a percentage of these employees will wind up in risk pools. The cost of larger risk pools will consume a large chunk of what formerly went toward the employer exclusion. I doubt there will be much left over to spend on universal tax credits. This always seemed like double-counting to me.

    • John R. Graham says:

      Don’t forget that one “pay for” is removing the exclusion of employer-based benefits. That is why this is so difficult to do politically: The accusation of taxing employer-based benefits.

  14. Val says:

    I would be so very happy to go to the doctor and pay my bill when I walk out. I cannot, however, because the bill first has to go through an insurance company so we can all find out what the real price is.

    So, for every $50 bill, the following happens:

    1) The provider bills the insurance company $50.
    2) The provider bills the patient $50 with a notation that the bill has been submitted to the insurance company.
    3) The insurance company says only one-half ($25) is reasonable and sends notice to the provider and to the patient.
    5) If the deductible has been met, the insurance company pays the provider $25.
    6) The provider sends the patient another bill showing that insurance has paid $25 and $25 is written off.
    7) If the deductible has not been met, the provider bills the patient for the real cost ($25).
    8) The patient pays provider $25.
    9) If the patient is slow-to-pay, the provider bills him again for the $25, and again, and again.

    If the patient tried to just pay $25, up front, he would still owe an additional $25 because insurance companies have agreements with providers, in restraint of trade, that prohibit the providers from offering a cash price. (I know – my provider said it would be fraudulent to give me a cash price.)

    If the patient pays the bill without it having first gone through an insurance company, the amount will not count against the year’s deductible.

    Should we wonder why insurance is so expensive?

    If you’ve followed this, very good. That $50 bill leaves the provider with maybe a few dollars. Had the bill been paid at the time of service, the provider would have earned $25.

    Insurance and medicine are the lone frontier where price fixing and restraint of trade are legal. That will not change until we relegate insurance to something we use for catastrophic (unexpected) events, and until are able pay for the oil changes and tune-ups with no insurance company or government interference. Nothing will change until prices are transparent and real.

  15. H. Carroll says:

    I’d like anyone to describe how or even why a “free” market in true emergency care is or should be possible. It is only possible at a “secondary” tier level – the use of intermediate payers (insurers) who will offer to pay any level of bill in exchange for a premium paid by the unfortunate accident/emergency victim, and this leads to the inevitable fine print parsing over “allowed fee level,” and mafia like agreements between cronies represented by large health systems and large insurers that leave everyone else reaping the wind of cost shifting and spiralling that inevitably results. It distorts prices and allows no counterweight that can yield a proper, truly logical cost+ mechanism for such medical services. I have no desire to have the government set mandatory prices for any medical service that even borders on the elective (either in time need of service, or nature of service itself), but emergency services do not, and can not, fall into such a categorization, and there needs to be some level of “boundary” conditions and rules that all the parties agree to abide by, whether established by a technocratic government body, or a non-governmental one, and it should probably be done as a cap, but not a required level, so that efficient competitors can market pre-paid/insurance products reflecting lower options.

    • allan (formerly Al) says:

      I hope you are not assuming that all of ER care is too unaffordable for individual self-pay. The stated ER bill might appear that way, but the actual amount paid is a lot lower. People could put a bit of money away for such care in an HSA or even take out a loan like they do for a car. Free market insurance could even pay for that much like what happens when we insure other products. As far as individual costs most of the costs of emergency room care are also done outside of an emergency room so in a free market the prices would already be available.

      Maybe there are some exceptions that I would have to think about. Maybe you could provide a common example with the problems you foresee.

    • John R. Graham says:

      That is kind of like stating that because a free market in fire departments is not possible (which may not be true), that the government should have total control of all buildings.

  16. Elena Siddall says:

    The Orwellian Affordable Care Act/Obamacare, is not the cornerstone of “fundamental transformation”, but the capstone of the Cloward-Piven Strategy-now 48 years old.

  17. David C. Rose says:


    I like your third item below, “Individual or Group?” It alludes to a bigger issue, one whose force is underappreciated because evidence of its failure is in the form of a dog that didn’t bark.

    In my view, even economists underestimate the salutary and dynamic effects of competition. Competition isn’t just about driving us to efficient actions over a known action space. Competition is also a force that produces the arrival of new actions and then winnows out the majority which are losers and promotes the copying of the winners, which are few but often very powerful.

    What does that have to do with item three? It speaks to the premise of healthcare reform. We have two bad things going on at once that are mutually reinforcing. First, innovation and invention driven by competition is almost non-existent in public rather than private production. Second, tying insurance to employment effectively required patients to fire their employer if they wanted to fire their insurer. It is hard to imagine a better bulwark against genuine market competition. So increasingly since WWII insurance was either in the public sector, where competitively driven innovation is almost non-existent, or it was in the private sector, where innovation was driven not to demand increasing inventions that make us healthier but more efficiency cost-containment schemes (e.g., provider lists whereby insurance companies used their monopsony power to drive down procedure reimbursement rates) because insurance companies were more concerned about cost than winning patients since the patients weren’t going to fire their employers to switch insurance. Both effects basically bottled-up socially beneficial competition. This was good for insurance companies and bad for everyone else.

