Merrill Matthews, Ph.D., is a resident scholar with the Institute for Policy Innovation. He is a public policy analyst specializing in healthcare issues and is the author of numerous studies in health policy and other public policy issues. When it comes to knowing your stuff on the complicated issue of healthcare, he’s got plenty of laurels. Matthews is past president of the Health Economics Roundtable for the National Association for Business Economics. For nine years he was executive director of the Washington, D.C.-based Council for Affordable Health Insurance, a health insurance trade association. National Journal recognized the council as one of the most effective health policy organizations in Washington.
The Freeman: Prior to the passage of Obamacare, what would you say were the three or four biggest problems with our healthcare system? (And can you describe them briefly?)
Matthews: There were four key problems: (1) uninsured people who developed a medical condition and then tried to buy coverage were often denied, the so-called “uninsurables”; (2) low-income workers had difficulty affording comprehensive coverage; (3) the tax treatment of health insurance (i.e., employees get a tax exclusion for money spent on premiums, which favored higher-income workers and encouraged spending more on health insurance); and (4) portability, meaning you lose your coverage when you change jobs.
The first two problems are not difficult to fix. For example, 35 states had set up safety-net programs to address the problem of the uninsurable. And seven more states required insurers to accept anyone who applied. Those programs needed some tweaking, with perhaps some “best practices” guidelines, but fixing the problem wouldn’t have taken much effort or money.
The important factor here is the first two problems engendered a lot of public sympathy, which means politicians wanted to try and fix them. So free-market defenders were ultimately forced to point out the least economy-distorting solution, which Obamacare ignored.
The last two problems are more difficult, and are related. The tax treatment of health insurance has encouraged employer-based coverage since the 1940s. Today, about 165 million Americans get their coverage through an employer. When Republicans have proposed changing the tax treatment they have been pummeled by Democrats, labor unions, and even large employer groups. Finding a solution to the last two won’t fix all of our health insurance problems, but it would go a long way.
The Freeman: Can you give ordinary people an example of how easy it is for people to overconsume when they go into a doctor with a PPO card?
Matthews: In the vast majority of cases, when a person goes to the doctor, hospital, or a pharmacy, a third party is paying most of the bill. In economic parlance, when a highly valued good or service seems cheap, consumers tend to overconsume. Patients pay a marginal cost of perhaps 10 cents or 20 cents on the dollar, after a deductible is met. That seems like a bargain and consumers respond accordingly.
And we have only made the system worse over the years. In 1960 about 48 percent of all healthcare spending was out of the patient’s pocket (OOP); by 2009 it was down to about 12 cents. When you juxtapose a graph since 1960 of the declining OOP spending with a graph of rising total healthcare spending, you can see the correlation. Indeed, most health economists believe about a third of total healthcare spending is being wasted on care that patients wouldn’t have bought had they been paying the marginal cost.
The Freeman: How do we restore a functioning price system to healthcare?
Matthews: There is only one way: Give consumers a reason to care about prices. That is actually happening, albeit slowly, and has been for a decade. Both employers and health insurers have been gradually turning to consumer-driven health plans (CDHPs) that include high-deductible insurance coverage for major accidents and illnesses and a tax-free account that can be used for smaller and routine medical expenditures. The idea behind the accounts, especially health savings accounts (HSAs), is to get patients to be value-conscious shoppers in the healthcare marketplace. And the evidence is that when patients control their healthcare dollars, healthcare spending, and therefore premiums, slows down or even declines.
The Freeman: What are coverage mandates and how much do they add to the cost of a policy?
Matthews: Since the 1960s the states have increasingly passed legislation requiring health insurance sold within that state to cover certain healthcare providers, services, and medical products. The federal government largely stayed out of health insurance until the mid-1990s, when it too started mandating coverages.
Proponents of the mandates always claim they will lower healthcare spending; but the actuaries almost always find that they increase spending. While some of the mandates can have a fairly significant upward impact on health insurance premiums—e.g., drug and alcohol abuse counseling, mental health coverage, chiropractors—the large majority of mandates have a relatively small impact, in part because not many people will use them given the size of the U.S. healthcare system. For example, in vitro fertilization is very expensive, but very few people actually use the service, so its impact may not be that large.
