Monday, January 25, 2010

The simplest explanation of health care reform you will ever read

The problem with the health care bill is that nobody knows what’s in it.  Nate Silver at FiveThirtyEight has done an excellent job explaining that while the public opposes the generic entity of “Obama’s health care bill,” a majority actually supports the bill once you explain what it does.  In fact, most people who oppose the bill believe things about it that are demonstrably false.

It’s understandable: health care is an incredibly complex issue—one in which there are few obviously right answers—and the current bill has been tortured by political sausage-making into a 1,000+ page behemoth of convolution.

But when you step back and look at the health care bill, it’s really not as hard to understand as it seems, and it's possible to write a simple explanation of the health care bill.  In fact, the Senate bill does just five main things:
  1. Bans insurance companies from denying coverage to people with preexisting conditions, and from rescinding coverage after you get sick
  2. Requires all Americans to purchase health insurance
  3. Provides subsidies for those unable to afford insurance premiums
  4. Establishes "exchanges" for people to compare and purchase insurance policies
  5. Pays for all of this with taxes on expensive “Cadillac” insurance plans and companies in the health care industry, and reductions in Medicare spending
As Paul Krugman points out, each of these pillars is crucial to the others’ success.  Take one pillar out of the package, and the whole structure collapses.  Understanding that, here's how to truthfully explain the health care bill to any skeptic on left or right such that its necessity becomes obvious - if you just want the short, bulleted version, scroll down toward the bottom.

We’ll start with the component that everyone agrees on: insurance companies should not be able to deny Americans coverage because of pre-existing conditions, nor take away your coverage once you get sick.  Our current system ensures that the Americans most in need of health care have the hardest time getting it.  This is wrong and immoral.  The bill bans these insurance company practices, so that no American will ever be denied by an insurer because of sickness.  Even Republicans support this provision (or say they do at least).

But this universally popular provision creates a new problem: if insurers have to accept anyone regardless of health, it creates an incentive for healthy people to wait until they get sick to buy insurance.  It’d be like waiting until your house burned down to buy home insurance - no insurance company can stay in business if it's forced to pay benefits to people who haven't paid premiums into the risk pool.  To cover these late-comers, insurers would have to raise premiums on everyone else.  Rising premiums would drive more people out of the system, requiring further premium increases, creating a “death spiral” that would bankrupt the insurance industry and ultimately require a true government takeover of health care.  Hence the individual mandate: if insurance companies have to cover everyone regardless of health status, then you have to require everyone to buy insurance. (Check out Ezra Klein's blog for more on this.)

Not everyone, of course, can afford insurance premiums.  So the health care bill provides subsidies to defray the costs for lower-income Americans.  Perhaps these could be more or less generous, but philosophically, the idea is sound: if you require everyone to buy insurance, you have to help out those who can’t afford to pay for it.

Of course now we’re requiring everyone to buy insurance companies’ product—and paying for those who can’t afford to do so.  If this is not to be just a massive transfer of taxpayer wealth to insurance companies, we have to limit insurers' ability to raise prices.  This can be done through command-and-control policies (e.g. price ceilings), but I prefer market solutions that work by facilitating competition.  It seems like the easiest way to do this would be to create a government-run insurance option to compete with private insurers, but that's off the table, so the current bill does the next best thing: it creates “insurance exchanges” that help Americans to compare and choose private insurance policies.  Again, there are better and worse ways to implement the exchanges, but on principle, it’s a reasonable idea.

