Why the Exchanges are a Mess and a Very Simple Solution

More than one commentator has remarked on the puzzling way the Obama presidency has dealt with online technology. When it comes to elections, the Obama campaign’s use of the Internet was state of the art — doing what had never been done before. Yet when it comes to the ObamaCare exchanges, the administration has been accused of using ten-year-old technology — producing a website with defects that are baffling to a whole generation of website designers. (David Friedman, I believe was one of the first to point out this incongruity.)

The short explanation, I believe, is that Obama privatized his election campaigns, while he nationalized health reform. The Internet aspect of his election campaign was managed by folks from Google and other entrepreneurial ventures that were able to devise strategies unencumbered by bureaucrats in Washington, D.C. In health insurance exchanges, by contrast, almost everything has been managed top down from inside the Beltway (with 55 contractors separately reporting to CMS!). As we have pointed out many times at this blog, the Obama administration has been unwilling to accept any health care innovation that emerges in the private sector.

Instead, the administration has insisted on carrying out its own pilot programs and demonstration projects, despite the miserable results. And as I noted last summer in The Wall Street Journal, the federal government is about the worst possible entity to manage new, online technology.

But let’s put all that aside for the moment. Assume that there were no “glitches” in the exchange software. The ObamaCare exchanges would still have been a disaster for a different reason. Explanation below the fold.

Problems, problems,
problems all day long.

There is nothing new about the idea of an exchange. EHealth has been running a nationwide online exchange for more than a decade and has enrolled more than 2 million people. As far as I can tell, EHealth could enroll the entire country if it were given the freedom to do so. But at last count, not a single state-run exchange has contracted with EHealth or any other private exchange. The federal government did contract with EHealth to create a portal in the 36 states where it is managing the exchanges. But it did so only at the last minute.

Even so, there is one thing EHealth cannot do. It can’t tell an insurance buyer how much subsidy he/she can expect. One reason is that figuring out how much subsidy you are entitled to is almost as difficult as filling out your income tax return.

Do you know what your “modified gross income” is? I bet there is not one person in a million who can answer that question. Take that back. I bet there is not one person in the whole country who can answer it unless he has already done some considerable research. Yet we all need to know this in order to determine how much subsidy we are entitled to in the health insurance exchange.

The problems don’t end there. You’re not entitled to any subsidy if your employer has offered you affordable coverage or if you are eligible for Medicaid. Do you know how difficult it is to determine if you are eligible for Medicaid? Last time I looked, the Medicaid form in Texas was about 20 pages long. The ACA is supposed to streamline the applications process and create a one-stop-shop to determine eligibility. How easy is it to do that? At this point, I can’t say.

Do you know if your employer has offered you insurance that is “affordable” and has the “minimum essential benefits”? If you don’t know, there is no way EHealth would know either.

Okay, now let’s turn to the promise I made in the title to this post. How could all this complexity be reduced to easy-to-manage simplicity? By adopting an idea proposed in 2008 by Barack Obama’s opponent, John McCain. It’s an idea Obama spent millions of dollars demagoguing on his way to an electoral victory.

The idea? Give everyone the same subsidy regardless of income, age, geography, or any other factor. For reasons explained below, I’m going to assume that amount is $2,500 for an adult and $8,000 for a family of four. So, if you are buying an individual policy and you enter the exchange, neither you nor anyone else will ever have to wonder how much your subsidy is. It’s $2,500. Voila! Problem solved.

Now let’s solve a second problem. Many people will want to know how much of their subsidy is advanceable. That is, how much can be applied directly to reduce the monthly premiums they must pay? Answer: in the exchange at least, the entire amount can be advanceable and this probably should be the default option. Then, when people file their April 15th income tax returns, they will pay the same amount of tax they would have paid even if ObamaCare didn’t exist.