    This means we have had two, not one, factors working together to keep a lid on the kind of competitive pressures that we take for granted in most of the economy in countries like the US. Small wonder, then, why so much of the support for change came from people who actually have insurance but were sore at their insurance companies for engaging in too much “quality control,” which is Orwell-speak for second-guessing doctor treatments and doctor referrals. If that weren’t bad enough, the differential tax treatment also drove most policies into models that maximized the benefits of differential tax treatment by having high premium but first dollar coverage. This, of course, shifted the game to making money by limiting the use of first dollar coverage (suffocating oversight of consumer choices). This, in turn, has morphed healthcare insurance into something different from insurance, into largely prepaid routine healthcare accounts.

    What’s ironic is that many of the pro-Obamacare healthcare economists got much of the above right. They understood that low deductible and low-coinsurance payment policies create all sorts of problems. They also understand the many problems that are associated with employer provided insurance. So they set up a system designed to end both.

    So they got much of the diagnosis right – let’s give credit where credit is due – but they got the treatment wrong. Most lack a basic faith in the free market system and therefore cannot imagine competitive pressures bringing us to a better outcome – perhaps in ways that not even the brightest free market economist can predict – without engineering and forcing the outcome through policy design.

    Evidence that they missed the mark is readily found in the behavior of insurance companies. Standardization of policies is said to be better for consumers, like not letting your 5 year old know that there are more flavors than chocolate and vanilla at Baskin Robbins so as to reduce the decision making time. But standardization is boon to insurance companies, for it eliminates a number of potential margins of competition (some as yet unknown to anyone) and thereby reduces competition generally. In doing so, it produces a richer and quieter life for health care insurance companies. Sure, they find plenty to carp about with Obamacare. It did turn their world upside down and their gig, given previous regulations that effectively suppressed competition, was already a pretty good one.

    But the truth of the matter is that Obamacare is, in fact, one of the greatest acts of crony capitalism ever devised. Step one: dramatically increase demand for the industry’s product. Step two: if the industry makes lots of money, let them keep it. Step three: if they lose money because things don’t work out as planned, no worries – there is a reinsurance fund set-up to nationalize these costs and thereby insure the pain is minimal.

    They have little faith in the free market system so they have little faith in market competition. Indeed, they don’t even give much thought to it. That, in turn, leads to policies that produce crony capitalists which hardly help to improve the reputation of the free market system. So they create a monster and then later point to the monster as evidence of the need to do, again, what caused the original problem in the first place. Increasingly the free market system is denigrated by straw man arguments based on straw men central planners created.

  18. allan (formerly Al) says:

    “I now think that was too generous.” … “So if people turn down a $1 tax credit, 25 cents should be sent to a local safety net institution.”

    An argument can be made that averages are unfair since demographically some communities might require more per patient than other communities. One wonders what the reason was for using an average amount and what concern had to be corrected.

  19. charlie bond says:

    Dear John:

    This post has generated some of the best commentary and debate I have read on the basics of health care financing. And it would appear that all the commentators are correct–at least to some degree.

    I believe the country is lurching toward the realization that occasional care–the random injury or illness that is not too serious–is underwritable like other random events (auto accidents, etc.). The actuaries can predict with a high degree of accuracy the cost of incidental care. The premiums for non-catastrophic care–almost regardless of age bracket (up to Medicare age)–would be affordable for virtually all Americans not covered by Medicaid.

    We thus are looking at what to do about the 5% of the population that drive 90% of our health care costs. What we have forgotten is that we don’t need to reform 100% of our health care delivery system to address that 5% of the population.

    You are correct in identifying the overwhelming influence of perverse incentives in the system. They are most notable with regard to this 5%. In a fee-for-service environment, the more care the providers give to the patient the more the providers get paid–whether that care is warranted or effective. With capitation, the less care rendered to this 5%, the greater the profit to the health plan and to some degree the providers. Neither system incentivizes real reform in how care is delivered to make that care more cost-effective.

    Accordingly, I am devoting much of my time to devising and implementing Continuum of Care Organizations (COCO’s) that coordinate and manage care to achieve both measurable quality improvements and lower costs. They are incentivized by gainsharing arrangements that motivate providers to work together in innovative and collaborative ways.

    Payors should take advantage of the changes in the marketplace to step up and finance the infrastuctural provider reorganization needed to change over to this new payment method; payors should also commit in good faith to long-term partnerships with providers in the gainshare so gainsharing does not be used like managed care was–just as a means of ratcheting down prices in the short run.

    For their part, Providers need to pull their heads out of the sand and recognize that they have to figure out how to get paid for NOT rendering services, while maintaining the patient’s wellbeing to the extent his or her condition allows. Gainsharing represents the only opportunity to do so. Otherwise, providers are looking at a bleak future of lower reimbursements and lower revenues.

    Most of all, patients need to accept their responsibility in maintaining their wellness, in following their doctor’s orders and recommendations, and in actively volunteering to help take care of their neighbors and fellow community members. In short we have to treat the reform of our health care in this country like an old-fashioned barn-raising. Everybody has to participate if we are going to be successful. To that end, patients must be incentivized by being allowed to participate in the gainshare. The Patient-Physician Alliance has been designed to deploy a methodology for such patient involvement, and I am happy to speak to any group in any community who wants to step up to encourage their fellow community members to address these responsibilities.

    Note, these strategies are all free market proposals that do not require legislation to implement, meaning we won’t have to watch the sad spectacle of our elected representatives ripping and tearing at each other over a tax credit bill. In other words, we can reform health care from the grass roots up, not the top down–if we want to.

    Anyone interested in this approach should feel free to contact me directly at

    Charlie Bond