Slowing our Roll on Healthcare Reform

Last week, three Republican Senators joined the 48 Senate Democrats and struck down a horrific bill that would have kicked 22 million Americans off of healthcare.  After six months of assault, this was a huge relief to members of the resistance who, literally worked day and night to lobby members of Congress to put a halt to it.  It was a good day.

It's only natural in the aftermath to start talking about a path forward.  Where do we go from here?  For those who would say "single payer now," I say: slow your roll.  Here's why:

If you've ever had a child come to you with gum stuck in her hair, that's a pretty good analogy for the American healthcare system.  It's sticky, it's messy, and it's sort of worked into all sorts of things.  Also similar, everyone's got their home remedies, all of which work to varying degrees, but nothing is a perfect solution.  And just yanking at it only makes things worse.

One oft-cited statistic about healthcare is that it represents 1/6th of the American economy.  That should be enough to give anyone pause.  While you may not feel any particular sympathy for the 'big bad insurance companies,' that number represents hundreds of billions of dollars, millions of jobs, and - oh yes - a bunch of publicly traded companies that find themselves comfortably nestled in our retirement accounts.  You simply can't turn an entire enormous industry on its head overnight without some serious consequences rippling across broad sectors of our nation.

So let's just put single payer back in the box for a while.  So, what's left?

It's important to think just a moment about what health insurance as a product does.  Because it's not actually for the patient.  Health insurance actually protects hospitals, ensuring they will get paid for services, ensuring they have the cash flow needed to continue operating.  Health insurers don't really provide the patient anything today.  They are an administrative layer, complete with the added costs of overhead and executive compensation, all conveniently added to the expense that the hospital already charges for care.  What's more, they charge you based on what they "guess" your eventual medical costs will be, whether or not they ever materialize.  This may sound like an indictment, but it's really the beginning of root causes.  If we break it down, we see problems that need to be solved.

• How do we ensure hospitals are protected from going out of business?
• How do we ensure health insurance companies profit from improved health, a benefit to the patient and reduced load on the system?
• How do we ensure people are really paying their 'fair share'?

And, most importantly:

• How do we ensure everyone gets the care they need without fear of going bankrupt?

There are a LOT of potential answers to each of these questions.  Do we declare hospitals "critical infrastructure" and provide them direct government subsidies (the way we do farms) to offset their shortfalls?  Maybe.  Do we transform the health insurance industry into a health management industry, where people pay for the access to non-medical and screening services that help improve the customer's health profile and limit doctor visits?  Possibly.  Do we transform "insurance" into "membership," where your actual accrued balance is what is used to pay directly for medical services when needed?  Who knows?  The point is, now you've got new, tangible problems to solve.  

And yes, would single payer address those things?  Of course.  But, again, we'd tank an entire industry overnight, throw a bunch of people out of work, sink your retirement account, and probably a mini-recession to go with it.  So let's move forward, but tread lightly.  

How Insurance Works

With the House's recent passage of the American Healthcare Act, drastically revising the provisions and protections of the Affordable Care Act, everybody, of all political persuasions is talking about health insurance.  The cost of it, subsidies, "high risk pools", and so on.  But what is insurance and how does it work?  How is health coverage different from other forms of insurance?  Let's take the politics out of it for a moment and just look at the mechanics.

On Risk:
Insurance - all insurance - is based on the principle of risk.  It is basically paying a smaller, known cost in exchange for the promise to offset the risk of an unexpected larger one.  Insurance companies employ specially trained math geeks, called Actuaries, to predict the level of risk their customers present and calculate the cost.  As long as a company correctly predicts that risk and prices accordingly, they can stay in business.

It's important to pause here.  If the risk of something is 100% certain (like a 100 year old man buying a life insurance policy), that doesn't work in an insurance model.  Insurance, above all, is basically betting that you won't need it for more than you pay in.  It's the peace of mind that a fixed predictable cost is better than getting hit with a big unexpected expense, but the company is betting that it won't come to that.

On Claims:
Insurance companies, using their actuaries, predict the likelihood and cost of people they insure filing claims under their policy.  Companies never expect to pay EVERYTHING on every policy for every policyholder all at once.  There's a fairly predictable volume.  Companies have to have the cash resources on hand to pay those claims as they come in.  But they also have to reserve cash in some form for a catastrophic event.  So, part of the money that comes in from premiums goes back out the door right away, and part of it goes to "loss reserving".  Think of 100-year storms or massive flu outbreaks.  You can't predict them specifically, but you know, eventually, you'll have to endure one.

On Pricing:
Here's where it gets interesting.  If you have a pretty good idea of the level of risk and the amount of claims you need to cover, then you've got the broad strokes of how much you need to charge.  If you wanted to, you could just take all of projected costs and divide them evenly across all customers.  But that would mean some people - the people with the lowest risk - would be paying more than their "fair share".

If you charge your best customers more than you have to, they're going to go somewhere else.  So, companies use "tiering" to break up rates into blocks, based on their risk profile.  For each individual person, the price is wrong, but as a group, the math works out.  The flip side is that there are some customers that will never pay enough in premium to cover their probable costs to the company, and tiered pricing has the double impact of keeping costs low to the "good" customers and financially encouraging "bad" customers to do business elsewhere.

This may sound a little heartless, but the quickest way for an insurance company to become financially unstable is to take on too many high-risk policies or to lose its low-risk customer base.  And a company that is financially unstable can't pay its claims anymore.  So, it's very important for companies to maintain a healthy and balanced total book of business.  If they don't, they can't keep their promises to the customers they have.  Each company  has to compete for those same precious low-risk customers, so price competitiveness is extremely important.

Cost-savings Tools:
Insurance companies have a few other means at their disposal to help balance the books.  The details are pretty complex, but they fit into three basic buckets:  controlling what's covered, controlling how much is coverable, and controlling who is covered.

• What's covered:  most policies specify exactly the sorts of things they will pay out for.  We call these "named perils".  This makes it easier to predict the total likely claims.  Companies can also offer "cafeteria style" policies, where you just pick the coverages most important to you.
• How much is covered:  There are two mechanisms here, caps and deductibles.  Caps limit the total amount paid out for a type of claim or over the life of the policy.  Deductibles, on the other hand, let policyholders take on some level of the risk in exchange for lower costs.  Deductibles are really useful for limiting the kinds of small claims that can nickel and dime a company to bankruptcy and are much harder to predict.
• Who is covered:  Like I said earlier, selling a 100-year old man a life insurance policy is a sure loser.  The policyholder is never going to pay enough in premium to offset the benefit, and that means other policyholders will have to make up the difference.  

These tools are used carefully and continuously to ensure the health of the book of business is balanced and that there is enough coming in to cover the claims as promised.

On High Risk Pools:
High risk customers are nothing new to insurance and not unique to healthcare.  People who have been convicted of a DUI, but still have a license to drive are a special risk.  People who live in coastal Florida are a whole lot more likely to have their rooftop ripped off than people living in Arizona or even 50 miles inland.  These bands of extreme risk are things that insurance companies would rather not deal with, but states usually require companies who want to do business to take on at least a portion of these customers as a condition of their license.  They usually also have to pay into a central pool of money, managed by the state, called reinsurance, to cover the general cost of exposure to all companies taking on these special risks.  In the worst cases, state-run agencies can be the last resort for coverage, because private companies simply can't make responsible choices in these scenarios without jeopardizing their ability to pay their mainstream customers' claims.

On Gimmicks:
A lot of lip service has been given to a few shiny objects that will supposedly make things better.  Two of them are "selling across state lines" and tort reform.  These could get a whole post of their own, but here is a short version of why they won't actually help.

Most insurers already operate in multiple states, many nation-wide.  They already balance profit and loss across their whole portfolio.  There is nothing that says a company has to isolate each risk pool and balance the books at a state level.  And, even if that was the case, it would only make a difference if the "other" state was a lot healthier than "your" state.  That doesn't really happen.  And then, the people picking up your share of the costs would be very unhappy.  So that's not a thing.

A "tort" is a liability lawsuit.  Lawyers don't sue people, they sue companies, because companies have a lot more money.  A judge could award a million dollar fine against me and it would do the plaintiff no good, because I simply don't have the money to pay it.  Lawyers sue companies.  Tort reform is about limiting the amount a company can be sued for.  That sounds great for companies, but if you're the plaintiff suing for damages, you probably don't want that to happen.  But this is why insurance companies put limits on their policies.  Those limits don't protect you, they protect the insurance companies from tort lawyers.  So, again, tort reform isn't going to make a meaningful difference in the cost of insurance.

Health Insurance, Specifically:
If you take a moment to consider my previous points, it quickly becomes obvious that health care is a special animal.  First of all, healthcare, unlike a car accident or a house fire, is something you WANT to happen.  It's not just a matter of predicting whether or not you will get sick or injured.  Routine care is both expected and necessary.  So, that challenges risk models right away.  Secondly, health crises, unlike a house fire, are normally long-term events, requiring progressively more expensive care as time goes on.  Third, lower income is a key predictable risk factor of poorer health.  There is a clear correlation between income and conditions and risk factors for chronic disease.  So the people who are least able to afford it are most likely to be a higher risk and require a higher premium.  And, fourth, those all-important low-risk customers that are the anchor of financial stability for any insurance company are the least likely to see the need to pay for coverage, making it very difficult to re-balance costs.