And a third problem is implicitly solved: What to do if one person is getting too much subsidy or someone else is getting too little? Or, how to rectify overpayments and underpayments on next year’s tax returns? If the subsidy is less than the premium that is owed, the applicant must pay the difference out-of-pocket. If it is more, the difference should be automatically deposited in a Health Savings Account, regardless of any other features in the plan.

[BTW, I’m not sure how ObamaCare is dealing with this last issue. If a reader knows, please share the information in the comments.]

Why did I choose $2,500 and $8,000 for the subsidies? Because that’s the Congressional Budget Office (CBO) estimate of the cost of enrolling new people in Medicaid. Let’s suppose that we allowed everyone to enroll in Medicaid if that is their choice. If they are “eligible,” they can use their tax credit to enroll. If they are not “eligible,” they have to add out-of-pocket funds to pay an actuarially fair price. At the same time, imagine we allowed everyone in Medicaid to leave the program, claim the tax credit and enroll in private health insurance.

In the language of the left, Medicaid would be the “public option,” although God knows why anyone would want to choose it.

This allows us to solve a fourth problem: In the exchange there would be no reason to care whether someone was technically eligible for Medicaid. If they want private insurance they can claim the tax subsidy and buy it.

And a fifth problem: the tax subsidy for employer provided insurance would be exactly the same as it is in the exchange. In that case, the exchange would have no reason to care what the employer offered. Employees could get health insurance at work or they could go to the exchange. The federal government’s contribution would be the same either way.

Since every individual and every family would get the same help from government, those subsidies would be the same regardless of:

  • Whether people obtain the insurance at work, in an exchange or in the market­place;
  • Whether they work less than 30 hours a week or more;
  • Whether their workplace has fewer than 50 employees or more; and
  • Whether they are in a union or not.

If we also dropped the employer mandate, we would have an approach that:

  • Would not encourage employers to avoid hiring new workers;
  • Would not encourage employers to drop health coverage for current employees or for their re­tirees;
  • Would not penalize employees and their employers if they work full time rather than part time;
  • Would not favor small business over large business or vice versa;
  • Would not favor non-union firms over union firms or vice versa;
  • Would not encourage outsourcing of labor saving technologies or in other ways discourage economic recovery.

Blissful, is it not?

The idea of a fixed sum refundable tax credit with the same amount for all taxpayers was introduced by Mark Pauly and me in a Health Affairs article about 15 years ago. And here is the irony: had the administration listened to us (instead of whom? Cutler? Gruber? Reinhardt? )…

Aah, but forget all that. Think how different this world would be if Barack Obama had paid attention to his own rhetoric and brought the two parties together by endorsing John McCain’s idea of a uniform tax credit.

The ObamaCare exchanges at this point might be working like a charm.

Comments (50)

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  1. Studebaker says:

    I’ve known for a long time that firms that specialize in contracting with the federal or state government are often not the most competent firms; just the ones that can navigate the bureaucracy. As a result, competition is low and the prices paid are far too high. But, this takes on a whole new level of incompetence when it comes to something as technical as information technology.

  2. mb says:

    Integrations are hard. You only have control over the systems, you own. State medicaid systems – states run those – so lots of negotiating is needed to create 50 of those interfaces (I would bet no 2 are exactly the same). Same with all the other systems – public and private. This was a huge complex system anybody that has done any system integrations would have told you the timeline was moronic. A private company could not have helped. Upgrading your systems while building a new system – well I am laughing typing that.

  3. Ken says:


  4. Greg Scandlen says:

    This may be the most important blog post you’ve ever written.

  5. Allan (formerly Al) says:

    If the website is the easy part, I wonder what is in store for us if and when the law actually goes into effect?

    The Obama administration obviously never signed onto the KISS rule… Keep It Simple Stupid.

  6. Patrick Skinner says:

    The liberals would never go for this idea of financial equal healthcare subsidy – the more financially successful should pay more they say!!!

    • Chris Kardos says:

      Why should someone who has the financial means to buy health insurance be given a subsidy to buy it? Just because our current tax code is flawed in thousands of ways doesn’t mean we should create more flaws!

