What is the US health reform about?

for some time now, I have wanted to read a short intelligible piece telling me what the US health reforms actually were about. The problem till now has been that the reforms entail 1200 pages of unreadable legal text referring to more unreadable text, and that the issue became too politicized to be able to trust what news providers said.

Fortunately, Professors Bobbi Wolfe and Bob Haveman provided this very readable piece in a European policy journal on the recent health reforms. It is only 8 pages, but it comes highly recommended as these authors have been in the health economics business for decades and can draw upon many sources close to the fountain for their opinions.

If I had to summarise their summary, the main points of the health plan that are doable are:

1. To extend health insurance in 2014 to about half of the 20% of the Americans under 65 without current health insurance.

2. To tax the big current winners in the health industry via imposing payroll taxes on employer-provided health benefits, to fleece the big pharmaceuticals and medical equipment companies, to make increases in insurance fees subject to government approval, and to cap the amount of health cover that is reimbursed via Medicare (which is the system for the over-65).

3. To impose community ratings, i.e. to force insurers to ensure the kids of those currently insured and to insure people with pre-existing conditions. Also, there is a big move to make it impossible to kick people out of insurance who develop a long-term illness (currently you can lose your insurance if you become too ill!). Most of these changes have already been imposed, presumably to make it hard to undo the legislation.

4. To have more health services be provided by the cheaper health professionals (nurses) and less by the expensive ones (specialists), for instance by extending community care facilities and tweaking the incentives of insurers and patients.

One of the less doable aspects of the plan is the attempt to force private insurers into offering four basic insurance packages and to compete across regions in the hope that this simplification plus competition will lead to lower prices. Without offering state insurance as a means of truly providing a base case however, you are then always susceptible to collusion amongst the insurers and the limited degree to which individuals and firms have an incentive to shop around. Also, the promise to improve hospital and medical efficiency via incentives such that about 160 billion US ‘cost savings’ are made sounds a little over-the-top to me. You have to fire a lot of people to make 160 billion in savings and that kind of job cutting is not easily achieved.

Yet, in its entirety, the plan is one of immense size, virtually certain to change the allocation of something like a quarter of total expenses on health in the US. I am making this number up from the 20 million extra individuals who are going to be insured as well as another 20 million extra projected to be serviced by the expanded community centers, which in total get you some 15% of the current insured population who will be serviced completely differently. Guessing that this group is less healthy and will thus use a disproportionate amount of services and guessing that the other changes will amount to maybe half the size of the sheer expansion, gets you at least a quarter change in total health cost allocation. If you look at the money that the extra taxes are supposed to generate in order to pay for these expansions, you are also looking at around 460 billion US per year, which is a quarter of all health expenses and 4% of GDP. That money is essentially taken from the rich and mainly allocated towards the poor and the really sick.

A transfer of 4% of the nation’s wealth from the rich to the poor is a big Robin Hood reform in my book. No wonder the incumbents in the health industry in the US are squealing.

Author: paulfrijters

Professor of Wellbeing and Economics at the London School of Economics, Centre for Economic Performance

%d bloggers like this: