I remember how excited I was when I created my first website in 1994. I had one of those little widgets at the bottom of the page to list number of visits. How could someone be more proud than to have a web site hit. The President must be so thrilled to have so many unique visitors to his web site. All his community organizing finally paying off…..
We are now in Day 3 of the the new Affordable Care Act. ACA is so terrific, the only positive thing the press reports is how the website crashing is a measure of success. Its more likely that when you fundamentally change one filth of the US economy and kick self employed people off their insurance, you are likely to get a few million people trying to buy insurance. While the press skims over the eye candy of web hits, I have a more fundamental question: will the Affordable Care Act work?
I have worked on some very complex engineering projects. While designing a fighter aircraft in the early 90’s we had more than 25k engineers working simultaneously across more than 100 suppliers. Our chief engineer could always translate an irreconcilable complex situation back to first principle. A bunch of engineers would be twisted in a knot about a finite element model determining landing gear loads of an aircraft hitting the carrier deck. The chief engineer would pull out F=MA and quickly dissect the error in their calculation. The aircraft worked flawlessly on launch, the product of thoughtful engineering.
When dealing with complex systems its always good to go back to first principle. On the basis of first principle analysis, the Affordable Care Act does not make sense to me. I have a few reasons why:
Dear John Letter: I am Losing My Healthcare
Effective Dec 31, 2013 I lose my healthcare. ACA supporters tell me I am wrong, but the fact remains, I lose my insurance because it is not compliant with ACA. I have paid for my own insurance since 2004. Like 42M other people in the United States, I am self employed. We all have the same problem getting healthcare. My current plan is an HSA. It cost me about $580/month, has a $2,500 deductible and no co-pay. Through the savings mechanism, I have accrued about 10K that I can use for any uncovered health expense. I go to any doctor I want.
Though I have tried to get into the exchange, I have yet to find out what plans are now available. Putting together various news reports from people in my state, it appears the nearest available plan is a Silver PPO. That plan is $560/month, has a 20% co-pay, and a $2,000 to $4,000 deductible (still unclear). It does not cover my current doctor or hospital system, but it offers a good hospital system. Though I save $20/month I have to pay 20% of all expenses. To me, this is by no means a savings. So even though I currently have insurance and a doctor I like, as of Dec 31st, like many others, it is gone.
7 Million Will Sign Up, or They Won’t
Sibelius expects that 7 Million will sign up for ACA in this enrollment period. I bet you think these 7 million are the desperate uninsured. They are not. The administration is giving us a low number on purpose, so later it can say “Look we got 20M signed up. What a success”. In fact, a large fraction of the people hitting the exchange are the 19M of the 42M self employed people who buy insurance from the Individual Market. Many of them lose their insurance under ACA. Anecdotally, it appears about 1/3 of the Individual market may be losing insurance. My guess is we will not know for a very long time how many people coming to the exchange lost their insurance because of ACA and how many bought insurance because they never had it. Surveys suggest 1/3 or more of the uninsured will not purchase insurance. With no limit on pre-existing conditions, why would they bother buying insurance they already can not afford? Forcing people from the individual market to now buy ACA is great way to be sure the exchange gets subscribers if pricing falls short of the uninsured’s expectations.
Web Site Performance: Every New System Has Problems, Just Look at Google When It Started
How many startups have a multi billion dollar budget and 3 years before launch to get it right? Senator Reid noted that the founders of Google said their website crashed all the time in the beginning because they had too much demand. California spent 313M to setup their online exchange. God knows how much the Federal Government spent. 500M? $1B? Google was likely bootstrapped with $1M. There is no comparison. The Federal Government spent 3 years planning the online exchange.
With no “Pre Existing Condition” rule, what does the insurance company need to know to price the insurance policy? Basically all the system needs to know is our age, number of people covered, plan choice (Gold, Silver, etc), and income (for subsidy). Frankly, none of this sounds difficult.
From a technology perspective its no surprise it is failing. You can only find out about plan information by completing the entire registration process. Forget the price, you can’t even find the name of the providers or scope of services. So everyone, lurkers and all, need to go through the whole process of registration, verification of your identify, details on your family, and then a list of possible plans. Imagine you wanted to buy a car, but before you could look at the car/options, or even the model, you needed to register your name with the federal government to browse the GM website. You would think someone would have created an exchange for health insurance already, and they have: www.ehealthinsurance.com – without logging in I got a quote in about 3 seconds. My guess is they did not spend $318M creating this site. Now that I think of it, its irritating the government is wasting money to poorly replicate an existing system.