      • Stephen Turnbull says:

        The reason for paying the subsidy to those with financial means is simply simplicity. Simplicity (pay everybody the same) is cheaper than means-testing, even if that is just asking for and verifying the 1040 Adjusted Gross Income, and comparing it to a single benchmark income. Complexity hurts — I am now a resident of Japan, and even though I made a point of giving a correct address when my daughter was treated in the emergency room of the Children’s Hospital of Philadelphia, I’ve never been billed. Good for me, but really, I should have paid. I doubt it was the cost of the stamp that deterred the accountants…. This example cuts the other way too: no doctor I’ve met likes turning away patients, even if it looks like they will be hard to collect from. That’s why we should have a “safety net”: to let doctors be doctors.
        As flawed as the tax system is, if we want to ensure that those with means pay for publicly-provided or publicly-funded services, it’s the tax system that should be used for *all* means-testing. Simple and (relatively) cheap, compared to replicating part of the IRS in every public program.

        • Chris Kardos says:

          Stephen, I don’t think giving everyone a subsidy is cheaper than means-testing. Means testing adds administrative costs for sure, but the subsides to purchase insurance on the exchanges will total in the hundreds of billions of dollars over 10 ten years, so I don’t think we can afford to provide subsidies to those who don’t need them for the sake of having a simpler approach.

          As for Mr. Goodman’s assertion that no one has any idea what their modified adjusted gross income is, that’s just more hyperbole. The bottom line is that most people who qualify for the subsides have a pretty straightforward income profile and their prior year 1040 will serve as a measure of how much subsidy they qualify for.

          The subsidy and income scale itself is also pretty straightforward and widely available.

          And finally, who said everything in life should be easy? If you want a subsidy, you have to demonstrate the need and you have to represent your income reasonably accurately.

          Not that difficult.

          I do congratulate Mr. Goodman on his blog though. His positions seem heavily biased, the data used seems cherry-picked to the extreme, and I disagree with almost all of his assertions, and yet I read them.

  7. Shikha Dalmia says:

    Interesting! You note that your analysis would make the employer mandate moot. But your solution still depends on the individual mandate, right? You are not advocating for that to be eliminated, yes?

    • Greg Scandlen says:

      John’s position has always been that there should no no mandate. That for people who don’t get insurance the subsidy would go to safety net providers to give direct services. I assume that is still his position.

      For me, I will just say that mandates NEVER work. some 15% of the affected population ALWAYS ignore them. Plus a large number of people can’t cope with an insurance policy of any kind.

  8. “Interesting! You note that your analysis would make the employer mandate moot. But your solution still depends on the individual mandate, right? You are not advocating for that to be eliminated, yes? ”

    Not to answer for John, but the funds could be placed into a person’s HSA and used, only on health care, as he or she desires. They might use it simply to pay out-of-pocket without buying an insurance policy. Perhaps unwise, but allowable. They run the risk of insolvency from a severe disease, of course. I would personally require a health policy up to perhaps age 21.

  9. Chuck Bush says:

    Thank you Mr. Goodman for professionally and cogently addressing the primary and practical aspects of the Affordable Care Act, which should have been the first to be reckoned. You identified and explained aspects of the health insurance delivery system that I have not heard elsewhere and which are all but non-existent knowledge with our lawmakers. Ten year old technology, total government control (isolationism), contracted vendors on top of contracted vendors, eHealthInsurance, MAGI, Medicaid eligibility, (which means “NO” subsidy) and an insurance industry infrastructure that could have been modified, for a fraction of the cost, to easily handle, “enrollment”.