All of these factors make healthcare as an insurance model especially challenging.  It's also why the individual mandate imposed by the Affordable Care Act (Obamacare) was so important.  The health of the whole portfolio is guaranteed by ensuring low-risk customers are built into the model.

Let's do the math:
Say the total cost of health care for Arizona is $10 Billion a year (I'm making this up).  With six million Arizonans, that's about $1,650 per person, per year in risk / cost.  Using tiering, 80% of your risk is in the top 20% of your pool.  Their "fair share" is $66,000.  That's 133% of the median Arizonan household income.  Hello bankruptcy!  Do we just write off coverage 20% of the population?  Or put them into high risk pools?  Either way, the money has to come from somewhere.  Hospitals and insurance companies will continue to incur the costs.  And you can be sure they will be passed back on to you, either in the form of premiums or, if through government subsidies, taxes.

But even in the lower risk tiers, at the lower income levels, the costs become prohibitive.  $2,500 a year may not feel like much to someone making $80-$100k in salary.  But to a person making minimum wage, that's 13% of their income.

As with anything, the devil is in the details.  And our personal health and that of our loved ones is an emotional strain as much as a financial one.  Still, these principles of insurance hold true, regardless.

Is Obamacare the best bad idea ever?

When the Affordable Care Act was being debated and ultimately passed, I was not happy.  I wasn't happy with the hyper-partisan political process and, more importantly, as an insurance guy, I wasn't happy with the proposed model.  But, eight years later, I believe this has turned out to be the best bad idea ever.

The Bad
Insurance is all about balancing risk with cost.  It's basically counting cards in blackjack.  If you do it well, you can charge people collectively reasonable and layered rates based on the risk of occurrence of a claim.  Insurers try and limit subsidization of higher risk groups by lower groups to provide more desirable rates to customers that are less likely to file a claim.

The certitude of a claim (i.e. a "pre-existing condition") completely breaks the model and stops it from functioning.  The only way to counter-balance that is finding a group of equal weight that has a virtual certitude of never filing a claim and somehow splitting the difference.  The ACA did that through the individual mandate.  The math works out, but it's hardly equitable.  And that's why costs have gone up.

And unlike something fairly straightforward, like Auto Insurance, health care issues aren't limited to a single clear point in time.  Often they are chronic and progressive, creating an ever-mounting cost spiral.

In fact, it's my belief that an insurance-centric model as the primary means of access to health care is a lousy idea.  Since insurance is predicated on the hope you never actually use it, the model is inherently at odds with the needs of the populace and modern medical practice, which places greater value on regular check-ups and screenings to prevent more serious conditions.  Nevertheless, that's what we've got.

The Good
The mission of our federal government is to "promote the general welfare."  I don't see anything more plainly fitting that scope than the health of our populace, our workforce, and our fighting force.  The ripple effects of a debilitated population to productivity are staggering.  Plus, expecting people to suffer when we have the means to alleviate it is simply inhuman.  So, creating a system that provides access to care for 12 million people who needed it most but couldn't get it, is fundamental to our duty to our fellow citizens.  We've raised the standard of fundamental support to people, and that's a victory we should all be proud of.  Cortez burned his ships, and none of us can go back now.  We are marooned together in this strange new land.  Now, we have to figure out how to make a life here.

The Ugly
The one reason above all that I have come to support the ACA is this:  eight years later and Republicans are still talking in bumper stickers.  Ridiculous statements like "health savings accounts" and "let the free market decide" show that they clearly don't have a clue how to fix it.  If the Democrats had not shoved the ACA down all of our throats, a courageous move that cost them dearly in congressional seats afterwards, we would still be dithering about slogans like "portability" and "tort reform" while people died.  We can only hope we can find another batch of brave souls to tackle Social Security someday soon.

The Next Steps
Whether the ACA survives or not will be up to Republicans in Congress.  We'll have to wait and see.  The ACA has problems, no doubt, but they will be hard-pressed to deliver on promises without throwing a lot of people under the bus.  I sincerely hope that they aren't that reckless.

What I hope happens next is this:  Congress uses it's power to direct hospitals and doctors to reduce actual COSTS of care to the point where insurance is no longer the primary way to see your doctor.  You can fiddle with the insurance models all you want, it's all still the same pile of money, just shuffled around differently.  You've got to dictate that hospitals provide the basic services at accessible prices for routine and regular care.  Then, maybe, the models can handle the rest.