However, even minimal-cost mandates add up. If a state were to stick with five or 10 mandates, they might not have much of an impact, but most states have 50 or more, and that can easily push up health insurance premiums by, say, 25 percent.
The Freeman: So, we don’t have an interstate health insurance market. In other words: Why—if I live in North Carolina or North Dakota—can I not buy a plan from a company in Iowa? (And what effects does this create?)
Matthews: In 1945 Congress passed the McCarran-Ferguson Act, which allows states to regulate insurance. The good news is that as a result the federal government stayed out of most health insurance issues until the mid-1990s, because it was seen as a prerogative of the states. Thus, the state where you live regulates the kind of health insurance you or your employer can buy. (Large companies that self-fund their health coverage—that is, they don’t use a health insurer—are generally exempt from those state insurance laws.)
A number of conservatives have seen the option of buying health insurance available in another state as a way to create competition in the market. While I strongly support the idea, it probably won’t be the panacea some people think. That’s because insurers negotiate price discounts with doctors and hospitals, which can be one-third or one-fourth the hospital’s “list price” for a procedure. An insurer with a policy available in another state may not have a provider network in the buyer’s state, which could be a huge problem. If people could buy insurance across state lines, the market might come up with a solution to the provider-network problem, but we don’t have one yet. But the original impetus for cross-state purchasing came from the fact that a handful of states (e.g., New Jersey, New York, and Massachusetts) have largely destroyed their individual health insurance markets. Giving people in New Jersey the option of buying a health insurance policy in neighboring Pennsylvania, which would likely cost about a third of the New Jersey policy, made a lot of sense.
The Freeman: How could this be reformed?
Matthews: Former Rep. John Shadegg introduced legislation that would create a national market for health insurance, and it addressed most of the problems raised, such as liability for an out-of-state health insurer. However, the legislation would probably work best in areas where a health insurer that had a policy available in a different state was also operating, and had contracted with providers, in the buyers’ state. And it could work well where one or more states share urban centers, such as Kansas City or around Washington.
The best solution is to move to a system of real indemnity health insurance. Under that system an insurer indemnifies the policyholder when an accident or a medical condition occurs. Under that system, the doctor would likely give the patient a bundled price that would cover the various expenses. Indeed, this is exactly what happens in most cosmetic and Lasik eye surgeries, which usually are not covered by insurance. Under a pure indemnity system, buying a health policy available in another state would be much easier.
The Freeman: It seems crazy that most people get their health insurance through their employers. Why do they? And what perverse effects does this create?
Matthews: We have an employer-based health insurance system primarily as a result of government price controls and the tax code. During World War II the federal government imposed a system of wage and price controls at a time when labor was scarce, due to so many in the armed services.
The government tried to limit employers’ ability to bid up the price of labor. So many employers began offering health coverage as a way to attract workers. In October 1943 the IRS ruled that the benefit was not taxable income—considered a “tax exclusion” because the money spent on benefits is excluded from income—making it even more attractive. The provision eventually became law. Thus by the 1950s, large employers increasingly offered health coverage as a benefit. Unions worked to make the coverage as comprehensive as possible. And that’s where we are.
There are benefits to employer-provided coverage. If a worker is financially strapped one month, he won’t be tempted to miss his health insurance premium because the employer is covering it. And many employers still see health coverage as a way to attract better workers and, because coverage doesn’t travel with the employee in a job change, to keep them.
But there are also problems, and one is that lack of portability just mentioned. In addition, it’s the employer, rather than the beneficiary, who is deciding what kind of coverage workers have. And, importantly, there is a tax fairness issue. Workers with employer coverage historically have gotten an unlimited tax benefit. The more the employer spends on coverage, the greater the benefit. And the higher the income the greater the benefit, because high-income employees are in a higher tax bracket.
While the self-employed get a 100 percent deduction for the money they spend on coverage, employees working for an employer who doesn’t provide coverage get no tax break.
There have been some attempts to address this problem. President George W. Bush proposed an end to the tax exclusion, and giving everyone a standard deduction instead: $7,500 for an individual or $15,000 for a family. As a presidential candidate, Senator John McCain also proposed ending the exclusion and giving workers a refundable tax credit that would have offset much of the cost of a policy. Neither idea gained much traction.