    I did not hear you say you want to maintain pre-existing conditions and medical underwriting, nor did you say that you want to throw out minimum essential benefits. You also provided a common sense bridge between what employers presently offer and what an individual exchange could offer. That is, aside from the “adverse selection” argument, as long as everyone is covered somewhere, who cares? You also provide a bridge that would allow employers to contribute even to an individual on the exchange. A defined credit may not be progressive, but it certainly is simple and it unquestionably acts as a tax cut, right out the gate. Employers would love that kind of credit. I am a 28 year licensed Michigan health insurance agent, a certified broker for the individual Marketplace and SHOP and I have actually read and re-read the ACT and the myriad of IRS, DOL, HHS, CMS, etc. notices and bulletins. The American public really do not have a clue what ObamaCare entails.

    • Perry says:

      Nor did anyone else unfortunately until now, since it was passed without a thourough reading and evaluation by our lawmakers.

  10. David C. Rose says:


    Are the penalty levels for not having insurance subject to change later by the executive branch, or are they statutorily set?

    I presume the former, but I also presume you know the answer cold.

    We all know the drill. If they had high enough penalties to get the job done the bill would have never passed the Congress. So they went with very low penalties for two reasons: 1) to get it through, and 2) to produce a new problem that can only be solved by, you guessed it, HHS being forced to increase the penalties to force young people to relent and buy insurance on the exchanges.

    If I am right, now would be a good time for someone in Congress to raise this issue and propose a bill requiring that subsequent changes be statutorily approved as most in Congress presumed but didn’t know because they did not have time to read the bill.

  11. Uwe Reinhardt says:


    We’ve done this round before, so let us do it again.

    Last time I asked you how someone earning, say, $25,000 or $30,000 a year who is not eligible for Medicaid in the state in which (s)he resides would fare if (s)he had a serious illness (e.g., cancer or mental illness) and Medicaid priced the premium for entering Medicaid at expected actuarial cost. Do you think $2,500 per year would do the trick?

    Furthermore, elsewhere on this blog we learned that Medicaid is dysfunctional and that uninsured patients fare better when they fall ill and get care than do patients covered by Medicaid.

    So this, then, is your simple solution?

    • John Goodman says:

      I assume that we keep the prohibition on varying premiums by health status. But insurers would be free to vary premiums by age and other factors. So if the expected cost for a grout of people of a certain age and in a certain area were $3,000 per person, Medicaid would be able to charge $500 on top of the tax credit to people who are not otherwise eligible to join.

  12. Bob Hertz says:

    Many sound observations, but do the numbers add up?

    It sounds like the tax credits would be available for all adult Americans under age 65, not in the military or in prison etc.

    To use round numbers, let us assume that means 75 million individuals and 75 million families of 2.5 persons each.

    I come up with a cost for the tax credits of 187 billion for singles and $600 billion for families, total of $787 billion a year.

    Set against that you have the fact that employer payments for health insurance would now be taxable to employees. That would raise $150 billion at most.

    Can we afford all these tax credits? The concept is good but those numbers scare me.

    • Chuck Bush says:

      Where did you get the idea that “employer payments for health insurance would now be taxable to employees?”

    • Studebaker says:

      There are about 200 million Americans who are not in Medicare, Medicaid or some other government program. The average cost of the credit would be about $2,000 per person. That’s a total of about $400 billion. Of this amount, $300 billion would come from eliminating the tax exclusion for employer-sponsored health insurance. The remaining $100 billion can come out of funds that are currently being used for ObamaCare.

    • Devon Herrick says:

      Bob, $787 billion sounds like a lot of money until you figure that Medicaid (54 million people) cost $414 billion in 2012. The tax subsidy for employer health plans costs something like $300 billion annually for 160 million people. The health insurance exchange will pay $6,000 subsidies on 20 million people in 2018 for a cost of $120 billion.

  13. Steve says:

    The sliding scale subsidies are the most important part of Obama care to most people who favor it and blocking the public option was the most important victory for opponents.

    I agree things would be better but both sides would hate it.

  14. Paul Nelson says:

    Unless I am mistaken, the average cost of healthcare per citizen in 2010 was about 8,500 per year. Its probably about the same currently. Does anyone really believe that Affordable Care Act of 2010 will significantly change this? Unfortunately, the fog arising from health.gov is merely consuming the political capital necessary to seriously focus on our nation’s economic commitment to our healthcare industry. A true “Tragedy of the Commons” is in the making!

