That’s done, but the debate on whether ObamaCare’s provisions are good ideas will continue. To date, this debate has been unable to shake off a lot of mythology—things believed about healthcare and our healthcare system in general, or ObamaCare specifically—that simply are not so.
The goals of healthcare reform—covering more Americans, improving outcomes, and doing so more cost effectively—are all laudable, but are all hampered by the continued belief in these myths. Rejecting these misconceptions is crucial to any chance of our eventually emerging with a better system.
Myth #1: Healthcare prices have soared in the recent past
If we choose to subsidize a portion of the population we should do so openly, using taxation and government spending, which at least shines sunlight on the cost, not through tricky regulation that hides it.Everyone knows that healthcare prices have soared, but everyone may well be wrong. The statistics we see are always about the amount we spend on healthcare, not the price of healthcare. Consider a comparison of healthcare in the 1950s versus today. In the 1950s, you had none of the subsequent developments in pharmaceuticals, surgery, diagnosis, etc. How much would you pay for that versus today’s healthcare? Not so much, I’m guessing. In fact, if you look around the world, in impoverished countries you can probably find a reasonable facsimile of this 1950s healthcare at a low cost. While this example is intentionally extreme, the measurement problem it illustrates is important. The quality of the best healthcare has soared over time. This measurement problem is not unique to healthcare. Measuring the price inflation in computers is incredibly difficult. If the price of a laptop today is the same as 20 years ago, but the laptop is ridiculously better now, hasn’t the price really fallen dramatically?
Consider another hypothetical. Imagine we develop a cure for all cancers that costs a flat $1 million per person and works perfectly. Let’s assume this is more than the total cost to treat these cancers otherwise. In this case, the amount we spend on healthcare will likely rise dramatically, because it just got much better and we chose to spend more on it. The cure we are talking about did not exist before now, so it does not make sense to ask whether the price rose. Here’s a better question. Are we better off even though we are spending much more on healthcare? Yes, we are, although some will cite the dramatic rise in our healthcare spending and demand that action be taken.
One more, and let’s get really simple. In the olden days, our great-grandparents might have had one pair of reading glasses. Now, many of us have one pair at home, one in the car, one at work, etc. Because we are more prosperous we spend more on reading glasses than our forebears, even though the price has not necessarily changed. Again, there is a gigantic difference between what we spend on something and its price. And again, the comparison of old and new prices is particularly vexing in healthcare because most of the healthcare we buy was not even invented when our great-grandparents were ill.
In these days of horrible discord, partisanship, and uncivil discourse (actually very much like the other 200+ years of the Republic) it is nice to know we can all still get together to rally around a really dumb idea.The above is highly relevant to our ongoing debate because the “soaring price of healthcare” is often cited as a reason we desperately need reform, perhaps radical reform. Even if correctly referred to as the “soaring cost of healthcare,” this is presented as an unambiguously bad thing, when that is certainly false. It’s bad when it’s a function of waste or monopoly power gained through cronyism—undoubtedly part of our system and, as usual, with government the main culprit—but not bad when it’s the result of improvement, undoubtedly a huge component over time. The price of healthcare over time is hard to accurately measure, but those screaming about the price soaring are probably wrong.
Myth #2: The pre-ObamaCare system was ‘insurance’
It was not a system of insurance. Insurance, as practiced everywhere else but healthcare, is about catastrophes. What we had was a government-subsidized payment plan funneled through insurance companies.
OK, this part is going to sting a bit. I never promised you there would be no math. Let’s step back a bit and talk about how insurance works. Few of us buy insurance because we expect to make money on the deal. No, the insurance company expects to profit and we expect to lose a bit. Free marketers and socialists can both surely agree that the insurance companies expect to profit. Well, how do they profit? It’s statistics (I told you it would sting). If they sell 1,000 policies that pay out $100,000 but only 1 percent of the time, they on average pay out $1,000,000 (1,000 policies times a $100,000 payoff times 1 percent, as 99 percent of the time they don’t pay). If they sell them for $1,100 each they take in 1,000 x $1,100 or $1,100,000 and will make a profit of $100,000. But despite the insurance company profiting, insurance can often be a great deal for you. You take out insurance because there are events that would cause you severe financial hardship—for instance, the totaling of a car you can’t afford to replace, the death of your family’s bread winner, or the destruction of your house. It’s worth overpaying a bit to avoid catastrophic financial consequences. We often call insurance like this “catastrophic,” as you’re only paying a small amount to insure against improbable but devastating events. Actually, we usually don’t bother to even call it “catastrophic insurance.” We usually just call it “insurance,” as that’s how it almost always works… except in healthcare!