The Freeman: How many of these problems we’ve been discussing does Obamacare address?
Matthews: Obamacare probably exacerbates all the current problems. Its two key components for expanding coverage to an estimated 30 million-plus Americans are expanding Medicaid to some 16 million low-income Americans and creating a system of health insurance exchanges (increasingly referred to as “marketplaces”) where taxpayer-funded subsidies would help people afford coverage. And so Obamacare gives millions of Americans free or heavily subsidized health insurance that greatly insulates them from the cost of care. Sheltered from the price of care, total healthcare spending will likely go up significantly.
However, free-market advocates have been monitoring Obamacare to see if CDHPs would be allowed as “qualified coverage” under Obamacare regulations. Only recently did it become clear that many CDHP plans would slip under the wire. That’s good news because they tend to be the least expensive plans. So as individuals begin choosing their policies, it’s possible that CDHPs will take a big leap forward. If so, the explosion in health spending could be mitigated somewhat. The irony is that the Democrats who wrote and passed Obamacare generally don’t like CDHPs, and yet they could be responsible for their expansion.
Another possible improvement has to do with portability. Private-sector companies are beginning to create their own health insurance exchanges, separate from the government—a good thing since the initial rollout of the government exchanges hit multiple snags. A number of large companies, representing hundreds of thousands of employees, have announced they are shifting their employees to these private exchanges—some of which actually began before Obamacare passed. The employers will provide a flat contribution to their employees, who will then be able to shop among several insurers within the exchange. If this works out well, it could be the first step in dismantling employer-based coverage. Employers still provide some of the funds for coverage, but the employee chooses among different plans and may even be able to keep that plan if he goes to work for another employer who is participating in the exchange.
So it is at least possible that some seeds of real reform are embedded in the legislation, which would be as big a surprise to the law’s drafters, as well as to those who have to live with it.
The Freeman: It seems like Obamacare is both a special-interest boondoggle—a sharing of spoils between the healthcare providers, Pharma and the insurance companies—and a means to get us to a single-payer system. Which do you think it is?
Matthews: All of the major trade associations decided they wanted to have a seat at the table and are perceived as being supportive. During the Clinton healthcare reform battle, a lot of the trade associations also wanted to work with the administration, but eventually they decided the law would hurt them and began to oppose it. That didn’t happen this time. In fact, some of them were being run or chaired by Democrats who wanted to give President Obama a victory.
Obama didn’t believe he could get a single-payer system—which he and many Democrats prefer—passed through Congress. So he decided to go for a type of public–private hybrid. Many people suspect that Democrats who passed the legislation knew it wouldn’t work, but supported it because they expect it to fail, opening the door for a single-payer system. Senate Majority Leader Harry Reid has recently made comments that can be seen as confirming that suspicion.
While that may be true, my own experience interacting with some Democrats is that they had no idea what they were doing or how health insurance worked, and like many bureaucrats, arrogantly assumed they could lay out a blueprint for how the health insurance market should work, and then draft legislation that would work as they envisioned. In short, they had the hubris to think they could restructure one-sixth of the U.S. economy, based upon their vision of equality and fairness, and the system would work.
So you might say the question comes down to whether you think the Democrats drafting the legislation were connivers or just arrogantly stupid. I don’t necessarily doubt the former, but I saw a lot of evidence for the latter.
The Freeman: How much damage do you think Obamacare can do over the long term?
Matthews: I think that answer depends on how problematic Obamacare is—or becomes. Although I wouldn’t call it likely, it is possible that the Obamacare rollout disaster, coupled with higher premiums and the possibility of many doctors refusing to participate, could drive public outrage and force major revisions in the legislation, if not a dismantling of it.
Alternatively, bureaucrats will get enough problems fixed to placate the public, and the subsidies will kick in so that it becomes impossible to repeal. Even conservatives in the U.K. support the country’s single-payer system.According to the U.S. Census Bureau, 49 percent of Americans already get some type of check from the federal government. By putting millions of people in Medicaid and redistributing billions of taxpayer dollars for subsidies, Obamacare will drive up that number significantly. For the first time ever, the majority of Americans will be dependent on the federal government for some portion of their income. That may be the tipping point to a headlong rush to a centrally planned welfare state, from which there will be no return.