  15. Bob Hertz says:

    Note to Chuck Bush: The fact that employer paid premiums would become taxable income was part and parcel of the McCain tax credit proposal of 2008.

    Note to John Goodman: Not a major point, but a lot of people would choose Medicaid over private insurance just because Medicaid has no deductibles or coinsurance. When you are poor enough to need Medicaid, that is a huge deal.

  16. Charlie Bond says:

    Hi John,
    As always, a very thought-provoking response, and one that politicians could run with.
    Whether via tax credit or subsidy, health care financing cannot be fixed until health care pricing is fixed, and health care pricing cannot be fixed until health care delivery is re-designed so as not to incentivize either overtreatament (via fee-for-service) or undertreatment (via capitation).
    Rather than subsidizing insurance payments through tax credits or otherwise, let’s invest in the development of health care innovations and efficiencies that streamline care and eliminate unnecessary treatment, and let’s reward people who take care of themselves and who help take care of others. Finally let’s end the malpractice racket that sucks billions of dollars from the system each year and drives costs through the roof by forcing the practice of unnecessary defensive medicine. All of these objectives can be achieved without government intervention through free-market solutions.
    So, while I very much admire your very thoughtful and clever idea for fixing the current government-created snafu, your proposed fix may only serve to further entrench the badly broken system. Adjusting how people pay for a poorly designed product or service does not fix the poor design. The last I checked the heallth insurers are doing just fine. The folks who need the help are the patients, and we should be re-designing health care for them.
    So while Washington wrangles over websites, let’s turn the country’s focus toward real patient care and the delivery of cost-effective medicine. By improving care and lowering costs, the financing “crisis” will ease and Americans will be healthier, wealthier and perhaps wiser.

    Very best regards,
    Charlie Bond

    • Paul Nelson says:


      You might consider one proposal to improve the efficiency and effectivenes of our nation’s healthcare industry. See:


      Over ten years, it proposes to reduce the cost of our nation’s healthcare from 18.0% of the GDP to 13.4% and to decrease our nation’s maternal mortality ratio by 80% (to rank in the top 11 of the world’s 43 developed nations). The wordpress blog site, NATIONAL HEALTH, describes a strategy to bring our nation’s healthcare industry in line with the definition of “Primary Health Care” first defined by the World Health Organization in 1975. This change in the GDP for 2010 alone would have represented a decrease of $650 Billion.)

    • DoctorSH says:

      “Whether via tax credit or subsidy, health care financing cannot be fixed until health care pricing is fixed, and health care pricing cannot be fixed until health care delivery is re-designed so as not to incentivize either overtreatament (via fee-for-service) or undertreatment (via capitation).”

      At present healthcare delivery is owned and operated by third parties. Patients and most physicians and other “providers” have no idea what things cost or the payments they will receive for services.
      The answer is to remove the third parties from the initial transaction. Physicians and patients MUST know the cost of services and the fees must occur at the time of service. Insurers can be utilized like in the past, reimbursing patients, the owners of the policy. Patients can pay for services through HSA funds.

      Third parties can be involved in large transactions such as hospital, emergency or catastrophic care. That is exactly what “real insurance” is designed to do.

      Physicians slowly gave up control of the healthcare system to government programs and then third party insurers. This is when costs rose dramatically and also when “fees” became unknown.

      Setting up further “systems” with large third party involvement and less personal responsibility will not help!

      Just my two cents!

      • Charlie Bond says:

        Thank you, Dr. SH for the comment. I began my legal career by working on tort reform back in 1975, when physicians united and reached out to their patients to effect a major positive policy change. Ever since then, I have preached to the medical profession and to the public that patients and physicians hold more power than they imagine.
        Physicians’ power stems from their strategic role in health care. No matter how health care is reformed, the path from patient to treatment almost always passes through at least one physician. So does the path from patient to reimbursement.