Something like 1% of people that are on the federal exchange get to even see the plans. Fewer actually buy a plan. Here is a hint to the people who wrote the software. Let the 99.5% of viewers just look at the breadth of available plans for their state. That takes all the load off the registration/verification/profile system to calculate plan options, subsidy, etc.
Frankly the design is so odd, it makes me think HHS is more interested in locking you into the system so you don’t realize the plans suck and you don’t want to buy.
ACA’s Economics of “Premiums” Don’t Work
ACA prohibits the highest price and the lowest price of insurance from being greater than 3x difference (Age Rating). This means an insurance company can not charge a 55 year old more than 3 times the premium of a 27 year old. But the cost of care for a 55 year old is about 7 times as high as for a 27 year old. For the actuarial system to balance, ACA needs to sign up 2.3 – 3.0 as many young people as old people. Demographically there are more 55 year olds than 27 year olds.
55 year olds worry about price, but have resources to adapt. 27 year olds are very price sensitive. A 27 year old can buy a catastrophic policy for about $40-$50/month. Perhaps they might be persuaded to pay as much as $150, or even $200 for a more comprehensive plan, but no more. So the 55 year olds plan can not be more than $450-$600/month. Of prices are too high, no young people will sign up and the system falls apart, and the rate for the old people is linked to the price sensitivities of the young people.
So what happens? Well the insurance company, not able to price the 55 year old’s policy at the correct yet higher price ,is forced to use price control to let the actuarial system balance. They achieve price control by limiting a patient’s hospital network to the lower cost often lower quality network systems.
We do not know how many young people will sign up. Since they can buy a policy when they are really sick, there is no compelling reason to buy now. If young people do not signup, the insurance companies will be forced to raise rates in 2015. Raising rates will cause more young people to bail.
Cost of Services are Unlikely to Go Down
ACA supporters believe the introduction of new patients with insurance drives operating costs down. If your in a freshman seminar, I guess you might believe as quantity goes up, price goes down. Well its not really that easy. Healthcare is a people driven service delivered by nurses, technicians and doctors. More patients also means more overhead. Though demand is going up offering uncertain pressure on price, supply is going down at a faster rate. Doctors are retiring faster than new supply. Medical infrastructure is slow to expand. Increased demand with limited supply drives cost of services up not down.
The other way to drive down cost is innovation. Innovation, like an EMR, might let a doctor see twice as many patients in the same period (it doesn’t really). A drug company developing a satin might reduce the number of invasive heart procedures. Technology and Innovation drive down cost. But ACA set a new tax on innovation, under the premise that ACA provides more patients to drug and device companies, so ACA should get a cut of profits from those companies. Unfortunately those profits are the motive for an entrepreneur to operate. Before we attack the entrepreneur’s greed, that profit is a fraction of the benefit their drug offers society by cutting invasive procedures.
Your Auto Insurance Doesn’t Cover Oil Changes
Insurance is about covering unexpected costs. Of 1,000 people a fraction might have a “break the bank” catastrophic illness that costs 100k or 200k. A larger fraction might have 50k in care. Most will never use their full insurance benefit. ACA attempts to reduce lifetime insurance costs through preventive services, as if a doctor telling us we need to lose weight is by magic gong to change our self destructive ways. Its clear, health improves greatly if people know and treat high blood pressure or diabetes. These preventative measures work better when your rates are altered as a nudge to good behavior. ACA prohibits setting insurance premium based on care compliance.
But none of this matters in the context of preventive care costs. We each pay for the care no matter if its covered by insurance or we pay it directly. Since more than 90% of the patients will have appointments with their doctor and need to pay for these treatments, the insurance company will pass 100% of those costs back to the patient in form of premium. The insurance company must charge for the overhead of paying for these services. Doctors charge for the 90-180 days it takes to receive reimbursement. Frankly between services, payment delays/overhead, and insurance costs, it costs the patient less overall to pay the doctor directly out of pocket.
The bigger irony is if you take care of high blood pressure, and live longer, you create a bigger social welfare burden because you live to 70, receive social security/Medicare, and die after having $100k in cancer treatment.
Conclusion
On a mid term and long term basis, the regulation of price and cost in a narrow service offering on a federal regulated exchange ultimately slows innovation, curtails supply, and drives entrepreneurs out of the healthcare field. The economic incentives are out of sync with the forces that have driven down the cost of computers, cars, phones, etc while improving quality and availability. Once the near term euphoria of web site hits wears off, we will find the new insurance plans were bought by people with existing insurance, the young invincibles undersubscribed, and health care costs are higher.