The insurance companies’ expected profits are not without risk. Companies compete on premiums to see who can sell the insurance for the lowest price while still being profitable, and, importantly, they compete on “underwriting.” Underwriting is attempting to assess risks and charge consumers most accurately, charging more for expensive, more probable risks, and less for the opposite (in my example above, I pretended we knew these risks; in reality, the insurance company has to guess at them). The insurance companies that predict more accurately are generally more profitable, and those that are woefully inaccurate go out of business.
Everyone knows that healthcare prices have soared, but everyone may well be wrong. The statistics we see are always about the amount we spend on healthcare, not the price of healthcare.Let’s get back to healthcare. Due primarily to the tax subsidy given to employer-provided healthcare (a bipartisan, so-far-untouchable disaster), catastrophic health insurance is not Americans’ norm. Rather, employers provide essentially all healthcare from basic health maintenance and symptom relief to the most expensive life-saving procedures, and they do it because the government massively subsidizes this approach.
This is odd. You don’t go to your car insurer to fill your car with gas or to your homeowner’s insurance company to change a light bulb. Why do you go to your health insurance company for everyday medical services? That is not insurance, it is tax-subsidized provision of all your healthcare needs, and it causes two of our system’s biggest problems. 1) Health coverage is not portable, as it’s employer-provided, and 2) consumers are insulated from the cost of basic healthcare because they don’t pay directly for services. Educated consumers spending their own money would be far better shoppers for healthcare. Also, I wish I wasn’t asked for a $5 co-pay after a doctor’s appointment. Ask me to pay at least $200 or nothing. Paying $5 for a prostate exam is demeaning to both parties.
Why does this matter? ObamaCare sets out to fix health insurance, and to provide it to more people. Laudable goals. But the system we had was not badly managed health insurance. It wasn’t insurance at all. ObamaCare does not throw out the crazy system we had in favor of real insurance, which would actually work, but rather enshrines and extends all the problems of an insane healthcare payment system masquerading as insurance and built as a tax dodge.
Myth #3: Stopping insurance companies from charging based on pre-existing conditions is the one good part of ObamaCare
Even many Republicans fall for this one, perhaps because it polls well. In these days of horrible discord, partisanship, and uncivil discourse (actually very much like the other 200+ years of the Republic) it is nice to know we can all still get together to rally around a really dumb idea.
The comparison of old and new prices is particularly vexing in healthcare because most of the healthcare we buy was not even invented when our great-grandparents were ill.Most of the economic function of any insurance company is precisely about assessing the expected economic cost of a pre-existing condition, and charging based on it. Whether your house is a firetrap or fireproof is a pre-existing condition for homeowner’s insurance. Whether you’re 90 years old or 20 years old is a pre-existing condition for life insurance. Whether you have a good driving record in a modern car with airbags and that cool new blind-spot indicator thingy, or you are Lindsay Lohan, is a pre-existing condition for auto insurance.
If it’s affordable to them, people should pay the cost of their own pre-existing conditions in all these instances. After all, sad or happy as their state may be, it is their state and not other people’s. Furthermore, economic efficiency is enhanced as, among other reasons, consumers have some control over many, though not nearly all, pre-existing conditions. An insurance company of any kind exists mainly to price these pre-existing conditions accurately, diversify across customers, and then do a lot of paperwork. This accurate pricing is the hard and economically valuable part of what an insurance company does. It’s really their main economic function. Yet ObamaCare bizarrely seeks to remove this benefit, while retaining insurance companies for, what, their famous customer service?
I snuck in something above, and I can sense the progressive reader ready to pounce: the phrase “if it’s affordable to them.” The trillion dollar question is what about those who can’t afford it? Well, society should debate that openly. Progressives can argue for a lot of help for those who can’t afford paying for their own pre-existing conditions, libertarians can argue for much less, and conservatives, if they haven’t learned from their recent history, can base their argument on whether they are currently running the government and will get credit for providing the goodies. But, if we decide to subsidize the unfortunate, as is likely to some degree, we should do so directly through taxation and government largesse. No matter what the final decision on the amount of subsidy, this way is at least honest. In contrast, ObamaCare hides a massive government transfer program from those without these conditions to those with them. Besides basic dishonesty, hiding costs always leads to bad decisions.
ObamaCare is asking some Americans to pay large amounts for others, and is trying to hide it as private insurance premiums rather than admit it is bigger government. It’s simply a scam for ObamaCare to not count programs like these, which force some Americans to pay for others, as government spending. The mafia keeps two sets of books, the government should only be allowed one.