        Tx $
        \ /
        / \
        Pt Pt

        Strategically, the physician has the potential to wield great power, but, as you say, has given that away. It is not too late, however, for physicians to unite and to call upon their greatest asset and their greatest weapon–the deep reserve of good will people hold for their doctors.

        The patient has even greater power. Whenever I walk in to negotiate a managed care contract for a medical group, the health plan negotiator doesn’t say “hello,” or “How are you?” The first words are always, “How many patient lives have you got?” Unaware of their commoditization, patients health care is bargained for in batches.

        The obvious strategy is to mobilize patients and unite physicians.

        Ironically, the market may be doing so. As more and more individuals are cast into the marketplace, they will discover the power of negotiating together with other individuals for their health care. Likewise, as physicians lurch lemming-like into the arms of hospital or big-group employment, they, like other laborers, will discover their power and safety is in numbers.

        And as Big Health and Big Government dictate more and more of the relationship between patient and doctor, patients and doctors will realize that the essential component of health care is the patient-doctor relationship. Doctors will come to realize that caring for patients must occur, not just in the exam room or operating room, but in the Board room and halls of government. And as surely as night follows day–if doctors take care of patients, patients will take care of them. It is on these premises that we are building the Patient-Physician Alliance with the goal of reforming health care from the grassroots up, not the top down.

        Thank you again for your thoughts.
        Charlie Bond

  17. Bob Hertz says:

    Note to Studebaker:

    Nor sure of your math. You say that eliminating the exclusion of employer paid premiums would net $300 billion.

    I do not have the exact amount of employer paid premiums today. Let’s say it is $600 billion.

    If you and I and everyone who gets employer money has to take that amount into income, it hits us at 15 or 20 percent for most taxpayers. That is at most $120 billion of new revenue for Uncle Sam.

    Help me out here.

    • Devon Herrick says:

      Hi Bob,
      Sorry but I realize I didn’t make my point very clear earlier. The Lewin Group estimates the federal health benefits tax expenditure in 2011 was $274.1 billion. The state tax expenditures would add a little to this but I don’t know the exact amount. We know ObamaCare will subsidize exchange coverage. The Medicaid expansion will cost more (i.e. Medicaid is already spending $2500 on kids and $4000 on adults). I suspect we’re already spending enough money for a refundable tax credit but not getting it. We could probably redirect some of the Medicaid dollars, employee health benefit dollars and exchange dollars.

  18. Bob Hertz says:

    Thanks Devon.

    I will check out Lewin’s numbers. I read their study of single payer in Minnesota and found you have to be careful with them.

    Not a major point, but most Medicaid dollars flow to the poor elderly and the severely disabled. I would not assume that this money will be available for tax credits.

  19. Blake Woodard says:


  20. Wanda J. Jones says:

    John and All–

    While it is comforting to find some simpler way to get and pay for insurance, I’d like to offer some ideas for reducing overall production costs in healthcare:

    1) Assume that current resources will be sufficient, and well-used even as populations grow and age. This will be tantamount to an annual 4 – 10% efficiency gain,

    2) Stimulate the delegation of care from tertiary to secondary, from secondary to primary and from primary to self-care. Each of these delegations will save billions. It can be seen in action, as tertiary procedures in heart– open heart surgery and health transplants– are being replaced by catheter-carried devices, such as balloon angioplasty and stents. The delegation to self-care is well on its way via social media and the adoption of healthful practices by people who enroll in various weight-loss and fitness programs, and by the miniaturization of diagnostic equipment, such as blood pressure testing,

    3) Strip, by an omnibus law, the excess regulation of healhtcare that causes providers to add compliance staff, use more paperwork, and spend executive time in protecting revenues from rapacious auditing firms that are paid according to the cases they turn down. I’ve been confronted by at least 20 pink consent forms in one hospital admission, which take time for nurses to assemble, have the patient sign, put them in the chart, then have the patient take home copies. Complete waste of time. Then there is the patient privacy law that has its own elaborate ceremonies and admin steps. More of these every year. Each law means a new person hired to insure compliance.