Finally, we need to find a way to pay for all this (the subsidies and exchanges).  There are two ways to do it: borrow money and continue to explode the deficit, or pay for it ourselves with taxes and/or spending cuts.  The Senate bill does the latter, and actually reduces the deficit over the next 10 years:
  • First, the bill taxes so-called “Cadillac” insurance plans that require very little out-of-pocket expenses.  This makes sense: these Cadillac plans are partially responsible for driving our health care costs so high, because their generous coverage encourages people to over-consume health care with little regard to the cost.  Since we need to raise revenue, it makes sense to do so in a way that has the additional benefit of discouraging irresponsibly extravagant plans.
  • Second, the bill taxes various companies in the health care industry, notably medical device manufacturers.  This also makes sense: the bill would help more Americans to afford these companies’ products, so it’s only fair that the companies should pick up part of the tab.
  • Third, the bill reduces Medicare spending, mostly by targeting inefficiencies and waste, and by reducing payments to doctors.  I can’t speak to the specifics, but the broad concept of freeing up dollars from Medicare makes sense.  It’s a bloated program that will deplete its trust fund by 2017, so Medicare can’t continue in its current form for much longer, regardless of what Obama's bill does.  In any case, Republicans have long clamored against entitlement spending; to oppose cuts in Medicare spending now reveals the extent of their party’s moral and intellectual bankruptcy.
So there you have it.  The Senate bill isn’t perfect, but it makes a lot of sense.  And the calls to break up the bill and pass only the popular provisions simply won’t work, because taking one provision away will doom the whole system.  Here’s a summary of the argument:

  • The Senate health care bill starts by doing what everyone agrees is right, and bans insurance companies from denying or rescinding coverage because of illness. 
  • To avoid creating an insurance death spiral where people simply wait until they get sick to buy insurance, it mandates that all Americans buy insurance (just like we do with car insurance). 
  • And to help lower-income Americans afford the product they’re now being required to buy, the bill provides them with subsidies.
  • To prevent insurance companies from simply raising premiums on its now-captive market, the bill introduces competition in the form of insurance exchanges that allow you to shop around for the best policies.
  • Finally, to pay for all this, the Senate bill taxes health care companies and Cadillac insurance plans, and reduces spending on Medicare—reductions which are inevitable in any case given Medicare’s looming insolvency.
If you want to ban insurance companies from discriminating against sick people, all of the other provisions of the bill must follow (in one form or another).  By the same token, if you oppose all forms of the other provisions, it means you support insurance company practices of denying or revoking sick people’s coverage.  Now your Congresspersons just need to get the message—so call them!



  1. This is neither real reform nor is it a boost to insurance companies; it is socialism and a obvious attack on our liberties and freedoms.


    Health Insurance

  2. Very insightful. Which specific freedoms does the health care bill attack?

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  3. My freedom to believe whatever I care to believe, regardless of what the facts are! YELLING! ANGER!

  4. And what if, say, 30% of the people decided they simply weren't going to purchase health insurance? I don't see how you can legally force people to buy health insurance. Sure, it forces insurance companies to offer coverage to everyone regardless of pre-existing conditions, but what does it do to make such coverage affordable to them? As someone inclined to think some form of universal health care is the way to go, I think this bill is highly flawed and like a house of cards that can very easily fall down. I suppose if you don't look beyond the surface of this it may sound appealing, but I smell disaster.

  5. Excellent summation of the Bill. One concern I have with the "Exchange" provision is whether there are in fact safeguards in the bill to prevent market collusion among the insurers. Competition is great in principle, but it seldom works in industries dominated by monopolistic companies that have regional domains. Any information in the bill regarding this issue?

    As an aside, has anyone watched any news coverage of the Reform bill on foreign networks (via the interwebs)? I recently watched a clip from a New Zealand news show explaining the bill and was amused to see the anchor completely befuddled that Republicans could be opposed to universal health care, something the anchor said to his viewers, "You and I take for granted." It's nice to escape the American media circus to get an outsider's perspective.

  6. And to the commenter above, if you are unable to understand how the government can force you to buy health insurance, observe how it forces you to buy auto insurance. It's called a "law". Sometimes people don't agree with certain "laws", but the state has the power to enforce them with or without your explicit consent. It's a basic part of living among other people in an organized society.

  7. I'm not an expert on the exchanges. I'd check out these two posts by Ezra Klein, who's way more steeped in the details than I am:

    in the second post, point #1 deals with the exchanges.

  8. Also, I pasted Tag0Mag0's comment in a new post:

  9. "Liberties" and "freedoms" to do what? Die in a ditch because you couldn't afford/were denied health insurance coverage?

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