The other very popular ObamaCare feature, “stay on your parents’ insurance until you are 26” (65 if you’re named Julia) follows the same idea. Comparing a family that wants that benefit to one that doesn’t (because they don’t have kids or their kids have their own insurance or they just don’t like their kids!), the family that wants it should pay more, as they are consuming more valuable services. Economically, a tax on everyone to pay for those who want to keep their kids on their insurance until they are 26 would essentially do the same thing as ObamaCare here, but we’d recognize it as a large growth in government spending, a burden on those who do not desire this benefit, and a brand new entitlement for those who do. But, again, ObamaCare hides this transfer payment through regulating what different people pay their insurance company. Again, if we choose to subsidize a portion of the population we should do so openly, using taxation and government spending, which at least shines sunlight on the cost, not through tricky regulation that hides it.
Those who would call the above mean-spirited (or worse), please remember that I’m leaving wide open the question of how generous to be, and how much government should or should not directly subsidize things like pre-existing conditions and 25-year-olds without insurance, while you are intentionally hiding it.
This theme of hiding costs is consistent throughout the progressive march to bigger and bigger government. Step number one, present great “benefits” you will bestow on the populace and present them as if you are nicer people than the other side who want to deny these benefits. Step two, hide the costs, either through the complexities of the tax system, or more overtly through off-the-books regulation like ObamaCare. Step three, continue to advance the progressive myth that if government provides something, or mandates something, it’s “free.” Step four, get the people hooked on the freebie until they are too scared to give it up even if it costs them well more than it’s worth to them. Step five, move on to destroying the next part of our economy and freedom.
Educated consumers spending their own money would be far better shoppers for healthcare.Finally, note that the issue with pre-existing conditions is also an artifact of the government distorting the market away from insurance and towards employer-provided total healthcare (remember myth #2!). Consider your life insurance. You buy it on your own, not through your employer, and it’s usually “guaranteed renewable.” When you change employers, get sick, or just get older, you keep your policy and your premiums stay steady. This is the type of policy the free market, without massive government distortion, has produced. It would produce an analogous successful market in health insurance if left alone. People would buy insurance when young, and that insurance would include the right to keep buying insurance with no increase in rates due to getting sick. It’s only because you lose your coverage when you leave an employer that we even have this problem at all. If you are getting the sense that government is the root of our problems, not the solution, you have been paying attention.
Myth #4: Healthcare costs are very high in the United States compared to socialized countries
Like the opening myth about soaring prices, this one is used to undermine faith in our system and open us to radical change for the worse (ObamaCare or worse).
The statistics often cited by progressives seem to show that we spend a larger fraction of our GDP on healthcare and don’t get better outcomes than other countries. I won’t argue over whether we actually spend more, but will argue about why we sometimes spend a lot, and whether the outcomes often cited are measured fairly. Spending more is not always bad, and is not always only because we have (somewhat) private markets.
ObamaCare does not throw out the crazy system we had in favor of real insurance, which would actually work, but rather enshrines and extends all the problems of an insane healthcare payment system masquerading as insurance and built as a tax dodge.
In conclusion, we must remember that there are many vital things our more free American healthcare system gets right, and more right than the less free rest of the world. If you have an adequate health plan, you often get better care with shorter wait times here than elsewhere. If you have a truly devastating illness, you—like the rest of the world who flocks here—get the best care possible, and healthcare a more socialized system will often declare not cost effective and phase out. You live in the country that makes far and away the most productive innovations in pharmaceuticals and healthcare in general—innovations made possible by the profit motive. It may sometimes be cold comfort, but you are footing a bill that saves a lot of lives here and worldwide. And, while you might pay a lot, getting those innovations, and also having the right to live your life as you—not as Mike Bloomberg, Barack Obama, or a team of academics from Harvard see fit—might raise costs, but is your right as an American.
So, with the Supreme Court ruling that ObamaCare is constitutional, we’re all going to be working on fixing, repealing, or replacing ObamaCare. Frankly, fixing our system is not as complicated as many make it out to be. There are lots and lots of specifics I won’t cover (e.g., allowing interstate competition, the role of health savings accounts, whether individual policies should be some level of deductible) but the big ones are 1) removing employer deductibility and getting back to a system of individuals buying catastrophic insurance, and 2) deciding through open debate, not sneaky regulation, how much we want to subsidize those who can’t afford adequate healthcare or insurance, whether they are poor, have pre-existing conditions, or are adults under 26 who can’t yet pay their own way.
Finally, as a basic input to the whole discussion, we need to understand myths #1 and #4: The rising amount we spend on healthcare is not the same thing as rising prices, and often reflects good not bad developments, and the costs of our system versus others are often exaggerated, and the benefits of our system often minimized, for political purposes.
We can fix all this and maintain what’s very right about our system, and retain our freedoms, but we have to let go of our myths first.
Clifford S. Asness is managing and founding principal of AQR Capital Management.