    4) Get to the root of drug costs by simplifying the patent/clinical trial process that causes a billion dollars in research expenditures for each drug receiving a patent. The resulting drug pricing is ridiculous. Drugs are the largest category of treatment, so making a dent in this category would save billions. The other method of saving would be to encourage a change to patches from pills.

    5) Accelerate the transition to curative medicine from patchwork. The whole genomic revolution is under-appreciated and under-implemented, yet it is curative. Then there is the ability to by-pass bad genetics at the level of the initial fertilization via selection of a fertilized egg/gamete that does not carry the bad gene.

    6) Focus in lifestyle change in the pre-65 age group where weight and addictions predispose many people to serious chronic diseases as they age. Some incentives would help.

    7. Build “front doors” by target group, such as seniors with lots of co-morbidities; adults with disabilities or addictions; women of child-bearing age and their young children; teens, and workers in hazardous jobs. Or, some other scheme. But the services should be medical, social and economic.

    8. For the poorest, with the least education and cognitive abilities, simply pay directly for the care sites, such as community health centers and county hospitals.

    The redesign of healthcare itself is much more important than just the reformulation of a payment system.

    Regards to all who struggle in this vineyard.

    Wanda J. Jones, President
    New Century Healthcare Institute
    San Francisco

    • Chuck Bush says:


      Very nicely laid out. You obviously have given a great deal of time to the thoughts you originated. So far, in all the dialog, I haven’t read someone’s political bent. Isn’t it amazing, with just the small amount of suggestions shared, there is enough common ground to (if acted upon) constructively, conservatively and progressively make change that would positively affect almost everyone? One wonders why we continue to allow the current residents in Congress to remain.

    • Greg Scandlen says:

      Yikes, Wanda, I normally agree with you but — “Then there is the ability to by-pass bad genetics at the level of the initial fertilization via selection of a fertilized egg/gamete that does not carry the bad gene”????? This is way too Dr. Strangelove for my taste or I expect for most all Americans. It implies in vitro for all and opens up selection not just for “bad genes” (whatever that is) but for a host of preferred traits. Creepy.

    • Paul Nelson says:

      As a solution, I would recommend the principles defined by Elinor Ostrom (and many colleagues) regarding the principles of shared-use strategies characterizing the efficient use of a common resource. A Nobel Prize winner, she spent her entire professional career studying the attributes of “Managing the Commons.” For healthcare, the “common resource” is the proportion of our national economy devoted to healthcare. Its excessive cost represents a TRAGEDY OF THE COMMONS, described many years ago by Garrett Hardin in 1968. Left unattended, this cost alone will eventually threaten our nation’s autonomy within the world-wide community and its marketplace arenas of resources, human dignity and knowledge.

  21. Uwe Reinhardt says:


    Did I read this correctly? Your plan would impose community rating on all insurers? And what about guaranteed issue and a mandate on individuals to be insured? Without guaranteed issue, insurers subject to community rating would reject coverage to any person with actuarial costs above the community rated premium. And without the mandate you would have a feast of adverse risk selection among consumers.

    You should clarify that for us.

    • Greg Scandlen says:

      I can’t speak for John, Uwe, but let’s unwind your scenario — since mandates don’t work and can never work, guaranteed issue and community rating have to be out the door (as you well know from New Jersey). And one of the great problems with O’care is that insurers are blind to who they are enrolling (since they can’t ask health questions) and therefore have no idea how much to charge. I have never understood the objection to some level of risk-based rating and risk-pools for the really sick new applicants.

      • Uwe Reinhardt says:


        In theory one could have a system of medically underwritten premiums coupled with a regime of subsidies that would make a household’s own contribution to the premium and out of pocket spending for items in a basic benefit package a function of that household’s income.

        Administering such a scheme is another matter.

        Of course, if we are willing to tell people stricken by, say, cancer or with congenital diseases “Tough! Life is unfair” and leave it at that, then all of these problems go away.

      • Allan (formerly Al) says:

        I would say Uwe’s response is pretty simplistic. He worries about risk reduction leaving the cancer patient in the cold, but forgets that there are simple market approaches that mitigate the problem.

    • John Goodman says:

      Uwe: for the purpose of this health alert, none of the issues you are raising matter. You can do it the way Obama Care does it. Or you can do it better. As I have explained before, there is no mandate for Medicare Part B and D or for Medigap insurance. But we don’t allow people to game the system.

      • Uwe Reinhardt says:


        With all due respect, I don’t buy that answer.

        See Bob Hertz comment further on. He understands what I am getting at.


    • Chuck Bush says:

      Polarization. What’s wrong with attempting to converse somewhere in the middle?

      Uwe, the simplest and most practical response to your guaranteed issue and community rating concerns is to point you to Blue Cross Blue Shield of Michigan and Priority Health. Both guarantee issue and community rate. They also enjoy almost 90% of the insured market in Michigan.
      Greg, in that Blue Cross Blue Shield of Michigan and Priority Health are functional examples, I would ask you to start there in consideration of guaranteed issue and community rating.
      But, I definitely agree that risk based pools and subsequent rating could be very useful to the marketplace. Although there is no way around the healthy having to subsidize the sick, if the chronic sick and pre-high cost claimants could be relegated to a heavily subsidized “sick risk pool,” competition might excel in the rest of the marketplace.

      • Greg Scandlen says:


        As I recall from my BCBS days the Michigan plan has some extraordinary regulatory advantages which gives it a virtual monopoly in the individual market. I’m not familiar with Priority Health. Is that also in Michigan? But I cannot tell you how they would avoid selection problems, even if they would be a monopoly. Perhaps you could enlighten us.

        • Chuck Bush says:

          Hi Greg,

          The regulatory factor you refer to, Blue Cross being a non-profit under Public Act 350, which results in a different taxable environment, has never allowed them to be in a monopolistic position. For many years, they enjoyed a majority market due to provider network arrangements and the auto industry. Over the last six years, Priority Health, also a non-profit, has really taking them to task. In addition, Priority Health runs very lean and Blue Cross has always had an unhealthy layer of fat. In Michigan, adverse selection has been bandied about by Blue Cross as a problem serious enough to bring them down, but, Priority Health has proven that its not the case. However, in a limited scope, commercial carriers, like Assurant or US Health and Life, have a significant rate advantaged (20%-40%) because of underwriting and a huge differential between young and old insureds. But, of course, in the small group market that advantage is being equalized.

      • Uwe Reinhardt says:


        You mean, BCBS Michigan has guaranteed issue and community rating without a mandate to be insured and that works?

        It certainly did not in NJ and NY.


        • Chuck Bush says:


          Yes they do and they always have had both. Traditionally, for both self funded and fully insured, medical underwriting information is good for only 12 months. Thereafter, the model is inconsequential because all claims are new.

  22. Bob Hertz says:

    I think that where Prof Reinhardt is going is this:

    if the insurance industry can use full medical ratings and age rate-ups as they used to in about 45 states, then a $2000 credit will be pretty darn skimpy for someone over 50 with a health history.

    It can be argued that with the ACA, the cure for this unfortunate group is worse than the disease….but they should not be ignored.

    If Dr Goodman’s proposal had about $50 billion per year in it for high risk pools, then I would be more impressed.

    Note- the Republican alternative to the ACA put forward a month ago had $25 billion for 10 years for high risk pools– pathetic.

  23. Chuck Bush says:


    I forgot to mention, MAGI is not used in the exchange enrollment process. Rather, a simple question of “how much do you think you will make in 2014” is used. Even if there is some sad, clandestine reason for the lack of continuity to the actual law, it is pathetic treatment.